**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended September 30, 2009 or**

 
| **o** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                  to                  **

** **

**Commission file number 1-16017**

** **

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant as specified in itscharter)

 

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

 

**441-295-2244**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes oNo o

 

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

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

As of November 2, 2009, 76,838,795 Class A common shares and18,044,478 Class B common shares of Orient-Express Hotels Ltd. wereoutstanding. All of the Class B shares are owned by a subsidiary ofOrient-Express Hotels Ltd.

 

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** **

**PART I —FINANCIAL INFORMATION**

 

**ITEM1.   Financial Statements**

** **

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                              | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                              | ** ** | **(Dollars in thousands)**         | ** ** |
| **Assets**                                                                              |       |                               |       |                              |       |
| Cash and cash equivalents                                                               |       | $                                  | 114,924    |                              | $          | 64,602 |   |
| Restricted cash                                                                         |       | 17,845                             |       | 13,224                            |       |
| Accounts receivable, net of allowances of $370and $681                                  |       | 62,515                             |       | 45,232                            |       |
| Due from related parties                                                                |       | 14,519                             |       | 9,985                             |       |
| Prepaid expenses and other                                                              |       | 25,548                             |       | 19,297                            |       |
| Inventories                                                                             |       | 44,206                             |       | 43,265                            |       |
| Assets of discontinued operations held for sale                                         |       | 74,971                             |       | 156,207                           |       |
| Real estate assets                                                                      |       | 107,711                            |       | 83,983                            |       |
| Total current assets                                                                    |       | 462,239                            |       | 435,795                           |       |
|                                                                                    |       |                               |       |                              |       |
| Property, plant and equipment, net of accumulateddepreciation of  $250,578 and $212,740 |       | 1,431,993                          |       | 1,352,996                         |       |
| Investments                                                                             |       | 70,681                             |       | 67,464                            |       |
| Goodwill                                                                                |       | 149,460                            |       | 154,054                           |       |
| Other intangible assets                                                                 |       | 20,795                             |       | 20,255                            |       |
| Other assets                                                                            |       | 38,463                             |       | 38,569                            |       |
|                                                                                    |       | $                                  | 2,173,631  |                              | $          | 2,069,133 |   |
|                                                                                    |       |                               |       |                              |       |
| **Liabilities and Equity**                                                              |       |                               |       |                              |       |
| Working capital facilities                                                              |       | $                                  | 8,402      |                              | $          | 54,179 |   |
| Accounts payable                                                                        |       | 26,266                             |       | 23,243                            |       |
| Accrued liabilities                                                                     |       | 97,059                             |       | 72,277                            |       |
| Deferred revenue                                                                        |       | 69,397                             |       | 55,988                            |       |
| Liabilities of discontinued operations held for  sale                                   |       | 42,775                             |       | 78,837                            |       |
| Current portion of long-term debt and capital  leases                                   |       | 170,074                            |       | 138,813                           |       |
| Total current liabilities                                                               |       | 413,973                            |       | 423,337                           |       |
|                                                                                    |       |                               |       |                              |       |
| Long-term debt and obligations under capital leases                                     |       | 660,064                            |       | 657,952                           |       |
| Liability for pension benefit                                                           |       | 7,973                              |       | 7,421                             |       |
| Other liabilities                                                                       |       | 21,038                             |       | 22,562                            |       |
| Deferred income taxes                                                                   |       | 168,523                            |       | 162,199                           |       |
| Liability for uncertain tax positions                                                   |       | 7,430                              |       | 11,493                            |       |
|                                                                                    |       | 1,279,001                          |       | 1,284,964                         |       |
| 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  (120,000,000shares authorized):             |       |                               |       |                              |       |
| Issued — 76,838,795                                                                |       | 769                                |       | 510                               |       |
| Class B common shares $0.01 par value  (120,000,000shares authorized):             |       |                               |       |                              |       |
| Issued — 18,044,478                                                                |       | 181                                |       | 181                               |       |
| Additional paid-in capital                                                              |       | 714,635                            |       | 570,727                           |       |
| Retained earnings                                                                       |       | 219,604                            |       | 271,571                           |       |
| Accumulated other comprehensive income                                                  |       | (41,947                            | )          | (60,210                           | )          |
| Less: reduction due to class B common shares owned  bya  subsidiary — 18,044,478   |       | (181                               | )          | (181                              | )          |
| Total shareholders’ equity                                                         |       | 893,061                            |       | 782,598                           |       |
| Non-controlling interests                                                               |       | 1,569                              |       | 1,571                             |       |
| Total equity                                                                            |       | 894,630                            |       | 784,169                           |       |
|                                                                                    |       | $                                  | 2,173,631  |                              | $          | 2,069,133 |   |

 

See notes tocondensed consolidated financial statements.

 

1

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**Orient-Express Hotels Ltd. andSubsidiaries**

 

**Statements of CondensedConsolidated Operations (unaudited)**

 
| **Three months ended September 30,**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **(Dollars in thousands,  except per share amounts)**                    | ** ** |
| ** **                                                               |       |     |       |     |       |
| Revenue                                                                  |       | $        | 142,175    |     | $          | 170,941 |   |
|                                                                     |       |     |       |     |       |
| Expenses:                                                                |       |     |       |     |       |
| Depreciation  and amortization                                           |       | 11,041   |       | 8,931    |       |
| Operating                                                                |       | 70,733   |       | 78,265   |       |
| Selling,  general and administrative                                     |       | 44,330   |       | 47,364   |       |
| Impairment  of fixed assets                                              |       | 9,809    |       | —   |       |
| Total  expenses                                                          |       | 135,913  |       | 134,560  |       |
|                                                                     |       |     |       |     |       |
| Earnings  from operations                                                |       | 6,262    |       | 36,381   |       |
|                                                                     |       |     |       |     |       |
| Interest  expense, net                                                   |       | (7,781   | )          | (10,858  | )          |
| Foreign  currency, net                                                   |       | 4,709    |       | (2,531   | )          |
| Net  finance costs                                                       |       | (3,072   | )          | (13,389  | )          |
|                                                                     |       |     |       |     |       |
| Earnings  before income taxes and earnings from unconsolidated companies |       | 3,190    |       | 22,992   |       |
|                                                                     |       |     |       |     |       |
| Provision  for income taxes                                              |       | (7,336   | )          | (6,665   | )          |
|                                                                     |       |     |       |     |       |
| (Losses)/earnings  before earnings from unconsolidated companies         |       | (4,146   | )          | 16,327   |       |
|                                                                     |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax of $573 and $1,574   |       | 1,439    |       | 4,224    |       |
|                                                                     |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                        |       | (2,707   | )          | 20,551   |       |
|                                                                     |       |     |       |     |       |
| Losses  from discontinued operations, net of tax               |       | (10,308  | )          | (14,172  | )          |
|                                                                     |       |     |       |     |       |
| Net  (losses)/earnings                                                   |       | $        | (13,015    | )        | $          | 6,379 |   |
|                                                                     |       |     |       |     |       |
| Basic  net (losses)/earnings per share:                                  |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                        |       | $        | (0.04      | )        | $          | 0.48 |   |
| Net  losses from discontinued operations                                 |       | (0.13    | )          | (0.33    | )          |
| Net(losses)/earnings                                                     |       | $        | (0.17      | )        | $          | 0.15 |   |
|                                                                     |       |     |       |     |       |
| Diluted  net (losses)/earnings per share:                                |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                        |       | $        | (0.04      | )        | $          | 0.48 |   |
| Net  losses from discontinued operations                                 |       | (0.13    | )          | (0.33    | )          |
| Net  (losses)/earnings                                                   |       | $        | (0.17      | )        | $          | 0.15 |   |
|                                                                     |       |     |       |     |       |
| Dividends  per share                                                     |       | $        | —     |     | $          | 0.025 |   |

 

See notes to condensed consolidatedfinancial statements.

 

2

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**Orient-Express Hotels Ltd. andSubsidiaries**

 

**Statements of CondensedConsolidated Operations (unaudited)**

 
| **Nine months ended September 30,**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **(Dollars in thousands,  except per share amounts)**                             | ** ** |
| ** **                                                                        |       |     |       |     |       |
| Revenue                                                                           |       | $        | 352,389    |     | $          | 445,454 |   |
|                                                                              |       |     |       |     |       |
| Expenses:                                                                         |       |     |       |     |       |
| Depreciation  and amortization                                                    |       | 29,992   |       | 27,609   |       |
| Operating                                                                         |       | 174,896  |       | 212,543  |       |
| Selling,  general and administrative                                              |       | 120,389  |       | 134,546  |       |
| Impairment  of goodwill and fixed assets                                          |       | 16,857   |       | —   |       |
| Total  expenses                                                                   |       | 342,134  |       | 374,698  |       |
|                                                                              |       |     |       |     |       |
| Earnings  from operations                                                         |       | 10,255   |       | 70,756   |       |
|                                                                              |       |     |       |     |       |
| Interest  expense, net                                                            |       | (24,588  | )          | (33,546  | )          |
| Foreign  currency, net                                                            |       | 487      |       | 2,131    |       |
| Net  finance costs                                                                |       | (24,101  | )          | (31,415  | )          |
|                                                                              |       |     |       |     |       |
| (Losses)/earnings  before income taxes and earnings from unconsolidated companies |       | (13,846  | )          | 39,341   |       |
|                                                                              |       |     |       |     |       |
| Provision  from income taxes                                                      |       | (8,255   | )          | (12,830  | )          |
|                                                                              |       |     |       |     |       |
| (Losses)/earnings  before earnings from unconsolidated companies                  |       | (22,101  | )          | 26,511   |       |
|                                                                              |       |     |       |     |       |
| Earnings  from unconsolidated companies, net of tax of $1,755 and $4,194          |       | 4,607    |       | 14,129   |       |
|                                                                              |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                                 |       | (17,494  | )          | 40,640   |       |
|                                                                              |       |     |       |     |       |
| Losses  from discontinued operations, net of tax                                  |       | (34,473  | )          | (19,135  | )          |
|                                                                              |       |     |       |     |       |
| Net  (losses)/earnings                                                            |       | $        | (51,967    | )        | $          | 21,505 |   |
|                                                                              |       |     |       |     |       |
| Basic  net (losses)/earnings per share:                                           |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                                 |       | $        | (0.27      | )        | $          | 0.96 |   |
| Net  losses from discontinued operations                                          |       | (0.53    | )          | (0.45    | )          |
| Net  (losses)/earnings                                                            |       | $        | (0.80      | )        | $          | 0.51 |   |
|                                                                              |       |     |       |     |       |
| Diluted  net (losses)/earnings per share:                                         |       |     |       |     |       |
| Net  (losses)/earnings from continuing operations                                 |       | $        | (0.27      | )        | $          | 0.96 |   |
| Net  losses from discontinued operations                                          |       | (0.53    | )          | (0.45    | )          |
| Net  (losses)/earnings                                                            |       | $        | (0.80      | )        | $          | 0.51 |   |
|                                                                              |       |     |       |     |       |
| Dividends  per share                                                              |       | $        | —     |     | $          | 0.075 |   |

 

See notes to condensed consolidatedfinancial statements.

 

3

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**Orient-Express Hotels Ltd. andSubsidiaries**

 

**Statements of CondensedConsolidated Cash Flows (unaudited)**

 
| **Nine months ended September 30,**                                                       | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                           |       |                                 |       |     |       |
| Cash  flows from operating activities:                                                         |       |                                 |       |     |       |
| Net  (losses)/earnings                                                                         |       | $                                    | (51,967    | )        | $          | 21,505 |   |
| Less:  losses from discontinued operations, net of tax                                         |       | 34,473                               |       | 19,135   |       |
| Net  (losses)/earnings from continuing operations                                              |       | (17,494                              | )          | 40,640   |       |
| Adjustments  to reconcile net (losses)/earnings to net cash provided by operating  activities: |       |                                 |       |     |       |
| Depreciation  and amortization                                                                 |       | 29,992                               |       | 27,609   |       |
| Amortization  and write-off of finance costs                                                   |       | 2,473                                |       | 2,426    |       |
| Impairment  losses                                                                             |       | 16,857                               |       | —   |       |
| Undistributed  earnings of affiliates                                                          |       | (6,871                               | )          | (9,241   | )          |
| Stock-based  compensation                                                                      |       | 3,237                                |       | 2,212    |       |
| Change  in deferred tax                                                                        |       | 2,568                                |       | (793     | )          |
| Losses  from disposals of fixed assets                                                         |       | 1,488                                |       | 560      |       |
| Unrealized  foreign exchange loss/(gain)                                                       |       | 2,765                                |       | (1,293   | )          |
| (Decrease)/increase  in provision for uncertain tax positions                                  |       | (4,068                               | )          | 862      |       |
| Other  non-cash items                                                                          |       | (172                                 | )          | 392      |       |
| Change  in assets and liabilities net of effects from acquisition of subsidiaries:             |       |                                 |       |     |       |
| Increase  in receivables, prepaid expenses and other                                           |       | (13,912                              | )          | (12,842  | )          |
| Decrease/(increase)in  inventories                                                             |       | 636                                  |       | (2,471   | )          |
| Increase  in real estate assets                                                                |       | (23,728                              | )          | (26,402  | )          |
| Increase  in payables, accrued liabilities and deferred revenue                                |       | 30,463                               |       | 33,349   |       |
| Dividends  received from unconsolidated companies                                              |       | 1,064                                |       | 4,140    |       |
|                                                                                           |       |                                 |       |     |       |
| Total  adjustments                                                                             |       | 42,792                               |       | 18,508   |       |
|                                                                                           |       |                                 |       |     |       |
| Net  cash provided by operating activities from continuing operations                          |       | 25,298                               |       | 59,148   |       |
| Net  cash used in operating activities from discontinued operations                            |       | (5,757                               | )          | (5,114   | )          |
|                                                                                           |       |                                 |       |     |       |
| Net  cash provided by operating activities                                                     |       | 19,541                               |       | 54,034   |       |
|                                                                                           |       |                                 |       |     |       |
| Cash  flows from investing activities:                                                         |       |                                 |       |     |       |
| Capital  expenditures                                                                          |       | (65,590                              | )          | (76,751  | )          |
| Acquisitions  and investments, net of cash acquired                                            |       | (183                                 | )          | (3,261   | )          |
| Increase  in restricted cash                                                              |       | (4,621                               | )          | (6,638   | )          |
| Proceeds  from sale of subsidiaries and fixed assets                                           |       | 28,215                               |       | 158      |       |
|                                                                                           |       |                                 |       |     |       |
| Net  cash used in investing activities from continuing operations                              |       | (42,179                              | )          | (86,492  | )          |
| Net  cash used in investing activities from discontinued operations                            |       | (840                                 | )          | (3,956   | )          |
|                                                                                           |       |                                 |       |     |       |
| Net  cash used in investing activities                                                         |       | (43,019                              | )          | (90,448  | )          |
|                                                                                                |            |                                      |            |          |            |  |  |

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Nine months ended September 30,**                                                                                   | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from financing activities:                                                                                     |       |                                 |       |     |       |
| Net  proceeds from working capital facilities and redrawable loans                                                         |       | (39,754                              | )          | 31,514   |       |
| Issuance  of common shares                                                                                                 |       | 140,915                              |       | —   |       |
| Stock  options exercised                                                                                                   |       | 15                                   |       | 193      |       |
| Issuance  of long-term debt                                                                                                |       | 34,854                               |       | 4,659    |       |
| Principal  payments under long-term debt                                                                                   |       | (39,175                              | )          | (25,899  | )          |
| Payment  of common share dividends                                                                                         |       | —                               |       | (3,185   | )          |
|                                                                                                                       |       |                                 |       |     |       |
| Net  cash provided by financing activities from continuing operations                                                      |       | 96,855                               |       | 7,282    |       |
| Net  cash used in financing activities from discontinued operations                                                        |       | (25,578                              | )          | (764     | )          |
|                                                                                                                       |       |                                 |       |     |       |
| Net  cash provided by financing activities                                                                                 |       | 71,277                               |       | 6,518    |       |
|                                                                                                                       |       |                                 |       |     |       |
| Effect  of exchange rate changes on cash and cash equivalents                                                              |       | 2,229                                |       | (1,966   | )          |
|                                                                                                                       |       |                                 |       |     |       |
| Net  increase/(decrease) in cash and cash equivalents                                                                      |       | 50,028                               |       | (31,862  | )          |
|                                                                                                                       |       |                                 |       |     |       |
| Cash  and cash equivalents at beginning of period (includes $1,282 (2009), $3,789  (2008) of discontinued operations cash) |       | 65,884                               |       | 90,925   |       |
|                                                                                                                       |       |                                 |       |     |       |
| Cash  and cash equivalents at end of period (includes $988 (2009), $900 (2008) of  discontinued operations cash)           |       | $                                    | 115,912    |     | $          | 59,063 |   |
|                                                                                                                            |            |                                      |            |          |            |  |  |

 

See notes tocondensed consolidated financial statements.

