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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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**(Mark One)**

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**x****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

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**For the fiscal year ended December 31, 2009**

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**OR**

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** ̈****   TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom               to               **

 

**CommissionFile Number 1-16017**

 

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**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

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

 

**22 Victoria Street,**

** Hamilton HM 12, Bermuda**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: **(441) 295-2244**

 

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SECURITIES REGISTERED PURSUANT TOSECTION 12(b) OF THE ACT:

 

| **Title of  each class**                          | ** ** | **Name of  each exchange  on which registered** |
|---------------------------------------------------|------------|-------------------------------------------------|
|                                              |       |                                            |
| Class A Common Shares, $0.01 par  value each |       | New York Stock Exchange                         |
| Preferred Share Purchase Rights                   |       | New York Stock Exchange                         |

 

SECURITIES REGISTERED PURSUANT TOSECTION 12(g) OF THE ACT: **None**.

 

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Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yes x  No  ̈

 

Indicate bycheck mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.  Yes  ̈ No x

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Act during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No  ̈

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  ̈ No  ̈

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. (Not applicable. See third paragraph underItem 1—Business on page 4.)

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theAct. (Check one):

 

| Large  Accelerated Filer **x**            |   | Accelerated  Filer ** ̈**         |
|------------------------------------------------|--------|--------------------------------------------|
| Non-Accelerated  Filer ** ̈**         |   | Smaller  reporting company ** ̈** |
| (Do  not check if a smaller reporting company) |   |                                       |

 

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes  ̈ No x

 

The aggregatemarket value of the Class A common shares held by non-affiliates of theregistrant computed by reference to the closing price on June 30, 2009(the last business day of the registrant’s second fiscal quarter in 2009) wasapproximately $647,000,000.

 

As ofFebruary 19, 2010, 90,796,005 class A common shares and 18,044,478class B common shares of the registrant were outstanding.  All of the class B shares are owned by asubsidiary of the registrant (see Note 14(d) to the FinancialStatements (Item 8)).

 

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DOCUMENTS INCORPORATED BY REFERENCE:  **None**

 

 

 

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**TABLE OF CONTENTS**

 
| ** **    | ** ** | ** **                                                                                                         | **Page** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------|----------|
|          |       |                                                                                                               |     |
| PART I   | Item 1.    | Business                                                                                                           | 4        |
|          | Item 1A.   | Risk Factors                                                                                                       | 25       |
|          | Item 1B.   | Unresolved  Staff Comments                                                                                         | 46       |
|          | Item 2.    | Properties                                                                                                         | 47       |
|          | Item 3.    | Legal  Proceedings                                                                                                 | 47       |
|          | Item 4.    | Submission  of Matters to a Vote of Security  Holders                                                              | 48       |
|          |       |                                                                                                               |     |
| PART II  | Item 5.    | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 49       |
|          | Item 6.    | Selected  Financial Data                                                                                           | 50       |
|          | Item 7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 52       |
|          | Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 94       |
|          | Item 8.    | Financial  Statements and Supplementary Data                                                                       | 96       |
|          | Item 9.    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                              | 167      |
|          | Item 9A.   | Controls  and Procedures                                                                                           | 167      |
|          | Item 9B.   | Other Information                                                                                                  | 169      |
|          |       |                                                                                                               |     |
| PART III | Item 10.   | Directors, Executive Officers  and Corporate Governance                                                            | 170      |
|          | Item 11.   | Executive  Compensation                                                                                            | 176      |
|          | Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   | 181      |
|          | Item 13.   | Certain Relationships and  Related Transactions and Director Independence                                          | 187      |
|          | Item 14.   | Principal Accounting Fees and  Services                                                                            | 189      |
|          |       |                                                                                                               |     |
| PART IV  | Item 15.   | Exhibits and Financial  Statement Schedules                                                                        | 191      |
|          |       | Signatures                                                                                                         | 193      |
|          |       | Exhibit Index                                                                                                 | 195      |

 

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**FORWARD-LOOKINGSTATEMENTS**

 

Forward-lookingstatements concerning the operations, performance, financial condition, plansand prospects of Orient-Express Hotels Ltd. and its subsidiaries are basedon the current expectations, assessments and assumptions of management, are nothistorical facts, and are subject to various risks and uncertainties.

 

Forward-lookingstatements can be identified by the fact that they do not relate only tohistoric or current facts, and often use words such as “anticipate”, “target”,“expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or other words ofsimilar meaning.

 

Actual resultscould differ materially from those anticipated in the forward-lookingstatements due to a number of factors, including those described in Item1—Business, Item 1A—Risk Factors, Item 3—Legal Proceedings, Item 7—Management’sDiscussion and Analysis, Item 7A—Quantitative and Qualitative Disclosures aboutMarket Risk, and Item 12—Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters below.

 

Investors arecautioned not to place undue reliance on these forward-looking statements whichare not guarantees of future performance. Orient-Express Hotels Ltd. undertakes no obligation to update or revisepublicly any forward-looking statement, whether as a result of new information,future events or otherwise.

 

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**PART I**

 

**ITEM 1.****                                                    ****Business**

 

Orient-ExpressHotels Ltd. (the “Company” and, together with its subsidiaries, “OEH”) isincorporated in the Islands of Bermuda and is a “foreign private issuer” asdefined in Rule 3b-4 promulgated by the U.S. Securities and ExchangeCommission (“SEC”) under the U.S. Securities Exchange Act of 1934 (the “1934Act”) and in SEC Rule 405 under the U.S. Securities Act of 1933.  As a result, it is eligible to file itsannual reports pursuant to Section 13 of the 1934 Act on Form 20-F(in lieu of Form 10-K) and to file its interim reports on Form 6-K(in lieu of Forms 10-Q and 8-K). However, the Company elects to file its annual and interim reports onForms 10-K, 10-Q and 8-K, including any instructions therein that relatespecifically to foreign private issuers.

 

These reports and amendments to them are availablefree of charge on the internet website of the Company as soon as reasonablypracticable after they are filed electronically with the SEC.  The internet website address ishttp://www.orient-express.com.  Unlessspecifically noted, information on the OEH website is not incorporated byreference into this Form 10-K annual report.

 

Pursuant to SEC Rule 3a12-3 under the 1934 Actregarding foreign private issuers, the proxy solicitations of the Company arenot subject to the disclosure and procedural requirements of SECRegulation 14A under the 1934 Act, and transactions in the Company’sequity securities by its officers, directors and significant shareholders areexempt from the reporting and liability provisions of Section 16 of the1934 Act.

 

**Introduction**

 

OEH is a hoteland travel company focused on the luxury end of the leisure market with exposureto both mature and emerging national economies. The Company’s predecessor began acquiring hotels in 1976 and organizedthe Company in 1995.  OEH currently ownsor part-owns 50 properties (all of which it manages), including the two hotelsin Sicily purchased in January 2010, consisting of 41 highly individualdeluxe hotels, one stand-alone restaurant, six tourist trains and tworiver/canal cruise businesses.  These arelocated in 24 countries worldwide.  OEHacquires or manages only very distinctive properties in areas of outstandingcultural, historic or recreational interest in order to provide luxurylifestyle experiences for the discerning traveller.  OEH has also been active in the developmentof for-sale residences adjoining some of its hotels, although OEH’s currentcommitments in this activity are a relatively small part of its business.

 

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The locationsof OEH’s 50 properties are shown in the map on page 3, where they number46 because the Hotel Cipriani and Palazzo Vendramin are contiguous in Venice,the Hotel Splendido and Splendido Mare are both in Portofino, and threeseparate safari lodges operate as a unit in Botswana.  These seven properties bring the total to 50.

 

Hotels and restaurants represent the largest segmentof OEH’s business, contributing 87% of revenue in 2009, 88% in 2008 and 81% in2007.  Tourist trains and cruisesaccounted for 13% of revenue in 2009, 15% in 2008 and 15% in 2007.  Property development activities accounted forthe remaining revenue in each year. Property revenue in 2008 was negative because of a change of accountingtreatment, as explained in Note 1(h) to the Financial Statements (Item 8below).

 

OEH’s worldwide portfolio of hotels currently consistsof 3,595 individual guest rooms and multiple-room suites, each known as a“key”.  Hotels owned by OEH in 2009achieved an average daily room rate (“ADR”) of $407 (2008—$442) and a revenueper available room (“RevPAR”) of $204 (2008—$266).  Approximately 70% of OEH’s customers areleisure travellers, with approximately 40% of customers in 2009 originatingfrom North America, 40% from Europe and the remaining 20% from elsewhere in theworld.

 

Revenue, earnings and identifiable assets of OEH in2009, 2008 and 2007 for its business segments and geographic areas arepresented in Note 19 to the Financial Statements.

 

**OwnedHotels—Europe**

 

*Italy*

 

The **Hotel Cipriani**and **Palazzo Vendramin**—95 keys—in Venicewere built for the most part in the 1950s and are located on about five acres(part on long-term lease) on Giudecca Island across from the Piazza San Marcowhich is accessed by a free private boat service.  Most of the rooms have views over theVenetian lagoon.  Features include finecuisine in three indoor and outdoor restaurants, gardens and terracesencompassing an Olympic-sized swimming pool, a tennis court, a spa and a largebanquet and meeting facility situated in an historic refurbishedwarehouse.  In 2008-2009, 16 standardrooms were converted to 11 suites.

 

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The **Hotel Splendido**and **Splendido Mare**—80 keys—overlookpicturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was builtin 1901 and is surrounded by gardens and terraces which include a swimming pooland tennis court.  There are two open-airand enclosed restaurants as well as banquet/meeting rooms, and a shuttle buslinking the main hotel with Splendido Mare on the harbor below.

 

The **Villa San Michele**—46keys—is located in Fiesole, a short distance from Florence.  Originally built as a monastery in the 15thcentury with a façade attributed to Michelangelo, it has stunning views overhistoric Florence and the Arno River Valley. OEH has remodelled and expanded the guest accommodation to luxurystandards, including the addition of a swimming pool.  A shuttle bus service is provided intoFlorence.  The property occupies tenacres.  The Villa San Michele alsooperates for hotel guests the five-bedroom main house of the **Capannelle** wine estate in the Chianti region owned by JamesSherwood.  See Item 13—CertainRelationships and Related Transactions and Director Independence below.

 

The **Hotel Caruso Belvedere**—48 keys—in Ravello is located onthree hill-top acres overlooking the Amalfi coast near Naples and ancient Romanand Greek archaeological sites such as Pompeii and Paestum.  Once a nobleman’s palace, parts of thebuildings date back to the 11th century. Operated as a hotel for many years, OEH rebuilt the property after acquiringit and reopened in 2005.  Amenitiesinclude two restaurants, an outdoor swimming pool, spa and extensive gardens.

 

In January 2010,OEH completed the purchase of two hotels in Taormina, Sicily.  These are the **Grand HotelTimeo**—83 keys—which is widely considered the most luxurious hotel inTaormina, and the **Villa Sant’Andrea**—78keys—which is a nearby hotel on the city’s Bay of Mazzaro with a privatebeach.  The hotels are linked by a guestshuttle service.  OEH plans to undertakea refurbishment program to upgrade both properties over three consecutivewinter closures, starting with the 2009-2010 winter for reopening in May 2010.

 

With panoramicviews of Mount Etna and the Gulf of Naxos from its main terrace, Grand HotelTimeo is located in the center of Taormina next to the second century GreekTheater.  Built in 1873 on a total siteof about ten acres, the hotel features a restaurant serving regional Sicilianspecialties, an outdoor swimming pool and fitness center, and banqueting andconference facilities, all surrounded by six acres of parkland.

 

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Built in 1830in Taormina’s seaside district, Villa Sant’Andrea has the atmosphere of aprivate villa set in lush gardens with a private beach, a total site of abouttwo acres, with many of the guest rooms and the hotel’s seafood restaurantlooking out at the Calabrian coast. Subject to obtaining local planning permission, up to 12 keys and aswimming pool may be added to the hotel.

 

All of these Italian properties operate seasonally,closing for varying periods during the winter.

 

*Portugal*

 

**Reid’s Palace**—163 keys—is a famous hotel on the islandof Madeira, situated on ten acres of semitropical gardens on a cliff top abovethe sea and the bay of Funchal, the main port city.  Opened in 1891, the hotel has fourrestaurants and banquet/meeting facilities. Leisure and sports amenities include fresh and sea water swimming pools,a third tide-filled pool, tennis courts, ocean water sports, a spa and accessto two championship golf courses.  It hasyear-round appeal to European leisure travellers, serving both winter escapesto the sun and regular summer holidays. For-sale residential units may be built in the future on the grounds ofthe hotel.

 

In June 2009, OEH sold to a private Portugueseinvestor the **Lapa Palace**—109 keys—located inthe embassy district of Lisbon.  See Note2 to the Financial Statements.

 

*Elsewherein Europe*

 

**Hôtelde la Cité**—61 keys—is located in the central square of the beautiful walledmedieval town of Carcassonne, France near Toulouse.  Opened in 1909, the hotel incorporates one ofthe 50 watch towers in Carcassonne’s ancient fortifications and features tworestaurants, gardens, a swimming pool and a nearby conference center, altogetheroccupying two acres.  One of therestaurants has been awarded one star for fine dining by the influentialMichelin Guide.  The hotel also operatesa canal barge on the Canal du Midi providing day excursions for guests.

 

OEH owns **La Residencia**—67keys—located in the charming village of Deià on the rugged northwest coast ofthe island of Mallorca, Spain in the Mediterranean.  Mallorca is a popular European touristdestination throughout the year.  Thecore of La Residencia was originally created from two adjoining 16th and 17thcentury country houses set on a hillside site of 30 acres.  The hotel features three restaurantsincluding the gastronomic El Olivio, as well as two large outdoor swimmingpools, tennis courts and a spa with an indoor pool.

 

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**Le Manoir aux Quat’Saisons**—32 keys—is located inOxfordshire, England about an hour’s drive west of London.  The main part of the hotel is a 16th centurymanor house set in 27 acres of gardens. The property was developed by Raymond Blanc, one of Britain’s famouschef-patrons, and the hotel’s restaurant has two stars in the MichelinGuide.  Mr. Blanc has given a long-termcommitment to remain the chef at the hotel.

 

OEH owns a 93.5% interest in the **Grand Hotel Europe**—301 keys—in St.Petersburg, Russia.  Originally built in 1875, the hotel occupies one sideof an entire city block on the fashionable Nevsky Prospect in the heart of thecity near the Russian Museum, Shostakovich Philharmonia and other tourist andcultural attractions as well as the business center.  There are fiverestaurants on the premises, popular with locals and visitors alike, as well asa grand ballroom, meeting facilities, a health club and spa and several retailshops.  OEH recently finished the renovation of ten luxuryhistoric suites reflecting the rich history of the hotel and city.  Afurther 20 terrace rooms are planned for renovation in the nearterm. The minority interest is owned by the City of St. Petersburg.

 

**Owned Hotels—North America**

 

*United States*

 

**Charleston Place**—435 keys—is located in theheart of historic Charleston, South Carolina, a popular destination fortourists and business meetings.  Openedin 1986, the hotel has two restaurants, extensive banqueting and conferencespace including a grand ballroom, a fitness center with spa and swimming pool,and a shopping arcade of 25 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historicRiviera Theater remodelled as additional conference space and retail shops.

 

While OEH has only a 19.9% ownership interest inCharleston Place, OEH manages the property under an exclusive long-termcontract, receives interest on partnership loans which it assumed at the timeof its original investment and on other loans made since then, and providesother forms of subordinated financial support. As a result, at the end of 2008, OEH determined under U.S. generallyaccepted accounting principles to consolidate the assets and liabilities of thehotel in OEH’s consolidated balance sheet at December 31, 2008, and sincethen has consolidated the hotel’s results in OEH’s statements of consolidatedoperations and cash flows.  Accordingly,OEH no longer accounts for Charleston Place among its “Hotel ManagementInterests” described below.  See Note 3 tothe Financial Statements regarding this change of accounting treatment.

 

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**Keswick Hall**—48 keys—is located in the rollingcountryside of central Virginia, near Charlottesville.  Originally a private home dating from 1912,it is popular for weekend breaks and business meetings and, with the adjacentKeswick Club, features a spa and fitness center, tennis courts, three swimmingpools and an Arnold Palmer-designed championship golf course.  The total site occupies 600 acres includingvacant land around the golf course being sold by OEH in parcels for privateresidential development.  See “PropertyDevelopment” below.

 

The **Inn at Perry Cabin**—80keys—was built in 1812 as a country inn located in St. Michaels, Maryland onthe eastern shore of Chesapeake Bay.  Seton 25 waterfront acres that include an outdoor swimming pool as well as boatingand fishing on the Bay, it is an attractive conference and vacationdestination, particularly for guests from the Washington, D.C. area.  OEH has completed a major renovation andexpansion of the hotel, including a new conference facility and a spa.  Vacant available land may be developed asresidences in the future.

 

OEH owns **El Encanto**—77keys—in Santa Barbara, California.  Thehotel is located in the hills above the restored Santa Barbara Mission, withviews out to the Pacific Ocean.  Built in1913 on a seven-acre site, the guest rooms are in cottages and low risebuildings spread throughout mature gardens with a swimming pool and tenniscourt.  OEH closed this hotel in late2006 for significant renovation, including the addition of 14 keys, a new mainbuilding with spa, restaurant and meeting facilities, and a new pool andfitness center.  Due to the currenteconomic downturn in the United States and subject to identifying a jointventure partner, OEH has rescheduled the renovation for completion in 2012.

 

In October 2009, OEH sold to third party buyersthe**Windsor Court**—322 keys—located in thecentral business district of New Orleans. See Note 2 to the Financial Statements.

 

*Caribbean*

 

**La Samanna**—83 keys—is located on the island of St.Martin in the French West Indies.  Builtin 1973, the hotel consists of several buildings on ten acres of land along a4,000-foot beach.  Amenities include tworestaurants, two swimming pools, a spa, tennis courts, fitness and conferencecenters, boating and ocean water sports, and extensive gardens.  The hotel is open most of the year,seasonally closing during the autumn months.

 

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OEH owns about 48 acres of additional land adjoiningLa Samanna on both the French and Dutch sides of St. Martin, which it isdeveloping as for-sale residential villas and apartments.  See “Property Development” below.  Unsold furnished villas provide additionalroom stock for the hotel.

 

*Mexico*

 

OEH owns the **Maroma Resort and Spa**—66keys—on Mexico’s Riviera Maya on the Caribbean coast of the Yucatan Peninsula,about 30 miles south of Cancun.  Theresort opened in 1995 and has 25 acres of land along a 750-foot beach with theCozumel barrier reef offshore where guests may fish, snorkel andscuba-dive.  Important Mayanarchaeological sites are also nearby. Rooms are arranged in low-rise villas and there are three restaurants,tennis courts and extensive spa facilities.

 

In addition, OEH purchased in 2007 a 28-acre tractadjacent to Maroma on which it plans to build and sell private villas in thefuture.  See “Property Development”below.

 

OEH owns the **Casa de Sierra Nevada**—37keys—a luxury resort in the colonial town of San Miguel de Allende.  Opened in 1952, the hotel consists of nineSpanish colonial buildings built in the 16th and 18th centuries.  OEH has renovated the hotel, including thetwo restaurants, and has built new suites as well as a pool, spa and gardenarea.  In addition to the nine ownedbuildings, the hotel leases two buildings for administration.  The total site is approximately twoacres.  OEH also owns a nearby cookingschool and retail shop operated in conjunction with the hotel.  During 2008, OEH acquired the 20% minorityinterest it did not previously own.

 

**Owned Hotels—Rest of the World**

 

*South America*

 

Built in the 1920s on a three-acre site facing CopacabanaBeach near the central business district of Rio de Janeiro, Brazil, the **Copacabana Palace**—243 keys—is a famous hotel in SouthAmerica and features two fine-dining restaurants, spacious function andbanqueting rooms including the hotel’s refurbished former casino rooms withspace for up to 1,200 persons, a 500-seat theater, a large swimming pool, spaand fitness center, and a roof-top tennis court and pool.  In 2009, OEH completed transformation of anumber of suites into a combination of suites and double rooms, therebyincreasing the key count, and opened a new “destination bar”.

 

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In 2007, OEH acquired a 50% interest in acompany that owns beachfront land in Buzios, Brazil, a popular upmarket resorttown about 100 miles east of Rio de Janeiro. If necessary permits were issued, OEH had planned to acquire the entireproperty and build a small hotel and for-sale villas.  In February 2009, the Municipality ofBuzios commenced a compulsory purchase process at fair value, with a view toturning the land into a public park. Accordingly, OEH’s development plan is inabeyance pending the outcome of this process.

 

In October 2007, OEH commenced operationof **Hotel****dasCataratas**—193 keys—beside the famous Iguacu Falls in Brazil on theborder with Argentina, having been awarded a 20-year lease by the Braziliangovernment.  It is the only hotel in thenational park surrounding the falls, a World Heritage site.  First opened in 1958 on about four acres, thehotel has two restaurants, conference facilities, a swimming pool and tenniscourt, and tropical gardens looking out at the falls.  OEH has extensively renovated and upgradedthe property in phases, with the last 64 rooms and the addition of a spascheduled for completion in 2010.

 

The **Miraflores Park Hotel**—82keys—is located in the fashionable Miraflores residential district of Lima,Peru surrounded by parkland and looking out at the Pacific Ocean, yet near thecommercial and cultural center of the city. Opened in 1997, the hotel has two restaurants, a large ballroom, rooftopoutdoor pool, health and beauty facilities and a business center for guests,and occupies about one acre of land.

 

*Southern Africa*

 

The **Mount Nelson Hotel**—201keys—in Cape Town, South Africa is a famous historic property opened in1899.  With beautiful gardens and pools,it stands just below Table Mountain and is within walking distance of the mainbusiness, civic and cultural center of the city.  The hotel has a ballroom, two swimming pools,tennis courts, and a fitness center and spa, all situated on ten acres ofgrounds.  Expansion is planned throughincorporation into the hotel of adjoining residential properties owned by OEH.

 

The **Westcliff Hotel**—117keys—is the only garden hotel in Johannesburg, South Africa, opened in 1998 andsituated on six hillside acres with views over the city’s zoo andparkland.  Laid out in village style, itsresort amenities include two swimming pools, a tennis court and a healthclub.  The hotel attracts business guestsbecause of its proximity to the city center. A banquet and conference center occupies part of adjacent expansionland.

 

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OEH’s African safari experience consists of threeseparate game-viewing lodges in Botswana called **Khwai RiverLodge, Eagle Island Camp** and **Savute Elephant Camp**—39keys in total.  Established in 1971, OEHleases the lodge sites in the Okavango River delta and nearby game reserves,where African wildlife can be observed from open safari vehicles or boats.  Each camp has 12 or 15 twin-bedded deluxetents under thatched roofs, and guests travel between the camps by lightaircraft. Boating, fishing, hiking and swimming are offered at the varioussites.

 

*Australia*

 

The **Observatory Hotel**—96keys—is in Sydney within walking distance of the central business district.  This hotel opened in 1993 and has tworestaurant and lounge areas, extensive meeting and banquet rooms, a spa andhealth club with indoor swimming pool, and a large parking garage on a site ofabout one acre.  There is also access toa nearby tennis court.

 

In January 2010, OEH completed the sale of **Lilianfels Blue Mountains**—85 keys—in the Blue MountainsNational Park west of Sydney to an undisclosed buyer.  The hotel has been designated as held forsale and its results have been accounted for as discontinued operations.  See Note 2 to the Financial Statements.

 

*French Polynesia*

 

**Bora Bora Lagoon Resort and Spa**—76 keys—opened in 1993 andhas bungalows situated over the lagoon water plus additional beach and gardenbungalows, all built in traditional Tahitian style on a 12-acre site.  Guests dine in two restaurants and enjoyextensive water sports and tennis.  Arecent renovation program included a new swimming pool, spa and conferencefacility.  On some of the resort’savailable vacant land, private residential villas for sale can bedeveloped.  As previously reported, thehotel has been designated as held for sale and its results have been accountedfor as discontinued operations.  See Note2 to the Financial Statements. In early February 2010, the hotel sustainedextensive damage when it was hit by a cyclone and is not expected to re-openbefore September 2010. It is covered under OEH’s global insurance program.

 

*Asia*

 

In July 2006, OEH acquired the Pansea groupof six deluxe hotels in Southeast Asia described below, each built anddecorated in traditional local style.

 

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**Napasai**—55 keys—is located on its ownbeach on the north side of Koh Samui island of Thailand in the Gulf ofSiam.  It originally opened in 2004 andfeatures two restaurants, tennis courts, a swimming pool, a spa and watersports such as diving and snorkeling in the nearby coral reef.  The guest rooms are arranged in seaviewcottages on a total site of about 40 acres on which 14 private villas have beenbuilt with vacant land available to develop and sell additional villas.  See “Property Development” below.  The hotel rents many of the existing villasto its guests on a revenue-sharing basis with the owners.

 

On Bali in Indonesia are two long-termleasehold properties, **Jimbaran Puri Bali**—64keys—and **Ubud Hanging Gardens**—38 keys.  Jimbaran Puri Bali originally occupied fourbeachfront acres on the south coast of the island.  Guest rooms are situated in cottages and, inaddition to ocean water sports, the hotel features two restaurants and aswimming pool.  In 2007, OEH acquired along lease of about three acres of vacant land beside the hotel and built 22one- and two-bedroom thatched villas, each with a plunge pool, that opened in2009.

 

Ubud Hanging Gardens is located on terraceson about seven steep hillside acres above the Ayung River gorge in the interiorof Bali.  The hotel opened in 2005 andoffers two restaurants, a swimming pool and spa, and a free shuttle bus to thenearby town of Ubud, a cultural and arts center.  Each key has its own private plunge pool.

 

**La Résidence d’Angkor**—62 keys—opened in 2002 and issituated in walled gardens in Siem Reap, Cambodia.  The hotel occupies a site of about two acresunder long-term lease.  The ancientTemples of Angkor, the principal tourist attraction in the area, are near thehotel which has an indoor/outdoor restaurant and swimming pool.  OEH added eight suites and a spa to thisproperty in 2009.

 

Built in 1920, **TheGovernor’s Residence**—48 keys—in the embassy district of Rangoon,Burma (Myanmar) was originally the official home of one of the Burmese stategovernors in the 1920s.  It is a teaktwo-storey mansion surrounded by verandas overlooking lotus gardens, along-term leased site of about two acres that opened as a hotel in 1997.  It includes a restaurant and swimmingpool.  OEH originally owned a 66%interest in the property and acquired the minority interest in 2009.  See Note 4 to the Financial Statements. Thehotel was damaged by the cyclone that struck Burma in May 2008 and was closedfor three months for repairs.

 

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In Luang Prabang, the ancient capital ofLaos, OEH owns a 69% interest in **La Résidence Phou Vao**—34keys.  The hotel opened in 2001 andoccupies about eight hillside acres under long-term lease.  Guest rooms are in four two-storey buildingssurrounded by gardens that include a restaurant, spa and swimming pool.

 

**Hotel Management Interests**

 

Through a50%/50% joint venture with a Spanish investment company, OEH owns and managesthe famous **Hotel Ritz**—167 keys—in centralMadrid near the financial district, Spanish parliament and many of the city’swell known tourist attractions.  Openedin 1910, the hotel has four spacious conference and banqueting suites, anindoor restaurant and the popular Ritz Terrace restaurant outdoors in thegardens.  OEH and its 50% partnerrenovated the public areas of the hotel and have plans for future refurbishmentof the guest rooms including the addition of four keys.

 

OEH has a50%/50% joint venture with local investors in Peru which, under exclusivemanagement of OEH, operates the following four hotels under long-term renewableleases.

 

The **Hotel Monasterio**—126 keys—is located in the ancient Incacapital of Cuzco, an important tourist destination in Peru.  The hotel was originally built as a Spanishmonastery in the 16th century, converted to hotel use in 1995, and upgradedsince then.  The deluxe guest rooms andtwo restaurants are arranged around open-air cloisters.  Because of Cuzco’s high altitude, speciallyoxygenated ventilation has been added to some of the refurbished rooms.  The three acre site includes a vacant conventadjoining the hotel which OEH and its joint venture partners are currentlyrebuilding as 56 additional keys scheduled to be opened in 2011 as **Palacio Nazarenas**.

 

The **Machu Picchu Sanctuary Lodge**—31 keys—is the only hotel atthe famous mountaintop Inca ruins at Machu Picchu.  All of the rooms have been refurbished to ahigh standard.  The joint venture alsohas a lease on seven acres at the foot of the ruins, close to the town wheretourists arrive by train, for possible future expansion.

 

ThePeru hotel joint venture of OEH built and opened in April 2008 a smallluxury bungalow hotel called **Las Casitas del Colca**—20keys—on 57 acres north of Arequipa near the 11,000 foot high rim of ColcaCanyon.  The hotel features individualcasitas with plunge pools, an intimate main dining room and a swimming pool andspa.  Guests enjoy tours of the sceniccanyon famous for its giant condors.

 

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In December 2009,the Peru hotel joint venture acquired **Hotel Rio Sagrado**—23keys—in the Sacred Valley of the Incas between Cusco and Machu Picchu.  Opened in April 2009, this new rustichotel has 21 suites and two villas, a spa and extensive gardens beside theUrubamba River on a site of about six acres set against an imposing mountainbackdrop.  The Sacred Valley is a popularpart of holiday itineraries in Peru, and a station on OEH’s PeruRail trainservice is a short distance from the hotel.

 

Neither MachuPicchu Sanctuary Lodge nor Hotel Rio Sagrado was damaged by heavy rains inJanuary 2010 in the Machu Picchu region of Peru, as described below under“Tourist Trains and Cruises” regarding OEH’s PeruRail joint venture, althoughguest numbers are currently reduced because of disruption to train services.

 

As noted under“Owned Hotels” above, OEH no longer accounts for Charleston Place inCharleston, South Carolina among its “Hotel Management Interests”.

 

**Restaurants**

 

OEH owns **‘21’ Club**, the famous landmark restaurant at 21 West 52ndStreet in mid-town Manhattan in New York City. Originally a speakeasy during Prohibition in the 1920s, this restaurantis open to the public, occupies three brownstone buildings and features fineAmerican cuisine.  It serves à la cartemeals in the original bar restaurant and a separate dining room upstairs, andalso has ten banqueting rooms used for functions, including the famous secretwine cellar.

 

OEH entered into agreements in November 2007with the New York Public Library to acquire its Donnell Library branch siteadjacent to ‘21’ Club and to construct a mixed use hotel and residentialdevelopment.  In February 2009, inlight of current and anticipated future economic conditions, OEH decided tosuspend further payments under the agreements, as they had been amended in December 2008.  In July 2009, OEHand the New York Public Library signed agreements to spread future payments onthis purchase over the next 24 months. In addition to the $7,000,000 that OEH had already paid, OEH paid$9,000,000 upon execution of the agreements, to be followed by 16 monthlypayments of $500,000 each commencing in February 2010 (the first of whichhas been made), and final payments of $6,000,000 and $29,000,000 in June 2011.  In the event OEH elects not to close thetransaction, the final payment of $29,000,000 will not be due to the Library,in which event OEH would be required to write off its investment including itscapitalized costs and associated fees. OEH has agreed to give the Library security on unencumbered villas at LaSamanna to secure the payments.

 

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OEHre-established in 2003 the famous **La Cabaña** steakhouse in Buenos Aires dating from the 1930s. In 2009, OEH contracted to sell this stand-alone restaurant withcompletion scheduled by March 2010. The restaurant has been designated as held for sale and its results havebeen accounted for as discontinued operations. See Note 2 to the Financial Statements.

 

**Tourist Trains and Cruises**

 

OEH’s principal European tourist trains, called the **Venice Simplon-Orient-Express**, operate in two parts in aregularly scheduled overnight service between London and Venice and on shortexcursions in southern England.  OEH owns30 railway cars originally used on historic “Orient-Express” and other famousEuropean trains.  All have beenrefurbished in original 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuationof the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composedentirely of Pullman cars with a capacity for up to 250 passengers.  The other train is based on the EuropeanContinent made up of Compagnie Internationale des Wagons-Lits et du Tourismesleeping cars and day coaches with capacity for up to 180 passengers.  They operate once or twice weekly principallybetween London and Venice from March to November each year via Paris,Zurich and Innsbruck on a scenic route through the Alps.  Passengers travel under the English Channelby coach on the Eurotunnel shuttle train. Occasional trips are also made from time to time to Rome, Prague,Budapest and Istanbul and other European destinations.

 

The eleven **British Pullman**dining cars of Venice Simplon-Orient-Express with capacity up to 220 passengersoperate all year, originating out of London on short excursions to places ofhistoric or scenic interest in southern England, including some overnight tripswhen passengers stay at local hotels. Both the British and Continental trains are available for privatecharter.

 

The **Northern Belle**tourist train offers day trips and charter service principally in the north ofEngland.  It builds on the success of OEH’sBritish Pullman business, which focuses on the south of England aroundLondon.  This train consists of sixdining cars elegantly decorated to be reminiscent of old British “Belle” trainsof the 1930s, plus related service cars, and can carry up to 250passengers.  Full course meals are servedon board and passengers stay in local hotels on overnight itineraries.

 

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OEH owns the **Royal Scotsman**luxury tourist train, having purchased in 2007 the 50% interest it did notpreviously own.  Founded in 1985, theRoyal Scotsman is composed of nine Edwardian-style cars accommodating up to 36passengers.  Each compartment in the sixsleeping cars has a private bathroom. Operating from April to October each year, the train travelson itineraries of up to seven nights through the Scottish countryside affordingpassengers the opportunity to visit clan castles, historic battlegrounds,famous Scotch whiskey distilleries and other points of interest.

 

**PeruRail** is a 50%/50% joint venturebetween OEH and Peruvian partners formed to operate part of the state-ownedrailways in Peru under a 30-year franchise awarded in 1999 and extendable everyfive years, upon the joint venture’s application, up to 30 additionalyears.  The joint venture pays thegovernment a fee related to traffic levels which can be partially offsetagainst investment in track improvements.  The 70-mile Cuzco-Machu Picchu line carriesmainly tourists visiting the famous Inca ruins, the principal means of accessbecause there is no convenient road, as well as local passenger traffic.  In 2009, other carriers began to operate onthis line in competition with PeruRail for the first time.  A second rail line runs from Cuzco toMatarani on the Pacific Ocean (via Arequipa) and to Puno on Lake Titicaca, andprincipally serves freight traffic.  TheCuzco-Machu Picchu line connects three of OEH’s Peruvian hotels allowinginclusive tours served by OEH’s **Hiram Bingham**luxury tourist train with capacity up to 84 passengers.  OEH also operates a deluxe daytime touristtrain called the **Andean Explorer** on the Cuzco-Punoroute through the High Andes mountains.

 

In January 2010, heavy rains in the Machu Picchuregion of Peru caused flooding and landslides that severely damaged PeruRail’stracks on the Cuzco-Machu Picchu line. Train services have been suspended onpart of the line, and the joint venture’s engineers currently estimate thedamaged track will be repaired by early April, subject to favorable weatherconditions. Management expects the cost of repairs and the disruption to railoperations to be covered by the joint venture’s insurance.

 

The **Eastern & OrientalExpress** in Southeast Asia travels up to one round trip each weekbetween Singapore, Kuala Lumpur and Bangkok. The journey lasts between 48 and 72 hours each way and includes two orthree nights on board and side trips to Penang in Malaysia and the River Kwaiin Thailand.  Some overnight trips arealso made from Bangkok to Chiang Mai and elsewhere in Thailand and toVientiane, Laos.  Originally built in1970, the 24 cars were substantially rebuilt to an elegant oriental style ofdécor and fitted with modern facilities such as air-conditioning and privatebathrooms.  The train is made up ofsleeping cars, three restaurant cars, a bar car and an open air observation carand can carry up to 130 passengers.  TheEastern & Oriental Express is available for charter by privategroups.  OEH manages the trainexclusively and has a 25% shareholding in the owning company.

 

OEH owns and operates a deluxe river cruiseship on theIrrawaddy River in central Burma, or Myanmar, called the **Road ToMandalay**.  The ship was aRhine River cruiser built in 1964 which OEH bought and refurbished.  It has 43 air-conditioned

 

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cabinswith private bathrooms, spacious restaurant and lounge areas and a canopied sundeck with swimming pool.  The shiptravels between Mandalay and Pagan up to eight times each month and carries upto 82 passengers who enjoy sightseeing along the river and guided shoreexcursions to places of historic interest. Five to eight night itineraries are offered, including airfare to andfrom the ship and hotel accommodation in Rangoon.  OEH also operates occasional cruises todifferent destinations, such as to Bhamo in the north of the country close tothe China border.  The ship does notoperate in the hottest summer months and occasionally when the water level ofthe Irrawaddy River falls too low due to lack of rainfall.  After suffering major damage in the cyclonethat struck Burma in May 2008, the ship was rebuilt and resumed service in2009 with a reduced number of cabins and an improved onboard experience.

 

OEH owns five luxury river and canal boats operatingas **Afloat in France** in Burgundy, Provenceand other rural regions of France.  In2007, OEH acquired the 50% interest in this business that it did not previouslyown.  The boats accommodate between sixand 12 passengers each in double berth compartments with private bathrooms, andsome have small plunge pools on deck. They operate seasonally between April and October on three tosix night itineraries with guests dining on board or in nearbyrestaurants.  Shore excursions areorganized each day.

 

**PropertyDevelopment**

 

OEH has been pursuing opportunities todevelop the real estate in its portfolio as private residences.  In addition to expansion by adding guestrooms and other facilities at the hotels, certain of OEH’s properties haveadjacent vacant land suitable for construction of deluxe for-sale residentialvillas and apartments, as noted above under the various “Owned Hotels”headings.  In some cases, theseresidences may be incorporated into existing hotel operations.  OEH’s future strategy is to develop onlyresidential projects that have been substantially pre-sold.

 

Among existingdevelopments, OEH has completed construction of Porto Cupecoy on the Dutch sideof St. Martin, on 12 acres of land adjacent to La Samanna hotel.  The development consists of 182 apartmentsand 35,000 square feet of retail and commercial space and a marina withfor-sale pleasure craft and mega-yacht boat slips.  The apartments range from 750 to 3,000 squarefeet in size.  At December 31, 2009,approximately 51% of the apartments at Porto Cupecoy had been pre-sold.  In addition, OEH expects to sell thecommercial space and marina.  OEH alsohas planning permission to build a further 60 units and a casino on anadditional parcel of Porto Cupecoy land, although no works are scheduled in thenear term.

 

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On the Frenchside of St. Martin, OEH recently completed the Villas at La Samanna, the firstphase of a multi-phase development of up to 37 private homes on 36 acres.  The villas consist of eight large homes inthree or four bedroom configurations each with a private swimming pool andaccess to hotel amenities and services as well as a hotel sponsored rental program.  Marketing of these units is underway and, in December 2009,OEH entered into a deferred sale agreement on four of the villas under which athird party has the option to acquire the villas within the next three years.  The remaining four villas are currently beingleased in the hotel’s rental program while they are being marketed for sale bythe local affiliate of Christies International.

 

At KeswickHall in Virginia, OEH is continuing to sell residential home sites on theKeswick Estate adjacent to the hotel and its Keswick Club championship golfcourse.  Subdivision of the landincluding roads and other infrastructure has been completed and two model homesconstructed.  Most purchasers buy vacantlots and build their own custom designed homes with their own architects andcontractors subject to the community’s development guidelines.  The famous architect Robert A.M. Sternhas recently designed five model homes for the development.  Forty-six of the 87 plots in the KeswickEstate development have been sold through December 31, 2009.

 

When OEH acquired the Pansea hotels groupin Southeast Asia in 2006, development of 14 private villas was alreadyunderway on the 40-acre site of Napasai on Koh Samui in Thailand.  Two villas were sold in 2009 and two remainfor sale, and up to 40 more may be built in the future.

 

In 2007, OEH completed the purchase ofabout 28 acres of vacant land beside its Maroma Resort and Spa on the RivieraMaya in Mexico.  OEH has the opportunityto build up to 20 locally designed private residential villas, a project that wouldonly be commenced on a substantially pre-sold basis.

 

Other hotels owned by OEH with suitablevacant land include Reids Palace in Madeira and Inn at Perry Cabin on theeastern shore of Maryland.  Developmentmay include sale of residences and, in some cases, ongoing management asintegral parts of the adjacent hotels or, at Keswick Hall, membership in thehotel’s golf club.  The for-saleresidences are marketed by local on-site sales personnel of OEH and throughthird-party real estate agents with listings locally and abroad.

 

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**Management Strategies**

 

As the foregoing indicates, OEH has a global mix ofhotel and other deluxe travel products that are geographically diverse andappeal to the high-end leisure market, reflecting an important managementstrategy.  As a result, leisure customersproduce about 80% of annual revenue and 70% of the room nights, while corporate/businesstravelers account for the rest.  OEH’sproperties are distinctive as well as luxurious and tend to attract guestsprepared to pay higher rates for the travel experiences OEH offers compared toits competitors.

 

OEH benefits from long-term trends and developmentsfavorably impacting the global hotel, travel and leisure markets, includinggrowth trends in the luxury hotel market in many parts of the world, increasedtravel and leisure spending by consumers, favorable demographic trends in relevantage and income brackets of U.S., European and other populations, and increasedonline travel bookings.  These long-termtrends suffered setbacks in recent years due to the present downturns in manynational economies, the shock of terrorist attacks, regional conflicts in Iraq,Afghanistan and other parts of the world, and the threatened SARS and swine fluepidemics.  Management believes, however,that the public’s confidence in international travel and demand for luxuryhotel and tourist products will be sustained over the long term.

 

Commencing in2008, OEH implemented a series of initiatives geared to position OEH tonavigate the then impending economic downturn. These included reduction in fixed and variable overheads, reduction inmaintenance capital expenditures to a targeted 2% of revenue, suspension ofcertain development projects, improved management of working capital, andsuspension of cash dividends on the class A common shares.  OEH expects a large part of the savings infixed and variable overheads will continue as the economic climate recovers.

 

During 2009, management began to implementsuccessfully a strategy to reduce OEH’s long-term debt position.  A number of non-core assets not consideredkey to OEH’s portfolio of unique, individual and high valued properties wereidentified, and management undertook to sell these non-core assets in ameasured timescale with the primary purpose of de-leveraging OEH’s balancesheet.  During 2009, OEH completed salesof Lapa Palace in Lisbon and Windsor Court in New Orleans and contracted tosell in early 2010 Lilianfels Blue Mountains in Australia and La Cabanarestaurant in Buenos Aires.  See Note 2to the Financial Statements.  Relateddebt secured by the

 

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propertiessold has been removed from the OEH balance sheet.  In addition, OEH’s developments ofresidential real estate described under “Property Development” above are beingprogressively sold over the medium term, and are expected to generatesubstantial net cash proceeds which also can be used to repay debt.  See Item 7—Management Discussion andAnalysis.

 

OEH management plans to grow the business in the longterm by:

 

·                                          increasing RevPAR and otherearnings at its established properties and recent acquisitions,

 

·                                          expanding existing hotelswhere land or space is available and potential investment returns arerelatively high,

 

·                                          developing vacant land as residencesfor sale,

 

·                                          increasing the utilization ofits tourist trains and cruises to add trips, and

 

·                                          acquiring additionaldistinctive luxury properties throughout the world that have attractivepotential investment returns.

 

Factors in OEH’s evaluation of a potential acquisitioninclude the uniqueness and deluxe nature of the property, attractions andexperiences for guests in the vicinity, acceptability of financial returns,upside potential through pricing, expansion or improved marketing, limitations onnearby competition, and convenient access. Expansion at existing properties by adding rooms and facilities such asspas and conference space can provide attractive investment returns becauseincremental operating costs are low.

 

OEH plans to continue owning or part-owning andmanaging most OEH properties, although OEH will consider contracts to manageproperties without part-ownership which meet its criteria in order tofacilitate entry into new markets or to preserve capital investment.  Ownership or part-ownership encourages OEH todevelop the distinctive local character of its properties and allows it tobenefit from current cash flow and potential future gains on sale.  Self-management or management with equity interesthas enabled OEH to capture the economic benefits otherwise shared with athird-party manager, to control the operations, quality and expansion of thehotels, and to use its experience with price changes, expansions andrenovations to improve cash flow and enhance asset values.

 

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Many of OEH’s individual properties, such as the HotelCipriani, Copacabana Palace and ‘21’ Club, have distinctive local character andbrand identity.  Management believes thatdiscerning travellers will choose an individually styled property in preferenceto a chain brand.  OEH links its propertiestogether through the “Orient-Express” name which originated with the legendaryluxury European train in the late 19th and early 20th centuries and which isrecognizable worldwide and synonymous with sophisticated travel and refinedelegance.

 

Commencing in2009, OEH initiated a new brand strategy expected to increase the visibility ofthe “Orient-Express” brand globally throughout OEH’s business segments andproduct offerings.  This initiative isintended to position OEH as a collection of deluxe travel and hospitalityexperiences, each of which would be individually branded and focused onauthentic local product and service. Management is hopeful that this new brand strategy will provide OEH withpublic relations and commercial advantages, increase efficiencies and theeffectiveness of the OEH portfolio, grow revenue and repeat business fromcustomers, and be attractive to property owners and potential joint venturepartners.

 

As indicated above under “Property Development”, OEHis continuing its deluxe for-sale residential development activities.  Management anticipates future profits bothfrom sales of land and completed units and, in certain cases, from ongoingmanagement for the owners as integral parts of the adjacent hotels.

 

**Marketing, Sales and Public Relations**

 

OEH’s sales and marketing function is primarily basedupon direct sales (prioritizing electronic channels such as the internet andstrategic travel agents and tour operators), cross-selling to customers, andpublic relations.  OEH has a corporatesales force of about 90 persons in 11 locations.  These include key account sales offices inNew York, Sao Paulo, London, Paris, Cologne, Milan, Madrid, Moscow, Tokyo andSingapore, and reservations offices in Charleston (South Carolina), London andSingapore.  OEH also has local sales representativesresponsible for the hotels where they are based.  OEH’s sales staff train preferred travelindustry and distribution partners, negotiate with group and corporate accountrepresentatives, and conduct marketing initiatives such as direct mailings,e-commerce, trade show participation and event sponsorship.  OEH participates in a number of partnerprograms, such as “American Express Centurion” and “Virtuoso”.  OEH offers its top travel agents and otherindustry partners free participation in OEH’s “Bellini Club” providing trainingcourses, special commissions and sales support for all OEH products worldwide.

 

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Websites and e-marketing are important direct salesand branding tools for OEH.  Through itsprincipal website (www.orient-express.com) and the websites of the individualproperties, OEH provides extensive descriptions and images of the propertiesand guest activities in English and other languages.  Direct online booking capability is providedas well as affiliate programs for online partners.  OEH operates other internet travel portalsthat direct customers to OEH’s properties, and works with other selectedelectronic distribution channels.

 

Because repeat customers appreciate the consistentquality of OEH’s hotels, trains, cruises and restaurants, an important part ofmanagement’s strategy is to promote OEH properties through variouscross-selling efforts.  These include theinhouse “Orient-Express Traveller” directory, worldwide preferred travel agentprograms, and direct communications with customers.  OEH sells luxury souvenir goods branded withthe names of its travel products.

 

OEH’s marketing strategy also focuses on publicrelations, which management believes is a highly cost-effective marketing toolfor luxury properties.  Because of theunique nature of its properties, guests are more likely to hear about OEH’shotels and tours through word-of-mouth or published articles rather thanthrough general advertising.  OEH has anin-house public relations office in London and representatives in 14 countriesworldwide, including contracts with third-party public relations firms, topromote its properties through targeted newspapers, general interest and travelmagazines, and broadcast, online and other media.

 

**Industry Awards**

 

OEH has gained a worldwide reputation for quality andservice in the luxury segment of the leisure and business travel markets.  Over the years, OEH’s properties have wonnumerous national and international awards given by consumer or tradepublications such as Conde Nast Traveller, Travel & Leisure and Tatlerand private subscription newsletters such as Andrew Harper’s Hideaway Report,or industry bodies such as the American Automobile Association.  The awards are based on opinion polls of thepublications’ readers or the professional opinion of journalists or panels ofexperts.  The awards are believed toinfluence consumer choice and are therefore highly prized.

 

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**Competition**

 

Some of OEH’s properties are located in areas wherethere are numerous competitors, some of which have greater resources than OEHhas.  Competition for guests in thehospitality industry is based generally on the convenience of location, thequality of the property and services offered, room rates and menu prices, therange and quality of food services and amenities offered, types of cuisine, andreputation and name recognition.

 

OEH’s strategy is to acquire only hotels which havespecial locations and distinctive character. Many are in areas with unique local history or high entry barriersbecause of zoning restrictions.  OEHbuilds its competitive advantage by offering high quality service and cuisine,usually with a local flavor.  Typically,therefore, OEH competes by providing a special combination of location,character, cuisine, service and experiential activities rather than relying onprice competition.

 

OEH’s luxury tourist trains have no directcompetitors.  Other trains exist onsimilar routes, including new services in 2009 on the Cusco-Machu Picchu lineof PeruRail, but management believes OEH’s trains and onboard service areunique and of such superior quality that guests consider an OEH train journeymore as a luxury experience and an end in itself rather than as a means oftransport.

 

**Employees**

 

OEH currently employs about 7,100 persons, about 2,500of whom are represented by labor unions. Approximately 6,150 persons are employed in the hotels and restaurants,850 in the trains and cruises business, and 100 in central administration andother activities.  Management believesthat OEH’s ongoing labor relations are satisfactory.

 

**GovernmentRegulation**

 

OEH and its properties are subject to numerous lawsand government regulations such as those relating to the preparation and saleof food and beverages, liquor service, health and safety of premises, employeerelationships, environmental matters, and planning and zoning rules. Managementbelieves that OEH is in compliance in all material respects with relevant lawsand regulations with respect to its business.

 

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**ITEM 1A.****                                           ****Risk Factors**

 

OEH’s business issubject to various risks, including those described below.  Investors should carefully consider the “RiskFactors” below.  These are separated intothree general groups:

 

·                  risks of OEH’sbusiness,

 

·                  risks that relateto OEH’s financial condition and results of operations, and

 

·                  risks ofinvesting in class A common shares.

 

The risksdescribed below are only those that management considers to be the mostsignificant.  There may be additionalrisks that management currently regards as less material or that are notpresently known.

 

If any of theserisks occurs, OEH’s business, prospects, financial condition, results ofoperations or cash flows could be materially adversely affected.  Any of the risks stated below may have amaterial adverse effect, which means the risk may have one or more of theseeffects.  In that case, the market priceof the class A common shares could decline.

 

This report also contains forward looking statementsthat involve risks and uncertainties. See “Forward Looking Statements” above. OEH’s actual results could differ materially from those anticipated inthese forward looking statements as a result of certain factors, including therisks described below and elsewhere in this report.

