# **UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

(Mark One)

 
| (  X  )                                                                                                                                                                                          |   | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                 |   |                                                                                                |
| For the quarterly period ended **September 30, 2008** or                                                                                                                                                        |
|                                                                                                                                                                                                                 |   |                                                                                                |
| (      )                                                                                                                                                                               |   | Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934 |
|                                                                                                                                                                                                                 |   |                                                                                                |
| For the transition period from               to                |
|                                                                                                                                                                                                                 |   |                                                                                                |
| Commission file number          1-16017                                                                                    |

 
| **ORIENT-EXPRESS HOTELS LTD.**                          |
|---------------------------------------------------------|
| ** **                                              |
| (Exact name of registrant  as specified in its charter) |

 

| Bermuda                                  |   | 98-0223493          |
|------------------------------------------|--------|---------------------|
|                                     |   |                |
| (State or other jurisdiction             |   | (I.R.S. Employer    |
| of incorporation or                      |   | Identification No.) |
| organization)                            |   |                |
|                                     |   |                |
| 22 Victoria Street                       |   |                |
| P.O. Box HM 1179                    |   |                |
| Hamilton HMEX, Bermuda                   |   |                |
|                                     |   |                |
| (Address of principal executive offices) |   | (Zip Code)          |

 

| 441–295–2244                                     |
|------------------------------------------------------------|
|                                                       |
| (Registrant’s telephone  number, including area code) |

 

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

 

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

 
| Large Accelerated Filer | x |   | Accelerated Filer         | 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 October 31, 2008, 42,469,500 Class A common shares and18,044,478 Class B common shares of Orient-Express Hotels Ltd. wereoutstanding. All of the Class B shares are owned by a subsidiary ofOrient-Express Hotels Ltd.

 

 

**PART I– FINANCIAL INFORMATION**

 

**ITEM1.       Financial Statements**

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

 
| **Condensed  Consolidated Balance Sheets (unaudited)**                                                                          |       |                             |       |                    |       |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
|                                                                                                                            |       | September 30,  2008         |       | December 31,  2007 |       |
|                                                                                                                            |       | (Dollars in thousands) |       |
| **Assets**                                                                                                                      | ** ** | ** **                       | ** ** | ** **              | ** ** |
| Cash and cash equivalents                                                                                                       |       | $                                | 58,915     |                    | $          | 90,565 |   |
| Restricted cash                                                                                                                 |       | 10,438                           |       | 3,800                   |       |
| Accounts receivable, net of allowances of $1,037 and  $1,292                                                                    |       | 66,710                           |       | 63,673                  |       |
| Due from related parties                                                                                                        |       | 26,329                           |       | 30,406                  |       |
| Prepaid expenses and other                                                                                                      |       | 20,663                           |       | 16,115                  |       |
| Inventories                                                                                                                     |       | 47,027                           |       | 45,756                  |       |
| Assets of discontinued operations held for sale                                                                                 |       | 41,802                           |       | 54,417                  |       |
| Real estate assets                                                                                                              |       | 53,189                           |       | 57,157                  |       |
| Total current assets                                                                                                            |       | 325,073                          |       | 361,889                 |       |
|                                                                                                                            |       |                             |       |                    |       |
| Property, plant and equipment, net of accumulated  depreciation of $260,953 and $268,297                                   |       | 1,302,493                        |       | 1,273,956               |       |
| Investments                                                                                                                     |       | 159,622                          |       | 147,539                 |       |
| Goodwill                                                                                                                        |       | 131,753                          |       | 133,497                 |       |
| Other intangible assets, net                                                                                                    |       | 21,607                           |       | 21,660                  |       |
| Other assets                                                                                                                    |       | 46,243                           |       | 49,896                  |       |
|                                                                                                                            |       | $                                | 1,986,791  |                    | $          | 1,988,437 |   |
| **Liabilities and Shareholders’ Equity**                                                                                   |       |                             |       |                    |       |
| Working capital facilities                                                                                                      |       | $                                | 48,877     |                    | $          | 64,419 |   |
| Accounts payable                                                                                                                |       | 28,710                           |       | 30,132                  |       |
| Accrued liabilities                                                                                                             |       | 75,581                           |       | 61,224                  |       |
| Deferred revenue                                                                                                                |       | 46,891                           |       | 35,545                  |       |
| Liabilities of discontinued operations held for sale  .                                                                         |       | 5,045                            |       | 5,619                   |       |
| Current portion of long-term debt and capital leases  .                                                                         |       | 122,509                          |       | 127,795                 |       |
| Total current liabilities                                                                                                       |       | 327,613                          |       | 324,734                 |       |
|                                                                                                                            |       |                             |       |                    |       |
| Long-term debt and obligations under capital leases                                                                             |       | 668,092                          |       | 658,615                 |       |
| Liability for pension benefit                                                                                                   |       | 6,104                            |       | 6,935                   |       |
| Other liabilities                                                                                                               |       | 4,659                            |       | 4,731                   |       |
| Deferred income taxes                                                                                                           |       | 114,385                          |       | 119,112                 |       |
| Liability for uncertain tax positions                                                                                           |       | 24,192                           |       | 24,025                  |       |
|                                                                                                                            |       | 1,145,045                        |       | 1,138,152               |       |
| Commitments and contingencies                                                                                                   |       |                             |       |                    |       |
| Minority interest                                                                                                               |       | 2,022                            |       | 1,754                   |       |
|                                                                                                                            |       |                             |       |                    |       |
| Shareholders’ equity:                                                                                                      |       |                             |       |                    |       |
| Preferred shares $0.01 par value (30,000,000 shares  authorized, issued nil)                                                    |       | -                                |       | -                       |       |
| Class A common shares $0.01 par value  (120,000,000 shares authorized):  Issued – 42,469,500 (2007 – 42,456,000) |       | 425                              |       | 424                     |       |
|                                                                                                                            |
| Class B common shares $0.01 par value  (120,000,000 shares authorized):  Issued – 18,044,478 (2007 – 18,044,478) |       | 181                              |       | 181                     |       |
|                                                                                                                            |
| Additional paid-in capital                                                                                                      |       | 517,711                          |       | 515,307                 |       |
| Retained earnings                                                                                                               |       | 320,689                          |       | 302,369                 |       |
| Accumulated other comprehensive income                                                                                          |       | 899                              |       | 30,431                  |       |
| Less: reduction due to class B common shares owned  by a subsidiary – 18,044,478 (2007 – 18,044,478)                  |       | (181)                            |       | (181)                   |       |
| Total shareholders’ equity                                                                                                 |       | 839,724                          |       | 848,531                 |       |
|                                                                                                                            |       | $                                | 1,986,791  |                    | $          | 1,988,437 |   |

 

See notes to condensed consolidated financialstatements.

 

2

 
| **Orient-Express Hotels Ltd. and Subsidiaries**                 |
|-----------------------------------------------------------------|
|                                                            |
| **Statements of Condensed Consolidated Operations (unaudited)** |

 
| Three months ended September 30,                           |       | 2008 |   | 2007 | ** ** |
|--------------------------------------------------------------------------------|------------|------|--------|------|------------|
| (Dollars in thousands, except per share amounts) | ** ** |

 
|                                                                     |   |   |    |   |   |
|--------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Revenue                                                                  |   | $      | 178,429 |   | $      | 178,875 |   |
|                                                                     |   |   |    |   |   |   |   |
| Expenses:                                                                |   |   |    |   |   |
| Depreciation and amortization                                            |   |   | 9,838   |   |   | 9,944 |   |
| Operating                                                                |   |   | 83,243  |   |   | 86,217 |   |
| Selling, general and administrative                                      |   |   | 51,225  |   |   | 43,179 |   |
| Total expenses                                                           |   |   | 144,306 |   |   | 139,340 |   |
|                                                                     |   |   |    |   |   |   |   |
| Gain on disposal of fixed assets                                         |   |   | -       |   |   | 2,312 |   |
|                                                                     |   |   |    |   |   |   |   |
| Earnings from operations                                                 |   |   | 34,123  |   |   | 41,847 |   |
|                                                                     |   |   |    |   |   |   |   |
| Interest expense, net                                                    |   |   | (11,588 | )      |   | (12,629 | ) |
| Foreign currency, net                                                    |   |   | (2,522  | )      |   | (1,474 | ) |
| Net finance costs                                                        |   |   | (14,110 | )      |   | (14,103 | ) |
|                                                                     |   |   |    |   |   |   |   |
| Earnings before income taxes and earnings from  unconsolidated companies |   |   | 20,013  |   |   | 27,744 |   |
|                                                                     |   |   |    |   |   |   |   |
| Provision for income taxes                                               |   |   | (6,686  | )      |   | (11,079 | ) |
|                                                                     |   |   |    |   |   |   |   |
| Earnings before earnings from unconsolidated  companies                  |   |   | 13,327  |   |   | 16,665 |   |
|                                                                     |   |   |    |   |   |   |   |
| Earnings from unconsolidated companies, net of tax                       |   |   | 4,224   |   |   | 5,630 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                  |   |   | 17,551  |   |   | 22,295 |   |
|                                                                     |   |   |    |   |   |   |   |
| (Losses)/earnings from discontinued operations, net  of tax              |   |   | (11,172 | )      |   | 258 |   |
|                                                                     |   |   |    |   |   |   |
| Net earnings                                                             |   | $      | 6,379   |   | $      | 22,553 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings per share, basic:                                           |   |   |    |   |   |
| Net earnings from continuing operations                                  |   | $      | 0.41    |   | $      | 0.52 |   |
| Net (losses)/earnings from discontinued operations                       |   |   | (0.26   | )      |   | 0.01 |   |
| Net earnings                                                             |   | $      | 0.15    |   | $      | 0.53 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings per share, diluted:                                         |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                  |   | $      | 0.41    |   | $      | 0.52 |   |
| Net (losses)/earnings from discontinued operations                       |   |   | (0.26   | )      |   | 0.01 |   |
| Net earnings                                                             |   | $      | 0.15    |   | $      | 0.53 |   |
|                                                                     |   |   |    |   |   |   |   |
| Dividends per share                                                      |   | $      | 0.025   |   | $      | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

 

3

 
| **Orient-Express Hotels Ltd. and Subsidiaries**                 |
|-----------------------------------------------------------------|
| ** **                                                      |
| **Statements of Condensed Consolidated Operations (unaudited)** |

 
| Nine months ended September 30,                            |   | 2008 |   | 2007 |   |
|--------------------------------------------------------------------------------|--------|------|--------|------|--------|
| (Dollars in thousands, except per share amounts) |   |

 
|                                                                     |   |   |    |   |   |
|--------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Revenue                                                                  |   | $      | 474,465 |   | $      | 432,501 |   |
|                                                                     |   |   |    |   |   |   |   |
| Expenses:                                                                |   |   |    |   |   |   |   |
| Depreciation and amortization                                            |   |   | 30,404  |   |   | 28,476 |   |
| Operating                                                                |   |   | 228,732 |   |   | 206,287 |   |
| Selling, general and administrative                                      |   |   | 145,872 |   |   | 120,769 |   |
| Total expenses                                                           |   |   | 405,008 |   |   | 355,532 |   |
|                                                                     |   |   |    |   |   |   |   |
| Gain on disposal of fixed assets                                         |   |   | -       |   |   | 2,312 |   |
|                                                                     |   |   |    |   |   |   |   |
| Earnings from operations                                                 |   |   | 69,457  |   |   | 79,281 |   |
|                                                                     |   |   |    |   |   |   |   |
| Interest expense, net                                                    |   |   | (35,978 | )      |   | (34,077 | ) |
| Foreign currency, net                                                    |   |   | 2,140   |   |   | (221 | ) |
| Net finance costs                                                        |   |   | (33,838 | )      |   | (34,298 | ) |
|                                                                     |   |   |    |   |   |   |   |
| Earnings before income taxes and earnings from  unconsolidated companies |   |   | 35,619  |   |   | 44,983 |   |
|                                                                     |   |   |    |   |   |   |   |
| Provision for income taxes                                               |   |   | (12,851 | )      |   | (17,110 | ) |
|                                                                     |   |   |    |   |   |   |   |
| Earnings before earnings from unconsolidated  companies                  |   |   | 22,768  |   |   | 27,873 |   |
|                                                                     |   |   |    |   |   |   |   |
| Earnings from unconsolidated companies, net of tax                       |   |   | 14,129  |   |   | 12,167 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                  |   |   | 36,897  |   |   | 40,040 |   |
|                                                                     |   |   |    |   |   |   |   |
| Losses from discontinued operations, net of tax                          |   |   | (15,392 | )      |   | (1,465 | ) |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings                                                             |   | $      | 21,505  |   | $      | 38,575 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings per share, basic:                                           |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                  |   | $      | 0.87    |   | $      | 0.95 |   |
| Net losses from discontinued operations                                  |   |   | (0.36   | )      |   | (0.04 | ) |
| Net earnings                                                             |   | $      | 0.51    |   | $      | 0.91 |   |
|                                                                     |   |   |    |   |   |   |   |
| Net earnings per share, diluted:                                         |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                  |   | $      | 0.87    |   | $      | 0.94 |   |
| Net losses from discontinued operations                                  |   |   | (0.36   | )      |   | (0.03 | ) |
| Net earnings                                                             |   | $      | 0.51    |   | $      | 0.91 |   |
|                                                                     |   |   |    |   |   |   |   |
| Dividends per share                                                      |   | $      | 0.075   |   | $      | 0.075 |   |

 

See notes tocondensed consolidated financial statements.

 

4

 
| **Orient-Express Hotels Ltd. and Subsidiaries**                 |
|-----------------------------------------------------------------|
| ** **                                                      |
| **Statements of Condensed Consolidated Cash Flows (unaudited)** |

 
| Nine months ended September 30, |   | 2008 |   | 2007 |   |
|-----------------------------------------------------|--------|------|--------|------|--------|
| (Dollars in thousands)                    |   |

 
|                                                                                 |   |   |    |   |   |
|--------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|
| Cash flows from operating activities:                                                |   |   |    |   |   |   |   |
| Net earnings from continuing operations                                              |   | $      | 36,897  |   | $      | 40,040 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |   |   |    |   |   |   |   |
| Depreciation and amortization                                                        |   |   | 30,404  |   |   | 28,476 |   |
| Amortization of finance costs                                                        |   |   | 2,426   |   |   | 2,346 |   |
| Undistributed earnings of affiliates                                                 |   |   | (9,241  | )      |   | (6,679 | ) |
| Dividends received from unconsolidated companies                                     |   |   | 4,140   |   |   | 1,763 |   |
| Stock–based compensation                                                        |   |   | 2,212   |   |   | 884 |   |
| Change in deferred tax                                                               |   |   | (793    | )      |   | 8,676 |   |
| Losses/(gains) from disposals of fixed assets                                        |   |   | 560     |   |   | (2,856 | ) |
| Other non-cash items                                                                 |   |   | (39     | )      |   | (136 | ) |
| Change in assets and liabilities net of effects from  acquisition of subsidiaries:   |   |   |    |   |   |   |   |
| Increase in receivables, prepaid expenses and other                                  |   |   | (12,842 | )      |   | (24,966 | ) |
| Increase in inventories                                                              |   |   | (2,471  | )      |   | (5,620 | ) |
| Increase in real estate assets held for sale                                         |   |   | (26,402 | )      |   | (9,749 | ) |
| Increase in payables, accrued liabilities and  deferred revenue                      |   |   | 33,349  |   |   | 22,606 |   |
|                                                                                 |   |   |    |   |   |   |   |
| Total adjustments                                                                    |   |   | 21,303  |   |   | 14,745 |   |
|                                                                                 |   |   |    |   |   |   |   |
| Net cash provided by operating activities from  continuing operations                |   |   | 58,200  |   |   | 54,785 |   |
| Net cash used in operating activities from  discontinued operations                  |   |   | (4,166  | )      |   | (552 | ) |
|                                                                                 |   |   |    |   |   |   |   |
| Net cash provided by operating activities                                            |   |   | 54,034  |   |   | 54,233 |   |
|                                                                                 |   |   |    |   |   |   |   |
| Cash flows from investing activities:                                                |   |   |    |   |   |   |   |
| Capital expenditures                                                                 |   |   | (79,300 | )      |   | (76,211 | ) |
| Acquisitions and investments, net of cash acquired                                   |   |   | (3,261  | )      |   | (18,747 | ) |
| Increase in restricted cash                                                          |   |   | (6,638  | )      |   | (2,243 | ) |
| Proceeds from sale of fixed assets and investments                                   |   |   | 158     |   |   | 3,683 |   |
|                                                                                 |   |   |    |   |   |   |   |
| Net cash used in investing activities from  continuing operations                    |   |   | (89,041 | )      |   | (93,518 | ) |
| Net cash used in investing activities from  discontinued operations                  |   |   | (1,407  | )      |   | (1,670 | ) |
|                                                                                 |   |   |    |   |   |   |   |
| Net cash used in investing activities                                                |   |   | (90,448 | )      |   | (95,188 | ) |

 

5

 
| **Orient-Express Hotels Ltd. and Subsidiaries**                 |
|-----------------------------------------------------------------|
| ** **                                                      |
| **Statements of Condensed Consolidated Cash Flows (unaudited)** |

 
| Nine months ended September 30, |   | 2008 |   | 2007 |   |
|-----------------------------------------------------|--------|------|--------|------|--------|
| (Dollars in thousands)                    |   |

 
|                                                                                                                     |   |   |    |   |   |    |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|
| Cash flows from financing activities:                                                                                    |   |   |    |   |   |    |   |
| Net proceeds from working capital facilities and  redrawable loans                                                       |   |   | 31,514  |   |   | 47,681  |   |
| Stock options exercised                                                                                                  |   |   | 193     |   |   | 3,958   |   |
| Issuance of long-term debt                                                                                               |   |   | 4,659   |   |   | 27,537  |   |
| Principal payments under long-term debt                                                                                  |   |   | (26,663 | )      |   | (33,312 | )      |
| Payment of common share dividends                                                                                        |   |   | (3,185  | )      |   | (3,177  | )      |
|                                                                                                                     |   |   |    |   |   |    |   |
| Net cash provided by financing activities                                                                                |   |   | 6,518   |   |   | 42,687  |   |
|                                                                                                                     |   |   |    |   |   |    |   |
| Effect of exchange rate changes on cash and cash  equivalents                                                            |   |   | (1,966  | )      |   | 1,929   |   |
|                                                                                                                     |   |   |    |   |   |    |   |
| Net (decrease)/increase in cash and cash equivalents                                                                     |   |   | (31,862 | )      |   | 3,661   |   |
|                                                                                                                     |   |   |    |   |   |    |   |
| Cash and cash equivalents at beginning of period  (includes $360 (2008), $1,422 (2007)  of discontinued operations cash) |   |   | 90,925  |   |   | 79,318  |   |
|                                                                                                                     |   |   |    |   |   |    |   |
| Cash and cash equivalents at end of period (includes  $148 (2008), $246 (2007) of  discontinued operations cash)         |   | $      | 59,063  |   | $      | 82,979  |   |

 

See notes to condensed consolidated financial statements.