 

5

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

 

**Statements of CondensedConsolidated Equity (unaudited)**

 
| **(Dollars in thousands)**                                                   | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/  (Loss)** | ** ** | **Non-  controlling  Interests** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Balance,  January 1, 2008                                                    |       | $                                    | —     |                                       | $          | 424                                        |       | $                                | 181        |                   | $          | 515,307                                              |       | $                                        | 302,369    |                                      | $          | 30,431                           |       | $ | (181 | ) |   |   | $ | 1,780 |   |
| Stock-based  compensation                                                    |       | —                               |       | —                                     |       | —                                     |       | 2,212                            |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock  options exercised                                                     |       | —                               |       | 1                                          |       | —                                     |       | 192                              |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Dividends  on common shares                                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (3,185                 | )          | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive  income:                                                       |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net  earnings                                                                |       | —                               |       | —                                     |       | —                                     |       | —                           |       | 21,505                 |       | —                                               |       | —                                   |       | $                                         | 21,505     |                             | 247        |   |
| Other  comprehensive income                                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | —                 |       | (29,532                                              | )          | —                                   |       | (29,532                                   | )          | (5                               | )          |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (8,027     | )                                |       |   |
| Balance,  September 30, 2008                                                 |       | $                                    | —     |                                       | $          | 425                                        |       | $                                | 181        |                   | $          | 517,711                                              |       | $                                        | 320,689    |                                      | $          | 899                              |       | $ | (181 | ) |   |   | $ | 2,022 |   |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Balance,  January 1, 2009                                                    |       | $                                    | —     |                                       | $          | 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                                        |       | —                                     |       | 140,656                          |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock  options exercised                                                     |       | —                               |       | —                                     |       | —                                     |       | 15                               |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Stock-based  compensation                                                    |       | —                               |       | —                                     |       | —                                     |       | 3,237                            |       | —                 |       | —                                               |       | —                                   |       |                                      |       | —                           |       |
| Comprehensive  loss:                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       |                                      |       |                             |       |
| Net  losses                                                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | (51,967                | )          | —                                               |       | —                                   |       | $                                         | (51,967    | )                                | 12         |   |
| Other  comprehensive income                                                  |       | —                               |       | —                                     |       | —                                     |       | —                           |       | —                 |       | 18,263                                               |       | —                                   |       | 18,263                                    |       | (14                              | )          |
|                                                                         |       |                                 |       |                                       |       |                                       |       |                             |       |                   |       |                                                 |       |                                     |       | $                                         | (33,704    | )                                |       |   |
| Balance,  September 30, 2009                                                 |       | $                                    | —     |                                       | $          | 769                                        |       | $                                | 181        |                   | $          | 714,635                                              |       | $                                        | 219,604    |                                      | $          | (41,947                          | )          | $ | (181 | ) |   |   | $ | 1,569 |   |

 

See notes to condensed consolidated financial statements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Notesto Condensed Consolidated Financial Statements**

 

**1.         Basisof financial statement presentation**

 

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

 

“FASB” meansFinancial Accounting Standards Board and “APB” means Accounting PrinciplesBoard, the FASB’s predecessor. “SFAS” means Statement of Financial AccountingStandards of the FASB, and “FIN,” “EITF” or “FSP” means an accountinginterpretation of the FASB. “ASC” means Accounting Standards Codification ofthe FASB and “ASU” means Accounting Standards Update of the FASB.

 

*(a) * *Accounting policies*

 

Theaccompanying condensed consolidated financial statements have been preparedpursuant to the rules and regulations of the U.S. Securities and ExchangeCommission for reporting on Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofthe management of the Company, all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation of financial position, operatingresults and cash flows have been included in the statements.  Interim results are not necessarilyindicative of results that may be expected for the year ending December 31,2009.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s periodic filings, including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.  See Note 1 to the consolidated financialstatements in the 2008 Form 10-K for additional information regarding significantaccounting policies.

 

The accounting policies used in preparing these financial statementsare the same as those applied in the prior year, except for the implementationof ASU 2009-01, ASC 815-10-50 (formerly SFAS No. 161), ASC 810-10-45 (formerlySFAS No. 160), ASC 805 (formerly SFAS No. 141(R)), ASC 350 (formerly FSP FAS142-3), ASC 820-10 (formerly SFAS No. 157 for nonfinancial assets andliabilities), ASC 855-10 (formerly SFAS No. 165), ASC 820-10 (formerly FSP FAS157-4), and ASC 825-10 (formerly FSP FAS 107-1 and APB 28-1).

 

7

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*ASU 2009-01*

 

Effective July 1, 2009, OEH has implemented ASU2009-01, Topic 105 - GAAP Amendments based on SFAS No. 168, “The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles”. The statement establishes the codification as thesource of authoritative U.S. accounting and reporting standards recognized bythe FASB for use in the preparation of financial statements and revises theframework for selecting the accounting principles to be used.

 

*ASC 815-10-50 (formerly SFAS No. 161)*

 

ASC 815-10-50, “Derivatives and Hedging – Overall –Disclosures” (formerly SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities - an amendment of FASB Statement No. 133”),**amends and expands the previous disclosure requirementswith the intent to provide users of financial statements with an enhancedunderstanding of: (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. The standard requiresqualitative disclosures about objectives and strategies for using derivatives,quantitative disclosures about the fair value of and gains and losses onderivative instruments, and disclosures about credit-risk-related contingentfeatures in derivative instruments. OEH has implemented the standard by addingthe required disclosures.

 

OEH records all derivatives on the balance sheet atfair value. The accounting for changes in the fair value of derivatives dependson the intended use of the derivative, whether OEH has elected to designate aderivative in a hedging relationship and apply hedge accounting and whether thehedging relationship has satisfied the criteria necessary to apply hedgeaccounting. Derivatives designated and qualifying as a hedge of the exposure tovariability in expected future cash flows, or other types of forecasttransactions, are considered cash flow hedges. Derivatives may also bedesignated as hedges of the foreign currency exposure of a net investment in aforeign operation. Hedge accounting generally provides for the matching of thetiming of gain or loss recognition on the hedging instrument with therecognition of the changes in the fair value of the hedged asset or liabilitythat are attributable to the hedged forecast transactions in a cash flow hedge.OEH may enter into derivative contracts that are intended to economically hedgecertain of its risks, even though hedge accounting does not apply or OEH electsnot to apply hedge accounting.

 

8

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*ASC 810-10-45 (formerly SFAS No. 160)*

 

Effective January1, 2009, OEH has implemented ASC 810-10-45, “Consolidation – Overall – OtherPresentation” (formerly SFAS No. 160, “Non-Controlling Interests inConsolidated 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.

 

*ASC 855-10-50 (formerly SFAS No. 165)*

 

Effective June15, 2009, OEH has implemented ASC 855-10-50, “Subsequent Events – Disclosure”(formerly SFAS No. 165, “Subsequent Events”). The date through which subsequentevents have been evaluated has been disclosed (see Note 19).

 

*ASC 805 (formerly SFAS No. 141(R)), ASC 350 (formerly FSP FAS 142-3),ASC 820-10 (formerly SFAS No. 157 for nonfinancial assets and liabilities), ASC820-10 (formerly FSP FAS 157-4), and ASC 825-10 (formerly FSP FAS 107-1 and APB28-10).*

 

Theimplementation of ASC 805, “Business Combinations” (formerly SFAS No. 141(R), “BusinessCombinations”), ASC 350, “Intangibles – Goodwill and Other” (formerly FSP FAS142-3, “Determination of the Useful Life of Intangible Assets”), ASC 820-10, “FairValue Measurements and Disclosures – Overall” (formerly SFAS No. 157, “FairValue Measurements” for nonfinancial assets and liabilities), ASC820-10,(formerly FSP FAS 157-4, “Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly”) and ASC 820-10 (formerly FSPFAS 107-1 and APB 28-1 “Interim Disclosures About Fair Value of FinancialInstruments”) has not resulted in any material impact to the financialstatements as of September 30, 2009 and for the nine months then ended.

 

*Recentaccounting pronouncements*

 

In August 2009, the FASB issued ASU 2009-05, “FairValue Measurements and Disclosures (Topic 820) – Measuring Liabilities at FairValue”, which provides clarification on techniques to be used to measure fairvalue of liabilities in circumstances in which a quoted price in an activemarket for the identical liability is not available. The standard is effectivefor the first reporting period beginning after issuance (i.e. for OEH the threemonths ending December 31, 2009). OEH is in the process of determining theeffects of the adoption of this standard on its consolidated financialstatements.

 

9

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In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (not yet incorporated into the FASBCodification), which changes how a reporting company determines when an entitythat is insufficiently capitalized or is not controlled through voting shouldbe consolidated. The standard will require a number of new disclosures about areporting company’s involvement with variable interest entities, anysignificant changes in risk exposure due to that involvement and how thatinvolvement affects the reporting company’s financial statements. The standardis effective from January 1, 2010. OEH is in the process of determining theeffects of the adoption of this standard on its consolidated financialstatements.

 

*(b)Net earnings per share*

 

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

 
| **Three months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Basic                                 |       | 76,836   |       | 42,470   |       |
| Effect of dilution                    |       | —   |       | 90       |       |
| Diluted                               |       | 76,836   |       | 42,560   |       |

 
| **Nine months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Basic                                |       | 65,082   |       | 42,468   |       |
| Effect of dilution                   |       | —   |       | 135      |       |
| Diluted                              |       | 65,082   |       | 42,603   |       |

 

For thethree months ended September 30, 2009 and the nine months ended September 30,2009, all share options and share-based awards were excluded from thecalculation of the diluted weighted average number of shares because OEH made anet loss in both periods and the effect of their inclusion would be anti-dilutive.For the three months ended September 30, 2008 and the nine months ended September30, 2008, the effect of anti-dilutive share options and share-based awards hasbeen excluded from the calculation of the diluted weighted average number ofshares.

 

10

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

 
| **Three months ended  September 30,** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|
|                                  |       |      |       |     |       |
| Share options                         |       | 1,620,509 |       | 580,452  |       |
| Share-based awards                    |       | 520,061   |       | 59,365   |       |
|                                  |       | 2,140,570 |       | 639,817  |       |

 
| **Nine months ended  September 30,** | ** ** | **2009**  | ** ** | **2008** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|
|                                 |       |      |       |     |       |
| Share options                        |       | 1,257,677 |       | 575,095  |       |
| Share-based awards                   |       | 425,476   |       | 59,324   |       |
|                                 |       | 1,683,153 |       | 634,419  |       |

 

The numbers ofstock options and share-based awards at September 30, 2009 was 2,131,432 (September30, 2008 – 651,315).

 

*(c)   Earnings from unconsolidated companies*

 

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees. This interest income amounted to $nil and $3,078,000 for thethree months ended September 30, 2009 and 2008, respectively, and $nil and$9,082,000 for the nine months ended September 30, 2009 and 2008, respectively.See Note 3 regarding consolidation of Charleston Center LLC effective December 31,2008.

 

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

 

*(a) Lapa Palace Hotel sale*

 

On June 2,2009, OEH sold its shares in the Lapa Palace Hotel owning company in Lisbon,Portugal for a cash consideration of $41,983,000. Of that consideration$26,287,000 has been received in cash on the date of sale, and the remaining$15,696,000 has been deferred until 2010 and is secured by a Portuguese bankguarantee. The disposal resulted in a gain on sale of $5,006,000.

 

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

 

11

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| **** ****                                 | **** **** | ****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                           |           | (719                        | )              |
|                                           |           | 40,962                      |           |
|                                           |           |                        |           |
| Gain  on sale                                  |           | $                           | 5,006          |   |

 

****Results of discontinuedoperations of the Lapa Palace Hotel are as follows (dollars in thousands):****

 
| ****Three months ended September 30,****             | **** **** | ****2009****   | **** **** | ****2008****   | **** **** |
|------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                      | **** **** | ****$****      | ****—**** | **** **** | ****$****      | ****3,505**** | **** **** |
| **** ****                                       | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Gain before tax and gain on sale****             | **** **** | ****$****      | ****—**** | **** **** | ****$****      | ****295**** | **** **** |
| ****Gain on sale****                                 | **** **** | ****—**** | **** **** | ****—**** | **** **** |
| ****Income before tax****                            | **** **** | ****—**** | **** **** | ****295****    | **** **** |
| ****Tax****                                          | **** **** | ****—**** | **** **** | ****(21****    | ****)****      |
| ****Net gain from discontinued********operations**** | **** **** | ****$****      | ****—**** | **** **** | ****$****      | ****274**** | **** **** |

 
| ****Nine months  ended September 30,****                | **** **** | ****2009****   | **** **** | ****2008****   | **** **** |
|---------------------------------------------------------|----------------|----------------|----------------|----------------|----------------|
| **** ****                                          | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****Revenue****                                         | **** **** | ****$****      | ****2,860****  | **** **** | ****$****      | ****10,335**** | **** **** |
| **** ****                                          | **** **** | **** **** | **** **** | **** **** | **** **** |
| ****(Loss)/ gain before tax and gain********on sale**** | **** **** | ****$****      | ****(827****   | ****)****      | ****$****      | ****594**** | **** **** |
| ****Gain on sale****                                    | **** **** | ****5,006****  | **** **** | ****—**** | **** **** |
| ****Income before tax****                               | **** **** | ****4,179****  | **** **** | ****594****    | **** **** |
| ****Tax****                                             | **** **** | ****—**** | **** **** | ****(21****    | ****)****      |
| ****Net gain from discontinued********operations****    | **** **** | ****$****      | ****4,179****  | **** **** | ****$****      | ****573**** | **** **** |

 

12

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*(b) Assets held for sale:Windsor Court Hotel, Bora Bora Lagoon Resort and La Cabana*

 

****During the fourthquarter of 2007, OEH decided to sell its investment in Bora Bora Lagoon Resort.The asset is being actively marketed and is expected to be disposed of within ayear. During the second quarter of 2009, OEH decided to sell Windsor CourtHotel and entered into a sale agreement in July 2009. The sale was completed inOctober 2009. During the third quarter of 2009, OEH decided to sell or close LaCabana restaurant. The asset is being actively marketed and is expected to bedisposed of within a year.****

 

****The hotels and therestaurant have been classified as held for sale and their results have beenpresented as discontinued operations for all the interim periods presented.****

 

****For the nine monthsended September 30, 2009, an impairment loss of $21,549,000 was recognized onthe re-measurement of Windsor Court Hotel which reduced the carrying amount ofthe hotel assets to fair value less costs to sell,**** offset by a related taxcredit of $7,146,000. For the nine months ended ****September 30, 2009, impairment losses wererecognized for Bora Bora Lagoon Resort tangible assets of $16,510,000, of which$4,510,000 was recorded in the three months ended September 30, 2009 to reflectthe level of offers being received for the purchase of the hotel.  An impairment loss of $5,368,000 wasrecognized for La Cabana tangible assets, to reflect the level of offers beingreceived on the restaurant.****

 

****Summarized operatingresults of the hotels and the restaurant held for sale are as follows (dollarsin thousands):****

**** ****
| ****Three months ended September 30,****             | ** **     | ****2009****    | ** **      | ****2008****    | ** **     |
|------------------------------------------------------|----------------|-----------------|-----------------|-----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** ****  | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****7,288****   | **** ****  | ****$****      | ****7,145**** | **** **** |
| **** ****                                       | **** **** | **** ****  | **** ****  | **** ****  | **** **** |
| ****Loss before tax and impairment****               | **** **** | ****$****       | ****(393****    | ****)****       | ****$****      | ****(2,446**** | ****)**** |
| ****Impairment loss****                              | **** **** | ****(9,915****  | ****)****       | ****(12,000**** | ****)****      |
| ****Loss before tax****                              | **** **** | ****(10,308**** | ****)****       | ****(14,446**** | ****)****      |
| ****Tax****                                          | **** **** | ****—****  | **** ****  | ****—****  | **** **** |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(10,308**** | ****)****       | ****$****      | ****(14,446**** | ****)**** |

 

13

----

 
| ****Nine months ended September 30,****              | **** **** | ****2009****    | **** ****  | ****2008****    | **** **** |
|------------------------------------------------------|----------------|-----------------|-----------------|-----------------|----------------|
| **** ****                                       | **** **** | **** ****  | **** ****  | **** ****  | **** **** |
| ****Revenue****                                      | **** **** | ****$****       | ****23,187****  | **** ****  | ****$****      | ****25,754**** | **** **** |
| **** ****                                       | **** **** | **** ****  | **** ****  | **** ****  | **** **** |
| ****Loss before tax and impairment****               | **** **** | ****$****       | ****(2,371****  | ****)****       | ****$****      | ****(7,708**** | ****)**** |
| ****Impairment loss****                              | **** **** | ****(43,427**** | ****)****       | ****(12,000**** | ****)****      |
| ****Loss before tax****                              | **** **** | ****(45,798**** | ****)****       | ****(19,708**** | ****)****      |
| ****Tax****                                          | **** **** | ****7,146****   | **** ****  | ****—****  | **** **** |
| ****Net loss from discontinued********operations**** | **** **** | ****$****       | ****(38,652**** | ****)****       | ****$****      | ****(19,708**** | ****)**** |

 

****Assets and liabilitiesof the hotels and the restaurant that have been classified as held for sale consistedof the following (dollars in thousands):****

**** ****
| **** ****                                                    | ** **     | ****September 30,**********2009****** | ** **     | ****December 31,**********2008****** | ** **     |
|-------------------------------------------------------------------|----------------|---------------------------------------|----------------|--------------------------------------|----------------|
| **** ****                                                    | **** **** | **** ****                        | **** **** | **** ****                       | **** **** |
| ****Current assets****                                            | **** **** | ****$****                             | ****10,693**** | **** ****                       | ****$****      | ****9,923**** | **** **** |
| ****Other assets****                                              | **** **** | ****3,246****                         | **** **** | ****1,505****                        | **** **** |
| ****Property, plant and equipment, net********of depreciation**** | **** **** | ****58,519****                        | **** **** | ****142,610****                      | **** **** |
| ****Goodwill****                                                  | **** **** | ****2,513****                         | **** **** | ****2,169****                        | **** **** |
| ****Total assets held for sale****                                | **** **** | ****$****                             | ****74,971**** | **** ****                       | ****$****      | ****156,207**** | **** **** |
| **** ****                                                    | **** **** | **** ****                        | **** **** | **** ****                       | **** **** |
| ****Liabilities held for sale****                                 | **** **** | ****$****                             | ****42,775**** | **** ****                       | ****$****      | ****78,837**** | **** **** |