 

**Risks of OEH’s Business**

 

**OEH’soperations are subject to adverse factors generally encountered in the lodging,hospitality and travel industries.**

 

Besides thespecific conditions discussed in the risk factors below, these adverse factorsinclude:

 

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

 

·                  recurrence ofrising travel costs such as increased air travel fares and higher fuel costs,and reduced capacities of airlines and other transport services,

 

·                  politicalinstability of the governments of some countries where OEH’s properties arelocated or operate, resulting in depressed demand,

 

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·                  less disposableincome of consumers and the travelling public,

 

·                  dependence onvarying levels of tourism, business travel and corporate entertainment,

 

·                  changes inpopular travel patterns,

 

·                  competition fromother hotels and leisure time activities,

 

·                  periodic localoversupply of guest accommodation, which may adversely affect occupancy andactual rates achieved,

 

·                  increases inoperating costs at OEH’s properties due to inflation and other factors whichmay not be offset by increased revenues, and changes in costs of materials,

 

·                  regional andlocal economic and political conditions affecting market demand for travel products,including recessions, civil disorder, and acts or threats of terrorism,

 

·                  expropriation ornationalization of properties by foreign governments, and limitations onrepatriation of local earnings,

 

·                  foreign exchangerate movements impacting OEH’s revenues and costs,

 

·                  adverse weatherconditions or destructive forces like fire or flooding that sometimes result inclosure of properties,

 

·                  reduction indomestic or international travel and demand for OEH’s properties due to actualor threatened acts of terrorism or war, or the outbreak of contagious disease,and heightened travel security measures instituted in response to these events,

 

·                  travel-relatedaccidents or industrial action, increased transportation and fuel costs, andnatural disasters interfering with travel, and

 

·                  seasonality, inthat 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.

 

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The effects ofmany of these factors vary among OEH’s hotels and other properties because oftheir geographic diversity.

 

For example,civil unrest in Burma in September 2007 resulted in reservationcancellations at The Governor’s Residence and Road To Mandalay at the beginningof the seasonal high demand period for those properties.  Bookings were recovering but suffered a newsetback when the hotel and ship were damaged by a cyclone hitting Burma in May 2008.

 

Also, as a resultof the terrorist attacks in the United States in September 2001 and thesubsequent military actions in Afghanistan and Iraq, international, regionaland even domestic travel was disrupted and public concerns about travel safetyincreased significantly.  Demand for mostof OEH’s properties declined substantially in the latter part of 2001 and in2002. Further acts of terrorism or a military action, or the threat of either,could again reduce leisure and business travel, thereby adversely affecting OEH’sresults.

 

The currentlyweakened economies of North America, Europe and other regions and the recentdisruption of financial markets in various parts of the world have resulted inRevPAR declines at most of OEH’s properties in 2009 and in shorter lead timesfor reservations because of customers’ economic uncertainty.  Shorter booking lead times were alsoexperienced in the 2001-2002 period.  Asa result, OEH’s ability to forecast operating results and cash flows has beenreduced.  These factors also affected OEH’sliquidity outlook.  See “Risks Relatingto OEH’s Financial Condition and Results of Operations’ below.

 

**If revenue decreases atOEH’s properties, its expenses may not decrease at the same rate, therebyadversely affecting OEH’s profitability and cash flow.**

 

Ownership andoperation of OEH’s properties involve many relatively fixed expenses such aspersonnel costs, interest, rent, property taxes, insurance and utilities.  If revenue declines when demand weakens, OEHmay not be able to reduce these expenses to the same degree to preserveprofitability.  While OEH did reduce manyoverhead expenses in late 2008 and 2009 during the current economic downturn inmany countries, its operating margins and cash flow declined as revenue fell.

 

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**Thehospitality industry is highly competitive, both for customers and foracquisitions of new properties.**

 

Some of OEH’sproperties are located in areas where there are numerous competitors seeking toattract customers, particularly in city centers. Competitive factors in thehospitality industry include:

 

·                  convenience of location,

 

·                  the quality ofthe property and services offered,

 

·                  room rates andmenu prices,

 

·                  the range andquality of food services and amenities offered,

 

·                  types of cuisine,and

 

·                  reputation andname recognition.

 

Demographic,geographic or other changes in one or more of OEH’s markets could impact theconvenience or desirability of its hotels and restaurants, and so couldadversely affect their operations.

 

Also, new orexisting competitors could significantly lower rates or offer greaterconveniences, services or amenities, or significantly expand, improve orintroduce new facilities in the markets in which OEH operates.  For example, new passenger rail services haverecently started to operate on the Cusco-Machu Picchu line of PeruRail for thefirst time in direct competition, which may reduce PeruRail’sprofitability.  As another example,largely because of new hotel competition in Bora Bora as well as high coststructures, OEH decided in late 2007 to dispose of Bora Bora Lagoon Resort.

 

OEH competes forhotel and restaurant acquisition opportunities with others who may have greaterfinancial resources.  These competitorsmay be prepared to accept a higher level of financial risk than OEH canprudently manage.  This competition mayhave the effect of reducing the number of suitable investment opportunitiesoffered to OEH and increasing its acquisition costs because the bargainingpower of property owners seeking to sell or to enter into management agreementsis increased.

 

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**Thehospitality industry is heavily regulated, including with respect to food andbeverage sales, employee relations, development and construction, andenvironmental matters, and compliance with these laws could reduceprofitability of properties that OEH owns or manages.**

 

OEH and itsvarious properties are subject to numerous laws and government regulations,including those relating to the preparation and sale of food and beverages,liquor service, and health and safety of premises.  The properties are also subject to lawsgoverning OEH’s relationship with employees in such areas as minimum wage andmaximum working hours, overtime, working conditions, hiring and firingemployees and work permits.

 

The success ofexpanding existing properties depends upon obtaining necessary building permitsor zoning variances from local authorities. Failure to obtain or delay in obtaining these permits could adverselyaffect OEH’s strategy of increasing revenues and earnings through expansion ofexisting properties.

 

OEH is alsosubject to U.S. and foreign laws and regulations relating to the environmentand the handling of hazardous substances that may impose or create significantpotential environmental liabilities, even in situations where the environmentalproblem or violation occurred on a property before OEH acquired it.  Existing environmental laws and regulations maybe revised or new laws and regulations related to global climate change, airquality or other environmental and health concerns may be adopted or becomeapplicable to OEH.

 

**OEH’sacquisition, expansion and development strategy may be less successful thanexpected and, therefore, its growth may be limited.**

 

Managementintends to increase OEH’s revenues and earnings in the long term throughacquisition of new properties and expansion of existing properties.  The ability to pursue new growthopportunities successfully will depend on management’s ability to:

 

·                  identifyproperties suitable for acquisition and expansion,

 

·                  negotiatepurchases or construction on commercially reasonable terms,

 

·                  obtain thenecessary financing and government permits,

 

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·                  build on scheduleand with minimum disruption to guests, and

 

·                  integrate newproperties into OEH’s operations.

 

Also, theacquisition of properties in new locations may present operating and marketingchallenges that are different from those encountered in OEH’s existinglocations.  OEH can give you no assurancethat management will succeed in this growth strategy, in particular in the faceof the current global economic uncertainty.

 

OEH plans todevelop new properties in the future. New project development is subject to such adverse factors as:

 

·                  sitedeterioration after acquisition,

 

·                  inability toobtain necessary government permits,

 

·                  inclementweather,

 

·                  labor or materialshortages,

 

·                  work stoppages,

 

·                  availability ofequity funding, construction finance and mortgage loans,

 

·                  weak economicenvironment before, during or after development,

 

·                  claims anddisputes between OEH and other contracting parties,

 

·                  untimely opening,

 

·                  high start-upcosts, and

 

·                  weak initialmarket acceptance of a new property.

 

For example, ElEncanto in Santa Barbara was originally closed for extensive renovations inlate 2006, with an expected reopening in 2008. However, because of changes in rebuilding plans, delays in obtaininggovernment permits, a slower pace of construction than initially expected anddifficulty in obtaining financing in the current economic climate, reopening ofthe hotel has been delayed at least until 2012.

 

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As anotherexample, due to the current weak economic conditions in the United States,including the problems in the credit and real estate markets, OEH has beenunable at this time to obtain suitable financing and/or equity partners for itsNew York hotel development project adjoining the ‘21’ Club.  The purchase of the development site may bedeferred until 2011, and OEH has negotiated the terms under which it mayterminate its obligations to complete the purchase, in which event OEH would berequired to write off its investment including capitalized costs and associatedfees.

 

**OEH may be unable to obtain the necessary additional capital to financethe growth of its business.**

 

The acquisition,expansion and development of OEH’s properties, as well as the ongoingrenovations, refurbishments and improvements required to maintain or upgradethose properties, are capital intensive. The availability of future borrowings and access to equity capitalmarkets to fund these acquisitions, expansions and projects depend onprevailing market conditions and the acceptability of financing terms on offer.  OEH can give no assurance that futureborrowings or equity financing will be available to OEH, or available onacceptable terms, in an amount sufficient to fund its needs. Future equityfinancings may be dilutive to the existing holders of common shares.  Future debt financings may requirerestrictive covenants that would limit OEH’s flexibility in operating itsbusiness.  See also “Risks Relating toOEH’s Financial Condition and Results of Operations” below.

 

**OEH’soperations may be adversely affected by extreme weather conditions and theimpact of natural disasters, and insurance may not fully cover these and otherrisks.**

 

OEH operatesproperties in a variety of locales, each of which is subject to local weatherpatterns affecting the properties and customer travel.  As OEH’s revenues are dependent on therevenues of individual properties, extreme weather conditions from time to timecan have a major adverse impact upon individual properties or particularregions.  For example, hurricanes in August andOctober 2005 caused damage to the Windsor Court Hotel in New Orleans andMaroma Resort and Spa on Mexico’s Yucatan Peninsula, resulting in temporaryclosure of the hotels for repairs. Similarly, The Governor’s Residence and Road to Manadalay cruiseship,both in Burma, were damaged by a cyclone in May 2008 and Bora Bora LagoonResort by a cyclone in February 2010.

 

OEH carriesproperty, loss of earnings, liability and other kinds of insurance in amountsmanagement deems reasonably adequate, but damages may exceed the insurancelimits or be outside the scope of coverage. Also, insurance against some risks may be unavailable to OEH oncommercially reasonable terms, requiring OEH to self insure against possibleloss.

 

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**If therelationships between OEH and its employees were to deteriorate, OEH may befaced with labor shortages or stoppages, which would adversely affect theability to operate its facilities.**

 

OEH’s relationswith its employees in various countries could deteriorate due to disputesrelated to, among other things, wage or benefit levels, working conditions ormanagement’s response to changes in government regulation of workers and theworkplace.  Operations rely heavily onemployees’ providing a high level of personal service, and any labor shortageor stoppage caused by poor relations with employees, including unionizedlabor, could adversely affect the ability to provide those services, whichcould reduce occupancy and room revenue and even tarnish OEH’s reputation.

 

**OEH’splans to expand existing properties, develop new ones and build residentialunits for sale at some properties are subject to project cost, completion andresale risks.**

 

Successful newproject development depends on timely completion within budget and satisfactorymarket conditions. Risks that could affect a project include:

 

·                  constructiondelays or cost overruns that may increase project costs,

 

·                  delay or denialof zoning, occupancy and other required government permits and authorizations,

 

·                  write-off ofdevelopment costs incurred for projects that are not pursued to completion,

 

·                  natural disasterssuch as earthquakes, hurricanes, floods or fires that could adversely impact aproject,

 

·                  defects in designor construction that may result in additional costs to remedy, or that requireall or a portion of a property to be closed during the period needed to rectifythe situation,

 

·                  inability toraise capital to fund a project because of poor economic or financialconditions,

 

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·                  claims anddisputes between OEH and other contracting parties resulting in delay, monetaryloss or project termination,

 

·                  governmentrestrictions on the nature or size of a project or timing of completion, or onthe ownership of completed units such as by foreign nationals, and

 

·                  changes in marketconditions for residences, such as credit availability and pricing terms, oroversupply that may affect OEH’s ability to sell residential units at a profitor at price levels originally anticipated.

 

Occurrence of any of these risks could adverselyaffect the profitability of planned expansions and new developments.

 

**OEH’s owned hotels andrestaurants are subject to risks generally incidental to the ownership ofcommercial real estate and often beyond its control.**

 

OEH’s owned hotels and restaurants are subject to risks generallyincidental to the ownership of commercial real estate and often beyond ourcontrol.  These include:

 

·                  fluctuatingvalues of commercial real estate as an investment, and potential valueimpairments,

 

·                  changes innational, regional and local economic and political conditions,

 

·                  changes ininterest rates and the availability, cost and terms of financing,

 

·                  the impact ofpresent or future government legislation and regulation (includingenvironmental laws),

 

·                  the ongoing needfor capital improvements to maintain or upgrade properties,

 

·                  changes inproperty taxes and operating expenses,

 

·                  the potential foruninsured or underinsured losses, and

 

·                  limited abilityto reduce the relatively high fixed costs of operating owned commercial realestate if revenue declines.

 

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For example, OEH has undertaken a program to sellowned properties that are non-core to its business, as well as continue sellingits developed for-sale residential real estate. In an unfavorable commercial real estate market, OEH may be unable tosell properties at values OEH is seeking, particularly during the currenteconomic downturn and weakness in credit markets, or sell them at the pace OEHhas planned.

 

**Loss or infringement of OEH’sbrand names could adversely affect its business.**

 

In the competitive hotel and leisure industry in which OEH operates,trade names and trademarks are important in the marketing, promotion andrevenue generation of OEH’s properties. OEH has a large number of trade namesand trademarks, and expends resources each year on their surveillance,registration and protection.  OEH’sfuture growth is dependent in part on increasing and developing its brandidentities.  The loss, dilution orinfringement of any of OEH’s brand identities could have an adverse effect onits business, results of operations and financial condition.

 

**SomeOEH properties are geographically concentrated in countries where nationaleconomic downturns, political events or other changing local conditions beyondOEH’s control could disproportionately affect OEH’s business.**

 

While OEH’s geographic diversification in 24 countries lessens thedependence of its results of operations on any particular region, OEH ownseight hotels in Italy and OEH owns one hotel in Peru and its 50/50 jointventures in Peru own a further four hotels as well as PeruRail.  Due to this concentration of properties inthese two countries, OEH’s business is more exposed to national events orconditions there than other countries where OEH operates.

 

**OEH maybe unable to manage effectively the risks associated with its joint ventureinvestments, which may adversely impact the operations of those joint ventures.**

 

Six of OEH’s hotels and two of its tourist trains are owned by jointventure companies in which OEH has an investment of 50% or less and sharescontrol of at least some aspects of their businesses, such as expenditure forcapital improvements.  These jointventure investments of OEH involve risks somewhat different from 100% ownershipbecause OEH’s partners

 

·                  may be unable tomeet their capital contribution obligations,

 

·                  may have businessinterests inconsistent with those of OEH or act contrary to OEH’s objectivesand policies,

 

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·                  may causeproperties to incur unplanned liabilities, or

 

·                  may take actionsthat impair OEH’s operation of the business.

 

If any of these possibilities occurs, OEH’s operations could be adverselyaffected because it may have limited ability to rectify resulting problemswithin the joint venture and even to dispose of its joint ventureinvestment.  Disputes with joint venturepartners may result in litigation costly to OEH.

 

**Risks Relating to OEH’s FinancialCondition**

**and Results of Operations**

 

**The current uncertainty infinancial markets and the sustained weakening of the economies of manycountries has adversely affected OEH’s financial condition and results ofoperations and could do so in the future.**

 

Financial markets in the United States, Europe and Asia haveexperienced significant disruption recently, including, among other things,volatility in securities prices and diminished liquidity and creditavailability.  Furthermore, the economiesof the United States and other countries have slowed down, leading to economicdownturns which could, among other things, reduce the amounts persons andbusinesses spend on travel, hotels, dining and entertainment.  OEH has experienced pressure on pricing,reduced occupancy at its properties, and fewer customers from traditionalmarkets for OEH’s hotels and other travel products.  Largely as a result, OEH’s consolidatedrevenue of $502,838,000 and earnings from operations of $51,583,000 in 2008declined to $456,956,000 and $19,699,000, respectively, in 2009.

 

OEH cannot predict the likely duration or severity of the currentdisruption in financial markets or the general economic uncertainty in theUnited States and many parts of the world. However, if weakened economic conditions continue or worsen, they coulddecrease OEH’s future revenue, profitability and cash flow from operationswhich could adversely impact its liquidity and financial condition, includingOEH’s ability to comply with financial covenants in its loan facilities.

 

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**The financial uncertaintyand economic weakening identified in the previous Risk Factor could adverselyimpact OEH’s liquidity and financial condition, in particular OEH’s ability toraise additional funds for its cash requirements for working capital,commitments and debt service.**

 

During the 12 months ending December 31, 2010, OEH hasapproximately $30,000,000 of scheduled debt repayments including capital leasepayments.  Additionally at December 31,2009, there was $26,614,000 of Porto Cupecoy indebtedness that matures as salesof apartments are made.  In 2011, OEH hasapproximately $456,800,000 of scheduled debt repayments including capital leasepayments.

 

OEH’s capital commitments at December 31, 2009 amounted to$54,627,000, including $43,000,000 related to the purchase of land and abuilding adjoining ‘21’ Club from the New York Public Library.  In July 2009, OEH and the Library signedagreements to spread and secure future payments on this purchase over 24months.  In addition to the $7,000,000already paid, OEH paid $9,000,000 upon execution of the agreements, to befollowed by 16 monthly payments of $500,000 each commencing in February 2010,and final payments of $6,000,000 and $29,000,000 in June 2011.  In the event OEH elects not to close thetransaction, the final payment of $29,000,000 will not be due to the Library.

 

Other capital commitments at December 31, 2009 included $9,300,000to complete construction of the Porto Cupecoy development, which is beingfunded by a short-term bank loan and from deposits received from buyers of soldunits, and a conditional commitment of $117,000,000 to purchase two hotels inSicily, which was completed and funded in January 2010 by assumption ofexisting and new indebtedness relating to the hotels and part of the proceedsof the second share offering referred to in the next paragraph.

 

In May 2009, OEH completed a public offering through underwritersin the United States of 25,875,000 newly issued class A common shares of theCompany, and in January 2010 completed an additional public offeringthrough underwriters in the U.S. of 13,800,000 class A common shares of theCompany.  OEH has been using the netproceeds from these offerings, totaling approximated $272,000,000, primarilyfor debt reduction, general corporate purposes and to fund part of the purchaseprice of the two Sicilian hotels.

 

OEH expects to fund its working capital requirements, debt service andcapital expenditure commitments for the foreseeable future from operating cashflow, available committed borrowing facilities, the refinancing of maturing debtwith new borrowing facilities, the proceeds of sales of non-core assets anddeveloped real estate, and the proceeds from the two recent class A sharesales.

 

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However, OEH can give you no assurance that, in the current economicand financial environment, additional sources of financing for its unfundedcommitments will be available on commercially acceptable terms, or available atall, or that OEH will be able to refinance maturing debt or to reschedule loanrepayments or capital commitments, or that other cash-saving steps managementmay take to enhance OEH’s liquidity and capital position will bridge anyshortfall.  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.

 

**Covenants in OEH’sfinancing agreements could be breached or could limit management’s discretionin operating OEH’s businesses, causing OEH to make less advantageous businessdecisions; OEH’s indebtedness is collateralized by substantially all of itsproperties.**

 

OEH’s financing agreements with several commercial bank lenders containcovenants that include limits on additional debt collateralized by mortgagedproperties, limits on property liens and limits on mergers and asset sales, andfinancial covenants requiring maintenance of minimum net worth amounts or aminimum debt service coverage, or establishing a maximum debt to equity ratioor a maximum loan to collateral value ratio. These covenants may limit OEH’s flexibility in operating propertiessecuring these agreements.  Indebtednessis also collateralized by substantially all of OEH’s properties. Futurefinancing agreements may contain similar provisions and covenants or even morerestrictive ones.  If OEH fails to complywith the restrictions in present or future financing agreements, a default mayoccur.  A default could allow thecreditors to accelerate the related debt as well as any other debt to which across-acceleration or cross-default provision applies.  A default could also allow the creditors toforeclose on the properties collateralizing the debt.

 

Management is in regular discussions with OEH’s bankers regardingfunding requirements and to ensure continued compliance with the financialcovenants applicable to OEH in its existing loan facilities.  At December 31, 2009, OEH was incompliance with all financial covenants, although the Hotel Ritz, Madrid, 50%owned by OEH, was out of compliance with a debt service coverage ratio in itsfirst mortgage loan facility which is non-recourse to and not credit-supportedby OEH or its joint venture partner in that hotel.  OEH and its partner continue to service thedebt and are discussing with the lender how to bring the hotel back intocompliance.

 

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OEH recognizes that, in the current economic climate, there is anenhanced risk of a covenant breach if weak trading conditions lead to adeterioration of its results and the costs of implementing remedial steps reduceOEH’s earnings in any given period.  Ifcurrent economic conditions, including the volatility recently experienced inforeign exchange and global debt markets, continue or worsen, managementbelieves there is heightened risk that OEH could breach certain financialcovenants that apply to it.

 

OEH’s liquidity would be adversely affected if a covenant breachoccurred in a material loan facility and OEH was unable to agree with itsbankers how the particular financial covenant should be amended or how the breachcould be cured.  Management expects totake pro active steps to meet with OEH’s bankers to seek an amendment to anyspecific financial covenant if management believed that it was likely that thecovenant would be breached because of adverse trading conditions or incurrenceof additional costs.  OEH can give noassurance, however, that its loan facility lenders would agree to modify anyaffected covenant, which could impact OEH’s ability to fund its cash requirementsfor working capital, commitments and debt service and could cause an event ofdefault under any affected loan facility.

 

**OEH’s substantialindebtedness could adversely affect its financial health.**

 

OEH has a large amount of debt in its capital structure and may incuradditional debt from time to time.  As ofDecember 31, 2009, OEH’s consolidated long-term indebtedness was$811,734,000 (including the current portion). Additionally there was $6,757,000 of debt related to discontinuedoperations.  This substantialindebtedness could:

 

·                  require OEH todedicate much of its cash flow from operations to debt service payments, and soreduce the availability of cash flow to fund working capital, capitalexpenditures, product and service development and other general corporatepurposes,

 

·                  limit OEH’sability to obtain additional financing for its business,

 

·                  increase OEH’svulnerability to adverse economic and industry conditions, including theseasonality of some of OEH’s activities, or

 

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·                  limit OEH’sflexibility in planning for, or reacting to, changes in its business andindustry as well as the economy generally.

 

OEH must also repay or refinance its indebtedness in the future.  Although OEH may seek to refinance itsindebtedness, OEH may be unable to obtain refinancing on satisfactory terms, inparticular because of the current economic uncertainty in debt markets.  OEH’s failure to repay indebtedness when duemay result in a default under that indebtedness and cause cross-defaults underother OEH indebtedness.

 

**Increases in prevailinginterest rates may increase OEH’s interest payment obligations.**

 

After taking into account OEH’s fixed interest rate swaps, approximately44% of OEH’s consolidated long-term debt at December 31, 2009 accruedinterest that fluctuates with prevailing interest rates, so that any rateincreases may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedgingtransactions in order to manage its floating interest rate exposure, but OEHcan give no assurance that those hedges will lessen the impact on OEH of risinginterest rates.  At December 31,2009, approximately 56% of OEH’s long-term debt was subject to fixed interestrate swaps.

 

**Fluctuations in foreigncurrency exchange rates may have a material adverse effect on OEH’s financialstatements and/or operating margins.**

 

Substantial portions of OEH’s revenue and expenses are denominated innon-U.S. currencies such as European euros, British pounds sterling, Russianrubles, South African rand, Australian dollars, Peruvian nuevos soles, Botswanapula, Brazilian reals, Mexican pesos and various South East Asiancurrencies.  In addition, OEH buys assetsand incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have amaterial adverse effect on OEH’s financial statements and/or operating margins.

 

OEH’s financial statements are presented in U.S. dollars and can beimpacted by foreign exchange fluctuations through both:

 

·                  translation risk,which is the risk that the financial statements for a particular period or asof a certain date depend on the prevailing exchange rates of the variouscurrencies against the U.S. dollar, and

 

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·                  transaction risk,which is the risk that the currency of costs and liabilities fluctuates inrelation to the currency of revenue and assets, which fluctuations mayadversely affect OEH’s operating margins.

 

**OEH’s ability to paydividends on the class A common shares is limited.**

 

OEH paid quarterly cash dividends on the Company’s class A and Bcommon shares in the amount of $0.025 per share in 2004 through 2008 butsuspended dividends beginning in 2009. OEH can give no assurance that it will be able to resume dividendpayments in the future because of debt repayment requirements, a downturn toOEH’s business or other reasons.

 

Under Bermuda law, the Company may not pay dividends or make otherdistributions on the class A and B common shares if there are reasonablegrounds for believing that OEH is, or after the payment would be, unable to payits liabilities as they become due, or if the realizable value of OEH’s assetsis less than the aggregate of its liabilities, issued share capital and “sharepremium accounts” (share premium is defined as the amount of shareholders’equity over and above the aggregate par value of issued shares).  OEH can give no assurance that the Companywill not be restricted by Bermuda law from paying dividends.

 

**OEH is subject toaccounting regulations and uses certain accounting estimates and judgments thatmay differ significantly from actual results.**

 

Implementation of existing and future standards and rules of theU.S. Financial Accounting Standards Board (“FASB”) or other regulatory bodiescould affect the presentation of OEH’s financial statements and relateddisclosures.  Future regulatoryrequirements could significantly change OEH’s current accounting practices anddisclosures.  These changes in thepresentation of OEH’s financial statements and related disclosures could changean investor’s interpretation or perception of OEH’s financial position andresults of operations.  For example, OEHbecame subject to the FASB’s Accounting Standards Codification (“ASC”) 740“Income Taxes” in the first quarter of 2007 requiring it to recognize at thattime a substantial initial liability with a corresponding adjustment toretained earnings.  OEH’s future incometax cost may include a tax benefit as the initial provision is released or atax cost as new liabilities are recognized, in addition to the tax costs orbenefits that relate to OEH’s trading activities and results.

 

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OEH uses many methods, estimates and judgments in applying itsaccounting policies.  By their nature,these are subject to substantial risks, uncertainties and assumptions, andfactors may arise over time that lead OEH to change its methods, estimates andjudgments which could significantly affect the presentation of OEH’s results ofoperations.

 

As an example of these estimates and judgments, in accordance with the ASC 350-30“Intangibles-Goodwill and Other”, OEH evaluates goodwill atleast annually, or when events or changes in circumstances, such as adversechanges in the industry or economic trends or an underperformance relative tohistorical or projected future operating results, indicate the carrying valuemay not be recoverable.  OEH’s impairmentanalysis incorporates various assumptions and uncertainties that managementbelieves are reasonable and supportable considering all available evidence,such as the future cash flows of the business, future growth rates and the relateddiscount rates.  However, theseassumptions and uncertainties are, by their very nature, highlyjudgmental.  OEH cannot guarantee thatits business will achieve the forecasted results which have been included inits impairment analysis.  If OEH is unableto meet these assumptions in future reporting periods, it may be required torecord a further charge in a future statement of operations for goodwillimpairment losses, in addition to the impairment charges on continuingoperations of $6,107,000 recorded in 2008 and $6,500,000 recorded in 2009.

 

**Risks of Investing in Class A Common Shares**

 

**The Company is notrestricted from issuing additional class A or B common shares, and anysales could negatively affect the trading price and book value of theclass A common shares outstanding.**

 

The Company may in its discretion sell newly issued class A or Bcommon shares from time to time.  Therecan be no assurance that the Company will not make significant sales ofclass A or B common shares in public offerings or private placements toraise capital, for funding future acquisitions, in employee equity compensationprograms or for other corporate purposes. Any sales could materially and adversely affect the trading price of theclass A common shares outstanding or result in dilution of the ownershipinterests of existing shareholders.

 

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**The price of theclass A common shares may fluctuate significantly, which may make itdifficult for shareholders to sell the class A common shares when theywant or at desired prices.**

 

The price of the class A common shares on the New York StockExchange constantly changes.  OEHmanagement expects that the market price of the class A common shares willcontinue to fluctuate.  Holders ofclass A common shares will be subject to the risk of volatility anddepressed prices.

 

The price of class A common shares can fluctuate as a result of avariety of factors, many of which are beyond OEH’s control.  These factors include:

 

·                  quarterlyvariations in operating results,

 

·                  operating resultsthat vary from the expectations of management, securities analysts andinvestors,

 

·                  changes inexpectations as to future financial performance, including financial estimatesby securities analysts and investors,

 

·                  developmentsgenerally affecting OEH’s business or the hospitality industry,

 

·                  marketspeculation about a potential acquisition of OEH or all or part of itsbusiness,

 

·                  announcements byOEH or its competitors of significant contracts, acquisitions, joint venturesor capital commitments,

 

·                  announcements bythird parties of significant claims or proceedings against OEH,

 

·                  the dividendpolicy for the class A and B common shares,

 

·                  future sales ofequity or equity-linked securities including by holders of large positions inthe outstanding class A common shares, and

 

·                  general domesticand international economic conditions.

 

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In addition, the stock market in general can experience volatility thatis often unrelated to the operating performance of a particular company.  Recently this volatility has been significantbecause of disruption in capital markets and contraction of creditavailability.  These broad marketfluctuations may adversely affect the market price of the class A commonshares.

 

**Investors in an offering ofclass A common shares by the Company may pay a much higher price than thebook value of the outstanding class A common shares.**

 

If investors purchase class A common shares in an offering by theCompany, they may incur immediate and substantial dilution representing the differencebetween OEH’s net tangible book value and the as-adjusted net tangible bookvalue per share after giving effect to the offering price.  The Company may also in the future issueadditional shares of its authorized and unissued class A common shares inconnection with compensation of OEH’s management, future acquisitions, futurepublic offerings or private placements of class A common shares forcapital raising purposes or for other business purposes, all of which mayresult in the dilution of the ownership interests of holders of outstandingclass A common shares.  Issuance ofadditional class A common shares may also create downward pressure on thetrading price of outstanding class A common shares that may in turnrequire the Company to issue additional shares to raise funds through sales ofits securities.  This may further dilutethe ownership interests of holders of outstanding class A common shares.

 

**OEH may have broaddiscretion over the use of the net proceeds from any offering of class A commonshares.**

 

OEH may have broad discretion as to the use of the proceeds from anyoffering by the Company of its class A common shares.  Accordingly, investors would be relying onthe judgment of the Company’s board of directors and OEH’s management with regardto the use of these net proceeds, and may not have the opportunity, as part ofthe investment decision, to assess whether the proceeds are being usedappropriately.  It is possible that theproceeds will be invested in a way that does not yield a favorable, or any,return for OEH.

 

**A subsidiary of theCompany, which has two Company directors on its board of directors, may controlthe outcome of most matters submitted to a vote of the Company’s shareholders.**

 

A wholly-owned subsidiary of the Company, Orient-Express Holdings1 Ltd. (“Holdings”), currently holds all 18,044,478 outstandingclass B common shares in the Company representing about 67% of thecombined voting power of class A and B common shares for most matterssubmitted to a vote of shareholders, 

 

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and the directorsand officers of the Company hold class A common shares representing anadditional 0.3% of combined voting power. In general, holders of class A common shares and holders ofclass B common shares vote together as a single class, with holders ofclass A common shares having one-tenth of one vote per share and holdersof class B common shares having one vote per share.  Therefore, as long as the number ofoutstanding class B shares exceeds one-tenth the number of outstandingclass A common shares, Holdings could control the outcome of most matterssubmitted to a vote of the shareholders.

 

Under Bermuda law, common shares of the Company owned by Holdings areoutstanding and may be voted by Holdings. The manner in which Holdings votes its shares is determined by the fourdirectors of Holdings, two of whom, John D. Campbell and Prudence M. Leith, arealso directors of the Company, consistently with the exercise by thosedirectors of their fiduciary duties to Holdings.  Those directors, should they choose to acttogether, will be able to control substantially all matters affecting theCompany, and to block a number of matters relating to any potential change ofcontrol of the Company.  See Item12—Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.

 

Certain institutional shareholders (collectively owning approximately6.7% of the class A common shares) 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 the Company’sbye-laws to treat the class B shares as “treasury shares” with no votingrights and to cancel the class B shares. Those resolutions were rejected at the October 10, 2008 specialgeneral meeting of shareholders of the Company by a majority of the votes ofthe outstanding class A and class B common shares, voting together asa single class. Following the defeat of the resolutions at the special generalmeeting, these shareholders filed a petition in the Supreme Court of Bermudaseeking similar and related relief.  SeeItem 3—Legal Proceedings.

 

The Company continues to believe the Bermuda litigation is withoutmerit and is defending the action vigorously. The corporate governance structure of the Company has been analyzed bylegal counsel, and the board of directors and management believe that thestructure is valid under Bermuda law.  Itenables OEH to oppose any proposals that are contrary to the best interests ofthe Company and its shareholders, including coercive or unfair offers toacquire the Company, and thus preserve the value of OEH for allshareholders.  This corporate governancestructure has been in place since the 

 

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Company’s initialpublic offering in 2000 and has been fully described in the Company’s publicfilings and clearly disclosed to investors considering buying the class Acommon shares.  However, the outcome ofany litigation is uncertain.  Additionallitigation against the Company or other future challenges of its governancestructure may occur which may cause OEH to incur added costs, such as legalexpenses, to defend the corporate governance structure.

 

**Provisions in the Company’scharter documents, and the preferred share purchase rights currently attachedto the class A and B common shares, may discourage a potential acquisitionof OEH, even one that the holders of a majority of the class A commonshares might favor.**

 

The Company’s memorandum of association and bye-laws contain provisionsthat could make it more difficult for a third party to acquire OEH or to engagein another form of transaction involving a change of control of the Companywithout the consent of the Company’s board of directors.  These provisions include:

 

·                  a supermajorityshareholder voting provision for the removal of directors from office with orwithout cause,

 

·                  a supermajorityshareholder voting provision for “business combination” transactions withbeneficial owners of shares carrying 15% or more of the votes which may be castat any general meeting of shareholders, and

 

·                  limitations onthe voting rights of such 15% beneficial owners.

 

Also, the Company’s board of directors has the right under Bermuda lawto issue preferred shares without shareholder approval, which could be done todilute the share ownership of a potential hostile acquirer.  Although management believes these provisionsprovide the shareholders an opportunity to receive a higher price by requiringpotential acquirers to negotiate with the Company’s board of directors, theseprovisions apply even if the offer is favored by shareholders holding amajority of the Company’s equity.

 

The Company has in place a shareholder rights agreement providing forrights to purchase series A junior participating preferred shares of theCompany.  The rights are not currentlyexercisable and they are attached to and trade together with the class Aand B common shares on a one-to-one basis. These rights may have anti-takeover effects on a potential acquirer holding15% or more of the outstanding class A or B common shares.

 

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These anti-takeover provisions are in addition to the ability ofHoldings and directors and officers of the Company to vote shares representinga significant majority of the total voting power of the Company’s commonshares. See the risk factor immediately above.

 

**A judgment of a UnitedStates court for liabilities under U.S. securities laws might not beenforceable in Bermuda, or an original action might not be brought in Bermudaagainst the Company for liabilities under U.S. securities laws.**

 

The Company is incorporated in Bermuda, a majority of its directors andofficers are residents of Bermuda, the United Kingdom and elsewhere in Europe,and most of its assets and the assets of its directors and officers are locatedoutside the United States.  As a result,it may be difficult for shareholders to:

 

·                  effect service ofprocess within the United States upon the Company or its directors andofficers, or

 

·                  enforce judgmentsobtained in United States courts against the Company or its directors andofficers based upon the civil liability provisions of the United States federalsecurities laws.

 

OEH has been advised by Appleby, its Bermuda legal counsel, that thereis doubt as to:

 

·                  whether ajudgment of a United States court based solely upon the civil liabilityprovisions of the United States federal securities laws would be enforceable inBermuda against the Company or its directors and officers, and

 

·                  whether anoriginal action could be brought in Bermuda against the Company or itsdirectors and officers to enforce liabilities based solely upon the UnitedStates federal securities laws.

 

**ITEM1B.               Unresolved StaffComments**

 

None.

 

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** **

**ITEM2.                  Properties**

 

OEH owns 35 hotels worldwide (includingnine under long-term lease), four European tourist trains, its Burmese cruiseshipand five small French canalboats, and one stand-alone restaurant in the UnitedStates, and owns interests of 50% or less in six hotels in Peru, Spain and theU.S., its Southeast Asian tourist train and PeruRail, all as described in Item1—Business above.  A second stand-alonerestaurant in Argentina is being sold and is excluded from these figures.  The small regional sales, marketing andoperating offices of the hotels, tourist trains and cruise businesses areoccupied under operating leases.

 

**ITEM3.            LegalProceedings**

 

There are no material legal proceedings,other than ordinary routine litigation incidental to OEH’s business and as describedbelow, to which the Company or any of its subsidiaries is a party or to whichany of their property is subject.

 

Corporate Governance Structure

 

A wholly-ownedsubsidiary of the Company, Orient-Express Holdings 1 Ltd. (“Holdings”),currently owns all outstanding 18,044,478 class B common shares of the Companyand may vote those shares under Bermuda law, which represent about 67% of thecombined voting power of the class A and B common shares for most matterssubmitted to a vote of the Company’s shareholders.  See Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters below.

 

On January 12, 2009, D.E. Shaw OculusPortfolios LLC, D.E. Shaw Valence Portfolios LLC and CR Intrinsic InvestmentsLLC filed a petition in the Supreme Court of Bermuda.  The petition (as amended) alleges, amongother things, (i) that the Company has acted unlawfully by holding andvoting, directly or indirectly, its own shares, (ii) that the Company’s boardof directors has exercised its fiduciary powers for an improper purpose withrespect to the holding and voting of class B common shares of the Company, (iii) thatthe Company’s board of directors has breached its fiduciary duties to theCompany and failed to act in good faith and in the best interests of theCompany and (iv) that the Company’s affairs have been conducted in amanner oppressive or prejudicial to the interests of the holders of the class Acommon shares of the Company.

 

The named respondents in the petition are (i) theCompany, (ii) Holdings and (iii) the individual members of theCompany’s current board of directors (other than Mitchell C. Hochberg).

 

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The petition does not seek damages but seeks, amongother relief, (i) a declaration that it is unlawful for the Company,directly or indirectly, to hold or vote the class B common shares, (ii) adeclaration that the board of directors acted for an improper purpose byholding or voting the class B common shares, (iii) an amendment to thebye-laws of the Company that would have the effect of treating the class Bcommon shares as treasury shares with no voting rights, (iv) an order requiringthe cancellation of all of the class B common shares, (v) an orderrestraining Holdings from exercising its voting rights in respect of the classB common shares and (vi) an order authorizing the petitioners to bringproceedings in the name of the Company to have the class B common sharescancelled and/or to prevent Holdings from exercising voting rights in respectof the class B common shares.

 

The respondents filed points of defence tothe petition on May 11, 2009.  Afterthe petitioners filed points of reply on June 11, 2009 to the points ofdefence, the petitioners and the respondents filed with the Court on July 10and 17, 2009 separate summonses seeking, among other matters, a trial onpreliminary issues relating to the legality of the holding of class B commonshares in the Company by Holdings.  Therespondents also filed a summons seeking to strike out (dismiss) thepetition.  A hearing before the Court washeld on September 16, 2009 at which a further hearing on the substance ofthe summonses was scheduled in late April 2010.

 

The Company believes that the petition is withoutmerit and intends to defend the action vigorously.  The petition does not seek damages and anyremedial action against the Company would likely be limited to compliance, ifordered, with the declaratory and injunctive relief sought.  Thecorporate governance structure of the Company, with dual class A and class Bcommon shares and ownership of the class B shares by Holdings, has beenanalyzed by legal counsel, and the Company’s management believes that thestructure is valid under Bermuda law.  It enables the Company tooppose any proposals that are contrary to the best interests of the Company andits shareholders, including coercive or unfair offers to acquire the Company,and thus preserve the value of the Company for all shareholders.  Thiscorporate governance structure has been in place since the Company’s initialpublic offering in 2000, and has been consistently described in the Company’spublic filings and disclosed to investors considering buying the Company’sclass A common shares.

 

**ITEM 4.****            ****Submission of Matters to a Vote of Security****Holders**

 

The Company submitted no matter to a vote of its security holdersduring the fourth quarter of 2009.

 

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**PART II**

 

**ITEM 5.            ****Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

The class A common shares of theCompany are traded on the New York Stock Exchange under the symbol OEH.  All of the class B common shares of theCompany are owned by a subsidiary of the Company and not listed.  See Item 12—Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterlyhigh and low sales prices of a class A common share in 2009 and 2008 as reportedfor New York Stock Exchange composite transactions:

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |       |     |       |     |       |   |   |   |   |
| First quarter  |       | $        | 9.45       |     | $          | 2.64 |   | $ | 58.56 |   | $ | 40.42 |   |
| Second quarter |       | 9.05     |       | 4.01     |       | 49.71 |   | 39.19 |   |
| Third quarter  |       | 12.98    |       | 6.67     |       | 43.28 |   | 23.55 |   |
| Fourth quarter |       | 11.43    |       | 7.63     |       | 24.47 |   | 3.80 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

The Company paid quarterly cash dividendsat the rate of $0.025 per class A and B common share in 2008, and paid nodividends in 2009 as a cash saving measure.

 

The Islands of Bermuda where the Company isincorporated have no applicable government laws, decrees or regulations whichrestrict the export or import of capital or affect the payment of dividends orother distributions to non-resident holders of the class A and B commonshares of the Company or which subject United States holders to taxes.

 

At February 19, 2010, the number ofrecord holders of the class A common shares of the Company wasapproximately 70.

 

During 2009, the Company made no offeringof its class A common shares that was not registered in the United States.  Also, during the fourth quarter of 2009, nopurchases of the Company’s common shares were made by or on behalf of theCompany or any affiliated person.

 

Information responding to Item 201(d) and(e) of SEC Regulation S-K is omitted because the Company is a foreignprivate issuer.

 

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**ITEM6.**** ****SelectedFinancial Data**

 

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

 
| ** **                                                               | ** ** | **Year ended  December 31,**            | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                               | ** ** | **2009**                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(In thousands except per  share amounts)** | ** ** |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Revenue                                                                  |       | $                                            | 456,956    |   | $ | 502,838 |   | $ | 528,956 |   | $ | 431,249 |   | $ | 373,241 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Impairments (1)                                                          |       | $                                            | (6,500     | ) | $ | (29,099 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Gain on disposal  of fixed assets (2)                                    |       | $                                            | 1,385      |   | $ | — |   | $ | 2,312 |   | $ | 6,619 |   | $ | — |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Earnings fromunconsolidatedcompanies, net  of tax                        |       | $                                            | 4,183      |   | $ | 16,771 |   | $ | 16,425 |   | $ | 11,970 |   | $ | 11,175 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  (loss)/earnings fromcontinuing operations                           |       | $                                            | (19,277    | ) | $ | 1,084 |   | $ | 53,976 |   | $ | 35,760 |   | $ | 42,293 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| (Loss)/earnings  fromdiscontinued  operations, net of tax (3)  |       | $                                            | (49,520    | ) | $ | (27,635 | ) | $ | (20,334 | ) | $ | 4,007 |   | $ | (754 | ) |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  (loss)/earnings                                                     |       | $                                            | (68,797    | ) | $ | (26,551 | ) | $ | 33,642 |   | $ | 39,767 |   | $ | 41,539 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Basic  (loss)/earnings pershare:                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  (loss)/earnings fromcontinuing operations                           |       | $                                            | (0.28      | ) | $ | 0.03 |   | $ | 1.27 |   | $ | 0.88 |   | $ | 1.11 |   |
| Net  (loss)/earningsfrom discontinuedoperations                          |       | (0.73                                        | )          | (0.64 | ) | (0.48 | ) | 0.10 |   | (0.02 | ) |
| Net (loss)/  earnings                                                    |       | $                                            | (1.01      | ) | $ | (0.61 | ) | $ | 0.79 |   | $ | 0.98 |   | $ | 1.09 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Diluted  (loss)/earningsper share:                                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Net  (loss)/earnings fromcontinuing operations                           |       | $                                            | (0.28      | ) | $ | 0.03 |   | $ | 1.27 |   | $ | 0.87 |   | $ | 1.10 |   |
| Net  (loss)/earningsfrom discontinuedoperations                          |       | (0.73                                        | )          | (0.64 | ) | (0.48 | ) | 0.10 |   | (0.02 | ) |
| Net  (loss)/earnings                                                     |       | $                                            | (1.01      | ) | $ | (0.61 | ) | $ | 0.79 |   | $ | 0.97 |   | $ | 1.08 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Total assets                                                             |       | $                                            | 2,072,690  |   | $ | 2,068,796 |   | $ | 1,988,437 |   | $ | 1,751,663 |   | $ | 1,452,166 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Long-term  obligations                                                   |       | $                                            | 811,734    |   | $ | 791,793 |   | $ | 714,837 |   | $ | 597,566 |   | $ | 495,947 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                                               |       | $                                            | 878,709    |   | $ | 782,598 |   | $ | 848,531 |   | $ | 806,996 |   | $ | 650,496 |   |
|                                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Dividends per  share                                                     |       | $                                            | —     |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   |

 

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(1)           The impairments in2008 consisted of impairment of goodwill at Hôtel de la Cité, Le Manoir auxQuat’Saisons and Keswick Hall of $6,107,000, and impairment of the equityinvestment in Hotel Ritz in Madrid of $22,992,000. The impairments in 2009consisted of impairment of goodwill at Miraflores Park Hotel, Casa de SierraNevada and Observatory Hotel amounting to $6,500,000.

 

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(2)           The gain in 2006related to the sale of the investment in Harry’s Bar.  The gain in 2007 related to the gain on thesettlement of insurance proceeds for hurricane damaged assets at Maroma Resortand Spa.  The 2009 gain is related tosettlement of insurance proceeds for hurricane damaged assets on the Road toMandalay ship.

 

(3)           The results ofLapa Palace Hotel, Windsor Court Hotel, Lilianfels Blue Mountains, Bora BoraLagoon Resort and La Cabana have been presented as discontinued operations forall periods presented.  Included in theloss from discontinued operations is goodwill and fixed asset impairment lossesof $43,695,000 in 2009, $15,616,000 in 2008 and $13,992,000 in 2007, gain onsales of Lapa Palace Hotel and Windsor Court Hotel in 2009 of $3,737,000, andan insurance loss at the Windsor Court Hotel in 2009 of $2,883,000.

 

See notes to consolidatedfinancial statements (Item 8).

 

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**ITEM 7.**** ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The following discussionincludes references to non-GAAP financial measures as defined inRegulation G of the SEC.  OEHpresents these measures because it believes they are of interest to theinvestment community by providing additional meaningful methods of evaluatingcertain aspects of OEH’s operating performance from period to period that maynot otherwise be apparent on the basis of U.S. generally accepted accountingprinciples.  These financial measuresshould be viewed in addition to, and not in lieu of, OEH’s consolidatedfinancial statements for the fiscal years presented in this report.

 

**Introduction**

 

OEH has three business segments: (1) hotels andrestaurants, (2) tourist trains and cruises and (3) real estate andproperty development.  Hotels in 2009consisted of 42 deluxe hotels, 36 of which were wholly or majority owned. Ofthe 36 hotels, as noted below, two were sold during 2009 and two others wereheld for sale at December 31, 2009 and were accounted for as discontinuedoperations.  The other 32 owned hotelsare referred to in this discussion as “owned hotels”.  These figures exclude the two hotelspurchased in Sicily by OEH in 2010.

 

The other six hotels, in which OEH has unconsolidatedequity interests and which it operates under management contracts, are referredto in this discussion as “hotel management interests”.  This includes the Charleston Place Hotel onlyin 2007 and 2008 because, as noted below and in Note 3 to the FinancialStatements, OEH has consolidated this hotel into its financial statementseffective December 31, 2008.

 

Of the owned hotels in 2009, 12 were located inEurope, seven in North America (excluding Charleston Place Hotel) and 17 in therest of the world.

 

In December 2007,Bora Bora Lagoon Resort in French Polynesia was designated as held for sale,and in December 2009, Lilianfels Blue Mountains in Katoomba, Australia,was also designated as held for sale. The sale of Lilianfels Blue Mountains wassubsequently completed in January 2010 for $19.3 million cash.

 

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In June 2009, OEH sold its owned Lapa Palace Hotel in Lisbon,Portugal for $42.0 million of which $26.3 million was received in cash in 2009 andthe remaining $15.7 million has been deferred for payment in 2010. The hotelwas not considered a long-term fit with OEH’s portfolio and strategy so OEHtook the opportunity to sell the property at an attractive price.

 

In October 2009, OEH sold its owned WindsorCourt Hotel in New Orleans, Louisiana for $44.25 million cash. The hotel wasnot considered a long-term fit with OEH’s portfolio as the market in NewOrleans is dominated by corporate and conference business, whereas OEH’s coremarket is primarily the leisure guest.

 

Of OEH’s stand alone restaurants in 2009, it currently owns and operatesthe ‘21’ Club in New York, New York. In December 2009,OEH signed an agreement to sell its La Cabana restaurant in Buenos Aires,Argentina for $2.7 million, to be paid on or before the end of March 2010.La Cabana was designated as held for sale at December 31, 2009.

 

Accordingly, the results of Bora Bora Lagoon Resort,Lilianfels Blue Mountains, Lapa Palace, Windsor Court Hotel and La Cabanarestaurant have been reflected as discontinued operations for all periodspresented.

 

OEH’s tourist trains and cruises segment operates sixtourist trains — four of which are owned and operated by OEH, one in which OEHhas an equity interest and an exclusive management contract, and one in whichOEH has an equity investment — and a river cruise ship and five canal boats.

 

OEH’s active real estate projects are in St. Martin,French West Indies, Keswick, Virginia and Koh Samui, Thailand.

 

Revenue peravailable room, or RevPAR, is a performance indicator used widely within thehotel industry as it is a function of the average daily room rate, or ADR,achieved for the rooms sold and average occupancy, being the rooms sold as aproportion of the rooms available to be sold. ADR on its own gives no indication of the relative occupancy of thehotel and could be shown as increasing while the number of rooms sold hadfallen, resulting in a reduction in rooms revenue over a prior period.

 

In 2007, OEH saw same store RevPAR growth of 15% inU.S. dollars and 11% in local currency, with average occupancy of 62% and ADRof $467.  In 2008, same store RevPARincreased 5% in U.S. dollars and 4% in local currency with average occupancy of59% and ADR of $482. In 2009, same store RevPAR decreased 23% in U.S. dollarsand decreased 19% in local currency with average occupancy of 51% and ADR of$407.

 

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OEH’s longer-term strategy to grow its businessincludes:

 

·      RevPAR growth:  the unique nature of OEH’s individualproperties and the avoidance of a chain brand have historically enabled OEH tocharge premium rates for rooms;

 

·      Expansion of hotels:  the returns on investment by adding new roomsor other facilities to a hotel are high as the incremental operating costs arelow;

 

·      Acquisitions:  OEH looks to invest in unique properties atreasonable prices with expansion potential and near-term upside potential inearnings through increasing room rates and/or reducing costs; and

 

·      Real estate:  OEH owns land near to or surrounding itshotels which it intends to develop over time, on a pre-sale basis, forresidential real estate sales.