 

6

 
| **Orient-Express  Hotels Ltd. and Subsidiaries**                                |
|---------------------------------------------------------------------------------|
| ** **                                                                      |
| **Statements  of Condensed Consolidated Shareholders’ Equity (unaudited)** |

 
| (Dollars in thousands) |   | Preferred  Shares  At Par  Value |   | Class A  Common  Shares  at Par  Value |   | Class B  Common  Shares  at Par  Value |   | Additional  Paid-In  Capital |   | Retained  Earnings |   | Accumulated  Other  Comprehensive  Income/(Loss) |   | Common  Shares  Owned by  Subsidiary |    | Total  Comprehensive  Income/  (Loss) |   |
|----------------------------------|--------|---------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------|--------|------------------------------|--------|--------------------|--------|--------------------------------------------------|--------|-------------------------------------------|---------|---------------------------------------|--------|
|                             |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |
|                             |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   |   |   |   |
| Balance, January 1, 2007    |   | $                                     | -      |                                             | $      | 422                                         |   | $                            | 181    |               | $      | 509,762                                          |   | $                                         | 301,785 |                                  | $      | (4,973 | ) | $ | (181 | ) |   |   |   |
| FIN48 liabilities                |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | (28,820 | )                                     |   | - |   |   | - |   |   |   |   |
| Stock-based compensation         |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | 884                                              |   |                                      | -       |                                  |   | - |   |   | - |   |   |   |   |
| Stock options exercised          |   |                                  | -      |                                             |   | 2                                           |   |                         | -      |               |   | 3,956                                            |   |                                      | -       |                                  |   | - |   |   | - |   |   |   |   |
| Dividends on common shares       |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | (3,177  | )                                     |   | - |   |   | - |   |   |   |   |
| Comprehensive income:            |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   |   |   |   |
| Net earnings                     |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | 38,575  |                                  |   | - |   |   | - |   | $ | 38,575 |   |
| Other comprehensive income       |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | -       |                                  |   | 32,434 |   |   | - |   |   | 32,434 |   |
|                             |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   | $ | 71,009 |   |
| Balance, September 30, 2007 |   | $                                     | -      |                                             | $      | 424                                         |   | $                            | 181    |               | $      | 514,602                                          |   | $                                         | 308,363 |                                  | $      | 27,461 |   | $ | (181 | ) |   |   |   |
|                             |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   |   |   |   |
| Balance, January 1, 2008    |   | $                                     | -      |                                             | $      | 424                                         |   | $                            | 181    |               | $      | 515,307                                          |   | $                                         | 302,369 | *                                     | $      | 30,431 |   | $ | (181 | ) |   |   |   |
| Stock-based compensation         |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | 2,212                                            |   |                                      | -       |                                  |   | - |   |   | - |   |   |   |   |
| Stock options exercised          |   |                                  | -      |                                             |   | 1                                           |   |                         | -      |               |   | 192                                              |   |                                      | -       |                                  |   | - |   |   | - |   |   |   |   |
| Dividends on common shares       |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | (3,185  | )                                     |   | - |   |   | - |   |   |   |   |
| Comprehensive income:            |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   |   |   |   |
| Net earnings                     |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | 21,505  |                                  |   | - |   |   | - |   | $ | 21,505 |   |
| Other comprehensive loss         |   |                                  | -      |                                             |   | -                                           |   |                         | -      |               |   | -                                                |   |                                      | -       |                                  |   | (29,532 | ) |   | - |   |   | (29,532 | ) |
|                             |   |                                  |   |                                             |   |                                        |   |                         |   |               |   |                                             |   |                                      |    |                                  |   |   |   |   |   |   | $ | (8,027 | )  |
| Balance, September 30, 2008 |   | $                                     | -      |                                             | $      | 425                                         |   | $                            | 181    |               | $      | 517,711                                          |   | $                                         | 320,689 |                                  | $      | 899 |   | $ | (181 | ) |   |   |   |

 

See notes tocondensed consolidated financial statements.

 

*  This amount differs from $304,412 shown inthe 2007 SEC Form 10-K annual report due to the correction of a typographicalerror.

 

7

 
| **Orient-Express Hotels Ltd. and Subsidiaries**          |
|----------------------------------------------------------|
|                                                     |
| **Notes to Condensed Consolidated Financial Statements** |

 

**1.             Basis of financial statementpresentation**

 

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

 

*(a) **Accounting policies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the US Securities and  Exchange Commission for reporting on Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by US generally accepted accountingprinciples for complete financial statements. In the opinion of the management of the Company, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof financial position, operating results and cash flows have been included inthe statements.  Interim results are notnecessarily indicative of results that may be expected for the year ending December 31,2008.  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, 2007.  See Note 1 to the consolidated financialstatements in the 2007 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 presentation of restricted cash, theimplementation of accounting for performance-based share awards, the adoptionof SFAS No. 157 and 159, the reclassification of certain real estateassets, and the accounting for hedges of net investments in foreign operations,in the nine months ended September 30, 2008.

 

*Restrictedcash*

 

In thestatements of condensed consolidated cash flows for the nine months ended September 30,2008 and nine months ended September 30, 2007, changes in restricted cashbalances have been reported in investing activities.  The restricted cash of $3,800,000 at December 31,2007 has been reclassified from cash and cash equivalents.

 

8

 

*Performancestock-based compensation accounting policy*

 

Under its 2007performance share plan, the Company granted share-based payment awards withperformance and market conditions to certain employees during the nine monthsended September 30, 2008.

 

The fair valueof the awards at the grant date is determined using the Monte Carlo model.  For awards with market conditions, theconditions are incorporated into the calculations, and the compensation valueis not adjusted if the conditions are not met. For awards with performance conditions, compensation expense isrecognized when it becomes probable that the performance criteria specified inthe awards will be achieved and, accordingly, the compensation value isadjusted following the changes in the estimates of shares likely to vest basedon the performance criteria.

 

Share-basedcompensation expense for the awards determined as described above is recognizedin earnings on a straight-line basis over the requisite service periods for theawards.  The total cost of a share-basedpayment award is reduced by estimated forfeitures expected to occur over thevesting period of the award.

 

*SFAS 157*

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements”, which (i) applies to certain assets andliabilities that are being measured and reported on a fair value basis, (ii) definesfair value, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosure about fairvalue measurements, and (iii) enables the reader of the financialstatements to assess the inputs to develop those measurements by establishing ahierarchy for ranking the quality and reliability of the information used todetermine fair values.

 

SFAS No. 157 requires that assets and liabilitiescarried at fair value be classified and disclosed in one of three categories,namely quoted market prices in active markets for identical assets orliabilities (Level 1), observable market-based inputs or unobservable inputsthat are corroborated by market data (Level 2), and unobservable inputs thatare not corroborated by market data (Level 3).

 

The Company adopted SFAS No. 157 effective January 1,2008, except as it applies to those non-financial assets and non-financialliabilities as noted in FSP FAS 157-2 described below.  There was no material impact on the Company’sfinancial statements from the adoption of the standard.  The following 

 

9

 

table summarizes the valuation of OEH’s assets andliabilities by the SFAS No. 157 fair value hierarchy at September 30,2008 (dollars in thousands):

 
| ** **                       | ** ** | ** **                   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                       | ** ** | September 30, 2008 | ** ** |
| ** **                       | ** ** | Level 1                 |       | Level 2 |       | Level 3 |       | Total      | ** ** |
|                             |       |                         |       |         |       |         |       |       |       |
| Assets at fair value:            |       |                         |       |         |       |         |       |       |       |
| Derivative financial instruments |       | $                            |  -    |         | $          |  2,678  |       | $          |  -    |   | $ |  2,678 |   |
| Total assets                     |       | $                            |  -    |         | $          |  2,678  |       | $          |  -    |   | $ |  2,678 |   |
|                             |       |                         |       |         |       |         |       |       |       |
| Liabilities at fair value:       |       |                         |       |         |       |         |       |       |       |
| Derivative financial instruments |       | $                            |  -    |         | $          |  1,945  |       | $          |  -    |   | $ |  1,945 |   |
| Total liabilities                |       | $                            |  -    |         | $          |  1,945  |       | $          |  -    |   | $ |  1,945 |   |

 

The fair value of OEH’s derivative financialinstruments is computed based on a market approach using information generatedby market transactions involving comparable instruments.

 

In February 2008,the FASB issued proposed FSP FAS 157-2, which delayed the effective date ofSFAS No. 157 for all non-financial assets and non-financial liabilities,except for those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  FSP FAS 157-2 partially defers the effectivedate of SFAS No. 157 to fiscal years beginning after November 15,2008, and interim periods within those fiscal years for items within the scopeof the FSP.

 

*SFAS159*

 

The Companyadopted SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”, which had no material impact on the Company’s financialstatements.

 

*Reclassificationof real estate assets*

 

As at September 30,2008, OEH has reclassified the villas under construction at La Samanna in St. Martinin the amount of $32,340,000 from real estate assets to owned fixed assets, asit has been decided not to market the villas actively for sale, but to operatethem as part of the adjacent hotel.

 

*Hedgesof net investments in foreign operations*

 

Hedges of netinvestments in foreign operations are accounted for similarly to cash flowhedges.  Any gain or loss on the hedginginstrument relating to the effective portion of the hedge is recorded in othercomprehensive income within foreign 

 

10

 

currencytranslation adjustment.  The gain or lossrelating to the ineffective portion will be recognized immediately in earningswithin foreign currency gains and losses. Gains and losses deferred in other comprehensive income are recognizedin earnings upon disposal of the foreign operation.  OEH links all hedges that are designated asnet investment hedges to specifically identified net investments in foreignsubsidiaries.

 

*(b) Netearnings per share*

 

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

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| Three months ended September 30, |       | 2008       |       | 2007       | ** ** |
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                 |       |       |       |       |       |
| Basic                                                |       | 42,469     |       | 42,444     |       |
| Effect of dilution                                   |       | 90         |       | 197        |       |
| Diluted                                              |       | 42,559     |       | 42,641     |       |
|                                                 |       |       |       |       |       |
|                                                 |       |       |       |       |       |
| Nine months  ended September 30,                | ** ** | 2008       |       | 2007       | ** ** |
|                                                 |       |       |       |       |       |
|                                                 |       |       |       |       |       |
| Basic                                                |       | 42,468     |       | 42,367     |       |
| Effect of dilution                                   |       | 135        |       | 184        |       |
| Diluted                                              |       | 42,603     |       | 42,551     |       |

 

For thethree months ended September 30, 2008 and 2007, the anti-dilutive effectof stock options on 180,139 and 7,773 class A common shares, respectively, wasexcluded from the computation of diluted earnings per share.  For the nine months ended September 30,2008 and 2007, the anti-dilutive effect of stock options on 66,935 and 3,491class A common shares, respectively, was excluded from the computation ofdiluted earnings per share.

 

*(c)  Dividends*

 

On January 4,April 4 and July 3, 2008, the Company declared a dividend of $0.025per common share payable February 5, May 5 and August 4, 2008,respectively, to shareholders of record on January 22, April 21 and July 18,2008, respectively.

 

*(d)  Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees 

 

11

 

amounting to$3,078,000 and $3,474,000 for the three months ended September 30, 2008and 2007, respectively, and $9,082,000 and $9,203,000 for the nine months endedSeptember 30, 2008 and 2007, respectively.

 

****2.             Discontinuedoperations****

 

****During the fourthquarter of 2007, OEH decided to sell its investment in Bora Bora LagoonResort.  Accordingly, the results of thehotel have been presented as a discontinued operation for all the interimperiods presented.****

 

****Summarized operatingresults of the hotel are as follows (dollars in thousands):****

**** ****
| **** ****                                                                | **** **** | **** ****  | **** ****  | **** **** | **** **** |
|-------------------------------------------------------------------------------|----------------|-----------------|-----------------|----------------|----------------|
| ****Three months ended ****September** ******30,****      | **** **** | ****2008****    | **** ****  | ****2007****   | **** **** |
| **** ****                                                                | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Revenue****                                                               | **** **** | ****$****       | ****3,162****   | **** **** | ****$****      | ****4,036**** | **** **** |
| ****Gain from discontinued  operations************before  impairment loss**** | **** **** | ****$****       | ****828****     | **** **** | ****$****      | ****258**** | **** **** |
| ****Impairment loss****                                                       | **** **** | ****(12,000**** | ****)****       | ****-****      | **** **** |
| ****Net (loss)/gain from discontinued  operations****                         | **** **** | ****$****       | ****(11,172**** | ****)****      | ****$****      | ****258**** | **** **** |

 
| **** ****                                                                | **** **** | **** ****  | **** ****  | **** **** | **** **** |
|-------------------------------------------------------------------------------|----------------|-----------------|-----------------|----------------|----------------|
| ****Nine months ended****September** ******30,****                       | **** **** | ****2008****    | **** ****  | ****2007****   | **** **** |
| **** ****                                                                | **** **** | **** ****  | **** ****  | **** **** | **** **** |
| ****Revenue****                                                               | **** **** | ****$****       | ****7,078****   | **** **** | ****$****      | ****8,690**** | **** **** |
| ****Loss from discontinued  operations************before  impairment loss**** | **** **** | ****$****       | ****(3,392****  | ****)****      | ****$****      | ****(1,465**** | ****)**** |
| ****Impairment loss****                                                       | **** **** | ****(12,000**** | ****)****       | ****-****      | **** **** |
| ****Net loss from discontinued  operations****                                | **** **** | ****$****       | ****(15,392**** | ****)****      | ****$****      | ****(1,465**** | ****)**** |

 

****Due to an increase incompetition and other market factors, operating profits and cash flows of theBora Bora Lagoon Resort were lower than expected in 2007 and previous years,which gave rise to an impairment of goodwill and long-lived assets in theamount of $3,891,000 and $10,101,000, respectively, recorded in the quarterended December 31, 2007.  In 2008the operating results and future outlook have further deteriorated, so that anadditional impairment of fixed assets in the amount of $12,000,000 has beenrecognized in the three months ended September 30, 2008.  The fair value of the investment wasestimated by management based on current price negotiations for the sale of thebusiness and considering other market factors.****

 

12

 

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

**** ****
| ** **                                                              | ** **     | ** **                             | **** **** | **** ****                        | **** **** | **** **** | **** **** |
|-------------------------------------------------------------------------|----------------|----------------------------------------|----------------|---------------------------------------|----------------|----------------|----------------|
| ** **                                                              | ** **     | September ****30,  2008 **** | **** **** | ****December 31,  2007 **** | **** **** |
| **** ****                                                          | **** **** | **** ****                         | **** **** | **** ****                        | **** **** | **** **** | **** **** |
| ****Current assets****                                                  | **** **** | ****$****                              | ****3,701****  | **** ****                        | **** **** | ****$****      | ****3,686****  | **** **** | **** **** |
| ****Other assets****                                                    | **** **** | ****3,104****                          | **** **** | **** ****                        | ****3,121****  | **** **** | **** **** |
| ****Property, plant and  equipment,************net of  depreciation**** | **** **** | ****32,679****                         | **** **** | **** ****                        | ****45,091**** | **** **** | **** **** |
| ****Goodwill****                                                        | **** **** | ****2,318****                          | **** **** | **** ****                        | ****2,519****  | **** **** | **** **** |
| ****Total assets held for  sale****                                     | **** **** | ****$****                              | ****41,802**** | **** ****                        | **** **** | ****$****      | ****54,417**** | **** **** | **** **** |
| ****Liabilities held for  sale****                                      | **** **** | ****$****                              | ****(5,045**** | ****)****                             | **** **** | ****$****      | ****(5,619**** | ****)**** | **** **** |

 

**3.             Acquisitions**

 

*Casa de Sierra Nevada minority interest*

 

On March 7, 2008, OEH agreed to accelerate the purchase of the 20%minority interest in Casa de Sierra Nevada it did not own for a cashconsideration of $2,329,000.  Followingguidance in SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, and EITF 00-4, “Majorityowner’s accounting for a transaction in the shares of a consolidated subsidiaryand a derivative indexed to the minority interest in that subsidiary”, deferredconsideration of $2,330,000, which had been recorded on the originalacquisition of 80% was cleared and the difference of $1,000 between the finalsettlement and original forward contract value was recorded in earnings asinterest income.

 

*LaSamanna spa*

 

On March 14, 2008, the subsidiary of OEH that owns La Samannaagreed to terminate the existing lease with the third party operator of the spaon the hotel’s premises and to transfer the employees, equipment and otherassets of the spa to La Samanna effective April 1, 2008 for a cashconsideration of $650,000.

 

The following table summarizes the preliminary fair values of theassets acquired at the date of acquisition (dollars in thousands):

 

13

 
| ** **                    | ** ** | ** ** | ** **                | ** ** |
|-------------------------------|------------|------------|---------------------------|------------|
| ** **                    | ** ** | ** ** | April 1,  2008  | ** ** |
|                          |       |       |                      |       |
| Inventory                     |       | $          | 10                        |       |
| Property, plant and equipment |       |       | 10                        |       |
| Goodwill                      |       |       | 630                       |       |
| Other intangible assets       |       |       | -                         |       |
| Total assets acquired         |       |       | 650                       |       |
| Total liabilities assumed     |       |       | -                         |       |
| Net assets acquired           |       | $          | 650                       |       |
|                          |       |       |                      |       |
| Cash consideration            |       | $          | 650                       |       |

 

Equipment of the spa has been fair valued based on the estimatedreplacement cost.  Goodwill of $630,000has been recorded of which $nil will be deductible as operating expenses fortax purposes.  This acquisition enabledOEH to take control of the spa operation and receive 100% of operating revenuesthat the business is expected to generate in future years, which contributed tothe purchase price and resulted in goodwill.