 

****Prior year comparativesincluded balances of Lapa Palace Hotel, which was sold in June 2009: $1,547,000of current assets, $1,016,000 of other assets, $42,761,000 of fixed assets and$19,921,000 of liabilities.****

 

****3.********                           ********Consolidationof variable interest entity – Charleston Place Hotel****

 

****OEH holds a 19.9% equityinvestment in Charleston Center LLC, owner of Charleston Place Hotel.  It has also made a number of loans to thehotel.  On evaluating its variousvariable interests in the hotel at December 31, 2008, OEH concluded that thehotel no longer qualified for certain scope exemptions under ASC 810, “Consolidation”(formerly FIN 46(R), “Consolidation of Variable Interest Entities”)****, because OEH’s share of loansprovided to the hotel had increased and OEH provided a majority of subordinatedfinancial support.****  OEH further concluded that OEH is the primarybeneficiary of the variable interest entity****becauseit is expected to absorb a majority of the entity’s residual gains or lossesbased on the current organizational structure. OEH has****consolidated the entity effective December 31, 2008. Previously the entity hadbeen accounted for under the equity method of accounting.****

 

14

----

 

****Theresults of operations of Charleston Place Hotel have been included in theconsolidated financial statements of OEH from January 1, 2009 and, accordingly,any intercompany transactions have been eliminated from that date forward.****

 

****The assets andliabilities of Charleston Center LLC that were consolidated into the financialstatements at their fair value as at December 31, 2008 were as follows (dollarsin thousands):****

**** ****
| ** **                                                 | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
|                                                       |       |                   |       |
| Current assets                                             |       | $                      | 4,937      |   |
| Property, plant and equipment                              |       | 196,650                |       |
| Other assets                                               |       | 1,824                  |       |
| 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 before amounts payable to OEH of $97,000 |       | $                      | 161,405    |   |

 

****Thethird-party debt of Charleston Center LLC is non-recourse to its members,including OEH, and the hotel’s separate assets and liabilities are notavailable to pay the debts of OEH and do not constitute obligations of OEH.****

 

**4.         Property, plant and equipment**

 

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

 

15

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| ** **                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land and buildings                      |       | $                            | 1,277,521  |                        | $          | 1,198,253 |   |
| Machinery and equipment                 |       | 186,571                      |       | 185,545                     |       |
| Fixtures, fittings and office equipment |       | 199,168                      |       | 168,715                     |       |
| River cruiseship and canalboats         |       | 19,311                       |       | 13,223                      |       |
|                                    |       | 1,682,571                    |       | 1,565,736                   |       |
| Less: accumulated depreciation          |       | (250,578                     | )          | (212,740                    | )          |
|                                    |       | $                            | 1,431,993  |                        | $          | 1,352,996 |   |

 

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

 
| ** **                                 | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Freehold and leased land****and  buildings |       | $                            | 16,112     |                        | $          | 15,535 |   |
| Machinery and equipment                    |       | 2,718                        |       | 2,189                       |       |
| Fixtures, fittings and officeequipment     |       | 3,028                        |       | 2,877                       |       |
|                                       |       | 21,858                       |       | 20,601                      |       |
| Less: accumulated depreciation             |       | (4,941                       | )          | (4,096                      | )          |
| ** **                                 |       | $                            | 16,917     |                        | $          | 16,505 |   |

 

In the three months ended September 30,2009, OEH identified a non-cash property, plant and equipment impairment chargeof $9,809,000 in respect of the Lilianfels Blue Mountains hotel. The carryingvalue of the assets was written down to the fair value based on the management’sbest estimate.

 

For the nine months ended September 30,2009, OEH capitalized interest in the amount of $4,067,000 in property, plantand equipment. For the year ended December 31, 2008, OEH capitalized interestin the amount of $7,628,000 in property, plant and equipment.

 

16

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**5.             Goodwill**

 

Thechanges in the carrying amount of goodwill for the nine months ended September 30,2009 are as follows (dollars in thousands):

 
| ** **                                       | ** ** | **Hotels &  Restaurants** | ** ** | **Trains &  Cruises** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance as of January 1, 2009               |       | $                                  | 146,381    |                           | $          | 7,673     |       | $ | 154,054 |   |
| Goodwill impairment (from continuing operations) |       | (6,835                             | )          | —                         |       | (6,835    | )          |
| Foreign currency translation adjustment          |       | 1,993                              |       | 248                            |       | 2,241     |       |
| Balance as at September 30, 2009            |       | $                                  | 141,539    |                           | $          | 7,921     |       | $ | 149,460 |   |

 

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

 

Thedetermination of impairment incorporates various assumptions and uncertaintiesthat OEH believes are reasonable and supportable considering all available evidence,such as the future cash flows of the business, future growth rates and therelated discount rate. However, these assumptions and uncertainties are, bytheir very nature, highly judgmental.  If the assumptions are not met, OEHmay be required to recognize additional goodwill impairment losses.

 

During thefirst quarter of 2009, OEH completed its 2008 impairment analysis andidentified a non-cash goodwill impairment charge of $6,835,000 in addition tothe estimated impairment loss included in its annual December 31, 2008results, as follows (dollars in thousands):

 
| Miraflores Park           |   | $     | 3,208  |   |
|---------------------------|--------|-------|--------|--------|
| Casa de Sierra Nevada     |   | 2,805 |   |
| Observatory Hotel         |   | 274   |   |
| Lilianfels Blue Mountains |   | 548   |   |
|                      |   | $     | 6,835  |   |

 

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 $7,048,000 inthe nine months ended September 30, 2009.

 

17

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**6.****            ****Otherintangible assets**

(Dollars inthousands)

 
| ** **                        | ** ** | **September 30, 2009** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| **Amortized intangible assets**   | ** ** | **Carrying  amount**        | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Favorable lease                   |       | $                           | 12,825     |   | $ | 1,104 |   | $ | 11,721 |   |
| Internet sites                    |       | 2,282                       |       | 308 |   | 1,974 |   |
| Total                             |       | $                           | 15,107     |   | $ | 1,412 |   | $ | 13,695 |   |
|                              |       |                        |       |   |   |   |   |
| **Unamortized intangible assets** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tradename                         |       |                        |       |   |   | $ | 7,100 |   |

 

Favorablelease intangible assets are amortized over the terms of the leases, which arebetween 19 and 60 years, and internet sites are amortized over ten years.

 

Amortization expense for the three months endedSeptember 30, 2009 was $118,000 (2008 — $89,000).  Amortization expense for the nine monthsended September 30, 2009 was $288,000 (2008 — $259,000).  Estimated amortization expense for each ofthe years ended December 31, 2009 to December 31, 2013 is $340,000.

 

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

 

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

 
| ** **                                                                                                                                                                                                  | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Loans from banks collateralized by property, plant and equipment  payable over periods of 1 to 11 years, with a weighted average interest rate  of 3.47% and 5.05% , respectively, primarily based on LIBOR |       | $                            | 817,396    |                        | $          | 783,192 |   |
| Obligations under capital lease                                                                                                                                                                             |       | 12,742                       |       | 13,573                      |       |
|                                                                                                                                                                                                        |       | 830,138                      |       | 796,765                     |       |
| Less: current portion                                                                                                                                                                                       |       | (170,074                     | )          | (138,813                    | )          |
|                                                                                                                                                                                                        |       | $                            | 660,064    |                        | $          | 657,952 |   |

 

Long-term debt at September 30, 2009 includes$79,509,000 (December 31, 2008 - $79,626,000) of debt at Charleston CenterLLC. This debt is non-recourse to OEH, and the separate assets and liabilitiesof Charleston Place Hotel are not available to pay the debts of OEH and do notconstitute obligations of OEH.

 

18

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Of the currentportion of long-term debt $116,145,000 (December 31, 2008 - $105,373,000)related to revolving credit facilities which, although falling due within 12months, are available for re-borrowing throughout the period of the loanfacilities which are repayable in 2011 and 2012.

 

Certain creditagreements of OEH have restrictive covenants. At September 30, 2009, OEH was in compliance with all financialcovenants that applied to OEH, including a minimum consolidated net worth testand a minimum consolidated interest coverage test as defined under OEH’slargest bank-syndicated loan facility. OEH does not currently have any covenants in its loan agreements whichlimit the payment of dividends.

 

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at September 30,2009 (dollars in thousands):

 

Year ending December 31,

 
| 2010                |   | $       | 7,871   |   |
|---------------------|--------|---------|---------|--------|
| 2011                |   | 463,950 |    |
| 2012                |   | 109,134 |    |
| 2013                |   | 16,251  |    |
| 2014 and thereafter |   | 62,858  |    |
|                |   | $       | 660,064 |   |

 

The fair value of the debt at September 30, 2009 has beenestimated in the amount of $759,669,000.

 

In April 2009, OEH closed a $30,000,000secured construction loan for its Porto Cupecoy residential mixed-usedevelopment project on the Dutch side of St. Martin, French West Indies.  OEH has drawn $21,437,000 of this loan.

 

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.

 

**8.             Other liabilities**

 

Other liabilities are $1,505,000 of deferredconsideration on acquisition of land next to Maroma Resort and Spa afterdiscounting to present value, $1,763,000 of deferred income relating toguarantees given by OEH in connection with bank loans entered into by thePeruvian hotel joint venture operation (see Note 18), $4,886,000 in respect ofinterest 

 

19

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rate swaps (see Note 17), $12,790,000 oflong-term accrued interest at Charleston Place Hotel and $94,000 due in respectof a stock appreciation rights plan (see Note 13).

 

**9.             Incometaxes**

 

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

 

OEH recorded a tax provision for the three months ended September 30,2009 of $7,336,000 compared to a provision of $6,665,000 for the correspondingperiod in 2008. OEH’s current tax charge for the three months ended September 30,2009 was $2,029,000 compared to a charge of $9,448,000 in 2008.

 

Cumulatively, OEH recorded a tax provision for the nine months ended September 30,2009 of $8,255,000 compared to a provision of $12,830,000 for the correspondingperiod in 2008. OEH’s current tax charge for the nine months ended September 30,2009 was $9,738,000 compared to a charge of $14,515,000 in 2008.

 

For the nine months ended September 30, 2009, the provision forincome taxes included a current tax charge of $2,249,000 and a deferred taxcharge of $3,221,000 arising in Italy in connection with the closure of a taxaudit in respect of the 2004, 2005 and 2006 tax years. OEH had previouslyincluded a liability of $4,960,000 within its provision under ASC 740, “IncomeTaxes” (formerly FIN 48, “Accounting for Uncertainty of Income Taxes”), inrespect of these uncertain tax positions. After releasing this provision thenet impact on the provision for income taxes in the nine months ended September 30,2009 was $510,000. The $2,249,000 current tax liability is payable in 12quarterly instalments of approximately $187,000 each, which commenced in July 2009.At September 30, 2009, payments totalling $187,000 have been made.

 

OEH’s tax provision for the three months ended September 30, 2009included a tax charge of $315,000 (2008 — $156,000) in respect of an increasein the provision under ASC 740, of which $157,000 (2008 - $148,000) relates tointerest and penalty costs associated with the uncertain tax positions.  OEH’s tax provision for the nine months endedSeptember 30, 2009 included a net tax benefit of $4,068,000 (2008 — taxcharge of $862,000) in respect of a reduction in the provision, including acharge of $428,000 (2008 - $744,000) that related to the potential interest andpenalty costs. As described in the preceding paragraph, the ASC 740 taxbenefits include a benefit of $4,960,000 related to the Italian tax audits.

 

20

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At September 30, 2009, OEH had recognized a $7,430,000 provision (December 31,2008 - $11,493,000) in respect of its uncertain tax positions.  OEH believes that it is reasonably possiblethat within the next 12 months the ASC 740 provision will decrease byapproximately $1,000,000 as a result of the resolution of tax positions incertain jurisdictions in which OEH operates.

 

Earnings fromunconsolidated companies are reported net of tax in the statements ofconsolidated operations.  The taxprovision applicable to these unconsolidated companies in the three monthsended September 30, 2009 was $573,000, compared to a provision of$1,574,000 in the corresponding period in 2008. The cumulative tax provisionapplicable to unconsolidated subsidiaries in the nine months ended September 30,2009 was $1,755,000 compared to a provision of $4,194,000 in the nine monthsended September 30, 2008.

 

**10.          Pensions**

 

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

 
| **Three months ended  September 30,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                               |       | $          | —     |       | $          | — |   |
| Interest cost                              |       | 261        |       | 296        |       |
| Expected return on plan assets             |       | (170       | )          | (282       | )          |
| Amortization of net loss                   |       | 163        |       | 114        |       |
| Net periodic benefit cost                  |       | $          | 254        |       | $          | 128 |   |

 
| **Nine months ended  September 30,** | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                              |       | $          | —     |       | $          | — |   |
| Interest cost                             |       | 736        |       | 917        |       |
| Expected return on plan assets            |       | (478       | )          | (872       | )          |
| Amortization of net loss                  |       | 459        |       | 354        |       |
| Net periodic benefit cost                 |       | $          | 717        |       | $          | 399 |   |

 

As reported inNote 11 to the financial statements in the Company’s 2008 Form 10-K annualreport, OEH expected to contribute $1,097,000 to its defined benefit pensionplan in 2009.  As of September 30,2009, $986,000 of contributions had been made. OEH anticipates contributing an additional $409,000 to fund its definedbenefit pension plan in 2009 for a total of $1,395,000.

 

21

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**11.          Supplemental cash flow information**

 (Dollarsin thousands)

 
| **Nine months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Cash paid for:                            |       |     |       |     |       |
| Interest                                  |       | $        | 25,764     |     | $          | 36,262 |   |
| Income taxes                              |       | $        | 8,177      |     | $          | 12,820 |   |

 

In conjunction with acquisitions in the nine monthsended September 30, 2008, liabilities were assumed as follows (dollars inthousands):

 
| **Nine months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Fair value of assets acquired             |       | $        | —     |     | $          | 3,261 |   |
| Cash paid                                 |       | —   |       | (3,261   | )          |
| Liabilities assumed                       |       | $        | —     |     | $          | — |   |

 

*Restricted cash*

 

Restricted cash of $17,845,000 at September 30,2009 and $13,224,000 at December 31, 2008 consisted mainly of the PortoCupecoy escrow account. Cash received for residential condominium purchases atPorto Cupecoy is held in escrow and released to OEH when the next phase ofconstruction is completed. At September 30, 2009, the Porto Cupecoy escrowaccount balance amounted to $10,303,000 (December 31, 2008 — $8,168,000).

 

**12.          Accumulated other comprehensive income**

 

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

 
| ** **                                         | ** ** | **September 30,********2009** | ** ** | **December 31,********2008** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Foreign currency translationadjustments            |       | $                                  | (18,657    | )                                 | $          | (40,851 | ) |
| Derivative financial instruments                   |       | (12,592                            | )          | (8,633                            | )          |
| Pension liability, net of tax of$3,106 and  $3,106 |       | (10,698                            | )          | (10,726                           | )          |
|                                               |       | $                                  | (41,947    | )                                 | $          | (60,210 | ) |

 

22

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The components of comprehensiveincome/(loss) are as follows (dollars in thousands):

 
| **Nine months ended  September 30,**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Net (loss)/earnings on common shares                             |       | $        | (51,967    | )        | $          | 21,505 |   |
| Foreign currency translation adjustments                         |       | 28,913   |       | (28,994  | )          |
| Foreign currency translation adjustments relating to Lapa Palace |       | (6,719   | )          | —   |       |
| Change in fair value of derivatives                              |       | (3,959   | )          | (538     | )          |
| Change in pension liability, net of tax of $nil and $nil         |       | 28       |       | —   |       |
| Comprehensive loss                                               |       | $        | (33,704    | )        | $          | (8,027 | ) |

 

**13.          Equity-compensationplans**

 

On June 5,2009, the shareholders of the Company approved a new 2009 Share Award andIncentive Plan (the “2009 Plan”) which replaced the 2000 Stock Option Plan,2004 Stock Option Plan and 2007 Performance Share Plan (the “Pre-existing Plans”).A total of 1,084,550 class A common shares plus the number of class A commonshares subject 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 2009Plan.

 

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’sBoard.

 

On June 8,2009, OEH awarded under the 2009 Plan stock options on 631,900 class A commonshares at an exercise price of $8.38 per share vesting in June 2012,deferred shares covering 21,265 class A common shares vesting in February 2012without performance criteria, and deferred shares covering 926 class A commonshares vesting in March 2012 with performance criteria related to totalshareholder return and earnings before tax.

 

On July 21,2009, OEH awarded under the 2009 Plan stock options on 5,000 class A commonshares at an exercise price of $7.71 per share vesting in July 2012.

 

23

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OEH awardedunder the 2007 Performance Share Plan, on February 2, 2009, 158,046 classA common shares vesting in February 2010 without performance criteria and68,070 class A common shares vesting in February 2012 without performancecriteria and, on March 13, 2009, 210,519 class A common shares vesting in March 2012with performance criteria related to total shareholder return and earningsbefore tax.

 

The fair valueof grants issued in the nine months ended September 30, 2009 was$4,435,000 (2008-$1,780,000).

 

Theweighted-average fair value of the stock options issued under the 2009 Plan onthe grant date was $4.17 per share.