 

Primarily to maintain and improve its liquidity, OEHhas raised equity capital in three tranches in the last 16 months, as follows:

 

·      In November 2008, OEH raised $52.5million in cash, after fees and costs, by selling 8,490,000 newly-issued classA common shares at $6.50 each.  Theproceeds were used primarily for general corporate purposes including workingcapital, debt service and capital investment.

 

·      In May 2009, OEH raised an additional$141.3 million in cash, after fees and costs, by selling 25,875,000newly-issued class A common shares at $5.75 each. This included3,375,000 shares covered by the underwriters’ over-allotment option which wasexercised in full. The proceeds of this sale are being used primarily for debt reduction and general corporate purposes.

 

·      In January 2010, OEH raised $131.1million in cash, after fees and costs, by selling 13,800,000 newly-issued classA common shares at $10.00 each.  Thisincluded 1,800,000 shares covered by the underwriters’ over-allotment optionwhich was exercised in full.  Part ofthe proceeds of this sale were used to pay the cash portion of the purchaseprice of two hotel properties located in Taormina, Sicily, and the remainder isbeing used for debt reduction and general corporate purposes.

 

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In 2009, 87% of OEH’s revenue was derived from thehotels and restaurants segment and 13% from tourist trains and cruises.  In the hotels and restaurants segment, 95% ofrevenue was from owned hotels, 4% from restaurants and 1% from hotel managementinterests.

 

OEH derives revenue from owned hotel operationsprimarily from the sale of rooms and the provision of food and beverages.  The main factors for analyzing rooms revenueare the number of room nights sold and the ADR, and RevPAR referred to abovewhich is a measure of both these factors.

 

Revenue from restaurants is derived from food andbeverages sold to customers.

 

Revenue from hotel management interests includes feesreceived under management contracts, which are based upon a combination of apercentage of the revenue from operations and operating earnings calculatedbefore specified fixed charges.

 

The revenue from the tourist trains and cruisessegment primarily comprises tickets sold for travel and food and beveragesales.

 

The revenue from real estate and property developmentis primarily derived from the sale of land and buildings.

 

Operating costs include labor, repairs andmaintenance, energy and the costs of food and beverages sold to customers inrespect of owned hotel operations, restaurants, tourist trains and cruises.

 

Selling, general and administrative expenses includetravel agents’ commissions, the salaries and related costs of the sales teams,advertising and public relations costs, and the salaries and related costs ofmanagement.

 

Depreciation and amortization includes depreciation ofowned hotels, restaurants, tourist trains and cruise boats.

 

When OEH discusses results for a period on a “comparable”or “same store” basis, OEH is considering only the results of hotels owned andoperating throughout the periods mentioned and excluding the effect of anyacquisitions, dispositions or major refurbishments.

 

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*Impact of Foreign CurrencyExchange Rate Movements*

 

As reportedbelow in the comparisons of the 2009, 2008 and 2007 financial years under “Resultsof Operations”, OEH faces exposure arising from the impact of translating itsglobal foreign currency earnings and expenses into U.S. dollars.  Nine of OEH’s owned hotels in 2009 operatedwith currencies linked to the European euro, two operated in South Africanrand, two in Australian dollars, one in British pounds sterling, three inBotswana pula, two in Mexican pesos, one in Peruvian nuevo soles, six invarious Southeast Asian currencies and one in Russian rubles. Revenue of theVenice Simplon-Orient-Express, British Pullman, Northern Belle and RoyalScotsman tourist trains was primarily in British pounds sterling, but theoperating costs of the Venice Simplon-Orient-Express were mainly denominated ineuros. Revenue of the Copacabana Palace and Hotel das Cataratas in Brazil wasrecorded in U.S. dollars, but substantially all of the hotels’ expenses weredenominated in Brazilian reals. Revenue derived by Maroma Resort and Spa and LaSamanna was recorded in U.S. dollars, but the majority of the hotels’ expenseswere denominated in Mexican pesos and European euros, respectively.

 

Except for thespecific instances described above, OEH’s properties match foreign currencyearnings and costs to provide a natural hedge against currency movements. Thereporting of OEH’s revenue and costs translated into U.S. dollars, however, canbe materially affected by foreign exchange rate fluctuations from period toperiod.

 

*Changeof Application of Accounting Policy for Porto Cupecoy*

 

OEH accounts for revenue from its real estateactivities in accordance with ASC 360-20-40 “Real Estate Sales-Derecognition”(formerly SFAS 66 “Accounting for Sales of Real Estate”). Revenue representsthe proceeds from sales of undeveloped land and developed properties that OEHis holding for sale. Previously, revenue related to the Porto Cupecoy projectstill under construction has been recognized under the percentage-of-completionmethod.

 

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ASC 360-20-40details five separate tests that must be met in order to use thepercentage-of-completion method for condominiums still under construction,including a requirement that the aggregate sales proceeds andcosts can be reasonably estimated. OEH has closely monitored each of the tests andconcluded during the fourth quarter of 2008 that, because of the sustainedweakening of the European and U.S. economies in particular which resulted in aslowdown in condominium sales compared to prior estimates, the aggregate salesproceeds that the project would generate could no longer be reasonablyestimated with sufficient certainty to permit OEH to continue to recognizerevenue under the percentage-of-completion method at this time.  Accordingly, OEH has reverted to accountingfor sales proceeds received at the Porto Cupecoy project as deposits until thecriteria required by ASC 360-20-40 are again met.

 

Because ofthis change in the application of OEH’s accounting policy, the cumulativerevenue and operating costs recognized by OEH in respect of the Porto Cupecoyproject were reversed through the statement of operations in the fourth quarterof 2008.

 

OEH willaccount for sales proceeds as deposits for Porto Cupecoy in the future untilthe criteria required by ASC 360-20-40 are again met.  The change of application of accountingpolicy in 2008 had no cash effect on OEH.

 

*Market Capitalization*

 

The Company’sclass A common share price increased during 2009 from $7.66 at December 31,2008 to $10.14 at December 31, 2009, an increase in OEH’s marketcapitalization from $390 million at December 31, 2008 to $779 million at December 31,2009. These prices were much lower, however, than those prevailing prior to thefourth quarter of 2008.  OEH does notbelieve that a change in its share price or market capitalization is indicativeof a change in the value of OEH’s assets over the period. OEH’s fixed assetsare carried in the balance sheet on a historical depreciated cost basis, andOEH management performed impairment tests on all long-lived assets. OEHmanagement believes the aggregate market value of these assets exceeds theircarrying value, in part because many of OEH’s assets were acquired many yearsago.

 

*Asset and InvestmentImpairments*

 

OEH regularlycompares the carrying value of its fixed assets and goodwill to its ownundiscounted and discounted cash flow projections, in order to determinewhether any of these assets is impaired as required by ASC 360 “Impairment orDisposal

 

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of Long-LivedAssets” (formerly SFAS 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets”) and ASC 350-30 “Intangibles-Goodwill and Other” (formerlySFAS 142 “Goodwill and Other Intangible Assets”).  OEH also periodically obtains third-partyvaluations of fixed assets to comply with bank loan requirements.

 

During thequarter ended March 31, 2009, OEH completed its annual 2008 impairment reviewand has identified the following additional estimated goodwill impairments of$6.3 million and tradename impairments of $0.2 million within its continuingoperations considering discounted future cash flows prepared as of the balancesheet date (dollars in millions):

 
| Miraflores Park       |   | $   | 3.2       |   |
|-----------------------|--------|-----|-----------|--------|
| Casa de Sierra Nevada |   | 3.0 |      |
| Observatory Hotel     |   | 0.3 |      |
|                  |   | $   |  6.5 |   |

 

Through a50%/50% joint venture with a Spanish partner, OEH has a 50% investment in andmanages the Hotel Ritz in Madrid.  Thejoint venture company is highly leveraged with first mortgage debt of €75.6million ($108.5 million) which is non-recourse to the joint venture partnersand unsecured debt of €1.0 million ($1.4 million).  One half of the unsecured debt is guaranteedby each joint venture partner.  OEHmanagement believes substantial capital expenditure is necessary to improve thehotel’s long-term profitability.  As aresult of the hotel’s discounted cash flow forecasts, OEH determined in 2008that its investment in the joint venture was impaired and reduced the carryingamount of that investment by $23.0 million in 2008.

 

Theseimpairments have no cash effect on OEH and arose primarily because of expectedreductions in future cash flows from these properties which resulted from theeconomic downturn in Europe, the U.S. and other parts of the world in late 2008and in 2009.

 

*Liquidity and FinancialCondition*

 

As reportedbelow under “Liquidity and Capital Resources—Liquidity”, OEH has substantialscheduled debt repayments and capital commitments in 2010 and is working toimprove its liquidity and capital position. OEH plans to utilize cash from operations, sales of non-core assets andits real estate developments, sales of class A common shares, appropriate debtfinance and other funding

 

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sources and,if necessary, to reschedule loan repayments and capital commitments.  Also as reported below, OEH was in compliancewith the major financial covenants in relevant loan facilities that applied toit at December 31, 2009.  OEHrecognizes that it is exposed to enhanced risk in the current economic climateof a covenant breach during 2010 if weak trading conditions lead to adeterioration of OEH’s results.  OEHexpects to take pro-active steps with its bankers to resolve prospectively anylikely breach.

 

*Recent Events in Peru*

 

Heavy rains in late January 2010 causedflooding in the Machu Picchu region of Peru resulting in a series of landslideswhich severely damaged and eroded railway tracks of OEH’s rail joint venturebetween Cuzco, Ollantaytambo and Machu Picchu. Services are currently suspended and none of the joint venture’s trainshave been able to operate between Ollantaytambo and Machu Picchu since lateJanuary.

 

Engineers from OEH’s rail joint venture haverepaired the track between Machu Picchu and Hydroelectrica, a town upriver fromMachu Picchu, and estimate that works to the damaged tracks betweenOllantaytambo and Machu Picchu, the main access route for tourist and localtrains from Cuzco, will be completed by early April, subject to favorableweather conditions.

 

Management expects the cost of repairs andthe disruption to rail operations to be covered by the joint venture’sinsurance.

 

The Machu Picchu Sanctuary Lodge, part ofOEH’s hotel joint venture in Peru, was not damaged by the floods although guestnumbers are reduced because train service to Cuzco is currently stopped. Hotel Rio Sagrado in the Sacred Valley has reopened, having been evacuated whennearby river levels were very high.  Theproperty was not damaged.

 

*Recent Events at Bora BoraLagoon Resort*

 

On February 4, 2010, Bora Bora Lagoon Resort, French Polynesia,was hit by tropical Cyclone Oli, with wind speeds reaching 160km per hour.  The resort sustained damage and is notexpected to re-open before September 2010. It is covered under OEH’s global insurance program.

 

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*Recent Events at Reid’sPalace, Madeira*

 

While heavy rains on February 20, 2010 causedflooding on the island of Madeira, OEH’s Reid’s Palace was undamaged.  The hotel and the island’s airport areoperating normally.  Hotel guests whocancel in the near term are being encouraged to re-book later in 2010.

 

**Resultsof Operations**

 

OEH’s operating results for the years 2009, 2008 and2007, expressed as a percentage of revenue, are as follows:

 
| ** **                                         | ** ** | **Year ended  December 31** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                                           |       |                             |       |   |   |   |   |
| Hotels and  restaurants                            |       | 87                               | %          | 88 | % | 81 | % |
| Tourist trains  and cruises                        |       | 13                               |       | 15 |   | 15 |   |
| Real estate and  property development              |       | —                           |       | (3 | ) | 4 |   |
|                                               |       | 100                              |       | 100 |   | 100 |   |
| Expenses:                                          |       |                             |       |   |   |   |   |
| Depreciation  and amortization                     |       | 9                                |       | 7 |   | 7 |   |
| Operating                                          |       | 49                               |       | 46 |   | 46 |   |
| Selling,  general and administrative               |       | 37                               |       | 36 |   | 30 |   |
| Impairment of  goodwill and otherintangible assets |       | 1                                |       | 1 |   | — |   |
| Impairment of  equity investment                   |       | —                           |       | 5 |   | — |   |
| Gain on sale of  fixed assetsor investments        |       | —                           |       | — |   | — |   |
| Net finance  costs                                 |       | 7                                |       | 8 |   | 7 |   |
| (Loss)/earnings  before incometaxes                |       | (3                               | )          | (3 | ) | 10 |   |
| Provision for  income taxes                        |       | (2                               | )          | — |   | (3 | ) |
| Earnings from  unconsolidatedcompanies             |       | 1                                |       | 3 |   | 3 |   |
| Net  (loss)/earnings fromcontinuing operations     |       | (4                               | )          | — |   | 10 |   |
| Loss from  discontinuedoperations                  |       | (11                              | )          | (5 | ) | (4 | ) |
| Net  (loss)/earnings as apercentage of revenue     |       | (15                              | )%         | (5 | )% | 6 | % |

 

As notedabove, management has determined in the fourth quarter of 2008 that theaggregate sales proceeds that the Porto Cupecoy real estate development projectwas expected to generate could no longer be reasonably estimated withsufficient certainty 

 

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to continueaccounting for the project using the percentage-of-completion method ofaccounting.  Accordingly, sales proceedsfrom the project have been accounted for as deposits beginning in the fourthquarter of 2008.  The cumulative revenueand operating costs recognized by OEH in respect of the project were reversedthrough the statement of operations, which resulted in negative real estaterevenue for 2008.

 

Segment net earnings from continuing operations beforeinterest expense (but after interest income from unconsolidated companies),foreign currency, tax (including tax on earnings from unconsolidatedcompanies), depreciation and amortization (“segment EBITDA”) for the years2009, 2008 and 2007 are analyzed as follows (dollars in millions):

 
| ** **                                         | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Segment EBITDA:                                    |       |                              |       |   |   |   |   |
| Owned Hotels:                                      |       |                              |       |   |   |   |   |
| Europe                                             |       | $                                 | 38.3       |   | $ | 61.2 |   | $ | 69.0 |   |
| North America                                      |       | 14.5                              |       | 9.4 |   | 10.3 |   |
| Rest of the  world                                 |       | 25.5                              |       | 32.0 |   | 34.5 |   |
| Hotel  management andpart-ownership interests      |       | 3.0                               |       | 23.3 |   | 23.8 |   |
| Restaurants                                        |       | 1.8                               |       | 3.5 |   | 5.0 |   |
| Tourist trains  and cruises                        |       | 20.6                              |       | 24.3 |   | 25.5 |   |
| Real estate andproperty  development               |       | (3.5                              | )          | (6.4 | ) | 4.1 |   |
| Impairment of  goodwill andother intangible assets |       | (6.5                              | )          | (6.1 | ) | — |   |
| Impairment of  equityinvestment                    |       | —                            |       | (23.0 | ) | — |   |
| Gain on sales  of fixed assetsor investments       |       | 1.4                               |       | — |   | 2.3 |   |
| Central  overheads                                 |       | (25.9                             | )          | (31.1 | ) | (26.1 | ) |
|                                               |       | $                                 | 69.2       |   | $ | 87.1 |   | $ | 148.4 |   |

 

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The foregoing segment EBITDA reconciles to net (loss)/earnings from continuingoperations, as follows (dollars in millions):

 
| ** **                                                     | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                           |       |                             |       |   |   |   |   |
| Net (loss)/earnings from continuing operations                 |       | $                                | (19.3      | ) | $ | 1.1 |   | $ | 54.0 |   |
| Add:                                                           |       |                             |       |   |   |   |   |
| Depreciation and amortization                                  |       | 40.8                             |       | 34.8 |   | 34.7 |   |
| Interest expense, net                                          |       | 31.1                             |       | 46.9 |   | 41.0 |   |
| Foreign currency, net                                          |       | 1.1                              |       | (4.8 | ) | (0.8 | ) |
| Provision for income taxes                                     |       | 11.0                             |       | 2.2 |   | 14.8 |   |
| Share of provision forincome taxes of  unconsolidatedcompanies |       | 4.5                              |       | 6.9 |   | 4.7 |   |
| Total                                                          |       | $                                | 69.2       |   | $ | 87.1 |   | $ | 148.4 |   |

 

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 continuing operations or netearnings (as determined in accordance with U.S. generally accepted accountingprinciples) as a measure of OEH’s operating performance, or as an alternativeto net cash provided by operating, investing and financing activities (asdetermined in accordance with U.S. generally accepted accounting principles) asa measure of OEH’s ability to meet cash needs.

 

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Year Ended December 31,2009 compared to

Year Ended December 31,2008

 

Operatinginformation for OEH’s owned hotels for the years ended December 31, 2009and 2008 is as follows:

 
| ** **                      | ** ** | **Year  ended  December 31,** | ** ** |       |       |         |       |
|---------------------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **                      | ** ** | **2009**                           | ** ** | **2008**   | ** ** |         |       |   |   |
| ** **                      |       |                               |       |       |       |         |       |   |   |
| Average Daily Rate (in dollars) |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 682                                |       | 795        |       |         |       |   |   |
| North America                   |       | 342                                |       | 374        |       |         |       |   |   |
| Rest of the world               |       | 293                                |       | 280        |       |         |       |   |   |
| Worldwide                       |       | 407                                |       | 442        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Rooms Available (in thousands)  |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 276                                |       | 282        |       |         |       |   |   |
| North America                   |       | 271                                |       | 269        |       |         |       |   |   |
| Rest of the world               |       | 448                                |       | 430        |       |         |       |   |   |
| Worldwide                       |       | 995                                |       | 981        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Rooms Sold (in thousands)       |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 127                                |       | 153        |       |         |       |   |   |
| North America                   |       | 150                                |       | 175        |       |         |       |   |   |
| Rest of the world****           |       | 221                                |       | 262        |       |         |       |   |   |
| Worldwide                       |       | 498                                |       | 590        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Occupancy (percentage)          |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 46                                 |       | 54         |       |         |       |   |   |
| North America                   |       | 55                                 |       | 65         |       |         |       |   |   |
| Rest of the world               |       | 49                                 |       | 61         |       |         |       |   |   |
| Worldwide                       |       | 50                                 |       | 60         |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| RevPAR (in dollars)             |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 313                                |       | 432        |       |         |       |   |   |
| North America                   |       | 189                                |       | 243        |       |         |       |   |   |
| Rest of the world               |       | 145                                |       | 170        |       |         |       |   |   |
| Worldwide                       |       | 204                                |       | 266        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars)  |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 313                                |       | 435        |       | (28          | )%         | (21 | )% |
| North America                   |       | 272                                |       | 359        |       | (24          | )%         | (23 | )% |
| Rest of the world               |       | 158                                |       | 181        |       | (13          | )%         | (12 | )% |
| Worldwide                       |       | 230                                |       | 299        |       | (23          | )%         | (19 | )% |

 

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Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, which is the rooms’ revenue divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, by excluding theeffect of any acquisitions, dispositions (including discontinued operations) ormajor refurbishments.  The same storedata excludes the following operations:

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

* *

*Revenue*

** **
| **Year ended December 31,**          | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 161,446    |     | $          | 217,121 |   |
| North America                             |       | 100,486                    |       | 64,214   |       |
| Rest of the world                         |       | 116,182                    |       | 129,317  |       |
| Hotel management/part ownership interests |       | 4,616                      |       | 10,629   |       |
| Restaurants                               |       | 14,436                     |       | 18,499   |       |
|                                      |       | 397,166                    |       | 439,780  |       |
| Tourist trains and cruises                |       | 58,084                     |       | 77,212   |       |
| Real estate                               |       | 1,706                      |       | (14,154  | )          |
|                                      |       | $                          | 456,956    |     | $          | 502,838 |   |

 

Total revenue decreased by $45.9 million,or 9%, from $502.8 million in 2008 to $456.9 million in 2009.  Hotels and restaurants revenue decreased by $42.6 million,or 10%, from $439.8 million in 2008 to $397.2 million in 2009. Revenuefrom tourist trains and cruises decreased by $19.1 million, or 25%, from $77.2million in 2008 to $58.1 million in 2009. The decrease in revenues is due to the global economic downturn and thenegative impact this has had on the hotel industry.

 

Owned hotels revenue decreased by $32.6 million, or8%, from $410.7 million in 2008 to $378.1 million in 2009, of which $24.5million was due to exchange rate fluctuations and $8.1 million was due to hoteltrading.  On a group basis, both averageroom rates and occupancy declined significantly.

 

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Although 22 condominiums at Porto Cupecoy were soldduring 2009,**no revenue was recognized followingOEH’s decision in 2008 to change theapplication of its accounting policy for revenue in respect of the PortoCupecoy development project to account for sales proceeds as deposits,resulting in revenue of $15.3 million recognized in 2007 being reversed in2008. Two villas at Napasai, Koh Samui, Thailand were sold during 2009 for $1.7million. There were no real estate sales at Napasai in 2008. Real estaterevenue derived from Keswick Hall was $1.1 million in 2008. There was no realestate revenue at Keswick Hall in 2009.

 

*Owned Hotels: *The decrease in owned hotels revenue of$32.6 million is analyzed by region as follows:

 

*Europe*

 
| **Year ended December 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Average daily rate (in dollars)  |       | 682      |       | 795      |       |
| Rooms available (in thousands)   |       | 276      |       | 282      |       |
| Rooms sold (in thousands)        |       | 127      |       | 153      |       |
| Occupancy (percentage)           |       | 46       |       | 54       |       |
| RevPAR (in dollars)              |       | 313      |       | 432      |       |
| Same store RevPAR (in dollars)   |       | 313      |       | 435      |       |

 

Revenuedecreased by $55.7 million, or 26%, from $217.1 million in 2008 to $161.4million in 2009.  Had exchange rates in2009 been the same as in 2008, Europe’s 2009 revenue would have been $18.0million higher than reported.

 

Revenue at theGrand Hotel Europe, St. Petersburg decreased by $21.9 million, or 40%, from$55.2 million in 2008 to $33.3 million in 2009. Of the decreased revenue, $9.0million was due to exchange rate movement and $12.9 million was due to trading.Average rate in local currency decreased by 4% and occupancy by 28% compared to2008.

 

In Italy,revenue at the Hotel Splendido and Splendido Mare decreased by $4.3 millionfrom $29.3 million in 2008 to $25.0 million in 2009. Revenue fell by $2.1million at the Villa San Michele from $12.0 million in 2008 to $9.9 million in2009, and decreased by $3.2 million at Hotel Caruso Belvedere from $13.8million in 2008 to $10.6 million in 2009. Revenue at the Hotel Cipriani andPalazzo Vendramin decreased by $6.0 million from $34.1 million in 2008 to $28.1million in 2009.  Altogether revenue atthe six Italian hotels fell by 17%. Without the negative effect of exchange rate movements of $3.6 millionin 2009 compared to the previous year, revenue at the Italian hotelscollectively would have been $12.0 million lower in 2009 than in 2008,reflecting a decline in average rates of 14% across the six properties on asame store local currency basis which was partially offset by a 2% rise inoccupancy, when expressed in local currency.

 

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Revenue at LaResidencia, Mallorca decreased by $5.7 million, or 34%, from $16.8 million in2008 to $11.1 million in 2009. Of the decrease in revenue, $0.5 million was dueto exchange rate movements and $5.2 million due to trading. Average ratedecreased by 12% and occupancy by 25% compared to 2008.

 

Revenue at LeManoir aux Quat’Saisons, Oxfordshire decreased by $3.0 million, or 13%, from$23.7 million in 2008 to $20.7 in 2009. Exchange rate movements caused revenueto fall by $3.7 million in 2009 compared to the prior year.  Revenue increased by $0.7 million due toimproved year on year trading.  Averagerate increased by 2% while occupancy dropped by 4% compared to the prior year.

 

Revenue atReid’s Palace, Madeira decreased by $7.8 million, or 31%, to $17.1 million in2009 from $24.9 million in 2008. Of the decrease in revenue, $0.8 million wasdue to exchange rate movements and $7.0 million due to trading. Occupancydeclined 20% and average rate declined 13% compared to 2008.

 

Revenue atHôtel de la Cité, Carcassonne decreased by $1.8 million, or 24%, to $5.6million in 2009 from $7.4 million in 2008. Both occupancy and average rate declinedat Hôtel de la Cité in 2009, by 14% and 7% respectively, compared to 2008.

 

On a samestore basis across the European hotels, RevPAR decreased by 21% in localcurrency or 28% when translated in U.S. dollars. Occupancy on a same storebasis declined from 54% in 2008 to 46% in 2009, and same store ADR declined 14%from $792 in 2008 to $682 in 2009.

 

*North America*

 
| **Year ended December 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Average daily rate (in dollars)  |       | 342      |       | 374      |       |
| Rooms available (in thousands)   |       | 271      |       | 269      |       |
| Rooms sold (in thousands)        |       | 150      |       | 175      |       |
| Occupancy (percentage)           |       | 55       |       | 65       |       |
| RevPAR (in dollars)              |       | 189      |       | 243      |       |
| Same store RevPAR (in dollars)   |       | 272      |       | 359      |       |

 

Revenueincreased by $36.3 million in 2009 compared to 2008. Excluding Charleston PlaceHotel which was consolidated for the first time in 2009, North America revenuedecreased by $10.2 million to $54.0 million in 2009 compared with $64.2 millionin 2008.

 

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Revenue at theCharleston Place Hotel, South Carolina was $46.5 million for 2009 compared with$57.7 million in 2008, a decrease of $11.2 million, or 19%. Occupancy fell 10%from 65% in 2008 to 55% in 2009, and RevPAR decreased by 20% from $167 in 2008to $133 in 2009. Earnings from the Charleston Place Hotel were reflected inearnings from unconsolidated companies in 2008.

 

Revenue at Innat Perry Cabin, Maryland decreased by $1.9 million, or 17%, from $11.3 millionin 2008 to $9.4 million in 2009. Occupancy decreased by 13% and average rate by1% compared to 2008.

 

In Mexico,revenue at Maroma Resort and Spa decreased by $5.5 million, or 31%, from $17.5million in 2008 to $12.0 million in 2009. The outbreak of swine flu and mediareports on domestic crime impacted revenue as travel plans to Mexico werecancelled by prospective tourists. Average rate dropped 7% while occupancydropped a significant 26% compared to 2008. Revenue at Casa de Sierra Nevada decreased by $0.8 million to $2.3million in 2009 from $3.1 million in 2008, of which $0.4 million was due tocurrency movement and $0.4 million was due to an occupancy decline of 26%,partly offset by an increase in average rate of 1% compared to 2008.

 

Revenue at LaSamanna, St Martin decreased by $1.2 million, or 6%, to $19.6 million in 2009from $20.8 million in the prior year, with both average rate and occupancydeclining by 15% and 9%, respectively, compared to 2008. Five of the eightvillas built on land owned by OEH adjacent to La Samanna were available forrental from mid-December 2008 for the first time, generating revenue of $2.1million in 2009.

 

Revenue atKeswick Hall, Virginia decreased by $0.4 million from $11.1 million in 2008 to$10.7 million in 2009. Average rates fell by 6% and occupancy fell by 3% in2009.

 

Across all ofthe North American properties, on a same store basis RevPAR decreased by 24%.Average occupancy was 55% in 2009 compared to 65% in 2008.

 

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*Rest of the World*

 
| **Year ended December 31,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Average daily rate (in dollars)  |       | 293      |       | 280      |       |
| Rooms available (in thousands)   |       | 448      |       | 430      |       |
| Rooms sold (in thousands)        |       | 221      |       | 262      |       |
| Occupancy (percentage)           |       | 49       |       | 61       |       |
| RevPAR (in dollars)              |       | 145      |       | 170      |       |
| Same store RevPAR (in dollars)   |       | 158      |       | 181      |       |

 

ExcludingHotel das Cataratas in Brazil which was undergoing refurbishment for the majorpart of 2009, revenue in the Rest of the World region decreased by $11.4million, or 9%, from $121.0 million in 2008 to $109.6 million in 2009.

 

Revenue at theCopacabana Palace, Brazil increased by $1.3 million, or 3%, to $41.8 million in2009 from $40.5 million in 2008. Exchange rate movements caused revenue to fallby $3.4 million in 2009 compared to the prior year at constant exchangerates.  Revenue increased by $4.7 milliondue to improved year on year trading. Occupancy on a same store basis decreased 3% in 2009 and average dailyrate increased by 2%.

 

Revenue at TheObservatory Hotel, Sydney, Australia, decreased by $1.4 million, or 11%, from$12.9 million in 2008 to $11.5 million in 2009. Exchange rate movementcontributed $0.7 million of the revenue shortfall and $0.7 million was due totrading. Average daily rate fell in 2009 by 10% compared to the prior year.Occupancy, however, increased 11% compared to 2008.

 

South African revenuedecreased by $6.4 million, or 21%, to $23.7 million in 2009 from $30.1 millionin 2008.  Revenue at the Mount NelsonHotel, Cape Town decreased by $4.8 million and revenue at the Westcliff,Johannesburg decreased by $1.6 million to $15.4 million and $8.3 million,respectively.  The movement of the SouthAfrican rand and U.S. dollar exchange rate had a negative impact on the revenueof these two hotels of $0.3 million, and $6.1 million of the shortfall was dueto trading. Local currency average daily rates at the Mount Nelson decreased by3% and occupancy decreased by 21% compared to the prior year. Local currencyrates increased by 1% at the Westcliff, which offset a drop in occupancy of 12%at this hotel on a same store basis.

 

Revenue at OEH’sthree safari camps in Botswana decreased by $3.2 million, or 32%, from $10.0million in 2008 to $6.8 million in 2009. Exchange rate movements between theU.S dollar and Botwanan pula had a negative impact on revenues of $0.3million.  Accordingly, trading declinedby $2.9 million in 2009 compared to the prior year.

 

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Revenue forOEH’s six Asian hotels collectively decreased by $0.7 million, or 4%, from$19.0 million in 2008 to $18.3 million in 2009. Exchange rate movements accounted for $0.6 million of the revenueshortfall.

 

The Rest ofthe World region RevPAR, on a same store basis, decreased by 12% in localcurrency compared to 2008. This translated into a same store RevPAR decrease of13% when expressed in U.S. dollars.

 

*HotelManagement and Part-Ownership Interests: *Revenuefrom hotel management interests decreased by $6.0 million from$10.6 million in 2008 to $4.6 million in 2009, primarily due to theconsolidation of Charleston Place Hotel for the first time in 2009. Thisproperty previously was accounted for under hotel management and part-ownershipinterests in 2008 and 2007. See Note 3 to the Financial Statements. Weakenedtrading due to the global economic climate negatively impacted OEH’s interestsat Hotel Ritz, Madrid and the Peru hotels by $0.4 million and $0.7 million,respectively.

 

*Restaurants: *Revenue decreased by $4.1 million from$18.5 million in 2008 to $14.4 million in 2009. The number of covers at the ‘21’Club in New York City dropped by 8%, and the average spend decreased 12%, from$125 in 2008 to $109 in 2009.

 

*TouristTrains and Cruises:*  Revenuedecreased by $19.1 million, or 25%, from $77.2 million in 2008 to $58.1 millionin 2009.

 

The Venice Simplon-Orient-Express revenue decreased by$10.4 million, or 37%, from $28.1 million in 2008 to $17.7 million in2009.  Exchange rate movement reduced thetrain’s revenue when reported in U.S. dollars by $3.2 million. VeniceSimplon-Orient-Express revenue also decreased partly due to the train operatingfewer trips than the previous year, resulting in fewer passenger numbers.  The decision to operate fewer trips was dueto a shortfall in demand, primarily as a result of the weakened global economicclimate.

 

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The Royal Scotsman generated revenue of $4.7 millionin 2009 compared to $6.1 million in the prior year. Of this decrease, $0.8million was due to exchange rate fluctuations. Revenue for The Royal Scotsmanalso decreased partly due to the train operating fewer trips than the previousyear, resulting in fewer passenger numbers, because of lower demand primarilyas a result of the weakened global economic climate.

 

Revenue generated by the day train services operatingin the United Kingdom — the British Pullman and the Northern Belle — decreasedby $2.1 million from $20.7 million in 2008 to $18.6 million in 2009, of which$3.4 million was due to the change in the British pound to U.S. dollar exchangerate offset by improved trading of $1.3 million.

 

*Real Estate: *Followingthe change in the fourth quarter of 2008 to account for sales proceeds asdeposits for the Porto Cupecoy development project, revenue of $15.3 millionrecognized in 2007 was reversed in 2008. Two villas at Napasai, Koh Samui,Thailand were sold during 2009 for $1.7 million. There were no real estatesales at Napasai in 2008. There was no real estate revenue at Keswick Hall in2009. Real estate revenue derived from Keswick Hall was $1.1 million in 2008when two lots were sold.

 

*Depreciationand Amortization*

 

Depreciation and amortization expense increased by$6.0 million from $34.8 million in 2008 to $40.8 million in 2009.Excluding Charleston Place Hotel which was consolidated for the first time, theincrease was $0.7 million, $0.6 million being exchange rate movement year onyear.

 

*OperatingExpenses*

 

Operating expenses decreased by $6.2 million, or3%, from $229.9 million in 2008 to $223.7 million in 2009. The 2008 expenseincluded a credit of $9.9 million following the change in the application ofthe accounting policy for the Porto Cupecoy development in the fourth quarterof 2008, excluding which the saving was $16.1 million. Furthermore, CharlestonPlace Hotel was consolidated for the first time in 2009 when operating expensesfor this property were $20.3 million. If this expense is also excluded, thedecrease in operating expense was $36.4 million. Operating expenses decreasedas a result of lower trading levels due to the global economic crisis.

 

Operating expenses at the European hotels, excludingLe Manoir aux Quat’Saisons and the Grand Hotel Europe, decreased by $12.0million, out of which $3.0 million was partly due to the European euro to U.S.dollar exchange rate.

 

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Operatingexpenses incurred in the United Kingdom in 2009 decreased by $12.0 million to$48.4 million in 2009 from $60.4 million in 2008. Movement in the British poundto the U.S. dollar caused expenses to decrease $10.8 million. The VeniceSimplon-Orient-Express train incurs significant operating costs in euros,primarily haulage, railway track access and staff costs, which were higher in2009 than in 2008 due to movements of the British pound exchange rate to theeuro.

 

As a percentage of revenue, operating expenses were49% of revenue in 2009 and 46% in 2008. Excluding the Porto Cupecoy costsmentioned above and Charleston Place Hotel, operating expenses were 49% ofrevenue in 2009 and 48% in 2008.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses decreasedby $12.8 million, or 7%, from $180.5 million in 2008 to $167.7million in 2009. Excluding Charleston Place Hotel which was consolidated forthe first time in 2009, the decrease was $27.0 million. Selling, general andadministrative expenses decreased as a result of lower trading levels due tothe weakened global economic climate.

 

Selling, general and administrative expenses at theEuropean hotels, excluding Le Manoir aux Quat’Saisons and the Grand HotelEurope, decreased by $5.0 million from $36.4 million in 2008 to $31.4 millionin 2009. Euro to U.S. dollar exchange rate movements caused costs to decreaseby $1.7 million.

 

Selling,general and administrative expenses in 2009 included an amount of $1.1 millionin respect of staff termination and restructuring costs.

 

As a percentage of revenue, selling, general andadministrative expenses were 37% of revenue in 2009 compared to 36% of revenuein 2008. Excluding Charleston Place Hotel, selling, general and administrativeexpenses were 38% in 2009.

 

*Impairmentof Goodwill*

 

As notedabove, OEH recorded an estimated goodwill impairment charge of $6.5 million inthe first quarter of 2009. The goodwill arose on the acquisition in previousyears of Miraflores Park Hotel, Casa de Sierra Nevada and The ObservatoryHotel. In 2008, an impairment charge of $6.1 million was recorded.  The goodwill arose on acquisitions inprevious years of Le Manoir aux Quat’Saisons, Hôtel de la Cité and KeswickHall.

 

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*Impairmentof Equity Investment*

 

As notedabove, OEH recorded an impairment charge of $23.0 million in 2008 in respectits 50% investment in Hotel Ritz in Madrid. There was no equivalent impairment expense in 2009 or 2007.

 

*Gainon disposal of fixed assets*

 

There was again on the settlement of insurance proceeds for hurricane damaged assets ofthe Road to Mandalay cruiseship of $1.4 million in 2009.

 

*Segment EBITDA*

 
| **Year ended December 31,**                   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                         | ** ** | **(dollars in thousands)** | ** ** |
| Segment EBITDA:                                    |       |                       |       |     |       |
|                                               |       |                       |       |     |       |
| Hotels and restaurants                             |       |                       |       |     |       |
| Owned hotels                                       |       |                       |       |     |       |
| Europe                                             |       | $                          | 38,328     |     | $          | 61,215 |   |
| North America                                      |       | 14,579                     |       | 9,455    |       |
| Rest of the world                                  |       | 25,453                     |       | 32,000   |       |
| Hotel management/part ownership interests          |       | 2,995                      |       | 23,302   |       |
| Restaurants                                        |       | 1,757                      |       | 3,518    |       |
|                                               |       | 83,112                     |       | 129,490  |       |
| Tourist trains and cruises                         |       | 20,571                     |       | 24,279   |       |
| Real estate                                        |       | (3,476                     | )          | (6,433   | )          |
| Impairment of goodwill and otherintangible  assets |       | (6,500                     | )          | (6,107   | )          |
| Impairment of equity investments                   |       | —                     |       | (22,992  | )          |
| Gain on disposal of assets                         |       | 1,385                      |       | —   |       |
| Central overheads                                  |       | (25,870                    | )          | (31,117  | )          |
|                                               |       |                       |       |     |       |
|                                               |       | $                          | 69,222     |     | $          | 87,120 |   |

 

Segment EBITDAmargins (calculated as segment EBITDA before impairment of fixed assets,goodwill and equity investments and gain on disposal of fixed assets, as apercentage of revenue) for the year ended December 31, 2009 decreased by7%, from 23% in 2008 to 16% in 2009.

 

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In 2009, theEuropean hotels collectively reported a segment EBITDA of $38.3 millioncompared to $61.2 million in the same period in 2008.  As a percentage of European hotel revenue,the European segment EBITDA margin declined from 28% in 2008 to 24% in 2009.

 

Segment EBITDAin the North American region was $9.5 million in 2008 and $14.6 million in2009, an increase of $5.1 million. Excluding Charleston Place Hotel which wasconsolidated for the first time in 2009, segment EBITDA for the North Americanregion was $2.6 million in 2009. As a percentage of North American hotelrevenue, the North American segment EBITDA margin remained at 15% for both 2008and 2009. Excluding Charleston Place Hotel, the EBITDA margin was 5% in 2009.

 

Segment EBITDAin the Rest of the World region decreased by $6.5 million to $25.5 million in2009 from $32.0 million in 2008.  The2009 and 2008 segment EBITDA included the full year results of Hotel dasCataratas, Brazil, which OEH began operating in October 2007 and which wasundergoing refurbishment in 2009 and 2008. This hotel reported an EBITDA lossof $4.9 million in 2009 compared to a loss of $3.6 million in 2008.  If Hotel das Cataratas results for the twoyears were excluded, segment EBITDA for the Rest of the World region decreasedby $5.3 million to $30.3 million in 2009 compared to $35.6 million in 2008. Thesegment EBITDA margin in 2009, excluding Hotel das Cataratas, was 28% comparedto a margin of 29% in 2008.

 

*Earningsfrom Operations*

 

Earnings from operations decreased by$31.9 million from a profit of $51.6 million in 2008 to a profit of$19.7 million in 2009 due to the factors referred to in the precedingparagraphs.

 

*NetFinance Costs*

 

In 2009, net finance costs of $32.1 million includeforeign currency translation losses of $1.1 million and a charge of $1.1million in accordance with ASC 815 “Derivatives and Hedging” (formerly SFAS 133“Accounting for Derivative Instruments and Hedging Activities”), relating tothe movement in fair value of non-effective interest rate hedges.  In 2008, net finance costs of $42.1 million includeda foreign currency gain of $4.8 million and a charge of $4.5 million fornon-effective interest rate hedges. Excluding this movement in fair value of interest rate hedges andforeign currency gains and losses, net finance costs decreased by $12.5 millionreflecting a decrease in average borrowing levels and lower average interestrates.

 

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*Provisionfor Income Taxes*

 

The provision for income taxes increased by $8.8million, from $2.2 million in 2008 to $11.0 million in 2009.

 

The Company isincorporated in Bermuda, which does not impose an income tax. Accordingly, the income tax provision was attributable to income tax chargesincurred by subsidiaries operating in jurisdictions that impose an income taxand also attributable to the relative amount of earnings or loss injurisdictions, the effect of valuation allowances, and uncertain tax positions.It is also affected by discrete items that may occur in any given year, but arenot consistent from year to year. Significant discrete items which had the most significant impact on thetax provision included a deferred tax charge of$5.2 million arising in respect of Brazilian fixed asset timing differences,following movements in the exchange rate between the U.S. dollar and Brazilianreal.

 

The provisionfor income taxes of $2.2 million for 2008 included a tax credit of $11.8million to reduce uncertain tax provisions including related interest andpenalties.

 

The provisionfor income taxes of $11.0 million for 2009 included a tax credit of $4.2million to reduce OEH’s uncertain tax positions including related interest andpenalties.

 

*Earningsfrom Unconsolidated Companies*

 

Earnings from unconsolidated companies, before taxes,which included OEH’s share of the net earnings of its equity investments aswell as interest income related to loans and advances to the equity investees,decreased by $15.1 million, or 63%, from $23.8 million in 2008 to $8.7 millionin 2009.

 

Earnings from the Charleston Place Hotel for 2009 arereflected within owned hotels, as the hotel was consolidated for the first timein 2009.  In 2008, earnings from theCharleston Place Hotel were $15.0 million.

 

Earnings from the Peruvian railway joint venturedecreased by $0.5 million, or 5%, from $11.0 million in 2008 to $10.5 millionin 2009. The Peruvian hotel joint venture earnings fell by $0.1 million from$2.4 million in 2008 to $2.3 million in 2009.

 

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OEH’s share of earnings from Hotel Ritz in Madrid fellby $4.0 million from income of $0.1 million in 2008 to a loss of $3.9 millionin 2009.

 

The income tax expense incurred by OEH in respect ofthese unconsolidated earnings was $4.5 million in 2009, compared to $7.0million in 2008.

 

*Lossesfrom Discontinued Operations*

 

The loss from discontinued operations in 2009 was$49.5 million, an increase of $21.9 million from the loss recognized in 2008 of$27.6 million.

 

Included inthe loss for 2009 was an impairment charge of $43.7 million recognized against goodwill and fixedassets of Bora Bora Lagoon Resort, Windsor Court Hotel, La Cabana restaurantand Lilianfels Blue Mountains.

 

Included inthe loss for 2008 was an impairment charge of $15.6 million recognized againstthe goodwill and fixed asset of Lapa Palace, Windsor Court Hotel and Bora BoraLagoon Resort.

 

During 2009,net gains of $3.7 million were realized on discontinued operations sold by OEH.In 2008, there were no discontinued operations sold and therefore no gains orlosses on sale were realized.

 

During 2009,OEH continued in its program to sell non-core assets. InJune 2009, OEH sold Lapa Palace as management had concluded that theLisbon market was not a prime leisure destination and lacked sufficient appealfor OEH’s leisure audiences. In addition, management did not see furtheropportunities to develop and grow business in Lisbon.

 

In October 2009,sold the Windsor Court Hotel. Management did not believethat New Orleans was a prime leisure destination for OEH’s customers.  The hotel’s performance had been impacted bynew local competition and significant capital investment in the hotel wasneeded.

 

****In December 2009, OEH signed an agreement to sell Lilianfels BlueMountains in Katoomba, New South Wales, Australia for A$21 million ($19.3million). Again, this hotel was situated in a non-core market for OEH.  The sale was completed in January 2010****.

 

Also in December 2009, OEH contractedto sell La Cabana in Buenos Aires for $2.7 million for completion in March 2010,principally due to the restaurant’s underperformance and the small size of thisactivity.

 

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Year ended December 31,2008 compared to

Year ended December 31,2007

 

Operatinginformation for OEH’s owned hotels for the years ended December 31, 2008and 2007 is as follows:

 
| ** **                      | ** ** | **Year  ended  December 31,** | ** ** |       |       |         |       |
|---------------------------------|------------|------------------------------------|------------|------------|------------|--------------|------------|
| ** **                      | ** ** | **2008**                           | ** ** | **2007**   | ** ** |         |       |   |   |
| ** **                      |       |                               |       |       |       |         |       |   |   |
| Average Daily Rate (in dollars) |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 796                                |       | 723        |       |         |       |   |   |
| North America                   |       | 546                                |       | 526        |       |         |       |   |   |
| Rest of the world               |       | 280                                |       | 274        |       |         |       |   |   |
| Worldwide                       |       | 482                                |       | 468        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Rooms Available (in thousands)  |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 282                                |       | 285        |       |         |       |   |   |
| North America                   |       | 107                                |       | 105        |       |         |       |   |   |
| Rest of the world               |       | 423                                |       | 374        |       |         |       |   |   |
| Worldwide                       |       | 812                                |       | 764        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Rooms Sold (in thousands)       |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 153                                |       | 167        |       |         |       |   |   |
| North America                   |       | 70                                 |       | 68         |       |         |       |   |   |
| Rest of the world****           |       | 262                                |       | 240        |       |         |       |   |   |
| Worldwide                       |       | 485                                |       | 475        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| Occupancy (percentage)          |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 54                                 |       | 59         |       |         |       |   |   |
| North America                   |       | 65                                 |       | 65         |       |         |       |   |   |
| Rest of the world               |       | 62                                 |       | 64         |       |         |       |   |   |
| Worldwide                       |       | 60                                 |       | 62         |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| RevPAR (in dollars)             |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 432                                |       | 423        |       |         |       |   |   |
| North America                   |       | 359                                |       | 343        |       |         |       |   |   |
| Rest of the world               |       | 173                                |       | 175        |       |         |       |   |   |
| Worldwide                       |       | 288                                |       | 291        |       |         |       |   |   |
|                            |       |                               |       |       |       |         |       |   |   |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars)  |       |                               |       |       |       |         |       |   |   |
| Europe                          |       | 410                                |       | 396        |       | 4            | %          | (1 | )% |
| North America                   |       | 353                                |       | 337        |       | 5            | %          | 5 | % |
| Rest of the world               |       | 173                                |       | 161        |       | 7            | %          | 13 | % |
| Worldwide                       |       | 289                                |       | 275        |       | 5            | %          | 4 | % |

 

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Same store RevPAR is a comparison based on theoperations of the same units in each period, by excluding the effect of any acquisitions,dispositions (including discontinued operations) or major refurbishments.  The same store data excludes the followingoperations:

 
| Hotel  Cipriani                 |   | Casa de Sierra Nevada      |
|---------------------------------|--------|----------------------------|
| Hotel  Caruso                   |   | Copacabana Palace          |
| Hôtel de la Cité      |   | Hotel das Cataratas        |
| La Residencia                   |   | Mount Nelson Hotel         |
| Le Manoir aux Quat’Saisons |   | La Residence d’Angkor |
| Bora Bora Lagoon Resort         |   | Windsor Court Hotel        |
| Lilianfels Blue Mountains       |   | Lapa Palace                |

* *

*Revenue*

* *
| **Year ended December 31,**          | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 217,121    |     | $          | 215,355 |   |
| North America                             |       | 64,214                     |       | 60,257   |       |
| Rest of the world                         |       | 129,317                    |       | 119,112  |       |
| Hotel management/part ownership interests |       | 10,629                     |       | 10,683   |       |
| Restaurants                               |       | 18,499                     |       | 21,159   |       |
|                                      |       | 439,780                    |       | 426,566  |       |
| Tourist trains and cruises                |       | 77,212                     |       | 82,482   |       |
| Real estate                               |       | (14,154                    | )          | 19,908   |       |
|                                      |       | $                          | 502,838    |     | $          | 528,956 |   |

 

Total revenue decreased by $26.1 million,or 5%, from $528.9 million in 2007 to $502.8 million in 2008.  Hotels and restaurants revenue increased by$13.2 million, or 3%, from $426.6 million in 2007 to$439.8 million in 2008, and the revenue from tourist trains and cruisesdecreased by $5.3 million, or 6%, from $82.5 million in 2007 to $77.2 millionin 2008.

 

*Hotels and Restaurants:*  Owned hotels revenue increased by $16.0million, or 4%, from $394.7 million in 2007 to $410.7 million in 2008.

 

Revenue from restaurants decreased by $2.7 million, or13%, from $21.2 million in 2007 to $18.5 million in 2008, mainly attributablethe impact of the economic downturn in the United States on the ‘21’ Clubrestaurant, New York City.

 

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Revenue from hotel management interests remained flatin 2008 compared to 2007.

 

The increase in owned hotels revenue of $16.0 millionis analyzed by region as follows:

 

*Europe:* Revenue increased by $1.7 million from $215.4 million in 2007 to $217.1million in 2008. The increase was attributable mainly to exchange ratefluctuations of $10.0 million.

 

On a same store basis in local currency, RevPAR inEurope decreased by 1% in 2008 compared to 2007, and when translated to U.S.dollars RevPAR increased 4%.

 

*North America:*  Revenue increased by $3.9 million from $60.3million in 2007 to $64.2 million in 2008. Revenue growth of $1.2 million was attributable to La Samanna, $1.1million to Maroma Resort and Spa and $0.9 million to Casa de Sierra Nevada.Casa de Sierra Nevada underwent refurbishment in 2007 and as a result 2,239room nights came back into inventory in 2008. Inn at Perry Cabin opened the newLinden Spa in the third quarter of 2007, with revenue of $0.9 million in 2008compared with $0.4 million in 2007.

 

On a same store basis, RevPAR in North America in 2008increased by 5% over 2007.

 

*Rest of the World:*  Revenue increased by $10.2 million, or 9%,from $119.1 million in 2007 to $129.3 million in 2008.  Southern African revenue decreased by 6% to$30.1 million from $31.9 million in the prior year, exchange rate fluctuationsreducing revenue by $4.7 million. Excluding Hotel das Cataratas, Brazil, whichOEH started to operate in October 2007 and which recorded revenue of $8.3million in 2008, Brazilian revenue increased by 4% to $40.5 million, againmainly attributable to exchange rate fluctuations of $2.4 million. Australianrevenue decreased by 6% to $12.9 million in 2008 from $13.7 million in 2007.Revenue for OEH’s six Asian hotels collectively increased by $2.9 million, or18%, from $16.1 million in 2007 to $19.0 million in 2008.

 

RevPAR in the Rest of the World region increased by13% in local currencies and increased by 7% in U.S. dollars.

 

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*Tourist Trains and Cruises: *Revenue decreased by $5.3 million, or 6%,from $82.5 million in 2007 to $77.2 million in 2008. This decrease included$2.5 million in respect of the Road to Mandalay river cruiseship which wasextensively damaged by a cyclone in Burma in May 2008, and exchange ratefluctuations reduced train revenue further by $3.2 million.

 

*Real Estate: *Followingthe change in the fourth quarter of 2008 to account for sales proceeds asdeposits for the Porto Cupecoy development project, revenue of $15.3 millionrecognized in 2007 was reversed in 2008. Real estate revenue derived fromKeswick Hall was $1.1 million in 2008 and $4.6 million in 2007. Two lots weresold in 2008 compared to the sale of five lots and one house in 2007. Therewere no sales of real estate at Napasai in 2008 and 2007.