 

The acquisition of the spa has been accounted for as a purchase inaccordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from March 14,2008.

 

**4.             Investments**

 

Investments include equity interests in and advancesto unconsolidated companies.

 

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

 

14

 
| ** **                                                                                  | ** **                        | ** **                     | ** ** | ** **                    | ** **                    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|-----------------------------------|--------------------------------|------------|-------------------------------|-------------------------------|------------|------------|------------|
| ** **                                                                                  | ** **                        | September 30,  2008  | ** ** | December 31,  2007  | ** **                    | ** ** |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Current assets                                                                              |                              | $                              | 55,752     |                          | $                             | 60,890     |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Property, plant and equipment, net                                                          |                              |                           | 376,835    |                          |                          | 358,708    |       |       |
| Other assets                                                                                |                              |                           | 54,087     |                          |                          | 51,376     |       |       |
| Total assets                                                                                |                              | $                              | 486,674    |                          | $                             | 470,974    |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Current liabilities                                                                         |                              | $                              | 49,148     |                          |                          | 48,710     |       |       |
| Long-term debt                                                                              |                              |                           | 250,981    |                          |                          | 246,420    |       |       |
| Other liabilities                                                                           |                              |                           | 101,539    |                          |                          | 97,663     |       |       |
| Total shareholders’ equity                                                             |                              |                           | 85,006     |                          |                          | 78,181     |       |       |
| Total liabilities and shareholders’ equity                                             |                              | $                              | 486,674    |                          | $                             | 470,974    |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Three months ended September 30,                                        |                              |                           | 2008       |                          |                          | 2007       |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Revenue                                                                                     |                              | $                              | 51,629     |                          | $                             | 47,941     |       |       |
| Earnings from operations before net finance costs                                           |                              | $                              | 9,356      |                          | $                             | 10,672     |       |       |
| Net earnings                                                                                |                              | $                              | 634        |                          | $                             | 1,948      |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Nine months ended September 30,                                                        |                              |                           | 2008       |                          |                          | 2007       |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Revenue                                                                                     |                              | $                              | 159,851    |                          | $                             | 141,328    |       |       |
| Earnings from operations before net finance costs                                           |                              | $                              | 34,675     |                          | $                             | 29,787     |       |       |
| Net earnings                                                                                |                              | $                              | 8,584      |                          | $                             | 4,704      |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| **5.**                                                                                      | **Property, plant and equipment** |                           |       |                          |                          |       |       |       |   |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| The major  classes of property, plant and equipment are as follows (dollars in  thousands): |                              |                           |       |                          |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |
|                                                                                        |                              | September 30,  2008  |       |                          | December 31,  2007  |       |       |
|                                                                                        |                              |                           |       |                          |                          |       |       |       |
| Land and buildings                                                                          |                              | $                              | 1,125,556  |                          | $                             | 1,074,059  |       |       |
| Machinery and equipment                                                                     |                              |                           | 209,706    |                          |                          | 205,873    |       |       |
| Fixtures, fittings and office equipment                                                     |                              |                           | 214,922    |                          |                          | 220,664    |       |       |
| River cruiseship and canalboats                                                             |                              |                           | 13,262     |                          |                          | 19,600     |       |       |
|                                                                                        |                              |                           | 1,563,446  |                          |                          | 1,520,196  |       |       |
| Less: accumulated depreciation                                                              |                              |                           | (260,953   | )                             |                          | (246,240   | )          |       |
|                                                                                        |                              | $                              | 1,302,493  |                          | $                             | 1,273,956  |       |       |
|                                                                                             |                                   |                                |            |                               |                               |            |            |            |  |  |  |  |

 

15

 

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

 
| ** **                              |   |   | ** **                     |   |   |                          | ** ** |   |   |
|-----------------------------------------|--------|--------|--------------------------------|--------|--------|-------------------------------|------------|--------|--------|
| ** **                              |   |   | September 30,  2008  |   |   | December 31,  2007  |       |
|                                    |   |   |                           |   |   |                          |       |   |   |
| Freehold and leased land and buildings  |   | $      | 17,465                         |   |   | $                             | 17,948     |   |   |
| Machinery and equipment                 |   |   | 2,625                          |   |   |                          | 2,573      |   |   |
| Fixtures, fittings and office equipment |   |   | 1,578                          |   |   |                          | 1,654      |   |   |
|                                    |   |   | 21,668                         |   |   |                          | 22,175     |   |   |
| Less: accumulated depreciation          |   |   | (3,163                         | )      |   |                          | (2,953     | )      |   |
|                                    |   | $      | 18,505                         |   |   | $                             | 19,222     |   |   |

 
| **6.** | **Goodwill** |
|--------|--------------|

 

Thechanges in the carrying amount of goodwill for the nine months ended September 30,2008 are as follows (dollars in thousands):

 
| ** **                                                         | ** ** | ** **                     | ** ** | ** **                 | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                         | ** ** | Hotels &  Restaurants |       | Trains &  Cruises |       | Total      | ** ** |
|                                                               |       |                           |       |                       |       |       |       |
| Balance as of January 1, 2008                                 |       | $                              | 124,909    |                       | $          | 8,588      |       | $ | 133,497 |   |
| Goodwill acquired during the year/(prior year  estimates adjusted) |       | 1,625                          |       | -                          |       | 1,625      |       |
| Foreign currency translation adjustment                            |       | (3,048                         | )          | (321                       | )          | (3,369     | )          |
| Balance as at September 30, 2008                              |       | $                              | 123,486    |                       | $          | 8,267      |       | $ | 131,753 |   |

 
| **7.** | **Other  intangible assets** |
|--------|------------------------------|
|   | (Dollars in  thousands)      |

 

 
| ** **                            | ** ** | ** ** |                         |       |   |                      | ** ** |
|---------------------------------------|------------|------------|------------------------------|------------|--------|---------------------------|------------|
| ** **                            | ** ** | ** ** | September 30, 2008 | ** ** |
| Amortized intangible assets | ** ** | ** ** | Carrying  amount             |       |   | Accumulated  amortization | ** ** |
|                                  |       |       |                         |       |   |                      |       |
| Favorable lease                       |       | $          | 13,001                       |       | $      | (775                      | )          |
| Internet sites                        |       |       | 2,136                        |       |   | (130                      | )          |
| Total                                 |       | $          | 15,137                       |       | $      | (905                      | )          |
|                                  |       |       |                         |       |   |                      |       |
| Unamortized intangible assets         |       |       |                         |       |   |                      |       |
| Tradename                             |       | $          | 7,375                        |       |   |                      |       |

 

Favorablelease intangible assets are amortized over the term of the lease, which is upto 50 years, and internet sites are amortized over ten years.

 

16

 

Amortization expense for the three monthsended September 30, 2008 was $89,000 (2007 - $87,000).  Amortization expense for the nine monthsended September 30, 2008 was $259,000 (2007 - $325,000).  Estimated amortization expense for each ofthe years ended December 31, 2008 to December 31, 2012 is $340,000.

 

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

 

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

 
| ** **                                                                                                                                                                                                 | ** ** | ** ** | ** **                     | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|--------------------------------|------------|------------|-------------------------------|------------|------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | ** ** | September 30,  2008  |       |       | December 31,  2007  | ** ** |
|                                                                                                                                                                                                       |       |       |                           |       |       |                          |       |       |       |
| Loans from banks collateralized by property, plant  and equipment payable over periods of 1 to 11 years, with a weighted average  interest rate of 5.45% and 5.77%, respectively, primarily based on LIBOR |       | $          | 776,479                        |       |       | $                             | 767,916    |       |       |
|                                                                                                                                                                                                       |       |       |                           |       |       |                          |       |       |       |
| Loan secured by river cruiseship, payable over 3  years, with a weighted interest rate of 7.48% at December 31, 2007 based on  LIBOR                                                                       |       |       | –                         |       |       |                          | 2,500      |       |       |
| Obligations under capital lease                                                                                                                                                                            |       |       | 14,122                         |       |       |                          | 15,994     |       |       |
|                                                                                                                                                                                                       |       |       | 790,601                        |       |       |                          | 786,410    |       |       |
| Less: current portion                                                                                                                                                                                      |       |       | (122,509                       | )          |       |                          | (127,795   | )          |       |
|                                                                                                                                                                                                       |       | $          | 668,092                        |       |       | $                             | 658,615    |       |       |

 

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

 

Of the currentportion of long-term debt, $88,882,000 (December 31, 2007 - $45,140,000)related to revolving facilities which, although falling due within 12 months,are available for re-borrowing throughout the period of the loan facilitieswhich are repayable in 2011 and 2012.

 

Certain creditagreements of OEH have restrictive covenants. At September 30, 2008, OEH was in compliance with these covenants,including a minimum consolidated net worth test and a minimum consolidatedinterest coverage test as defined under a bank-syndicated €190,000,000 loanfacility.  OEH does not currently haveany covenants in its loan agreements which limit the payment of dividends.

 

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at September 30,2008 (dollars in thousands):

 

17

 
|                           |       |       |       |       |
|--------------------------------|------------|------------|------------|------------|
| Year ending  December 31, | ** ** | ** ** | ** ** | ** ** |
|                           |       |       |       |       |
| 2009                           |       | $          | 9,228      |       |
| 2010                           |       |       | 51,103     |       |
| 2011                           |       |       | 387,802    |       |
| 2012                           |       |       | 96,236     |       |
| 2013 and thereafter            |       |       | 123,723    |       |
|                           |       | $          | 668,092    |       |

 

**9.             Other liabilities**

 

Other liabilities are $1,379,000 of deferred consideration in respectof the acquisition of land next to Maroma Resort and Spa after discounting topresent value, $2,058,000 of deferred income relating to guarantees given byOEH in connection with bank loans entered into by the Peruvian hotel jointventure operation (see Note 18), and $1,222,000 in respect of interest rateswaps (see Note 17).

 

**10.          Income taxes**

 

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

 

OEH recorded a tax provision for the three months ended September 30,2008 of $6,686,000 compared to a provision of $11,079,000 for the correspondingperiod in 2007. OEH’s current tax cost for the three months ended September 30,2008 is $9,502,000 compared to a cost of $4,226,000 in 2007.

 

Cumulatively, OEH recorded a tax provision for the nine months ended September 30,2008 of $12,851,000 compared to a provision of $17,110,000 for the correspondingnine months in 2007. OEH’s current tax cost for the nine months ended September 30,2008 is $15,377,000 compared to a cost of $10,058,000 in 2007.

 

OEH’s tax charge for the three months ended September 30, 2008included a tax charge of $54,000 in respect of the provision under FASBinterpretation No. 48, “Accounting for Uncertainty of Income Taxes” (FIN48), of which $46,000 relates to interest and penalty costs associated with theuncertain tax positions.  OEH’s taxcharge of $12,851,000 for the nine months ended September 30, 2008included a tax charge of $862,000 in respect of the FIN 48 provision, includinga charge of $744,000 that related to the potential interest and penalty costs.

 

18

 

As at September 30, 2008, OEH recognized $24,192,000 (December 31,2007 - $24,025,000) provision in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the FIN 48 provision will decrease byapproximately $10,000,000 to $18,000,000 as a result of the resolution of taxpositions in certain jurisdictions in which OEH operates.

 

Earnings from unconsolidated subsidiaries are reported net of tax inthe statements of condensed consolidated operations. The applicable taxprovision in the three months ended September 30, 2008 was $1,574,000compared to a provision of $1,152,000 in the corresponding period in 2007. Thecumulative tax provision applicable to unconsolidated subsidiaries in the ninemonths ended September 30, 2008 was $4,194,000 compared to a provision of$3,715,000 in the corresponding period in 2007.

 

**11.          Pensions**

 

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

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| Three months ended September 30, |       | 2008       |       | 2007       | ** ** |
|                                                 |       |       |       |       |       |
| Service cost                                         |       | $          | -          |       | $          | - |   |
| Interest cost                                        |       | 296        |       | 296        |       |
| Expected return on plan assets                       |       | (282       | )          | (273       | )          |
| Amortization of net loss                             |       | 114        |       | 143        |       |
| Net periodic benefit cost                            |       | $          | 128        |       | $          | 166 |   |

 
|                                  |   |   |   |   |       |
|---------------------------------------|--------|--------|--------|--------|------------|
| Nine months  ended September 30, |   | 2008   |   | 2007   | ** ** |
|                                  |   |   |   |   |       |   |   |
| Service cost                          |   | $      | -      |   | $          | - |   |
| Interest cost                         |   | 917    |   | 870    |       |
| Expected return on plan assets        |   | (872   | )      | (803   | )          |
| Amortization of net loss              |   | 354    |   | 419    |       |
| Net periodic benefit cost             |   | $      | 399    |   | $          | 486 |   |

 

As reported inNote 10 to the financial statements in the Company’s 2007 Form 10-K annualreport, OEH expected to contribute $1,385,000 to its defined benefit pensionplan in 2008.  As of September 30,2008, $1,028,000 of contributions had been made.  OEH anticipates contributing an additional$357,000 to fund its pension plans in 2008 for a total of $1,385,000.

 

19

 

**12.          Supplementalcash flow information**

(Dollars in thousands)

 
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| Nine months ended September 30, |       | 2008       |       | 2007       | ** ** |
|                                                |       |       |       |       |       |
| Cash paid for:                                      |       |       |       |       |       |
| Interest                                            |       | $          | 36,262     |       | $          | 35,415 |   |
| Income taxes                                        |       | $          | 12,820     |       | $          | 7,494 |   |

 

In conjunction with acquisitions (see Note 3)liabilities were assumed as follows (dollars in thousands):

 
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| Nine months ended September 30, |       | 2008       |       | 2007       | ** ** |
|                                                |       |       |       |       |       |
| Fair value of assets acquired                       |       | $          | 3,261      |       | $          | 19,661 |   |
| Cash paid                                           |       | (3,261     | )          | (18,747    | )          |
| Liabilities assumed                                 |       | $          | —     |       | $          | 914 |   |

 

*Restricted cash*

 

Restricted cash of $10,438,000 as at September 30,2008 and $3,800,000 as at December 31, 2007 consisted mainly of the PortoCupecoy escrow account.  Cash receivedfor residential condominium purchases at Cupecoy is held in escrow.  Most of the escrow account cash is releasedinto OEH’s current bank account when the next phase of construction iscompleted.  At September 30, 2008,Porto Cupecoy escrow account balance amounted to $9,871,000 (December 31,2007 - $3,800,000).

 

**13.          Accumulatedother comprehensive income**

 

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

 
| ** **                                       | ** ** | ** ** | ** **               | ** ** | ** ** | ** **              | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|--------------------------|------------|------------|-------------------------|------------|------------|------------|
| ** **                                       | ** ** | ** ** | September 30,  2008 |       |       | December 31,  2007 | ** ** |
|                                             |       |       |                     |       |       |                    |       |       |       |
| Foreign currency translation adjustments         |       | $          | 9,197                    |       |       | $                       | 38,191     |       |       |
| Derivative financial instruments                 |       |       | 192                      |       |       |                    | 730        |       |       |
| Additional minimum pension liability, net of tax |       |       | (8,490                   | )          |       |                    | (8,490     | )          |       |
|                                             |       | $          | 899                      |       |       | $                       | 30,431     |       |       |

 

20

 

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

 
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| Nine months ended September 30, |       | 2008       |       | 2007       | ** ** |
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                        |       | $          | 21,505     |       | $          | 38,575 |   |
| Foreign currency translation adjustments            |       | (28,994    | )          | 30,841     |       |
| Change in fair value of derivatives                 |       | (538       | )          | 1,593      |       |
| Comprehensive (loss)/income                         |       | $          | (8,027     | )          | $          | 71,009 |   |

 

**14.          Commitments**

 

Outstanding contracts to purchase fixed assets wereapproximately $122,628,000 at September 30, 2008 (December 31, 

2007 - $102,361,000).

