**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

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

 

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

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

 

**For the transition period from                   to                   **

 

**Commission file number      1-16017**

 

**ORIENT-EXPRESS HOTELS LTD.**

(Exact name of registrant as specified in its charter)

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes   ý    No   o

 

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

 

As of July 29, 2005,36,874,351 Class A common shares and 20,503,877 Class B common sharesof Orient-Express Hotels Ltd. were outstanding, including 18,044,478 Class Bshares owned by a subsidiary of Orient-Express Hotels Ltd. and 7,443,901 Class Ashares and 2,459,399 Class B shares owned by Sea Containers Ltd.

 

 

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**PART I – FINANCIALINFORMATION**

 

**ITEM1.   Financial Statements**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Condensed ConsolidatedBalance Sheets (unaudited)**

 
| ** **                                                                                                               | ** ** | **June 30,****2005**  | ** ** | **December 31,****2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                                                     |       |                       |       |                          |       |
| **Assets**                                                                                                               |       |                       |       |                          |       |
| Cash and cash equivalents                                                                                                |       | $                          | 79,145     |                          | $          | 85,610 |   |
| Accounts receivable, net of allowances of  $951 and $1,027                                                               |       | 51,869                     |       | 34,984                        |       |
| Due from related parties                                                                                                 |       | 15,924                     |       | 14,718                        |       |
| Prepaid expenses and other                                                                                               |       | 14,141                     |       | 11,914                        |       |
| Inventories                                                                                                              |       | 29,720                     |       | 28,965                        |       |
| Total current assets                                                                                                     |       | 190,799                    |       | 176,191                       |       |
|                                                                                                                     |       |                       |       |                          |       |
| Property, plant and equipment, net of  accumulated depreciation of $160,357 and $155,582                                 |       | 985,853                    |       | 916,811                       |       |
| Investments                                                                                                              |       | 125,110                    |       | 123,599                       |       |
| Goodwill                                                                                                                 |       | 64,117                     |       | 29,529                        |       |
| Other assets                                                                                                             |       | 20,404                     |       | 19,461                        |       |
|                                                                                                                     |       | $                          | 1,386,283  |                          | $          | 1,265,591 |   |
| **Liabilities and Shareholders’ Equity**                                                                            |       |                       |       |                          |       |
| Working capital facilities                                                                                               |       | $                          | 45,264     |                          | $          | 42,920 |   |
| Accounts payable                                                                                                         |       | 31,523                     |       | 23,839                        |       |
| Due to related parties                                                                                                   |       | 5,236                      |       | 5,453                         |       |
| Accrued liabilities                                                                                                      |       | 53,111                     |       | 37,288                        |       |
| Deferred revenue                                                                                                         |       | 22,709                     |       | 20,493                        |       |
| Current portion of long-term debt and  capital leases                                                                    |       | 54,436                     |       | 46,245                        |       |
| Total current liabilities                                                                                                |       | 212,279                    |       | 176,238                       |       |
|                                                                                                                     |       |                       |       |                          |       |
| Long-term debt and obligations under  capital leases                                                                     |       | 499,622                    |       | 537,461                       |       |
| Deferred income taxes                                                                                                    |       | 14,357                     |       | 2,710                         |       |
|                                                                                                                     |       | 726,258                    |       | 716,409                       |       |
| Minority interest                                                                                                        |       | 4,577                      |       | 4,192                         |       |
|                                                                                                                     |       |                       |       |                          |       |
| Shareholders’ equity:                                                                                               |       |                       |       |                          |       |
| Preferred shares $0.01 par value  (30,000,000 shares authorized, issued nil)                                             |       | —                     |       | —                        |       |
| Class A common shares $0.01 par value  (120,000,000 shares authorized):  Issued-36,865,601 (2004 – 31,790,601) |       | 368                        |       | 318                           |       |
| Class B common shares $0.01 par value  (120,000,000 shares authorized):  Issued-20,503,877                          |       | 205                        |       | 205                           |       |
| Additional paid-in capital                                                                                               |       | 403,096                    |       | 280,212                       |       |
| Retained earnings                                                                                                        |       | 292,342                    |       | 277,281                       |       |
| Accumulated other comprehensive loss                                                                                     |       | (40,382                    | )          | (12,845                       | )          |
| Less: reduction due to Class B common  shares owned by a subsidiary – 18,044,478                               |       | (181                       | )          | (181                          | )          |
| Total shareholders’ equity                                                                                          |       | 655,448                    |       | 544,990                       |       |
| Commitments  and contingencies                                                                                           |       |                       |       |                          |       |
|                                                                                                                     |       | $                          | 1,386,283  |                          | $          | 1,265,591 |   |