 

*Depreciationand Amortization*

 

Depreciation and amortization increased by$0.1 million from $34.7 million in 2007 to $34.8 million in2008.

 

*OperatingExpenses*

 

Operating expenses decreased by $15.5 million, or6%, from $245.4 million in 2007 to $229.9 million in 2008.  Operating expenses of $3.5 million related toHotel das Cataratas, which OEH began to operate in October 2007. The hotelincurred operating costs of $1.1 million in 2007. As a percentage of revenue,operating expenses remained stable at 46% for both 2008 and 2007.

 

*Selling,General and Administrative Expenses*

 

Selling, general and administrative expenses increasedby $21.9 million, or 14%, from $158.6 million in 2007 to$180.5 million in 2008, including $6.1 million at Hotel das Cataratas,which OEH began to operate in October 2007, and $1.9 million at GrandHotel Europe.

 

Selling, general and administrative expenses at theEuropean hotels, excluding Le Manoir aux Quat’Saisons and the Grand HotelEurope, were negatively impacted by $2.5 million due to exchange ratefluctuation. Personnel changes also took place in the fourth quarter of 2008 asa result of OEH’s plan to achieve overhead cost savings of $20.0 millionthrough 2009, resulting in a cost of $2.7 million from staff terminations andrestructuring. As a percentage of revenue, selling, general and administrativeexpenses were 36% of revenue in 2008 and 30% in 2007.

 

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*SegmentEBITDA*

 

Segment EBITDA margins (calculated as segment EBITDAbefore impairment of fixed assets, goodwill and equity investments and gain ondisposal of fixed assets, as a percentage of revenue) for 2008 decreased by 5%from 28% in 2007 to 23% in 2008.

 

*Earningsfrom Operations*

 

Earnings from operations decreased by$40.9 million, or 44%, from $92.5 million in 2007 to$51.6 million in 2008, due to the factors referred to in the precedingparagraphs.

 

*NetFinance Costs*

 

Net finance costs increased by $1.9 million, or 5%,from $40.2 million in 2007 to $42.1 million in 2008.  This includes foreign currency transactiongains of $4.8 million in 2008 (2007-$0.8 million gain).  Excluding foreign currency, net finance costsincreased by $5.9 million, or 14%, from $41.0 million in 2007 to $46.9 millionin 2008, reflecting an increase in average borrowings in 2008 compared to the previousyear. The net finance cost in 2008 also included a cost of $2.9 million inrespect of an interest rate hedge which under ASC 815 “Derivatives and Hedging”(formerly SFAS 133 “Accounting for Derivative Instruments and HedgingActivities”) became ineffective during the year.

 

*Provisionfor Income Taxes*

 

The provision for income taxes decreased by $12.6million, from $14.8 million in 2007 to $2.2 million in 2008. The 2008amount included a tax credit of $11.8 million to reduce OEH’s uncertain taxpositions including related interest and penalties.

 

*Earningsfrom Unconsolidated Companies*

 

Earnings from unconsolidated companies, before taxes,increased by $2.6 million, or 12%, from $21.2 million in 2007 to $23.8 millionin 2008. Earnings from the Peruvian railway joint venture increased by $1.7million, or 19%, from $9.3 million in 2007 to $11.0 million in 2008. ThePeruvian hotel joint venture earnings fell by $0.6 million from $3.0 million in2007 to $2.4 million in 2008.

 

Earnings from Charleston Place increased by $0.3million from $9.8 million in 2007 to $10.1 million in 2008. Interest incomerelated to loans and advances to this joint venture totalled $11.8 million in2007 and $11.9 million in 2008. OEH’s share of earnings from Hotel Ritz inMadrid fell by $0.3 million from income of $0.4 million in 2007 to income of$0.1 million in 2008.

 

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In April 2007, OEH acquired the 50% interests inthe Afloat in France and The Royal Scotsman businesses that it did notpreviously own. OEH’s share of the losses generated by these businesses priorto the acquisitions in April 2007 totalled $1.3 million. There were noequivalent unconsolidated earnings in 2008.

 

The income tax expense incurred by OEH in respect ofthese unconsolidated earnings was $7.0 million in 2008 compared to $4.8 millionin 2007.

 

*Lossfrom Discontinued Operations*

 

The loss from discontinued operations in 2008 was$27.6 million. This was an increase of $7.3 million from the loss recognized in2007 of $20.3 million.

 

Included in the loss for 2008 was an impairment chargeof $15.6 million recognized against goodwill and fixed assets of Bora BoraLagoon Resort, Windsor Court Hotel and Lapa Palace. The impairment was due tothe operating results and future outlook, together with the ability ofpotential purchasers to fund an acquisition having further deteriorated. Inaddition, there was a $3.0 million deferred tax charge relating to Bora Bora LagoonResort in respect of tax losses which were unlikely to be used.

 

In 2007, increases in competition and other marketfactors caused operating profits and cash flows of the Bora Bora Lagoon Resortto be lower than expected. This gave rise to an impairment of goodwill andfixed assets of $14.0 million. No other impairments were recognized for anyother discontinued operations in 2007.

 

**Liquidityand Capital Resources**

 

*WorkingCapital*

 

OEH had cash and cash equivalents of $72.2 million at December 31,2009, $8.0 million more than the $64.2 million at December 31,2008.  In addition, OEH had restrictedcash of $19.9 million (2007-$13.2 million), $9.4 million of which relates tothe Porto Cupecoy project in St. Martin which will be released when the next12.5% phase of construction is completed. At

 

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December 31,2009, there were undrawn amounts available to OEH under committed short-termlines of credit of $30.6 million (2008-$8.6 million) and undrawn amountsavailable to OEH under secured revolving credit facilities of $12.0 million,bringing total cash availability at December 31, 2009 to $134.6 million,including the restricted cash of $19.9 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital surplus of$41.1 million at December 31 2009, an increase of $11.8 million from aworking capital balance of $29.3 million at December 31, 2008.  Working capital surplus in 2009 resulted froma reduction of current liabilities of $70.9 million, with a significantreduction in working capital facilities in part due to the sale of non-coreassets.  In addition, liabilities ofdiscontinued operations have fallen by $74.6 million due to the sale of bothLapa Palace and Windsor Court Hotel. Real estate assets held for sale have also increased by $36.3 million.  Offsetting the reduction in current liabilitiesis the reduction in assets of discontinued operations due to the sale ofnon-core assets described above.

 

*CashFlow*

 

*Operating Activities.*  Net cash used in operating activitiesdecreased by $41.6 million to a deficit of $16.5 million for the year endedDecember 31, 2009, from cash provided by operating activities of$25.1 million for the year ended December 31, 2008. The reduction inoperating cash flows was as a result of weakening operational performanceacross the OEH businesses through 2009, and increases in accounts receivablespartially offset by higher depreciation charges. Net cash used in discontinuedoperations increased by $14.3 million to $18.5 million in 2009 from $4.2million in 2008.

 

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*Investing Activities.*  Cash used in investing activities was $10.3million for the year ended December 31, 2009, compared to net cash used of$124.9 million for the year ended December 31, 2008, a decrease of$114.6 million.  Capital expenditure of$72.1 million included $7.6 million for refurbishment of the Grand HotelEurope, $8.7 million for refurbishment of the Italian hotels, $11.9 million forrebuilding Hotel das Cataratas, $3.6 million for El Encanto construction, $6.3million for Copacabana Palace refurbishment, and $4.1 million for constructionat Porto Cupecoy and the villas at La Samanna.

 

Disposals of non-core assets, Lapa Palace and WindsorCourt Hotel, resulted in net proceeds of $67.4 million being realized. Inaddition, $5.9 million was received from the insurers of the Road to Mandalay.

 

Restricted cash of $19.9 million at December 31,2009 (2008- $13.2 million) mainly consisted of the Porto Cupecoy escrow accountand cash deposits required under credit support arrangements and for OEH’spurchase of two hotels in Sicily completed in January 2010.  Cash received for residential condominiumpurchases at Porto Cupecoy is held in escrow and released into OEH’s currentbank account when the next phase of construction is completed.  At December 31, 2009, the Porto Cupecoyescrow account balance amounted to $9.4 million (2008-$8.2 million) and thecredit support and Sicilian hotel purchase deposits amounted to $6.2 million(2008-$nil).

 

*Financing Activities.*  Net cash provided in financing activities forthe year ended December 31, 2009 was $32.1 million compared to cashprovided from financing activities of $76.7 million for the year ended December 31,2008, a decrease of $44.6 million. Under OEH’s European loan facility, $15.4million was repaid on the sale of Lapa Palace in 2009.  In addition, $47.0 million of debt was repaidon the sale of Windsor Court in 2009.

 

In May 2009, OEH raised $140.9 million in cash byselling 25,875,000 newly-issued class A common shares at $5.75 each. In November 2008,OEH raised $52.5 million in cash by selling 8,490,000 newly-issued class Acommon shares at $6.50 each. The proceeds of these sales are being usedprimarily for general corporate purposes including working capital, debtservice and capital investment.

 

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*CapitalCommitments*

 

There were $11.6 million of capital commitmentsoutstanding at December 31, 2009 related to investments in owned hotelsand a further $43.0 million commitment outstanding related to the purchase ofland and a building adjoining ‘21’ Club from the New York Public Library.  Outstanding contracts for project-relatedcosts on the Porto Cupecoy development amounted to $9.3 million at December 31,2009.

 

In addition, OEH entered into conditional contracts inOctober 2009 to purchase Grand Hotel Timeo and Villa Sant’Andrea for €81million ($117.0 million) in Taormina, Sicily.  These contracts required a €2 million ($2.9million) deposit in October 2009 and OEH retained the option not to closeon the properties, which would have required forfeiture of the deposit.  Subsequent to December 31, 2009, OEHacquired both properties.  See Note 21 tothe Financial Statements.

 

*Indebtedness*

 

At December 31, 2009, OEH had $811.7****million of consolidated long-term debt, including thecurrent portion, collateralized by OEH assets with a number of commercial banklenders which is payable over periods of one to 23 years with a weightedaverage interest rate of 3.51%.  SeeNote 9 to the Financial Statements regarding the maturity of long-termdebt.

 

Long-term debt at December 31, 2009 includes$79.5 million of debt obligations of Charleston Center LLC, owner of theCharleston Place Hotel in which OEH has a 19.9% equity investment. As notedbelow in “Off-Balance Sheet Arrangements”, at December 31, 2008, OEH consideredthe investment to be within the scope of ASC 810-10 “Consolidation-VariableInterest Entities” (formerly FIN 46(R) “Consolidation of Variable InterestEntities”) and that OEH is the primary beneficiary of the variable interestentity, as defined by ASC 810-10.  OEHwas therefore required to consolidate the hotel’s assets and liabilitieseffective December 31, 2008. This debt is non-recourse to the members ofCharleston Center LLC, including OEH, and therefore the hotel’s liabilities donot constitute obligations of OEH.

 

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Many OEH financing agreements contain covenants thatinclude limits on the property owning subsidiary’s ability to raise additionaldebt collateralized by these properties, limits on liens on the properties andlimits on mergers and asset sales and, in some cases, financial covenants suchas a minimum interest coverage ratio and debt service coverage ratio and amaximum debt to equity ratio.  Some ofthe Company guarantees of these facilities contain financial covenants on OEHcovering a minimum consolidated tangible net worth and a minimum consolidatedinterest coverage ratio. OEH was in full compliance with all major covenantsthat applied to OEH at December 31, 2009.

 

Approximately 50%****of theoutstanding principal was drawn in European euros at December 31, 2009,and the balance primarily drawn in U.S. dollars.  At December 31, 2009, 44%****of borrowings of OEH were in floating interest rates.

 

*Liquidity*

 

During the 12 months ending December 31, 2010,OEH has approximately $171.3****million ofscheduled debt repayments. However, $114.1 million of this amount relates torevolving facilities which, provided OEH complies with the terms of the facilities,are available for redrawing.  Of theremaining $57.2 million of debt repayments, $26.6 million is debt at the PortoCupecoy development which is repayable as units are sold.  OEH expects to meet the other repaymentsthrough operating cash flow and other available committed facilities.

 

Additionally, OEH’s capital commitments amount to$54.6****million at December 31, 2009(excluding the contracts to purchase two hotels in Sicily for $117.0 million),of which $43.0****million relates to the purchaseof land and a building adjoining ‘21’ Club from the New York PublicLibrary.  The balance of $11.6****million of capital commitments is currently covered bycommitted funding and projected operating cash flows.  OEH expects to incur costs of a further $9.3million to complete its Porto Cupecoy development, funded largely by depositson sales as the work progresses and a short-term bank loan.  The purchase of the two hotels in Italy wascompleted in January 2010, funded by existing and new indebtednessrelating to the properties and a portion of the cash proceeds of the sale ofclass A common shares also in January. See Note 21 to the Financial Statements

 

OEH has prepared cash flow projections which indicateit will have available cash from operations, appropriate debt finance, recentsales of class A common shares, and other sources sufficient to fund itsworking capital requirements, committed capital expenditures, committedacquisitions and debt service for the next 12 months and the foreseeablefuture.

 

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OEH is inregular discussions with its bankers regarding funding requirements and toensure its continued compliance with the financial covenants applicable to OEHin its existing loan facilities.  At December 31,2009, OEH was in compliance with all major covenants, although the Hotel Ritzin Madrid was out of compliance with a debt service coverage ratio in its firstmortgage loan facility which is non-recourse to and not credit-supported by OEHor its joint venture partner in that hotel. OEH and its partner are discussing with the lender how to bring thehotel back into compliance.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a covenantbreach if weak trading conditions lead to a deterioration of OEH’s results andthe costs of implementing remedial steps reduce OEH’s earnings in any givenperiod.  If current economic conditions,including the volatility recently experienced in foreign exchange and globaldebt markets, continue or worsen, OEH believes there is heightened risk that itcould breach certain financial covenants applicable to OEH during 2010.

 

OEH’s liquiditywould be adversely affected if a covenant breach occurred in a material loanfacility and OEH were unable to agree with its bankers how the particularfinancial covenant should be amended or how the breach could be cured.  OEH expects to take pro-active steps to meetwith its bankers to seek an amendment to any specific financial covenant if OEHbelieved that it was likely that the covenant would be breached because ofadverse trading conditions or incurrence of additional costs.  There can be no assurance, however, that OEH’sloan facility lenders would agree to modify any affected covenant, which couldimpact OEH’s ability to fund its cash requirements for working capital,commitments and debt service.

 

*ContractualObligations Summary*

 

The following table summarizes OEH’s material knowncontractual obligations in 2010 and later years as of December 31, 2009,excluding accounts payable and accrued liabilities and excluding theconditional contracts to purchase two hotels in Sicily which became unconditionaland were completed in January 2010 (dollars in thousands):

 

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| ** **                | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **2010**                          | ** ** | **2011-  2012** | ** ** | **2013-  2014** | ** ** | **There-  after** | ** ** | **Total** | ** ** |
| Working capitalfacilities |       | $                                 | 6,666      |   | $ | — |   | $ | — |   | $ | — |   | $ | 6,666 |   |
| Debt                      |       | 171,287                           |       | 555,696 |   | 27,857 |   | 44,826 |   | 799,666 |   |
| Capital leases            |       | 2,101                             |       | 4,114 |   | 630 |   | 5,223 |   | 12,068 |   |
| Operating leases          |       | 8,416                             |       | 16,389 |   | 16,151 |   | 108,853 |   | 149,809 |   |
| Capital  commitments      |       | 5,500                             |       | 49,127 |   | — |   | — |   | 54,627 |   |
| Porto Cupecoy  project    |       | 9,264                             |       | — |   | — |   | — |   | 9,264 |   |
|                      |       | $                                 | 203,234    |   | $ | 625,326 |   | $ | 44,638 |   | $ | 158,902 |   | $ | 1,032,100 |   |

 

OEH has excluded expectedfuture interest payments from the above table, as this calculation is largelydependent on average borrowing levels that OEH expects to have at the end ofeach of the years presented as well as the expected interest rates on the debtnot covered by interest rate swaps.  Theactual interest payments made in 2009 were $35.6 million.

 

Of the current portion of long term debt of $171.3million, $114.1 million related to revolving credit facilities which, althoughdisclosed as falling due within 12 months, are available for re-borrowingthroughout the period of the loan facilities which are repayable in 2011 and2012.

 

Of the capital commitments obligations of $54.6million, $43.0 million relates to the purchase of land and a building adjoining‘21’ Club from the New York Public Library.

 

OEH also has obligations with respect to its pensionbenefit plans (see Note 11 to the Financial Statements).

 

As noted above, at December 31, 2009, OEH has aprovision of $7.2 million in respect of its uncertain tax positions inaccordance with ASC 740 “Income Taxes” (formerly FIN 48).  OEH is unable to estimate with any certaintywhen, or if, these liabilities will fall due. Accordingly, they are excluded from the contractual obligations table.

 

*Off-BalanceSheet Arrangements (including Charleston Place Hotel)*

 

OEH had no material off-balance sheet arrangements at December 31,2009 other than those involving its equity investees reported in Notes 1(i), 3,4(b), 9(a) and 20 to the Financial Statements, and commitments andcontingencies and derivative financial instruments reported in Notes 1(w), 16and 17.

 

Prior to December 31, 2008, OEH consideredits investment in Charleston Center LLC, owner of the Charleston Place Hotel inwhich OEH has a 19.9% equity investment, to be an exemption from the scope ofASC 810-10 “Consolidation-Variable Interest Entities” (formerly FIN 46(R)“Consolidation of Variable Interest Entities”). At December 31, 2008, OEHconsidered the investment no longer met the scope exception previously metbecause at that date OEH provided more than half of the hotel owning company’stotal equity, subordinated debt and other forms of subordinated financialsupport. OEH has also determined that it is the primary beneficiary of thevariable interest entity, as defined by ASC 810-10.  Accordingly, OEH is required to consolidatethe hotel with effect from December 31, 2008.

 

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****The assets and liabilities of Charleston Place Hotelhave been consolidated in the financial statements at their fair value as at December 31,2008, which were as follows (dollars in thousands):****

**** ****
| **** ****                                      | **** **** | ****December 31, 2008**** | **** **** |
|-----------------------------------------------------|----------------|--------------------------------|----------------|
| **** ****                                      | **** **** | **** ****                 | **** **** |
| ****Current assets****                              | **** **** | ****$****                      | ****4,937****  | **** **** |
| ****Other assets****                                | **** **** | ****1,824****                  | **** **** |
| ****Property, plant and equipment****               | **** **** | ****196,650****                | **** **** |
| ****Goodwill****                                    | **** **** | ****40,395****                 | **** **** |
| ****Total assets****                                | **** **** | ****243,806****                | **** **** |
| **** ****                                      | **** **** | **** ****                 | **** **** |
| ****Current liabilities****                         | **** **** | ****(5,373****                 | ****)****      |
| ****Third-party debt****                            | **** **** | ****(79,626****                | ****)****      |
| ****Deferred income taxes****                       | **** **** | ****(64,100****                | ****)****      |
| ****Other liabilities****                           | **** **** | ****(12,306****                | ****)****      |
| ****Total liabilities****                           | **** **** | ****(161,405****               | ****)****      |
| **** ****                                      | **** **** | **** ****                 | **** **** |
| ****Net assets (before $97,000 payable to OEH)****  | **** **** | ****$****                      | ****82,401**** | **** **** |
| **** ****                                      | **** **** | **** ****                 | **** **** |
| ****Book value of OEH’s variable interests**** | **** **** | ****$****                      | ****82,401**** | **** **** |

 

****Goodwill represents theexcess of the reported amount of the previously held interests and the fairvalue of the newly consolidated liabilities and non-controlling interests, overthe fair value of the newly consolidated identifiable assets.  The fair value of the non-controllinginterests has been treated as $nil since the hotel had net liabilities prior toconsolidation.****

 

****The net assets have beenfair valued based on the estimated market values of the hotel’sproperties.  After fair valuing all otherassets and liabilities, goodwill of $40.4 million has been recorded of which$nil will be deductible as operating expenses for tax purposes.****

 

Current liabilities, third-party debt andother liabilities include $79.5 million of debt obligations of CharlestonCenter LLC. Each of the three loans included in this amount is non-recourse tothe members of Charleston Center LLC whose separate assets are not available topay the debts of OEH and whose separate liabilities do not constituteobligations of OEH.

 

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## **Critical Accounting Policies andEstimates**

 

The precedingdiscussion and analysis of OEH’s financial condition and results of operationsis based on its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires OEH management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues andexpenses.  On an ongoing basis, OEHmanagement evaluates these estimates. Management bases its estimates on historical experience and on variousother assumptions that it believes are reasonable under the circumstances, theresult of which form the basis for judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

Criticalaccounting policies are those that reflect significant judgments oruncertainties, and potentially result in materially different results underdifferent assumptions and conditions. OEH management believes the following are OEH’s most critical accountingpolicies and estimates.

 

*Long-lived assets andgoodwill*

 

In accordance with ASC 360-10 “Impairment or Disposalof Long-Lived Assets” (formerly SFAS 144 “Accounting for the Impairment orDisposal of Long-Lived Assets”), OEH management periodically evaluates therecoverability of long-lived assets whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable.  These evaluations include analyses based onthe cash flows generated by the underlying assets, profitability informationincluding estimated future operating results, trends or other determinants offair value.  If the value of the assetdetermined by these evaluations is less than its carrying amount, a loss, ifany, is recognized for the difference between the fair value and the carryingvalue of the asset.  Future adversechanges in market conditions or poor operating results of the related businessmay indicate an inability to recover the carrying value of the asset, therebypossibly requiring an impairment charge in the future.

 

In accordance with ASC 350-30 “Intangibles-Goodwilland Other” (formerly SFAS 142 “Goodwill and Other Intangible Assets”), goodwillmust be evaluated annually for impairment. The impairment testing under ASC 350-30 isperformed in two steps, first, the determination of impairment based upon thefair value of a reporting unit as compared with its carrying value

 

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and, second,if there is an impairment, the measurement of the amount of impairment loss bycomparing the implied fair value of goodwill with the carrying amount of thatgoodwill.  The impairment analysis incorporatesvarious assumptions and uncertainties that OEH believes are reasonable andsupportable considering all available evidence, such as the future cash flowsof the business, future growth rates and the related discount rate, all ofwhich are unique to the specific reporting units.  However, these assumptions and uncertaintiesare, by their very nature, highly judgmental.

 

OEH did not have anygoodwill impairment charges as part of its annual impairment testing as of December 31,2009.  Under the first step of the 2009testing, the fair value of one reporting unit was approximately 5% in excess ofits carrying value.  That reporting unithas goodwill of $5.4 million.  The fairvalues of two other reporting units were approximately 10% in excess of theircarrying values.  Those reporting unitshad $3.7 million of goodwill.  Allgoodwill amounts were included within the hotels and restaurants segment. Thereis no guarantee that OEH’s business will achieve the forecasted results whichhave been included in its impairment analysis. If OEH is unable to meet these assumptions in future reporting periods,OEH may be required to record a charge in a future statement of operations forgoodwill impairment losses.

 

Impairment charges of$6.1 million were recorded in 2008 and an additional $6.5 million in the firstquarter of 2009, as a result of the completion of the 2008 annual impairmenttest (see Note 6 to the Financial Statements).

 

Other intangible assets with indefinite usefullives are also reviewed for impairment in accordance with ASC 350-30.

 

*Depreciation*

 

Real estate and other fixed assets are recorded at cost and are depreciated over their estimated useful lives by the straight-line method.  The depreciation rates on freehold buildings are 60 years with a 10% residual value, on trains are up to 75 years, and on machinery and other remaining assets range from 5 to 25 years.  Leasehold improvements are depreciated over the shorter of the estimated useful life or the respective lease terms including lease extensions that are reasonably assured.

 

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*Pensions*

 

OEH’s primary defined benefit pension plan isaccounted for using actuarial valuations required by ASC 715-30 “Compensation-RetirementBenefits” (formerly SFAS 87 “Employers’ Accounting for Pensions”, and SFAS 158 “Employers’Accounting for Defined Benefit Pension and Other Post-retirement Plans — AnAmendment of FASB Statements No. 87, 88, 106 and 132(R)”).  Management considers accounting for pensionscritical to all of OEH’s operating segments because management is required tomake significant subjective judgments about a number of actuarial assumptions,which include discount rates, long-term return on plan assets and mortalityrates.  On May 31, 2006, the planwas closed to future benefit accrual.

 

Managementbelieves that a 6.5% long-term return on plan assets in 2009 is reasonabledespite the recent market volatility.  Indetermining the expected long-term rate of return on assets, management hasreviewed anticipated future long-term performance of individual asset classesand the consideration of the appropriate asset allocation strategy given theanticipated requirements of the plan to determine the average rate of earningsexpected on the funds invested.  Theprojected returns are based on broad equity and bond indices, including fixedinterest rate gilts (U.K. Government issued long-term securities) of long-termduration since the plan operates in the U.K.

 

Managementregularly reviews OEH’s actual asset allocation and periodically rebalancesinvestments to targeted allocations when considered appropriate.  While the analysis considers recent fundperformance and historical returns, the assumption is primarily a long-term,prospective rate.  Management willcontinue to evaluate the expected rate of return at least annually, and willadjust as necessary.

 

Depending onthe assumptions and estimates used, pension expense could vary within a rangeof outcomes and have a material effect on OEH’s consolidated financialstatements.  Management is currentlymonitoring and evaluating the level of pension contributions based on variousfactors that include investment performance, actuarial valuation and taxdeductibility.  Management will evaluatethe need for additional contributions in 2010 based on these factors.  Management believes that the cash flows fromOEH’s operations will be sufficient to fund additional contributions, if any,to the plan.

 

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* *

*Foreign currency*

 

The functional currency for each of theCompany’s foreign subsidiaries is the applicable local currency, except forFrench West Indies, Brazil, Peru and one property in Mexico where thefunctional currency is U.S. dollars.

 

For foreign subsidiaries with a functional currencyother than the U.S. dollar, income and expenses are translated into U.S.dollars, the reporting currency of the Company, at the average rates ofexchange prevailing during the year.  Theassets and liabilities are translated into U.S. dollars at the rates of exchangeon the balance sheet date and the related translation adjustments are includedin accumulated other comprehensive income/(loss).  Translation adjustments arising fromintercompany financing that is long-term in nature are accounted for similarly.  Foreign currency transaction gains and lossesare recognized in earnings as they occur.

 

##### *Taxassets*

##### * *

OEH maintainsa valuation allowance to reduce its gross deferred tax assets to reflect theamount, based upon OEH’s estimates of income that would likely berealized.  If OEH’s future operationsdiffered from those in the estimates, OEH may need to increase or decrease thevaluation allowance, which could affect its reported operations.

 

*Real estate developmentaccounting*

 

Revenue from real estate activities is accounted forunder ASC 360-20-40 “Real Estate Sales-Derecognition” (formerly SFAS 66 “Accountingfor Sales of Real Estate”) and represents the proceeds from sales ofundeveloped land and developed properties that OEH is holding for sale. Profitfrom sales of land and developed properties are recognized upon closing usingthe full accrual method of accounting, provided that all the requirementsprescribed by ASC 360-20-40 have been met. Revenue related to projects still under construction is recognized underthe percentage-of-completion method where all criteria specified in ASC360-20-40 have been met.  For sales thatdo not meet these criteria, revenue is deferred.

 

The process of real estate revenue recognitioninvolves significant estimates of total project revenue and costs. During thethree months ended December 31, 2008, the downturn in the global economyresulted in a slowdown in the condominium apartment sales at Porto Cupecoycompared to prior estimates. Accordingly, OEH’s management concluded that it was no longer possibleto estimate reasonably total project sales proceeds and profits and, therefore,revenue on the Porto Cupecoy project could no longer be recorded using thepercentage-of-completion method under ASC 360-20-40.

 

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**Recent Accounting Pronouncements**

 

*ASC810-10*

 

In June 2009, the FASB issued SFAS 167 “Amendments to FASBInterpretation No. 46(R)”, which amends the consolidation guidance thatapplies to variable interest entities. The amendments will significantly affectthe overall consolidation analysis under ASC 810-10 “Consolidation”. While theFASB’s discussions leading up to the issuance of SFAS 167 focused extensivelyon structured finance entities, the amendments to the consolidation guidanceaffect all entities and enterprises currently within the scope of ASC 810-10,as well as qualifying special-purpose entities that are currently outside thescope of ASC 810-10. Accordingly, an enterprise will need to reconsider carefullyits previous ASC 810-10 conclusions, including (1) whether an entity is avariable interest entity, (2) whether the enterprise is the entity’sprimary beneficiary, and (3) what type of financial statement disclosuresare required. SFAS 167 is effective as of the beginning of the first fiscalyear that begins after November 15, 2009. Early adoption is prohibited.The Company is in process of evaluating the effects of the adoption of SFAS167.

 

*ASU 2009-13*

 

In October 2009,the FASB issued ASU 2009-13 “Revenue Recognition” on multiple-deliverablerevenue arrangements.  ASU 2009-13codifies the consensus in EITF Issue 08-1, which supersedes Issue 00-21(codified in ASC 605-25). The ASU was issued in response to concerns related tothe accounting for revenue arrangements with multiple deliverables under Issue00-21 and applies to all deliverables in contractual arrangements in allindustries in which a vendor will perform multiple revenue-generatingactivities, except when some or all deliverables in a multiple-deliverablearrangement are within the scope of other, more specific sections of the ASC(e.g., ASCs 840, 952, 360-20 (pre-ASC guidance from SFAS 13, 45, and 66) andother sections of ASC 605 on revenue recognition (e.g., pre-ASC guidance fromSOPs 81-1 and 97-2)).

 

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Specifically, ASU 2009-13 addresses the unit of accounting forarrangements involving multiple deliverables. It also addresses how arrangementconsideration should be allocated to the separate units of accounting, whenapplicable. However, guidance on determining when the criteria for revenuerecognition are met and on how an entity should recognize revenue for a givenunit of accounting is located in other sections of the ASC (e.g., SAB Topic13). Although the ASU retains the criteria from Issue 00-21 for when delivereditems in a multiple-deliverable arrangement should be considered separate unitsof accounting, it removes the previous separation criterion under Issue 00-21that objective and reliable evidence of the fair value of any undelivered itemsmust exist for the delivered items to be considered a separate unit or separateunits of accounting.

 

ASU 2009-13 is effective for fiscal years beginning on or after June 15,2010. Entities can elect to apply the ASU (1) prospectively to new ormaterially modified arrangements after its effective date or (2) retrospectivelyfor all periods presented. Early adoption is permitted. However, if an entityelects prospective application and adopts the ASU early after its first interimreporting period, it must also retrospectively apply the ASU as of thebeginning of that fiscal year and disclose the effect of the retrospectiveadjustments on the prior interim periods’ revenue, income before taxes, netincome, and earnings per share. ****TheCompany does not expect any material impact from the adoption of the ASU****.

 
| **ITEM 7A.** | ** ** | **Quantitative and 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 its overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flow.  OEH does not hold market ratesensitive financial instruments for trading purposes.

 

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changes in interest rates on floating rateborrowings, principally based on U.S. dollar LIBOR and EURIBOR, and onshort-term cash investments.  OEHmanagement assesses market risk based on changes in interest rates using asensitivity analysis.  If interest ratesincreased by 10% with all other variables held constant, annual net financecosts of OEH would have increased by approximately $900,000 based on borrowingsoutstanding at December 31, 2009.

 

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The market risk relating to foreign currencies arisesfrom holding assets, buying, selling and financing in currencies other than theU.S. dollar, principally the European euro, British pound, South African rand,Brazilian real and Australian dollar. Some non-U.S. subsidiaries of the Company borrow in local currencies,and OEH may in the future enter into forward exchange contracts relating topurchases denominated in foreign currencies.

 

Nine of OEH’sowned hotels in 2009 operated with currencies linked to the European euro, twooperated in South African rand, two in Australian dollars, one in Britishpounds sterling, three in Botswana pula, two in Mexican pesos, one in Peruviannuevo soles, six in various Southeast Asian currencies and one in Russianrubles. Revenue of the Venice Simplon-Orient-Express, British Pullman, NorthernBelle and Royal Scotsman tourist trains was primarily in British poundssterling, but the operating costs of the Venice Simplon-Orient-Express weremainly denominated in euros. Revenue of the Copacabana Palace and Hotel dasCataratas in Brazil was recorded in U.S. dollars, but substantially all of thehotels’ expenses were denominated in Brazilian reals. Revenue derived by MaromaResort and Spa and La Samanna was recorded in U.S. dollars, but the majority ofthe hotels’ expenses were denominated in Mexican pesos and the euro,respectively.

 

OEH’sproperties match foreign currency earnings and costs to provide a natural hedgeagainst currency movements.  In addition,a significant proportion of the guests at OEH hotels located outside of theUnited States originate from the United States. When a foreign currency in which OEH operates devalues against the U.S.dollar, OEH has considerable flexibility to increase prices in local currency,or vice versa.  Management believes thatwhen these factors are combined, OEH does not face a material exposure to itsnet earnings from currency movements, although the reporting of OEH’s revenueand costs translated into U.S. dollars can, from period to period, bematerially affected.

 

OEH management uses a sensitivity analysis to assessthe potential impact on net earnings of changes in foreign currency financialinstruments from hypothetical changes in the foreign currency exchangerates.  The primary assumption used inthis model is a hypothetical 10% weakening or strengthening of the foreigncurrencies against the U.S. dollar.  At December 31,2009, as a result of this analysis, OEH management determined that the impacton foreign currency financial instruments of a 10% strengthening of foreigncurrency exchange rates in relation to the U.S. dollar would decrease OEH’s netearnings by approximately $1.2 million.

 

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**ITEM 8.  Financial Statements and Supplementary Data**

 

*Reportof Independent Registered Public Accounting Firm*

 

Board ofDirectors and Shareholders

Orient-ExpressHotels Ltd.

Hamilton,Bermuda

 

We haveaudited the accompanying consolidated balance sheets of Orient-Express HotelsLtd. and subsidiaries (the “Company”) as of December 31, 2009 and 2008,and the related consolidated statements of operations, changes in total equity,and cash flows for each of the three years in the period ended December 31,2009.  Our audits also included theconsolidated financial statement schedule listed in Item 15.  These financial statements and the financialstatement schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements and the financial statement schedule based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of Orient-Express Hotels Ltd. and subsidiariesas of December 31, 2009 and 2008, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2009, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion,such consolidated financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

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As discussedin Note 1 to the consolidated financial statements, on January 1, 2009,the Company adopted the non-controlling interest guidance from AccountingStandards Codification 810, “Consolidations” (formerly SFAS 160, “Non-ControllingInterests in Consolidated Financial Statements — an amendment of ARB 51”). TheCompany has retrospectively adjusted all periods presented in the consolidatedfinancial statements for the effect of this change.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the Company’sinternal control over financial reporting as of December 31, 2009, basedon the criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated February 26, 2010 expressed an unqualified opinion on theCompany’s internal control over financial reporting.

 
| /s/ Deloitte  LLP       |   |
|-------------------------|--------|
|                    |   |
| London,  England        |   |
| February 26,  2010 |   |

 

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

**Consolidated Balance Sheets**

** **
| ** **                                                                               | ** ** | **December 31,**      | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                               | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|                                                                                     |       |                       |       |   |   |
| **Assets**                                                                               |       |                       |       |   |   |
| Cash and cash  equivalents                                                               |       | $                          | 72,151     |   | $ | 64,208 |   |
| Restricted cash                                                                          |       | 19,894                     |       | 13,224 |   |
| Accounts  receivable, net of allowances of $453 and $679                                 |       | 59,905                     |       | 44,927 |   |
| Due from related  parties                                                                |       | 19,385                     |       | 9,676 |   |
| Prepaid expenses  and other                                                              |       | 22,331                     |       | 19,263 |   |
| Inventories                                                                              |       | 44,191                     |       | 42,873 |   |
| Assets of  discontinued operations held for sale                                         |       | 41,770                     |       | 180,930 |   |
| Real estate  assets                                                                      |       | 120,288                    |       | 83,983 |   |
| Total current  assets                                                                    |       | 399,915                    |       | 459,084 |   |
|                                                                                     |       |                       |       |   |   |
| Property, plant  and equipment, net of accumulated depreciationof $255,218 and  $209,368 |       | 1,403,773                  |       | 1,329,955 |   |
| Investments                                                                              |       | 58,432                     |       | 67,464 |   |
| Goodwill                                                                                 |       | 149,180                    |       | 153,502 |   |
| Other intangible  assets                                                                 |       | 20,982                     |       | 20,255 |   |
| Other assets                                                                             |       | 40,408                     |       | 38,536 |   |
|                                                                                     |       | $                          | 2,072,690  |   | $ | 2,068,796 |   |
| **Liabilities  and Equity**                                                              |       |                       |       |   |   |
| Working capital  facilities                                                              |       | $                          | 6,666      |   | $ | 54,179 |   |
| Accounts payable                                                                         |       | 23,575                     |       | 23,085 |   |
| Accrued  liabilities                                                                     |       | 74,569                     |       | 71,549 |   |
| Deferred revenue                                                                         |       | 68,784                     |       | 55,783 |   |
| Liabilities of  discontinued operations held for sale                                    |       | 11,847                     |       | 86,410 |   |
| Current portion  of long-term debt and capital leases                                    |       | 173,388                    |       | 138,813 |   |
| Total current  liabilities                                                               |       | 358,829                    |       | 429,819 |   |
|                                                                                     |       |                       |       |   |   |
| Long-term debt  and obligations under capital leases                                     |       | 638,346                    |       | 652,980 |   |
| Liability for  pension benefit                                                           |       | 7,402                      |       | 7,421 |   |
| Other  liabilities                                                                       |       | 19,742                     |       | 22,562 |   |
| Deferred income  taxes                                                                   |       | 160,742                    |       | 160,352 |   |
| Liability for  uncertain tax positions                                                   |       | 7,151                      |       | 11,493 |   |
|                                                                                     |       | 1,192,212                  |       | 1,284,627 |   |
| Commitments and  contingencies                                                           |       |                       |       |   |   |
|                                                                                     |       |                       |       |   |   |
| Equity:                                                                                  |       |                       |       |   |   |
| Shareholders’  equity:                                                              |       |                       |       |   |   |
| Preferred shares  $0.01 par value (30,000,000 sharesauthorized,  issued nil)             |       | —                     |       | — |   |
| Class A  common shares $0.01 par value (120,000,000 sharesauthorized):              |       |                       |       |   |   |
| Issued — 76,843,053  (2008 — 50,959,500)                                       |       | 769                        |       | 510 |   |
| Class B  common shares $0.01 par value (120,000,000 sharesauthorized):              |       |                       |       |   |   |
| Issued —  18,044,478 (2008 — 18,044,478)                                       |       | 181                        |       | 181 |   |
| Additional  paid-in capital                                                              |       | 714,980                    |       | 570,727 |   |
| Retained  earnings                                                                       |       | 202,774                    |       | 271,571 |   |
| Accumulated  other comprehensive loss                                                    |       | (39,814                    | )          | (60,210 | ) |
| Less: reduction  due to class B common shares owned by asubsidiary —  18,044,478    |       | (181                       | )          | (181 | ) |
| Total  shareholders’ equity                                                         |       | 878,709                    |       | 782,598 |   |
| Non-controlling interests                                                                |       | 1,769                      |       | 1,571 |   |
| Total equity                                                                             |       | 880,478                    |       | 784,169 |   |
|                                                                                     |       |                       |       |   |   |
|                                                                                     |       | $                          | 2,072,690  |   | $ | 2,068,796 |   |

 

Seenotes to consolidated financial statements.

 

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

**Statements of Consolidated Operations**

 
| **Year ended December 31,**                                                           | ** ** | **2009**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Revenue                                                                                    |       | $                                                     | 456,956    |     | $          | 502,838  |       | $ | 528,956 |   |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Expenses:                                                                                  |       |                                                  |       |     |       |     |       |
| Depreciation and amortization                                                              |       | 40,830                                                |       | 34,772   |       | 34,677   |       |
| Operating                                                                                  |       | 223,650                                               |       | 229,894  |       | 245,418  |       |
| Selling, general and administrative                                                        |       | 167,662                                               |       | 180,482  |       | 158,625  |       |
| Impairment of goodwill and other  intangible assets                                        |       | 6,500                                                 |       | 6,107    |       | —   |       |
| Total expenses                                                                             |       | 438,642                                               |       | 451,255  |       | 438,720  |       |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Gain on disposal of fixed assets                                                           |       | 1,385                                                 |       | —   |       | 2,312    |       |
| Earnings from operations                                                                   |       | 19,699                                                |       | 51,583   |       | 92,548   |       |
| Impairment of investment in unconsolidated company                                         |       | —                                                |       | (22,992  | )          | —   |       |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Earning before net finance costs, income  taxes and earnings from unconsolidated companies |       | 19,699                                                |       | 28,591   |       | 92,548   |       |
| Interest expense, net                                                                      |       | (31,068                                               | )          | (46,874  | )          | (41,029  | )          |
| Foreign currency, net                                                                      |       | (1,058                                                | )          | 4,774    |       | 799      |       |
| Net finance costs                                                                          |       | (32,126                                               | )          | (42,100  | )          | (40,230  | )          |
|                                                                                       |       |                                                  |       |     |       |     |       |
| (Loss)/earnings before income taxes and  earnings from unconsolidated companies            |       | (12,427                                               | )          | (13,509  | )          | 52,318   |       |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Provision for income taxes                                                                 |       | (11,033                                               | )          | (2,178   | )          | (14,767  | )          |
|                                                                                       |       |                                                  |       |     |       |     |       |
| (Loss)/earnings before earnings from  unconsolidated companies                             |       | (23,460                                               | )          | (15,687  | )          | 37,551   |       |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Earnings from unconsolidated companies,  net of tax of $4,510, $6,986 and $4,772           |       | 4,183                                                 |       | 16,771   |       | 16,425   |       |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Net (loss)/earnings from continuing  operations                                            |       | (19,277                                               | )          | 1,084    |       | 53,976   |       |
| Loss from discontinued operations, net of  tax of $(7,961), $1,610 and $860                |       | (49,520                                               | )          | (27,635  | )          | (20,334  | )          |
| Net (loss)/earnings                                                                        |       | $                                                     | (68,797    | )        | $          | (26,551  | )          | $ | 33,642 |   |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Basic (loss)/earnings per share:                                                           |       |                                                  |       |     |       |     |       |
| Net (loss)/earnings from continuing  operations                                            |       | $                                                     | (0.28      | )        | $          | 0.03     |       | $ | 1.27 |   |
| Net loss from discontinued operations                                                      |       | (0.73                                                 | )          | (0.64    | )          | (0.48    | )          |
| Net (loss)/earnings                                                                        |       | $                                                     | (1.01      | )        | $          | (0.61    | )          | $ | 0.79 |   |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Diluted (loss)/earnings per share:                                                         |       |                                                  |       |     |       |     |       |
| Net (loss)/earnings from continuing operations                                             |       | $                                                     | (0.28      | )        | $          | 0.03     |       | $ | 1.27 |   |
| Net loss from discontinued operations                                                      |       | (0.73                                                 | )          | (0.64    | )          | (0.48    | )          |
| Net (loss)/earnings                                                                        |       | $                                                     | (1.01      | )        | $          | (0.61    | )          | $ | 0.79 |   |
|                                                                                       |       |                                                  |       |     |       |     |       |
| Dividends per share                                                                        |       | $                                                     | —     |     | $          | 0.10     |       | $ | 0.10 |   |

 

Seenotes to consolidated financial statements.

 

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

**Statements of Consolidated Cash Flows**

** **
| ** **                                                                                                                        | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                                        | ** ** | **(Dollars in thousands)**        | ** ** |
| Cash flows from operating activities:                                                                                             |       |                              |       |   |   |   |   |
| Net (loss)/earnings                                                                                                               |       | $                                 | (68,797    | ) | $ | (26,551 | ) | $ | 33,642 |   |
| Less: loss from discontinued operations,  net of tax                                                                              |       | 49,520                            |       | 27,635 |   | 20,334 |   |
| Net (loss)/earnings from continuing  operations                                                                                   |       | (19,277                           | )          | 1,084 |   | 53,976 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Adjustment to reconcile net  (loss)/earnings from continuing operations to net cash (used in)/ provided by  operating activities: |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                                                                     |       | 40,830                            |       | 34,772 |   | 34,677 |   |
| Amortization and write-off of finance  costs                                                                                      |       | 3,430                             |       | 3,103 |   | 3,243 |   |
| Impairment losses                                                                                                                 |       | 6,500                             |       | 29,099 |   | — |   |
| Undistributed earnings of unconsolidated  companies                                                                               |       | (9,212                            | )          | (11,690 | ) | (9,390 | ) |
| Loss/(gain) from sale of investments and  fixed assets                                                                            |       | 3,710                             |       | 382 |   | (3,018 | ) |
| Stock-based compensation                                                                                                          |       | 4,121                             |       | 2,800 |   | 1,442 |   |
| Other non-cash items                                                                                                              |       | 2,651                             |       | (136 | ) | 114 |   |
| Change in deferred tax                                                                                                            |       | 11,720                            |       | (5,184 | ) | 1,699 |   |
| Decrease in provisions for uncertain tax  positions                                                                               |       | (4,202                            | )          | (11,756 | ) | (7,091 | ) |
| Change in assets and liabilities, net of  effects from acquisition of subsidiaries:                                               |       |                              |       |   |   |   |   |
| Decrease/(increase) in accounts  receivable, prepaid expenses and other                                                           |       | (16,207                           | )          | 11,486 |   | (20,248 | ) |
| Decrease/(increase) in inventories                                                                                                |       | (129                              | )          | 51 |   | (5,509 | ) |
| Increase in real estate assets held for  sale                                                                                     |       | (36,305                           | )          | (57,289 | ) | (19,048 | ) |
| Increase in accounts payable, accrued  liabilities, deferred revenue and other liabilities                                        |       | 13,276                            |       | 28,813 |   | 19,483 |   |
| Dividends received from unconsolidated  companies                                                                                 |       | 1,064                             |       | 3,840 |   | 1,763 |   |
| Total adjustments                                                                                                                 |       | 21,247                            |       | 28,291 |   | (1,883 | ) |
| Net cash provided by operating activities  from continuing operations                                                             |       | 1,970                             |       | 29,375 |   | 52,093 |   |
| Net cash (used in)/provided by operating  activities from discontinued operations                                                 |       | (18,496                           | )          | (4,232 | ) | 840 |   |
| Net cash (used in)/provided by operating  activities                                                                              |       | (16,526                           | )          | 25,143 |   | 52,933 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Cash flows from investing activities:                                                                                             |       |                              |       |   |   |   |   |
| Capital expenditures                                                                                                              |       | (72,090                           | )          | (108,704 | ) | (99,179 | ) |
| Acquisitions and investments, net of cash  acquired                                                                               |       | (86                               | )          | (2,996 | ) | (21,877 | ) |
| Increase in restricted cash                                                                                                       |       | (6,670                            | )          | (9,079 | ) | (3,800 | ) |
| Proceeds from sale of investments and  fixed assets                                                                               |       | 73,346                            |       | 158 |   | 4,723 |   |
| Net cash used in investing activities  from continuing operations                                                                 |       | (5,500                            | )          | (120,621 | ) | (120,133 | ) |
| Net cash used in investing activities  from discontinued operations                                                               |       | (4,752                            | )          | (4,272 | ) | (6,816 | ) |
| Net cash used in investing activities                                                                                             |       | (10,252                           | )          | (124,893 | ) | (126,949 | ) |
|                                                                                                                                   |            |                                   |            |  |  |  |  |  |  |  |

 

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

**Statements of Consolidated Cash Flows(continued)**

 
| ** **                                                                                                                              | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                                              | ** ** | **(Dollars in thousands)**        | ** ** |
| Cash flows from financing activities:                                                                                                   |       |                              |       |   |   |   |   |
| Net (repayments of)/ proceeds from  working capital facilities and redrawable loans                                                     |       | (41,265                           | )          | 56,425 |   | 53,838 |   |
| Issuance of common shares, net                                                                                                          |       | 140,901                           |       | 52,514 |   | — |   |
| Stock options exercised                                                                                                                 |       | 15                                |       | 192 |   | 4,105 |   |
| Proceeds from long-term debt                                                                                                            |       | 42,244                            |       | 5,738 |   | 177,500 |   |
| Principal payments under long-term debt                                                                                                 |       | (49,238                           | )          | (33,936 | ) | (147,391 | ) |
| Payment of common share dividends                                                                                                       |       | —                            |       | (4,247 | ) | (4,238 | ) |
| Net cash provided by financing activities  from continuing operations                                                                   |       | 92,657                            |       | 76,686 |   | 83,814 |   |
| Net cash (used in)/ provided by financing  activities from discontinued operations                                                      |       | (60,593                           | )          | 54 |   | — |   |
| Net cash provided by financing activities                                                                                               |       | 32,064                            |       | 76,740 |   | 83,814 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| Effect of exchange rate changes on cash                                                                                                 |       | 1,799                             |       | (2,031 | ) | 1,809 |   |
| Net increase/(decrease)in cash and cash  equivalents                                                                                    |       | 7,085                             |       | (25,041 | ) | 11,607 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| Cash and cash equivalents at beginning of  year (includes $1,676 (2009), $4,310 (2008), $3,071 (2007) of discontinued  operations cash) |       | 65,884                            |       | 90,925 |   | 79,318 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| Cash and cash equivalents at end of year  (includes $818 (2009), $1,676 (2008), $4,310 (2007) of discontinued  operations cash)         |       | $                                 | 72,969     |   | $ | 65,884 |   | $ | 90,925 |   |
|                                                                                                                                         |            |                                   |            |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

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** **

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

**Statements of Changes inConsolidated Total Equity**

 
| **(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********Held  By A********Subsidiary** | ** ** | **Total********Comprehensive********Income/********(Loss)** | ** ** | **Non-********Controlling********Interests** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------|------------|
| Balance, January 1, 2007                                                |       | $                                                       | —     |                                                                     | $          | 422                                                                      |       | $                                            | 181        |                         | $          | 509,762                                                                        |       | $                                                            | 301,785    |                                                        | $          | (4,973                                       | )          | $ | (181 | ) |   |   | $ | 1,882 |   |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| ASC 740 liabilities                                                          |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | (28,820                      | )          | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock based compensation                                                     |       | —                                                  |       | —                                                                   |       | —                                                                   |       | 1,442                                        |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock options exercised                                                      |       | —                                                  |       | 2                                                                        |       | —                                                                   |       | 4,103                                        |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Dividends on common shares                                                   |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | (4,238                       | )          | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Comprehensive income:                                                        |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| Net earnings on common shares                                                |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | 33,642                       |       | —                                                                         |       | —                                                       |       | $                                                           | 33,642     |                                         | 213        |   |
| Other comprehensive income                                                   |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | —                       |       | 35,404                                                                         |       | —                                                       |       | 35,404                                                      |       | (49                                          | )          |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       | $                                                           | 69,046     |                                         |       |   |
| Acquisition of non-controlling interest                                      |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | (292                                         | )          |
| Balance, December 31, 2007                                              |       | —                                                  |       | 424                                                                      |       | 181                                                                      |       | 515,307                                      |       | 302,369                      |       | 30,431                                                                         |       | (181                                                         | )          |                                                        |       | 1,754                                        |       |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| Issuance of class A common shares in direct  offering, net of issuance costs |       | —                                                  |       | 86                                                                       |       | —                                                                   |       | 52,428                                       |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock based compensation                                                     |       | —                                                  |       | —                                                                   |       | —                                                                   |       | 2,800                                        |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock options exercised                                                      |       | —                                                  |       | —                                                                   |       | —                                                                   |       | 192                                          |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Dividends on common shares                                                   |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | (4,247                       | )          | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Comprehensive income:                                                        |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| Net loss on common shares                                                    |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | (26,551                      | )          | —                                                                         |       | —                                                       |       | $                                                           | (26,551    | )                                            | 223        |   |
| Other comprehensive loss                                                     |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | —                       |       | (90,641                                                                        | )          | —                                                       |       | (90,641                                                     | )          | (18                                          | )          |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       | $                                                           | (117,192   | )                                            |       |   |
| Dividends to non-controlling interest                                        |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | (388                                         | )          |
| Balance, December 31, 2008                                              |       | —                                                  |       | 510                                                                      |       | 181                                                                      |       | 570,727                                      |       | 271,571                      |       | (60,210                                                                        | )          | (181                                                         | )          |                                                        |       | 1,571                                        |       |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| Issuance of class A common shares in public  offering, net of issuance costs |       | —                                                  |       | 259                                                                      |       | —                                                                   |       | 140,642                                      |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock based compensation                                                     |       | —                                                  |       | —                                                                   |       | —                                                                   |       | 4,121                                        |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Stock options exercised                                                      |       | —                                                  |       | —                                                                   |       | —                                                                   |       | 15                                           |       | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | —                                       |       |
| Comprehensive income:                                                        |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       |                                                        |       |                                         |       |
| Net loss on common shares                                                    |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | (68,797                      | )          | —                                                                         |       | —                                                       |       | $                                                           | (68,797    | )                                            | 23         |   |
| Other comprehensive loss                                                     |       | —                                                  |       | —                                                                   |       | —                                                                   |       | —                                       |       | —                       |       | 20,396                                                                         |       | —                                                       |       | 20,396                                                      |       | (10                                          | )          |
|                                                                         |       |                                                    |       |                                                                     |       |                                                                     |       |                                         |       |                         |       |                                                                           |       |                                                         |       | $                                                           | (48,401    | )                                            |       |   |
| Acquisition of non-controlling interest                                      |       | —                                                  |       | —                                                                   |       | —                                                                   |       | (525                                         | )          | —                       |       | —                                                                         |       | —                                                       |       |                                                        |       | 185                                          |       |
| Balance, December 31, 2009                                              |       | $                                                       | —     |                                                                     | $          | 769                                                                      |       | $                                            | 181        |                         | $          | 714,980                                                                        |       | $                                                            | 202,774    |                                                        | $          | (39,814                                      | )          | $ | (181 | ) |   |   | $ | 1,769 |   |

 

See notes to consolidatedfinancial statements.