 

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

 

As reported in the Company’s 2007 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants, (ii) tourist trains and cruises, and (iii) real estateand property development.  Segmentperformance is evaluated based upon segment net earnings before interest,foreign currency, tax (including tax on earnings from unconsolidatedcompanies), depreciation and amortization (“segment EBITDA”).  Financial information regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 

21

 
|                                                             |                            |       |    |       |   |
|------------------------------------------------------------------|---------------------------------|------------|---------|------------|--------|
| Three months ended September 30,                            |                            | 2008  |    | 2007  |   |
| Revenue:                                                         |                            |       |    |       |   |
| Hotels and restaurants                                           |                            |       |    |       |   |   |
| Owned hotels                                                     | –  Europe        |       | $       | 91,622     |   | $ | 86,728 |   |
|                                                             | –  North America |       |    | 16,729     |   |   | 17,908 |   |
|                                                             | –  Rest of world |       |    | 33,437     |   |   | 28,284 |   |
| Hotel management/part ownership interests                        |                            |       | 2,426   |       |   | 2,279 |   |
| Restaurants                                                      |                            |       | 3,337   |       |   | 3,439 |   |
|                                                             |                            |       | 147,551 |       |   | 138,638 |   |
| Tourist trains and cruises                                       |                            |       | 27,424  |       |   | 26,164 |   |
| Real estate                                                      |                            |       | 3,454   |       |   | 14,073 |   |
|                                                             |                            | $          | 178,429 |       | $      | 178,875 |   |
|                                                             |                            |       |    |       |   |   |   |
| Depreciation and amortization:                                   |                            |       |    |       |   |   |   |
| Hotels and restaurants                                           |                            |       |    |       |   |   |   |
| Owned hotels                                                     | –  Europe        |       | $       | 4,612      |   | $ | 4,216 |   |
|                                                             | –  North America |       |    | 1,922      |   |   | 1,969 |   |
|                                                             | –  Rest of world |       |    | 2,272      |   |   | 2,494 |   |
| Restaurants                                                      |                            |       | 266     |       |   | 282 |   |
|                                                             |                            |       | 9,072   |       |   | 8,961 |   |
| Tourist trains and cruises                                       |                            |       | 766     |       |   | 983 |   |
|                                                             |                            | $          | 9,838   |       | $      | 9,944 |   |
|                                                             |                            |       |    |       |   |   |   |
| Segment EBITDA:                                                  |                            |       |    |       |   |   |   |
| Owned hotels                                                     | –  Europe        |       | $       | 36,549     |   | $ | 38,254 |   |
|                                                             | –  North America |       |    | (1,532     | )      |   | 944 |   |
|                                                             | –  Rest of world |       |    | 6,681      |   |   | 6,497 |   |
| Hotel management/part ownership interests                        |                            |       | 4,664   |       |   | 5,757 |   |
| Restaurants                                                      |                            |       | (432    | )          |   | (237 | ) |
| Tourist trains and cruises                                       |                            |       | 10,247  |       |   | 9,555 |   |
| Real estate                                                      |                            |       | (223    | )          |   | 3,160 |   |
| Central overheads                                                |                            |       | (6,195  | )          |   | (7,669 | ) |
| Gain on disposal of fixed assets                                 |                            |       | -       |       |   | 2,312 |   |
|                                                             |                            | $          | 49,759  |       | $      | 58,573 |   |
|                                                             |                            |       |    |       |   |   |   |
| Segment EBITDA/net earnings  reconciliation:                     |                            |       |    |       |   |   |   |
| Segment EBITDA                                                   |                            | $          | 49,759  |       | $      | 58,573 |   |
| Less:                                                            |                            |       |    |       |   |   |   |
| Depreciation and amortization                                    |                            |       | 9,838   |       |   | 9,944 |   |
| Interest expense, net                                            |                            |       | 11,588  |       |   | 12,629 |   |
| Foreign currency, net                                            |                            |       | 2,522   |       |   | 1,474 |   |
| Provision for income taxes                                       |                            |       | 6,686   |       |   | 11,079 |   |
| Share of provision for income taxes of  unconsolidated companies |                            |       | 1,574   |       |   | 1,152 |   |
| Earnings from continuing operations                              |                            | $          | 17,551  |       | $      | 22,295 |   |
|                                                             |                            |       |    |       |   |   |   |
| Earnings from unconsolidated companies, net of tax:              |                            |       |    |       |   |   |   |
| Hotels and restaurants                                           |                            |       |    |       |   |   |   |
| Hotel management/part ownership interests                        |                            | $          | 1,228   |       | $      | 2,968 |   |
| Tourist trains and cruises                                       |                            |       | 2,996   |       |   | 2,662 |   |
|                                                             |                            | $          | 4,224   |       | $      | 5,630 |   |

 

22

 
|                                                             |                            |   |    |    |   |
|------------------------------------------------------------------|---------------------------------|--------|---------|---------|--------|
| Nine months ended September 30,                             |                            | 2008   |    | 2007    |   |
| Revenue:                                                         |                            |   |    |    |   |
| Hotels and restaurants                                           |                            |   |    |    |   |   |
| Owned hotels                                                     | –  Europe        |   | $       | 204,435 |   | $ | 184,842 |   |
|                                                             | –  North America |   |    | 67,119  |   |   | 63,032 |   |
|                                                             | –  Rest of world |   |    | 105,044 |   |   | 86,981 |   |
| Hotel management/part ownership interests                        |                            |   | 8,251   |    |   | 7,577 |   |
| Restaurants                                                      |                            |   | 13,491  |    |   | 14,377 |   |
|                                                             |                            |   | 398,340 |    |   | 356,809 |   |
| Tourist trains and cruises                                       |                            |   | 64,145  |    |   | 60,772 |   |
| Real estate                                                      |                            |   | 11,980  |    |   | 14,920 |   |
|                                                             |                            | $      | 474,465 |    | $      | 432,501 |   |
|                                                             |                            |   |    |    |   |   |   |
| Depreciation and amortization:                                   |                            |   |    |    |   |   |   |
| Hotels and restaurants                                           |                            |   |    |    |   |   |   |
| Owned hotels                                                     | –  Europe        |   | $       | 14,200  |   | $ | 11,923 |   |
|                                                             | –  North America |   |    | 5,764   |   |   | 5,519 |   |
|                                                             | –  Rest of world |   |    | 6,938   |   |   | 7,246 |   |
| Restaurants                                                      |                            |   | 828     |    |   | 743 |   |
|                                                             |                            |   | 27,730  |    |   | 25,431 |   |
| Tourist trains and cruises                                       |                            |   | 2,674   |    |   | 3,045 |   |
|                                                             |                            | $      | 30,404  |    | $      | 28,476 |   |
|                                                             |                            |   |    |    |   |   |   |
| Segment EBITDA:                                                  |                            |   |    |    |   |   |   |
| Owned hotels                                                     | –  Europe        |   | $       | 66,995  |   | $ | 66,477 |   |
|                                                             | –  North America |   |    | 9,093   |   |   | 10,379 |   |
|                                                             | –  Rest of world |   |    | 23,061  |   |   | 23,711 |   |
| Hotel management/part ownership interests .                      |                            |   | 17,618  |    |   | 17,433 |   |
| Restaurants                                                      |                            |   | 1,137   |    |   | 1,919 |   |
| Tourist trains and cruises                                       |                            |   | 21,616  |    |   | 19,415 |   |
| Real estate                                                      |                            |   | (1,183  | )       |   | 2,678 |   |
| Central overheads                                                |                            |   | (20,153 | )       |   | (20,685 | ) |
| Gain on disposal of fixed assets                                 |                            |   | -       |    |   | 2,312 |   |
|                                                             |                            | $      | 118,184 |    | $      | 123,639 |   |
| Segment EBITDA/net earnings  reconciliation:                     |                            |   |    |    |   |   |   |
| Segment EBITDA                                                   |                            | $      | 118,184 |    | $      | 123,639 |   |
| Less:                                                            |                            |   |    |    |   |   |   |
| Depreciation and amortization                                    |                            |   | 30,404  |    |   | 28,476 |   |
| Interest expense, net                                            |                            |   | 35,978  |    |   | 34,077 |   |
| Foreign currency, net                                            |                            |   | (2,140  | )       |   | 221 |   |
| Provision for income taxes                                       |                            |   | 12,851  |    |   | 17,110 |   |
| Share of provision for income taxes of  unconsolidated companies |                            |   | 4,194   |    |   | 3,715 |   |
| Earnings from continuing operations                              |                            | $      | 36,897  |    | $      | 40,040 |   |
|                                                             |                            |   |    |    |   |   |   |
| Earnings from unconsolidated companies, net of tax:              |                            |   |    |    |   |   |   |
| Hotels and restaurants                                           |                            |   |    |    |   |   |   |
| Hotel management/part ownership interests                        |                            | $      | 7,288   |    | $      | 7,550 |   |
| Tourist trains and cruises                                       |                            |   | 6,841   |    |   | 4,617 |   |
|                                                             |                            | $      | 14,129  |    | $      | 12,167 |   |

 

23

 
|                                 |                            |       |   |       |   |
|--------------------------------------|---------------------------------|------------|--------|------------|--------|
| Nine months ended September 30, |                            | 2008  |   | 2007  |   |
|                                 |                            |       |   |       |   |
| Capital expenditure:                 |                            |       |   |       |   |   |
| Owned hotels                         | –  Europe        |       | $      | 28,637     |   | $ | 27,896 |   |
|                                 | –  North America |       |   | 17,465     |   |   | 29,127 |   |
|                                 | –  Rest of world |       |   | 18,263     |   |   | 11,521 |   |
| Restaurants                          |                            |       | 544    |       |   | 723 |   |
| Tourist trains and cruises           |                            |       | 3,145  |       |   | 2,967 |   |
| Real estate                          |                            |       | 11,253 |       |   | 3,977 |   |
|                                 |                            | $          | 79,307 |       | $      | 76,211 |   |

 

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

 
|                             |   |       |    |       |   |
|----------------------------------|--------|------------|---------|------------|--------|
| Three months ended September 30, |   | 2008  |    | 2007  |   |
|                             |   |       |    |       |   |
| Revenue:                         |   |       |    |       |   |
| Europe                           |   | $          | 117,383 |       | $      | 111,330 |   |
| North America                    |   | 24,850     |    | 36,064     |   |
| Rest of world                    |   | 36,196     |    | 31,481     |   |
|                             |   | $          | 178,429 |       | $      | 178,875 |   |

 
|                            |   |       |    |       |   |
|---------------------------------|--------|------------|---------|------------|--------|
| Nine months ended September 30, |   | 2008  |    | 2007  |   |
|                            |   |       |    |       |   |
| Revenue:                        |   |       |    |       |   |
| Europe                          |   | $          | 263,451 |       | $      | 240,806 |   |
| North America                   |   | 96,624     |    | 95,143     |   |
| Rest of world                   |   | 114,390    |    | 96,552     |   |
|                            |   | $          | 474,465 |       | $      | 432,501 |   |

 

**16.          Stock-basedawards with performance/market criteria**

 

On March 3,2008, the Company granted to nine employees share-based awards with performanceand market conditions covering a total of 29,765 class A common shares underits 2007 performance share plan.  Theshares will be issued after three years from the grant date upon payment of anominal amount, provided performance and market criteria set forth in theawards are met.  All of these awards wereoutstanding at September 30, 2008.

 

Half of eachaward is subject to performance criteria based on OEH’s earnings before tax forthe year ending December 31, 2010, and the other half of each award issubject to market criteria based on OEH’s total shareholder return compared tothe average total shareholder return of a specified group of 

 

24

 

other hoteland leisure companies over the period of three years.

 

When theshares are issued under the awards, the grantees are also entitled to receive acash equivalent of the dividends, if any, that would have been paid on theclass A common shares during the period between the grant date and the shareissue date.

 

The fair valueof the awards with performance and market conditions granted in the nine monthsended September 30, 2008 was $568,000 (2007 - $nil).  The weighted-average grant date fair value ofthe performance-based part of the awards was $51.95 per share and of themarket-based part of the awards $31.60 per share.  The assumptions used in the Monte Carlovaluation model were:

 

| Expected  share price volatility     |   | 33.1%   |
|--------------------------------------|--------|---------|
| Risk-free  interest rate             |   | 1.76%   |
| Expected  annual dividends per share |   | $0.10   |
| Expected  life of awards             |   | 3 years |

 

Expectedvolatility is based on historical volatility of the Company’s class A commonshare price and other factors.  The termof awards represents the period of time they are expected to be outstanding,based on historical data.  The risk-freerate for periods within the vesting period of the awards is based on the USTreasury yield curve in effect at the time of grant.

 

**17.          Derivativefinancial instruments**

 

*Interest rate swaps*

 

OEH is exposedto interest rate risk on its floating rate debt, and in the last few years hasentered into interest rate swap agreements that limit the exposure to a fixedrate level.

 

In September 2006,OEH entered into five-year interest rate swap agreements for the notionalamounts of €75,000,000 ($118,000,000) and €24,700,000 ($38,900,000) that limitthe exposure from interest rate fluctuations of Euro debt to a fixed ratelevel.

 

Although theinterest rate swap for €24,700,000 economically hedges the interest rate risk,it has not qualified as a cash flow hedge from inception and, therefore,changes in the fair value of this swap have been recorded within interestexpense of $403,000 loss for the three months ended September 30, 2008(2007 - $250,000), and $184,000 loss for the nine months ended September 30,2008 (2007 - $396,000 gain).

 

25

 

The interestrate swap for €75,000,000 has been designated and has qualified as a cash flowhedge of the floating rate debt effective December 31, 2006.  This swap is expected to be, and has been,highly effective in off-setting exposures from fluctuations in interestrates.  The movements recorded in othercomprehensive income were $2,270,000 loss for the three months ended September 30,2008 (2007 - $1,036,000), and $215,000 loss for the nine months ended September 30,2008 (2007 - $1,410,000 gain).  The ineffectiveportion recorded in earnings was $190,000 loss for the three months ended September 30,2008 (2007 - $77,000), and $311,000 loss for the nine months ended September 30,2008 (2007 - $28,000).

 

In October 2007,OEH entered into five-year interest rate swap agreements for the notionalamounts of $10,000,000 and $20,000,000 that limit the exposure from interestrate fluctuations of US dollar debt to a fixed rate level.

 

The swaps havebeen designated and qualified as cash flow hedges of the floating rate debteffective since October 18, 2007. These swaps are expected to be, and have been, highly effective.  The movements recorded in other comprehensiveincome were $457,000 loss for the three months ended September 30, 2008(2007 - $nil), and $377,000 loss for the nine months ended September 30,2008 (2007 - $nil).

 

In April 2008,OEH entered into six different three- to five-year interest rate swapagreements for the total notional amount of $151,000,000, amortizing to$96,800,000, that limit the exposure from interest rate fluctuations of USdollar debt to a fixed rate level.

 

The swaps havebeen designated and have qualified as cash flow hedges of the floating ratedebt effective since April 29, 2008. These swaps are expected to be, and have been, highly effective.  The movements recorded in other comprehensiveincome were $959,000 loss for the three months ended September 30, 2008(2007 - $nil) and $126,000 gain for the nine months ended September 30,2008 (2007 - $nil).

 

Of theexisting losses at September 30, 2008, approximately $656,000 will bereclassified into earnings in the next 12 months, assuming no further changesin fair value of the contracts.

 

To comply withthe provision of SFAS No. 157, OEH incorporates credit valuationadjustments to reflect appropriately both its own non-performance risk and therespective counterparty’s non-performance risk in the fair valuemeasurements.  In adjusting the fairvalue of its derivative contracts for the 

 

26

 

effect ofnon-performance risks, OEH has considered the impact of netting and anyapplicable credit enhancements, such as collateral postings, thresholds, mutualputs and guarantees.

 

At September 30,2008 and December 31, 2007, the fair values of the outstanding interestrate swaps were as follows (dollars in thousands):

 
|                         |   |                     |   |                 |   |               |   |                     |   |
|------------------------------|--------|--------------------------|--------|----------------------|--------|--------------------|--------|--------------------------|--------|
|                         |   | September 30,  2008 |   |
| Derivative Name              |   | Current  asset           |   | Non-  current  asset |   | Current  liability |   | Non-  current  liability |   |
| Euro swap €75 million   |   | $                        | 861    |                 |   | $                  | 798    |                     |   | $ | – |   |   | $ | – |   |   |
| Euro swap €24.7 million |   | 210                      |   |                 | 138    |               |   | –                   |   |   | – |   |   |
| USD swap $10 million         |   | –                   |   |                 | – |               |   | 99                       |   |   | 359 |   |   |
| USD swap $20 million         |   | –                   |   |                 | – |               |   | 192                      |   |   | 748 |   |   |
| USD swaps $151 million       |   | 160                      |   |                 | 511    |               |   | 432                      |   |   | 115 |   |   |
|                         |   | $                        | 1,231  |                 |   | $                  | 1,447  |                     |   | $ | 723 |   |   | $ | 1,222 |   |   |

 
|                         |   |                  |   |                 |   |               |   |                     |   |
|------------------------------|--------|-----------------------|--------|----------------------|--------|--------------------|--------|--------------------------|--------|
|                         |   | December 31,2007 |   |
| Derivative Name              |   | Current  asset        |   | Non-  current  asset |   | Current  liability |   | Non-  current  liability |   |
| Euro swap €75 million   |   | $                     | 627    |                 |   | $                  | 1,660  |                     |   | $ | – |   |   | $ | – |   |   |
| Euro swap €24.7 million |   | 199                   |   |                 | 347    |               |   | –                   |   |   | – |   |   |
| USD swap $10 million         |   | –                |   |                 | – |               |   | –                   |   |   | 337 |   |   |
| USD swap $20 million         |   | –                |   |                 | – |               |   | –                   |   |   | 685 |   |   |
| USD swaps $151 million       |   | –                |   |                 | – |               |   | –                   |   |   | – |   |   |
|                         |   | $                     | 826    |                 |   | $                  | 2,007  |                     |   | $ | – |   |   | $ | 1,022 |   |   |

 

The fairvalues of the swaps were accounted for as accounts receivable, othernon-current assets, accrued liabilities and other long-term liabilities.

 

*Net investment hedges*

 

OEH designatedits Euro-denominated revolving indebtedness as a net investment hedge oflong-term investments in its Euro-functional subsidiaries.  The amount of gains and losses related to theeffective portion of the net investment hedge, net of tax, recorded in othercomprehensive income was $36,000 gain for the three months ended September 30,2008 (2007 - $nil) and $5,479,000 loss for the nine months ended September 30,2008 (2007 - $nil).  There has been noineffective portion of the hedge.

 

27

 

**18. Related party transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due to OEH by Eastern and OrientalExpress Ltd. at September 30, 2008 was $1,891,000 (December 31, 2007- $1,330,000).

 

OEH managesunder a long-term contract the Charleston Place Hotel (accounted for under theequity method) and has made loans to the hotel-owning company.  The carrying value of investments in thehotel, which include equity investments and loans, amounted to $70,552,000 atSeptember 30, 2008 (December 31, 2007 - $60,550,000).  For the three months ended September 30,2008, OEH earned $875,000 (2007 - $958,000) in management fees which arerecorded in revenue, and $3,078,000 (2007 - $3,474,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  For the nine months ended September 30,2008, OEH earned $3,763,000 (2007 - $3,850,000) in management fees which arerecorded in revenue, and $9,082,000 (2007 - $9,203,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  These loans have anindefinite maturity period.  The amountdue to OEH from Charleston Place Hotel at September 30, 2008 was$12,309,000 (December 31, 2007 - $19,749,000).

 

OEH managesunder long-term contracts the Hotel Monasterio, the Machu Picchu SanctuaryLodge and Las Casitas del Colca owned by its 50/50 joint venture with localPeruvian interests, as well as the 50/50-owned PeruRail operation, and providesloans, guarantees and other credit accommodation to these joint ventures.  In the three months ended September 30,2008, OEH earned management and guarantee fees of $2,259,000 (2007 -$1,898,000) and loan interest of $13,000 (2007 - $16,000) which are recorded inrevenue.  In the nine months ended September 30,2008, OEH earned management and guarantee fees of $5,973,000 (2007 -$4,846,000) and loan interest of $44,000 (2007 - $47,000) which are recorded inrevenue.  At September 30, 2008, OEHhad a $750,000 subordinated loan to the PeruRail operation with an indefinitematurity date and interest at a spread over LIBOR.  OEH has guaranteed bank loans of $16,522,000which have been drawn down by the hotel joint venture.  OEH expects to earn $2,388,000 in guaranteefees over the remaining period of the loans and this amount was included in theamounts due to OEH at September 30, 2008. The amount due to OEH from its Peruvian joint venture operations at September 30,2008 was $9,238,000 (December 31, 2007 - $6,277,000).