 

See notes to condensed consolidated financialstatements.

 

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Three  months ended June 30,**                   | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
|                                                    |       |                                                  |       |     |       |
| Revenue                                                 |       | $                                                     | 126,252    |     | $          | 100,536 |   |
|                                                    |       |                                                  |       |     |       |
| Expenses:                                               |       |                                                  |       |     |       |
| Depreciation  and amortization                          |       | 8,632                                                 |       | 7,014    |       |
| Operating                                               |       | 58,351                                                |       | 47,930   |       |
| Selling,  general and administrative                    |       | 34,975                                                |       | 29,063   |       |
| Total  expenses                                         |       | 101,958                                               |       | 84,007   |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from operations before net finance costs      |       | 24,294                                                |       | 16,529   |       |
|                                                    |       |                                                  |       |     |       |
| Interest  expense, net                                  |       | (6,726                                                | )          | (4,906   | )          |
| Interest and  related income                            |       | 495                                                   |       | 30       |       |
| Net finance  costs                                      |       | (6,231                                                | )          | (4,876   | )          |
|                                                    |       |                                                  |       |     |       |
| Earnings  before income taxes                           |       | 18,063                                                |       | 11,653   |       |
|                                                    |       |                                                  |       |     |       |
| Provision  for income taxes                             |       | 3,420                                                 |       | 2,375    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  before earnings from unconsolidated companies |       | 14,643                                                |       | 9,278    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from unconsolidated companies, net of tax     |       | 3,814                                                 |       | 3,633    |       |
|                                                    |       |                                                  |       |     |       |
| Net earnings  on class A and class B common shares      |       | $                                                     | 18,457     |     | $          | 12,911 |   |
|                                                    |       |                                                  |       |     |       |
| Net earnings  per class A and class B common share:     |       |                                                  |       |     |       |
| Basic and  diluted                                      |       | $                                                     | 0.47       |     | $          | 0.38 |   |
|                                                    |       |                                                  |       |     |       |
| Dividends  per class A and class B common share         |       | $                                                     | 0.025      |     | $          | 0.025 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

**Statementsof Condensed Consolidated Operations (unaudited)**

 
| **Six  months ended June 30,**                     | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|
|                                                    |       | **(Dollars in thousands,  except per share amounts)** |       |
|                                                    |       |                                                  |       |     |       |
| Revenue                                                 |       | $                                                     | 206,741    |     | $          | 164,370 |   |
|                                                    |       |                                                  |       |     |       |
| Expenses:                                               |       |                                                  |       |     |       |
| Depreciation  and amortization                          |       | 16,450                                                |       | 13,969   |       |
| Operating                                               |       | 99,680                                                |       | 81,759   |       |
| Selling,  general and administrative                    |       | 66,398                                                |       | 55,046   |       |
| Total  expenses                                         |       | 182,528                                               |       | 150,774  |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from operations before net finance costs      |       | 24,213                                                |       | 13,596   |       |
|                                                    |       |                                                  |       |     |       |
| Interest  expense, net                                  |       | (13,805                                               | )          | (9,950   | )          |
| Interest and  related income                            |       | 4,075                                                 |       | 94       |       |
| Net finance  costs                                      |       | (9,730                                                | )          | (9,856   | )          |
|                                                    |       |                                                  |       |     |       |
| Earnings  before income taxes                           |       | 14,483                                                |       | 3,740    |       |
|                                                    |       |                                                  |       |     |       |
| Provision  for income taxes                             |       | 3,122                                                 |       | 1,363    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  before earnings from unconsolidated companies |       | 11,361                                                |       | 2,377    |       |
|                                                    |       |                                                  |       |     |       |
| Earnings  from unconsolidated companies, net of tax     |       | 5,539                                                 |       | 5,928    |       |
|                                                    |       |                                                  |       |     |       |
| Net earnings  on class A and class B common shares      |       | $                                                     | 16,900     |     | $          | 8,305 |   |
|                                                    |       |                                                  |       |     |       |
| Net earnings  per class A and class B common share:     |       |                                                  |       |     |       |
| Basic                                                   |       | $                                                     | 0.46       |     | $          | 0.24 |   |
| Diluted                                                 |       | $                                                     | 0.45       |     | $          | 0.24 |   |
|                                                    |       |                                                  |       |     |       |
| Dividends  per class A and class B Common share         |       | $                                                     | 0.05       |     | $          | 0.05 |   |