 

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

**Notes to Consolidated Financial Statements**

 

**1.****                                     ****Summaryof significant accounting policies and basis of presentation**

 

*(a)**                              **Business*

 

In this report Orient-Express Hotels Ltd. isreferred to as the “Company”, and the Company and its subsidiaries are referredto collectively as “OEH”.

 

At December 31, 2009, OEH owned or invested in 40deluxe hotels and resorts located in the United States, Mexico, Caribbean,Europe, southern Africa, South America, Southeast Asia, Australia and SouthPacific (one of which was under contract to be sold), a stand-alone restaurantsin New York (a second stand-alone restaurant in Buenos Aires was under contractto be sold), six tourist trains in Europe, Southeast Asia and Peru, and a rivercruiseship in Burma and five canalboats in France. Also at December 31,2009, two hotels in Europe were under contract for purchase by OEH.

 

*(b)**                              **Basis ofpresentation*

 

The accompanying consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America and reflect the results of operations,financial position and cash flows of the Company and all its majority-ownedsubsidiaries and variable interest entities in which OEH is the primarybeneficiary.  The consolidated financialstatements have been prepared using the historical basis in the assets and liabilitiesand the historical results of operations directly attributable to OEH, and allintercompany accounts and transactions between the Company and its subsidiarieshave been eliminated.  Unconsolidatedcompanies that are 20% to 50% owned are accounted for on an equity basis.

 

“FASB” means Financial Accounting Standards Board and “APB”means Accounting Principles Board, the FASB’s predecessor.  “SFAS” means Statement of FinancialAccounting Standards of the FASB, and “FIN”, “EITF”, “SOP” or “FSP” means anaccounting interpretation of the FASB. “ASC” means the Accounting StandardsCodification of the FASB and “ASU” means an Accounting Standards Update of theFASB.

 

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On evaluating its various variable interests inCharleston Place Hotel, in which OEH holds a 19.9% equity investment, OEHconcluded that with effect from December 31, 2008, the hotel no longerqualified for certain scope exemptions under ASC 810 “Consolidation” (formerlyFIN 46(R) “Consolidation of Variable Interest Entities”).  OEH further concluded that OEH is the primarybeneficiary of the variable interest entity as defined by ASC 810 and hasconsolidated the entity effective December 31, 2008.

 

In December 2007, OEH decided to sell Bora BoraLagoon Resort and OEH continues to hold this subsidiary for sale.  Accordingly, the results of the hotel havebeen reflected as discontinued operations for all periods presented.

 

****In December 2009, OEH signed an agreement to sell Lilianfels BlueMountains in Katoomba, New South Wales, Australia for A$21,000,000($19,300,000). Accordingly, the results of the hotel have been reflected asdiscontinued operations for all periods presented. This sale was completed on January 29,2010.****

 

****In December 2009, OEH signed an agreement to sell La Cabanarestaurant in Buenos Aires for $2,700,000. Accordingly, the results of therestaurant have been reflected as discontinued operations for all periodspresented. Completion of this sale is scheduled to take place by March 2010.****

 

On June 2,2009, OEH sold the shares in its Lapa Palace Hotel subsidiary in Lisbon,Portugal for a cash consideration of $41,983,000. Of that consideration$26,287,000 was received in cash on the date of sale and remaining $15,696,000has been deferred until 2010. The disposal resulted in a gain on sale of$4,826,000 which is reported within losses from discontinued operations, net oftax.  See Note 2.

 

On October 2,2009, OEH sold the net assets of the Windsor Court Hotel, in New Orleans,Louisiana for a cash consideration of $44,250,000. The disposal resulted in aloss on sale of $1,089,000 which is reported within losses from discontinuedoperations, net of tax. See Note 2.

 

*(c)**                               **Cash and cashequivalents*

 

Cash and cash equivalents include all cash balancesand highly-liquid investments having original maturities of three months orless.

 

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*(d)**                              **Restrictedcash*

 

In the statements of consolidated cash flows for theyears ended December 31, 2009, 2008 and 2007, changes in restricted cashbalances have been reported in investing activities.

 

*(e)**                               **Foreign currency*

 

The functional currency for each of the Company’sforeign subsidiaries is the applicable local currency, except for properties inFrench West Indies, Brazil, Peru and one property in Mexico, where thefunctional currency is U.S. dollars.

 

For foreign subsidiaries with a functional currencyother than the U.S. dollar, income and expenses are translated into U.S.dollars, the reporting currency of the Company, at the average rates ofexchange prevailing during the year.  Theassets and liabilities are translated into U.S. dollars at the rates ofexchange on the balance sheet date and the related translation adjustments areincluded in accumulated other comprehensive income/(loss).  Translation adjustments arising fromintercompany financing that is long-term investment in nature are accounted forsimilarly.  Foreign currency transactiongains and losses are recognized in earnings as they occur.

 

*(f)**                                  **Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Estimates include, among others, theallowance for doubtful accounts, depreciation and amortization, carrying valueof assets including intangible assets, employee benefits, taxes including ASC740 “Income Taxes”, and contingencies, projected revenue and costs for realestate revenue recognition.  Actualresults may differ from those estimates.

 

*(g)**                              **Stock-basedcompensation*

 

Stock-based compensation expense for OEH’s share-basedpayment awards is recognized in earnings on a straight-line basis over therequisite service period of the award. Compensation expense for performance share awards is 

 

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recognizedwhen it becomes probable that the performance criteria, if any, specified inthe awards will be achieved.  The totalcost of a share-based payment award is reduced by estimated forfeitures expectedto occur over the vesting period of the award. The grant-date fair value of share-based payment awards is determinedusing the Black-Scholes model.  See Note15.

 

Under its 2007 performance share plan and 2009 shareaward incentive plan, the Company granted share-based payment awards withperformance and market conditions to certain employees during the years ended December 31,2009 and 2008.  The fair value of theawards 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 is recognizedwhen it becomes probable that the performance criteria specified in the awardswill be achieved and, accordingly, the compensation value is adjusted followingthe changes in the estimates of shares likely to vest based on the performancecriteria.

 

*(h)**                              **Revenuerecognition*

 

Hotel and restaurant revenue is recognized when therooms are occupied and the services are performed.  Tourist train and cruise revenue isrecognized upon commencement of the journey. Deferred revenue consisting of deposits paid in advance is recognized asrevenue when the services are performed for hotels and restaurants and uponcommencement of tourist train and cruise journeys.  Revenue under management contracts isrecognized based upon the attainment of certain financial results, primarilyrevenue and operating earnings, in each contract as defined.

 

*Real estate*

 

Revenue from real estate activities is accounted forunder ASC 360-20 “Real Estate Sales” (formerly SFAS 66 “Accounting for Sales ofReal Estate”), and represents the proceeds from sales of undeveloped land anddeveloped properties that OEH is holding for sale.  Profit from sales of land and developedproperties is recognized upon closing using the full accrual method ofaccounting, provided that all the requirements prescribed by ASC 360-20 havebeen met.  Revenue related to projectsstill under construction is recognized under the percentage-of-completionmethod where all criteria specified in ASC 360-20 have been met.  For sales that do not meet these criteria,revenue is deferred.

 

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During the three months ended December 31, 2008,the downturn in the global economy resulted in a slowdown in the condominiumapartment sales at Porto Cupecoy compared to prior estimates.  Accordingly, OEH’s management concluded thatit was no longer possible to estimate reasonably total project sales proceedsand profits and, therefore, revenue on the Porto Cupecoy project could no longerbe recorded using the percentage-of-completion method under ASC 360-20.

 

Effective October 1, 2008, revenue on the PortoCupecoy project is accounted for as deposits until the criteria required by ASC360-20-40-50 are met.  Under this method,all project-related costs are accumulated on the balance sheet as real estateassets held for sale and all customer sales proceeds are deferred on thebalance sheet as deposits.

 

Revenue and costs previously recognized in OEH’sconsolidated statements of operations have been reversed in the three monthsended December 31, 2008, in the following amounts (dollars in thousands):

 
| ** **   | ** ** | **Three months ended**  | ** ** | **Year  ended**        | ** ** | **Three months ended** | ** ** | **Year  ended**     | ** ** | ** **              | ** ** |
|--------------|------------|-------------------------|------------|------------------------|------------|------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **   | ** ** | **September  30, 2007** | ** ** | **December  31, 2007** | ** ** | **December  31, 2007** | ** ** | **March 31,  2008** | ** ** | **June 30,  2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** | **Total  Reversal** | ** ** |
| ** **   | ** ** | ** **              | ** ** | ** **             | ** ** | ** **             | ** ** | ** **          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Revenue      |       | $                       | 10,671     |                   | $          | 4,669                  |       | $                   | 15,340     |                    | $          | 3,730 |   | $ | 4,413 |   | $ | 3,454 |   | $ | 11,597 |   | $ | 26,937 |   |
| Costs        |       | 7,660                   |       | 2,814                  |       | 10,474                 |       | 3,868               |       | 4,247                   |       | 3,101 |   | 11,216 |   | 21,690 |   |
| Gross profit |       | $                       | 3,011      |                   | $          | 1,855                  |       | $                   | 4,866      |                    | $          | (138 | ) | $ | 166 |   | $ | 353 |   | $ | 381 |   | $ | 5,247 |   |

 

*(i)**                                 **Earningsfrom unconsolidated companies*

 

Earnings from unconsolidated companies include OEH’sshare of the net earnings of its equity investments as well as interest incomerelated to loans and advances to the equity investees.  This interest income amounted to $nil in 2009(2008-$12,608,000; 2007-$11,807,000). See Note 3 regarding the consolidation ofCharleston Center LLC effective December 31, 2008.

 

*(j)**                                  **Marketingcosts*

 

Marketingcosts are expensed as incurred (except in the case of real estate projects, seeNote 1(q)) and are reported in selling, general and administrativeexpenses.  Marketing costs include costsof advertising and other marketing activities. These costs were $29,301,000 in 2009 (2008-$36,751,000;2007-$35,204,000).

 

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*Reclassificationof selling, general and administrative costs*

 

Certainexpenses including marketing costs that were previously recorded withinoperating expenses were reclassified into selling, general and administrativeexpenses to correct for an error in classification.  The balances reclassified were $6,131,000 forthe year ended December 31, 2008 (2007-$6,351,000) and had no impact onnet earnings, basic or diluted earnings per share, segment EBITDA, net assetsor retained earnings for all periods presented.

 

*(k)**                              **Interestexpense, net*

 

Interest expense, net includes $1,172,000 of interestincome in 2009 (2008-$1,597,000; 2007-$2,420,000). OEH capitalizes interestduring the construction of assets. Interest expense, net excludes interestwhich has been capitalized in the amount of $5,275,000 in 2009 (2008-$7,628,000;2007-$5,619,000).

 

*(l)**                                 **Foreigncurrency, net*

 

Foreign currency, net consists entirely of foreigncurrency exchange transaction loss of $1,058,000 in 2009 (2008 — gain of$4,774,000; 2007 — gain of $799,000).

 

*(m)**                            **Incometaxes*

 

OEH’s income tax expense, deferred tax assets andliabilities and reserves for uncertain tax positions reflect management’s bestassessment of estimated future taxes to be paid.   OEH is subject to income taxes in numerousforeign jurisdictions. The calculation of tax liabilities involves dealing withuncertainties in the application of complex tax laws and regulations in manyjurisdictions across OEH’s global operations. Significant judgments and estimates are required in determining theconsolidated income tax expense.

 

Deferred income taxes result from temporarydifferences between the financial reporting and tax bases of assets andliabilities.  Deferred taxes are recordedat enacted statutory rates and are adjusted as enacted rates change.Classification of deferred tax assets and liabilities corresponds with theclassification of the underlying assets and liabilities giving rise to thetemporary differences or the period of expected reversal, as applicable.  A valuation allowance is established, whennecessary, to reduce deferred tax assets to the amount that is more likely thannot to be realized based on available evidence.

 

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In evaluating OEH’s ability to recover deferred taxassets within the jurisdiction from which they arise, management considers allavailable positive and negative evidence, including scheduled reversals ofdeferred tax liabilities, projected future taxable income, tax planningstrategies and recent financial operations. In projecting future taxableincome, management begins with historical results adjusted for the results ofdiscontinued operations and changes in accounting policies, and incorporates assumptionsincluding the amount of future state, federal and foreign pretax operatingincome, the reversal of temporary differences, and the implementation offeasible and prudent tax planning strategies. These assumptions requiresignificant judgment in forecasting future taxable income and are consistentwith the plans and estimates OEH is using to manage the underlying businesses.In evaluating the objective evidence that historical results provide,management considers three years of cumulative operating income or loss.

 

Income tax positions must meet a more-likely-than-notthreshold to be recognized. Management recognizes tax liabilities in accordancewith U.S. generally accepted accounting principles applicable to uncertain taxpositions, and adjusts these liabilities when judgment changes as a result ofthe evaluation of new information not previously available. Due to thecomplexity of some of these uncertainties, the ultimate resolution may resultin a payment that is materially different from OEH’s current estimate of thetax liabilities. These differences will be reflected as increases or decreasesto income tax expense in the period in which they are determined.

 

*(n)**                              **Earningsper share*

 

Basic earnings per share exclude dilution and arecomputed by dividing net (loss)/earnings available to common shareholders bythe weighted average number of class A and B common shares outstanding for theperiod. The number of shares used in computing basic and diluted earnings pershare was as follows (in thousands):

 
| **Year ended December 31,** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |     |       |
| Basic                            |       | 68,046   |       | 43,443   |       | 42,390   |       |
| Effect of dilution               |       | —   |       | —   |       | 184      |       |
| Diluted                          |       | 68,046   |       | 43,443   |       | 42,574   |       |

 

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For theyears ended December 31, 2009 and 2008, all share options and share-basedawards were excluded from the calculation of the diluted weighted averagenumber of shares because OEH made a net loss in both years and the effect oftheir inclusion would be anti-dilutive. For the year ended December 31,2007, the effect of anti-dilutive share options and share-based awards has beenexcluded from the calculation of the diluted weighted average number of shares.The average number of share options and share-based awards excluded was asfollows:

 
| **Year ended December 31,** | ** ** | **2009**  | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|-----------|------------|----------|------------|----------|------------|
|                             |       |      |       |     |       |     |       |
| Share options                    |       | 1,367,530 |       | 611,235  |       | 1,580    |       |
| Share-based awards               |       | 363,373   |       | 60,628   |       | —   |       |
|                             |       | 1,730,903 |       | 671,863  |       | 1,580    |       |

 

The numbers ofstock options and share-based awards at December 31, 2009 were 2,350,422(2008 — 1,059,315; 2007 - 593,150).

 

*(o)**                              **Inventories*

 

Inventories include food, beverages,certain operating stocks and retail goods. Inventories are valued at the lower of cost or market value under thefirst-in, first-out method.

 

*(p)**                              **Property,plant and equipment, net*

 

Property, plant and equipment, net are stated at costless accumulated depreciation.  The costof significant renewals and betterments is capitalized and depreciated, whileexpenditures for normal maintenance and repairs are expensed as incurred.

 

Depreciation expense is computed using thestraight-line method over the following estimated useful lives:

 
| **Descriptions**                                          | ** ** | **Useful lives**                               |
|-----------------------------------------------------------|------------|------------------------------------------------|
| Buildings                                                 |       | Up to  60 years and 10% residual value         |
| Tourist  trains                                           |       | Up to  75 years                                |
| River  cruiseship and canalboats                          |       | 25  years                                      |
| Furniture,  fixtures and equipment                        |       | 5 to  25 years                                 |
| Equipment  under capital lease and leasehold improvements |       | Lesser  of initial lease term or economic life |

 

Art and certain antiques are not depreciated.

 

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*(q)**                              **Realestate assets*

 

Real estate assets consist primarily of inventorycosts of real estate property developments. Expenditures directly related to non-hotel real estate developments,such as real estate taxes and capital improvements, are capitalized.  Inventory costs of real estate developmentinclude construction costs and ancillary costs, which are expensed as realestate revenue is recorded.  Directselling costs, such as the costs of model apartments and their furnishings andsemi-permanent signs, are capitalized within the cost of real estate assets forsale.  Other costs directly associatedwith sales, such as direct sales commissions, are recorded as prepaid expensesand charged to expense in the period in which the related revenue is recognizedas earned.  Costs that do not meet thecriteria for capitalization, such as the salaries of sales personnel, generaland administrative expenses of the sales office, advertising and promotions,are expensed as incurred.  Land propertydevelopment costs are accumulated by project and are allocated to individualresidential units, principally using the relative sales value method.

 

*(r)**                                **Impairmentof long-lived assets*

 

In accordance with ASC 360-10-35 “Impairment orDisposal of Long-Lived Assets-Subsequent Measurement” (formerly SFAS 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets”), OEH management reviewslong-lived assets whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable.  In the event that an impairment occurs, OEHrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

*(s)**                                **Investments*

 

Investments include equity interests in and advancesto unconsolidated companies.

 

*(t)**                                 **Goodwilland other intangible assets*

 

In accordance with ASC 350 “Intangibles-Goodwill andOther” (formerly SFAS 142 “Goodwill and Other Intangible Assets”), goodwillmust be evaluated at least annually to determine impairment.  Goodwill is not amortized.  The goodwill impairmenttesting under ASC 350 is performed in two steps, first, the determination ofimpairment based upon the fair value of a reporting unit as compared with itscarrying value and, second, if there is an implied impairment, the measurementof the amount of impairment loss is determined by comparing the implied fairvalue of goodwill with the carrying amount of that goodwill.  Impairment testing is performed annually atyear end.  Other intangible assets withindefinite useful lives are also reviewed for impairment in accordance with ASC350.

 

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*(u)**                              **Concentrationof credit risk*

 

Due to the nature of the leisure industry,concentration of credit risk with respect to trade receivables is limited.  OEH’s customer base is comprised of numerouscustomers across different geographic areas.

 

*(v)**                               **Pensions*

 

OEH’s primarydefined benefit pension plan is accounted for using actuarial valuationsrequired by ASC 715-30 “Compensation-Retirement Benefits” (formerly SFAS 87 “Employers’Accounting for Pensions”, and SFAS 158 “Employers’ Accounting for DefinedBenefit Pension and Other Post-retirement Plans — An Amendment of FASBStatements No. 87, 88, 106 and 132(R)”). Net funded status is recognized on the balance sheet and anyunrecognized prior service costs, experience gains and losses, or transitionobligation are reported as a component of other comprehensive income inshareholders’ equity. See Note 11.

 

In determiningthe expected long-term rate of return on assets, management has reviewedanticipated future long-term performance of individual asset classes and theconsideration of the appropriate asset allocation strategy given theanticipated requirements of the plan to determine the average rate of earningsexpected on the funds invested.  Theprojected returns are based on broad equity and bond indices, including fixedinterest rate gilts (United Kingdom Government issued long-term securities) oflong-term duration since the plan operates in the U.K.

 

Managementreviews OEH’s actual asset allocation on an annual basis and rebalancesinvestments to targeted allocations when considered appropriate.  While the analysis considers recent fundperformance and historical returns, the assumption is primarily a long-term,prospective rate.

 

Management iscurrently monitoring and evaluating the level of pension contributions based onvarious factors that include investment performance, actuarial valuation andtax deductibility.

 

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*(w)**                            **Derivative financial instruments*

 

If a derivative instrument is notdesignated as a hedge for accounting purposes, the fluctuations in the fairvalue of the derivative are recorded in earnings.

 

If a derivative is designated as a fair value hedge,the changes in the fair value of the derivative and of the hedged itemattributable to the hedged risk are recognized in earnings.  If a derivative is designated as a cash flowhedge, the effective portions of changes in the fair value of the derivativeare recorded as a component of accumulated other comprehensive income/(loss) inshareholders’ equity and are recognized in the statement of consolidatedoperations when the hedged item affects earnings.  The ineffective portion of a hedgingderivative’s change in the fair value will be immediately recognized inearnings.

 

OEH managementformally documents all relationships between hedging instruments and hedgeditems, as well as its risk management objectives and strategies for undertakingvarious hedge transactions.  OEH linksall hedges that are designated as fair value hedges to specific assets orliabilities on the balance sheet or to specific firm commitments.  OEH links all hedges that are designated ascash flow hedges to forecasted transactions or to floating rate liabilities onthe balance sheet.  OEH management alsoassesses, both at the inception of the hedge and on an ongoing basis, whetherthe derivatives that are used in hedging transactions are highly effective inoffsetting changes in fair values or cash flows of hedged items.  Should it be determined that a derivative isnot highly effective as a hedge, OEH will discontinue hedge accountingprospectively.

 

OEH is exposed to interest rate risk on its floatingrate debt and management uses derivatives to manage the impact of interest ratechanges on earnings and cash flows.  OEH’spolicy is to enter into interest rate swap and interest rate cap agreementsfrom time to time to hedge the variability in interest rate cash flows onfloating rate debt.  These swapseffectively convert the floating rate interest payments on a portion of theoutstanding debt into fixed payments.

 

Hedges of net investments in foreign operations areaccounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effectiveportion of the hedge is recorded in other comprehensive income within foreigncurrency translation adjustment.  Thegain or loss relating to the ineffective portion will be recognized immediatelyin earnings within foreign currency gains and losses.  Gains and losses deferred in othercomprehensive income are recognized in earnings upon disposal of the foreignoperation.  OEH links all hedges that aredesignated as net investment hedges to specifically identified net investmentsin foreign subsidiaries.

 

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(x)                                   *Fairvalue accounting*

 

*ASC 820-10*

 

In September 2006, the FASB issued ASC 820-10 “FairValue Measurements and Disclosures” (formerly SFAS 157 “Fair Value Measurements”),which (i) applies to certain assets and liabilities that are beingmeasured and reported on a fair value basis, (ii) defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosure about fair valuemeasurements and (iii) enables the reader of the financial statements toassess the inputs to develop those measurements by establishing a hierarchy forranking the quality and reliability of the information used to determine fairvalues.

 

ASC 820-10 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 ASC 820-10 effective January 1,2008, except as it applies to those non-financial asset and non-financialliabilities as noted below.  There was nomaterial impact on the OEH’s financial statements from the adoption of thestandard.  The following tables summarizethe valuation of OEH’s assets and liabilities by the fair value hierarchy at December 31,2009 and 2008 (dollars in thousands):

 
| ** **                     | ** ** | **December 31, 2009** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets at fair  value:         |       |                       |       |   |   |   |   |   |   |
| Derivate financial instruments |       | $                          | —     |   | $ | 37 |   | $ | — |   | $ | 37 |   |
| Total assets                   |       | $                          | —     |   | $ | 37 |   | $ | — |   | $ | 37 |   |
| Liabilities at  fair value:    |       |                       |       |   |   |   |   |   |   |
| Derivate financial instruments |       | $                          | —     |   | $ | 13,618 |   | $ | — |   | $ | 13,618 |   |
| Total  liabilities             |       | $                          | —     |   | $ | 13,618 |   | $ | — |   | $ | 13,618 |   |

 

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| ** **                     | ** ** | **December 31, 2008** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets at fair  value:         |       |                       |       |   |   |   |   |   |   |
| Derivate financial instruments |       | $                          | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Total assets                   |       | $                          | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Liabilities at  fair value:    |       |                       |       |   |   |   |   |   |   |
| Derivate financial instruments |       | $                          | —     |   | $ | 6,823 |   | $ | 5,858 |   | $ | 12,681 |   |
| Total  liabilities             |       | $                          | —     |   | $ | 6,823 |   | $ | 5,858 |   | $ | 12,681 |   |

 

The tablebelow presents a reconciliation of the beginning and ending balances ofliabilities having fair value measurements based on significant unobservableinputs (Level 3) (dollars in thousands):

 
| ** **                       | ** ** | **Beginning  balance at  January 1,  2009** | ** ** | **Transfers  from  Level 3** | ** ** | **Realized  losses  included  in  earnings** | ** ** | **Unrealized  losses  included in  other  comprehensive  income** | ** ** | **Settlements** | ** ** | **Ending  balance  at  December  31, 2009** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------|------------|---------------------------------------------|------------|
| Liabilities at fair value:       |       |                                             |       |                         |       |                                         |       |                                                              |       |            |       |                                        |       |
| Derivative financial instruments |       | $                                                | 5,858      |                         | $          | (5,202                                       | )          | $                                                                 | 1,405      |            | $          | (671                                        | )          | $ | (1,390 | ) | $ | — |   |
| Total liabilities                |       | $                                                | 5,858      |                         | $          | (5,202                                       | )          | $                                                                 | 1,405      |            | $          | (671                                        | )          | $ | (1,390 | ) | $ | — |   |

 

OEH reviewsits fair value hierarchy classifications quarterly.  Changes in significant observable valuationinputs identified during these reviews may trigger reclassification of fairvalue hierarchy levels of financial assets and liabilities.  These reclassifications are reported astransfers in Level 3 at their fair values at the beginning of the period inwhich the change occurs and the transfers out at their fair values at the endof the period.  The amount of totallosses for the year ended December 31, 2009 included in earnings that areattributable to the change in unrealized gains or losses relating to thoseliabilities still held was $15,000.

 

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

 

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*ASC 825-10*

 

The Company adopted ASC 825-10 “Financial Instruments”(formerly SFAS 159 “The Fair Value Option for Financial Assets and FinancialLiabilities”) effective January 1, 2009 which had no material impact onOEH’s financial statements.

 

*(y)**                               **Recentaccounting pronouncements*

 

*ASC 810*

 

Effective January 1, 2009, OEH hasimplemented ASC 810 “Consolidations” (formerly SFAS 160 “Non-ControllingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”).Non-controlling interests have been classified as a component of equity for allperiods presented and the statements of consolidated equity have been amendedaccordingly. No further disclosures have been made as the impact on thestatements of consolidated operations from the non-controlling interests is notdeemed material.

 

*ASC810-10*

 

In June 2009, the FASB issued SFAS 167 “Amendments to FASBInterpretation No. 46(R)” which amends the consolidation guidance thatapplies to variable interest entities. The amendments will significantly affectthe overall consolidation analysis under ASC 810-10 “Consolidation”. While theFASB’s discussions leading up to the issuance of SFAS 167 focused extensivelyon structured finance entities, the amendments to the consolidation guidanceaffect all entities and enterprises currently within the scope of ASC 810-10,as well as qualifying special-purpose entities that are currently outside thescope of ASC 810-10. Accordingly, an enterprise will need to reconsider carefullyits previous ASC 810-10 conclusions, including (1) whether an entity is avariable interest entity, (2) whether the enterprise is the entity’s  primary beneficiary, and (3) what typeof financial statement disclosures are required. SFAS 167 is effective as ofthe beginning of the first fiscal year that begins after November 15,2009. Early adoption is prohibited. The Company is evaluating the effects ofthe adoption of SFAS 167.

 

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*ASU 2009-13*

 

In October 2009,the FASB issued ASU 2009-13 “Revenue Recognition” on multiple-deliverablerevenue arrangements. ASU 2009-13 codifies the consensus in EITF Issue 08-1,which supersedes Issue 00-21 (codified in ASC 605-25). The ASU was issued inresponse to concerns related to the accounting for revenue arrangements withmultiple deliverables under Issue 00-21 and applies to all deliverables incontractual arrangements in all industries in which a vendor will performmultiple revenue-generating activities, except when some or all deliverables ina multiple-deliverable arrangement are within the scope of other, more specificsections of the ASC (e.g., ASCs 840, 952, 360-20 (pre-ASC guidance from SFAS13, 45, and 66) and other sections of ASC 605 on revenue recognition (e.g.,pre-ASC guidance from SOPs 81-1 and 97-2)).

 

Specifically, ASU 2009-13 addresses the unit of accounting forarrangements involving multiple deliverables. It also addresses how arrangementconsideration should be allocated to the separate units of accounting, whenapplicable. However, guidance on determining when the criteria for revenuerecognition are met and on how an entity should recognize revenue for a givenunit of accounting is located in other sections of the ASC (e.g., SAB Topic13). Although the ASU retains the criteria from Issue 00-21 for determiningwhen delivered items in a multiple-deliverable arrangement should be consideredseparate units of accounting, it removes the previous separation criterionunder Issue 00-21 that objective and reliable evidence of the fair value of anyundelivered items must exist for the delivered items to be considered aseparate unit or separate units of accounting.

 

ASU 2009-13 is effective for fiscal years beginning on or after June 15,2010. Entities can elect to apply the ASU (1) prospectively to new ormaterially modified arrangements after its effective date or (2) retrospectivelyfor all periods presented. Early adoption is permitted. However, if an entityelects prospective application and adopts the ASU early after its first interimreporting period, it must also retrospectively apply the ASU as of thebeginning of that fiscal year and disclose the effect of the retrospectiveadjustments on the prior interim periods’ revenue, income before taxes, netincome, and earnings per share. ****TheCompany does not expect any material impact from the adoption of the ASU****.

 

****2.********                                     ********Discontinued operations****

 

*(a) Lapa Palace Hotelsale*

 

On June 2,2009, OEH sold the shares in its Lapa Palace Hotel subsidiary in Lisbon,Portugal for $41,983,000. The hotel was a part of OEH’s hotels and restaurantssegment.  Of the sale price, $26,287,000was received in cash on the date of sale and the remaining $15,696,000 has beendeferred until 2010 and is secured by a Portuguese bank guarantee. The disposalresulted in a gain on sale of $4,826,000 which is reported within losses fromdiscontinued operations, net of tax.

 

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

 
| **** ****                                | **** **** | ****June 2,********2009**** | **** **** |
|-----------------------------------------------|----------------|----------------------------------|----------------|
| **** ****                                | **** **** | **** ****                   | **** **** |
| ****Cash****                                  |           | $                                | 1,303          |   |
| ****Property, plant and equipment,  net****   | **** **** | ****43,333****                   | **** **** |
| Net working capital deficit                   |           | (281                             | )              |
| Loans                                         |           | (715                             | )              |
| Deferred taxation                             |           | (965                             | )              |
| Net assets                                    |           | 42,675                           |           |
| Reversal of foreign currency translation gain | **** **** | (6,719                           | )              |
|                                          |           | 35,956                           |           |
| Consideration:                                | **** **** | **** ****                   | **** **** |
| Cash                                          |           | 26,287                           |           |
| Deferred, discounted to present value         |           | 15,394                           |           |
| Less: costs to sell                           |           | (899                             | )              |
|                                          |           | 40,782                           |           |
|                                          |           |                             |           |
| Gain on sale                                  |           | $                                | 4,826          |   |

 

****Results of discontinued operations of the Lapa Palace Hotel are asfollows (dollars in thousands):****

 
| ****Years  ended December 31****                         | ** **     | ****2009****   | ** **     | ****2008****   | ** **     | ****2007****   | ** **     |
|---------------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                                | **** **** | **** **** | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                               | **** **** | ****$****      | ****2,860****  | **** **** | ****$****      | ****12,457**** | **** **** | ****$**** | ****13,167**** | **** **** |
| ****(Loss)/ earnings before tax and********gain on sale****   | **** **** | ****$****      | ****(827****   | ****)****      | ****$****      | ****(964****   | ****)****      | ****$**** | ****662**** | **** **** |
| ****Gain on sale****                                          | **** **** | ****4,826****  | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Income before tax****                                     | **** **** | ****3,999****  | **** **** | ****(964****   | ****)****      | ****662****    | **** **** |
| ****Tax****                                                   | **** **** | ****—**** | **** **** | ****(711****   | ****)****      | ****(259****   | ****)****      |
| ****Net gain /(loss) from  discontinued********operations**** | **** **** | ****$****      | ****3,999****  | **** **** | ****$****      | ****(1,675**** | ****)****      | ****$**** | ****403**** | **** **** |

 

*(b) Windsor Court Hotelsale*

 

On October 2,2009, OEH sold the net assets of the Windsor Court Hotel, in New Orleans,Louisiana for a cash consideration of $44,250,000. The hotel was a part of OEH’shotels and restaurants segment.  Thedisposal resulted in a loss on sale of $1,089,000 which is reported withinlosses from discontinued operations, net of tax.

 

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

 
| ** **                                  | ** **     | **October 2, 2009** | ** **     |
|---------------------------------------------|----------------|--------------------------|----------------|
| **** ****                              | **** **** | **** ****           | **** **** |
| ****Property, plant and equipment,  net**** |           | $                        | 43,040         |   |
| Net working capital surplus                 |           | 928                      |           |
| Deferred costs                              |           | 459                      |           |
| Net assets                                  |           | 44,427                   |           |
| Consideration:                              | **** **** | **** ****           | **** **** |
| Cash                                        |           | 44,250                   |           |
| Less: working capital adjustment            |           | (266                     | )              |
| Less: costs to sell                         |           | (646                     | )              |
|                                        |           | 43,338                   |           |
|                                        |           |                     |           |
| Loss on sale                                |           | $                        | 1,089          |   |

 

****Results of discontinued operations of the Windsor Court Hotel are asfollows (dollars in thousands):****

 
| ****Years  ended December 31****                | ** **     | ****2009****    | ** **      | ****2008****   | ** **     | ****2007****   | ** **     |
|------------------------------------------------------|----------------|-----------------|-----------------|----------------|----------------|----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****16,963****  | **** **** | ****$****      | ****23,904**** | **** **** | ****$**** | ****25,154**** | **** **** |
| ****Losses before tax and loss on********sale****    | **** **** | ****$****       | ****(25,597**** | ****)****      | ****$****      | ****(7,052**** | ****)****      | ****$**** | ****(3,013**** | ****)**** |
| ****Loss on sale****                                 | **** **** | ****(1,089****  | ****)****       | ****—**** | **** **** | ****—**** | **** **** |
| ****Losses before tax****                            | **** **** | ****(26,686**** | ****)****       | ****(7,052**** | ****)****      | ****(3,013**** | ****)****      |
| ****Tax benefit****                                  | **** **** | ****6,114****   | **** ****  | ****2,302****  | **** **** | ****1,399****  | **** **** |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(20,572**** | ****)****      | ****$****      | ****(4,750**** | ****)****      | ****$**** | ****(1,614**** | ****)**** |

 

*(c) Assets held for sale:Bora Bora Lagoon Resort, Lilianfels Blue Mountains and La Cabana*

 

****During the fourth quarter of 2007, OEH decided to sell its investmentin Bora Bora Lagoon Resort. The asset is being actively marketed and isexpected to be disposed of within a year. In December 2009, OEH signed anagreement to sell Lilianfels Blue Mountains in Katoomba, New South Wales,Australia for A$21,000,000 ($19,300,000). This sale was completed on January 29,2010. Also in December 2009, OEH signed an agreement to sell La Cabanarestaurant in Buenos Aires for $2,700,000. Completion of this sale is scheduledto take place by March 2010.****

 

****The hotels and restaurant have been classified as held for sale andtheir results have been presented as discontinued operations for all theperiods presented.****

 

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

 
| ****Years  ended December 31****                | ** **     | ****2009****    | ** **      | ****2008****    | ** **     | ****2007****    | ** **     |
|------------------------------------------------------|----------------|-----------------|-----------------|-----------------|----------------|-----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** ****  | **** **** | **** ****  | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****17,776****  | **** ****  | ****$****      | ****19,892****  | **** **** | ****$**** | ****22,720**** | **** **** |
| ****Loss before tax and********impairment****        | **** **** | ****$****       | ****(2,559****  | ****)****       | ****$****      | ****(6,009****  | ****)****      | ****$**** | ****(3,131**** | ****)**** |
| ****Impairment loss****                              | **** **** | ****(32,235**** | ****)****       | ****(12,000**** | ****)****      | ****(13,992**** | ****)****      |
| ****Loss before tax****                              | **** **** | ****(34,794**** | ****)****       | ****(18,009**** | ****)****      | ****(17,123**** | ****)****      |
| ****Tax benefit/(provision)****                      | **** **** | ****1,847****   | **** ****  | ****(3,201****  | ****)****      | ****(2,000****  | ****)****      |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(32,947**** | ****)****       | ****$****      | ****(21,210**** | ****)****      | ****$**** | ****(19,123**** | ****)**** |

 

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

**** ****
| ****Years  ended December 31****                              | ** **     | ****2009****   | ** **      | ****2008****    | ** **     |
|--------------------------------------------------------------------|----------------|----------------|-----------------|-----------------|----------------|
| **** ****                                                     | **** **** | **** **** | **** ****  | **** ****  | **** **** |
| ****Current assets****                                             | **** **** | ****$****      | ****5,701****   | **** ****  | ****$****      | ****11,020**** | **** **** |
| ****Other assets****                                               | **** **** | ****118****    | **** ****  | ****1,539****   | **** **** |
| ****Property, plant and equipment,  net of********depreciation**** | **** **** | ****35,951**** | **** ****  | ****168,371**** | **** **** |
| ****Total assets held for sale****                                 | **** **** | ****$****      | ****41,770****  | **** ****  | ****$****      | ****180,930**** | **** **** |
| ****Liabilities held for sale****                                  | **** **** | ****$****      | ****(11,847**** | ****)****       | ****$****      | ****(86,410**** | ****)**** |

 

Prior yearcomparatives include balances of Lapa Palace Hotel which was sold in June 2009:$1,547,000 of current assets, $1,016,000 of other assets, $42,761,000 of fixedassets and $19,921,000 of liabilities. Prior year comparatives also includebalances of Windsor Court Hotel which was sold in October 2009: $5,276,000of current assets, $390,000 of other assets, $65,245,000 of fixed assets and$53,704,000 of liabilities.

 

****3.********                                     ********Consolidation of variable interest entity — Charleston Place Hotel****

 

****OEH holds a 19.9% equity investment in CharlestonCenter LLC, owner of Charleston Place Hotel. It has also made a number of loans to the hotel.  On evaluating its various variable interestsin the hotel, OEH concluded that effective December 31, 2008, the hotel nolonger qualified for certain scope exemptions under****ASC 810-10 “Consolidation-VariableInterest Entities” (formerly FIN 46(R) “Consolidation of Variable Interest Entities”), because OEH’s share of loansprovided to the hotel had increased and OEH provided a

 

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majority ofsubordinated financial support.****  OEH further concluded that OEH is the primarybeneficiary of the variable interest entity as defined in ASC 810-10****because it is expected toabsorb a majority of the entity’s residual gains or losses based on the currentorganizational structure.  OEH has****consolidated the entity effective December 31,2008. Previously the entity had been accounted for under the equity method ofaccounting.****

 

****The assets and liabilities of Charleston Place Hotelhave been consolidated into the financial statements at their fair value as at December 31,2008 which were as follows (dollars in thousands):****

**** ****
| **** ****                                                 | **** **** | ****December 31, 2008**** | **** **** |
|----------------------------------------------------------------|----------------|--------------------------------|----------------|
| **** ****                                                 | **** **** | **** ****                 | **** **** |
| ****Current  assets****                                        | **** **** | ****$****                      | ****4,937****  | **** **** |
| ****Other  assets****                                          | **** **** | ****1,824****                  | **** **** |
| ****Property,  plant and equipment****                         | **** **** | ****196,650****                | **** **** |
| ****Goodwill****                                               | **** **** | ****40,395****                 | **** **** |
| ****Total  assets****                                          | **** **** | ****243,806****                | **** **** |
| **** ****                                                 | **** **** | **** ****                 | **** **** |
| ****Current  liabilities****                                   | **** **** | ****(5,373****                 | ****)****      |
| ****Third-party  debt****                                      | **** **** | ****(79,626****                | ****)****      |
| ****Deferred  income taxes****                                 | **** **** | ****(64,100****                | ****)****      |
| ****Other  liabilities****                                     | **** **** | ****(12,306****                | ****)****      |
| ****Total  liabilities****                                     | **** **** | ****(161,405****               | ****)****      |
| **** ****                                                 | **** **** | **** ****                 | **** **** |
| ****Net  assets (before amounts payable to OEH of $97,000)**** | **** **** | ****$****                      | ****82,401**** | **** **** |
| ****Book  value of OEH’s variable interest****            | **** **** | ****$****                      | ****82,401**** | **** **** |

 

****Goodwill represents theexcess of the reported amount of the previously held interests and the fairvalue of the newly consolidated liabilities and non-controlling interests, overthe fair value of the newly consolidated identifiable assets.  The fair value of the non-controllinginterests has been treated as $nil since the hotel has net liabilities.****

 

****The net assets have beenfair valued based on the estimated market values of the hotel’sproperties.  After fair valuing all otherassets and liabilities, goodwill of $40,395,000 has been recorded of which $nilwill be deductible as operating expenses for tax purposes.****

 

****The third-party debt ofCharleston Center LLC is non-recourse to its members, including OEH, andtherefore the hotel’s separate assets are not available to pay the debts of OEHand the hotel’s separate liabilities do not constitute obligations of OEH.****

 

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****The results of theoperation of Charleston Place Hotel were included in the consolidated financialstatements of OEH from January 1, 2009 and therefore any intercompanytransactions were eliminated from that date.****

 

****The proforma results ofoperations data presented below assume that consolidation of the hotel had beenmade at the beginning of 2007 (dollars in thousands, except per share amounts):****

 
| **** ****                      | **** **** | **Year ended December 31,** | **** ****  |
|-------------------------------------|----------------|----------------------------------|-----------------|
| **** ****                      | **** **** | ****2008****                     | **** ****  | ****2007**** | **** **** |
| **** ****                      | **** **** | **** ****                   | **** ****  | **** **** | **** **** |
| ****Revenue****                     | **** **** | ****$****                        | ****608,432**** | **** **** | ****$**** | ****641,131**** | **** **** |
| ****Net  (loss)/earnings:****       | **** **** | ****$****                        | ****(34,354**** | ****)**** | ****$**** | ****25,537**** | **** **** |
| ****(Loss)/earnings  per share:**** | **** **** | **** ****                   | **** ****  | **** **** | **** **** |
| ****Basic****                       | **** **** | ****$****                        | ****(0.79****   | ****)**** | ****$**** | ****0.60**** | **** **** |
| ****Diluted****                     | **** **** | ****$****                        | ****(0.79****   | ****)**** | ****$**** | ****0.60**** | **** **** |

 

**4.****                                     ****Significant acquisitions, dispositions****andinvestments**

 

*(a)**                              **Acquisitions*

 

*2009 Acquisition*

 

*The Governor’s Residence non-controlling interest*

 

Effective November 30,2009, OEH purchased the remaining 35% non-controlling interest in The Governor’sResidence in Rangoon, Burma it did not own for a cash consideration of$340,000, including transaction costs, bringing its interest to 100%. Resultsin 2009 prior to the purchase of the remaining interest were a loss of$185,000.

 

*2008 Acquisitions*

 

*Casa de Sierra Nevadanon-controlling interest*

 

On March 7, 2008, OEH agreed to acceleratethe purchase of the 20% non-controlling interest in Casa de Sierra Nevada itdid not own for a cash consideration of $2,329,000.  Following guidance in ASC 480-10 “DistinguishingLiabilities from Equity” (formerly SFAS 150 “Accounting for Certain FinancialInstruments with 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”),deferred consideration 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.

 

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*La Samanna Spa*

 

On March 14, 2008, the subsidiary of OEHthat owns La Samanna agreed to terminate the existing lease with the thirdparty operator of the spa on the hotel’s premises and to transfer theemployees, equipment and other assets of the spa to La Samanna effective April 1,2008 for a cash consideration of $650,000.

 

The following table summarizes the fair valueof the net assets acquired at the date of acquisition (dollars in thousands):

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

 

Equipment of the spa has been fair valued basedon the estimated replacement cost. Goodwill of $630,000 has been recorded of which $nil will be deductibleas operating expenses for tax purposes. This acquisition enabled OEH to take control of the spa operation andreceive 100% of operating revenues that the business is expected to generate infuture years, which contributed to the purchase price and resulted in goodwill.

 

The acquisition of the spa has been accountedfor as a purchase.  The results of theoperation have been included in the consolidated financial statements of OEHfrom March 14, 2008.

 

OEH’s results would not have been materiallydifferent had these acquisitions in 2008 occurred at the beginning of the year.

 

*2007 Acquisitions*

 

*Afloatin France*

 

On April 12,2007, OEH exercised its option to acquire the remaining 50% it did not own inthe company operating the Afloat in France canal and river cruise business, fora cash consideration of $2,700,000, bringing OEH’s investment to 100% ownership.

 

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The followingtable summarizes the fair values of the 50% share of the assets acquired andliabilities assumed at the date of acquisition (dollars in thousands).

 
| ** **                           | ** ** | **April 12, 2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
|                                 |       |                    |       |
| Goodwill and other intangible assets |       | $                       | 3,876      |   |
| Total assets acquired                |       | 3,876                   |       |
|                                 |       |                    |       |
| Current liabilities                  |       | (1,176                  | )          |
| Total liabilities assumed            |       | (1,176                  | )          |
| Net assets acquired                  |       | $                       | 2,700      |   |
|                                 |       |                    |       |
| Cash consideration                   |       | $                       | 2,700      |   |

 

OEH’s combinedinvestments in the Afloat in France business result in total goodwill asfollows (dollars in thousands):

 
| ** **                                                        | ** ** | **April 12, 2007** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
|                                                              |       |                    |       |
| Purchase price paid for the initial 50%, less  accumulated losses |       | $                       | 251        |   |
| Purchase price of the second 50% interest                         |       | 2,700                   |       |
|                                                              |       | 2,951                   |       |
| Add:                                                              |       |                    |       |
| Fair value of liabilities assumed                                 |       | 2,353                   |       |
| Less:                                                             |       |                    |       |
| Fair value of assets acquired                                     |       | —                  |       |
| Total goodwill                                                    |       | $                       | 5,304      |   |

 

The canalboatsoperated by the acquired company had been purchased by OEH in 2004 and leasedto the operating company.  Goodwill andother intangible assets of $5,304,000 has been recorded, of which $nil will bedeductible as operating expenses for tax purposes.  This acquisition enabled OEH to take fullcontrol of the Afloat in France operation and to receive 100% of operatingrevenues that the business is expected to generate in future years, whichcontributed to the purchase price and resulted in goodwill.

 

Theacquisition of Afloat in France has been accounted for as a purchase.  The results of the operation have beenincluded in the consolidated financial statements of OEH from April 12,2007.

 

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*RoyalScotsman*

 

On April 25,2007, OEH exercised its option to acquire the remaining 50% it did not own inthe company owning and operating the Royal Scotsman tourist train, for a cashconsideration of £1,375,000 (equivalent to $2,711,000), bringing OEH’sinvestment to 100% ownership.

 

The followingtable summarizes the fair values of the 50% share of the assets acquired andliabilities assumed at the date of acquisition (dollars in thousands):

 
| ** **                           | ** ** | **April 25, 2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
|                                 |       |                    |       |
| Goodwill and other intangible assets |       | $                       | 1,656      |   |
| Property, plant and equipment        |       | 3,327                   |       |
| Current assets                       |       | 47                      |       |
| Total assets acquired                |       | 5,030                   |       |
|                                 |       |                    |       |
| Current liabilities                  |       | (921                    | )          |
| Deferred tax liabilities             |       | (371                    | )          |
| Long-term debt                       |       | (1,027                  | )          |
| Total liabilities assumed            |       | (2,319                  | )          |
| Net assets acquired                  |       | $                       | 2,711      |   |
|                                 |       |                    |       |
| Cash consideration                   |       | $                       | 2,711      |   |

 

OEH’s combinedinvestments in the Royal Scotsman business result in total goodwill as follows(dollars in thousands):

 
| ** **                                                        | ** ** | **April 25, 2007** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
|                                                              |       |                         |       |
| Purchase price paid for the initial 50%, plus accumulated profits |       | $                            | 1,409      |   |
| Purchase price of the second 50% interest                         |       | 2,711                        |       |
|                                                              |       | 4,120                        |       |
| Add:                                                              |       |                         |       |
| Fair value of liabilities assumed                                 |       | 4,853                        |       |
| Less:                                                             |       |                         |       |
| Fair value of assets acquired                                     |       | (7,224                       | )          |
| Total goodwill                                                    |       | $                            | 1,749      |   |

 

Property,plant and equipment of the Royal Scotsman have been fair valued based on theestimated replacement cost of the train. Goodwill of $1,749,000 has been recorded of which $nil will bedeductible as operating expenses for tax purposes.  This acquisition enabled OEH to take fullcontrol of the Royal Scotsman 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.