 

OEH managesunder a long-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a50% interest and is accounted for under the equity method.  For the three months ended September 30,2008, OEH earned $354,000 (2007 - $343,000) in management fees, which areincluded in revenue.  For the nine monthsended 

 

28

 

September 30,2008, OEH earned $1,202,000 (2007 - $1,028,000) in management fees, which areincluded in revenue.  The amount due toOEH from the Hotel Ritz, Madrid, at September 30, 2008 was $2,458,000 (December 31,2007 - $2,624,000).

 

JamesSherwood, a director of the Company, has a right of first refusal to purchasethe Hotel Cipriani in Venice, Italy in the event OEH proposes to sell it.  The purchase price would be the offered saleprice in the case of a cash sale or the fair market value of the hotel, asdetermined by an independent valuer, in the case of a non-cash sale.  Mr. Sherwood has also been granted anoption to purchase the hotel at fair market value if a change in control of theCompany occurs.

 

29

 

**ITEM 2.                  Management's Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Results of Operations**

** **

**Overview**

 

OEH has threebusiness segments, namely (1) hotels and restaurants, (2) touristtrains and cruises and (3) real estate and property development.  Hotels currently consist of 41 deluxehotels.  Thirty-six of these hotels arewholly or majority owned, and are referred to in this discussion as “ownedhotels”.  The other five hotels, in whichOEH has unconsolidated equity interests and operate under management contracts,are referred to in this discussion as “hotel management interests”.  Of the owned hotels, 12 are located in Europe,seven in North America and 17 in the rest of the 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 restaurants ‘21’ Club in New York and La Cabañain Buenos Aires.

 

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.

 

OEH’s operations are subject to adversefactors generally encountered in the hospitality and travel industries,including

 

·     cyclicaldownturns arising from changes in general and local economic conditions andbusiness activities, which impact levels of travel and demand for travelproducts,

 

·     lessdisposable income of consumers and the travelling public,

 

·     dependenceon varying levels of tourism, business travel and corporate entertainment,

 

·     changesin popular travel patterns,

 

·     competitionfrom other hotels and leisure time activities,

 

·     periodiclocal oversupply of guest accommodation, which may adversely affect occupancyand actual room rates achieved,

 

·     increasesin operating costs at OEH properties due to inflation and other factors whichmay not be offset by increased revenues, and changes in costs of materials,

 

·     foreignexchange rate movements impacting OEH’s revenues and costs,

 

·     adverseweather conditions or destructive forces like fire or flooding that sometimesresult in closure of OEH’s properties, and

 

·     seasonality,in that many of OEH’s hotels and tourist trains are located in the northernhemisphere where they operate at low revenue or close during the winter months.

 

The effect of these factorsvaries among OEH’s hotels and other properties because of their geographicdiversity.  The currently weakeningeconomies of North America, Europe and other regions and the current disruptionof financial markets in various parts of the world have resulted in shorterlead times for reservations at many of OEH’s properties because of customers’economic uncertainty.  As a result, OEH’sability to forecast operating results and cash flows has been reduced.  These factors have also affected OEH’sliquidity outlook as discussed below under the heading “Liquidity and WorkingCapital - Liquidity.”

 

30

 

**Three months Ended September 30,2008 compared to**

**Three months Ended September 30,2007                      **

** **

OEH'soperating results for the three months ended September 30, 2008 and 2007,expressed as a percentage of revenue, were as follows:

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Three months ended September 30,                    |   | 2008   |   | 2007   |   |
|                                                |   | %      |   | %      |   |
| Revenue                                             |   |   |   |   |   |   |   |
| Hotels and restaurants                              |   | 83     |   |   | 78     |   |   |
| Tourist trains and cruises                          |   | 15     |   |   | 14     |   |   |
| Real estate                                         |   |   | 2      |   |   |   | 8 |   |   |
|                                                |   |   | 100    |   |   |   | 100 |   |   |
|                                                |   |   |   |   |   |   |   |
| Expenses                                            |   |   |   |   |   |   |   |
| Depreciation and amortization                       |   | 6      |   |   | 6      |   |   |
| Operating                                           |   | 46     |   |   | 48     |   |   |
| Selling, general and administrative                 |   | 29     |   |   | 24     |   |   |
| Gain on disposal of assets                          |   | – |   |   | (1     | ) |   |
| Net finance costs                                   |   |   | 8      |   |   |   | 8 |   |   |
| Earnings before income taxes                        |   | 11     |   |   | 15     |   |   |
| Provision for income taxes                          |   | (4     | )      |   | (6     | ) |   |
| Earnings from unconsolidated companies              |   |   | 2      |   |   |   | 3 |   |   |
| Net earnings from continuing operations             |   |   | 9      |   |   |   | 12 |   |   |
| Net losses from discontinued operations, net of tax |   |   | (6     | )      |   |   | – |   |   |
| Net earnings as a percentage of revenue             |   |   | 3      |   |   |   | 12 |   |   |

 

Segment net earnings before interest, foreignexchange, tax (including tax on unconsolidated companies), depreciation andamortization (“segment EBITDA”) of OEH's operations for the three months endedSeptember 30, 2008 and 2007 are analyzed as follows (dollars in millions):

 

31

 

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Three months ended September 30, |       | 2008       |       | 2007       |       |       |       |
|                                                 |       |       |       |       |       |       |       |
| Segment  EBITDA:                                     |       |       |       |       |       |       |       |
| Owned  hotels:                                       |       |       |       |       |       |       |       |
| Europe                                               |       | $          | 36.5       |       | $          | 38.3       |       |   |   |
| North America                                        |       | (1.5       | )          | 0.9        |       |       |       |
| Rest of the World                                    |       | 6.7        |       | 6.5        |       |       |       |
| Hotel management interests                           |       | 4.7        |       | 5.7        |       |       |       |
| Restaurants                                          |       | (0.4       | )          | (0.2       | )          |       |       |
| Tourist trains and cruises                           |       | 10.2       |       | 9.6        |       |       |       |
| Real estate                                          |       | (0.2       | )          | 3.2        |       |       |       |
| Gain on disposal of assets                           |       | -          |       | 2.3        |       |       |       |
| Central overheads                                    |       |  (6.2 | )          |  (7.7 | )          |       |       |
| Total segment EBITDA                                 |       | $          |       | 49.8       |       | $          |       | 58.6 |   |   |   |
|                                                      |            |            |            |            |            |            |            |  |  |  |  |

 

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

 
|                                                             |   |            |   |            |   |   |   |
|------------------------------------------------------------------|--------|-----------------|--------|-----------------|--------|--------|--------|
| Three months ended September 30,                            |   | 2008            |   | 2007            |   |   |   |
|                                                             |   |            |   |            |   |   |   |
| Net earnings                                                     |   | $               | 6.4    |            | $      | 22.6   |   |   |   |
| Add:                                                             |   |            |   |            |   |   |   |
| Depreciation and amortization                                    |   | 9.8             |   | 9.9             |   |   |   |
| Net finance costs                                                |   | 14.1            |   | 14.1            |   |   |   |
| Provision for income taxes                                       |   | 6.7             |   | 11.1            |   |   |   |
| Loss/(earnings) from discontinued operations, net of  tax        |   | 11.2            |   | (0.3            | )      |   |   |
| Share of provision for income taxes of  unconsolidated companies |   |   1.6 |   |   1.2 |   |   |   |
| Segment EBITDA                                                   |   | $               |   | 49.8            |   | $      |   | 58.6 |   |   |   |
|                                                                  |        |                 |        |                 |        |        |        |  |  |  |  |

 

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 US generally accepted accounting principles) as ameasure of OEH’s operating performance, or as an alternative to net cashprovided by operating, investing and financing activities (as determined inaccordance with US generally accepted accounting principles) as a measure ofOEH’s ability to meet cash needs.

 

32

 

Operating information for OEH’s owned hotels for thethree months ended September 30, 2008 and 2007 is as follows:

 
|                            |   | Three months  ended  September 30, |   |           |   |     |   |
|---------------------------------|--------|----------------------------------------------|--------|----------------|--------|----------|--------|
|                            |   | 2008                                         |   | 2007           |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
| Average Daily Rate (in dollars) |   |                                         |   |           |   |     |   |   |   |
| Europe                          |   | 917                                          |   | 807            |   |     |   |   |   |
| North America                   |   | 325                                          |   | 302            |   |     |   |   |   |
| Rest of the world               |   | 279                                          |   | 244            |   |     |   |   |   |
| Worldwide                       |   | 533                                          |   | 479            |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
| Rooms Available (in thousands)  |   |                                         |   |           |   |     |   |   |   |
| Europe                          |   | 92                                           |   | 92             |   |     |   |   |   |
| North America                   |   | 55                                           |   | 55             |   |     |   |   |   |
| Rest of the world               |   | 109                                          |   | 101            |   |     |   |   |   |
| Worldwide                       |   | 256                                          |   | 248            |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
| Rooms Sold (in thousands)       |   |                                         |   |           |   |     |   |   |   |
| Europe                          |   | 59                                           |   | 63             |   |     |   |   |   |
| North America                   |   | 30                                           |   | 34             |   |     |   |   |   |
| Rest of the world               |   |   66                                    |   |   62 |   |     |   |   |   |
| Worldwide                       |   | 155                                          |   | 159            |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
| Occupancy (percentage)          |   |                                         |   |           |   |     |   |   |   |
| Europe                          |   | 64                                           |   | 68             |   |     |   |   |   |
| North America                   |   | 54                                           |   | 63             |   |     |   |   |   |
| Rest of the world               |   | 60                                           |   | 62             |   |     |   |   |   |
| Worldwide                       |   | 60                                           |   | 64             |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
| RevPAR (in dollars)             |   |                                         |   |           |   |     |   |   |   |
| Europe                          |   | 589                                          |   | 551            |   |     |   |   |   |
| North America                   |   | 174                                          |   | 189            |   |     |   |   |   |
| Rest of the world               |   | 167                                          |   | 151            |   |     |   |   |   |
| Worldwide                       |   | 320                                          |   | 309            |   |     |   |   |   |
|                            |   |                                         |   |           |   |     |   |   |   |
|                            |   |                                         |   |           |   | Change % |   |
| Same Store RevPAR (in dollars)  |   |                                         |   |           |   | Dollars  |   | Local  Currency |   |
| Europe                          |   | 589                                          |   | 551            |   | 7%       |   | -3% |   |
| North America                   |   | 175                                          |   | 191            |   | -9%      |   | -9% |   |
| Rest of the world               |   | 145                                          |   | 116            |   | 25%      |   | 25% |   |
| Worldwide                       |   | 334                                          |   | 307            |   | 9%       |   | 1% |   |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation. Occupancy is the number of rooms sold divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, such as by excludingthe effect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 

33

 
| Copacabana Palace     | Bora Bora Lagoon Resort |
|-----------------------|-------------------------|
| El Encanto            | Mount Nelson Hotel      |
| Casa de Sierra Nevada | Hotel das Cataratas     |

 

*Overview*

* *

The net earnings for the period were $6.4 million ($0.15per common share) on revenue of $178.4 million, compared with net earnings of$22.6 million ($0.53 per common share) on revenue of $178.9 million in the sameperiod in the prior year. The net earnings from continuing operations for theperiod were $17.6 million ($0.41 per common share) compared with net earningsfrom continuing operations of $22.3 million ($0.52 per common share) in theprior year period.

 

*Revenue*

** **
|                                      |   |                    |    |    |   |    |   |
|-------------------------------------------|--------|-------------------------|---------|---------|--------|---------|--------|
| Three months ended September 30,     |   | 2008                    |    | 2007    |   |    |   |
|                                      |   | (dollars in  thousands) |    |    |   |
|                                      |   |                    |    |    |   |    |   |
| Revenue:  Hotels and restaurants          |   |                    |    |    |   |    |   |
| Owned hotels                              |   |                    |    |    |   |    |   |
| Europe                                    |   | $                       | 91,622  |    | $      | 86,728  |   |   |   |
| North America                             |   | 16,729                  |    | 17,908  |   |    |   |
| Rest of the world                         |   | 33,437                  |    | 28,284  |   |    |   |
| Hotel management/part ownership interests |   | 2,426                   |    | 2,279   |   |    |   |
| Restaurants                               |   | 3,337                   |    | 3,439   |   |    |   |
|                                      |   | 147,551                 |    | 138,638 |   |    |   |
| Tourist trains and cruises                |   | 27,424                  |    | 26,164  |   |    |   |
| Real estate                               |   | 3,454                   |    | 14,073  |   |    |   |
|                                      |   | $                       | 178,429 |    | $      | 178,875 |   |   |   |

** **

Total revenuesdecreased by $0.5 million, from $178.9 million in the three months ended September 30,2007 to $178.4 million in the three months ended September 30, 2008.  Hotels and restaurants revenue increased by$9.0 million, or 6%, from $138.6 million in the three months ended September 30,2007 to $147.6 million in the three months ended September 30, 2008. Touristtrains and cruises revenue increased by $1.2 million, or 5%, from $26.2 millionfor the three months ended September 30, 2007 to $27.4 million for thethree months ended September 30, 2008. Real estate revenue decreased by $10.6 million from $14.1 million forthe three months ended September 30, 2007 to $3.5 million for the threemonths ended September 30, 2008.

 

The increasein hotel revenue year on year was due primarily to increased room rates acrossthe group.  Of hotel revenue growth, $5.9million was due to exchange rate fluctuations in Europe.

 

34

 

The revenuefrom restaurants decreased by $0.1 million, or 3%, from $3.4 million in thethree months ended September 30, 2007 to $3.3 million in the three monthsended September 30, 2008.

 

*Owned Hotels:*  For owned hotels overall, same store RevPARin US dollars increased by 9% in the three months ended September 30, 2008compared to the three months ended September 30, 2007.  Measured in local currency this increase insame store RevPAR was 1%.

 

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

 

*Europe*

 
|                                  |   |   |   |   |   |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Three months ended September 30, |   | 2008   |   | 2007   |   |   |   |
|                                  |   |   |   |   |   |   |   |   |   |
| Average daily rate (in dollars)       |   | 917    |   |   | 807    |   |   |   |   |
| Rooms available (in thousands)        |   | 92     |   |   | 92     |   |   |   |   |
| Rooms sold (in thousands)             |   | 59     |   |   | 63     |   |   |   |   |
| Occupancy (percentage)                |   | 64     |   |   | 68     |   |   |   |   |
| RevPAR (in dollars)                   |   | 589    |   |   | 551    |   |   |   |   |
| Same store RevPAR (in dollars)        |   | 589    |   |   | 551    |   |   |   |   |

 

Revenueincreased by $4.9 million, or 6%, from $86.7 million for the three months endedSeptember 30, 2007 to $91.6 million for the three months ended September 30,2008.  The Grand Hotel Europe revenuesgrew by $2.5 million, or 18%, from $13.8 million for the three months ended September 30,2007 to $16.3 million for the three months ended September 30, 2008.  Of the increased revenue, $1.8 million wasdue to average rate improvements despite a small reduction in occupancycompared with the prior year.  Exchangerate movements were responsible for the other $0.7 million of revenue growth inthe period.

 

In Italy,revenues at the Hotel Splendido increased by $1.3 million, or 8%, to $17.0million in the three months ended September 30, 2008, but this was partlyoffset by a drop in revenues of $0.6 million at the Villa San Michele.  Revenues at this hotel were $5.6 million inthe three months ended September 30, 2008 compared to $6.2 million in thesame period in the prior year.  Revenuesat the Hotel Cipriani also decreased by $0.8 million, to $16.6 million.  Revenues at the Hotel Caruso Belvedereincreased by $0.7 million to $7.9 million. Without the positive effect of exchange rate movements in the threemonths ended September 30, 2008 compared to the three months ended September 30,2007 of $3.9 million, revenues at the four Italian hotels collectively wouldhave been $3.5 million lower in the current period than 

 

35

 

in the prioryear, reflecting a decline in occupancy of 8% across the four properties.

 

Revenues at LaResidencia increased by $0.9 million, or 13%, from $6.9 million for the threemonths ended September 30, 2007 to $7.8 million for the three months endedSeptember 30, 2008.  Of theincreased revenues, $0.6 million was due to exchange rate movements with $0.3million of the revenue growth due to average rate improvements and improvedoccupancy.  Revenues at Le Manoir auxQuat’Saisons decreased by $0.1 million, or 1%, from $6.7 million for the threemonths ended September 30, 2007 to $6.6 million for the three months endedSeptember 30, 2008.  Revenues fell$0.5 million as a result of exchange rate fluctuations but this fall was offsetby $0.4 million of rooms and non-rooms revenue growth.

 

Revenues atReids Palace, Madeira increased by $1.3 million, to $7.4 million for the threemonths ended September 30, 2008, from $6.1 million in the prior year.  Revenues at Lapa Palace, Lisbon and Hotel dela Cite, Carcassonne, both decreased by $0.1 million to $3.5 million and $2.9million, respectively.  At Reids Palace,exchange rate fluctuations accounted for $0.6 million additional revenue in thethree months ended September 30, 2008, compared to the same period in2007.  Exchange rate fluctuations alsoled to $0.3 million additional revenues at Lapa Palace and $0.2 millionadditional revenues at Hotel de la Cite. Average rate and occupancy improvements at Reids Palace generatedadditional revenues of $0.7 million in 2008, but a drop in occupancy at LapaPalace and Hotel de la Cite caused revenue decreases of $0.4 million and $0.3million, respectively.

 

On a samestore basis across the European hotels, RevPAR in local currency decreased by3% which translates to a 7% increase in US dollars.

 

*North America*

 
|                                  |   |   |   |   |   |   |   |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Three months ended September 30, |   | 2008   |   | 2007   |   |   |   |
|                                  |   |   |   |   |   |   |   |   |   |
| Average daily rate (in dollars)       |   | 325    |   |   | 302    |   |   |   |   |
| Rooms available (in thousands)        |   | 55     |   |   | 55     |   |   |   |   |
| Rooms sold (in thousands)             |   | 30     |   |   | 34     |   |   |   |   |
| Occupancy (percentage)                |   | 54     |   |   | 63     |   |   |   |   |
| RevPAR (in dollars)                   |   | 174    |   |   | 189    |   |   |   |   |
| Same store RevPAR (in dollars)        |   | 175    |   |   | 191    |   |   |   |   |
|                                       |        |        |        |        |        |        |        |        |        |  |  |

 

Revenuesdecreased by $1.2 million, or 7%, from $17.9 million in the three months ended September 30,2007 to $16.7 million in the three months ended September 30, 2008.  Revenue at Inn 

 

36

 

at PerryCabin, Maryland, decreased by $0.2 million, or 4%, from $3.9 million for thethree months ended September 30, 2007 to $3.7 million for the three monthsended September 30, 2008.  WindsorCourt Hotel in New Orleans recorded a $1.0 million decrease, or 23%, inrevenues to $3.5 million for the three months ended September 30, 2008.