 

Estimate ofthe fair value of stock options on the grant date using the Black-Scholesoption pricing model was based on the following assumptions:

 
| Expected share price volatility     |   | 55      | %      |
|-------------------------------------|--------|---------|--------|
| Risk-free interest rate             |   | 2.95    | %      |
| Expected annual dividends per share |   | $       | 0      |   |
| Expected life of stock options      |   | 5 years |   |
|                                     |        |         |        |  |

 

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

 

The totalcompensation related to unvested awards outstanding at September 30, 2009,to be recognized over the period October 1, 2009 to September 30,2012, is $6,500,000.

 

In addition tothe above, on January 20, 2009, OEH awarded 65,415 stock appreciationrights (SARs) under its 2007 Stock Appreciation Rights Plan at an exerciseprice of $6.50 per share vesting in January 2012. The SARs have beenrecorded as liabilities with a fair value of $94,000 at September 30,2009.

 

24

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

 

*Fair value of financialinstruments*

 

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

 

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

 

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

 

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

 
| ** **                                                                                                                | ** **     | ****September 30, 2009**** | **** **** |
|---------------------------------------------------------------------------------------------------------------------------|----------------|---------------------------------|----------------|
| **** ****                                                                                                            | **** **** | ****Carrying  amount****        | **** **** | ****Fair value**** | **** **** |
| ****Cash and cash equivalents****                                                                                         | **** **** | ****$****                       | 114,924        | **** **** | ****$**** | ****114,924**** | **** **** |
| ****Working capital********facilities****                                                                                 | **** **** | ****$****                       | 8,402          | **** **** | ****$**** | ****8,402**** | **** **** |
| ****Long-term debt, including********current portion,********excluding obligations********under capital********leases**** | **** **** | ****$****                       | 817,396        | **** **** | ****$**** | ****759,669**** | **** **** |

 

25

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*Fair values ofnon-financial assets measured on a non-recurring basis*(dollars in thousands):

 
| ** **                                      | ** ** | ** **     | ** ** | **Fair value measurements using** | ** ** | ** **      | ** ** |
|-------------------------------------------------|------------|----------------|------------|-----------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | ** **     | ** ** | **Quoted prices**                 | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **     | ** ** | **in active**                     | ** ** | **Significant** | ** ** | ** ** | ** ** | **Total losses** | ** ** |
| ** **                                      | ** ** | **Fair Value** | ** ** | **markets for**                   | ** ** | **other**       | ** ** | **Significant** | ** ** | **for nine** | ** ** |
| ** **                                      | ** ** | **At**         | ** ** | **identical**                     | ** ** | **observable**  | ** ** | **unobservable** | ** ** | **months ended** | ** ** |
| ** **                                      | ** ** | **September**  | ** ** | **assets**                        | ** ** | **inputs**      | ** ** | **inputs** | ** ** | **September** | ** ** |
| ** **                                      | ** ** | **30, 2009**   | ** ** | **(Level 1)**                     | ** ** | **(Level 2)**   | ** ** | **(Level 3)** | ** ** | **30, 2009** | ** ** |
| Assets of discontinued operations held for sale |       | $              | 74,971     |                              | $          | —          |       | $ | 74,971 |   | $ | — |   | $ | (43,427 | ) |
| Property, plant and equipment,net               |       | $              | 18,079     |                              | $          | —          |       | $ | 18,079 |   | $ | — |   | $ | (9,809 | ) |
| Goodwill                                        |       | $              | —     |                              | $          | —          |       | $ | — |   | $ | — |   | $ | (6,835 | ) |
| Other intangible assets                         |       | $              | —     |                              | $          | —          |       | $ | — |   | $ | — |   | $ | (213 | ) |

 

Assets ofdiscontinued operations held for sale with a carrying amount of $118,398,000were written down to their fair value less cost to sell, resulting in a loss of$43,427,000 which was included in losses from discontinued operations for theperiod (see Note 2).

 

Property,plant and equipment with a carrying amount of $27,888,000 was written down toits fair value of $18,079,000, resulting in an impairment charge of $9,809,000which was included in earnings from continuing operations for the period (seeNote 4).

 

Goodwill witha carrying amount of $6,835,000 was written down to its implied fair value ofnil, 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).

 

**15.          Commitmentsand contingencies**

 

Outstanding contracts to purchase fixed assets wereapproximately $51,948,000 at September 30, 2009 (December 31, 2008 -$76,606,000), including $43,000,000 (December 31, 2008 - $53,000,000) inrespect of the New York Public Library contracts referred to in the nextparagraph. Additionally, outstanding contracts for project related costs on thePorto Cupecoy development were approximately $13,957,000 at September 30,2009 (December 31, 2008 - $31,960,000).

 

26

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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, OEH decided to suspend further payments under theagreements, 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$6,000,000 and $29,000,000 in June 2011. In the event OEH elects not to close the transaction, the final paymentof $29,000,000 will not be due to the Library. OEH has given the Library security on unencumbered villas at La Samannato secure the payments.

 

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

 

As reported in the Company’s 2008 Form 10-Kannual report, OEH has three reporting segments, (i) hotels andrestaurants,  (ii) tourist trainsand cruises, and (iii) real estate and property development.  Segment performance is evaluated based uponsegment net earnings before interest, foreign currency, tax (including tax onearnings from unconsolidated companies), depreciation and amortization (“segmentEBITDA”).  Financial informationregarding these business segments is as follows, with net finance costsappearing net of capitalized interest and interest and related income (dollarsin thousands):

** **
| **Three months ended  September 30,** | ** **      | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|-----------------|----------|------------|----------|------------|
|                                       |            |     |       |     |       |
| Revenue:                                   |            |     |       |     |       |
| Hotels and restaurants                     |            |     |       |     |       |
| Owned hotels                               | - Europe        |     | $          | 67,535   |       | $ | 88,117 |   |
|                                       | - North America |     | 19,897     |     | 13,184     |   |
|                                       | - Rest of world |     | 29,113     |     | 33,437     |   |
| Hotel management/part ownership interests  |            | 1,109    |       | 2,426    |       |
| Restaurants                                |            | 2,151    |       | 2,899    |       |
|                                       |            | 119,805  |       | 140,063  |       |
| Tourist trains and cruises                 |            | 20,682   |       | 27,424   |       |
| Real estate                                |            | 1,688    |       | 3,454    |       |
|                                       |            | $        | 142,175    |     | $          | 170,941 |   |

 

27

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| **Three months ended  September 30,**                      | ** **      | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|-----------------|----------|------------|----------|------------|
|                                                            |            |     |       |     |       |
| Depreciation and amortization:                                  |            |     |       |     |       |
| Hotels and restaurants                                          |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 4,010    |       | $ | 4,267 |   |
|                                                            | - North America |     | 3,563      |     | 1,390      |   |
|                                                            | - Rest of world |     | 2,516      |     | 2,272      |   |
| Restaurants                                                     |            | 187      |       | 236      |       |
|                                                            |            | 10,276   |       | 8,165    |       |
| Tourist trains and cruises                                      |            | 765      |       | 766      |       |
|                                                            |            | $        | 11,041     |     | $          | 8,931 |   |
|                                                            |            |     |       |     |       |
| Segment EBITDA:                                                 |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 25,595   |       | $ | 35,905 |   |
|                                                            | - North America |     | (68        | )        | 300        |   |
|                                                            | - Rest of world |     | 4,704      |     | 6,681      |   |
| Hotel management/part ownership interests                       |            | (141     | )          | 4,664    |       |
| Restaurants                                                     |            | (494     | )          | (269     | )          |
| Tourist trains and cruises                                      |            | 7,686    |       | 10,247   |       |
| Real estate                                                     |            | (740     | )          | (223     | )          |
| Impairment of goodwill and fixed assets                         |            | (9,809   | )          | —   |       |
| Central overheads                                               |            | (7,418   | )          | (6,195   | )          |
|                                                            |            | $        | 19,315     |     | $          | 51,110 |   |
|                                                            |            |     |       |     |       |
| Segment EBITDA/net  earnings reconciliation:                    |            |     |       |     |       |
| Segment EBITDA                                                  |            | $        | 19,315     |     | $          | 51,110 |   |
| Less:                                                           |            |     |       |     |       |
| Depreciation and amortization                                   |            | 11,041   |       | 8,931    |       |
| Interest expense, net                                           |            | 7,781    |       | 10,858   |       |
| Foreign currency, net                                           |            | (4,709   | )          | 2,531    |       |
| Provision for income taxes                                      |            | 7,336    |       | 6,665    |       |
| Share of provision for income taxes ofunconsolidated  companies |            | 573      |       | 1,574    |       |
| (Losses)/earnings fromcontinuing  operations                    |            | $        | (2,707     | )        | $          | 20,551 |   |
|                                                            |            |     |       |     |       |
| Earnings from unconsolidated companies,net of tax:              |            |     |       |     |       |
| Hotels and restaurants                                          |            |     |       |     |       |
| Hotel management/part ownership interests                       |            | $        | (903       | )        | $          | 1,228 |   |
| Tourist trains and cruises                                      |            | 2,342    |       | 2,996    |       |
|                                                            |            | $        | 1,439      |     | $          | 4,224 |   |
| Capital expenditure:                                            |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 120      |       | $ | 5,028 |   |
|                                                            | - North America |     | 10,885     |     | 5,300      |   |
|                                                            | - Rest of world |     | 5,640      |     | 9,970      |   |
| Restaurants                                                     |            | 200      |       | 260      |       |
| Tourist trains and cruises                                      |            | 6,120    |       | 169      |       |
| Real estate                                                     |            | 1,802    |       | 7,172    |       |
|                                                            |            | $        | 24,767     |     | $          | 27,899 |   |

 

28

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| **Nine months ended  September 30,**                       | ** **      | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|-----------------|----------|------------|----------|------------|
|                                                            |            |     |       |     |       |
| Revenue:                                                        |            |     |       |     |       |
| Hotels and restaurants                                          |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 133,212  |       | $ | 194,100 |   |
|                                                            | - North America |     | 75,877     |     | 49,772     |   |
|                                                            | - Rest of world |     | 85,278     |     | 105,044    |   |
| Hotel management/part ownership interests                       |            | 3,377    |       | 8,251    |       |
| Restaurants                                                     |            | 8,717    |       | 12,162   |       |
|                                                            |            | 306,461  |       | 369,329  |       |
| Tourist trains and cruises                                      |            | 44,240   |       | 64,145   |       |
| Real estate                                                     |            | 1,688    |       | 11,980   |       |
|                                                            |            | $        | 352,389    |     | $          | 445,454 |   |
|                                                            |            |     |       |     |       |
| Depreciation and amortization:                                  |            |     |       |     |       |
| Hotels and restaurants                                          |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 11,832   |       | $ | 13,089 |   |
|                                                            | - North America |     | 8,693      |     | 4,167      |   |
|                                                            | - Rest of world |     | 6,782      |     | 6,938      |   |
| Restaurants                                                     |            | 563      |       | 741      |       |
|                                                            |            | 27,870   |       | 24,935   |       |
| Tourist trains and cruises                                      |            | 2,122    |       | 2,674    |       |
|                                                            |            | $        | 29,992     |     | $          | 27,609 |   |
| Segment EBITDA:                                                 |            |     |       |     |       |
| Owned hotels                                                    | - Europe        |     | $          | 37,357   |       | $ | 65,277 |   |
|                                                            | - North America |     | 11,957     |     | 8,936      |   |
|                                                            | - Rest of world |     | 17,253     |     | 23,061     |   |
| Hotel management/part ownership interests                       |            | 1,774    |       | 17,618   |       |
| Restaurants                                                     |            | 31       |       | 1,516    |       |
| Tourist trains and cruises                                      |            | 15,983   |       | 21,616   |       |
| Real estate                                                     |            | (1,533   | )          | (1,183   | )          |
| Impairment of goodwill and fixed assets                    |            | (16,857  | )          | —   |       |
| Central overheads                                               |            | (19,356  | )          | (20,153  | )          |
|                                                            |            | $        | 46,609     |     | $          | 116,688 |   |
|                                                            |            |     |       |     |       |
| Segment EBITDA/net  earnings reconciliation:                    |            |     |       |     |       |
| Segment EBITDA                                                  |            | $        | 46,609     |     | $          | 116,688 |   |
| Less:                                                           |            |     |       |     |       |
| Depreciation and amortization                                   |            | 29,992   |       | 27,609   |       |
| Interest expense, net                                           |            | 24,588   |       | 33,546   |       |
| Foreign currency, net                                           |            | (487     | )          | (2,131   | )          |
| Provision for income taxes                                      |            | 8,255    |       | 12,830   |       |
| Share of provision for income taxes ofunconsolidated  companies |            | 1,755    |       | 4,194    |       |
| (Losses)/earnings fromcontinuing  operations                    |            | $        | (17,494    | )        | $          | 40,640 |   |

 

29

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| **Nine months ended  September 30,**          | ** **      | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------|-----------------|----------|------------|----------|------------|
|                                               |            |     |       |     |       |
| Earnings from unconsolidated companies,net of tax: |            |     |       |     |       |
| Hotels and restaurants                             |            |     |       |     |       |
| Hotel management/part ownership interests          |            | $        | (1,161     | )        | $          | 7,288 |   |
| Tourist trains and cruises                         |            | 5,768    |       | 6,841    |       |
|                                               |            | $        | 4,607      |     | $          | 14,129 |   |
| Capital expenditure:                               |            |     |       |     |       |
| Owned hotels                                       | - Europe        |     | $          | 14,892   |       | $ | 28,247 |   |
|                                               | - North America |     | 19,260     |     | 15,311     |   |
|                                               | - Rest of world |     | 18,768     |     | 18,263     |   |
| Restaurants                                        |            | 244      |       | 532      |       |
| Tourist trains and cruises                         |            | 7,861    |       | 3,145    |       |
| Real estate                                        |            | 4,565    |       | 11,253   |       |
|                                               |            | $        | 65,590     |     | $          | 76,751 |   |

 

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

 
| **Three months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                   |       |     |       |     |       |
| Europe                                     |       | $        | 87,420     |     | $          | 113,878 |   |
| North America                              |       | 23,736   |       | 21,305   |       |
| Rest of world                              |       | 31,019   |       | 35,758   |       |
|                                       |       | $        | 142,175    |     | $          | 170,941 |   |

 
| **Nine months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                  |       |     |       |     |       |
| Europe                                    |       | $        | 175,647    |     | $          | 253,116 |   |
| North America                             |       | 86,282   |       | 79,277   |       |
| Rest of world                             |       | 90,460   |       | 113,061  |       |
|                                      |       | $        | 352,389    |     | $          | 445,454 |   |

 

**17. Derivatives and hedging activities**

 

*Risk management objective of usingderivatives*

 

OEH enters into derivative financial instruments tomanage exposures that arise from business activities that result in the receiptor payment of future known and uncertain cash amounts, the value of which isdetermined by interest rates. OEH’s derivative financial instruments are usedto manage differences in the amount, timing and duration of OEH’s known orexpected cash receipts and payments principally related to its investments andborrowings.

 

30

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*Cash flow hedges of interest rate risk*

 

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

 

The effective portion of changes in the fair value ofderivatives designated and qualifying as cash flow hedges is recorded in accumulatedother comprehensive income and is subsequently reclassified into earnings inthe period that the hedged forecast transaction affects earnings. During thenext 12 months, OEH estimates that an additional $8,461,000 will bereclassified as an increase to interest expense. During the nine months ended September 30,2009, such 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 September 30, 2009, OEH had the followingoutstanding interest rate derivatives that were designated as cash flow hedgesof interest rate risk:

 
| **Interest Rate  Derivatives** | ** ** | **Notional Amount** | ** **  |
|--------------------------------|------------|---------------------|-------------|
|                           |       |                |        |
| Interest Rate Swap             |       | €              | 165,000,000 |   |
| Interest Rate Swaps            |       | $                   | 181,250,000 |   |
| Interest Rate Swaps            |       | A$                  | 20,000,000  |   |

 

*Non-designated hedges of interest rate risk*

 

Derivatives not designated as hedges are used tomanage OEH’s exposure to interest rate movements but do not meet the stricthedge accounting requirements. As of September 30, 2009, OEH had oneinterest rate swap with a €24,700,000 ($36,318,000) notional amount that was anon-designated hedge of OEH’s exposure to interest rate risk.