 

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Theacquisition of the Royal Scotsman has been accounted for as a purchase.  The results of the operation have beenincluded in the consolidated financial statements of OEH from April 25,2007.

 

*La Résidence Phou Vao non-controlling interestinterest*

 

Effective March 10,2007, OEH purchased an additional 18% interest in La Résidence Phou Vao**in Luang Prabang, Laos for a cash consideration of$626,000, including transaction costs, bringing its total interest to 69%.  A deferred tax liability of $83,000 has beenrecorded on the acquisition arising mainly on the fair value adjustment toassets of $236,000.  Goodwill has beenincreased by $178,000.

 

*Finalretention payment relating to Grand Hotel Europe*

 

In March 2007,a final retention payment of $2,850,000 plus accrued interest of $218,000 hasbeen made in accordance with the original agreement for the acquisition of GrandHotel Europe in St. Petersburg completed in February 2005.

 

*(b)**                              **Investments*

 

In June 2007,OEH acquired 50% of a company holding real estate in Buzios, Brazil, for a cashconsideration of $5,000,000.  OEH plannedto build a hotel and villas on the acquired land.  The remaining 50% of the property holdingcompany was expected to be sold to OEH for a cash consideration of $5,000,000when the building permits were obtained from the local authorities. In February 2009,the Municipality of Buzios designated the property as having a “public interest”which is the first step in a process for the compulsory purchase of the land bythe municipality in exchange for a payment of fair compensation to the owners. OEHis currently in negotiation to recover its investment in the project based onthe municipality’s decision to purchase the land.

 

Investmentsrepresent equity interests of 50% or less and in which OEH exerts significantinfluence but does not consolidate.  OEHdoes not have effective control of these unconsolidated companies and,therefore, accounts for these investments using the equity method.

 

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OEH’s investments in and loans and advances tounconsolidated companies amounted to $68,762,000 at December 31, 2009(2008-$67,464,000). OEH’s earnings from unconsolidated companies, net of taxwere $4,183,000 in 2009 (2008-$16,771,000; 2007-$16,425,000).  See Note 20.

 

As discussed in Note 3, Charleston Center LLC has beenconsolidated into the financial statements of OEH with effect from December 31,2008.  The summarized balance sheetinformation presented below, therefore, does not include this hotel at December 31,2008.  The summarized profit and lossaccount information presented does include OEH’S earnings from this hotel forthe years ended December 31, 2008 and 2007.

 

Summarized financial data for unconsolidated companiesare as follows (dollars in thousands):

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Current assets                                   |       | $                     | 64,040     |   | $ | 55,877 |   |
| Property, plant  and equipment, net              |       | 347,198               |       | 307,745 |   |
| Other assets                                     |       | 5,050                 |       | 5,124 |   |
| Total assets                                     |       | $                     | 416,288    |   | $ | 368,746 |   |
|                                             |       |                  |       |   |   |
| Current  liabilities                             |       | $                     | 45,581     |   | $ | 30,293 |   |
| Long-term debt                                   |       | 175,487               |       | 165,202 |   |
| Other  liabilities                               |       | 71,271                |       | 46,028 |   |
| Total  shareholders’ equity                 |       | 123,949               |       | 127,223 |   |
| Total  liabilities and shareholders’ equity |       | $                     | 416,288    |   | $ | 368,746 |   |

 
| ** **                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue                                           |       | $        | 125,173    |     | $          | 209,093  |       | $ | 196,564 |   |
| Earnings from  operations beforenet finance costs |       | $        | 22,497     |     | $          | 44,789   |       | $ | 40,979 |   |
| Net earnings                                      |       | $        | 8,659      |     | $          | 8,645    |       | $ | 7,472 |   |

 

Included in unconsolidated companies are the Peruhotel and PeruRail joint ventures, under which OEH and the other 50%participant must contribute equally additional equity capital needed for thebusinesses.  If the other participantdoes not meet this obligation, OEH has the right to dilute the otherparticipant and obtain a majority equity interest in the affected joint venturecompany.  OEH also has rights to purchasethe other participant’s interests, exercisable in limited circumstances such asits bankruptcy.

 

Due to the downturn in the travel and hospitalityindustry in Europe and elsewhere, operating results of Hotel Ritz in Madridwere lower than expected in the three months ended December 31, 2008.  The earnings forecast for the next few yearswas revised and an impairment assessment performed on OEH’s 50% investment inthe hotel company.  At December 31,2008, an impairment loss of $22,992,000 was recognized relating to OEH’sinvestment in this hotel.  The fair valueof OEH’s investment was estimated using the hotel’s discounted future cash flowforecasts. No impairments were recorded in 2009.

 

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As a consequence of the impairment loss recognized byOEH relating to its equity investment in Hotel Ritz in 2008, the joint venturecompany Hotel Ritz Madrid S.A. qualified as a significant subsidiary of OEHunder Rule 3-09 of SEC Regulation S-X at December 31, 2008 andrequires inclusion of separate financial statements.

 

As a consequence of lower earnings from continuingoperations before tax of OEH in 2009, the joint venture companies Hotel RitzMadrid S.A., Peru OEH S.A., PeruRail S.A. and Ferrocarril Transandino S.A. allqualified as significant subsidiaries of OEH under Rule 3-09 of SECRegulation S-X at December 31, 2009 and require inclusion of separatefinancial statements.

 

**5.****            ****Property,plant and equipment, net**

 

The major classes of property, plant and equipment areas follows (dollars in thousands):

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Land and buildings                      |       | $                     | 1,258,443  |   | $ | 1,176,821 |   |
| Machinery and equipment                 |       | 185,548               |       | 184,762 |   |
| Fixtures, fittings and office equipment |       | 196,264               |       | 164,517 |   |
| River cruiseship and canalboats         |       | 18,736                |       | 13,223 |   |
|                                    |       | 1,658,991             |       | 1,539,323 |   |
| Less: accumulated depreciation          |       | (255,218              | )          | (209,368 | ) |
|                                    |       | $                     | 1,403,773  |   | $ | 1,329,955 |   |

 

The major classes of assets under capitalleases included above are as follows (dollars in thousands):

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Freehold and leased land and buildings  |       | $                     | 15,821     |   | $ | 15,535 |   |
| Machinery and equipment                 |       | 2,640                 |       | 2,189 |   |
| Fixtures, fittings and office equipment |       | 2,746                 |       | 2,795 |   |
|                                    |       | 21,207                |       | 20,519 |   |
| Less: accumulated depreciation          |       | (4,782                | )          | (4,046 | ) |
|                                    |       | $                     | 16,425     |   | $ | 16,473 |   |

 

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**6.            Goodwill**

 

The changes in the carrying amount of goodwill for the years ended December 31,2009 and 2008 are as follows (dollars in thousands):

 
| ** **                                        | ** ** | **Year ended December 31, 2009** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **Hotels &  Restaurants**    | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
| Balance as of  January 1, 2009               |       | $                                     | 145,829    |   | $ | 7,673 |   | $ | 153,502 |   |
| Goodwill  impairment (from continuing operations) |       | (6,287                                | )          | — |   | (6,287 | ) |
| Foreign currency  translation adjustment          |       | 1,684                                 |       | 281 |   | 1,965 |   |
| Balance as at  December 31, 2009             |       | $                                     | 141,226    |   | $ | 7,954 |   | $ | 149,180 |   |

 
| ** **                                        | ** ** | **Year ended December 31, 2008** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **Hotels &  Restaurants**    | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
| Balance as of  January 1, 2008               |       | $                                     | 120,932    |   | $ | 8,196 |   | $ | 129,128 |   |
| Goodwill arising  during the year                 |       | 42,020                                |       | — |   | 42,020 |   |
| Goodwill  impairment (from continuing operations) |       | (5,636                                | )          | — |   | (5,636 | ) |
| Foreign currency  translation adjustment          |       | (11,487                               | )          | (523 | ) | (12,010 | ) |
| Balance as at  December 31, 2008             |       | $                                     | 145,829    |   | $ | 7,673 |   | $ | 153,502 |   |

 

The grossgoodwill amount at January 1, 2009 was $159,138,000 (January 1, 2008-$129,128,000) and the accumulated impairment at that date was $5,636,000 (2008-$nil). All impairments to that date related to hotel and restaurant operations.

 

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

 

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Thedetermination of impairment incorporates various assumptions and uncertaintiesthat OEH believes are reasonable and supportable considering all availableevidence, such as the future cash flows of the business, future growth ratesand the related discount rate. However, these assumptions and uncertaintiesare, by their very nature, highly judgmental. If the assumptions are not met, OEH may be required to recognizeadditional goodwill impairment losses.

 

OEH did nothave any goodwill impairment charges as part of its annual impairment testingas of December 31, 2009.  Under thefirst step of the 2009 testing, the fair value of one reporting unit wasapproximately 5% in excess of its carrying value.  That reporting unit has goodwill of $5,400,000.  The fair values of two other reporting unitswere approximately 10% in excess of their carrying values.  Those reporting units have $3,700,000 ofgoodwill.

 

During thefirst quarter of 2009, OEH finalized its 2008 impairment analysis andidentified a non-cash goodwill impairment charge of $6,287,000 in addition tothe estimated impairment loss of $5,636,000 included in its annual December 31,2008 results referred to below, as follows (dollars in thousands):

 
| Miraflores Park       |   | $     | 3,208       |   |
|-----------------------|--------|-------|-------------|--------|
| Casa de Sierra Nevada |   | 2,805 |        |
| Observatory Hotel     |   | 274   |        |
|                  |   | $     |  6,287 |   |

 

In addition,an impairment charge of $213,000 was made in respect of tradenames owned by theCasa de Sierra Nevada, bringing the total impairment charge to $6,500,000 inthe year ended December 31, 2009.

 

At the date offiling the Company’s annual report on Form 10-K for the year ended December 31,2008, OEH had not completed its impairment analysis.  Based on the work performed, however, OEH concludedthat an impairment loss could be reasonably estimated and recorded a non-cashgoodwill impairment charge in continuing operations of $5,636,000 representingits best estimate of the impairment loss present at December 31, 2008, asfollows (dollars in thousands):

 
| Le Manoir aux Quat’  Saisons |   | $   | 5,270  |   |
|-----------------------------------|--------|-----|--------|--------|
| Hôtel de la Cité        |   | 85  |   |
| Keswick Hall                      |   | 281 |   |
|                              |   | $   | 5,636  |   |

 

The impairmentcharge of $6,107,000 in the year ended December 31, 2008 included animpairment charge of $471,000 in respect of a shop lease intangible asset at****Hôtel de la Cité.

 

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**7.****                                     ****Otherintangible assets**

 

Otherintangible assets consist of the following as of December 31, 2009 and2008 (dollars in thousands):

 
| ** **                              | ** ** | **Year ended December 31, 2009** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Favorable  lease  assets**          | ** ** | **Internet  Sites** | ** ** | **Tradename** | ** ** | **Total** | ** ** |
| Carrying amount:                        |       |                                  |       |   |   |   |   |   |   |
| Balance as of January 1, 2009      |       | $                                     | 11,925     |   | $ | 1,967 |   | $ | 7,318 |   | $ | 21,210 |   |
| Additions                               |       | —                                |       | 437 |   | — |   | 437 |   |
| Impairment                              |       | —                                |       | — |   | (213 | ) | (213 | ) |
| Foreign currency translation adjustment |       | 1,121                                 |       | 13 |   | (5 | ) | 1,129 |   |
| Balance as at December 31, 2009    |       | $                                     | 13,046     |   | $ | 2,417 |   | $ | 7,100 |   | $ | 22,563 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Accumulated amortization:               |       |                                  |       |   |   |   |   |   |   |
| Balance as of January 1, 2009      |       | $                                     | 790        |   | $ | 165 |   | $ | — |   | $ | 955 |   |
| Charge for the year                     |       | 326                                   |       | 209 |   | — |   | 535 |   |
| Foreign currency translation adjustment |       | 95                                    |       | (4 | ) | — |   | 91 |   |
| Balance as at December 31, 2009    |       | $                                     | 1,211      |   | $ | 370 |   | $ | — |   | $ | 1,581 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Net book value:                         |       |                                  |       |   |   |   |   |   |   |
| As at December 31, 2008            |       | $                                     | 11,135     |   | $ | 1,802 |   | $ | 7,318 |   | $ | 20,255 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| As at December 31, 2009            |       | $                                     | 11,835     |   | $ | 2,047 |   | $ | 7,100 |   | $ | 20,982 |   |

 
| ** **                              | ** ** | **Year ended December 31, 2008** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Favorable  lease  assets**          | ** ** | **Internet  Sites** | ** ** | **Tradename** | ** ** | **Total** | ** ** |
| Carrying amount:                        |       |                                  |       |   |   |   |   |   |   |
| Balance as of January 1, 2008      |       | $                                     | 12,861     |   | $ | 2,066 |   | $ | 7,360 |   | $ | 22,287 |   |
| Additions                               |       | —                                |       | 353 |   | — |   | 353 |   |
| Impairment                              |       | —                                |       | — |   | — |   | — |   |
| Foreign currency translation adjustment |       | (936                                  | )          | (452 | ) | (42 | ) | (1,430 | ) |
| Balance as at December 31, 2008    |       | $                                     | 11,925     |   | $ | 1,967 |   | $ | 7,318 |   | $ | 21,210 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Accumulated amortization:               |       |                                  |       |   |   |   |   |   |   |
| Balance as of January 1, 2008      |       | $                                     | 512        |   | $ | 115 |   | $ | — |   | $ | 627 |   |
| Charge for the year                     |       | 338                                   |       | 71 |   | — |   | 409 |   |
| Foreign currency translation adjustment |       | (60                                   | )          | (21 | ) | — |   | (81 | ) |
| Balance as at December 31, 2008    |       | $                                     | 790        |   | $ | 165 |   | $ | — |   | $ | 955 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Net book value:                         |       |                                  |       |   |   |   |   |   |   |
| As at December 31, 2007            |       | $                                     | 12,349     |   | $ | 1,951 |   | $ | 7,360 |   | $ | 21,660 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| As at December 31, 2008            |       | $                                     | 11,135     |   | $ | 1,802 |   | $ | 7,318 |   | $ | 20,255 |   |

 

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

 

Amortization expense forthe year ended December 31, 2009 was $535,000 (2008-$409,000; 2007-$461,000).

 

Estimated amortizationexpense for each of the years 2010 to 2014 is $535,000.

 

**8.****                                     ****Workingcapital facilities**

 

Working capital facilities are composed of thefollowing, all repayable within one year (dollars in thousands):

 
| ** **                                                                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Unsecured working capital facilities, with a weighted average  interest rate of 4.22% and 5.68%, respectively |       | $                     | 6,666      |   | $ | 54,179 |   |
|                                                                                                               |            |                       |            |  |  |  |  |

 

OEH had approximately $37,243,000 of working capitallines of credit at December 31, 2009 (2008-$62,787,000) issued by variousfinancial institutions and having various expiration dates, of which$30,577,000 was undrawn (2008-$8,608,000).

 

**9.****                                     ****Long-termdebt and obligations under capital leases**

 

*(a)**                              **Long-termdebt*

 

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

 
| ** **                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Loans from banks collateralized by  property, plant and equipment payable over periods of 1 to 23 years, with a  weighted average interest rate of 3.51% and 4.98%**,**respectively |       | $                     | 799,666    |   | $ | 778,220 |   |
| Obligations under capital lease (see Note  9(b))                                                                                                                                    |       | 12,068                |       | 13,573 |   |
|                                                                                                                                                                                |       | 811,734               |       | 791,793 |   |
| Less: current portion                                                                                                                                                               |       | 173,388               |       | 138,813 |   |
|                                                                                                                                                                                |       | $                     | 638,346    |   | $ | 652,980 |   |

 

Long-term debt at December 31, 2009 includes$79,469,000 (2008-$79,626,000) of debt obligations of Charleston Center LLC,owner of the Charleston Place Hotel in which OEH has a 19.9% equityinvestment.  This debt is non-recourse tothe members of Charleston Centre LLC, including OEH, and therefore the hotel’sseparate assets are not available to pay the debts of OEH and and the hotel’sseparate liabilities do not constitute obligations of OEH.  The fair value of the debt at December 31,2009 is estimated to be $72,255,000.

 

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Of the current portion of long-term debt, $114,083,000(2008-$105,373,000) related to revolving credit facilities which, althoughfalling due within 12 months, are available for re-borrowing throughout the periodof the loan facilities which are repayable in 2011 and 2012.

 

Certain credit agreements of OEH have restrictivecovenants.  At December 31, 2009,OEH was in compliance with all major covenants that applied to OEH, including aminimum consolidated net worth test and a minimum consolidated interestcoverage test as defined under OEH’s largest bank-syndicated 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 consolidated long-term debt excluding obligations under capital leases at December 31,2009 (dollars in thousands):

 
| **Year ending December 31,** |   |    |    |
|-----------------------------------|--------|---------|---------|
|                              |   |    |    |
| 2010                              |   | 171,287 |    |
| 2011                              |   | 452,483 |    |
| 2012                              |   | 103,213 |    |
| 2013                              |   | 16,077  |    |
| 2014                              |   | 11,780  |    |
| 2015 and thereafter               |   | 44,826  |    |
|                              |   | $       | 799,666 |   |
|                                   |        |         |         |  |

 

The Company has guaranteed $474,902,000 of thelong-term debt of its subsidiary companies as at December 31, 2009.

 

The fair value of the debt excluding obligations undercapital leases at December 31, 2009 has been estimated in the amount of$731,107,000 (2008-$583,966,000).

 

In April 2009, OEH closed a $30,000,000 securedconstruction loan for its Porto Cupecoy residential mixed-use developmentproject on the Dutch side of St. Martin, French West Indies.  OEH has drawn $26,614,000 of this loan at December 31,2009.

 

In July 2009, OEH completed an A$20,000,000($16,000,000) refinancing of its two Australian properties. The margin on thethree-year loan is at a rate of 2.5% over the Australian dollar lending rate.

 

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The Company has guaranteed, through 2012, $3,643,000of the debt obligations of the PeruRail operations, an unconsolidated jointventure in which OEH has a 50% investment and, through 2016 additional debtobligations of $11,660,000. The Company has also guaranteed through 2009,$6,508,000 of PeruRail contingent obligations relating to the performance of itsgovernmental rail concessions.  TheCompany has also guaranteed, through 2010, a $3,000,000 working capitalfacility to Eastern and Oriental Express Ltd. in which OEH has a 25% equityinvestment, and $2,152,000 of a working capital loan facility of Hotel Ritz,Madrid in which OEH has a 50% equity investment.

 

OEH has a 50% investment in an unconsolidated jointventure company that owns four hotels in Peru. The Company has contingently guaranteed, through 2016, $16,029,000 ofdebt obligations of the joint venture and, through 2016, a further $13,949,000of its debt obligations.  The guaranteesare contingent because they may only be enforced in the event there is a changein control of the joint venture, which would occur only if OEH’s ownership ofthe economic and voting interests in the joint venture falls below 50%, anevent which has not occurred.

 

Deferredfinancing costs related to the above outstanding long-term debt are $9,077,180at December 31, 2009 (2008-$10,336,000) and are amortized to interestexpense over the term of the corresponding long-term debt.

 

*(b)**                              **Obligationsunder capital leases*

 

The following is a summary of future minimum leasepayments under capital leases together with the present value of the minimumlease payments at December 31, 2009 (dollars in thousands):

 
| **Year ending December 31,**                    |   |   |   |
|------------------------------------------------------|--------|--------|--------|
|                                                 |   |   |   |
| 2010                                                 |   | $      | 2,686  |   |
| 2011                                                 |   | 4,269  |   |
| 2012                                                 |   | 645    |   |
| 2013                                                 |   | 627    |   |
| 2014                                                 |   | 628    |   |
| 2015 and thereafter                                  |   | 23,331 |   |
| Minimum lease payments                               |   | 32,186 |   |
| Less: amount of interest contained in above payments |   | 20,118 |   |
| Present value of minimum lease payments              |   | 12,068 |   |
| Less: current portion                                |   | 2,101  |   |
|                                                 |   | $      | 9,967  |   |

 

The amount ofinterest deducted from minimum lease payments to arrive at the present value isthe interest contained in each of the leases.

 

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**10.****                              ****Otherliabilities**

 

Other liabilities at December 31, 2009 consist of$1,520,000 (2008-$1,462,000) of deferred consideration on acquisition of landnext to Maroma Resort and Spa after discounting to present value, $1,607,000(2008-$1,990,000) of deferred income relating to guarantees given by OEH inconnection with bank loans entered into by the Peruvian hotel joint ventureoperation (see Note 20), $3,573,000 (2008-$6,804,000) in respect of interestrate swaps (see Note 17), $12,940,000 (2008-$12,306,000) of long-term accruedinterest at Charleston Place Hotel (see Note 3) and $102,000 (2008-$nil) due inrespect of a stock appreciation rights plan (see Note 15).

 

**11.****                              ****Pensionplans**

 

From January 1, 2003, a number of non-U.S. OEHemployees participated in a funded defined benefit pension plan in the United Kingdomcalled Orient-Express Services 2003 Pension Scheme.  On May 31, 2006, the plan was closed forfuture benefit accruals.

 

The significant weighted-average assumptions used todetermine net periodic costs of the plan during the year were as follows:

 
| ** **                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                             |       |                             |       |   |   |   |   |
| Discount rate                                    |       | 5.70                             | %          | 5.70 | % | 5.70 | % |
| Expected long-term rate of return on plan assets |       | 6.50                             | %          | 7.50 | % | 7.50 | % |

 

The significant weighted-average assumptions used todetermine benefit obligations of the plan at year end were as follows:

 
| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Discount rate |       | 5.80                  | %          | 5.70 | % |

 

The discount rate effectively represents the rate ofreturn on high quality corporate bonds at the end of the year in the country inwhich the assets are held.

 

The expected rate of return on the pension fundassets, net of expenses has been determined by considering the actual assetclasses held by the plan at December 31, 2009 and the yields available onUK government bonds at that date.

 

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For equities and corporate bonds management hasassumed that long-term returns will exceed those expected on UK governmentbonds by a risk premium. This is based on historical equity and bond returnsover the long term. As these returns are long-term expected returns, the totalreturns on equities and corporate bonds only vary in line with the UKgovernment bond yields and are not further adjusted for current market trends.

 

The expected returns on annuities are set equal to theend of year discount rate as the value of annuities is tied to this rate.

 

The fair value of OEH’s pension plan assets at December 31,2009 by asset category is as follows (dollars in thousands):

 
| ** **                  | ** ** | **Total** | ** ** | **Quoted  prices in  active  markets for  identical  assets  (Level 1)** | ** ** | **Significant  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
|-----------------------------|------------|-----------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| Cash                        |       | $         | 246        |                                                                     | $          | 246                                            |       | $                                                | —     |   | $ | — |   |
| Equity securities:          |       |      |       |                                                                     |       |                                           |       |                                             |       |
| UK managed funds            |       | 4,708     |       | 4,708                                                                    |       | —                                         |       | —                                           |       |
| Overseas managed funds      |       | 3,294     |       | 3,294                                                                    |       | —                                         |       | —                                           |       |
| Fixed income securities:    |       |      |       |                                                                     |       |                                           |       |                                             |       |
| UK government bonds         |       | 345       |       | 345                                                                      |       | —                                         |       | —                                           |       |
| Corporate bonds             |       | 1,637     |       | 1,637                                                                    |       | —                                         |       | —                                           |       |
| Other types of investments: |       |      |       |                                                                     |       |                                           |       |                                             |       |
| Annuities                   |       | 1,603     |       | —                                                                   |       | —                                         |       | 1,603                                            |       |
|                        |       | $         | 11,833     |                                                                     | $          | 10,230                                         |       | $                                                | —     |   | $ | 1,603 |   |

 

Fair value measurements using significant unobservableinputs (Level 3) are as follows (dollars in thousands):

 
| ** **                                          | ** ** | **Annuities** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|-----------|------------|
| Beginning balance at January 1, 2009           |       | $             | —     |      | $          | — |   |
| Actual return on assets:                            |       |          |       |      |       |
| Relating to assets still held at the reporting date |       | —        |       | —    |       |
| Relating to assets sold during the period           |       | (196          | )          | (196      | )          |
| Purchases, sales and settlements                    |       | —        |       | —    |       |
| Transfers in and/out of Level 3                     |       | 1,799         |       | 1,799     |       |
| Ending balance at December 31, 2009            |       | $             | 1,603      |      | $          | 1,603 |   |

 

The allocation of the assets was in compliance withthe target allocation set out in the plan investment policy,the principal objectives of which are to deliver returns above those ofgovernment and corporate bonds and to minimize the cost of providing pensionbenefits.  OEH is currently purchasingannuities to match the benefits of pensioners. OEH is allocating a majority of the plan’s assets to equities as theyhave historically outperformed bonds over the long term.  OEH will allocate plan assets to bonds andcash to help reduce the volatility of the portfolio and reflect the age profileof the membership.

 

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The changes in the benefit obligation, the plan assetsand the funded status for the plan were as follows (dollars in thousands):

 
| ** **                                                   | ** ** | **Year ended********December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Change in benefit obligation:                                |       |                                    |       |   |   |
| Benefit obligation at beginning of year                      |       | $                                       | 15,995     |   | $ | 21,922 |   |
| Service cost                                                 |       | —                                  |       | — |   |
| Interest cost                                                |       | 994                                     |       | 1,160 |   |
| Plan participants’ contributions                        |       | —                                  |       | — |   |
| Net transfer in                                              |       | —                                  |       | — |   |
| Actuarial (gain)/loss                                        |       | 829                                     |       | (910 | ) |
| Benefits paid                                                |       | (506                                    | )          | (80 | ) |
| Curtailment gain                                             |       | —                                  |       | — |   |
| Settlement                                                   |       | —                                  |       | — |   |
| Foreign currency translation                                 |       | 1,923                                   |       | (6,097 | ) |
| Benefit obligation at end of year                            |       | 19,235                                  |       | 15,995 |   |
|                                                         |       |                                    |       |   |   |
| Change in plan assets:                                       |       |                                    |       |   |   |
| Fair value of plan assets at beginning of  year              |       | 8,774                                   |       | 15,200 |   |
| Actual return on plan assets                                 |       | 1,187                                   |       | (3,615 | ) |
| Employer contributions                                       |       | 1,291                                   |       | 836 |   |
| Plan participants’ contributions                        |       | —                                  |       | — |   |
| Net transfer in                                              |       | —                                  |       | — |   |
| Benefits paid                                                |       | (506                                    | )          | (80 | ) |
| Settlement                                                   |       | —                                  |       | — |   |
| Foreign currency translation                                 |       | 1,087                                   |       | (3,567 | ) |
| Fair value of plan assets at end of year                     |       | 11,833                                  |       | 8,774 |   |
| Funded status at end of year                                 |       | $                                       | (7,402     | ) | $ | (7,221 | ) |
| Net actuarial loss recognized in other  comprehensive income |       | $                                       | 12,322     |   | $ | 13,516 |   |

 

Amounts recognized in the consolidated balance sheetconsist of the following (dollars in thousands):

 
| ** **              | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Non-current assets      |       | $                                 | —     |   | $ | — |   |
| Current liabilities     |       | $                                 | —     |   | $ | — |   |
| Non-current liabilities |       | $                                 | 7,402      |   | $ | 7,221 |   |

 

Amounts recognized in other comprehensive incomeconsist of the following (dollars in thousands):

 
| ** **                                             | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net (loss)/ gain                                       |       | $                                 | (10,421    | ) | $ | (10,726 | ) |
| Prior service cost/ (credit)                           |       | —                            |       | — |   |
| Net transitional obligation/ (asset)                   |       | —                            |       | — |   |
| Total amount recognized in other  comprehensive income |       | $                                 | (10,241    | ) | $ | (10,726 | ) |

 

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The following table details certain information withrespect to OEH’s UK defined benefit pension plan (dollars in thousands):

 
| ** **                     | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| ** **                     | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Projected benefit obligation   |       | $                                 | 19,235     |   | $ | 15,995 |   |
| Accumulated benefit obligation |       | $                                 | 19,235     |   | $ | 15,995 |   |
| Fair value of plan assets      |       | $                                 | 11,833     |   | $ | 8,774 |   |

 

The components of net periodic benefit cost for theOEH employees covered under the plan consisted of the following (dollars inthousands):

 
| ** **                                     | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                              |       |   |   |   |   |
| Service cost                                   |       | $                                 | —     |   | $ | — |   | $ | — |   |
| Interest cost on projected benefit  obligation |       | 994                               |       | 1,160 |   | 1,164 |   |
| Expected return on assets                      |       | (645                              | )          | (1,103 | ) | (1,076 | ) |
| Net amortization and deferrals                 |       | 620                               |       | 448 |   | 554 |   |
| Net periodic benefit cost                      |       | $                                 | 969        |   | $ | 505 |   | $ | 642 |   |

 

OEH expects to contribute $1,755,000 to the UK definedbenefit pension plan in 2010.  Thefollowing benefit payments, which reflect assumed future service, are expectedto be paid (dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2010                              |       | $          | 214        |   |
| 2011                              |       | 277        |       |
| 2012                              |       | 423        |       |
| 2013                              |       | 436        |       |
| 2014                              |       | 498        |       |
| Next five years                   |       | 3,077      |       |
|                                   |            |            |            |  |

 

The estimated net loss amortized from accumulatedother comprehensive income into net periodic pension cost in the next fiscalyear is $696,000.

 

Also included in the consolidated balance sheet at December 31,2009 is an amount of $359,000 (2008-$200,000) relating to deferred benefitpension obligations at the hotels in Bali, Indonesia.  The accrual was made based on actuarialvaluation as at December 31, 2009. There are no assets to be disclosed.

 

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OEH has another defined benefit pension plan in SouthAfrica for certain employees of the Mount Nelson Hotel.  The total number of active members is three,and the remaining members are retired pensioners.  The latest actuarial valuation performed asat December 31, 2007 and updated for foreign exchange rates at December 31,2009 showed a net pension plan surplus of approximately $81,000 (2008-$84,000)based on fair value of plan assets of $1,400,000 (2008-$1,446,000) andprojected benefit obligation of $1,319,000 (2008-$1,362,000). The surplus hasnot been recognized in the financial statements as it is deemed not recoverable.

 

Certain employees of OEH are members of the BritishRail pension plan, which is a governmental multi-employer defined benefitpension plan.  Total OEH contributionsinto the plan for 2009 were $63,000 (2008-$74,000; 2007-$78,000).

 

Certain employees of OEH were members of definedcontribution pension plans.  Totalcontributions to the plans were as follows (dollars in thousands):

 
| ** **                     | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2009**                          | ** ** | **2008** | ** ** |
|                           |       |                              |       |   |   |
| Employer’s  contributions |       | $                                 | 1,676      |   | $ | 1,705 |   |
|                                |            |                                   |            |  |  |  |  |

 

**12.****                            ****Incometaxes**

 

The Company isincorporated in Bermuda, which does not impose an income tax. Accordingly, the income tax provision was attributable to income tax chargesincurred by subsidiaries operating in jurisdictions that impose an income tax,the relative amount of earnings or loss in various jurisdictions, the effect ofvaluation allowances, and uncertain tax positions. The income tax provision isalso affected by discrete items that may occur in any given year, but are notconsistent from year to year. Significant discrete items which had the mostsignificant impact on the tax rate include a deferred taxcharge of $5,200,000 in 2009 arising in respect of Brazilian fixed asset timingdifferences, following movements in the exchange rate between the dollar andBrazilian real.

 

The provision for income taxes consists of thefollowing (dollars in thousands):

 

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| ** **         | ** ** | **Year ended December 31, 2009** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **Pre Tax  (Loss)/  Income**          | ** ** | **Current** | ** ** | **Non-current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                  |       |   |   |   |   |   |   |   |   |
| Bermuda            |       | $                                     | 679        |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| United  States     |       | (3,226                                | )          | 928 |   | — |   | (401 | ) | 527 |   |
| Rest of the  world |       | (9,880                                | )          | 9,413 |   | — |   | 1,093 |   | 10,506 |   |
|               |       | $                                     | (12,427    | ) | $ | 10,341 |   | $ | — |   | $ | 692 |   | $ | 11,033 |   |

 
| ** **         | ** ** | **Year ended December 31, 2008** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **Pre Tax  (Loss)/  Income**          | ** ** | **Current** | ** ** | **Non-current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                  |       |   |   |   |   |   |   |   |   |
| Bermuda            |       | $                                     | (17,735    | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| United States      |       | (854                                  | )          | 1,742 |   | — |   | (1,994 | ) | (252 | ) |
| Rest of the  world |       | 5,080                                 |       | 7,271 |   | — |   | (4,841 | ) | 2,430 |   |
|               |       | $                                     | (13,509    | ) | $ | 9,013 |   | $ | — |   | $ | (6,835 | ) | $ | 2,178 |   |

 
| ** **         | ** ** | **Year ended December 31, 2007** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **Pre Tax  (Loss)/  Income**          | ** ** | **Current** | ** ** | **Non-current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|               |       |                                  |       |   |   |   |   |   |   |   |   |
| Bermuda            |       | $                                     | (22,986    | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| United States      |       | 4,956                                 |       | 1,357 |   | — |   | (465 | ) | 892 |   |
| Rest of the  world |       | 70,348                                |       | 14,960 |   | — |   | (1,085 | ) | 13,875 |   |
|               |       | $                                     | 52,318     |   | $ | 16,317 |   | $ | — |   | $ | (1,550 | ) | $ | 14,767 |   |

 

Earnings from unconsolidated companies are reported net of tax. The taxprovision applicable to these unconsolidated companies in the year ended December 31,2009 was $4,510,000 (2008-$6,986,000; 2007-$4,772,000).

 

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

 

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| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **Components of net deferred tax assets or liabilities** | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                  |       |   |   |   |   |
| Operating loss carryforwards                             |       | $                     | 47,926     |   | $ | 50,977 |   | $ | 49,048 |   |
| Pensions                                                 |       | 2,072                 |       | 2,021 |   | 1,883 |   |
| Other                                                    |       | 1,820                 |       | 2,337 |   | 1,526 |   |
| Less: valuation allowance                                |       | (6,506                | )          | (3,371 | ) | (4,378 | ) |
| Net deferred tax assets                                  |       | 45,312                |       | 51,964 |   | 48,079 |   |
|                                                     |       |                  |       |   |   |   |   |
| Depreciable assets                                       |       | (187,109              | )          | (196,868 | ) | (139,977 | ) |
| Deferred tax liabilities                                 |       | (187,109              | )          | (196,868 | ) | (139,977 | ) |
| Net deferred tax liabilities                             |       | $                     | (141,797   | ) | $ | (144,904 | ) | $ | (91,898 | ) |

 

The net deferred tax assets or net deferred taxliabilities are included in other assets or deferred tax liabilities on theconsolidated balance sheet, respectively.

 

A net deferred tax liability of $64,100,000 wasrecognized at December 31, 2008 on the consolidation of Charleston CenterLLC in accordance with ASC 810-10 “Consolidation-Variable Interest Entities”(formerly FIN46(R) “Consolidation of Variable Interest Entities”). This liability results fromthe difference between the tax basis of the hotel’s depreciable assets and thefair value of these assets consolidated in the OEH balance sheet. This figureremains unchanged at December 31, 2009.

 

The gross amount of tax loss carryforwards is$205,250,000 at December 31, 2009 (2008- $168,320,000). Of this amount,$25,045,000 will expire in the five years ending December 31, 2014 and afurther $21,599,000 will expire in the five years ending December 31,2018. The remaining losses of $158,606,000 will expire after December 31,2018 or have no expiry date. After weighing all positive and negative evidence,a valuation allowance has been provided against gross deferred tax assets whereit is thought more likely than not that the benefits associated with theseassets will not be realized.

 

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Except forearnings that are currently distributed, income taxes and foreign withholdingtaxes have not been recognized on the excess of the amount for financialreporting purposes over the tax basis of investments in foreign subsidiariesthat are essentially permanent in duration.  A liability could arise ifamounts are distributed by the subsidiaries or if the subsidiaries areultimately disposed of.  The amount of temporary differences totalled$29,196,470 at December 31, 2009 (2008-$29,212,675).  It is not practicable to estimate theadditional income taxes related to permanently reinvested earnings or thetemporary differences related to investments in subsidiaries.

 

The provision for income taxes in 2009 included a current tax charge of$2,249,000 and a deferred tax charge of $3,221,000 arising in Italy inconnection with the closure of a tax audit in respect of the 2004, 2005 and2006 tax years. OEH had previously included a liability of $4,959,000 withinits provision under ASC 740 “Income Taxes” (formerly FIN 48 “Accounting forUncertainty of Income Taxes”), in respect of these uncertain tax positions.After releasing this provision the net impact on the provision for income taxesin 2009 was $511,000. The $2,249,000 current tax liability is payable in 12quarterly instalments of approximately $187,000 each, which commenced in July 2009.At December 31, 2009, payments totalling $374,000 have been made.

 

OEH’s 2009 taxprovision of $11,033,000 included a charge of $1,097,000 in respect of theprovision for uncertain tax positions under ASC 740, including a charge of$349,000 that relates to the potential interest and penalty costs associatedwith the uncertain tax positions.

 

OEH’s 2008 taxprovision also included a benefit of $12,180,000 in respect of the ASC 740provision, following the statutory expiration of a number of uncertain taxpositions in certain jurisdictions in which OEH operates for which an ASC 740provision was recognized upon adoption on January 1, 2007. The tax benefitincluded a benefit of $5,903,000 that relates to the potential interest andpenalty costs that had been included in the ASC 740 provision in respect ofthese uncertain tax positions.

 

OEH recognizesinterest and penalties related to unrecognized tax benefits in income taxexpense in the consolidated statement of operations and recognizes accruedinterest and penalties in the related tax liability in the consolidated balancesheet.

 

At December 31, 2009, the total amounts ofunrecognized tax benefits included the following (dollars in thousands):

 

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| ** **                                                    | ** ** | **Year ended December 31, 2009** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **Total**                        | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Penalties** | ** ** |
| Balance at  January 1, 2009                                   |       | $                                | 11,493     |   | $ | 8,180 |   | $ | 1,140 |   | $ | 2,173 |   |
| Additional uncertain tax provision identified during the year |       | 1,097                            |       | 748 |   | 254 |   | 95 |   |
| Uncertain tax provision on prior year positions               |       | (4,959                           | )          | (4,523 | ) | (83 | ) | (353 | ) |
| Uncertain tax provisions paid or expensed during the year     |       | (340                             | )          | (272 | ) | (68 | ) | — |   |
| Foreign exchange                                              |       | (140                             | )          | (79 | ) | (24 | ) | (37 | ) |
| Balance at December 31, 2009                                  |       | $                                | 7,151      |   | $ | 4,054 |   | $ | 1,219 |   | $ | 1,878 |   |

 

At December 31,2009, OEH recognized a $7,151,000 liability in respect of its uncertain taxpositions. All of this ASC 740 provision arises in jurisdictions inwhich OEH conducts business other than Bermuda.

 

At December 31, 2008, the total amounts ofunrecognized tax benefits included the following (dollars in thousands):

 
| ** **                                                    | ** ** | **Year ended December 31, 2008** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **Total**                        | ** ** | **Principal** | ** ** | **Interest** | ** ** | **Penalties** | ** ** |
| Balance at  January 1, 2008                                   |       | $                                | 24,025     |   | $ | 14,912 |   | $ | 2,035 |   | $ | 7,078 |   |
| Additional uncertain tax provision identified during the year |       | 424                              |       | 167 |   | 136 |   | 121 |   |
| Uncertain tax provision on prior year positions               |       | (12,180                          | )          | (6,277 | ) | (994 | ) | (4,909 | ) |
| Uncertain tax provisions paid or expensed during the year     |       | —                           |       | — |   | — |   | — |   |
| Foreign exchange                                              |       | (776                             | )          | (622 | ) | (37 | ) | (117 | ) |
| Balance at December 31, 2008                                  |       | $                                | 11,493     |   | $ | 8,180 |   | $ | 1,140 |   | $ | 2,173 |   |

 

Interest and penalties due to unrecognized tax benefits are includedwithin the provision for income taxes. The uncertain tax benefit at December 31,2009, if recognized, would be recorded to the provision for income taxes.

 

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The balance ofunrecognized tax benefits, if recognized, would affect the effective taxrate.

 

OEH is subject to taxation in the United States andvarious states and foreign jurisdictions. As of December 31, 2009, OEH isno longer subject to U.S. federal, state, local or foreign examinations by taxauthorities for years before 2005.

 

OEH believesthat it is reasonably possible that within the next 12 months the ASC 740provision will decrease by approximately $1,000,000 to $2,000,000 as a resultof expiration of uncertain tax positions in certain foreign jurisdictions inwhich OEH operates.

 

**13.****                              ****Supplementalcash flow information and restricted cash**

 
| ** **     | ** ** | **Year ended  December 31,** | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **     | ** ** | **(Dollars in thousands)**        | ** ** |
| Cash paid for: |       |                              |       |   |   |   |   |
| Interest       |       | $                                 | 35,602     |   | $ | 54,995 |   | $ | 49,820 |   |
| Income taxes   |       | $                                 | 14,412     |   | $ | 16,248 |   | $ | 13,477 |   |

 

Non-cashinvesting and financing activities:

 

In conjunction with certain acquisitions in 2009, 2008and 2007 (see Note 4(a)), liabilities were assumed as follows (dollars inthousands):

 
| ** **                    | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                              |       |   |   |   |   |
| Fair value of assets acquired |       | $                                 | 86         |   | $ | 2,996 |   | $ | 22,605 |   |
| Cash paid                     |       | (86                               | )          | (2,996 | ) | (21,877 | ) |
| Liabilities assumed           |       | $                                 | —     |   | $ | — |   | $ | 728 |   |

 

*Restrictedcash*

 

Restrictedcash of $19,894,000 at December 31, 2009 (2008- $13,224,000) mainlyconsisted of the Porto Cupecoy escrow account, cash deposits required undercredit support arrangements, and the deposit on the Sicilian hotels purchasedin January 2010.  Cash received forresidential condominium purchases at Porto Cupecoy is held in escrow andreleased into OEH’s current bank account when the next phase of construction iscompleted.  At December 31, 2009,the Porto Cupecoy escrow account balance amounted to $9,397,000 (2008-$8,168,000)and the cash deposits for credit support and the hotels purchase amounted to$6,159,000 (2008-$nil).

 

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**14.****         ****Shareholders’equity**

 

*(a)**         **Publicoffering*

 

In May 2009, the**Company issued and sold throughunderwriters 25,875,000 class A common shares in a public offering registeredin the United States.  Net proceedsamounted to $140,901,000.

 

In November 2008, the Company issued and sold ina registered direct offering in the United States 8,490,000 class A commonshares.  Net proceeds amounted to$52,514,000.

 

*(b)**         **Dual common share capitalization*

 

The Company has been capitalized withclass A common shares, of which there are 120,000,000 authorized, andclass B common shares, of which there are 120,000,000 authorized, eachconvertible at any time into one class A common share.  In general, holders of class A andclass B common shares vote together as a single class, with holders ofclass B shares having one vote per share and holders of class Ashares having one-tenth of one vote per share. In all other substantial respects, the class A and class Bcommon shares are the same.

 

*(c)**          **Shareholderrights agreement*

 

The Company has in place a shareholder rightsagreement which will be implemented not earlier than the tenth day followingthe first to occur of (i) the public announcement of the acquisition by aperson (other than a subsidiary of the Company) of 15% or more of theoutstanding class A common shares or 15% or more of the outstanding class Bcommon shares, and (ii) the commencement or announcement of a tender offeror exchange offer by a person for 30% or more of the outstanding class A commonshares or 30% or more of the outstanding class B common shares.  At that time, the rights will detach from theclass A and class B common shares, and the holders of the rights willbe entitled to purchase, for each right held, one one-hundredth of aseries A junior participating preferred share of the Company at anexercise price of $142 (the “Purchase Price”) for each one one-hundredth ofsuch junior preferred share, subject to adjustment in certain events.  From and after the date on which any personacquires beneficial ownership of 15% or more of the outstanding class A commonshares or 15% or more of the outstanding class B common shares, each holder ofa right (other than the acquiring person) will be entitled upon exercise toreceive, at the then current Purchase Price and in lieu of the junior preferredshares, that number of class A or class B common shares (depending onwhether the right was

 

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previouslyattached to a class A or B share) having a market value of twice thePurchase Price.  If the Company isacquired or 50% or more of its consolidated assets or earning power is sold,each holder of a right will be entitled to receive, upon exercise at the thencurrent Purchase Price, that amount of common equity of the acquiring companywhich at the time of such transaction would have a market value of two timesthe Purchase Price.  Also, the Company’sboard of directors may exchange all or some of the rights for class A andclass B common shares (depending on whether the right was previouslyattached to a class A or B share) if any person acquires 15% beneficialownership as described above, but less than 50% beneficial ownership.  The rights will expire on June 1, 2010but may be redeemed at a price of $0.05 per right at any time prior to thetenth day following the date on which a person acquires beneficial ownership of15% or more of the outstanding class A common shares or 15% or more of theoutstanding class B common shares.

 

*(d)**         **Acquiredshares*

 

Included in shareholders’ equity is a reduction for18,044,478 class B common shares of the Company that a subsidiary of theCompany acquired in 2002.  Underapplicable Bermuda law, these shares are outstanding and may be voted althoughin computing earnings per share these shares are treated as a reduction tooutstanding shares.

 

*(e)**          **Preferredshares*

 

The Company has 30,000,000 authorized preferredshares, par value $0.01 each, 500,000 of which have been reserved for issuanceas series A junior participating preferred shares upon exercise ofpreferred share purchase rights held by class A and B common shareholdersin connection with the shareholder rights agreement.  See Note 14(c).

 

**15.****         ****Share-basedcompensation plans**

 

At December 31, 2009, OEH had four share-basedcompensation plans, which are described below. The compensation cost that has been charged against earnings for theseplans was $4,121,000 for the year ended December 31, 2009(2008-$2,800,000; 2007-$1,442,000).

 

*(a)**         **2000 and2004 stock option plans*

 

Under the Company’s 2000 and 2004 stock option plans,options to purchase up to 750,000 and 1,000,000, respectively, class Acommon shares may be awarded to employees of OEH at fair market value at thedate of grant.  Options are

 

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exercisablethree years after award and must be exercised ten years from the date ofgrant.  At December 31, 2009, 90,200class A common shares were reserved under the 2000 plan for issuancepursuant to options awarded to 20 persons, and 784,750 class A common shareswere reserved under the 2004 plan for issuance pursuant to options awarded to105 persons.   At December 31, 2009,no options remain available for issue under future grants under the 2000 and2004 plans as these have been transferred to the 2009 plan described below.

 

The total compensation cost related to unexercisedoptions at December 31, 2009 to be recognized over the period January 1,2010 to December 31, 2012, was $1,812,000.  The fair value of grants issued in the yearto December 31, 2009 was $nil (2008-$2,099,000; 2007-$5,005,000).  The fair value of options which vested in theyear to December 31, 2009 was $1,492,000.  Transactions under the plans for 2009 and2008 are as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Option Price** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|
| Outstanding at January 1, 2009   |       | 995,950    |       | $5.89  -$59.23   |       |
| Granted                               |       | —     |       |             |       |
| Forfeited                             |       | (114,099   | )          | $5.89  -$59.23   |       |
| Exercised                             |       | (6,901     | )          | $5.89            |       |
| Outstanding at December 31, 2009 |       | 874,950    |       | $5.89  -$59.23   |       |
| Exercisable at December 31, 2009 |       | 262,250    |       | $13.06  -$42.87  |       |

 
| ** **                            | ** ** | **Shares** | ** ** | **Option Price** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|
| Outstanding at January 1, 2008   |       | 562,950    |       | $13.06  -$59.23  |       |
| Granted                               |       | 494,300    |       | $5.89  -$51.90   |       |
| Forfeited                             |       | (47,800    | )          | $13.06  -$59.23  |       |
| Exercised                             |       | (13,500    | )          | $13.40  -$14.70  |       |
| Outstanding at December 31, 2008 |       | 995,950    |       | $5.89  -$59.23   |       |
| Exercisable at December 31, 2008 |       | 198,500    |       | $13.06  -$28.50  |       |

 

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The options outstanding at December 31, 2009,were as follows:

 
| ** **           | ** ** | **Number of Shares**            | ** ** | **Weighted Average of**         | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Exercise  Prices** | ** ** | **Outstanding  at  12/31/2009** | ** ** | **Exercisable  at  12/31/2009** | ** ** | **Remaining  Contractual  Lives** | ** ** | **Exercise  Prices for  Outstanding  Options** | ** ** | **Exercise  Prices for  Exercisable  Options** | ** ** |
| ** **           |       |                            |       |                            |       |   |   |   |   |   |   |
| $                    |  5.89 |                            | 365,300    |                            | —     |   | 8.9 |   | $ | 5.89 |   | — |   |
| $                    | 13.06      |                            | 14,250     |                            | 14,250     |   | 2.8 |   | $ | 13.06 |   | $ | 13.06 |   |
| $                    | 13.40      |                            | 20,000     |                            | 20,000     |   | 3.4 |   | $ | 13.40 |   | $ | 13.40 |   |
| $                    | 14.70      |                            | 58,500     |                            | 58,500     |   | 4.6 |   | $ | 14.70 |   | $ | 14.70 |   |
| $                    | 19.00      |                            | 25,750     |                            | 25,750     |   | 1.2 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 21.40      |                            | 2,000      |                            | 2,000      |   | 5.1 |   | $ | 21.40 |   | $ | 21.40 |   |
| $                    | 28.40      |                            | 33,000     |                            | 33,000     |   | 5.7 |   | $ | 28.40 |   | $ | 28.40 |   |
| $                    | 28.50      |                            | 25,000     |                            | 25,000     |   | 5.5 |   | $ | 28.50 |   | $ | 28.50 |   |
| $                    | 34.88      |                            | 7,800      |                            | 7,800      |   | 6.2 |   | $ | 34.88 |   | $ | 34.88 |   |
| $                    | 34.90      |                            | 15,500     |                            | 15,500     |   | 6.6 |   | $ | 34.90 |   | $ | 34.90 |   |
| $                    | 35.85      |                            | 25,300     |                            | —     |   | 8.7 |   | $ | 35.85 |   | — |   |
| $                    | 36.45      |                            | 11,000     |                            | 11,000     |   | 6.7 |   | $ | 36.45 |   | $ | 36.45 |   |
| $                    | 36.50      |                            | 35,450     |                            | 35,450     |   | 6.5 |   | $ | 36.50 |   | $ | 36.50 |   |
| $                    | 42.87      |                            | 14,000     |                            | 14,000     |   | 6.9 |   | $ | 42.87 |   | $ | 42.87 |   |
| $                    | 45.69      |                            | 25,000     |                            | —     |   | 7.6 |   | $ | 45.69 |   | — |   |
| $                    | 46.08      |                            | 22,100     |                            | —     |   | 8.4 |   | $ | 46.08 |   | — |   |
| $                    | 51.90      |                            | 19,700     |                            | —     |   | 8.2 |   | $ | 51.90 |   | — |   |
| $                    | 52.51      |                            | 12,850     |                            | —     |   | 7.2 |   | $ | 52.51 |   | — |   |
| $                    | 52.51      |                            | 111,500    |                            | —     |   | 7.7 |   | $ | 52.51 |   | — |   |
| $                    | 52.59      |                            | 14,450     |                            | —     |   | 7.5 |   | $ | 52.59 |   | — |   |
| $                    | 59.23      |                            | 16,500     |                            | —     |   | 7.9 |   | $ | 59.23 |   | — |   |
|                 |       | 874,950                         |       | 262,250                         |       |   |   |   |   |   |   |

 
| ** **                  | ** ** | **For options granted  during the  year ended December 31,** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                        |       |                                                              |       |   |   |   |   |
| Weighted average fair value |       | $                                                                 | 0.00       |   | $ | 4.25 |   | $ | 20.72 |   |
|                             |            |                                                                   |            |  |  |  |  |  |  |  |

 

Estimates of fair values of stock options on the grantdates using the Black-Scholes option pricing model were based on the followingassumptions:

 
| ** **                           | ** ** | **For years********ended  December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                                          |       |   |   |   |   |
| Expected share  price volatility     |       | —                                        |       | 38.9%-47.5% |   | 38.68%-39.30% |   |
| Risk-free  interest rate             |       | —                                        |       | 1.67%-3.2% |   | 3.28%-5.05% |   |
| Expected annual  dividends per share |       | —                                        |       | $0.10 |   | $0.10 |   |
| Expected life of  stock options      |       | —                                        |       | 5 years |   | 5 years |   |

 

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Expected volatilities are based on historicalvolatility of the Company’s class A common share price and other factors.  The expected term of options granted is basedon historical data and represents the period of time that options are expectedto be outstanding.  The risk-free ratefor periods within the expected life of the option is based on the U.S.Treasury yield curve in effect at the time of grant.