 

Revenues atMaroma Resort and Spa, Mexico decreased by $0.2 million, or 6%, from $2.9million for the three months ended September 30, 2007 to $2.7 million forthe three months ended September 30, 2008. Revenues at Casa de Sierra Nevada, Mexico increased by $0.2 million, to$0.7 million in the three months ended September 30, 2008.

 

Revenues at LaSamanna, St Martin and Keswick Hall, Virginia remained at $2.6 million and $3.3million, respectively, in both the three months ended September 30, 2007and the three months ended September 30, 2008.

 

Across all ofthe North American properties, on a same store basis RevPAR decreased by9%.  Average occupancy was 54% in thethree months ended September 30, 2008, compared to 63% in the same periodin 2007.

 

*Rest of the World*

 
|                                  |   |   |   |   |   |   |   |   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Three months ended September 30, |   | 2008   |   | 2007   |   |   |   |
|                                  |   |   |   |   |   |   |   |   |   |
| Average daily rate (in dollars)       |   | 279    |   |   | 244    |   |   |   |   |
| Rooms available (in thousands)        |   | 109    |   |   | 101    |   |   |   |   |
| Rooms sold (in thousands)             |   | 66     |   |   | 62     |   |   |   |   |
| Occupancy (percentage)                |   | 60     |   |   | 62     |   |   |   |   |
| RevPAR (in dollars)                   |   | 167    |   |   | 151    |   |   |   |   |
| Same store RevPAR (in dollars)        |   | 145    |   |   | 116    |   |   |   |   |
|                                       |        |        |        |        |        |        |        |        |        |  |

 

ExcludingHotel das Cataratas, Brazil, which OEH started to operate on October 1,2007 and which recorded revenues of $1.7 million in the three months ended September 30,2008, revenues in the Rest of the World region increased by $3.4 million, or12%, from $28.3 million for the three months ended September 30, 2007 to$31.7 million for the three months ended September 30, 2008.  Revenues at the Copacabana Palace, Brazilincreased by $1.2 million, or 16%, to $8.6 million for the three months ended September 30,2008.  All of this increase was due tothe effect of exchange rate movements between the Brazilian Real and US dollar.

 

Revenues atOEH’s two Australian properties were $5.9 million for the three months ended September 30,2007 and also for the three months ended September 30, 2008.

 

37

 

SouthernAfrica revenues increased by $1.3 million, or 15%, from $8.7 million for thethree months ended September 30, 2007 to $10.0 million for the threemonths ended September 30, 2008. All of this additional revenue was generated by Orient-Express Safaris,Botswana.  Improved trading causedrevenues here to increase by $1.5 million, but exchange rate fluctuationsreduced this increase by $0.3 million, for net growth of $1.2 million.  Exchange rate fluctuations caused revenues atthe Mount Nelson, Cape Town, to fall by $0.2 million and caused a fall inrevenues of $0.3 million at the Westcliff, Johannesburg.  These decreases were offset by tradingimprovements of $0.1 million and $0.5 million at the two South African hotels,respectively, for the three months ended September 30, 2008.

 

OEH’s sixAsian hotels collectively increased revenues by $0.7 million, or 17%, from $4.3million in the three months ended September 30, 2007 to $5.0 million inthe three months ended September 30, 2008. This includes a decrease in revenues at The Governors Residence, Yangon,which declined by $0.1 million following the cyclone Nargis that struck thecountry in May 2008, and resulted in the hotel being closed for most ofthe quarter.  Excluding The Governor’sResidence, all of the Asian hotels recorded good revenue growth due to higheraverage rates without any decline in occupancy. Exchange rate movements had only a minimal effect on the Asian hotelrevenues.

 

The Rest of theWorld region RevPAR, on a same store basis, increased by 25% in localcurrencies in the three months ended September 30, 2008 compared to thethree months ended September 30, 2007. This translates to a same store RevPAR increase of 25% when expressed inUS dollars.

 

*Hotel Management andPart-Ownership Interests: *Revenues increased by $0.1million from $2.3 million in the three months ended September 30, 2007 to$2.4 million in the three months ended September 30, 2008.  Revenues earned from the managed hotel inCharleston decreased by $0.1 million, to $0.9 million for the three monthsended September 30, 2008.  Revenuesearned from the managed hotels in Peru increased by $0.2 million, or 22%, to$1.2 million for the three months ended September 30, 2008.

 

*Restaurants*:  Revenues decreased by $0.1 million, from $3.4million in the three months ended September 30, 2007 to $3.3 million inthe three months ended September 30, 2008. Revenues at ‘21’ Club in New York fell by $0.2 million, or 7%, to $2.9million in the three months ended September 30, 2008, due to a reducedvolume of corporate events.  Revenues atLa 

 

38

 

 

Cabana, BuenosAires, Argentina, increased by $0.1 million, to $0.4 million for the threemonths ended September 30, 2008.

 

*Trains and Cruises: *Revenues increased by $1.2 million, or 5%,from $26.2 million in the three months ended September 30, 2007 to $27.4million in the three months ended September 30, 2008.    Venice Simplon-Orient-Express revenueincreased by $1.6 million, or 21%, from $8.1 million for the three months endedSeptember 30, 2007 to $9.7 million for the three months ended September 30,2008 due to increased passenger numbers in the current year.  Revenues at the Royal Scotsman grew by 9%, or$0.2 million, from $3.2 million in the three months ended September 30,2007 to $3.4 million in the three months ended September 30, 2008.  The strengthening of the US dollar againstthe British pound led to a negative exchange rate effect in the quarter.  Combined, the Venice Simplon-Orient-Expressand The Royal Scotsman revenues were $1.0 million lower in the three monthsended September 30, 2008 than would have been the case if the exchangerate was the same as in the three months ended September 30, 2007.  Revenues from the day train services operatedin the United Kingdom decreased by $0.1 million, to $7.3 million for the threemonths ended September 30, 2008. Trading improvements of $0.4 million were offset by a further $0.5million negative foreign exchange effect. The Road to Mandalay river cruiseship in Myanmar did not operate in thethree months ended September 30, 2008, following the cyclone which struckthe country in May 2008.  The shipgenerated revenues of $0.9 million in the three months ended September 30,2007.

 

*Real Estate*:  All of the real estate revenues of $3.5million in the three months ended September 30, 2008 came from the PortoCupecoy development, where revenue is recorded using the percentage ofcompletion method.  No condominiums weresold in the quarter and five condominium purchase agreements were cancelled.  Revenue of $10.7 million was recognized inthe comparable period in 2007.  Norevenue was recorded at Keswick Hall, Virginia, in the current period, comparedto revenue of $3.4 million in the three months ended September 30, 2007.

 

*Depreciation and amortization*

 

Depreciation and amortization decreased by $0.1million, or 1%, from $9.9 million in the three months ended September 30,2007 to $9.8 million in the three months ended September 30, 2008.

 

39

 

*Operating expenses*

 

Operating expenses decreased by $3.0 million, or 3%,from $86.2 million in the three months ended September 30, 2007 to $83.2million in the three months ended September 30, 2008.  As a percentage of revenue, operatingexpenses decreased from 48% of revenue for the three months ended September 30,2007, to 47% of revenue for the three months ended September 30, 2008.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $8.0 million, or 19%, from $43.2 million in the three months ended September 30,2007 to $51.2 million in the three months ended September 30, 2008.  The selling, general and administrativeexpenses incurred in the three months ended September 30, 2008 includedcosts of $2.2 million incurred at the Hotel das Cataratas, Brazil, which OEH beganto operate in October 2007. Excluding these costs, as a percentage of revenue, selling, general andadministrative expenses increased to 27% in the current period compared to 24%for the three months ended September 30, 2007.  Selling, general and administrative expensesin Europe were impacted by inflationary pressures, particularly in respect ofwages and movements in the euro-dollar exchange rate.

 

*Segment EBITDA margins*

 
|                                                |   |                             |   |   |   |
|-----------------------------------------------------|--------|----------------------------------|--------|--------|--------|
| Three months ended September 30 |   | 2008                             |   | 2007   |   |
|                                                |   | (dollars in thousands) |   |
| Segment EBITDA                                      |   |                             |   |   |   |
| Hotels and restaurants  Owned hotels                |   |                             |   |   |   |
| Europe                                              |   | $                                | 36,549 |   | $      | 38,254 |   |
| North America                                       |   | (1,532                           | )      | 944    |   |
| Rest of the world                                   |   | 6,681                            |   | 6,497  |   |
| Hotel management/part ownership interests           |   | 4,664                            |   | 5,757  |   |
| Restaurants                                         |   | (432                             | )      | (237   | )      |
|                                                |   | 45,930                           |   | 51,215 |   |
| Tourist trains and cruises                          |   | 10,247                           |   | 9,555  |   |
| Real estate                                         |   | (223                             | )      | 3,160  |   |
| Gain on disposal of assets                          |   | –                           |   | 2,312  |   |
| Central overheads                                   |   | (6,195                           | )      | (7,669 | )      |
|                                                |   | $                                | 49,759 |   | $      | 58,573 |   |

 

Althoughsegment EBITDA for the quarter decreased by 15% from $58.6 million in 2007 to$49.8 million in 2008, segment EBITDA margins (calculated as segment EBITDA asa percentage of revenue) decreased by 3% from 31% for the three months ended September 30,2007 to 28% for the three months ended September 30, 2008.  Excluding the gain arising on the disposal of

 

40

 

assets in thethree months ended September 30, 2007, Segment EBITDA for the quarterdecreased by $6.5 million.

 

The Europeanhotels collectively reported a segment EBITDA of $36.5 million compared to$38.3 million in the same period in 2007. As a percentage of revenues, the European segment EBITDA margin declinedfrom 34% in the three months ended September 30, 2007 to 31% in the threemonths ended September 30, 2008.

 

Segment EBITDAin the North American region was a loss of $1.5 million in the three monthsended September 30, 2008 compared to earnings of $0.9 million in the sameperiod in the prior year.

 

Segment EBITDAin the Rest of the World region increased by $0.2 million from $6.5 million inthe three months ended September 30, 2007 to $6.7 million in the threemonths ended September 30, 2008. The 2008 segment margin includes the results of Hotel das Cataratas,Brazil, which OEH has operated since October 1, 2007 and which isundergoing refurbishment.  If the resultsof this hotel are excluded, segment EBITDA for the Rest of the World regionincreased by $1.5 million, to $8.0 million for the three months ended September 30,2008.  The segment EBITDA margin for thethree months ended September 30, 2008, excluding Hotel das Cataratas, was23% compared to a margin of 18% for the same period in 2007.

 

*Earnings from operations*

 

Earnings from operations decreased by $7.7 millionfrom a profit of $41.8 million in the three months ended September 30,2007 to a profit of $34.1 million in the three months ended September 30,2008, due to the factors described above.

 

*Net finance costs*

 

Net finance costs were $14.1 million in both the threemonths ended September 30, 2007 and the three months ended September 30,2008.  The three months ended September 30,2007 included a foreign exchange loss of $1.5 million compared to a foreignexchange loss of $2.5 million in the three months ended September 30,2008.  Excluding the foreign exchangeitems, net finance costs decreased by $1.0 million, or 8%, from $12.6 millionfor the three months ended September 30, 2007 to $11.6 million for thethree months ended September 30, 2008.

 

41

 

*Provision for income taxes*

 

The provisionfor income taxes decreased by $4.4 million, or 40%, from a provision of $11.1million in the three months ended September 30, 2007 to a provision of$6.7 million in the three months ended September 30, 2008.  As a percentage of earnings before incometaxes and earnings from unconsolidated companies, the tax rate in the threemonths ended September 30, 2008 was 7% lower than the rate in the priorperiod, at 33%.  The provision for incometaxes of $6.7 million for the three months ended September 30, 2008included a tax provision of $0.1 million in respect of OEH’s FIN 48 liability,compared to a provision of $0.2 million in respect of the FIN 48 liability inthe three months ended September 30, 2007.

 

*Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies net of tax decreased by $1.4 million, or 25%, from$5.6 million in the three months ended September 30, 2007 to $4.2 millionin the three months ended September 30, 2008.  This was mainly due to lower earnings fromOEH’s investments in Peru, Charleston and Madrid.  The tax cost associated with earnings fromunconsolidated companies was $1.6 million in the three months ended September 30,2008 compared to $1.2 million in the three months ended September 30,2007.

 

*Loss from discontinued operations*

 

The loss from discontinued operations in the threemonths ended September 30, 2008 consisted of earnings of $0.8 million fromBora Bora Lagoon Resort which is being held for sale, less an impairment chargeof $12.0 million in respect of this property, on the basis of indicative offersthat have been received.

 

42

 

**Ninemonths Ended September 30, 2008 compared to**

**Ninemonths Ended September 30, 2007                     **

 

OEH’s operating results for the nine months ended September 30,2008 and 2007, expressed as a percentage of revenue, were as follows:

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30, |   | 2008   |   | 2007   |   |
|                                                |   | %      |   | %      |   |
| Revenue                                             |   |   |   |   |   |   |   |   |   |
| Hotels and restaurants                              |   |   | 84     |   |   |   | 83 |   |   |
| Tourist trains and cruises                          |   |   | 14     |   |   |   | 14 |   |   |
| Real estate                                         |   |   | 2      |   |   |   | 3 |   |   |
|                                                |   |   | 100    |   |   |   | 100 |   |   |
|                                                |   |   |   |   |   |   |   |   |   |
| Expenses                                            |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                       |   |   | 6      |   |   |   | 7 |   |   |
| Operating                                           |   |   | 48     |   |   |   | 48 |   |   |
| Selling, general and administrative .               |   |   | 31     |   |   |   | 28 |   |   |
| Gain on disposal of assets                          |   |   | – |   |   |   | – |   |   |
| Net finance costs                                   |   |   | 7      |   |   |   | 8 |   |   |
| Earnings before income taxes                        |   |   | 8      |   |   |   | 9 |   |   |
| Provision for income taxes                          |   |   | (3     | )      |   |   | (4 | ) |   |
| Earnings from unconsolidated companies              |   |   | 3      |   |   |   | 3 |   |   |
| Net earnings from continuing operations             |   |   | 8      |   |   |   | 8 |   |   |
| Net losses from discontinued operations, net of tax |   |   | (3     | )      |   |   | – |   |   |
| Net earnings as a percentage of revenue             |   |   | 5      |   |   |   | 8 |   |   |

 

Segment EBITDA of OEH’s operations for thenine months ended September 30, 2008 and 2007 are analyzed as follows(dollars in millions):

 

43

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30, |   | 2008   |   | 2007   |   |
|                                                |   |   |   |   |   |   |   |
| Segment  EBITDA:                                    |   |   |   |   |   |   |   |
| Owned  hotels:                                      |   |   |   |   |   |   |   |
| Europe                                              |   | $      | 67.0   |   |   | $ | 66.5 |   |   |
| North America                                       |   | 9.1    |   |   | 10.4   |   |   |
| Rest of the World                                   |   | 23.1   |   |   | 23.6   |   |   |
| Hotel management interests                          |   | 17.6   |   |   | 17.4   |   |   |
| Restaurants                                         |   | 1.1    |   |   | 1.9    |   |   |
| Tourist trains and cruises                          |   | 21.6   |   |   | 19.5   |   |   |
| Real estate                                         |   | (1.2   | )      |   | 2.7    |   |   |
| Gain on disposal of assets                          |   | – |   |   | 2.3    |   |   |
| Central overheads                                   |   | (20.1  | )      |   | (20.7  | ) |   |
| Total segment EBITDA                                |   | $      | 118.2  |   |   | $ | 123.6 |   |   |

 

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

 
|                                                             |   |   |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30,              |   | 2008   |   | 2007   |   |
|                                                             |   |   |   |   |   |   |   |   |   |
| Net earnings                                                     |   | $      | 21.5   |   |   | $ | 38.6 |   |   |
| Add:                                                             |   |   |   |   |   |   |   |
| Depreciation and amortization                                    |   | 30.4   |   |   | 28.5   |   |   |
| Net finance costs                                                |   | 33.8   |   |   | 34.2   |   |   |
| Provision for income taxes                                       |   | 12.9   |   |   | 17.1   |   |   |
| Loss from discontinued operations, net of tax                    |   | 15.4   |   |   | 1.5    |   |   |
| Share of provision for income taxes of  unconsolidated companies |   | 4.2    |   |   | 3.7    |   |   |
| Segment EBITDA                                                   |   | $      | 118.2  |   |   | $ | 123.6 |   |   |

 

Operating information for OEH’s owned hotels for thenine months ended September 30, 2008 and 2007 is as follows:

 

44

 
|                            |   | Nine months ended  September 30, |   |   |   |   |   |
|---------------------------------|--------|-------------------------------------------------|--------|--------|--------|--------|--------|
|                            |   | 2008                                            |   | 2007   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   |   |   |
| Average Daily Rate (in dollars) |   |                                            |   |   |   |   |   |   |   |
| Europe                          |   | 834                                             |   |   | 714    |   |   |   |   |   |   |
| North America                   |   | 391                                             |   |   | 366    |   |   |   |   |   |   |
| Rest of the world               |   | 282                                             |   |   | 255    |   |   |   |   |   |   |
| Worldwide                       |   | 479                                             |   |   | 435    |   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   |   |   |   |   |
| Rooms Available (in thousands)  |   |                                            |   |   |   |   |   |   |   |   |   |
| Europe                          |   | 247                                             |   |   | 247    |   |   |   |   |   |   |
| North America                   |   | 170                                             |   |   | 166    |   |   |   |   |   |   |
| Rest of the world               |   | 343                                             |   |   | 298    |   |   |   |   |   |   |
| Worldwide                       |   | 760                                             |   |   | 711    |   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   |   |   |   |   |
| Rooms Sold (in thousands)       |   |                                            |   |   |   |   |   |   |   |   |   |
| Europe                          |   | 143                                             |   |   | 149    |   |   |   |   |   |   |
| North America                   |   | 107                                             |   |   | 107    |   |   |   |   |   |   |
| Rest of the world               |   | 209                                             |   |   | 190    |   |   |   |   |   |   |
| Worldwide                       |   | 459                                             |   |   | 446    |   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   |   |   |   |   |
| Occupancy (percentage)          |   |                                            |   |   |   |   |   |   |   |   |   |
| Europe                          |   | 58                                              |   |   | 60     |   |   |   |   |   |   |
| North America                   |   | 63                                              |   |   | 64     |   |   |   |   |   |   |
| Rest of the world               |   | 61                                              |   |   | 64     |   |   |   |   |   |   |
| Worldwide                       |   | 60                                              |   |   | 63     |   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   |   |   |   |   |
| RevPAR (in dollars)             |   |                                            |   |   |   |   |   |   |   |   |   |
| Europe                          |   | 482                                             |   |   | 432    |   |   |   |   |   |   |
| North America                   |   | 247                                             |   |   | 235    |   |   |   |   |   |   |
| Rest of the world               |   | 172                                             |   |   | 162    |   |   |   |   |   |   |
| Worldwide                       |   | 290                                             |   |   | 273    |   |   |   |   |   |   |
|                            |   |                                            |   |   |   |   |   | Change % |   |
| Same Store RevPAR (in dollars)  |   |                                            |   |   |   |   |   | Dollars |   | Local  Currency |   |
| Europe                          |   | 457                                             |   |   | 407    |   |   | 12 | % |   | 1 | % |   |
| North America                   |   | 251                                             |   |   | 239    |   |   | 5 | % |   | 5 | % |   |
| Rest of the world               |   | 178                                             |   |   | 153    |   |   | 16 | % |   | 15 | % |   |
| Worldwide                       |   | 291                                             |   |   | 260    |   |   | 12 | % |   | 6 | % |   |

 

45

 

Same store RevPAR is a comparison based on theoperations of the same units in each period, such as by excluding the effect ofany acquisitions or major refurbishments. The same store data excludes the following operations:

 
| Copacabana Palace     | Bora Bora Lagoon Resort |
|-----------------------|-------------------------|
| El Encanto            | Mount Nelson Hotel      |
| Casa de Sierra Nevada | Hotel das Cataratas     |

 

*Overview*

 

The net earnings for the period were $21.5 million ($0.51per common share) on revenue of $474.5 million compared with net earnings of$38.6 million ($0.91 per common share) on revenue of $432.5 million in theprior year period. The net earnings from continuing operations for the periodwere $36.9 million ($0.87 per common share) compared with net earnings fromcontinuing operations of $40.0 million ($0.95 per common share) in the prioryear period.