 

31

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The table below presents the fair value of OEH’sderivative financial instruments as well as their classification as of September 30,2009 (dollars in thousands):

 
| ** **                                        | ** ** | **Asset/(Liability)  Derivatives** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **Balance Sheet  Location**        | ** ** | **Fair  Value as of  Sept 30, 2009** | ** ** | **Fair Value as of  December 31, 2008** | ** ** |
| Derivatives designated as hedging instruments     |       |                               |       |   |   |   |   |
| Interest Rate Swaps                               |       | Other assets                       |       | $ | 128 |   | $ | — |   |
| Interest Rate Swaps                               |       | Accrued  liabilities               |       | (9,547 | ) | (1,980 | ) |
| Interest Rate Swaps                               |       | Other  liabilities                 |       | (4,351 | ) | (6,803 | ) |
| Total                                             |       |                               |       | $ | (13,770 | ) | $ | (8,783 | ) |
|                                              |       |                               |       |   |   |   |   |
| Derivatives not designated as hedging instruments |       |                               |       |   |   |   |   |
| Interest Rate Swap                                |       | Accrued  liabilities               |       | $ | (1,196 | ) | $ | (1,670 | ) |
| Interest Rate Swap                                |       | Other  liabilities                 |       | (535 | ) | (2,228 | ) |
| Total                                             |       |                               |       | $ | (1,731 | ) | $ | (3,898 | ) |

 

The tables below (in which “OCI” means othercomprehensive income) present the effect of OEH’s derivative financialinstruments on the statement of operations for the three and nine months ended September 30,2009 and 2008 (dollars in thousands):

 
| **Three months ended  September 30,**                                        | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                              |       |                 |       |                 |       |
| Derivatives in cash flow hedging relationship                                     |       | Interest  rate swaps |       | Interest  rate swaps |       |
| Amount of loss recognized inOCI (effective  portion), net of tax                  |       | $                    | (4,881     | )                    | $          | (3,716 | ) |
| Location of loss reclassifiedfrom  accumulated OCI into income(effective portion) |       | Interestexpense      |       | Interestexpense      |       |
| Amount of loss reclassified fromaccumulated OCI  into income (effective portion)  |       | $                    | (2,200     | )                    | $          | (255 | ) |
| Location of (loss)/gain recognized inincome on  derivatives (ineffectiveportion)  |       | Interestexpense      |       | Interestexpense      |       |
| Amount of (loss)/gain recognized inincome on  derivatives (ineffectiveportion)    |       | $                    | (20        | )                    | $          | 6 |   |
|                                                                              |       |                 |       |                 |       |
| Derivatives not designated ashedging  instruments                                 |       | Interestrate swap    |       | Interestrate swap    |       |
| Location of loss recognized inincome                                              |       | Interestexpense      |       | Interestexpense      |       |
| Amount of loss recognized in income                                               |       | $                    | (328       | )                    | $          | (171 | ) |

 

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| **Nine months ended  September 30,**                                         | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                              |       |                 |       |                 |       |
| Derivatives in cash flow hedging relationship                                     |       | Interest  rate swaps |       | Interest  rate swaps |       |
| Amount of loss recognized inOCI (effective  portion), net of tax                  |       | $                    | (8,560     | )                    | $          | (335 | ) |
| Location of loss reclassifiedfrom  accumulated OCI into income(effective portion) |       | Interestexpense      |       | Interestexpense      |       |
| Amount of loss reclassifiedfrom  accumulated OCI into income(effective portion)   |       | $                    | (4,586     | )                    | $          | (44 | ) |
| Location of loss recognized inincome on  derivatives (ineffectiveportion)         |       | Interestexpense      |       | Interestexpense      |       |
| Amount of loss recognized inincome on  derivatives (ineffectiveportion)           |       | $                    | (20        | )                    | $          | (125 | ) |
|                                                                              |       |                 |       |                 |       |
| Derivatives not designated ashedging  instruments                                 |       | Interestrate swap    |       | Interestrate swap    |       |
| Location of (loss)/gain recognized inincome                                       |       | Interestexpense      |       | Interestexpense      |       |
| Amount of (loss)/gain recognized inincome                                         |       | $                    | (1,004     | )                    | $          | 235 |   |

 

*Credit-risk-related contingent features*

 

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

 

As of September 30, 2009, the fair value ofderivatives in a net liability position, which includes accrued interest butexcludes any adjustment for non-performance risk, related to these agreementswas $16,041,000. As of September 30, 2009, OEH has posted cash collateralof $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 $16,041,000.

 

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*ASC 825-10 disclosures*

 

The following table summarizes the valuation of OEH’s financialassets and liabilities by the fair value hierarchy at September 30, 2009(dollars in thousands):

 
| ** **                       | ** ** | **September 30,  2009** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Level 1**                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets at fair value:            |       |                         |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                            | —     |   | $ | 128 |   | $ | — |   | $ | 128 |   |
| Total assets                     |       | $                            | —     |   | $ | 128 |   | $ | — |   | $ | 128 |   |
| Liabilities at fair value:       |       |                         |       |   |   |   |   |   |   |
| Derivative financial instruments |       | $                            | —     |   | $ | 15,629 |   | $ | — |   | $ | 15,629 |   |
| Total liabilities                |       | $                            | —     |   | $ | 15,629 |   | $ | — |   | $ | 15,629 |   |

 

The tablesbelow present a reconciliation of the beginning and ending balances ofliabilities having fair value measurements based on significant unobservableinputs (Level 3) during the nine months ended September 30, 2009 (dollarsin thousands):

 
| ** **                      | ** ** | **Beginning********balance********at********January  1, 2009** | ** ** | **Transfers********into********Level 3** | ** ** | **Realized  losses********included********in********earnings** | ** ** | **Unrealized********gains********included in********other********comprehensive********income** | ** ** | **Settle-********ments** | ** ** | **Ending  balance********at  September********30, 2009** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------------------------|------------|
| Liabilities atfair value:       |       |                                                           |       |                                     |       |                                                           |       |                                                                                           |       |                     |       |                                                     |       |
| Derivativefinancial instruments |       | $                                                              | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |                     | $          | (671                                                     | )          | $ | (1,390 | ) | $ | — |   |
| Totalliabilities                |       | $                                                              | 5,858      |                                     | $          | (5,202                                                         | )          | $                                                                                              | 1,405      |                     | $          | (671                                                     | )          | $ | (1,390 | ) | $ | — |   |

 

There were nomovements in Level 3 derivatives during the three months ended September 30,2009, and there were no derivatives classified as Level 3 derivatives as at September 30,2009 or June 30, 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 September 30,2009 was $nil for the three months ended September 30, 2009 and $15,000for the nine months ended September 30, 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 

 

34

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at their fairvalues at the end of the period.  During the nine months ended September 30,2009, OEH transferred certain derivative instruments due to decreasedsignificance of unobservable inputs used to estimate the fair value of thesesecurities.

 

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

 

*Non-derivative financialinstruments — net investment hedges*

 

OEH usescertain of its debt denominated in foreign currency to hedge portions of itsnet investments in foreign operations against adverse movements in exchangerates. These contracts are included in non-derivative hedging instruments. Thefair values of non-derivative hedging instruments were $88,145,000 at September 30,2009 and $83,403,000 at December 31, 2008, both liabilities. Amountsrecorded in other comprehensive income were $3,982,000 loss for the threemonths ended September 30, 2009 and $8,142,000 gain for the three monthsended September 30, 2008, and a $4,742,000 loss for the nine months ended September 30,2009 and $2,663,000 gain for the nine months ended September 30, 2008.

 

**18. Related party transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  The amount due to OEH by Eastern and OrientalExpress Ltd. at September 30, 2009 was $825,000 (December 31, 2008 -$1,290,000).

 

OEH manages under long-termcontracts the Hotel Monasterio, the Machu Picchu Sanctuary Lodge and LasCasitas del Colca owned by its 50/50 joint venture with local Peruvianinterests, as well as the 50/50-owned PeruRail operation, and provides loans,guarantees and other credit accommodation to these joint ventures.  In the three months ended September 30,2009, OEH earned management and guarantee fees of $1,788,000 (2008 -$2,259,000) and loan interest of $nil (2008 - $13,000) which are recorded inrevenue. For the nine months ended September 30, 2009, OEH earnedmanagement and guarantee fees of $4,943,000 (2008 - $5,973,000) and loaninterest of $nil (2008 - $44,000) which are recorded in revenue. The amount dueto OEH from its joint venture Peruvian operations at September 30, 2009was $5,417,000 (December 31, 2008 - $6,502,000).

 

35

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OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50%interest and is accounted for under the equity method.  For the three months ended September 30,2009, OEH earned $234,000 (2008 - $354,000) in management fees, which areincluded in revenue. For the nine months ended September 30, 2009, OEHearned $787,000 (2008 - $1,202,000) in management fees, which are included inrevenue. The amount due to OEH from the Hotel Ritz, Madrid, at September 30,2009 was $8,276,000 (December 31, 2008 - $1,883,000).

 

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.

 

**19.  Subsequent events**

 

OEHhas evaluated subsequent events up to November 6, 2009, the date thefinancial statements are issued.

 

On October 2, 2009, OEHsold Windsor Court Hotel, New Orleans, for cash consideration of $44,250,000.

 

36

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**ITEM2.         Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Introduction**

 

OEH has threebusiness segments, namely (1) hotels and restaurants, (2) touristtrains and cruises and (3) real estate and property development. Hotelscurrently consist of 39 deluxe hotels. Thirty-five of these hotels are whollyor majority owned (except Charleston Place Hotel), and are referred to in thisdiscussion as “owned hotels.” As explained in Note 3 to the financialstatements, OEH holds a 19.9% equity investment in Charleston Center LLC, ownerof Charleston Place Hotel, which OEH manages and has consolidated into itsfinancial statements effective December 31, 2008. The other four hotels,in which OEH has unconsolidated equity interests and operate under managementcontracts, are referred to in this discussion as “hotel management interests.”Of the owned hotels, 11 are located in Europe, seven in North America and 17 inthe rest of the world.

 

****OnJune 2, 2009, OEH sold the Lapa Palace Hotel in Lisbon, Portugal at aprice of $42.0 million, of which $15.7 million is deferred until 2010, whichresulted in a gain of $5.0 million (or $0.08 per share).********In June 2009, OEH decided to sell Windsor Court Hotel in NewOrleans.  The sale of the propertyoccurred on October 2, 2009 for cash consideration of $44.25 million.********The**** operation ofthese two hotels was not material to OEH’s consolidated financial statements,and accordingly, pro forma data have not been presented. ****In December 2007, OEH decided to sell its investment in Bora BoraLagoon Resort.  The results of thesethree hotels have been presented as discontinued operations for all of theinterim periods presented.****

 

OEH currentlyowns and operates the restaurants ‘21’ Club in New York and La Cabana in BuenosAires.  In September 2009, OEHdecided to sell its investment in La Cabana restaurant and its results havebeen presented as discontinued operations for all the interim periodspresented.

 

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

 

For adiscussion of OEH’s liquidity, see under the heading “Liquidity and CapitalResources” below. On May 4, 2009, the Company completed apublic offering through underwriters in the United States of 25,875,000 newlyissued class A common 

 

37

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shares including 3,375,000 shares covered by the underwriters’over-allotment option in the offering which was exercised in full. OEH is usingthe net proceeds, approximately $140.9 million, primarily for debt reduction and generalcorporate purposes.

 

For a discussionof the impact of foreign exchange rate movements on OEH’s results of operationsand financial condition and the changeof application of accounting policy for Porto Cupecoy, see Item 7 —Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report.

 

**Resultsof Operations**

 

**Threemonths Ended September 30, 2009 compared to**

**Three months Ended September 30, 2008**

 

OEH’s operating results for the three months ended September 30,2009 and 2008, expressed as a percentage of revenue, were as follows:

 
| **Three months ended September 30,**           | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                |       |     |       |     |       |
| Revenue                                             |       |     |       |     |       |
| Hotels and restaurants                              |       | 84       |       | 82       |       |
| Tourist trains and cruises                          |       | 15       |       | 16       |       |
| Real estate                                         |       | 1        |       | 2        |       |
|                                                |       | 100      |       | 100      |       |
| Expenses                                            |       |     |       |     |       |
| Depreciation and amortization                       |       | 8        |       | 5        |       |
| Operating                                           |       | 50       |       | 46       |       |
| Selling, general and administrative                 |       | 31       |       | 28       |       |
| Impairment of fixed assets                          |       | 7        |       | 0        |       |
| Net finance costs                                   |       | 2        |       | 8        |       |
| Earnings before income taxes                        |       | 2        |       | 13       |       |
| Provision for income taxes                          |       | (5       | )          | (4       | )          |
| Earnings from unconsolidated companies              |       | 1        |       | 3        |       |
| Net (losses)/earnings from continuingoperations     |       | (2       | )          | 12       |       |
| Net losses from discontinuedoperations, net  of tax |       | (7       | )          | (8       | )          |
| Net (losses)/earnings as a percentage ofrevenue     |       | (9       | )          | 4        |       |

 

Segment net earnings before interest,foreign currency, tax (including tax on unconsolidated companies), depreciationand amortization (“segment EBITDA”) of OEH’s operations for the three monthsended September 30, 2009 and 2008 are analyzed as follows (dollars inmillions):

 

38

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| **Three months ended September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Segment  EBITDA:                          |       |     |       |     |       |
| Owned  hotels:                            |       |     |       |     |       |
| Europe                                    |       | $        | 25.6       |     | $          | 35.9 |   |
| North  America                            |       | (0.1     | )          | 0.3      |       |
| Rest  of the World                        |       | 4.7      |       | 6.7      |       |
| Hotel  management interests               |       | (0.1     | )          | 4.7      |       |
| Restaurants                               |       | (0.5     | )          | (0.3     | )          |
| Tourist  trains and cruises               |       | 7.7      |       | 10.2     |       |
| Real  estate                              |       | (0.8     | )          | (0.2     | )          |
| Impairment  of fixed assets               |       | (9.8     | )          | 0.0      |       |
| Central  overheads                        |       | (7.4     | )          | (6.2     | )          |
| Total  segment EBITDA                     |       | $        | 19.3       |     | $          | 51.1 |   |

 

The foregoingsegment EBITDA reconciles to net (losses)/earnings as follows (dollars inmillions):

 
| **Three months ended September 30,**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |
| Net (losses)/earnings                                           |       | $        | (13.0      | )        | $          | 6.4 |   |
| Add:  Depreciation and amortization                             |       | 11.0     |       | 8.9      |       |
| Net finance costs                                               |       | 3.1      |       | 13.4     |       |
| Provision for income taxes                                      |       | 7.3      |       | 6.7      |       |
| Loss from discontinued operations,net of tax                    |       | 10.3     |       | 14.1     |       |
| Share of provision for income taxesof  unconsolidated companies |       | 0.6      |       | 1.6      |       |
| Segment EBITDA                                                  |       | $        | 19.3       |     | $          | 51.1 |   |

 

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

 

39

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Operating information for OEH’s owned hotels for thethree months ended September 30, 2009 and 2008 is as follows:

 
| ** **                      | ** ** | **Three  months  ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2009**                                     | ** ** | **2008**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                            |       |                                         |       |       |       |       |       |       |   |   |
| Average Daily Rate (in dollars) |       |                                         |       |       |       |       |       |       |   |   |
| Europe                          |       | 797                                          |       | 962        |       |       |       |       |   |   |
| North America                   |       | 273                                          |       | 308        |       |       |       |       |   |   |
| Rest of the world               |       | 282                                          |       | 279        |       |       |       |       |   |   |
| Worldwide                       |       | 458                                          |       | 517        |       |       |       |       |   |   |
|                            |       |                                         |       |       |       |       |       |       |   |   |
| Rooms Available (in thousands)  |       |                                         |       |       |       |       |       |       |   |   |
| Europe                          |       | 82                                           |       | 82         |       |       |       |       |   |   |
| North America                   |       | 67                                           |       | 66         |       |       |       |       |   |   |
| Rest of the world               |       | 119                                          |       | 109        |       |       |       |       |   |   |
| Worldwide                       |       | 268                                          |       | 257        |       |       |       |       |   |   |
|                            |       |                                         |       |       |       |       |       |       |   |   |
| Rooms Sold (in thousands)       |       |                                         |       |       |       |       |       |       |   |   |
| Europe                          |       | 48                                           |       | 55         |       |       |       |       |   |   |
| North America                   |       | 36                                           |       | 41         |       |       |       |       |   |   |
| Rest of the world               |       | 55                                           |       | 66         |       |       |       |       |   |   |
| Worldwide                       |       | 139                                          |       | 162        |       |       |       |       |   |   |
|                            |       |                                         |       |       |       |       |       |       |   |   |
| Occupancy (percentage)          |       |                                         |       |       |       |       |       |       |   |   |
| Europe                          |       | 59                                           |       | 67         |       |       |       |       |   |   |
| North America                   |       | 54                                           |       | 62         |       |       |       |       |   |   |
| Rest of the world               |       | 46                                           |       | 61         |       |       |       |       |   |   |
| Worldwide                       |       | 52                                           |       | 63         |       |       |       |       |   |   |
|                            |       |                                         |       |       |       |       |       |       |   |   |
| RevPAR (in dollars)             |       |                                         |       |       |       |       |       |       |   |   |
| Europe                          |       | 470                                          |       | 639        |       |       |       |       |   |   |
| North America                   |       | 147                                          |       | 193        |       |       |       |       |   |   |
| Rest of the world               |       | 130                                          |       | 167        |       |       |       |       |   |   |
| Worldwide                       |       | 238                                          |       | 324        |       |       |       |       |   |   |

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Change  %** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**   | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |          |       |   |   |
| Europe                         |       | 470        |       | 639        |       | -26           | %          | -18 | % |
| North America                  |       | 193        |       | 282        |       | -31           | %          | -31 | % |
| Rest of the world              |       | 145        |       | 180        |       | -19           | %          | -18 | % |
| Worldwide                      |       | 280        |       | 379        |       | -26           | %          | -20 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night 

 

40

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of operation. Occupancy is the number of rooms sold divided by the number of availablerooms.  Same store RevPAR is a comparisonbased on the operations of the same units in each period, such as by excludingthe effect of any acquisitions or major refurbishments.  The same store data excludes the followingoperations:

 

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

 

*Overview*

 

The net loss for the three months ended September 30,2009 was $13.0 million ($0.17 per common share) on revenue of $142.2 million,compared with net earnings of $6.4 million ($0.15 per common share) on revenueof $170.9 million in the third quarter of the prior year. OEH’s revenue in thecurrent quarter was adversely affected by the global economic downturn. Costscontinue to be under tight control.

 

Excluding discontinued operations, the net loss forthe three months ended September 30, 2009 was $2.7 million compared withnet earnings of $20.6 million in the three months ended September 30,2008.