 

Cash received from exercised options was $15,000 forthe year ended December 31, 2009 (2008-$192,000; 2007-$4,105,000).

 

*(b)**         **2007performance share plan*

 

In 2007, the Company adopted the 2007 performanceshare plan.  Under this plan, awards ofup to 500,000 class A common shares may be granted to OEH employees.  The shares covered by the awards will be issuedafter at least one year from the grant date upon payment of a nominal amount,subject to meeting performance criteria set forth in the awards.  Awards may also be granted under the planwithout any specified performance criteria. When the shares are issued underthe awards, the grantees are also entitled to receive a cash equivalent of thedividends, if any, that would have been paid on the shares in respect ofdividend record dates occurring during the period between the award grant dateand the share issue date. At December 31, 2009, no awards remain availablefor future grants as these have been transferred to the 2009 plan describedbelow.

 

At December 31, 2009, 466,081 class A commonshares were reserved under the plan for issuance pursuant to awards made to 52persons.

 

Awards covering a total of 259,717 class A commonshares do not specify any performance criteria and will vest as long as thegrantees stay in employment after one year or after three years from the grantdate depending on the terms of the award.

 

In 2009, the Company granted to ten OEH employeesshare-based awards with performance and market conditions covering a total ofup to 210,519 class A common shares. Half of each award is subject to performance criteria based on OEH’searnings before tax for the year ending December 31, 2011, and the otherhalf of each award is subject to market criteria based on OEH’s totalshareholder return compared to the average total shareholder return of aspecified group of other hotel and leisure companies over the period of threeyears.

 

The total compensation cost related to non-vestedawards granted under the plan at December 31, 2009, to be recognized overthe period January 1, 2010 to December 31, 2012, was $1,059,000.  The fair value of grants awarded in the yearto December 31, 2009 was $1,590,825 (2008-$598,000; 2007-$1,415,000).

 

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The status of the awards as of December 31,2009 and changes during the year ended December 31, 2009 are presented asfollows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant date fair  value** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| Outstanding at January 1, 2009   |       | 63,365     |       | $                                                      | 31.28      |   |
| Granted                               |       | 436,635    |       | $                                                      | 3.64       |   |
| Exercised                             |       | (5,278     | )          | $                                                      | 0.94       |   |
| Forfeited                             |       | (28,641    | )          | $                                                      | 5.13       |   |
| Outstanding at December 31, 2009 |       | 466,081    |       | $                                                      | 5.57       |   |
| Exercisable at December 31, 2009 |       | —     |       |                                                   |       |

 

Estimates of fair values of the awards withperformance and market conditions issued in 2009 and 2008 were made using theMonte Carlo valuation model, and estimates of fair values of the awards withoutperformances and market conditions issued in 2007, 2008 and 2009 were madeusing Black-Scholes valuation model based on the following assumptions:

 
| ** **                          | ** ** | **For years  ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                   |       |   |   |   |   |
| Expected share price volatility     |       | 49.00%                                 |       | 33.1% |   | 38.68%-38.73% |   |
| Risk-free interest rate             |       | 1.75%                                  |       | 1.76% |   | 4.07%-4.59% |   |
| Expected annual dividends per share |       | $0.00                                  |       | $0.10 |   | $0.10 |   |
| Expected life of awards             |       | 1-3 years                              |       | 3 years |   | 3 years |   |

 

The basis of assumptions wassimilar to that used for the 2000 and 2004 stock option plans.

 

*(c)**          **2007stock appreciation rights plan*

 

OEH adopted astock appreciation rights plan in 2007 under which stock appreciation rights (“SARs”)may be awarded to eligible employees. Each award is to be settled in cash measured by the increase (if any) ofthe publicly-quoted price of the Company’s class A common shares between thedate of the award and the third anniversary of that date, multiplied by thenumber of SARs granted in the individual award.

 

In the yearended December 31, 2009, OEH awarded 65,415 SARs at an exercise price of$6.50 per share vesting in January 2012. The SARs have been recorded asliabilities with a fair value of $102,000 at December 31, 2009. No awardswere granted under the 2007 plan in years ended December 31, 2008 and2007.

 

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The total compensation cost related to non-vestedawards granted under the plan at December 31, 2009, to be recognized overthe period January 1, 2010 to December 31, 2012, was $222,000.  The fair value of grants awarded in the yearto December 31, 2009 was $324,000.

 

Estimates of fair values of the awards were made usingBlack-Scholes valuation model based on the following assumptions:

 
| ** **                          | ** ** | **For years  ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                   |       |   |   |   |   |
| Expected share price volatility     |       | 49% -50%                               |       | — |   | — |   |
| Risk-free interest rate             |       | 1.48% - 2.69%                          |       | — |   | — |   |
| Expected annual dividends per share |       | $0.00                                  |       | — |   | — |   |
| Expected life of awards             |       | 3 years                                |       | — |   | — |   |

 

The basis of assumptions wassimilar to that used for the 2000 and 2009 stock option plans.

 

*(d)**         **2009share award and incentive plan*

 

On June 5,2009, the shareholders of the Company approved a new 2009 share award andincentive plan which replaced the 2000 stock option plan, 2004 stock optionplan and 2007 performance share plan (the “Pre-existing Plans”). A total of1,084,550 class A common shares plus the number of class A common sharessubject to outstanding awards under the Pre-existing Plans which becomeavailable after June 5, 2009 as a result of expirations, cancellations,forfeitures or terminations, are reserved for issuance for awards under the2009 share award and incentive plan

 

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

 

OEH awardedunder the 2009 plan on June 8, 2009 stock options on 631,900 class Acommon shares at an exercise price of $8.38 per share becoming exercisable in June 2012.On July 21, 2009, OEH awarded stock options on 5,000 class A common sharesat an exercise price of $7.71 per share becoming exercisable in July 2012.On December 3, 2009, OEH awarded stock options on 424,700 class A commonshares at an exercise price of $8.91 per share becoming exercisable in December 2012.

 

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The total compensation cost related to non-vestedstock options at December 31, 2009 to be recognized over the period January 1,2010 to December 31, 2012, was $3,983,000.  The fair value of grants issued in the yearto December 31, 2009 was $4,527,045. The fair value of options which vested in the year to December 31,2009 was $6,902.  Transactionsunder the plans have been as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Option Price** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|
| Outstanding at January 1, 2009   |       | —     |       |             |       |
| Granted                               |       | 1,061,600  |       | $7.71 - $8.91    |       |
| Forfeited                             |       | (72,748    | )          | $8.38            |       |
| Exercised                             |       | (1,652     | )          | $8.38            |       |
| Outstanding at December 31, 2009 |       | 987,200    |       | $7.71 - $8.91    |       |
| Exercisable at December 31, 2009 |       | —     |       |             |       |

 

The options outstanding at December 31, 2009,were as follows:

 
| ** **                 | ** ** | **Number of Shares**                        | ** ** | **Weighted Average of**                     | ** ** |
|----------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| **Exercise********Prices** | ** ** | **Outstanding********at********12/31/2009** | ** ** | **Exercisable********at********12/31/2009** | ** ** | **Remaining  Contractual********Lives** | ** ** | **Exercise********Prices for  Outstanding  Options** | ** ** | **Exercise********Prices for  Exercisable********Options** | ** ** |
| ** **                 |       |                                        |       |                                        |       |   |   |   |   |   |   |
| $                          |  8.38 |                                        | 557,500    |                                        | —     |   | 9.4 |   | $ | 8.38 |   | — |   |
| $                          |  7.71 |                                        | 5,000      |                                        | —     |   | 9.5 |   | $ | 7.71 |   | — |   |
| $                          |  8.91 |                                        | 424,700    |                                        | —     |   | 9.9 |   | $ | 8.91 |   | — |   |
|                       |       | 987,200                                     |       | —                                      |       |   |   |   |   |   |   |

 

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

 
| ** **                          | ** ** | **For years  ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                   |       |   |   |   |   |
| Expected share price volatility     |       | 55%-56%                                |       | — |   | — |   |
| Risk-free interest rate             |       | 2.14-2.95%                             |       | — |   | — |   |
| Expected annual dividends per share |       | $0.00                                  |       | — |   | — |   |
| Expected life of stock options      |       | 5 years                                |       | — |   | — |   |

 

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

 

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At December 31, 2009, 22,191 class A commonshares were reserved under the 2009 plan for issuance pursuant to awards ofdeferred shares made to three persons. Of these awards, 21,265 do not specify any performance criteria and willvest in June 2012. The remaining award of up to 926 deferred shares willalso vest in June 2012 and is subject to performance and market criteria.Half of the 926 deferred share award is subject to performance criteria basedon OEH’s earnings before tax for the year ending December 31, 2011, andthe other half is subject to market criteria based on OEH’s total shareholderreturn compared to the average total shareholder return of a specified group ofother hotel and leisure companies over the period of three years.

 

The total compensation cost related to non-vesteddeferred share awards granted under the 2009 plan at December 31, 2009, tobe recognized over the period January 1, 2010 to December 31, 2012,was $150,000.  The fair value of deferredshares awarded in the year to December 31, 2009 was $185,757.

 

The status of the deferred share awards as of December 31,2009 and changes during the year ended December 31, 2009 are presented as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant date fair  value** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Outstanding at January 1, 2009   |       | —     |       |                                         |       |
| Granted                               |       | 22,191     |       | $                                            | 8.37       |   |
| Forfeited                             |       | —     |       |                                         |       |
| Outstanding at December 31, 2009 |       | 22,191     |       | $                                            | 8.37       |   |
| Exercisable at December 31, 2009 |       | —     |       |                                         |       |

 

Estimates of fair value of the awards were made usingthe Black-Scholes valuation model were based on the following assumptions:

 
| ** **                          | ** ** | **For years  ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                   |       |   |   |   |   |
| Expected share price volatility     |       | 55.00                                  | %          | — |   | — |   |
| Risk-free interest rate             |       | 2.95                                   | %          | — |   | — |   |
| Expected annual dividends per share |       | $                                      | 0.00       |   | — |   | — |   |
| Expected life of awards             |       | 3 years                                |       | — |   | — |   |
|                                     |            |                                        |            |  |  |  |  |  |

 

The basis of assumptions wassimilar to that used for the 2000 and 2004 stock option plans.

 

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**16.          Commitments and contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $54,627,000 at December 31, 2009 (2008-$76,606,000)including the New York City contract referred to below.

 

In addition, OEH entered into conditional contractsdated October 2009 to purchase Grand Hotel Timeo and Villa Sant’Andrea in Taormina,Sicily for€81,000,000 ($117,000,000). Subsequent to December 31,2009, the conditions of the contracts are satisfied and OEH completed thepurchase of both properties.  See Note21.

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH entered into agreements in November 2007 with the NewYork Public Library to acquire its Donnell Library branch site adjacent to ‘21’Club and to construct a mixed use hotel and residential development in New YorkCity. In February 2009, in light of current and anticipated futureeconomic conditions at that time, OEH decided to suspend further payments underthe agreements, as they had been amended in December 2008. On July 9,2009, OEH and the New York Public Library signedagreements to spread future payments on this purchase over the next 24 months.In addition to the $7,000,000 that OEH has already paid, OEH paid $9,000,000upon execution of the agreements, to be followed by 16 monthly payments of$500,000 each commencing in February 2010, and final payments of $6,000,000and $29,000,000 in June 2011.  In February 2010,OEH made the first payment under the July 2009 agreements.  In the event OEH elects not to close thetransaction, the final payment of $29,000,000 will not be due to theLibrary.  OEH has agreed to give theLibrary security on unencumbered villas at La Samanna to secure the payments.

 

Future rental payments under operating leases inrespect of equipment rentals and leased premises are payable as follows(dollars in thousands):

 
| ** **          | ** ** | **Year ended  December 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
|                |       |                              |       |
|                |       |                              |       |
| 2010                |       | $                                 | 8,416      |   |
| 2011                |       | 8,220                             |       |
| 2012                |       | 8,169                             |       |
| 2013                |       | 8,076                             |       |
| 2014                |       | 8,075                             |       |
| 2015 and thereafter |       | 108,853                           |       |
|                |       | $                                 | 149,809    |   |

 

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Rental expense for the year ended December 31,2009 amounted to $8,825,000 (2008-$8,806,000; 2007-$4,101,000).

 

Outstanding contracts for project related costs on thePorto Cupecoy development amounted to $9,264,000 at December 31, 2009(2008-$31,960,000)

 

**17.          Derivative financial instruments**

 

*Risk management objective of using derivatives*

 

OEH entersinto derivative financial instruments to manage exposures that arise frombusiness activities that result in the receipt or payment of future known anduncertain cash amounts, the value of which is determined by interest rates. OEH’sderivative financial instruments are used to manage differences in the amount,timing and duration of OEH’s known or expected cash receipts and payments principallyrelated to its investments and borrowings.

 

*Cash flow hedges of interest rate risk*

 

OEH’sobjective in using interest rate derivatives is to add certainty and stabilityto its interest expense and to manage its exposure to interest rate movements.To accomplish this objective, OEH primarily uses interest rate swaps as part ofits interest rate risk management strategy. Interest rate swaps designated ascash flow hedges involve the receipt of variable-rate amounts from acounterparty in exchange for OEH making fixed-rate payments over the life ofthe agreements without the exchange of the underlying notional loan amount.

 

The effectiveportion of changes in the fair value of derivatives designated and qualifyingas cash flow hedges is recorded in accumulated other comprehensive income andis subsequently reclassified into earnings in the period that the hedgedforecast transaction affects earnings. During the year ended December 31,2009, these derivatives were used to hedge the variable cash flows associatedwith existing variable interest rate debt. The ineffective portion of thechange in fair value of the derivatives is recognized directly in earnings.

 

As of December 31, 2009, OEH had the followingoutstanding interest rate derivatives that were designated as cash flow hedgesof interest rate risk:

 

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| **Interest Rate Derivatives** | ** ** | **Notional Amount** | ** **  |
|-------------------------------|------------|---------------------|-------------|
|                          |       |                |        |
| Interest Rate Swaps           |       | €              | 165,000,000 |   |
| Interest Rate Swaps           |       | $                   | 181,250,000 |   |
| Interest Rate Swaps           |       | A$                  | 20,000,000  |   |
|                               |            |                     |             |  |  |

 

*Non-designatedhedges of interest rate risk*

 

Derivativesnot designated as hedges are used to manage OEH’s exposure to interest ratemovements but do not meet the strict hedge accounting requirements of ASC 815 “Derivativesand Hedging” (formerly SFAS 133 “Accounting for Derivative Instruments and HedgingActivities”). As of December, 2009, OEH had one interest rate swap witha €24,700,000 notional amount that was a non-designated hedge of OEH’s exposureto interest rate risk.

 

To comply withthe provisions of ASC 820-10 “Fair Value Measurements and Disclosures”(formerly SFAS 157 “Fair Value Measurements”), OEH incorporates creditvaluation adjustments to reflect appropriately both its own non-performancerisk and the respective counterparty’s non-performance risk in the fair valuemeasurements.  In adjusting the fairvalue of its derivative contracts for the effect of non-performance risks, OEHhas considered the impact of netting and any applicable credit enhancements,such as collateral postings, thresholds, mutual puts and guarantees.

 

The table below presents the fair value of OEH’sderivative financial instruments and their classification as of December 31,2009 and 2008 (dollars in thousands):

 
| ** **                                                       | ** ** | **Liability Derivatives**   | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **Balance Sheet  Location** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| Derivatives designated as hedging instruments under ASC 815:     |       |                        |       |   |   |   |   |
| Interest Rate Swaps                                              |       | Other Assets                |       | $ | 37 |   | $ | — |   |
| Interest Rate Swaps                                              |       | Accrued  liabilities        |       | (8,886 | ) | (4,207 | ) |
| Interest Rate Swaps                                              |       | Other  liabilities          |       | (3,238 | ) | (4,576 | ) |
| Total                                                            |       |                        |       | $ | (12,087 | ) | $ | (8,783 | ) |
| Derivatives not designated as hedging instruments under ASC 815: |       |                        |       |   |   |   |   |
| Interest Rate Swap                                               |       | Accrued  liabilities        |       | $ | (1,159 | ) | $ | (1,670 | ) |
| Interest Rate Swap                                               |       | Other  liabilities          |       | (335 | ) | (2,228 | ) |
| Total                                                            |       |                        |       | $ | (1,494 | ) | $ | (3,898 | ) |

 

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The table below (in which “OCI” means othercomprehensive income) presents the effect of OEH’s derivative financial instrumentson the statement of operations for the year ended December 31, 2009 and2008 (dollars in thousands):

 
| ** **                                                                               | ** ** | **Year  ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                               | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Interest rate swaps which are designated under ASC 815 as hedging  instruments:          |       |                              |       |   |   |
| Amount of loss recognized in OCI (effective portion),                                    |       | $                                 | (9,710     | ) | $ | (9,255 | ) |
| Amount of (loss)/gain reclassified from accumulated OCI into income  (effective portion) |       | $                                 | (7,056     | ) | $ | 108 |   |
| Location of loss recognized in income on derivatives (ineffective  portion)              |       | Interest Expense                  |       | Interest expense |   |
| Amount of loss recognized in income on derivatives (ineffective  portion)                |       | $                                 | (20        | ) | $ | (119 | ) |
| Interest rate swaps which are not designated under ASC 815 as hedging  instruments:      |       |                              |       |   |   |
| Amount of (loss)/gain recognized in income                                               |       | $                                 | (1,081     | ) | $ | (4,331 | ) |

 

At December 31, 2009 the amount accounted for inother comprehensive income which is expected to be reclassified to interestexpense in the next 12 months is $8,082,000 (2008-$4,063,000).

 

*ASC 820-10 disclosure*

 

The followingtable summarizes the valuation of OEH’s assets and liabilities by the ASC820-10 fair value hierarchy at December 31, 2009 (dollars in thousands):

 
| ** **                       | ** ** | **Beginning********balance********at********January  1, 2009** | ** ** | **Transfers********into********Level 3** | ** ** | **Realized  losses********included********in********earnings** | ** ** | **Unrealized********gains********included in********other********comprehensive********income** | ** ** | **Settlements** | ** ** | **Ending  balance********at  December********31, 2009** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------|------------|---------------------------------------------------------|------------|
| Liabilities at fair value:       |       |                                                           |       |                                     |       |                                                           |       |                                                                                           |       |            |       |                                                    |       |
| Derivative financial instruments |       | $                                                              | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |            | $          | (671                                                    | )          | $ | (1,390 | ) | $ | — |   |
| Total Liabilities                |       | $                                                              | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |            | $          | (671                                                    | )          | $ | (1,390 | ) | $ | — |   |

 

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There were nomovements in Level 3 derivatives in the three months ended December 31,2009 and there were no derivatives classified as Level 3 derivatives as at December 31,2009.

 

The amount oftotal losses included in earnings that are attributable to the change inunrealized gains or losses relating to those liabilities still held at December 31,2009 was $15,000 for the year ended December 31, 2009.

 

OEH reviewsits fair value hierarchy classifications quarterly.  Changes insignificant observable valuation inputs identified during these reviews maytrigger a reclassification of the fair value hierarchy levels of financialassets and liabilities.  These reclassifications are reported as transfersinto Level 3 at their fair values at the beginning of the period in which thechange occurs and the transfers out at their fair values at the end of theperiod.

 

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

 

*Credit-risk-relatedcontingent features*

 

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

 

As of December 31, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest and anadjustment for non-performance risk, related to these agreements was$13,618,000. As of December 31, 2009, OEH has posted cash collateral of$3,710,000 with certain of its derivative counterparties in respect of thesenet liability positions. If OEH breached any of these provisions, it would berequired to settle its obligations under the agreements at their terminationvalue of $14,087,000.

 

*Non-derivative financialinstruments — net investment hedges*

 

OEH usescertain of its debt denominated in foreign currency to hedge portions of itsnet investments in foreign operations against adverse movements in exchangerates. OEH designated its euro-denominated revolving indebtedness as a net 

 

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investmenthedge of long-term investments in its euro-functional subsidiaries.  These contracts are included in non-derivativehedging instruments. The values of non-derivative hedging instruments were$86,083,000 at December 31, 2009 and $83,403,000 at December 31,2008, both liabilities. Amounts recorded in other comprehensive income were a$2,642,000 loss for the year ended December 31, 2009 and a $9,363,000 lossfor the year ended December 31, 2008.

 

*Fair value of financialinstruments*

 

Certainmethods and assumptions were used to estimate the fair value of each class offinancial instruments for which it is practicable to estimate fair value. Thecarrying amount of cash and cash equivalents and working capital facilitiesapproximates fair value because of the short maturity of those instruments. Thefair value of OEH’s long-term debt is estimated based on the credit spreads forOEH derived from a third party credit risk model.

 

The estimatedfair values of OEH’s financial instruments as of December 31, 2009 and 2008 are as follows (dollars inthousands):

 
| ** **                                                                                     | ** **     | ****December 31, 2009**** | **** ****  |
|------------------------------------------------------------------------------------------------|----------------|--------------------------------|-----------------|
| **** ****                                                                                 | **** **** | ****Carrying  amount****       | **** ****  | ****Fair value**** | **** **** |
| ****Cash and cash equivalents****                                                              |           | $                              | 92,045          | **** **** | ****$**** | ****92,045**** | **** **** |
| ****Working capital facilities****                                                             |           | $                              | 6,666           | **** **** | ****$**** | ****6,666**** | **** **** |
| ****Long-term debt, including current  portion, excluding obligations under capital leases**** | **** **** | ****$****                      | ****799,666**** | **** **** | ****$**** | ****731,107**** | **** **** |

 
| ** **                                                                                                   | ** **     | ****December 31, 2008**** | **** **** |
|--------------------------------------------------------------------------------------------------------------|----------------|--------------------------------|----------------|
| **** ****                                                                                               | **** **** | ****Carrying  amount****       | **** **** | ****Fair value**** | **** **** |
| ****Cash and cash equivalents****                                                                            | **** **** | ****$****                      | 77,432         | **** **** | ****$**** | ****77,432**** | **** **** |
| ****Working capital facilities****                                                                           | **** **** | ****$****                      | 54,179         | **** **** | ****$**** | ****54,179**** | **** **** |
| ****Long-term debt, including current  portion,********excluding obligations under capital********leases**** | **** **** | ****$****                      | 778,220        | **** **** | ****$**** | ****583,966**** | **** **** |

 

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

 

The estimatedfair values of OEH’s non-financial assets measured on a non-recurring basis atDecember 31, 2009 are as follows (dollars in thousands): 

 
| ** **                                      | ** ** | ** **                | ** ** | **Fair value measurements using**                    | ** ** | ** **                         | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **Fair Value**            | ** ** | **Quoted prices  in active  markets for  identical** | ** ** | **Significant  other  observable** | ** ** | **Significant  unobservable** | ** ** | **Total losses  for year  ended** | ** ** |
| ** **                                      | ** ** | **At December  31, 2009** | ** ** | **assets  (Level 1)**                                | ** ** | **inputs  (Level 2)**              | ** ** | **inputs  (Level 3)** | ** ** | **December 31,  2009** | ** ** |
| Assets of discontinued operations held for sale |       | $                         | 41,770     |                                                 | $          | —                             |       | $ | 41,770 |   | $ | — |   | $ | (32,235 | ) |
| Goodwill                                        |       | $                         | —     |                                                 | $          | —                             |       | $ | — |   | $ | — |   | $ | (6,835 | ) |
| Other intangible assets                         |       | $                         | —     |                                                 | $          | —                             |       | $ | — |   | $ | — |   | $ | (213 | ) |

 

Assets ofdiscontinued operations held for sale with a carrying amount of $74,005,000were written down to their fair value, less cost to sell, resulting in a lossof $32,235,000 which was included in losses from discontinued operations forthe period (see Note 2).

 

Goodwill witha carrying amount of $6,835,000 was written down to its implied fair value of$nil, resulting in an impairment charge of $6,835,000 which was included inearnings from continuing operations for the period (see Note 5).

 

Also otherintangible assets with a carrying amount of $213,000 were written down to theirfair value of $nil, resulting in an impairment charge of $213,000 which wasincluded in earnings from continuing operations for the period (see Note 5).

 

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**18.          Other comprehensive income/(loss)**

 

Theaccumulated balances for each component of other comprehensive income/(loss)are as follows (dollars in thousands):

 
| ** **                                          | ** ** | **Year ended  December 31,** | ** **    |
|-----------------------------------------------------|------------|-----------------------------------|---------------|
| ** **                                          | ** ** | **2009**                          | ** **    | **2008** | ** ** |
| Foreign currency translation adjustments            |       | $                                 |  (18,118 | ) | $ |  (40,851 | ) |
| Derivative financial instruments                    |       | (11,275                           | )             | (8,633 | ) |
| Pension liability, net of tax of $2,072  and $3,106 |       | (10,421                           | )             | (10,726 | ) |
|                                                |       | $                                 |  (39,814 | ) | $ |  (60,210 | ) |

 

The componentsof comprehensive income/(loss) are as follows (dollars in thousands):

 
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net(loss)/earnings on common shares      |       | $                                | (68,797    | ) | $ |  (26,551 | ) | $ |  33,642 |   |
| Foreign currency translation adjustments |       |  22,733                     |       |  (79,042 | ) |  34,646 |   |
| Change in fair value of derivatives      |       |  (2,642                     | )          |  (9,363 | ) | 730 |   |
| Change in pension liability              |       | 305                              |       | (2,236 | ) |  28 |   |
| Comprehensive income                     |       | $                                | (48,401    | ) | $ | (117,192 | ) | $ |  69,046 |   |

 

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

 

OEH’s segmentinformation has been prepared in accordance with ASC 280-10 “Segment Reporting”(formerly SFAS 131 ****“****Disclosures about Segments ofan Enterprise and Related Information****”)****.  OEH has three reportingsegments, (i) hotels and restaurants, (ii) tourist trains andcruises, and (iii) real estate and property development, which are groupedinto various geographical regions. Hotels at December 31, 2009 are located in the United States, Caribbean,Mexico, Europe, southern Africa, South America, Southeast Asia, Australia andSouth Pacific, restaurants are located in New York and Buenos Aires, touristtrains operate in Europe and Southeast Asia and Peru, a river cruiseshipoperates in Burma and five canalboats in France, and real estate developmentsare located in the U.S., Caribbean, Mexico, Europe and Southeast Asia.  Segment performance is evaluated based uponsegment net earnings before interest expense, foreign currency, tax (includingtax on earnings from unconsolidated companies), depreciation and amortization (“segmentEBITDA”).  Segment information is presentedin accordance with the accounting policies described in Note 1.

 

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Financialinformation regarding these business segments is as follows (dollars inthousands):

 
| ** **                                                       | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                                                         |       |                              |       |   |   |   |   |
| Hotels and restaurants                                           |       |                              |       |   |   |   |   |
| Owned hotels - Europe                                            |       | $                                 | 161,446    |   | $ | 217,121 |   | $ | 215,355 |   |
| - North America                                                  |       | 100,486                           |       | 64,214 |   | 60,257 |   |
| - Rest of World                                                  |       | 116,182                           |       | 129,317 |   | 119,112 |   |
| Hotel management/part ownership interests                        |       | 4,616                             |       | 10,629 |   | 10,683 |   |
| Restaurants                                                      |       | 14,436                            |       | 18,499 |   | 21,159 |   |
|                                                             |       | 397,166                           |       | 439,780 |   | 426,566 |   |
| Tourist trains and cruises                                       |       | 58,084                            |       | 77,212 |   | 82,482 |   |
| Real estate                                                      |       | 1,706                             |       | (14,154 | ) | 19,908 |   |
|                                                             |       | $                                 | 456,956    |   | $ | 502,838 |   | $ | 528,956 |   |
|                                                             |       |                              |       |   |   |   |   |
|                                                             |       |                              |       |   |   |   |   |
| Depreciation and amortization:                                   |       |                              |       |   |   |   |   |
| Hotels and restaurants                                           |       |                              |       |   |   |   |   |
| Owned hotels - Europe                                            |       | $                                 | 16,295     |   | $ | 16,689 |   | $ | 15,434 |   |
| - North America                                                  |       | 11,834                            |       | 5,526 |   | 5,402 |   |
| - Rest of World                                                  |       | 8,953                             |       | 8,401 |   | 8,725 |   |
| Restaurants                                                      |       | 718                               |       | 808 |   | 891 |   |
|                                                             |       | 37,800                            |       | 31,424 |   | 30,452 |   |
| Tourist trains and cruises                                       |       | 3,030                             |       | 3,348 |   | 4,225 |   |
|                                                             |       | $                                 | 40,830     |   | $ | 34,772 |   | $ | 34,677 |   |
|                                                             |       |                              |       |   |   |   |   |
| Segment EBITDA:                                                  |       |                              |       |   |   |   |   |
| Owned hotels - Europe                                            |       | $                                 | 38,328     |   | $ | 61,215 |   | $ | 68,999 |   |
| - North America                                                  |       | 14,579                            |       | 9,455 |   | 10,259 |   |
| - Rest of World                                                  |       | 25,453                            |       | 32,000 |   | 34,448 |   |
| Hotel management/part ownership interests                        |       |                              | 2,995      |   |   | 23,302 |   |   | 23,840 |   |
| Restaurants                                                      |       | 1,757                             |       | 3,518 |   | 5,034 |   |
| Tourist trains and cruises                                       |       | 20,571                            |       | 24,279 |   | 25,481 |   |
| Real estate                                                      |       | (3,476                            | )          | (6,433 | ) | 4,121 |   |
| Gain on disposal of fixed assets                                 |       | 1,385                             |       | — |   | 2,312 |   |
| Impairment of goodwill and other  intangible assets              |       | (6,500                            | )          | (6,107 | ) | — |   |
| Impairment of equity investment                                  |       | —                            |       | (22,992 | ) | — |   |
| Central overheads                                                |       | (25,870                           | )          | (31,117 | ) | (26,072 | ) |
|                                                             |       | $                                 | 69,222     |   | $ | 87,120 |   | $ | 148,422 |   |
|                                                             |       |                              |       |   |   |   |   |
| Segment EBITDA/net earnings  reconciliation:                     |       |                              |       |   |   |   |   |
| Segment EBITDA                                                   |       | $                                 | 69,222     |   | $ | 87,120 |   | $ | 148,422 |   |
| Less:                                                            |       |                              |       |   |   |   |   |
| Depreciation and amortization                                    |       | 40,830                            |       | 34,772 |   | 34,677 |   |
| Interest expense, net                                            |       | 31,068                            |       | 46,874 |   | 41,029 |   |
| Foreign currency, net                                            |       | 1,058                             |       | (4,774 | ) | (799 | ) |
| Provision for income taxes                                       |       | 11,033                            |       | 2,178 |   | 14,767 |   |
| Share of provision for income taxes of  unconsolidated companies |       | 4,510                             |       | 6,986 |   | 4,772 |   |
| (Loss)/earnings from continuing  operations.                     |       | $                                 | (19,277    | ) | $ | 1,084 |   | $ | 53,976 |   |

 

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| ** **                                           | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Earnings from unconsolidated companies,  net of tax: |       |                              |       |   |   |   |   |
| Hotels and restaurants                               |       |                              |       |   |   |   |   |
| Hotel management/part ownership interests            |       | $                                 | (2,809     | ) | $ | 9,090 |   | $ | 11,462 |   |
| Tourist trains and cruises                           |       | 6,992                             |       | 7,681 |   | 4,963 |   |
|                                                 |       | $                                 | 4,183      |   | $ | 16,771 |   | $ | 16,425 |   |
|                                                 |       |                              |       |   |   |   |   |
| Capital expenditure:                                 |       |                              |       |   |   |   |   |
| Hotels and restaurants                               |       |                              |       |   |   |   |   |
| Owned hotels - Europe                                |       | $                                 | 13,560     |   | $ | 31,233 |   | $ | 35,591 |   |
| - North America                                      |       | 21,493                            |       | 24,531 |   | 35,986 |   |
| - Rest of World                                      |       | 24,599                            |       | 29,852 |   | 16,587 |   |
| Restaurants                                          |       | 342                               |       | 530 |   | 608 |   |
|                                                 |       | 59,994                            |       | 86,146 |   | 88,772 |   |
| Tourist trains and cruises                           |       | 9,098                             |       | 3,777 |   | 4,347 |   |
| Real estate                                          |       | 2,998                             |       | 18,781 |   | 6,060 |   |
|                                                 |       | $                                 | 72,090     |   | $ | 108,704 |   | $ | 99,179 |   |

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Identifiable assets:                       |       |                  |       |   |   |
| Hotels and  restaurants                    |       |                  |       |   |   |
| Owned hotels -  Europe                     |       | $                     | 661,711    |   | $ | 624,436 |   |
| - North America                            |       | 597,465               |       | 614,510 |   |
| - Rest of World                            |       | 405,306               |       | 354,535 |   |
| Hotel  management/part ownership interests |       | 68,221                |       | 77,146 |   |
| Restaurants                                |       | 31,367                |       | 32,244 |   |
|                                       |       | 1,764,070             |       | 1,702,871 |   |
| Tourist trains  and cruises                |       | 105,083               |       | 101,012 |   |
| Real estate                                |       | 161,767               |       | 83,983 |   |
| Discontinued  operations held for sale     |       | 41,770                |       | 180,930 |   |
|                                       |       | $                     | 2,072,690  |   | $ | 2,068,796 |   |

 

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

 
| ** **    | ** ** | **Year ended  December 31,** | ** ** |
|---------------|------------|-----------------------------------|------------|
| ** **    | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:      |       |                              |       |   |   |   |   |
| Europe        |       | $                                 | 217,293    |   | $ | 288,173 |   | $ | 290,094 |   |
| North America |       | 114,922                           |       | 75,459 |   | 108,521 |   |
| Rest of World |       | 124,741                           |       | 139,206 |   | 130,341 |   |
|          |       | $                                 | 456,956    |   | $ | 502,838 |   | $ | 528,956 |   |

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Long-lived  assets at book value: |       |                  |       |   |   |
| Europe                            |       | $                     | 631,862    |   | $ | 643,704 |   |
| North America                     |       | 599,381               |       | 559,957 |   |
| Rest of World                     |       | 411,454               |       | 367,515 |   |
|                              |       | $                     | 1,642,697  |   | $ | 1,571,176 |   |

 

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Long-lived assets at book value constitute the following (dollars inthousands):

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Property, plant  and equipment |       | $                     | 1,403,773  |   | $ | 1,329,955 |   |
| Investments                    |       | 58,432                |       | 67,464 |   |
| Goodwill                       |       | 149,180               |       | 153,502 |   |
| Other intangible  assets       |       | 20,982                |       | 20,255 |   |
|                           |       | $                     | 1,632,367  |   | $ | 1,571,176 |   |

 

**20.          Related party transactions**

 

OEH guarantees a $3,000,000working capital facility of Eastern and Oriental Express Ltd., in which OEH hasa non-controlling shareholder interest. This guarantee was in place before December 31, 2004.  The amount due to OEH from Eastern andOriental Express Ltd. at December 31, 2009 was $647,000 (2008-$1,290,000).

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method until December 31, 2008) and madeloans to the hotel-owning company.  Asdiscussed in Note 3, with effect from December 31, 2008, the hotel-owningcompany has been consolidated into the financial statements of OEH.  For the year ended December 31, 2008,OEH earned $4,867,000 (2007-$5,200,000) in management fees which are recordedin revenue, and $12,068,000 (2007-$11,807,000) in interest income onpartnership and other loans, which is recorded in earnings from unconsolidatedcompanies.

 

OEH manages under long-termcontracts the Hotel Monasterio, Machu Picchu Sanctuary Lodge, Las Casitas delColca and Hotel Rio Sagrado 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 year ended December 31, 2009, OEHearned management and guarantee fees of $6,610,000 (2008-$7,685,000;2007-$6,477,000) and loan interest of $nil (2008-$44,000; 2007-$63,000) whichare recorded in revenue.  The amount dueto OEH from its joint venture Peruvian operations at December 31, 2009 was$7,931,000 (2008-$6,502,000).

 

OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH holds a 50%interest accounted for under the equity method. For the year ended December 31, 2009, OEH earned $1,113,000(2008-$1,321,000; 2007-$1,867,000) in management fees, which are included inrevenue.  The amount due to OEH from theHotel Ritz at December 31, 2009 was $10,807,000(2008-$1,883,000).  See Note 4(b) regarding impairment ofthis investment.

 

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OEH has granted to James Sherwood, a director of theCompany, a right of first refusal to purchase the Hotel Cipriani in Venice,Italy in the event OEH proposes to sell it. The purchase price would be the offered sale price in the case of a cashsale or the fair market value of the hotel, as determined by an independentvaluer, in the case of a non-cash sale.  Mr. Sherwoodhas also been granted an option to purchase the hotel at fair market value if achange in control of the Company occurs. Mr. Sherwood may elect to pay 80% of the purchase price if heexercises his right of first refusal, or 100% of the purchase price if heexercises his purchase option, by a non-recourse promissory note secured by thehotel payable in ten equal annual instalments with interest at LIBOR.  These agreements relating to the HotelCipriani between Mr. Sherwood and OEH and its predecessor companies havebeen in place since 1983 and were last amended and restated in 2005.

 

**21.****                              ****Subsequent events**

 

On January 19, 2010,the Company issued and sold through underwriters 13,800,000 class A commonshares in a public offering registered in the United States. Net proceedsamounted to $131,100,000.

 

On January 22, 2010,OEH purchased two hotels in Italy in Taormina, Sicily — the Grand Hotel Timeoand the Villa Sant’Andrea — at a purchase price of €81,000,000 ($117,000,000)funded by existing and new indebtedness relating to the properties, and aportion of the net proceeds of the share offering referred to above.  OEH’s deposit of €2,000,000 ($2,869,000)under the purchase agreements, accounted for as restricted cash at December 31,2009, was released when this purchase was completed.

 

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**Summary of quarterlyearnings (unaudited)**

** **
| ** **                                                                      | ** ** | **Quarter ended** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **December  31**  | ** ** | **September  30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| **2009**                                                                        |       |              |       |   |   |   |   |   |   |
|                                                                            |       |              |       |   |   |   |   |   |   |
| Revenue                                                                         |       | $                 | 111,284    |   | $ | 139,555 |   | $ | 126,606 |   | $ | 79,511 |   |
| Earnings/ (loss)  from operations                                               |       | $                 | (720       | ) | $ | 15,892 |   | $ | 13,667 |   | $ | (9,140 | ) |
| Net finance  costs                                                              |       | (8,107            | )          | (3,113 | ) | (7,921 | ) | (12,985 | ) |
| Earnings/(loss) before income taxes and  earnings from unconsolidated companies |       | (8,827            | )          | 12,779 |   | 5,746 |   | (22,125 | ) |
| (Provision for)/ benefit from income taxes                                      |       | 165               |       | (10,279 | ) | (10,296 | ) | 9,377 |   |
| Earnings from unconsolidated companies net  of tax                              |       | (424              | )          | 1,439 |   | 2,049 |   | 1,119 |   |
| Net earnings/(loss) from continuing  operations                                 |       | (9,086            | )          | 3,939 |   | (2,501 | ) | (11,629 | ) |
| Net (loss)/earnings from discontinued  operations                               |       | (7,744            | )          | (16,954 | ) | (21,812 | ) | (3,010 | ) |
| Net  (loss)/earnings                                                            |       | $                 | (16,830    | ) | $ | (13,015 | ) | $ | (24,313 | ) | $ | (14,639 | ) |
|                                                                            |       |              |       |   |   |   |   |   |   |
| Net  earnings/(loss) per share:                                                 |       |              |       |   |   |   |   |   |   |
| Basic                                                                           |       | $                 | (0.22      | ) | $ | (0.17 | ) | $ | (0.36 | ) | $ | (0.29 | ) |
| Diluted                                                                         |       | $                 | (0.22      | ) | $ | (0.17 | ) | $ | (0.36 | ) | $ | (0.29 | ) |
| Dividends per  share                                                            |       | $                 | —     |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                            |       |              |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                      | ** ** | **December  31**  | ** ** | **September****30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| **2008**                                                                        |       |              |       |   |   |   |   |   |   |
|                                                                            |       |              |       |   |   |   |   |   |   |
| Revenue                                                                         |       | $                 | 65,236     |   | $ | 168,283 |   | $ | 166,978 |   | $ | 102,341 |   |
| Earnings/(loss)  from operations                                                |       | $                 | (41,947    | ) | $ | 36,290 |   | $ | 33,293 |   | $ | 955 |   |
| Net finance  costs                                                              |       | (11,156           | )          | (13,094 | ) | (7,931 | ) | (9,919 | ) |
| Earnings/(loss) before income taxes and  earnings from unconsolidated companies |       | (53,103           | )          | 23,196 |   | 25,362 |   | (8,964 | ) |
| (Provision for)/ benefit from income taxes                                      |       | 10,652            |       | (6,665 | ) | (9,722 | ) | 3,557 |   |
| Earnings from unconsolidated companies net  of tax                              |       | 2,642             |       | 4,224 |   | 5,838 |   | 4,067 |   |
| Net earnings/(loss) from continuing  operations                                 |       | (39,809           | )          | 20,755 |   | 21,478 |   | (1,340 | ) |
| Net (loss)/earnings from discontinued  operations                               |       | (8,247            | )          | (14,376 | ) | (2,014 | ) | (2,998 | ) |
| Net  (loss)/earnings                                                            |       | $                 | (48,056    | ) | $ | 6,379 |   | $ | 19,464 |   | $ | (4,338 | ) |
|                                                                            |       |              |       |   |   |   |   |   |   |
| Net  earnings/(loss) per share:                                                 |       |              |       |   |   |   |   |   |   |
| Basic                                                                           |       | $                 | (1.04      | ) | $ | 0.15 |   | $ | 0.46 |   | $ | (0.10 | ) |
| Diluted                                                                         |       | $                 | (1.04      | ) | $ | 0.15 |   | $ | 0.46 |   | $ | (0.10 | ) |
| Dividends per  share                                                            |       | $                 | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

 

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**ITEM9.          Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**ITEM9A.         Controls andProcedures**

 

*Disclosure Controls and Procedures*

 

The Company’s chief executive officer and chief financial officer haveevaluated the effectiveness of OEH’s disclosure controls and procedures (asdefined in SEC Rule 13a-15(e)) as of December 31, 2009 and, based onthat evaluation, believe those disclosure controls and procedures are effectiveas of that date.

 

*Management’s Annual**Report on**Internal Control overFinancial Reporting*

 

OEHmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in SEC Rule 13a-15(f)).  OEH’s internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles.  Management assessed the effectiveness ofOEH’s internal control over financial reporting as of December 31,2009.  In making this assessment,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in Internal Control—IntegratedFramework.  Based on this assessment andthose criteria, management believes that OEH’s internal control over financialreporting was effective as of December 31, 2009.

 

Deloitte LLP,OEH’s independent registered public accounting firm, issued the report below onthe effectiveness of OEH’s internal control over financial reporting.

 

*Reportof Independent Registered Public Accounting Firm*

 

Board ofDirectors and Shareholders

Orient-ExpressHotels Ltd.

Hamilton,Bermuda

 

We haveaudited the internal control over financial reporting of Orient-Express HotelsLtd. and subsidiaries (the “Company”) as of December 31, 2009, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible for

 

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maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting.  Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by thecompany’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections ofany evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

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In ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2009, based on thecriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andconsolidated financial statement schedule listed in Item 15 as of and for theyear ended December 31, 2009 of the Company and our report dated February 26,2010 expressed an unqualified opinion on those consolidated financialstatements and financial statement schedule.

 

As discussedin Note 1 to the consolidated financial statements, on January 1, 2009,the Company adopted the non-controlling interest guidance from AccountingStandards Codification 810, “Consolidations” (formerly SFAS 160, “Non-ControllingInterests in Consolidated Financial Statements — an amendment of ARB 51”). TheCompany has retrospectively adjusted all periods presented in the consolidatedfinancial statements for the effect of this change.

 
| /s/ Deloitte  LLP       |   |
|-------------------------|--------|
|                    |   |
| London,  England        |   |
| February 26,  2010 |   |

 

*Changes in Internal Control over FinancialReporting*

 

There have been no changes in OEH’s internal control over financialreporting during the fourth quarter of 2009 that have materially affected, orare reasonably likely to materially affect, OEH’s internal control overfinancial reporting.

 

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 of misstatements.  In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents.  Controls may become inadequatebecause of changes in conditions, or the degree of compliance with the policiesor procedures may deteriorate, for example. Because of these and other inherent limitations of control systems,there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

 

**ITEM9B.            OtherInformation**

 

None.

 

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**PART III**

 

**ITEM 10.            Directors,Executive Officers and Corporate Governance**

 

**Directors**

 

The directors of the Company are as follows:

 
| **Name, Age**             | ** ** | **Principal Occupation   and Other Major   Affiliations**                                                                 | ** ** | **Year  First   Became  Director** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| John D.  Campbell, 67     |       | Senior  Counsel (retired) of Appleby (attorneys)                                                                          |       | 1994                               |       |
| Mitchell C.  Hochberg, 57 |       | Managing  Principal of Madden Capital LLC (real estate investment, development and  advisory firm)                        |       | 2009                               |       |
| James  B. Hurlock, 76     |       | Non-executive  Chairman of the Board of the Company, and Partner (retired) of  White & Case (attorneys)          |       | 2000                               |       |
| Prudence  M. Leith, 70    |       | Freelance  food consultant, television presenter, and novelist                                                            |       | 2006                               |       |
| J.  Robert Lovejoy, 65    |       | Senior  Advisor, General Counsel and Chief Compliance Officer of Coatue Management  LLC (financial asset management firm) |       | 2000                               |       |
| Georg  R. Rafael, 72      |       | Managing  Director of Rafael Group S.A.M. (hoteliers)                                                                     |       | 2002                               |       |
| James  B. Sherwood, 76    |       | Retired  Chairman of the Board of the Company                                                                             |       | 1994                               |       |
| Paul  M. White, 45        |       | President  and Chief Executive Officer of the Company                                                                     |       | 2008                               |       |

 

The principal occupation of each director during atleast the last five years is that shown in the table supplemented by thefollowing information.

 

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Mr. Campbell was a member of the law firm Applebyuntil March 1999 and retired as Senior Counsel in July 2003.  Mr. Campbell is the non-executiveChairman of the Board of The Bank of Bermuda Ltd., a subsidiary of HSBCHoldings plc, and a non-executive director and Chairman of the Nominations andGovernance Committee of Argus Group Holdings Ltd., a public company listed onthe Bermuda Stock Exchange engaged principally in the insurance business.  Mr. Campbell was also a non-executivedirector of Sea Containers Ltd. (“SCL”), formerly a leasing and transportcompany listed on the New York Stock Exchange and subsequently subject toChapter 11 reorganization proceedings in the United States in 2006 to 2009 andsubject to liquidation proceedings in Bermuda since January 2010 when Mr. Campbellstepped down as a director.

 

Mr. Hochberg has been the Managing Principal ofMadden Capital since March 2007.  Hewas President and Chief Operating Officer of Ian Schrager Company, a developerand manager of innovative luxury hotels and residential projects in the UnitedStates, in 2006 and early 2007.  Mr. Hochbergfounded, and for 20 years to December 2005, was the President and ChiefExecutive Officer of Spectrum Communities and its successor, developers ofluxury home communities in the northeastern United States.  He is a lawyer and a certified publicaccountant.

 

Mr. Hurlock acted as Chairman of the ManagementCommittee of White & Case LLP overseeing worldwide operations from1980 until his retirement in 2000.  Healso served as Interim CEO of Stolt-Nielsen Transportation Group Ltd., achemical transport services company, from July 2003 until June 2004.  Mr. Hurlock was appointed non-executiveChairman of the Board in June 2007.

 

Ms. Leith was the founder, owner and Managing Directorof Leith’s Group which, from 1960 until its sale in 1995 to Accor, grew toencompass restaurants, a prestigious London-based chef school, contractcatering, and event and party catering.  Part ofher current consulting activities is with Compass Group PLC, a large foodservice business with operations principally in the United Kingdom, ContinentalEurope and North America.  Ms. Leithhas served in the past as a non-executive director on the boards of BritishRailways, Whitbread PLC, Halifax PLC, Safeway PLC, Woolworths Group PLC,Nations Healthcare Ltd. and Omega International Group PLC.

 

Mr. Lovejoy in December 2009 joined CoatueManagement, a long/short equity manager of about $2.5 billion of institutionalassets.  During the three prior years, hewas Managing Director of Groton Partners LLC, a private merchant bankingfirm.  In 2000-2005, he was SeniorManaging Director of Ripplewood Holdings LLC, a private equity investment firm.  Prior to that position he was a ManagingDirector of Lazard

 

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Freres &Co. LLC, an investment banking firm, and a General Partner of Lazard’spredecessor partnership for over 15 years. Mr. Lovejoy is also a non-executive director of One LibertyProperties Inc., a commercial and industrial real estate investment trustlisted on the New York Stock Exchange.

 

Mr. Rafael was until early 2002 the Vice Chairmanof the Executive Committee of Mandarin Oriental Hotels, having sold RafaelHotels Ltd., a deluxe hotel owning and operating company that Mr. Rafaelestablished in 1986, to Mandarin in 2000. Before Rafael Hotels, he was joint Managing Director of RegentInternational Hotels, a hotel group Mr. Rafael helped start in 1972.