 

See notes to condensed consolidated financialstatements.

 

4

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 
| **Six  months ended June 30,**                                                  | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows  from operating activities:                                               |       |                       |       |     |       |
| Net earnings                                                                         |       | $                          | 16,900     |     | $          | 8,305 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities: |       |                       |       |     |       |
| Depreciation  and amortization                                                       |       | 16,450                     |       | 13,969   |       |
| Undistributed  earnings of affiliates                                                |       | (871                       | )          | (1,979   | )          |
| Other  non-cash items                                                                |       | (1,842                     | )          | (784     | )          |
| Change in  assets and liabilities net of effects from acquisition of subsidiaries:   |       |                       |       |     |       |
| Increase in  receivables, prepaid expenses and other                                 |       | (24,846                    | )          | (12,154  | )          |
| Increase in  inventories                                                             |       | (2,572                     | )          | (1,268   | )          |
| Increase in  payables, accrued liabilities and deferred revenue                      |       | 25,013                     |       | 16,608   |       |
|                                                                                 |       |                       |       |     |       |
| Total  adjustments                                                                   |       | 11,332                     |       | 14,392   |       |
|                                                                                 |       |                       |       |     |       |
| Net cash provided  by operating activities                                           |       | 28,232                     |       | 22,697   |       |
|                                                                                 |       |                       |       |     |       |
| Cash flows  from investing activities:                                               |       |                       |       |     |       |
| Capital  expenditures                                                                |       | (58,025                    | )          | (28,929  | )          |
| Acquisitions  and investments, net of cash acquired                                  |       | (96,075                    | )          | (11,184  | )          |
| Proceeds  from sale of fixed assets and other                                        |       | 1,140                      |       | 122      |       |
|                                                                                 |       |                       |       |     |       |
| Net cash  used in investing activities                                               |       | (152,960                   | )          | (39,991  | )          |
|                                                                                 |       |                       |       |     |       |
| Cash flows  from financing activities:                                               |       |                       |       |     |       |
| Net  (repayment of)/proceeds from working capital facilities and redrawable loans    |       | (90,004                    | )          | 3,801    |       |
| Issuance of  common shares                                                           |       | 122,934                    |       | —   |       |
| Issuance of  long-term debt                                                          |       | 108,409                    |       | 12,974   |       |
| Principal  payments under long-term debt                                             |       | (20,075                    | )          | (20,776  | )          |
| Payment of  common share dividends                                                   |       | (1,839                     | )          | (1,651   | )          |
|                                                                                 |       |                       |       |     |       |
| Net cash  provided by/(used in) financing activities                                 |       | 119,425                    |       | (5,652   | )          |
|                                                                                 |       |                       |       |     |       |
| Effect of  exchange rate changes on cash and cash equivalents                        |       | (1,162                     | )          | (369     | )          |
|                                                                                 |       |                       |       |     |       |
| Net decrease  in cash and cash equivalents                                           |       | (6,465                     | )          | (23,315  | )          |
|                                                                                 |       |                       |       |     |       |
| Cash and  cash equivalents at beginning of period                                    |       | 85,610                     |       | 81,347   |       |
|                                                                                 |       |                       |       |     |       |
| Cash and cash  equivalents at end of period                                          |       | $                          | 79,145     |     | $          | 58,032 |   |

 

See notes to condensed consolidated financialstatements.