 

*Revenue*

** **
|                                                |   |                             |    |    |   |
|-----------------------------------------------------|--------|----------------------------------|---------|---------|--------|
| Nine months ended September 30, |   | 2008                             |    | 2007    |   |
|                                                |   | (dollars in thousands) |    |
| Revenue:                                            |   |                             |    |    |   |
| Hotels and restaurants   Owned hotels               |   |                             |    |    |   |
| Europe                                              |   | $                                | 204,435 |    | $      | 184,842 |   |
| North America                                       |   | 67,119                           |    | 63,032  |   |
| Rest of the world                                   |   | 105,044                          |    | 86,981  |   |
| Hotel management/part ownership interests           |   | 8,251                            |    | 7,577   |   |
| Restaurants                                         |   | 13,491                           |    | 14,377  |   |
|                                                |   | 398,340                          |    | 356,809 |   |
| Tourist trains and cruises                          |   | 64,145                           |    | 60,772  |   |
| Real estate                                         |   | 11,980                           |    | 14,920  |   |
|                                                |   | $                                | 474,465 |    | $      | 432,501 |   |

 

Total revenuesincreased by $42.0 million, or 10%, from $432.5 million in the nine monthsended September 30, 2007 to $474.5 million in the nine months ended September 30,2008.  Hotels and restaurants revenueincreased by $41.5 million, or 12%, from $356.8 million in the nine monthsended September 30, 2007 to $398.3 million in the nine months ended September 30,2008.  Tourist trains and cruisesrevenues increased by $3.3 million, or 6%, from $60.8 million for the ninemonths ended September 30, 2007 to $64.1 million for the nine months endedSeptember 30, 2008.  Real estaterevenues decreased by $2.9 million from $14.9 million for the nine months endedSeptember 30, 2007 to $12.0 million for the nine months ended September 30,2008.

 

The increasein hotel revenue year on year was due primarily to the impact of exchange ratefluctuations in Europe and the Rest of the World region, backed up by increasedroom rates across the group, which offset a decline in occupancy.

 

The revenuefrom restaurants decreased by $0.9 million, or 6%, from $14.4 million in thenine months ended September 30, 2007 to $13.5 million in the nine monthsended September 30, 2008.

 

46

 

*Owned hotels:*  For owned hotels overall, same store RevPARin US dollars increased by 12% in the nine months ended September 30, 2008compared to the nine months ended September 30, 2007.  Measured in local currency this increase insame store RevPAR was 6%.

 

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

 

*Europe*

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30, |   | 2008   |   | 2007   |   |
|                                                |   |   |   |   |   |   |   |
| Average daily rate (in dollars) |   | 834    |   |   | 714    |   |   |
| Rooms available (in thousands)                      |   | 247    |   |   | 247    |   |   |
| Rooms sold (in thousands)                           |   | 143    |   |   | 149    |   |   |
| Occupancy (percentage)                              |   | 58     |   |   | 60     |   |   |
| RevPAR (in dollars)                                 |   | 482    |   |   | 432    |   |   |
| Same store RevPAR (in dollars)                      |   | 457    |   |   | 407    |   |   |

 

Revenueincreased by $19.6 million, or 11%, from $184.8 million for the nine months ended September 30, 2007 to $204.4million for the nine months ended September 30, 2008.  The Grand Hotel Europe revenues grew by $11.4million, or 32%, from $36.0 million for the nine months ended September 30,2007 to $47.4 million for the nine months ended September 30, 2008.  Of the increased revenue, $8.1 million wasdue to average rate improvements of 34% coupled with increased occupancy up 2%compared with the prior year.  Exchangerate movements were responsible for the other $3.3 million of revenue growth inthe period.

 

In Italy,revenues at the Hotel Splendido increased by $2.0 million, or 8%, to $28.6million in the nine months ended September 30, 2008, but this was partlyoffset by a drop in revenues of $1.2 million at the Villa San Michele and adecrease of $1.0 million at the Hotel Cipriani. Revenues at these hotels were$10.9 million and $33.0 million, respectively, in the nine months ended September 30,2008.  Revenues at the Hotel CarusoBelvedere increased by $0.6 million, or 5%, from $12.7 million in the ninemonths ended September 30, 2007 to $13.3 million in the nine months ended September 30,2008.  Without the positive effect ofexchange rate movements of $9.9 million in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007, revenues at thefour Italian hotels collectively would have been $9.5 million lower in thecurrent period than in the prior year, reflecting a decline in occupancy of 10%across the four properties.

 

47

 

Revenues at LaResidencia increased by $2.9 million, or 24%, from $12.4 million for the ninemonths ended September 30, 2007 to $15.3 million for the nine months endedSeptember 30, 2008.  Of theincreased revenues, $1.7 million was due to exchange rate movements with $1.2million of the revenue growth due to average rate improvements of 17% whichoffset reduced occupancy.  Revenues at LeManoir aux Quat’Saisons grew by $1.0 million, or 5%, from $17.3 million for thenine months ended September 30, 2007 to $18.3 million for the nine monthsended September 30, 2008.  Thisrevenue increase was solely due to average rate, including non-room revenue,and occupancy improvements.

 

Revenues atReids Palace, Madeira increased by $3.4 million, to $20.9 million for the ninemonths ended September 30, 2008, from $17.5 million in the prioryear.  Revenues at Lapa Palace, Lisbonand Hotel de la Cite, Carcassonne, increased by $0.4 million and $0.2 million,respectively, to $10.3 million and $6.3 million, respectively, for the ninemonths ended September 30, 2008. These revenue improvements were all the result of exchange ratemovements.  Had the Euro to US dollarexchange rate for the nine months ended September 30, 2008 been the sameas in the nine months ended September 30, 2007, revenues at these threeproperties collectively would have been $0.5 million lower than the combinedrevenues of $33.7 million reported in the nine months ended September 30,2007.

 

On a samestore basis across the European hotels, RevPAR in local currency increased by1% which translates to a 12% increase in US dollars.

 

*North America*

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30, |   | 2008   |   | 2007   |   |
|                                                |   |   |   |   |   |   |   |
| Average  daily rate (in dollars)                    |   | 391    |   |   | 366    |   |   |
| Rooms  available (in thousands)                     |   | 170    |   |   | 166    |   |   |
| Rooms  sold (in thousands)                          |   | 107    |   |   | 107    |   |   |
| Occupancy  (percentage)                             |   | 63     |   |   | 64     |   |   |
| RevPAR  (in dollars)                                |   | 247    |   |   | 235    |   |   |
| Same  store RevPAR (in dollars)                     |   | 251    |   |   | 239    |   |   |

 

Revenuesincreased by $4.1 million, or 6%, from $63.0 million in the nine months ended September 30,2007 to $67.1 million in the nine months ended September 30, 2008.  Revenues at Inn at Perry Cabin, Maryland,increased by $0.8 million, or 10% from $8.1 million for the nine months ended September 30,2007 to $8.9 million for the nine months ended September 30, 2008.  Windsor Court Hotel in New Orleans recorded a$0.4 million 

 

48

 

decrease, or2%, in revenues to $17.3 million for the nine months ended September 30,2008.

 

Revenues atMaroma Resort and Spa, Mexico increased by $1.5 million, or 13%, from $11.9million for the nine months ended September 30, 2007 to $13.4 million forthe nine months ended September 30, 2008, reflecting average rateimprovements of 12% which offset reduced occupancy, down 1% for the nine monthsended September 30, 2008 compared to the same period in 2007.  Revenues at Casa de Sierra Nevada, Mexicoincreased by $1.0 million, to $2.5 million in the nine months ended September 30,2008.  Part of the hotel was closedfor renovation during the nine months ended September 30, 2007.

 

Revenues at LaSamanna, St Martin increased by $0.9 million, or 6%, to $16.4 million in thenine months ended September 30, 2008, while revenues at Keswick Hall,Virginia improved by $0.2 million from $8.4 million in the nine months ended September 30,2007 to $8.6 million in the nine months ended September 30, 2008.

 

Across all ofthe North American properties, on a same store basis RevPAR increased by5%.  Average occupancy was 63% in thenine months ended September 30, 2008, compared to 64% in the same periodin 2007.

 

*Rest of the World*

 
|                                                |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Nine months ended September 30, |   | 2008   |   | 2007   |   |
|                                                |   |   |   |   |   |   |   |
| Average  daily rate (in dollars)                    |   | 282    |   |   | 255    |   |   |
| Rooms  available (in thousands)                     |   | 343    |   |   | 298    |   |   |
| Rooms  sold (in thousands)                          |   | 209    |   |   | 190    |   |   |
| Occupancy  (percentage)                             |   | 61     |   |   | 64     |   |   |
| RevPAR  (in dollars)                                |   | 172    |   |   | 162    |   |   |
| Same  store RevPAR (in dollars)                     |   | 178    |   |   | 153    |   |   |

 

ExcludingHotel das Cataratas, Brazil, which OEH started to operate on October 1,2007 and which recorded revenues of $6.6 million in the nine months ended September 30,2008, revenues in the Rest of the World region increased by $11.5 million, or13%, from $87.0 million for the nine months ended September 30, 2007 to$98.5 million for the nine months ended September 30, 2008.  Revenues at the Copacabana Palace, Brazilincreased by $4.1 million, or 16%, to $29.7 million for the nine months ended September 30,2008.  All of this increase was due tothe effect of exchange rate movements between the Brazilian Real and US dollar.

 

49

 

Revenues atOEH’s two Australian properties increased by $1.6 million, or 9%, from $16.7million for the nine months ended September 30, 2007 to $18.3 million forthe nine months ended September 30, 2008. The increase was also all due to exchange rate movements between theAustralian and US dollars.

 

SouthernAfrica revenues increased by $2.3 million to $29.9 million for the nine monthsended September 30, 2008.  Revenuesat the Mount Nelson, Cape Town increased by $0.1 million and revenues increasedby $0.4 million at the Westcliff, Johannesburg to $13.9 million and $7.7million, respectively.  Revenues atOrient-Express Safaris, Botswana, increased by $1.9 million, or 28%, to $8.4million.  The increased revenues in bothSouth Africa and Botswana were the result of improved trading.  Average rate increases more than compensatedfor a slight fall in occupancy across the three properties.  Exchange rate movements had a negative impacton revenues, year on year of $2.1 million. Accordingly, the trading improvement was $4.4 million for the ninemonths ended September 30, 2008 compared to the prior year.

 

OEH’s sixAsian hotels collectively increased revenues by $2.7 million, or 24%, from$11.5 million in the nine months ended September 30, 2007 to $14.2 millionin the nine months ended September 30, 2008.  This includes a decrease in revenues at TheGovernors Residence, Yangon, which declined by $0.4 million to $0.5 millionfollowing the cyclone that struck the country in May 2008 which resultedin the hotel being closed for part of the second and third quarters.  Excluding The Governors Residence, the Asianhotels recorded good revenue growth due to higher average rates and occupancy.  Exchange rate movements had only a minimaleffect on the Asian hotel revenues.

 

The Rest ofthe World region RevPAR, on a same store basis, increased by 15% in localcurrencies in the nine months ended September 30, 2008 compared to thenine months ended September 30, 2007. This translates to a same storeRevPAR increase of 16% when expressed in US dollars.

 

*Hotel Management andPart-Ownership Interests: *Revenues increased by $0.7million from $7.6 million in the nine months ended September 30, 2007 to $8.3million in the nine months ended September 30, 2008.  Revenues earned from the managed hotel inMadrid increased by $0.2 million, or 13%, to $1.2 million for the nine monthsended September 30, 2008.  Revenuesearned from the managed hotels in Peru increased by $0.6 million, or 22% to$3.3 million for the nine months ended September 30, 2008.

 

50

 

*Restaurants*:  Revenues decreased by $0.9 million, from$14.4 million in the nine months ended September 30, 2007 to $13.5 millionin the nine months ended September 30, 2008.  Revenues at ‘21’ Club in New York fell by$1.2 million, or 9%, to $12.2 million in the nine months ended September 30,2008, due to a reduced volume of corporate events.  Revenues at La Cabana, Buenos Aires,Argentina, increased by $0.3 million, to $1.3 million for the nine months endedSeptember 30, 2008.

 

*Trains and Cruises: *Revenues increased by $3.3 million, or 6%,from $60.8 million in the nine months ended September 30, 2007 to $64.1 millionin the nine months ended September 30, 2008.  Venice Simplon-Orient-Express revenuesincreased by $4.5 million, or 23%, from $19.5 million for the nine months endedSeptember 30, 2008 to $24.0 million for the nine months ended September 30,2008 due to increased occupancy and rates. Damage sustained during Cyclone Nargis in May 2008 caused the Roadto Mandalay river cruiseship to suspend its operations and as a result revenuedecreased by $1.7 million to $1.7 million for the nine months ended September 30,2008, compared to $3.4 million for the nine months ended September 30,2007.

 

*Real Estate*:  Revenues in the nine months ended September 30,2008 recorded in respect of the Porto Cupecoy development, using the percentageof completion basis, were $11.6 million compared to $10.7 million in the prioryear.  In the nine months ended September 30,2008, revenues recorded at Keswick Hall, Virginia, were $0.3 million, $3.9million lower than in the nine months ended September 30, 2007 as no homeswere sold at Keswick in the current year.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $1.9million, or 7%, from $28.5 million in the nine months ended September 30,2007 to $30.4 million in the nine months ended September 30, 2008, primarilydue to the effect of capital expenditures incurred during 2007, and the impactof exchange rate movements.  As apercentage of revenue, depreciation and amortization expense fell to 6% ofrevenue from 7% of revenue in the nine months ended September 30, 2007.

 

51

 

*Operating expenses*

 

Operating expenses increased by $22.4 million, or 11%,to $228.7 million in the nine months ended September 30, 2008.  As a percentage of revenue, operatingexpenses were 48% of revenue for the nine months ended September 30, 2007and the nine months ended September 30, 2008. Exchange rate movements (in particular the year on year devaluation ofthe US dollar against the Euro) and local wage inflation caused operating costsacross Europe to rise compared to the prior year when translated into USdollars.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses increasedby $25.1 million, or 21%, from $120.8 million in the nine months ended September 30,2007 to $145.9 million in the nine months ended September 30, 2008.  The selling, general and administrativeexpenses incurred in the nine months ended September 30, 2008 includedcosts of $6.7 million incurred at the Hotel das Cataratas, Brazil, which OEHbegan to operate in October 2007. Excluding these costs, as a percentage of revenue, selling, general andadministrative expenses increased from 28% in the nine months ended September 30,2007 to 29% in the nine months ended September 30, 2008.  As noted above, the movement of the Euro inparticular, but also the Russian rouble and the Brazilian real exchange rates,had a significant impact on the selling, general and administrative costsincurred during the year.

 

*Segment EBITDA margins*

 
|                                               |   |                    |    |    |   |
|----------------------------------------------------|--------|-------------------------|---------|---------|--------|
| Nine months ended September 30 |   | 2008                    |    | 2007    |   |
|                                               |   | (dollars in  thousands) |    |
| Segment  EBITDA:                                   |   |                    |    |    |   |
| Hotels  and restaurants                            |   |                    |    |    |   |
| Owned  hotels                                      |   |                    |    |    |   |
| Europe                                             |   | $                       | 66,995  |    | $      | 66,477 |   |
| North  America                                     |   | 9,093                   |    | 10,379  |   |
| Rest  of the world                                 |   | 23,061                  |    | 23,711  |   |
| Hotel  management/part ownership interests         |   | 17,618                  |    | 17,433  |   |
| Restaurants                                        |   | 1,137                   |    | 1,919   |   |
|                                               |   | 117,904                 |    | 119,919 |   |
| Tourist  trains and cruises                        |   | 21,616                  |    | 19,415  |   |
| Real  estate                                       |   | (1,183                  | )       | 2,678   |   |
| Gain  on disposal of assets                        |   | –                  |    | 2,312   |   |
| Central  overheads                                 |   | (20,153                 | )       | (20,685 | )      |
|                                               |   | $                       | 118,184 |    | $      | 123,639 |   |

 

Segment EBITDAfor the nine months ended September 30, 2008 decreased by 4% from $123.6million in 2007 to $118.2 million in 2008. Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) decreased by 4% from 29% for the 

 

52

 

nine monthsended September 30, 2007 to 25% for the nine months ended September 30,2008.