 

*Revenue*

 
| **Three months ended September 30,** | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                  |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 67,535     |     | $          | 88,117 |   |
| North America                             |       | 19,897                     |       | 13,184   |       |
| Rest of the world                         |       | 29,113                     |       | 33,437   |       |
| Hotel management/part ownershipinterests  |       | 1,109                      |       | 2,426    |       |
| Restaurants                               |       | 2,151                      |       | 2,899    |       |
|                                      |       | 119,805                    |       | 140,063  |       |
| Tourist trains and cruises                |       | 20,682                     |       | 27,424   |       |
| Real  estate                              |       | 1,688                      |       | 3,454    |       |
|                                      |       | $                          | 142,175    |     | $          | 170,941 |   |

 

Total revenue decreased by $28.7 million, or 17%, from$170.9 million in the three months ended September 30, 2008 to $142.2million in the three months ended September 30, 2009.  Revenue in the three months ended September 30,2009 included $10.0 million at Charleston Place Hotel, which is consolidatedfor the 

 

41

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first time in the current year. The remaining hotelsand restaurants revenue decreased by $30.3 million, or 22%, from $140.1 millionin the three months ended September 30, 2008 to $109.8 million in thethree months ended September 30, 2009. Tourist trains and cruises revenue decreased by $6.7 million, or 25%,from $27.4 million for the three months ended September 30, 2008 to $20.7million for the three months ended September 30, 2009.

 

The decrease in hotel revenue was due primarily to thecombination of lower occupancy and lower average rates across the group.

 

The revenue from restaurants decreased by $0.7million, or 26%, from $2.9 million in the three months ended September 30,2008 to $2.2 million for the three months ended September 30, 2009.

 

For owned hotels overall, same store RevPAR in U.S.dollars decreased by 26% in the three months ended September 30, 2009compared to the three months ended September 30, 2008.  Measured in local currencies this decreasewas 20%.

 

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

 

*Europe*

 

Revenue decreased by $20.6 million, or 23%, from $88.1million for the three months ended September 30, 2008 to $67.5 million forthe three months ended September 30, 2009. Difficult trading conditionsacross Europe caused average daily rates to fall by 17% from $962 in the threemonths ended September 30, 2008 to $797 in the three months ended September 30,2009, and occupancy to fall from 66% in the three months ended September 30,2008 to 59% in the three months ended September 30, 2009. On a same storebasis, RevPAR in local currency decreased by 18%, and in U.S. dollars thistranslated into a decrease of 26%.

 

Exchange rate movements caused revenue to fall by $6.0million in the three months ended September 30, 2009 compared with thesame period in 2008.

 

*North America*

 

Revenue increased by $6.7 million, or 51%, from $13.2million in the three months ended September 30, 2008 to $19.9 million inthe three months ended September 30, 2009. The 2009 revenue included $10.0 million at Charleston Place Hotel, whichOEH consolidated from January 1, 2009 for the first time. The remainder ofrevenue in the North America region fell by $3.3 million, or 25%, in the threemonths ended September 30, 2009 to $9.9 million.

 

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Following the outbreak of H1N1 (swine flu) in Mexico,occupancy at Maroma Resort & Spa declined from 48% in the three monthsended September 30, 2008 to 22% in the same period in 2009. Revenue atthis hotel fell by $1.7 million, or 59%, from $2.8 million in the three monthsended September 30, 2008 to $1.1 million in the three months ended September 30,2009.

 

On a same store basis, excluding Charleston PlaceHotel, RevPAR decreased by 31%.  Averageoccupancy across the North American properties was 54% compared to 67% in thesame period in 2008. Average daily rates fell by 15% from $421 in the threemonths ended September 30, 2008 to $359 in the three months ended September 30,2009.

 

*Rest of the World*

 

Revenue decreased by $4.3 million, or 13%, from $33.4million in the three months ended September 30, 2008 to $29.1 million inthe three months ended September 30, 2009. Exchange rate movements across the region were responsible for $1.5million of the revenue fall and a decline in average room rates and occupancycaused overall revenue to drop by $2.8 million.

 

Revenue at OEH’s hotels in South America collectivelydecreased by $1.2 million, or 10%, from $12.5 million in the three months endedSeptember 30, 2008 to $11.3 million in the three months ended September 30,2009. Had exchange rates remained the same for the three months of 2009compared to the three months of 2008, South American revenue would havedecreased by $0.3 million for the three months ended September 30, 2009compared to the three months ended September 30, 2008.

 

Southern Africa revenue decreased by $2.8 million, or29%, from $10.0 million in the three months ended September 30, 2008 to$7.2 million in the three months ended September 30, 2009. Revenue at OEH’stwo Australian properties decreased by $0.4 million, or 6%, to $5.6 million inthe three months ended September 30, 2009; $0.3 million, was due to thedepreciation of the Australian dollar against the U.S. dollar.

 

The RevPAR on a same store basis for the Rest of theWorld region decreased by 18% in local currencies in the three months ended September 30,2009 compared to the three months ended September 30, 2008.  This translates to a 19% decrease whenexpressed in U.S. dollars.

 

43

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*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $1.3million from $2.4 million in the three months ended September 30, 2008 to$1.1 million in the three months ended September 30, 2009. The 2008revenue included $0.9 million in respect of Charleston Place Hotel, which isincluded within OEH’s consolidated earnings with effect from January 1,2009. Excluding this hotel from the prior year, revenue from hotel managementand part ownership interests decreased by $0.5 million from $1.6 million in thethree months ended September 30, 2008 to $1.1 million in the three monthsended September 30, 2009.

 

*Restaurants: *Revenuedecreased by $0.7 million, or 26%, from $2.9 million in the three months ended September 30,2008 to $2.2 million in the three months ended September 30, 2009.  La Cabana was accounted for as discontinuedoperations for the first time during the three months ended September 30,2009 and was excluded from both years.

 

*Trains and Cruises: *Revenue decreased by $6.7 million, or 25%,from $27.4 million in the three months ended September 30, 2008 to $20.7million in the three months ended September 30, 2009.  Venice Simplon-Orient-Express revenuedecreased by $3.2 million from $9.7 million in the three months ended September 30,2008 to $6.5 million in the three months ended September 30, 2009. Fewerday train services were operated in the United Kingdom in the three monthsended September 30, 2009 than in the prior year, resulting in a revenuedecrease of $2.5 million compared with the same period in the prior year.

 

*Real Estate: *Althoughtwo condominiums at Porto Cupecoy were sold during the three months ended September 30,2009,**no revenue was recognized following OEH’sdecision to change the application ofits accounting policy in respect of the Porto Cupecoy development in thefourth quarter of 2008. Revenue of $3.5 million was recognized in the threemonths ended September 30, 2008 at Porto Cupecoy under the percentagecompletion method of accounting. Two villas at Napasai were sold during thethree months ended September 30, 2009 for $1.7 million. There was norevenue at Keswick Hall in the three months ended September 30, 2009 or inthe three months ended September 30, 2008.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $2.1million from $8.9 million in the three months ended September 30, 2008 to$11.0 million in the three months ended September 30, 2009. The 2009depreciation charge includes an expense of $1.9 million in respect ofCharleston Place. Excluding this charge, depreciation was $0.2 million higherin 2009 than in the prior period.

 

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*Operating expenses*

 

Operating expenses decreased by $7.6 million from$78.3 million in the three months ended September 30, 2008 to $70.7million in the three months ended September 30, 2009. Operating expensesin 2009 include an expense of $4.6 million in respect of Charleston Place. Theremaining operating expenses were $12.2 million lower in 2009 than in the comparable2008 period. Operating expenses were 46% of revenue in the three months ended September 30,2008 and 50% of revenue in the three months ended September 30, 2009.Excluding Charleston Place Hotel’s revenue and expenses, operating expenses in2009 still represented 50% of revenue.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expenses decreasedby $3.1 million from $47.4 million in the three months ended September 30,2008 to $44.3 million in the three months ended September 30, 2009. The2009 costs include an expense of $3.5 million in respect of Charleston PlaceHotel. The remaining selling, general and administrative expenses were $6.6million lower in 2009 than in the prior period, $0.9 million of which was dueto exchange rates for the three months ended September 30, 2009 comparedwith exchange rates in the same period in 2008. Selling, general andadministrative expenses were 28% of revenue in the three months ended September 30,2008 and 31% of revenue in the three months ended September 30, 2009.Excluding Charleston Place Hotel’s revenue and expenses, selling, general andadministrative expenses in 2009 were also 31% of revenue in 2009.

 

*Impairment of fixed assets*

 

In the three months ended September 30,2009, OEH identified a non-cash property, plant and equipment impairment chargeof $9.8 million in respect of its Lilianfels Blue Mountains hotel. The carryingvalue of the assets was written down to the fair value based on the management’sbest estimate.

 

45

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*Segment EBITDA*

 
| **Three months ended September 30**   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
|                                       |       |                       |       |     |       |
| Segment  EBITDA:                           |       |                       |       |     |       |
| Hotels  and restaurants                    |       |                       |       |     |       |
| Owned  hotels                              |       |                       |       |     |       |
| Europe                                     |       | $                          | 25,595     |     | $          | 35,905 |   |
| North  America                             |       | (68                        | )          | 300      |       |
| Rest  of the world                         |       | 4,704                      |       | 6,681    |       |
| Hotel  management/part ownership interests |       | (141                       | )          | 4,664    |       |
| Restaurants                                |       | (494                       | )          | (269     | )          |
|                                       |       | 29,596                     |       | 47,281   |       |
| Tourist trains and cruises                 |       | 7,686                      |       | 10,247   |       |
| Real estate                                |       | (740                       | )          | (223     | )          |
| Impairment of fixed assets                 |       | (9,809                     | )          | —   |       |
| Central overheads                          |       | (7,418                     | )          | (6,195   | )          |
|                                       |       | $                          | 19,315     |     | $          | 51,110 |   |

 

Segment EBITDA for the three months ended September 30,2009 decreased by 62% from $51.1 million in 2008 to $19.3 million in 2009.Segment EBITDA decreased in 2009 mainly due to a challenging trading period andan impairment of fixed assets of $9.8 million. Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) decreased by 16% from 30% for the three months ended September 30,2008, to 14% for the three months ended September 30, 2009.

 

The European hotels collectively reported a segmentEBITDA of $25.6 million in 2009 compared to $35.9 million in the same period in2008.  As a percentage of European hotelsrevenue, the European segment EBITDA margin fell from 41% in 2008 to 38% in2009.

 

With the inclusion of Charleston Place Hotel from January 1,2009, segment EBITDA in the North American hotel region decreased from $0.3million in the three months ended September 30, 2008 to $(0.1) million inthe three months ended September 30, 2009. Excluding Charleston PlaceHotel, segment EBITDA in the North American region decreased by $2.2 million,from $0.3 million in the three months ended September 30, 2008, to $(1.9)million in the three months ended September 30, 2009.

 

Segment EBITDA in the Rest of the World hotel regiondecreased by 30% from $6.7 million in the three months ended September 30,2008 to $4.7 million in the three months ended September 30, 2009.  The segment EBITDA margin for the threemonths ended September 30, 2009 was 16%, compared to a margin of 20% forthe same period in 2008.

 

46

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*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $30.1 millionfrom a profit of $36.4 million in the three months ended September 30,2008 to a profit of $6.3 million in the three months ended September 30,2009, due to the factors described above.

 

*Net finance costs*

 

Net finance costs were $13.4 million for the threemonths ended September 30, 2008 and $3.1 million for the three monthsended September 30, 2009. The three months ended September 30, 2008included a foreign exchange loss of $2.5 million compared to a foreign exchangegain of $4.7 million in the three months ended September 30, 2009.Excluding these foreign exchange items, net interest expense decreased by $3.1million, or 29%, from $10.9 million in the three months ended September 30,2008 to $7.8 million in the three months ended September 30, 2009,primarily due to lower interest rates in the three months ended September 30,2009 compared to the same period in the prior year.

 

*Provision for income taxes*

 

The provision for income taxes increased by $0.6 million, from aprovision of $6.7 million in the three months ended September 30, 2008 toa provision of $7.3 million in the three months ended September 30, 2009.

 

The provision for income taxes for the three months ended September 30,2009 included a deferred tax charge of $1.6 million arising in respect ofBrazilian fixed asset timing differences, following movements in the exchangerate between the dollar and Brazilian real, and a deferred tax benefit of $2.9 millionarising in respect of fixed asset timing differences, following an impairmentof $9.8 million in the book value of fixed assets in Australia.

 

The provisionfor income taxes of $7.3 million for the three months ended September 30,2009 included a tax provision of $0.3 million in respect of OEH’s liability foruncertain tax positions under ASC 740, “Income Taxes” (formerly FIN 48),compared to a provision of $0.1 million in respect of the liability in thethree months ended September 30, 2008.

 

47

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*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $2.8 million, from $4.2 million in the three months ended September 30,2008 to $1.4 million in the three months ended September 30, 2009.  The 2008 earnings included $1.6 million inrespect of Charleston Place Hotel, which is included within OEH’s consolidatedearnings with effect from January 1, 2009. Excluding this hotel from theprior year, earnings from unconsolidated companies net of tax decreased by $1.2million from $2.6 million in the three months ended September 30, 2008 to$1.4 million in the three months ended September 30, 2009. The tax cost associatedwith earnings from unconsolidated companies, excluding Charleston Place Hotel,was $0.9 million in 2008 and $0.6 million in 2009.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of thelosses arising from Bora Bora Lagoon Resort, Windsor Court Hotel and La Cabanarestaurant which are being held for sale, and the earnings of the Lapa PalaceHotel, which was sold during the three months ended June 30, 2009including the gain arising on that sale.

 

Bora Bora Lagoon Resort’s net loss decreased from$11.2 million for the three months ended September 30, 2008 to $4.1million for the three months ended September 30, 2009. The 2008 and 2009losses include impairment charges of $12.0 million and $4.5 million for thisproperty, respectively.

 

The Windsor Court net loss decreased from $3.1 millionfor the three months ended September 30, 2008 to $0.6 million for thethree months ended September 30, 2009. The sale of the hotel was completedin early October 2009.

 

The La Cabana restaurant net loss increased from $0.2million for the three months ended September 30, 2008 to $5.6 million forthe three months ended September 30, 2009. The 2009 loss includedimpairment charges of $5.4 million for this property.

 

TheLapa Palace Hotel net earnings were $0.3 million for the three months ended September 30,2008.  As the property was sold in June 2009,there were no earnings for the three months ended September 30, 2009.

 

48

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**Ninemonths Ended September 30, 2009 compared to**

**Ninemonths Ended September 30, 2008**

 

OEH’s operating results for the nine months ended September 30,2009 and 2008, expressed as a percentage of revenue, were as follows:

 
| **Nine months ended  September 30,**            | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       | **%**    |       | **%**    |       |
|                                                 |       |     |       |     |       |
| Revenue                                              |       |     |       |     |       |
| Hotels and restaurants                               |       | 87       |       | 83       |       |
| Tourist trains and cruises                           |       | 13       |       | 14       |       |
| Real estate                                          |       | —   |       | 3        |       |
|                                                 |       | 100      |       | 100      |       |
| Expenses                                             |       |     |       |     |       |
| Depreciation and amortization                        |       | 8        |       | 6        |       |
| Operating                                            |       | 50       |       | 48       |       |
| Selling, general and administrative                  |       | 34       |       | 30       |       |
| Impairment of fixed assets and goodwill              |       | 5        |       | —   |       |
| Net finance costs                                    |       | 7        |       | 7        |       |
| (Losses)/earnings before income taxes                |       | (4       | )          | 9        |       |
| Provison for income taxes                            |       | (2       | )          | (3       | )          |
| Earnings from unconsolidated companies               |       | 1        |       | 3        |       |
| Net (losses)/earnings from continuing operations     |       | (5       | )          | 9        |       |
| Net losses from discontinued operations,  net of tax |       | (10      | )          | (4       | )          |
| Net (losses)/earnings as a percentage of revenue     |       | (15      | )          | 5        |       |

 

Segment EBITDA of OEH’s operations for thenine months ended September 30, 2009 and 2008 are analyzed as follows(dollars in millions):

 
| **Nine months ended  September 30,** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |
| Segment EBITDA:                           |       |     |       |     |       |
| Owned hotels:                             |       |     |       |     |       |
| Europe                                    |       | $        | 37.4       |     | $          |  65.3 |   |
| North America                             |       | 12.0     |       | 8.9      |       |
| Rest of the World                         |       | 17.2     |       | 23.1     |       |
| Hotel management interests                |       | 1.8      |       | 17.6     |       |
| Restaurants                               |       | 0.0      |       | 1.5      |       |
| Tourist trains and cruises                |       | 16.0     |       | 21.6     |       |
| Real estate                               |       | (1.5     | )          | (1.2     | )          |
| Impairment of fixed assets and goodwill   |       | (16.9    | )          | —   |       |
| Central overheads                         |       | (19.3    | )          | (20.2    | )          |
| Total segment EBITDA                      |       | $        |  46.7 |     | $          |  116.6 |   |

 

The foregoingsegment EBITDA reconciles to net (losses)/ earnings as follows (dollars inmillions):

 

49

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| **Nine months ended  September 30,**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Net (losses)/earnings                                            |       | $        | (52.0      | )        | $          | 21.5 |   |
| Add:                                                             |       |     |       |     |       |
| Depreciation and amortization                                    |       | 30.0     |       | 27.6     |       |
| Net finance costs                                                |       | 24.1     |       | 31.4     |       |
| Provision for income taxes                                       |       | 8.3      |       | 12.8     |       |
| Loss from discontinued operations, net of  tax                   |       | 34.5     |       | 19.1     |       |
| Share of provision for income taxes of  unconsolidated companies |       | 1.8      |       | 4.2      |       |
| Segment EBITDA                                                   |       | $        | 46.7       |     | $          | 116.6 |   |