 

Mr. Sherwood founded the hotel business of apredecessor of the Company (an affiliate of SCL) in 1976 when it purchased itsfirst hotel, the Hotel Cipriani in Venice, Italy.  He retired from his executive duties with theCompany in December 2006 (having ceased to be a co-principal executiveofficer in October 2006) and stepped down as Chairman of the Board in June 2007.  He resigned as a director and non-executiveChairman of SCL in March 2006 having founded its predecessor company in1965.  He also served as President of SCLduring that time until January 2006. As noted above regarding Mr. Campbell, SCL has been inreorganization and liquidation proceedings since 2006.

 

Mr. White was appointed President and ChiefExecutive Officer of the Company in August 2007, having served as VicePresident—Finance and Chief Financial Officer from September 2005.  Previously, he was Vice President—Hotels,Africa, Australia and South America of the Company from 1999 to 2005, and wasDirector of Hotel Operations for the same geographical region in 1998 and1999.  He joined the Company’spredecessor, Orient-Express Hotels Inc., in 1991 from Forte Hotels, initiallyas Financial Controller.  Havingqualified as an accountant, he is currently a member of the Chartered Instituteof Management Accountants, and was the Company’s acting chief financial andaccounting officer until March 2008 when Martin O’Grady assumed thoseduties for the Company.

 

**ExecutiveOfficers**

 

The executive officers of the Company are as follows:

 
| **N****ame, Age**  | ** ** | **Position**                                                  |
|--------------------|------------|---------------------------------------------------------------|
|               |       |                                                          |
| Paul  M. White, 45 |       | President  and Chief Executive Officer since August 2007 |

 

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| **N****ame, Age**          | ** ** | **Position**                                                                                     |
|----------------------------|------------|--------------------------------------------------------------------------------------------------|
|                       |       |                                                                                             |
| Martin  O’Grady, 46   |       | Vice  President–Finance and Chief Financial Officer since March 2008                        |
| Filip  J.M. Boyen, 51      |       | Vice  President since September 2007 and Chief Operating Officer since  September 2009 |
| Roger  V. Collins, 63      |       | Vice  President–Design and Technical Services since 2001                                    |
| Phillip  A. Gesue, 40      |       | Vice  President–Real Estate since September 2009                                       |
| Edwin  S. Hetherington, 60 |       | Vice  President, General Counsel and Secretary since December 2006                               |
| Pippa  Isbell, 56          |       | Vice  President–Corporate Communications since September 2007                               |
| Maurizio  Saccani, 59      |       | Vice  President–Italy since September 2007                                             |
| David  C. Williams, 55     |       | Vice  President–Sales and Marketing since 2004                                              |

 

The principal occupation of each person during at leastthe last five years is shown in the table supplemented by the followinginformation.

 

Mr. White’s previous experience is reported aboveregarding the Company’s directors.

 

Prior to becoming an officer of the Company, Mr. O’Gradyserved as Chief Financial Officer of Orion Capital Managers LP, a Europeanprivate equity real estate investment firm including hotels.  From 1999 until 2005, he worked for SecurityCapital European Realty, where he served as Chief Financial Officer of AccessSelf Storage, a retail self-storage operator in the United Kingdom, France andAustralia.  From 1992 until 1998, Mr. O’Gradyheld a number of senior finance and accounting positions with Jardine MathesonGroup, an Asian-based conglomerate, including Group Financial Controller ofMandarin Oriental Hotels from 1992 to 1995. Mr. O’Grady began his career with PricewaterhouseCoopers and is anAssociate Chartered Accountant in England and Wales.

 

Mr. Boyen held positions with Marco Polo Hotels,Sun International Hotels and Ramada Renaissance before he joined OEH in1997.  Initially, he served as GeneralManager of Bora Bora Lagoon Resort until 1999, when he became Managing Directorof OEH’s hotel and tourist train operations in Peru.  He was appointed Vice President—Hotels,Africa, Australia and South America of the Company in September 2005, andVice President—Operations in September 2007.

 

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In November 2008, Mr. Boyen settled aninvestigation into alleged insider dealing in shares of a mining companypublicly traded in the United Kingdom brought by the Financial ServicesAuthority, an independent non-governmental body that regulates the financialservices industry in the United Kingdom (“FSA”).   In settling the matter, the FSA imposed acivil penalty of $152,000 on Mr. Boyen for engaging in market abuse fortrading on behalf of himself and a third party on the basis of insideinformation in contravention of the U.K. Financial Services and Markets Act2000.  Mr. Boyen fully cooperatedwith the FSA’s investigation.  None ofthe activities or information involved in the investigation related to OEH orthe Company’s securities.

 

Mr. Collins, an engineer, has worked in the hotelindustry since 1979 with Grand Metropolitan Hotels, Courage Inns and Taverns,and Trusthouse Forte Hotels, having joined Orient-Express Hotels Inc. in1991.

 

Mr. Gesue joined OEH in February 2009 asDirector of Real Estate responsible initially for its Porto Cupecoy project andother real estate activities in the U.S. and Caribbean.  Previously, he was Director of Acquisitionsand Development of Time Equities Inc., a U.S. based investor in office,residential, retail and mixed use properties. In 2000 to 2002, he was President and a partner of Biba Hotels,developer of an award winning boutique hotel in Florida.  Before these positions, he worked in projectmanagement of residential condominium and rental developments and in mortgagebanking.

 

Mr. Hetherington started withOrient-Express Hotels Inc. as Counsel and Secretary in 1980, and served asthe Company’s Secretary starting in 1994. Until the end of 2006, he was also Vice President, General Counsel andSecretary of SCL.  As noted above under“Directors” regarding Mr. Campbell, SCL has been in reorganization andliquidation proceedings since 2006.

 

Ms. Isbell joined the Company in 1998 afterselling the public relations consultancy she founded in 1987.  Her work in the hospitality industry hadincluded representation of Intercontinental Hotels, Forte, HiltonInternational, Jarvis Hotels, and Millennium and Copthorne.  From 2000 to September 2007, she servedas Vice President—Public Relations of the Company.

 

Mr. Saccani joined Orient-Express Hotels Inc. in1978 as Food and Beverage Manager of the Hotel Cipriani.  After serving as Manager in Italy of theVenice Simplon-Orient-Express, he became Managing Director of the Villa SanMichele in 1985 and, by 2007, had assumed responsibility for all of theCompany’s hotels in Italy.

 

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Mr. Williams joined Orient-Express Hotels Inc. in1981 as Sales and Reservations Manager. He became responsible for strategic marketing developments and businessinitiatives in the Americas, Europe and Asia. He previously worked for Carlson Marketing Group.

 

Nicholas R. Varian resigned as a Vice President andChief Development Officer of the Company in December 2009.

 

**Corporate Governance**

 

The board of directors of the Company has establishedcorporate governance measures substantially in compliance with requirements ofthe New York Stock Exchange (“NYSE”).  These include a set of Corporate GovernanceGuidelines, Charters for each of the standing Audit Committee, CompensationCommittee and Nominating and Governance Committee of the full board, and a Codeof Business Conduct for Directors, Officers and Employees.  The board of directors has also adopted aCode of Business Practices for the Company’s Principal Executive, Financial andAccounting Officers, which is filed as an exhibit to this report.  These documents are published on the Company’swebsite (www.orient-express.com).

 

Because the Company is a foreign private issuer asdefined in SEC rules, it is not required to comply with all NYSE corporategovernance requirements as they apply to U.S. domestic companies listed on theNYSE.  The Company’s corporate governancemeasures, however, do not differ in any significant way from thoserequirements.

 

The present members of the Company’s Audit Committeeare Messrs. Campbell, Hurlock and Lovejoy. The board has designated Mr. Lovejoy, an independent director, as anaudit committee financial expert as defined by SEC rules.  The present members of the CompensationCommittee and the Nominating and Governance Committee are Ms. Leith and Messrs. Campbell,Hurlock, Lovejoy and Rafael.  See Item13—Certain Relationships and Related Transactions and Director Independencebelow.  In addition, the board hasdesignated Messrs. Hurlock, Lovejoy and Rafael as a committee to considerstrategic overtures to the Company.

 

The non-executive directors of the Company meetregularly without management present.  Mr. Hurlockpresides at these executive sessions of the board.

 

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Interested persons may communicate directly with anyof the Company’s directors by writing to him or her at the Company’s registeredoffice address (Orient-Express Hotels Ltd., 22 Victoria Street, Hamilton HM 12,Bermuda).

 

**ITEM 11.            ExecutiveCompensation**

 

Because the Company is a foreign private issuer, it isresponding to this Item 11 as permitted by Item 402(a)(1) of SECRegulation S-K.

 

The following table shows the salary and bonus of Mr. Whitepaid in cash during 2009, and of all executive officers as a group for servicesto OEH in all capacities:

 
| **Name of Individual or Group**                 | ** ** | **Principal********Capacities in********Which Served** | ** ** | **Cash********Compensation** | ** **    |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|---------------|
|                                            |       |                                                   |       |                         |          |
| Paul M. White                                   |       | President, ChiefExecutive  Officerand  Director        |       | $                            |  484,100 |   |
| All executive officers as a group(nine persons) |       |                                                   |       | $                            | 2,941,900     |   |

 

This table and the other data about executive officersof the Company in this Item 11 excludes Nicholas R. Varian who resigned as anexecutive officer in December 2009.

 

OEH has entered into agreements with Mr. Whiteand most of the Company’s other executive officers entitling them to terminateemployment in certain circumstances constituting a change in control of the Companyand to receive an amount equal to two times each officer’s annualcompensation.  The agreements of the U.S.tax-paying officers also require the Company to pay the excise tax on theirseverance payments imposed pursuant to section 4999 of the U.S. InternalRevenue Code.

 

**Retirement Plans**

 

Through May 2006, certain executive officers whoare United Kingdom citizens participated in a contributory defined benefitpension plan established by an OEH subsidiary for British employees.  The amount of contribution by the subsidiaryto the plan in respect of a specific person cannot readily be separated orindividually calculated.  Participants inthe plan are eligible to receive at their normal retirement date an annual pensionbased on the number of years of pensionable service and their final pensionablecompensation.

 

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In May 2006, the subsidiary froze its U.K. definedbenefit pension plan, thus stopping future benefit accrual, so that the benefitpayable to participants at their normal retirement date will be calculatedusing pensionable service and final pensionable salary at that date.  From May 2006 and for later years, theOEH subsidiary established a defined contribution retirement plan for Britishemployees, including U.K.-based officers, under which the subsidiarycontributes to individual accounts established by employees.  The subsidiary currently contributes for theexecutive officer participants in the new plan at the rate of up to ten percentof annual salary.

 

Under the U.K. defined benefit plan, currentlyestimated accrued annual benefits payable to participating executive officersof the Company amounted to approximately $266,000in the aggregate at December 31, 2009, and under the U.K. definedcontribution plan, the OEH subsidiary contributed on behalf of participatingexecutive officers a total of $167,000during 2009.  See Note 11 to theFinancial Statements regarding retirement plans.

 

Certain U.S. subsidiaries of OEH haveadopted a 401(k) retirement plan that permits employees to contribute amountsout of their compensation into individual tax-deferred accounts.  The maximum contribution an employee couldmake was $16,500 in 2009.  Threeexecutive officers of the Company based in the U.S. participated in this planin 2009, and OEH paid $2,000 into each of their accounts as partial matchingpayments under the plan in addition to their own contributions.

 

**OptionAwards under 2000 and 2004 Stock Option Plans and 2009 Share Award andIncentive Plan**

 

Options to purchase class A common shares of theCompany at market value at the time of award have been granted to directors,executive officers and selected employees under the Company’s 2000 and 2004Stock Option Plans and 2009 Share Award and Incentive Plan.  These plans are administered by theCompensation Committee of the board of directors.  The options awarded have substantially thesame terms and, in general, become exercisable three years after the date ofgrant and expire ten years from date of grant. In certain circumstances constituting a change in control of theCompany, outstanding options become immediately exercisable, and optionees maythereafter surrender their options instead of exercising them and receivedirectly from the Company in cash the difference between the option exerciseprice and the value of the underlying shares determined according to the plans.

 

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During 2009, options to purchase an aggregate of700,400 class A shares were granted under the 2009 plan to executiveofficers of the Company at prices ranging from $8.38 to $8.91 per share,including options on 170,400 shares to Mr. White.  During 2009, no options were granted to theseven non-executive directors of the Company and no options were exercised bydirectors or officers.  At December 31,2009, options under the three plans to purchase an aggregate of 1,206,050 classA shares (of which 200,850 were exercisable by June 30, 2010) were held bydirectors and executive officers at per share exercise prices ranging from$5.89 to $59.23 and expiring between 2010 and 2019.  See Note 15 to the Financial Statements.

 

Following approval of the 2009 plan by shareholders atthe June 5, 2009 annual general meeting of the Company, no further grantsof stock options may be made under the 2000 and 2004 plans.

 

**ShareAwards under 2007 Performance Share Plan and 2009 Share Award and IncentivePlan**

 

Like the 2009 Share Award and Incentive Plan, theCompany’s 2007 Performance Share Plan is administered by the CompensationCommittee of the board of directors. Directors, executive officers and selected employees may be awarded anamount of class A common shares of the Company to be issued currently or on adeferred basis after the expiration of a vesting period.  The Compensation Committee may condition thevesting of deferred shares on achievement, in whole or in part, of specifiedperformance criteria in the individual award such as earnings targets, totalshareholder return goals or other criteria. Shares may also be issued under the awards before the vesting period hasexpired if a change in control of the Company occurs or certain other earlyvesting events occur.

 

During 2009, awards were made under the 2007 and 2009plans with performance criteria based on total shareholder return and earningsbefore tax on up to 52,637 class A shares to Mr. White and up to 135,309shares to the other executive officers, and additional awards were made withoutperformance criteria on 89,335 class A shares to the seven non-executivedirectors of the Company and one officer. All of these awards will vest in 2012. Also during 2009, awards were made under the 2007 plan withoutperformance criteria vesting in 2010 on 29,984 class A shares to Mr. White,20,259 shares to Mr. Hurlock and 33,078 shares to five other officers.  All of these shares vested and were issued in February 2010.  At December 31, 2009, a total of up to344,489 awards of class A shares of the Company had been granted to directorsand executive officers under the 2007 and 2009 plans vesting in 2010 to 2012,including the shares vested and issued in February 2010.  See Note 15 to the Financial Statements.

 

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Early in 2010, awards of deferred shares withoutperformance criteria were made under the 2009 plan to executive officers on atotal of 88,338 class A shares vesting in 2011, including 19,216 shares to Mr. White,and on 20,000 class A shares vesting in August 2010 to each of Mr. Whiteand one other officer.

 

As noted above with respect to the 2000 and 2004 StockOption Plans, following shareholder approval of the 2009 plan, no further shareawards may be made under the 2007 plan.

 

**Non-ExecutiveDirector Fees**

 

In 2009, each of Ms. Leith and Messrs. Campbell,Hochberg, Lovejoy, Rafael and Sherwood received a board of directors retainerfee at the annual rate of $32,500, and a fee of $2,750 for each meeting of the boardor a committee thereof which he or she attended.  Mr. Hochberg’s annual retainer fee wasprorated for the period he served on the board following his initial electionas a director in June 2009.  Messrs. Campbelland Lovejoy as members of the Audit Committee were paid a retainer fee of$5,000 per year, and Ms. Leith and Messrs. Campbell, Lovejoy andRafael as members of the Compensation Committee and Nominating and GovernanceCommittee were paid a retainer fee of $2,500 per year for service on each ofthose two Committees.  Mr. Lovejoywas also paid an additional retainer fee of $20,000 per year as chairman of theAudit and Compensation Committees.  AsChairman of the Board, chairman of the Nominating and Governance Committee anda member of the Audit Committee, Mr. Hurlock was paid an all-inclusiveamount of $375,000 in lieu of annual retainer or per meeting attendance fees.

 

Aggregate cash retainer, attendance and other directorfees to Ms. Leith and Messrs. Campbell, Hochberg, Hurlock, Lovejoy,Rafael and Sherwood described above amounted to $953,200 in 2009.

 

In addition, as noted above, these seven non-executivedirectors participate in the Company’s 2000 and 2004 Stock Option Plans, 2007Performance Share Plan and 2009 Share Award and Incentive Plan.  Included in the awards summarized above areawards in 2009 of deferred shares without performance criteria under the 2007and 2009 plans on a total of 74,335 class A shares to the seven directors,vesting in 2012, and under the 2007 plan on 20,259 class A shares to Mr. Hurlockwhich vested and were issued to him in February 2010.

 

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In March 2007,the Company and Mr. Sherwood entered into an agreement regarding his retirementfrom executive duties with OEH in December 2006, and his continuingthereafter as a non-executive director of the Company including Chairman of theBoard until June 2007.  Theagreement requires the Company to provide office accommodation and secretarialservices to Mr. Sherwood, and private medical cover for him and his wifeunder OEH’s employee health insurance. The agreement also requires the Company to reimburse Mr. Sherwoodup to £50,000 per year ($78,500 in 2009) for hispersonal business expenses while he remains a non-executive director during thethree-year period ending June 2010.

 

In September 2007,the Company and Mr. Sherwood entered into another agreement under which heprovided consultancy services to OEH for property acquisitions and guestrelations under the supervision of the Company’s President and Chief ExecutiveOfficer, and was compensated for those services at the rate of £100,000 per year plus reimbursement of hisreasonable business expenses incurred in providing the services.  This agreement was terminated in June 2008.

 

See Item 13—Certain Relationships and RelatedTransactions and Director Independence regarding other agreements between OEHand Mr. Sherwood and a previous business relationship between OEH and Mr. Hochberg’sfirm.

 

Mr. Hurlock and his family may stay at OEH’sproperties without charge, except for third-party provided services used duringhis visits.  The other non-executivedirectors and their families are entitled to 75% discounts off the usual roomrates and food and beverage prices for their personal visits at OEH’sproperties.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The Compensation Committee of the Company’s board of directorsis composed of five non-executive directors, namely Ms. Leith and Messrs. Campbell,Hurlock, Lovejoy and Rafael.  NoCompensation Committee member has served as an officer or employee of theCompany in an executive capacity.  Noexecutive officer of the Company serves on the board of directors orcompensation committee of another company that has an executive officer servingon the Company’s board of directors or its Compensation Committee.

 

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**ITEM12.            SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

**FivePercent Shareholders**

 

The following table contains information concerningthe beneficial ownership of the Company’s class A common shares andclass B common shares by the only persons known to the Company to ownbeneficially more than 5% of the outstanding shares of either class of commonshares.

 

Orient-ExpressHoldings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of theCompany, which owns only class B shares. Under Bermuda law, the shares owned by Holdings are outstanding and maybe voted.  In a strategic transactioninvolving OEH such as a takeover of the Company, this structure may assist inmaximizing the value that the Company and its shareholders receive in thetransaction.  See Item 3—LegalProceedings regarding a petition filed in the Bermuda Supreme Court in January 2009by certain class A shareholders of the Company challenging this structure.  Each class B share is convertible at any timeinto one class A share and, therefore, the shares listed as owned by Holdingsrepresent class B shares and the class A shares into which those shares areconvertible.

 

Voting and dispositive power with respect to the classB shares owned by Holdings is exercised by its board of directors, who are Ms. Leith,Mr. Campbell and two other persons who are not directors or officers ofthe Company.  Each of these persons maybe deemed to share beneficial ownership of the class B shares owned by Holdingsfor which he or she serves as a director, as well as the class A shares intowhich those class B shares are convertible, but is not shown in the tablebelow.

 
| **Name and Address**                                                                          | ** ** | **No. of********Class A********and Class B********Shares** | ** ** | **Percent********of********Class A********Shares(1)** | ** ** | **Percent********of********Class B********Shares** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                                                          |       |                                                                      |       |                                                       |       |                                                    |       |
| Orient-Express Holdings 1 Ltd.   22 Victoria StreetHamilton HM 12Bermuda                      |       | 18,044,478                                                                |       | 16.6                                                       | %          | 100.0                                                   | %          |
|                                                                                          |       |                                                                      |       |                                                       |       |                                                    |       |
| Cohen & Steers Inc. et al. (2)   280 Park Avenue, 10th FloorNew York, New York 10017 |       | 7,318,915                                                                 | (6)        | 8.1                                                        | %          | —                                                  |       |

 

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| **Name and Address**                                                                                       | ** ** | **No. of********Class A********and Class B********Shares** | ** ** | **Percent********of********Class A********Shares(1)** | ** ** | **Percent********of********Class B********Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | ** **                                                                | ** ** | ** **                                                 | ** ** | ** **                                              | ** ** |
| The Indian Hotels Co. Ltd. andSamsara Properties Ltd. (3)Mandlik House, Mandlik RoadMumbai 400 001, India  |       | 7,130,764                                                                 | (6)        | 7.9                                                        | %          | —                                                  |       |
|                                                                                                       |       |                                                                      |       |                                                       |       |                                                    |       |
| T. Rowe Price Associates Inc. (4)100 E. Pratt StreetBaltimore, Maryland 21202                              |       | 7,090,200                                                                 | (6)        | 7.8                                                        | %          | —                                                  |       |
|                                                                                                       |       |                                                                      |       |                                                       |       |                                                    |       |
| D.E. Shaw Valence Portfolios LLC,D.E. Shaw Oculus Portfolios LLCand CR Intrinsic InvestmentsLLC et al. (5) |       | 6,053,678                                                                 | (6)        | 6.7                                                        | %          | —                                                  |       |

 

----

(1)                                  The percentage of class Ashares shown is based on 90,796,005 class A shares outstanding on February 19,2010, plus the class A shares issuable upon conversion of the class Bshares beneficially owned by that person, if any.

 

(2)                                  The information with respectto Cohen & Steers Inc. (“Cohen & Steers”) relates only toclass A shares and is derived form the joint Schedule 13G report as of February 12,2010 and filed with the SEC on that date. The report states that (a) Cohen & Steers is a holdingcompany owning Cohen & Steers Capital Management Inc. (“C&SCapital”), a registered investment adviser, (b) Cohen & Steersand C&S Capital own Cohen & Steers Europe S.A., a registeredinvestment adviser, (c) Cohen & Steers has sole voting power withrespect to 5,545,146 class A shares and sole dispositive power with respect to7,318,915 class A shares, (d) C&S Capital has sole voting power withrespect to 5,471,487 class A shares and sole dispositive power with respect to7,162,703 class A shares and (e) C&S Europe has sole voting power withrespect to 73,659 class A shares and sole dispositive power with respect to156,212 class A shares.

 

(3)                              The information with respectto The Indian Hotels Co. Ltd. (“Indian Hotels”) and its subsidiary SamsaraProperties Ltd. relates only to class A shares and is derived from their jointSchedule 13D report as amended as of May 1, 2009 and filed with the SEC onthat date.  The report states that thesecompanies have shared voting and dispositive power with respect to 7,130,764class A shares.

 

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(4)                                  The information with respectto T. Rowe Price Associates Inc. (“T. Rowe Price”) relates only to class Ashares and is derived from its Schedule 13G report amended as of February 12,2010 and filed with the SEC on that date. The report states that (a) T. Rowe Price is a registered investmentadviser and (b) it has sole voting power with respect to 1,897,500 class A shares and soledispositive power with respect to 7,090,200 class A shares.

 

(5)                              As a result of an agreementdated June 2, 2008 among D.E. Shaw Valence Portfolios LLC (“Valence”),D.E. Shaw Oculus Portfolios LLC (“Oculus”) and CR Intrinsic Investments LLC(“CR Intrinsic”), the D.E. Shaw entities and the CR Intrinsic entitiesdescribed in the following two paragraphs of this note (5) may be deemedto constitute a “group” within the meaning of Rule 13d-5(b) under the1934 Act, and this group may be deemed to own beneficially an aggregate of6,053,678 class A shares.  All of theparties to that agreement and their affiliates expressly disclaimed beneficialownership of securities held by any other party, other than to the extent ofsuch party’s pecuniary interest therein or the various accounts under suchparty’s management and control.

 

The information with respect to Valence andOculus relates only to class A shares and is derived from the joint Schedule13D report as amended as of January 20, 2010 and filed with the SEC on January 21,2010 by Valence, Oculus, D.E. Shaw & Co. LLC (“DESCO LLC”), D.E. Shaw &Co. LP (“DESCO LP”) and David E. Shaw. The report states that (a) Mr. Shaw is President and soleshareholder of D.E. Shaw & Co. Inc. which is the general partner ofDESCO LP which in turn is the managing member and investment adviser of Valenceand the investment adviser of Oculus and D.E. Shaw Synoptic Portfolios 2 LLC(“Synoptic”), (b) Mr. Shaw is President and sole shareholder of D.E.Shaw & Co. II Inc. which is the managing member of DESCO LLC which inturn is the managing member of Oculus and Synoptic, (c) DESCO LP and Mr. Shawhave shared voting and dispositive power with respect to 3,218,678 class Ashares, (d) Valence has shared voting and dispositive power with respectto 2,273,300 class A shares, (e) Oculus has shared voting and dispositivepower with respect to 945,344 class A shares, (f) DESCO LLC has sharedvoting and dispositive power with respect to 945,378 class A shares which arecomprised of the Oculus shares and 34 class A shares beneficially owned bySynoptic and (g) the address of Valence, Oculus and the other D.E. Shawentities is 120 West 45th Street,Tower 45, 39th Floor, New York, New York 10036.

 

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The information with respect to CR Intrinsic relatesonly to class A shares and is derived from the joint Schedule 13D report asamended as of January 20, 2010 and filed with the SEC on that date by CRIntrinsic, CR Intrinsic Investors LLC (“CR Intrinsic Investors”) and Steven A.Cohen.  The report states that (a) Mr. Cohencontrols CR Intrinsic Investors, (b) CR Intrinsic Investors has aninvestment management agreement with CR Intrinsic and holds all investment andvoting power with respect to securities held by CR Intrinsic, (c) CRIntrinsic, CR Intrinsic Investors and Mr. Cohen have shared voting anddispositive power with respect to 2,835,000 class A shares and (d) theaddress of CR Intrinsic and the other CR Intrinsic entities is 72 CummingsPoint Road, Stamford, Connecticut 06902.

 

(6)                                  Class A shares only.

 

**Directors and Executive Officers**

 

The following table contains information concerningthe beneficial ownership of class A common shares of the Company by eachcurrent director and executive officer of the Company and by all directors andexecutive officers of the Company as a group. Each person has sole voting and dispositive power with respect to his orher shares, except Mr. Campbell who shares voting and dispositive powerwith respect to his shares, Mr. Lovejoy who shares voting and dispositivepower with respect to 4,200 shares, and Mr. Sherwood who shares voting anddispositive power with respect to 10,300 shares.  Each individual’s holding is less than 1% ofthe class A shares outstanding.  Thegroup total includes 200,850 class A shares covered by stock options becomingexercisable before June 30, 2010 held by directors and executive officersunder the Company’s 2000 and 2004 Stock Option Plans which, together with theother shares beneficially owned by directors and executive officers, represents1.0% of class A shares outstanding.

 

As noted above, certain of the directors of theCompany may be deemed to share beneficial ownership of the class B shares heldby Holdings because they are also directors of that subsidiary, but thoseshares are not included in the following table.

 

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| **Name**                                                                                                       | ** ** | **No. of Class********A Shares** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                           |       |                                  |       |
| Filip J.M.  Boyen                                                                                              |       | 37,193                                |       |
| John D.  Campbell                                                                                              |       | 11,000                                |       |
| Roger V.  Collins                                                                                              |       | 5,074                                 |       |
| Phillip A.  Gesue                                                                                              |       | —                                |       |
| Edwin S.  Hetherington                                                                                         |       | 11,000                                |       |
| Mitchell C.  Hochberg                                                                                          |       | —                                |       |
| James B.  Hurlock                                                                                              |       | 20,259                                |       |
| Pippa Isbell                                                                                                   |       | 5,747                                 |       |
| Prudence M.  Leith                                                                                             |       | 4,250                                 |       |
| J. Robert  Lovejoy                                                                                             |       | 12,200                                |       |
| Martin O’Grady                                                                                            |       | 5,997                                 |       |
| Georg R. Rafael                                                                                                |       | 12,500                                |       |
| Maurizio  Saccani                                                                                              |       | —                                |       |
| James B.  Sherwood                                                                                             |       | 545,295                               |       |
| Paul M. White                                                                                                  |       | 52,084                                |       |
| David C.  Williams                                                                                             |       | 10,867                                |       |
| All directors  and executive officers as agroup (16 persons)  including 200,850 exercisablestock option shares |       | 934,316                               |       |

 

The foregoing table does not include options topurchase an aggregate of 1,005,200 class A shares becoming exercisable after June 30,2010 held by directors and executive officers under the Company’s 2000 and 2004Stock Option Plans and 2009 Share Award and Incentive Plan, and does notinclude currently unvested awards of deferred share covering an aggregate of upto 463,841 class A shares vesting after June 30, 2010 held by directorsand executive officers under the Company’s 2007 Performance Share Plan and 2009Share Award and Incentive Plan.

 

**VotingControl of the Company**

 

The following table lists the voting powerheld by the known beneficial owners of more than 5% of the outstandingclass A or class B common shares of the Company and all directors andexecutive officers as a group.  Thedirectors of the Company who are deemed to be beneficial owners solely becausethey are directors of Holdings are not listed individually but are included inthe group.

 

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| **Name**                                                                                                       | ** ** | **No. of********Class A********Shares** | ** ** | **No. of********Class B******** Shares** | ** ** | **Combined********Voting  Power** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|
|                                                                                                           |       |                                              |       |                                                    |       |                              |       |
| Holdings                                                                                                       |       | —                                            |       | 18,044,478                                              |       | 66.5                              | %          |
| Cohen &  Steers et al.                                                                                |       | 7,318,915                                         |       | —                                                  |       | 2.7                               | %          |
| Indian Hotels  et al.                                                                                          |       | 7,130,764                                         |       | —                                                  |       | 2.6                               | %          |
| T. Rowe Price                                                                                                  |       | 7,090,200                                         |       | —                                                  |       | 2.6                               | %          |
| Valence, Oculus, CR Intrinsic etal.                                                                            |       | 6,053,678                                         |       | —                                                  |       | 2.2                               | %          |
| All directors  and executiveofficers as a group (16persons)  including 200,850exercisable stock option  shares |       | 934,316                                           |       | 18,044,478                                              |       | 66.8                              | %          |

 

In general the holders of class A and B commonshares of the Company vote together as a single class on most matters submittedto general meetings of shareholders, with holders of class B shares havingone vote per share and holders of class A shares having one-tenth of avote per share.  Each class B shareis convertible at any time into one class A share.  In all other material respects, theclass A and B shares are identical and are treated as a single class ofcommon shares.

 

Holdings andthe Company’s directors and executive officers hold in total approximately 17%in number of the outstanding class A and class B shares having approximately67% of the combined voting power of the outstanding common shares of theCompany for most matters submitted to a vote of the Company’sshareholders.  Other shareholders,accordingly, hold approximately 83% in number of the outstanding common shareshaving about 33% of combined voting power in the Company.

 

Under Bermuda law, the class B shares owned byHoldings (representing approximately 67% of the combined voting power) areoutstanding and may be voted by that subsidiary.  The investment by Holdings in class B sharesand the manner in which Holdings votes those shares are determined by the boardof directors of Holdings (two of whom are also directors of the Company)consistently with the exercise by those directors of their fiduciary duties tothe subsidiary.  Holdings, therefore, hasthe ability to elect at least a majority of the members of the board of directorsof the Company and to control the outcome of most matters submitted to a voteof the Company’s shareholders.

 

With respect to a number of strategic matters whichwould tend to change control of the Company, its memorandum of association andbye-laws contain provisions that could make it more difficult for a third partyto acquire OEH without the

 

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consentof the Company’s board of directors. These provisions include supermajority shareholder voting provisions forthe removal of directors and for “business combination” transactions withbeneficial owners of shares carrying 15% or more of the votes which may be castat any general meeting of shareholders, and limitations on the voting rights ofsuch 15% beneficial owners.  Also, theCompany’s board of directors has the right under Bermuda law to issue preferredshares without shareholder approval, which could be done to dilute the shareownership of a potential hostile acquirer. Also, the rights to purchase series A junior participatingpreferred shares, one of which is attached to each class A andclass B common share of the Company, may have anti-takeover effects.  See Note 14(c) to the FinancialStatements.  Although OEH managementbelieves these provisions provide the Company and its shareholders with theopportunity to receive appropriate value in a strategic transaction by requiringpotential acquirers to negotiate with the Company’s board of directors, theseprovisions apply even if the potential transaction may be considered beneficialby many shareholders.

 

Information responding to Item 201(d) of SECRegulation S-K is omitted because the Company is a foreign private issuer.

 

**ITEM 13.               Certain Relationships and RelatedTransactions and Director Independence**

 

**RelatedParty Transactions**

 

Mr. Sherwoodowns a private residential apartment in the Hotel Cipriani in Venice, Italy, ahotel owned by a subsidiary of the Company. OEH has granted Mr. Sherwood a right of first refusal to purchasethe hotel in the event OEH proposes to sell it. The purchase price would be the offered sale price in the case of a cashsale or the fair market value of the hotel, as determined by an independentvaluer, in the case of a non-cash sale. Similarly, if Mr. Sherwood proposes to sell his apartment, he hasgranted OEH a right of first refusal to purchase it at fair market value or, atMr. Sherwood’s option in the case of a proposed cash sale, the offeredsale price.  In addition, the Company hasgranted an option to Mr. Sherwood to purchase the hotel at fair marketvalue if a change in control of the Company occurs.  Mr. Sherwood may elect to pay 80% of thepurchase price if he exercises his right of first refusal, or 100% of thepurchase price if he exercises his purchase option, by a non-recoursepromissory note secured by the hotel payable in ten equal annual instalmentswith interest at LIBOR.  These agreementsrelating to the Hotel Cipriani between Mr. Sherwood and OEH and itspredecessor companies have been in place since 1983 and were last amended andrestated in 2005.

 

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Mr. Sherwoodand the subsidiary of the Company which owns the Hotel Cipriani have anagreement entered into in 1982 under which he may rent his apartment to thehotel in return for 50% of the amounts paid by hotel guests for use of theapartment.  In 2009, the hotel paid Mr. Sherwood$98,100 for the use of his apartment. Also, in any calendar year when the apartment is made available to thehotel for 90 days or more when the hotel is open to guests, the hotel isobligated to clean, repair and insure the apartment at its expense and provide Mr. Sherwoodand his guests with all hotel services other than food and beverages free ofcharge, including electricity, air conditioning, telephone rental, water androom services for the apartment.  To theextent that the apartment is made available to the hotel for less than90 days per year, Mr. Sherwood must pay a proportionate share ofthose expenses.

 

Mr. Sherwood owns Capannelle S.r.l., a wineestate in the Chianti region of Italy that produces wine, olive oil and otherproducts principally for public sale.  In2009, the estate sold $48,800 of products to OEH hotels at prices the same asits public prices.

 

Capannelle and the Company’s subsidiary that owns theVilla San Michele near Florence, Italy have an agreement dating from 2002 underwhich Capannelle makes the main house and other parts of the wine estateavailable to short-stay guests provided by the hotel.  The incremental costs of Capannelle and VillaSan Michele in servicing the guests each year are netted against the amountscharged by the hotel for guest accommodation, food, beverage and other hotelservices, and the net amount is shared equally between Capannelle and Villa SanMichele.  In 2009, Capannelle earned $nilfrom this arrangement which continues on a year-to-year basis unless terminatedby either party.

 

In April 2009,the Company and Mr. Sherwood entered into an agreement limiting his actsand communications on behalf of the Company involving third parties outside ofthe Company, without the prior written authorization of the board of directorsor the President and Chief Executive Officer. Mr. Sherwood agreed that if he consciously fails to abide by thelimitations, he may be removed as a director by the board for cause inaccordance with the Company’s bye-laws.

 

Mr. Hochberg,who was first elected a director at the Company’s annual general meeting on June 5,2009, is the Managing Principal of Madden Capital LLC, a real estate investment,development and advisory firm.  Asubsidiary of the Company engaged Madden to provide consulting services on itsNew York hotel project, and paid Madden total fees of $1,145,000 covering theperiod June 2007 through June 2009, at which time the engagementterminated.

 

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See also “Non-Executive Director Fees” in Item11—Executive Compensation regarding other agreements between OEH and Mr. Sherwood,and Note 20 to the Financial Statements (Item 8 above) regarding other relatedparty transactions.

 

**DirectorIndependence**

 

The eight members of the board of directors of theCompany are identified in Item 10—Directors, Executive Officers and CorporateGovernance.  Regarding the independenceof directors from OEH’s management, the board has reviewed the materiality ofany relationship that each of the eight directors of the Company has with OEHeither directly or indirectly through another organization, including the feesand other compensation described under “Non-Executive Director Fees” in Item11—Executive Compensation and including the transactions described under“Related Party Transactions” above.  Thecriteria applied included the director independence requirements set forth inthe Company’s Corporate Governance Guidelines, any other managerial, familial,professional, commercial or affiliated relationship between a director and theCompany, a subsidiary or another director and, with respect to the Company’sAudit Committee, the SEC’s independence rules. Based on this review, the Board has determined that Ms. Leith and Messrs. Campbell,Hurlock, Lovejoy and Rafael are independent directors.  The Company’s Corporate Governance Guidelinesare filed as a exhibit to this report and are available at OEH’s websitewww.orient-express.com.

 

**ITEM14.               PrincipalAccounting Fees and Services**

 

The following table presents the fees ofDeloitte LLP, OEH’s independent registered public accounting firm, for auditand permitted non-audit services in 2009 and 2008:

 
| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Audit fees         |       | $        | 2,014,000  |     | $          | 2,551,000 |   |
| Audit-related fees |       | 434,000  |       | 374,000  |       |
| Tax fees           |       | 654,000  |       | 495,000  |       |
| All other fees     |       | —   |       | —   |       |
| Total              |       | $        | 3,102,000  |     | $          | 3,420,000 |   |

 

Audit servicesconsist of work performed in connection with the audits of financial statementsand the effectiveness of internal control over financial reporting for eachfiscal year and in the review of financial statements included in

 

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quarterlyreports during the year, as well as work normally done by the independentauditor in connection with statutory and regulatory filings, such as statutoryaudits of non-U.S. subsidiaries, and consents and comfort letters for SECregistration statements.

 

Audit-relatedservices consist of assurance and related services that are normally performedby the independent auditor and that are reasonably related to the audit orreview of financial statements but are not reported under audit services,including due diligence reviews in potential transactions and audits of benefitplans.

 

Tax servicesconsist of all services performed by the independent auditor’s tax personnel,except those services specifically related to the audit or review of financialstatements, and include fees in the areas of tax return preparation andcompliance and tax planning and advice.

 

Other servicesconsist of those services permitted to be provided by the independent auditorbut not included in the other three categories. There were no other services provided in 2009 and 2008.

 

The Audit Committee of the board of directors of theCompany has established a policy to pre-approve all audit and permittednon-audit services provided by the independent auditor.  Prior to engagement of the auditor for thenext year’s audit, management and the auditor submit to the Committee adescription of the audit and permitted non-audit services expected to beprovided during that year in each of four categories of services describedabove, together with a fee proposal for those services.  Prior to the engagement of the independentauditor, the Audit Committee considers with management and the auditor andapproves (or revises) both the description of audit and permitted non-auditservices proposed and the budget for those services.  If circumstances arise during the year whenit becomes necessary to engage the independent auditor for additional servicesnot contemplated in the original pre-approval, the Audit Committee at itsregularly scheduled meetings requires separate pre-approval before engaging theindependent auditor.  To ensure prompthandling of unexpected matters, the Committee may delegate pre-approvalauthority to one or more of its members who report any pre-approval decisionsto the Committee at its next scheduled meeting. For 2009 and 2008, all of the audit and permitted non-audit services describedabove were pre-approved under the policy.

 

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**PART IV**

 

**ITEM15.****                                             ****Exhibitsand Financial Statement Schedules**

 
| ** **                                                                                                                                                                                                        | **Page Number** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
|                                                                                                                                                                                                              |                 |
| 1.             Financial Statements                                                                                                                   |                 |
|                                                                                                                                                                                                              |                 |
| Reports of  independent registered public accounting firm                                                                                                                                                         | 96                   |
| Consolidated  financial statements - years ended December 31, 2009, 2008 and 2007:                                                                                                                           |                 |
| Balance  sheets (December 31, 2009 and 2008)                                                                                                                                                                 | 98                   |
| Statements of  operations                                                                                                                                                                                         | 99                   |
| Statements  of cash flows                                                                                                                                                                                         | 100                  |
| Statements  of total equity                                                                                                                                                                                       | 102                  |
| Notes to  financial statements                                                                                                                                                                                    | 103                  |
|                                                                                                                                                                                                              |                 |
| 2.             Financial Statement Schedule                                                                                                           |                 |
|                                                                                                                                                                                                              |                 |
| Schedule II -  Valuation and qualifying accounts (years ended December 31, 2009, 2008  and 2007)                                                                                                             | 192                  |
|                                                                                                                                                                                                              |                 |
| 3.             Exhibits.  The index to exhibits appears below, on the  pages immediately following the signature pages to this report. |                 |

 

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ORIENT-EXPRESSHOTELS LTD. AND SUBSIDIARIES

 

Schedule II—Valuationand Qualifying Accounts

** **
| **Column A**                                | ** ** | **Column B**                               | ** ** | **Column C**                              | ** ** | **Column D**                         | ** ** | **Column E**   | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                                  | ** ** | ** **                                 | ** ** | **Additions**                             | ** ** | ** **                           | ** ** | ** **     | ** ** |
| **Description**                             | ** ** | **Balance  at  beginning  of period** | ** ** | **Charged  to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions** | ** ** | **Balance  at  end  of period** | ** ** |
|                                        |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Year ended December 31, 2009:          |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Allowance for doubtful accounts             |       | $                                          | 679,000    |                                      | $          | 225,000                              |       | $              | (2,000     | )(2) | $ | (449,000 | )(1) | $ | 453,000 |   |
| Valuation allowance on deferred tax  assets |       | $                                          | 3,371,000  |                                      | $          | 3,135,000                            |       | —         |       | — |   | $ | 6,506,000 |   |
|                                        |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Year ended December 31, 2008:          |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Allowance for doubtful accounts             |       | $                                          | 822,000    |                                      | $          | 175,000                              |       | $              | (51,000    | )(2) | $ | (267,000 | )(1) | $ | 679,000 |   |
| Valuation allowance on deferred tax  assets |       | $                                          | 4,378,000  |                                      | —     |                                 | —     |           | $          | (1,007,000 | )(3) | $ | 3,371,000 |   |
|                                        |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Year ended December 31, 2007:          |       |                                       |       |                                      |       |                                 |       |           |       |   |   |
| Allowance for doubtful accounts             |       | $                                          | 662,000    |                                      | $          | 258,000                              |       | $              | 30,000     | (2) | $ | (128,000 | )(1) | $ | 822,000 |   |
| Valuation allowance on deferred tax  assets |       | $                                          | 4,293,000  |                                      | $          | 85,000                               |       | —         |       | — |   | $ | 4,378,000 |   |

 

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(1)                                  Bad debts written off, net ofrecoveries.

(2)                                  Foreign currency translationadjustments.

(3)                                  Release of valuation allowance

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

Dated:  February 26, 2010

 
|   | ORIENT-EXPRESS  HOTELS LTD. |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         | /s/ Paul M. White |
|   |                        | Paul M. White |
|   |                        | President and Chief Executive Officer |

 

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Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.

 

Dated: February 26, 2010

 

| **Name**                  | ** ** | **Title**                                            |
|---------------------------|------------|------------------------------------------------------|
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  John D. Campbell     |       | Director                                             |
| John  D. Campbell         |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  Mitchell C. Hochberg |       | Director                                             |
| Mitchell  C. Hochberg     |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  James B. Hurlock     |       | Chairman and  Director                               |
| James  B. Hurlock         |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  Prudence M. Leith    |       | Director                                             |
| Prudence  M. Leith        |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  J. Robert Lovejoy    |       | Director                                             |
| J.  Robert Lovejoy        |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  Georg R. Rafael      |       | Director                                             |
| Georg  R. Rafael          |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  James B. Sherwood    |       | Director                                             |
| James  B. Sherwood        |       |                                                 |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  Paul M. White        |       | President,  Chief Executive                          |
| Paul  M. White            |       | Officer and  Director                                |
|                      |       |                                                 |
|                      |       |                                                 |
| /s/  Martin O’Grady  |       | Vice  President—Finance and                     |
| Martin  O’Grady      |       | Chief  Financial Officer  (Chief Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                                                                            | ** ** | **Description**                                                                                                                                                                                                            |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                         |       |                                                                                                                                                                                                                       |
| 3.1              |       | Exhibit 3.1 to July 9, 2007 Form 8-K Current Report  (File No. 1- 16017)                                 |       | Memorandum of Association and Certificate of Incorporation of Orient-  Express Hotels Ltd.                                                                                                                                 |
| 3.2              |       | Exhibit 3.2 to June 15, 2007 Form 8-K Current Report  (File No. 1- 16017)                                |       | Bye-Laws of Orient-Express Hotels Ltd.                                                                                                                                                                                     |
| 3.3              |       | Exhibit 1 to April 23, 2007 Amendment No. 1 to  Form 8-A Registration Statement (File No. 1- 16017) |       | Rights Agreement dated June 1, 2000, and amended and restated  April 12, 2007, between Orient-Express Hotels Ltd. and Computershare  Trust Company N.A., as Rights Agent                                              |
| 3.4              |       | Exhibit 4.2 to December 10, 2007 Form 8-K Current Report  (File No. 1-16017)                                       |       | Amendment No. 1 dated December 10, 2007 to Amended and  Restated Rights Agreement (Exhibit 3.3)                                                                                                             |
| 4.1              |       | Exhibit 1.1 to July 26, 2006 Form 8-K Current Report  (File No. 1-16017)                                 |       | Secured Facility Agreement dated July 20, 2006 for  Orient-Express Hotels Ltd. arranged by Barclays Capital with Barclays Bank  PLC acting as Agent and Barclays Bank PLC acting and Security Trustee                 |
| 4.2              |       | Exhibit 1.2 to July 26, 2006 Form 8-K Current Report  (File No. 1-16017)                                 |       | Secured Facility Agreement dated July 20, 2006 for  Orient-Express Hotels Ltd. arranged by Barclays Capital with BancaNazionale del Lavoro  S.p.A.  acting as Lender and Barclays Bank PLC acting as Security Trustee |

 

OEH has noinstrument with respect to long-term debt not listed above under which thetotal amount of securities authorized exceeds 10% of the total assets of OEH ona consolidated basis.  The Company agreesto furnish to the SEC upon request a copy of each instrument with respect tolong-term debt not filed as an exhibit to this report.

 

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| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                                             | ** ** | **Description**                                                                                                                                                                                            |
|------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                          |       |                                                                                                                                                                                                       |
| 10.1             |       | Exhibit 10.1 to 2008 Form 10-K Annual Report (File  No. 1-16017)                    |       | Orient-Express Hotels Ltd. 2000 Stock Option Plan                                                                                                                                                          |
| 10.2             |       | Exhibit 10.2 to 2008 Form 10-K Annual Report (File  No. 1-16017)                    |       | Orient-Express Hotels Ltd. 2004 Stock Option Plan                                                                                                                                                          |
| 10.3             |       | Exhibit 10.3  to 2008 Form 10-K Annual Report (File No. 1-16017)                    |       | Orient-Express  Hotels Ltd. 2007 Performance Share Plan                                                                                                                                                    |
| 10.4             |       |                                                                                          |       | Orient-Express  Hotels Ltd. 2007 Stock Appreciation Rights Plan                                                                                                                                            |
| 10.5             |       | Exhibit 10.1  to June 8, 2009 Form 8-K Current Report (File No. 1- 16017) |       | Orient-Express  Hotels Ltd. 2009 Share Award and Incentive Plan                                                                                                                                            |
| 10.6             |       | Exhibit 10.3  to 2004 Form 10-K Annual Report (File No. 1-16017)                    |       | Amended  and Restated Agreement Regarding Hotel Cipriani Interests dated  February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l. and  Orient- Express Hotels Ltd.                          |
| 10.7             |       | Exhibit 10.4 to 2004 Form 10-K Annual Report (File  No. 1-16017)                    |       | Amended and Restated Right of First Refusal and Option Agreement  Regarding Indirectly Held Hotel Cipriani Interests dated February 8,  2005 between James B. Sherwood and Orient-Express Hotels Ltd. |
| 10.8             |       | Exhibit 10.4 to Form S-1 Registration Statement  No. 333-12030                 |       | Agreement dated February 18, 1982 between James B. Sherwood and  Hotel Cipriani S.p.A. regarding apartment                                                                                            |
| 10.9             |       | Exhibit 10.10 to 2003 Form 10-K Annual Report (File  No. 1-16017)              |       | Contract of Special Partnership or Joint Venture dated August 1,  2002 between Alberghiera Fiesolana S.p.A. and Capannelle S.r.l.                                                                     |
| 10.10            |       | Exhibit 10 to July 25, 2007 Form 8-K Current Report  (File No. 1- 16017)  |       | Form of Severance Agreement dated December 1, 2006, as  amended July 25, 2007, between Orient-Express Hotels Ltd. and Paul White                                                            |

 

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| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                                | ** ** | **Description**                                                                                                                                                                                                                                      |
|------------------|------------|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                             |       |                                                                                                                                                                                                                                                 |
| 10.11            |       | Exhibit 10.11 to 2006 Form 10-K Annual Report (File  No. 1-16017) |       | Form of Severance Agreement dated December 1, 2006 between  Orient-Express Hotels Ltd. and each of Filip Boyen, Roger Collins, Pippa  Isbell and Martin O’Grady (dated November 15, 2007 for Mr. O’Grady)              |
| 10.12            |       | Exhibit 10.12 to 2006 Form 10-K Annual Report (File  No. 1-16017) |       | Form of Severance Agreement dated December 1, 2006 between  Orient-Express Hotels Ltd. and each of Edwin Hetherington, David Williams and  Phillip A. Gesue (dated February 9, 2009 for Mr. Gesue)                               |
| 11               |       |                                                                             |       | Statement of computation of per share earnings                                                                                                                                                                                                       |
| 12               |       |                                                                             |       | Statement of computation of ratios                                                                                                                                                                                                                   |
| 14               |       | Exhibit 14 to 2003 Form 10-K Annual Report (File  No. 1-16017)    |       | Code of Business Practices for Principal Executive, Financial and  Accounting Officers                                                                                                                                                               |
| 21               |       |                                                                             |       | Subsidiaries of Orient- Express Hotels Ltd.                                                                                                                                                                                                          |
| 23               |       |                                                                             |       | Consent of Deloitte LLP relating to Form S-3 Registration  Statements No. 333-155364 and No. 333- 158308 and Form S-8  Registration Statements No. 333-58298, No. 333- 129152,  No. 333-147448 and No. 333-161459 |
| 31               |       |                                                                             |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                          |
| 32               |       |                                                                             |       | Section 1350 Certification                                                                                                                                                                                                                      |
| 99               |       | Exhibit 99 to 2004 Form 10-K Annual Report (File  No. 1-16017)         |       | Corporate Governance Guidelines of Orient- Express Hotels Ltd.                                                                                                                                                                                       |

 

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