 

The Europeanhotels collectively reported a segment EBITDA of $67.0 million compared to$66.5 million in the same period in 2007. As a percentage of revenues, the European segment EBITDA margin declinedfrom 28% in the nine months ended September 30, 2007 to 25% in the ninemonths ended September 30, 2008.

 

Segment EBITDAin the North American region was $10.4 million in the nine months ended September 30,2007 and decreased by $1.3 million to $9.1 million in the nine months ended September 30,2008.  As a percentage of revenues, thesegment EBITDA margin declined from 11% in the nine months ended September 30,2007 to 10% in the nine months ended September 30, 2008.

 

Segment EBITDAin the Rest of the World region decreased by $0.6 million from $23.7 million inthe nine months ended September 30, 2007 to $23.1 million in the ninemonths ended September 30, 2008. The 2008 segment margin includes the results of Hotel das Cataratas,Brazil, which OEH has operated since October 1, 2007 and which isundergoing refurbishment.  If the Hoteldas Cataratas result (a loss of $2.9 million) is excluded, segment EBITDA forthe Rest of the World region increased by $2.3 million, to $26.0 million forthe nine months ended September 30, 2008. The segment EBITDA margin for the nine months ended September 30,2008, excluding Hotel das Cataratas, was 27% compared to a margin of 28% forthe same period in 2007.

 

*Earnings from operations*

 

Earnings from operations decreased by $9.8 millionfrom a profit of $79.3 million in the nine months ended September 30, 2007to a profit of $69.5 million in the nine months ended September 30, 2008,due to the factors described above.

 

*Net finance costs*

 

Net finance costs decreased by $0.5 million, or 1%,from $34.3 million for the nine months ended September 30, 2007 to $33.8million for the nine months ended September 30, 2008.  The nine months ended September 30, 2007included a foreign exchange loss of $0.2 million compared to a foreign exchangegain of $2.1 million in the nine months ended September, 2008.  Excluding the foreign exchange items, netfinance costs increased by $1.9 million, or 6%, from $34.1 million for the ninemonths ended September 30, 2007 to $36.0 million for the nine months endedSeptember 30, 2008, due to the impact of financing new 

 

53

 

investments, the currency impact of non-US dollarborrowings and higher average borrowings throughout the period compared withthe prior year.

 

*Provision for income taxes*

 

The provisionfor income taxes decreased by $4.2 million, or 25%, from a provision of $17.1million in the nine months ended September 30, 2007 to a provision of$12.9 million in the nine months ended September 30, 2008.  As a percentage of earnings before incometaxes and earnings from unconsolidated companies, the tax rate in the ninemonths ended September 30, 2008 was 2% lower than the rate in the priorperiod, at 36%.  The provision for incometaxes of $12.9 million for the nine months ended September 30, 2008included a tax provision of $0.9 million in respect of OEH’s FIN 48 liability, comparedto a provision of $1.0 million in respect of the FIN 48 liability in the ninemonths ended September, 2007.

 

*Earnings fromunconsolidated companies*

 

Earnings fromunconsolidated companies net of tax increased by $1.9 million from $12.2million in the nine months ended September 30, 2007 to $14.1 million inthe nine months ended September 30, 2008. This was mainly due to increased earnings from OEH’s investments in Peruand Charleston.  The tax cost associatedwith earnings from unconsolidated companies was $3.7 million in the nine monthsended September 30, 2007 and $4.2 million in the nine months ended September 30,2008.

 

*Loss from discontinued operations*

 

The loss from discontinued operations in the ninemonths ended September 30, 2008 consisted of a loss of $3.4 million fromBora Bora Lagoon Resort which is being held for sale.  The equivalent loss in the nine months ended September 30,2007 was $1.5 million.  An additionalimpairment charge of $12.0 million was also recorded in the current year, onthe basis of indicative offers for the property that have been received.

 

54

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $58.9 million at September 30,2008, $31.7 million less than the $90.6 million at December 31, 2007.  In addition, OEH had restricted cash of $10.4million (2007 - $3.8 million) mainly related to the Porto Cupecoy project inSt. Martin, which will be released when the next 12.5% phase of construction iscompleted.  At September 30, 2008,there were undrawn amounts available to OEH under committed short-term lines ofcredit of $17.5 million and undrawn amounts available to OEH under securedrevolving credit facilities of $60.5 million, bringing total cash availabilityat September 30, 2008 to $147.3 million including restricted cash of $10.4million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of$2.5 million at September 30, 2008, a decrease of $39.7 million from abalance of $37.2 million at December 31, 2007.  The main factor that contributed to thedecrease in working capital was the increased use of cash for financing capitalprojects. See discussion under the heading “Liquidity” below.

 

*Cash Flow*

 

*Operating Activities*.  Net cash provided by operating activitiesdecreased by $0.2 million from $54.2 million for the nine months ended September 30,2007 to $54.0 million for the nine months ended September 30, 2008.  The cash used at Bora Bora Lagoon Resort wasoffset by positive movements in working capital balances.

 

*Investing Activities*.  Cash used in investing activities decreasedby $4.7 million to $90.5 million for the nine months ended September 30,2008, compared to $95.2 million for the nine months ended September 30,2007.

 

This was mainly due to the lower acquisitions andinvestments.   Acquisitions in 2008 of$3.3 million included the acquisition of the 20% minority interest in Casa deSierra Nevada, and the La Samanna spa acquisition.  The 2007 acquisitions included the finalpayment for the Grand Hotel Europe, La Residence d’Angkor minority interestacquisition, acquisitions of Afloat in France and the Royal Scotsman,acquisition of internet website intangible assets, and investments in Buzios.

 

Capital expenditure of $79.3 million included $7.7million of Hotel Cipriani refurbishment, $8.5 million of Grand Hotel Europerefurbishment, $8.9 million of El Encanto construction costs, $7.4 million forconstruction of assets at Porto Cupecoy, $6.8 million at Hotel das Cataratas,and $4.0 million at Copacabana Palace, as well as smaller capital expendituresacross many other properties.

 

55

 

The $6.6 million increase in restricted cashrepresented the net movement in the escrow account used in the Porto Cupecoyproperty development.

 

*Financing Activities*.  Cash provided by financing activities for thenine months ended September 30, 2008 was $6.5 million compared to $42.7million for the nine months ended September 30, 2007, a decrease of $36.2million.  The main factor thatcontributed to this decrease was the repayment of a number of working capitalfacilities during 2008 to reduce interest costs.

 

*Capital Commitments*.  There were $122.6 million of capitalcommitments outstanding as of September 30, 2008 relating mainly toinvestments in owned hotels and the Porto Cupecoy property development, and thepurchase of land and a building adjoining ‘21’ Club, New York.

 

*Indebtedness*

 

At September 30, 2008, OEH had $790.6 million oflong-term debt secured by assets, including the current portion, which isrepayable over periods of 1 to 11 years with a weighted average maturity of 3.8years and a weighted average interest rate of 5.45%**.**  See Note 8 to the financial statementsregarding the maturity of long-term debt. Approximately 53% of the outstanding principal was drawn in euros andthe balance primarily in US dollars.  At September 30,2008, 58% of borrowings of OEH were in floating interest rates.

 

*Liquidity*

 

During the 12 months ending September 30, 2009, OEHhas approximately $34 million of scheduled debt repayments, excluding amountsrelating to revolving facilities, which it expects to meet through operatingcash flow and other available committed facilities.  Additionally, OEH’s capital commitments, asreported above, amount to $122.6 million, of which approximately 50% iscurrently covered by committed funding and projected operating cash flows.

 

OEH is discussing with its advisers the mostappropriate way of funding the remaining unfunded commitments.  Options available to OEH, depending onavailability in the current economic and financial environment and OEH’scontinuing compliance with financial covenants in its existing loan facilities,include raising additional debt at property level, issuing debt instruments orequity, rescheduling commitments as noted below, disposing of properties forcash, or a combination of the foregoing. OEH expects to have available cash from operations, appropriate debtfinance and other sources sufficient to fund its working capital requirements,committed capital expenditures, committed acquisitions and debt service for theforeseeable future.  However, OEH cannotgive assurance that, in the current economic and financial environment,additional sources of financing for 

 

56

 

OEH’s unfunded commitments will be available to OEH oravailable on commercially acceptable terms. As noted below, OEH is taking stepsto enhance its liquidity and capital position. If additional sources offinancing are unavailable, including because of possible future breach of loanfinancial covenants, OEH may be unable to fund its cash requirements forworking capital, commitments and debt service.

 

OEH is in regular discussions with its bankersregarding funding requirements and to ensure its continued compliance with thefinancial covenants in its existing loan facilities. At September 30, 2008,OEH was in compliance with all those covenants. OEHrecognizes that, in the current economic climate, there is an enhanced risk ofa covenant breach if weak trading conditions lead to a deterioration of OEH’sresults andfurthermore the costs of implementing the steps noted below reduce OEH’s earnings in any given period.  If current economic conditions, including thevolatility recently experienced in global financial markets, continues orworsens, when considering certain downside scenarios, OEH believes there is heightenedrisk that it could breach certain financial covenants, which could occur in thefirst six months of 2009.  OEH’sliquidity would be adversely affected if a covenant breach occurred in amaterial loan facility and if the Company were unable to agree with its bankershow the particular financial covenant should be amended or how the breach couldbe cured.  OEH expects to take pro-activesteps to meet with its bankers to seek an amendment to any specific financialcovenant if the Company believed that it was likely that the covenant would bebreached because of adverse trading conditions or incurrence of additional costs.  There can be no assurance, however, thatOEH’s loan facility lenders would agree to modify any affected covenant, whichcould impact OEH’s ability to fund its cash requirements for working capital,commitments and debt service.

 

OEH hasundertaken several steps to enhance its liquidity and overall capital position,including the following:

 

·     OEHexpects to delay for up to six months the previously reported $46 million duewith respect to the purchase of a branch of the New York Public Library in NewYork City adjoining ‘21’ Club, and the plan to build a hotel on the site.  OEH and the Library are discussing thedetails of this delay which will require OEH to pay a further deposit of $3million to confirm the purchase extension and additional monthly paymentstotalling not more than $2 million if the extension period goes beyond threemonths.

 

·     The reopening of El Encanto in SantaBarbara (currently closed for refurbishment) is expected to be pushed back toat least the middle of 2010, which will defer $30 million of capitalexpenditures and enable OEH to open this property in more favorable marketconditions.

 

·     After a due diligence review, OEH and itspartner The Related Group have decided to cancel new hotel building projects in Miami andCartagena, Colombia.  Review continues inrespect of a third project in Panama City, Panama but if that project goesahead, OEH does not expect its investment to the end of 2009 to be more than $1million.

 

·     OEH has decided not to go ahead withacquisitions previously under discussion in Zambia and Puglia, Italy.

 

·     OEH is working with its project managers andadvisers to reschedule and rephase the construction of the Porto Cupecoyproperty development in St Martin, French West Indies.

 

·     Cash dividend payments on the Company’sclass A and B common shares will be suspended, beginning in 2009.

 

·     OEH plans to reduce 2009 capitalexpenditures to $12 million needed to complete specific property improvementsthat are already underway, principally at the Grand Hotel Europe, St.Petersburg and Hotel Cipriani, Venice, or which must be spent in order tocomply with local building or health and safety regulations.  OEH does not expect to spend more than $12million replacing furniture, fixtures and equipment across all of itsproperties next year.

 

·     OEH plans to achieve overhead cost savingsof at least $20 million through 2009. Personnel changes are already taking place following a review of OEH’shotel management and operating structures, and reductions are expected to bemade in selling,general and administrative costs in 2009.

 

**Recent Accounting Pronouncements**

 

As of September 30,2008, the Company’s adoption of recent accounting pronouncements, which aredescribed in Note 1 to the financial statements in the Company’s 2007 Form 10-Kannual report, has not changed from December 31, 2007, except for adoptionof SFAS No. 157 and 159 as described in Note 1(a) to the financialstatements in this report and except as follows:

 

57

* *

*SFAS 161*

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities – An Amendmentof FASB Statement No. 133”.  Thisstatement changes the disclosure requirements for derivative instruments andhedging activities.  Entities arerequired to provide enhanced disclosures about (a) how and why an entityuses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  SFAS No. 161 is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008.  TheCompany is in the process of evaluating the effects of the adoption of SFAS No. 161.

 

## **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 2007 Form 10-Kannual report.

 

**ITEM 3.****                             Quantitativeand Qualitative Disclosures about Market Risk**

 

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

 

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 US 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$2,700,000 on an annual basis based on borrowings at September 30, 2008.The interest 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 nine months of 2008 fromthose described in the Company’s 2007 Form 10-K annual report.

 

**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 September 30, 2008 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 third quarter of 2008 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance 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**

** **

**ITEM1A.        Risk Factors**

 

There havebeen no significant changes in the risk factors of the Company previouslyidentified in Item 1A of the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007, except with respect to the following:

 

***Thecrisis in the financial markets and sustained weakening of the economy couldimpact OEH’s business and financial condition and may limit OEH’s ability toraise additional funds.***

 

As widelyreported, financial markets in the United States, Europe and Asia have beenexperiencing extreme disruption recently, including, among other things,extreme volatility in securities prices, as well as severely diminishedliquidity and credit availability. Furthermore, it appears that the economiesof the United States and other countries are contracting and there may be aneconomic recession which could, among other things, reduce the amounts peoplespend on travel, hotels, dining and entertainment.   The turmoil in the financial markets maylimit OEH’s ability to access the capital markets and raise funds required for capitalexpenditures at its existing properties, possible future acquisitions anddevelopment of new projects.  The Companyis not able to predict the likely duration or severity of the currentdisruption in financial markets or the general economic conditions in theUnited States and the world.  However, ifeconomic conditions continue or worsen, they could decrease OEH’s futureprofitability and cash flow from operations which could adversely impact OEH’sliquidity and financial condition, including its ability to comply withfinancial covenants in its loan facilities.

 

***TheCompany’s directors and officers may control the outcome of most matterssubmitted to a vote of shareholders.***

 

A wholly-owned subsidiary of the Company,Orient-Express Holdings 1 Ltd. (“Holdings”), currently holds all18,044,478 outstanding Class B common shares in the Company representingabout 81% of the combined voting power of Class A and B common shares formost matters submitted to a vote of shareholders, and the directors andofficers of the Company hold Class A common shares representing anadditional 0.3%.  In general, holders of Class A shares and holdersof Class B shares vote together as a single class, with holders of Class Ashares having one-tenth of one vote per share and holders of Class Bshares having one vote per share.  Therefore, as long as the number of outstandingClass B shares exceeds one-tenth the number of outstanding Class Ashares, Holdings could control 

 

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the outcome of most matters submitted to avote of the shareholders.

 

Under Bermuda law, common shares of theCompany owned by Holdings are outstanding and may be voted by Holdings. The manner in which Holdings votes its shares is determined by the fivedirectors of Holdings, three of whom, John D. Campbell, Prudence M. Leith andJames B. Sherwood, are also directors of the Company, consistently with theexercise by those directors of their fiduciary duties to Holdings.  Thosedirectors, should they choose to act together, will be able to controlsubstantially all matters affecting the Company, and to block a number ofmatters relating to any potential change of control of the Company.  SeeItem 12–Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters in the Company’s 2007 Form 10-K annual report.

 

Certain institutionalshareholders (collectively owning approximately 14.3% of the Company’s Class Acommon shares) identified in Item 4–Submission of Matters to a Vote of SecurityHolders appearing below in this report have challenged the Company’s corporategovernance structure as it relates to the ownership and voting of Class Bcommon shares, including by proposing shareholder resolutions to amend theCompany’s Bye-Laws to treat the Class B shares as “treasury shares” withno voting rights and to cancel the Class B shares.  As reported below, these resolutions wererejected at the October 10, 2008 special general meeting of shareholdersby a majority of the votes of the outstanding Class A and Class Bcommon shares, voting together as a single class.

 

The corporate governancestructure of the Company has been analyzed by legal counsel, and the Company’smanagement believes that the structure is valid under Bermuda law.  This corporate governance structure has beenin place since the Company’s initial public offering in 2000, and has beenfully described in the Company’s public filings and clearly disclosed toinvestors considering buying the Company’s Class A common shares.  However, future challenges of this structuremay occur which may cause the Company to incur added costs, such as legalexpenses, to defend its corporate governance structure.

 

# **ITEM 4.          Submission ofMatters to a Vote of Security Holders**

 

# **On October 10,2008, the Company convened and held a special general meeting of holders of theClass A and Class B common shares of the Company to consider tworesolutions.  The meeting and the tworesolutions were purportedly requisitioned under section 74 of the BermudaCompanies Act 1981 (as amended) by D.E. Shaw Valence Portfolios LLC, D.E. ShawOculus Portfolios LLC and CR Intrinsic Investments LLC as beneficial owners of**

 

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# **Class A commonshares.  A brief description of eachresolution and the number of votes on each are as follows:**

 

# **(1)       Amendment of the Company’s Bye-Laws totreat the Class B common shares of the Company as treasury shares:  FOR 3,010,025, AGAINST 18,168,430, andABSTAIN 754.**

 

# **(2)       Authorization to cancel the Class Bcommon shares of the Company:  FOR2,964,009, AGAINST 18,214,419, and ABSTAIN 781.**

 

Accordingly,neither resolution was adopted at the special general meeting.

 

# **ITEM 6.          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:  November 10,2008

 

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# **EXHIBIT INDEX**

 

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

 

3.2    –         Bye-Laws of the Company, filed as Exhibit 3to the Company’s Form 8-K Current Report on June 20, 2007 andincorporated herein by reference.

 

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

 

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

 

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

 

32    –          Section 1350 Certification.

 

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