 

Operating information for OEH’s owned hotels for thenine months ended September 30, 2009 and 2008 is as follows:

 
| ** **                      | ** ** | **Nine months  ended September  30,** | ** ** |     |       |   |   |
|---------------------------------|------------|-------------------------------------------------|------------|----------|------------|--------|--------|
| ** **                      | ** ** | **2009**                                        | ** ** | **2008** | ** ** |   |   |   |   |
|                            |       |                                            |       |     |       |   |   |   |   |
| Average Daily Rate (in dollars) |       |                                            |       |     |       |   |   |   |   |
| Europe                          |       | 717                                             |       | 879      |       |   |   |   |   |
| North America                   |       | 364                                             |       | 406      |       |   |   |   |   |
| Rest of the world               |       | 276                                             |       | 282      |       |   |   |   |   |
| Worldwide                       |       | 420                                             |       | 484      |       |   |   |   |   |
|                            |       |                                            |       |     |       |   |   |   |   |
| Rooms Available (in thousands)  |       |                                            |       |     |       |   |   |   |   |
| Europe                          |       | 212                                             |       | 217      |       |   |   |   |   |
| North America                   |       | 164                                             |       | 162      |       |   |   |   |   |
| Rest of the world               |       | 353                                             |       | 343      |       |   |   |   |   |
| Worldwide                       |       | 729                                             |       | 722      |       |   |   |   |   |
|                            |       |                                            |       |     |       |   |   |   |   |
| Rooms Sold (in thousands)       |       |                                            |       |     |       |   |   |   |   |
| Europe                          |       | 102                                             |       | 128      |       |   |   |   |   |
| North America                   |       | 92                                              |       | 108      |       |   |   |   |   |
| Rest of the world               |       | 174                                             |       | 209      |       |   |   |   |   |
| Worldwide                       |       | 368                                             |       | 445      |       |   |   |   |   |
|                            |       |                                            |       |     |       |   |   |   |   |
| Occupancy (percentage)          |       |                                            |       |     |       |   |   |   |   |
| Europe                          |       | 48                                              |       | 59       |       |   |   |   |   |
| North America                   |       | 56                                              |       | 67       |       |   |   |   |   |
| Rest of the world               |       | 49                                              |       | 61       |       |   |   |   |   |
| Worldwide                       |       | 50                                              |       | 62       |       |   |   |   |   |

 

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| ** **          | ** ** | **Nine months  ended Sept 30,** | ** ** |     |       |   |   |
|---------------------|------------|------------------------------------------------|------------|----------|------------|--------|--------|
| ** **          | ** ** | **2009**                                       | ** ** | **2008** | ** ** |   |   |   |   |
|                |       |                                           |       |     |       |   |   |   |   |
| RevPAR (in dollars) |       |                                           |       |     |       |   |   |   |   |
| Europe              |       | 344                                            |       | 519      |       |   |   |   |   |
| North America       |       | 205                                            |       | 271      |       |   |   |   |   |
| Rest of the world   |       | 136                                            |       | 172      |       |   |   |   |   |
| Worldwide           |       | 212                                            |       | 299      |       |   |   |   |   |

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**  | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |         |       |   |   |
| Europe                         |       | 344        |       | 521        |       | -34          | %          | -23 | % |
| North America                  |       | 272        |       | 368        |       | -26          | %          | -25 | % |
| Rest of the world              |       | 148        |       | 184        |       | -20          | %          | -14 | % |
| Worldwide                      |       | 235        |       | 332        |       | -29          | %          | -21 | % |

 

The same store data excludes the following operations:

 
| Hotel Cipriani             | Hotel Splendido                |
|----------------------------|--------------------------------|
| Villa San Michele          | Hotel Caruso Belvedere         |
| Hotel das Cataratas        | Charleston Place Hotel         |
| Lapa Palace                | Windsor  Court                 |
| Bora Bora Lagoon Resort    | The  Governor’s Residence |
| La Residence D’Angkor |                           |

 

*Overview*

 

The net loss for the nine months ended September 30,2009 was $52.0 million ($0.80 per common share) on revenue of $352.4 million,compared with net earnings of $21.5 million ($0.51 per common share) on revenueof $445.5 million in the prior year period.

 

OEH’s revenue in the nine months ended September 30,2009 was affected by the global economic downturn. Impairment of fixed assetsand goodwill in 2009 and discontinued operations were $51.3 million. OEH’sremaining net loss in the first nine months of 2009 was $0.6 million comparedwith net earnings of $40.6 million in 2008, a fall of $41.2 million, whilerevenue fell by $93.1 million, or 21%, in the nine months ended September 30,2009 compared to the nine months ended September 30, 2008.

 

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*Revenue*

 
| **Nine months ended  September 30,** | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Revenue:                                  |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 133,212    |     | $          | 194,100 |   |
| North America                             |       | 75,877                     |       | 49,772   |       |
| Rest of the world                         |       | 85,278                     |       | 105,044  |       |
| Hotel management/part ownership interests |       | 3,377                      |       | 8,251    |       |
| Restaurants                               |       | 8,717                      |       | 12,162   |       |
|                                      |       | 306,461                    |       | 369,329  |       |
| Tourist trains and cruises                |       | 44,240                     |       | 64,145   |       |
| Real estate                               |       | 1,688                      |       | 11,980   |       |
|                                      |       | $                          | 352,389    |     | $          | 445,454 |   |

 

Total revenue decreased by $93.1 million, or 21%, from$445.5 million in the nine months ended September 30, 2008 to $352.4million in the nine months ended September 30, 2009.  Revenue in the nine months ended September 30,2009 included $34.9 million at Charleston Place Hotel, which is consolidatedfor the first time in the current year. The remainder of hotels and restaurantsrevenue decreased by $97.7 million, or 26%, from $369.3 million in the ninemonths ended September 30, 2008 to $271.6 million in the nine months endedSeptember 30, 2009.  Tourist trainsand cruises revenue decreased by $19.9 million, or 31%, from $64.1 million forthe nine months ended September 30, 2008 to $44.2 million for the nine monthsended September 30, 2009.

 

The decrease in hotel revenue was due primarily to thecombination of lower occupancy and lower average rates across the group.

 

The revenue from restaurants decreased by $3.5million, or 28%, from $12.2 million in the nine months ended September 30,2008 to $8.7 million for the nine months ended September 30, 2009.

 

For owned hotels overall, same store RevPAR in U.S.dollars decreased by 29% in the nine months ended September 30, 2009compared to the nine months ended September 30, 2008.  Measured in local currencies this decreasewas 21%.

 

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

 

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*Europe*

 

Revenue decreased by $60.9 million, or 31%, from$194.1 million for the nine months ended September 30, 2008 to $133.2million for the nine months ended September 30, 2009. Difficult tradingconditions across Europe caused average daily rates to fall by 19% from $879 inthe nine months ended September 30, 2008 to $717 in the nine months ended September 30,2009, and occupancy to fall from 59% in the nine months ended September 30,2008 to 48% in the nine months ended September 30, 2009. On a same storebasis, RevPAR in local currency decreased by 23%, and in U.S. dollars thistranslated into a decrease of 34%.

 

Exchange rate movements caused revenue to fall by$23.2 million in the nine months ended September 30, 2009 compared withthe same period in 2008.

 

*North America*

 

Revenue increased by $26.1 million, or 52%, from $49.8million in the nine months ended September 30, 2008 to $75.9 million inthe nine months ended September 30, 2009. The 2009 revenue included $34.9 million at Charleston Place Hotel, whichOEH consolidated from January 1, 2009 for the first time. The remainder ofrevenue in the North America region fell by $8.8 million, or 18%, in the ninemonths ended September 30, 2009 to $41.0 million.

 

Following the outbreak of swine flu in Mexico, revenueat Maroma Resort & Spa fell $4.9 million, or 36%, from $13.4 millionin the nine months ended September 30, 2008 to $8.5 million in the ninemonths ended September 30, 2009.

 

On a same store basis, excluding Charleston PlaceHotel, RevPAR decreased by 26%.  Averageoccupancy across the North American properties was 57% compared to 68% in thesame period in 2008. Average daily rates fell by 11% from $540 in the ninemonths ended September 30, 2008 to $478 in the nine months ended September 30,2009

 

*Rest of the World*

 

Revenue decreased by $19.7 million, or 19%, from$105.0 million in the nine months ended September 30, 2008 to $85.3million in the nine months ended September 30, 2009.  Exchange rate movements across the regionwere responsible for $13.6 million of the revenue fall and a decline in averageroom rates and occupancy caused overall revenue to drop by an additional $6.2million.

 

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Revenue at OEH’s hotels in South America collectivelydecreased by $6.3 million, or 15%, from $42.6 million in the nine months ended September 30,2008 to $36.3 million in the nine months ended September 30, 2009. Hadexchange rates in the first nine months of 2009 been the same as in the firstnine months of 2008, South American revenue would have been $0.2 million higherthan in the nine months ended September 30, 2008.

 

Revenue at OEH’s six Asian hotels collectivelydecreased by $1.0 million, or 7%, to $13.2 million in the nine months ended September 30,2009. The political unrest in Thailand in the first three months of 2009 was amajor factor in revenue at the Napasai falling by $1.9 million, or 46%.Occupancy at this hotel declined from 66% in the nine months ended September 30,2008 to 34% in the same period in 2009.

 

Southern Africa revenue decreased by $8.7 million, or29%, of which $2.7 million was due to exchange rate movements on thetranslation of the South African rand and Botswana pula to the U.S. dollar.Revenue at OEH’s two Australian properties decreased by $3.7 million, or 20%,to $14.6 million in the nine months ended September 30, 2009; 85% of thechange in revenue, or $3.1 million, was due to the depreciation of theAustralian dollar against the U.S. dollar.

 

The RevPAR on a same store basis for the Rest of theWorld region decreased by 14% in local currencies in the nine months ended September 30,2009 compared to the nine months ended September 30, 2008.  This translates to a 20% decrease whenexpressed in U.S. dollars.

 

*Hotel Management and Part-OwnershipInterests: *Revenue decreased by $4.9 millionfrom $8.3 million in the nine months ended September 30, 2008 to $3.4million in the nine months ended September 30, 2009. The 2008 revenueincluded $3.8 million in respect of Charleston Place Hotel, which is includedwithin OEH’s consolidated earnings with effect from January 1, 2009.Excluding this hotel from the prior year, revenue from hotel management andpart ownership interests decreased by $1.1 million from $4.5 million in thenine months ended September 30, 2008 to $3.4 million in the nine monthsended September 30, 2009. Revenue from Hotel Ritz, Madrid fell by $0.4million in the first three quarters of 2009 compared to same period in theprior year.

 

*Restaurants: *Revenuedecreased by $3.5 million, or 28%, from $12.2 million in the nine months ended September 30,2008 to $8.7 million in the nine months September June 30, 2009.

 

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*Trains and Cruises: *Revenue decreased by $19.9 million, or 31%,from $64.1 million in the nine months ended September 30, 2008 to $44.2million in the nine months ended September 30, 2009.  Venice Simplon-Orient-Express revenuedecreased by $9.7 million from $24.0 million in the nine months ended September 30,2008 to $14.3 million in the nine months ended September 30, 2009,principally as a result of running 12 fewer services in the current year.  Fewer day train services were operated in theUnited Kingdom in the nine months ended September 30, 2009 than in theprior year, resulting in a revenue decrease of $4.3 million compared with thesame period in the prior year.  Fewertrains were operated to maximize capacity during reduced periods of demand andto minimize haulage costs.  OEH adjustsservices operated in response to increases or decreases in demand.

 

*Real Estate: *Although15 condominiums at Porto Cupecoy were sold during the nine months ended September 30,2009,**no revenue was recognized following OEH’sdecision to change the application ofits accounting policy in respect of the Porto Cupecoy development in thefourth quarter of 2008 from the percentage-of-completion method to the depositmethod. Revenue of $11.6 million was recognized in the nine months ended September 30,2008 at Porto Cupecoy under the percentage completion method of accounting.There was no revenue at Keswick Hall in the nine months ended September 30,2009 compared to revenue of $0.3 million in the nine months ended September 30,2008.

 

*Depreciation and amortization*

 

Depreciation and amortization increased by $2.4million from $27.6 million in the nine months ended September 30, 2008 to$30.0 million in the nine months ended September 30, 2009. The 2009depreciation charge includes an expense of $3.9 million in respect ofCharleston Place. Excluding this charge, depreciation was $1.5 million lower in2009 than in the prior period, $1.3 million of which was due to the change inexchange rates for the nine months ended September 30, 2009 compared withexchange rates in the same period in 2008.

 

*Operating expenses*

 

Operating expenses decreased by $37.6 million from$212.5 million in the nine months ended September 30, 2008 to $174.9million in the nine months ended September 30, 2009. Operating expenses in2009 include an expense of $15.2 million in respect of Charleston Place. Theremaining operating expenses were $52.8 million lower in 2009 than in the priorperiod, $4.4 million of which was due to the change in exchange rates for thenine months ended September 30, 2009 compared with exchange rates in thesame period in 2008. Operating expenses were 48% of revenue in the nine monthsended September 30, 2008 and 50% of revenue in the nine months ended September 30,2009. Excluding Charleston Place Hotel’s revenue and expenses, operatingexpenses in 2009 still represented 50% of revenue.

 

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*Selling, general and administrative expenses*

 

Selling, general and administrative expenses decreasedby $14.1 million from $134.5 million in the nine months ended September 30,2008 to $120.4 million in the nine months ended September 30, 2009. The2009 costs include an expense of $10.3 million in respect of Charleston PlaceHotel. The remaining selling, general and administrative expenses were $24.4million lower in 2009 than in the prior period, $6.2 million of which was dueto the change in exchange rates for the nine months ended September 30,2009 compared with exchange rates in the same period in 2008. Selling, generaland administrative expenses were 30% of revenue in the nine months ended September 30,2008 and 34% of revenue in the nine months ended September 30, 2009.Excluding Charleston Place Hotel’s revenue and expenses, selling, general andadministrative expenses in 2009 were 35% of revenue in 2009.

 

*Impairment of goodwill*

 

During thethree months ended March 31, 2009, OEH completed its 2008 impairmentanalysis and identified the following non-cash goodwill and tradenameimpairments within its continuing operations, considering discounted futurecash flows prepared as of the December 31, 2008 balance sheet date(dollars in millions):

 
| Miraflores Park           |   | $   | 3.2    |   |
|---------------------------|--------|-----|--------|--------|
| Casa de Sierra Nevada     |   | 3.0 |   |
| Lilianfels Blue Mountains |   | 0.5 |   |
| Observatory Hotel         |   | 0.3 |   |
|                      |   | $   | 7.0    |   |

 

Theseimpairments have no cash effect on OEH and arose primarily because of expectedreductions in future cash flows.

 

*Impairment of fixed assets*

 

In the nine months ended September 30,2009, OEH identified a non-cash property, plant and equipment impairment chargeof $9.8 million in respect of its Lilianfels Blue Mountains hotel. The carryingvalue of the assets was written down to the fair value based on the management’sbest estimate.

 

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*Segment EBITDA*

* *
| **Nine months ended  September 30**  | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Segment EBITDA:                           |       |                       |       |     |       |
| Hotels and restaurants                    |       |                       |       |     |       |
| Owned hotels                              |       |                       |       |     |       |
| Europe                                    |       | $                          | 37,357     |     | $          | 65,277 |   |
| North America                             |       | 11,957                     |       | 8,936    |       |
| Rest of the world                         |       | 17,253                     |       | 23,061   |       |
| Hotel management/part ownership interests |       | 1,774                      |       | 17,618   |       |
| Restaurants                               |       | 31                         |       | 1,516    |       |
|                                      |       | 68,372                     |       | 116,408  |       |
| Tourist trains and cruises                |       | 15,983                     |       | 21,616   |       |
| Real estate                               |       | (1,533                     | )          | (1,183   | )          |
| Impairment of fixed assets and goodwill   |       | (16,857                    | )          | —   |       |
| Central overheads                         |       | (19,356                    | )          | (20,153  | )          |
|                                      |       |                       |       |     |       |
|                                      |       | $                          | 46,609     |     | $          | 116,688 |   |

 

Segment EBITDA for the nine months ended September 30,2009 decreased by 70% from $116.7 million in 2008 to $46.6 million in 2009.Segment EBITDA decreased in 2009 mainly due to a challenging trading period andan impairment of fixed assets and goodwill of $16.9 million.  Segment EBITDA margins (calculated as segmentEBITDA as a percentage of revenue) decreased by 13% from 26% for the ninemonths ended September 30, 2008, to 13% for the nine months ended September 30,2009.

 

The European hotels collectively reported a segmentEBITDA of $37.4 million in 2009 compared to $65.3 million in the same period in2008.  As a percentage of European hotelsrevenue, the European segment EBITDA margin fell from 34% in 2008 to 28% in2009.

 

With the inclusion of Charleston Place Hotel from January 1,2009, segment EBITDA in the North American hotel region increased by 34% from$8.9 million in the nine months ended September 30, 2008, to $12.0 millionin the nine months ended September 30, 2009. Excluding Charleston PlaceHotel, segment EBITDA in the North American region decreased by $5.7 million,or 64%, to $3.2 million in the nine months ended September 30, 2009.

 

Segment EBITDA in the Rest of the World hotel regiondecreased by 25% from $23.1 million in the nine months ended September 30,2008 to $17.3 million in the nine months ended September 30, 2009.  The segment EBITDA margin for the nine monthsended September 30, 2009 was 20%, compared to a margin of 22% for the sameperiod in 2008.

 

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*Earnings from operations before net financecosts*

 

Earnings from operations decreased by $60.5 millionfrom a profit of $70.8 million in the nine months ended September 30, 2008to a profit of $10.3 million in the nine months ended September 30, 2009,due to the factors described above.

 

*Net finance costs*

 

Net finance costs decreased by $7.3 million, or 23%,from $31.4 million for the nine months ended September 30, 2008 to $24.1million for the nine months ended September 30, 2009.  The nine months ended September 30, 2008included a foreign exchange gain of $2.1 million compared to a foreign exchangegain of $0.5 million in the nine months ended September 30, 2009.Excluding these foreign exchange items, net interest expense decreased by $9.0million, or 27%, from $33.5 million in the nine months ended September 30,2008 to $24.5 million in the nine months ended September 30, 2009,primarily as a result of lower interest rates in the nine months ended September 30,2009 compared to the same period in the prior year.

 

*Provision for income taxes*

 

The provision for income taxes decreased by $4.5 million, from aprovision of $12.8 million in the nine months ended September 30, 2008 toa provision of $8.3 million in the nine months ended September 30, 2009.

 

The provision for income taxes for the nine months ended September 30,2009 included a deferred tax charge of $4.5 million arising in respect ofBrazilian fixed asset timing differences, following movements in the exchangerate between the dollar and Brazilian real, and a deferred tax benefit of $2.9 millionarising in respect of fixed asset timing differences, following an impairmentof $9.8 million in the book value of fixed assets in Australia.

 

The provision for income taxes for the nine months ended September 30,2009 included a current tax charge of $2.2 million and a deferred tax charge of$3.2 million arising in Italy in connection with the closure of a tax audit inrespect of the 2004, 2005 and 2006 tax years. OEH had previously included aliability of $4.9 million within its provision for uncertain tax positionsunder ASC 740, “Income Taxes” (formerly FIN 48). The provision for income taxesin the nine months ended September 30, 2009 included a tax credit in theamount of $4.9 million to release this provision. The net cost 

 

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to OEH taking into account all of these entries was $0.5 million. The$2.2 million current tax liability is payable in 12 quarterly instalments ofapproximately $0.5 million each, commencing in July 2009.

 

Excluding the ASC 740 tax credit related to the Italian uncertain taxposition, the provision from income taxes for the nine months ended September 30,2009 included a tax charge of $0.6 million in respect of theASC 740 liability, compared to a provision of $0.9 million in respect of theliability in the nine months ended September 30, 2008.

 

*Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies net of taxdecreased by $9.5 million, from $14.1 million in the nine months ended September 30,2008 to $4.6 million in the nine months ended September 30, 2009.  The 2008 earnings included $5.9 million inrespect of Charleston Place Hotel, which is included within OEH’s consolidatedearnings with effect from January 1, 2009. Excluding this hotel from theprior year, earnings from unconsolidated companies net of tax decreased by $3.6million from $8.2 million in the nine months ended September 30, 2008 to$4.6 million in the nine months ended September 30, 2009. The tax costassociated with earnings from unconsolidated companies, excluding CharlestonPlace Hotel, was $2.4 million in 2008 and $1.8 million in 2009.

 

*Loss from discontinued operations*

 

The loss from discontinued operations consisted of thelosses arising from Bora Bora Lagoon Resort, Windsor Court Hotel and La Cabanarestaurant which are being held for sale, and the earnings of the Lapa PalaceHotel, which was sold during the three months ended June 30, 2009including the gain arising on that sale.

 

The Bora Bora Lagoon Resort’s net loss increased from$15.4 million for the nine months ended September 30, 2008 to $17.7million for the nine months ended September 30, 2009. The 2009 lossincludes an impairment charge of $16.5 million in respect of this property.

 

The Windsor Court net loss increased from $3.9 millionfor the nine months ended September 30, 2008 to $15.0 million for the ninemonths ended September 30, 2009. The 2009 loss includes an impairmentcharge of $21.5 million in anticipation of the sale of this property (completedin early October 2009), with a related tax credit of $7.1 million in respect ofthe impairment write down.

 

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The La Cabana restaurant net loss increased from $0.5million for the nine months ended September 30, 2008 to $5.9 million forthe nine months ended September 30, 2009. The 2009 loss includesimpairment charges of $5.4 million for this property.

 

TheLapa Palace Hotel net earnings increased from $0.6 million for the nine monthsended September 30, 2008 to $4.2 million for the nine months ended September 30,2009. The 2009 earnings included a gain of $5.0 million arising on the disposalof the hotel, including a foreign currency translationadjustment gain of $6.7 million.

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH had cash and cash equivalents of $114.9 million atSeptember 30, 2009, $50.3 million more than the $64.6 million at December 31,2008. In addition, OEH had restricted cash of $17.8 million (December 31,2008 - $13.2 million) mainly related to the Porto Cupecoy project in St. Martin,which will be released when the next 12.5% phase of construction iscompleted.  At September 30, 2009,there were undrawn amounts available to OEH under committed short-term lines ofcredit of $25.0 million and undrawn amounts available to OEH under securedrevolving credit facilities of $12.0 million, bringing total cash availabilityat September 30, 2009 to $169.7 million, including the restricted cash of$17.8 million.

 

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital surplus of$48.3 million at September 30, 2009, an increase of $35.8 million from asurplus of $12.5 million at December 31, 2008. The main factors thatcontributed to the increase in working capital were the increase in cash andcash equivalents and the decrease in working capital facilities borrowed, offsetby the impairments to the Windsor Court, Bora Bora Lagoon Resort and La Cabanarestaurant and by the increase in the current portion of long-term debt.  The decrease in working capital facilities of$45.8 million was due to OEH’s efforts to reduce high-interest debts.  The increase in the current portion oflong-term debt of $31.3 million was mainly due to the incurrence of PortoCupecoy debt which is repayable next year on completion of construction ($21.4million).

 

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*Cash Flow*

 

*Operating Activities.* Net cash provided byoperating activities decreased by $34.5 million from $54.0 million for the ninemonths ended September 30, 2008 to $19.5 million for the nine months endedSeptember 30, 2009. The decrease was due to a weakened performance of thecontinuing hotels, tourist trains and restaurant businesses in the first ninemonths of 2009.

 

*Investing Activities*.  Cash used in investing activities decreasedby $47.4 million to $43.0 million cash outflow for the nine months ended September 30,2009, compared to $90.4 million cash outflow for the nine months ended September 30,2008.

 

The $28.2 million proceeds from disposals in the ninemonths ended September 30, 2009 consisted of proceeds from the sale ofLapa Palace Hotel and $4.0 million insurance proceeds for the Road to Mandalaycruise ship. The $3.3 million acquisitions made during the first nine months of2008 included acquisitions of the 20% minority interest in Casa de SierraNevada, and the La Samanna spa acquisition. There were no acquisitions in the first nine months of 2009.

 

Restricted cash in the first nine months of 2009increased by $4.6 million compared to an increase in restricted cash of $6.6million in the same period in 2008. This mainly represented movements in PortoCupecoy escrow account.

 

Capital expenditure of $65.6 million included $12.7million of New York hotel project costs, $7.2 million of Hotel Ciprianirefurbishment, $9.2 million of Hotel das Cataratas capital costs, $5.1 millionof Copacabana Palace Hotel refurbishment, $6.1 million of Grand Hotel Europerefurbishment, $3.1 million of El Encanto construction costs, and $4.6 millionon construction of assets at Porto Cupecoy in St. Martin.

 

Overall capital expenditure for the nine months ended September 30,2009 was reduced by 14% compared to the same period in 2008 due to themanagement’s strategic initiatives.

 

*Financing Activities*.  Cash provided by financing activities for thenine months ended September 30, 2009 was $71.3 million compared to $6.5million for the nine months ended September 30, 2008, an increase of $64.8million. On May 4, 2009, the Company completed a publicoffering of 25,875,000 class A common shares with net proceeds of $140.9million. This was offset by net debt repayments of $69.7 million in the ninemonths ended September 30, 2009, compared with net borrowings of $9.5million in the nine months ended September 30, 2008. Of the repayments in2009, $25.6 million related to discontinued operations of Lapa Palace andWindsor Court.

 

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*Capital Commitments*.  There were $51.9 million of capitalcommitments outstanding as of September 30, 2009 of which $8.9 millionrelated to investments in owned hotels and $43.0 million to the purchase ofland and a building adjoining ‘21’ Club, New York. OEH negotiated a deferral ofthis purchase in early July 2009. The $43.0 million capital commitment forthe New York hotel project reduces to $14.0 million if OEH decides not toproceed with the purchase.

 

*Indebtedness*

 

At September 30, 2009, OEH had $830.1 million oflong-term debt secured by assets, including the current portion, which isrepayable over periods of 1 to 11 years with a weighted average maturity of 2.7years and a weighted average interest rate of 3.5%**.**  See Note 7 to the financial statementsregarding the maturity of long-term debt. Additionally there was $36.8 millionof debt related to discontinued operations.

 

Approximately 50% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars.  At September 30, 2009, 44% of borrowingsof OEH were in floating interest rates.

 

*Liquidity*

 

During the three months ending December 31, 2009,OEH has approximately $7.5 million of scheduled debt repayments, excludingamounts relating to revolving working capital facilities and excluding $2.8million of debt at Keswick Hall which comes due when the relevant building lotsare sold.  OEH repaid mortgage debt of $36.8 million on closing the saleof the Windsor Court Hotel in October 2009. This debt is included withinliabilities of discontinued operations held for sale.

 

OEH’s capital commitments at September 30, 2009amounted to $51.9 million of which $43.0 million relates to the purchase ofland and a building adjoining ‘21’ Club from the New York Public Library. On July 9, 2009, OEH and the Library signedagreements to spread and secure future payments on this purchase over the next24 months. In addition to the $7 million that OEH had already paid, OEH paid $9million upon execution of the agreements, to be followed by 16 monthly paymentsof $0.5 million each commencing in February 2010, and final payments of $6million and $29 million in June 2011. In the event OEH elects not to close the transaction, the final paymentof $29 million will not be due to the Library.  OEH also expects to incur costs of afurther $14.0 million to complete construction of its Porto Cupecoydevelopment, which is being funded by a short-term loan agreed with a banklender in April 2009 and from monies received from buyers of sold units.

 

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On May 4, 2009, OEH completed a public offering throughunderwriters in the United States of 25,875,000 newly issued class A commonshares including 3,375,000 shares covered by the underwriters’ over-allotmentoption in the offering which was exercised in full. OEH is using the netproceeds from the offering, approximately $140.9 million, primarily for debtreduction and general corporate purposes.

 

OEHexpects to fund its working capital requirements, debt service and capitalexpenditure commitments for the foreseeable future from operating cash flow,available committed borrowing facilities, the May 2009 share sale proceeds andthe proceeds of sales of non-core assets and developed real estate.

 

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

 

As disclosedin the Company’s 2008 Form 10-K annual report, OEH was concerned that itcould violate a minimum $600 million tangible net worth covenant in twolong-term debt facilities at the end of its first quarter of 2009.Approximately $102.3 million had been borrowed under these facilities at March 31,2009 when tangible net worth calculated under the covenants was approximately$586 million.  In May 2009, OEH and the bank lenders agreed a waiverof these net worth covenants, and OEH repaid $9.7 million in June 2009 inconnection with the waiver.  One of theloans was the Windsor Court Hotel mortgage loan which was repaid subsequentlyin October 2009 when the hotel was sold.

 

At September 30, 2009, OEH was incompliance with all financial covenants although, as disclosed in the Company’sForm 10-K annual report, Hotel Ritz, Madrid, in which OEH has a 50%interest, was out of compliance with a debt service 

 

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coverage ratio in its first mortgage loanfacility which is non-recourse to and not credit-supported by OEH or its joint venturepartner in the hotel.  OEH and itspartner continue to service the debt and to negotiate with the lender todetermine how to bring the hotel back into compliance. Noassurance can be given that these negotiations will be successful.

 

OEH recognizesthat, in the current economic climate, there is an enhanced risk of a financialcovenant breach in its existing loan facilities if weak trading conditions leadto a deterioration of OEH’s results and the costs of implementing remedialsteps reduce OEH’s earnings in any given period. If current economicconditions, including the volatility recently experienced in foreign exchangeand global debt markets, continue or worsen, OEH believes, as previouslyreported, the heightened risk that it could breach certain financial covenantscontinues.

 

**Recent Accounting Pronouncements**

 

In August 2009, the FASB issued ASU 2009-05, “FairValue Measurements and Disclosures (Topic 820) — Measuring Liabilities at FairValue”, which provides clarification techniques to be used to measure fairvalue of liabilities in circumstances in which a quoted price in an activemarket for the identical liability is not available. The standard is effectivefor the first reporting period beginning after issuance (i.e. for OEH the threemonths ending December 31, 2009). OEH is in the process of determining theeffects of the adaptation of this standard on its consolidated financialstatements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (not yet incorporated into the FASBCodification), which changes how a reporting company determines when an entitythat is insufficiently capitalized or is not controlled through voting shouldbe consolidated. The standard will require a number of new disclosures about areporting company’s involvement with variable interest entities, anysignificant changes in risk exposure due to that involvement and how thatinvolvement affects the reporting company’s financial statements. The standardis effective from January 1, 2010. OEH is in the process of determiningthe effects of the adaptation of this standard on its consolidated financialstatements.

 

## **Critical Accounting Policies**

## ** **

For adiscussion of these, see under the heading “Critical Accounting Policies” inItem 7 — Management’s Discussion and Analysis in the Company’s 2008 Form 10-Kannual report.

 

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

 

OEH is exposed to market risk from changes ininterest rates and foreign currency exchange rates.  These exposures are monitored and managed aspart of OEH’s overall risk management program, which recognizes theunpredictability of financial markets and seeks to mitigate material adverseeffects on consolidated earnings and cash flows.  OEH does not hold market rate sensitivefinancial instruments for trading purposes.

 

The market risk relating tointerest rates arises mainly from the financing activities of OEH. Earnings areaffected by changes in interest rates on borrowings, principally based on U.S.dollar LIBOR and EURIBOR, and on short-term cash investments.  If OEH’s weighted average interest rateincreased by 10%, with all other variables held constant, annual net financecosts of OEH would have increased by approximately $900,000 on an annual basisbased on borrowings at September 30, 2009. The interest rates onsubstantially all of OEH’s long-term debt are adjusted regularly to reflectcurrent market rates.  Accordingly, thecarrying amounts approximate fair value.

 

The market risk relating toforeign currencies and its effects have not changed materially during the firstnine months of 2009 from those described in the Company’s 2008 Form 10-Kannual report.

 

**ITEM 4.****                                                    ****Controlsand Procedures**

 

The Company’s management, under the supervision and with theparticipation of its chief executive and financial officers, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of September 30, 2009 and, based on thatevaluation, believes those disclosure controls and procedures are effective asof that date.  There have been no changesin the Company’s internal control over financial reporting (as defined in SEC Rule 13a-15(f))during the third quarter of 2009 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1.          Legal Proceedings**

 

As previously reported in the Company’s 2008 Form 10-Kannual report and June 30, 2009 Form 10-Q quarterly report, threehedge funds owning collectively about 6.1 million class A common shares in theCompany filed a petition in the Supreme Court of Bermuda on January 12,2009 challenging on various grounds the Company’s corporate governancestructure with dual class A and class B common shares outstanding and ownershipof higher-voting class B common shares by a wholly-owned subsidiary of theCompany.  The named respondents are the Company, its subsidiary and sevenof the current eight members of Company’s Board of Directors.

 

TheCompany continues to believe the petition is without merit and intends todefend the action vigorously.  The respondents filed points of defence tothe petition on May 11, 2009.  After the petitioners filed points ofreply on June 11, 2009 to the points of defence, the petitioners and therespondents filed with the Court on July 10 and 17, 2009 separatesummonses seeking, among other matters, a trial on preliminary issues relatingto the legality of the holding of class B common shares in the Company by thesubsidiary.  The respondents also filed a summons seeking to strike out(dismiss) the petition.  A hearing before the Court was held on September 16,2009 at which a further hearing on the substance of the summonses was scheduledin early 2010 on dates available to the Court and to be agreed among theparties.

 

# **ITEM 6.          Exhibits**

# ** **

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

 

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**SIGNATURES**

 

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

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

 

 

Dated: November 6,2009

 

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# **EXHIBIT INDEX**

# ** **

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

 

3.2           -               Bye-Lawsof the Company, filed as Exhibit 3.2 to the Company’s Form 8-KCurrent Report on June 15, 2007 and incorporated herein by reference.

 

3.3           -               RightsAgreement dated as of June 1, 2000, and amended and restated as of April 12,2007, between the Company and Computershare Trust Company, N.A., as rightsagent, filed as Exhibit 1 to Amendment No. 1 to the Company’sRegistration Statement on Form 8-A dated April 23, 2007, for theCompany’s preferred share purchase rights, and incorporated herein byreference.

 

3.4           -               AmendmentNo. 1 dated December 10, 2007 to amended and restated RightsAgreement (Exhibit 3.3), filed as Exhibit 4.2 to the Company’s Form 8-KCurrent Report on December 10, 2007 and incorporated herein by reference

 

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

 

32            -               Section 1350Certification.

 

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