 

5

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

 

**Statements of Condensed Consolidated Shareholders’Equity (unaudited)**

 
| ** **                                                                        | ** ** | ** **    | ** ** | **Class A** | ** ** | **Class B** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **        | ** ** | ** **     | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|----------------|------------|--------------|------------|-------------------|------------|----------------|------------|-------------------|------------|
| ** **                                                                        | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common**       | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | **Common**     | ** ** | ** **        | ** ** |
| ** **                                                                        | ** ** | **Shares**    | ** ** | **Shares**       | ** ** | **Shares**       | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | **Shares**     | ** ** | **Total**         | ** ** |
| ** **                                                                        | ** ** | **At Par**    | ** ** | **at Par**       | ** ** | **at Par**       | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Owned by**   | ** ** | **Comprehensive** | ** ** |
| **(Dollars in thousands)**                                                        | ** ** | **Value**     | ** ** | **Value**        | ** ** | **Value**        | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Subsidiary** | ** ** | **Income/(Loss)** | ** ** |
|                                                                              |       |          |       |             |       |             |       |           |       |         |       |              |       |           |       |              |       |
| Balance,  January 1, 2005                                                    |       | $             | —     |             | $          | 318              |       | $              | 205        |         | $          | 280,212           |       | $              | 277,281    |              | $          | (12,845 | ) | $ | (181 | ) |   |   |
| Issuance of  Class A common shares in public offering, net of issuance costs |       | —        |       | 50               |       | —           |       | 121,848        |       | —       |       | —            |       | —         |       |              |       |
| Stock-based  compensation                                                         |       | —        |       | —           |       | —           |       | 561            |       | —       |       | —            |       | —         |       |              |       |
| Stock options  exercised                                                          |       | —        |       | —           |       | —           |       | 475            |       | —       |       | —            |       | —         |       |              |       |
| Dividends on  common shares                                                       |       | —        |       | —           |       | —           |       | —         |       | (1,839       | )          | —            |       | —         |       |              |       |
| Comprehensive  loss:                                                              |       |          |       |             |       |             |       |           |       |         |       |              |       |           |       |              |       |
| Net earnings on  common shares for the period                                     |       | —        |       | —           |       | —           |       | —         |       | 16,900       |       | —            |       | —         |       | $                 | 16,900     |   |
| Other  comprehensive loss                                                         |       | —        |       | —           |       | —           |       | —         |       | —       |       | (27,537           | )          | —         |       | (27,537           | )          |
|                                                                              |       |          |       |             |       |             |       |           |       |         |       |              |       |           |       | $                 | (10,637    | ) |
| Balance,  June 30, 2005                                                      |       | $             | —     |             | $          | 368              |       | $              | 205        |         | $          | 403,096           |       | $              | 292,342    |              | $          | (40,382 | ) | $ | (181 | ) |   |   |

 

See notes to condensed consolidated financialstatements.

 

6

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**Orient-ExpressHotels Ltd. and Subsidiaries**

 

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

 

**1.             Basis of financial statementpresentation**

 

In this report Orient-Express Hotels Ltd. is referred to as the “Company”,and the Company and its subsidiaries are referred to collectively as “OEH”.  At June 30, 2005, Sea Containers Ltd., aBermuda company (“SCL”), owned 25% of the equity shares in the Company.

 

*(a) **Accounting policies*

 

For a description of significant accounting policies and basis ofpresentation, see Notes 1 and 15 to the consolidated financial statements inthe Company’s 2004 Form 10-K annual report.  As of June 30, 2005, these significantaccounting policies have not changed from December 31, 2004, except asreferred to in Note 1(c) below.  “SFAS”means Statement of Financial Accounting Standards and “FIN” means an accountinginterpretation, both of the U.S. Financial Accounting Standards Board.

 

The condensed consolidated financial statements are unaudited and havebeen prepared following the rules and regulations of the U.S. Securitiesand Exchange Commission.

 

In the opinion of management, all adjustments necessary for a fairpresentation of the results of operations for the three and six months ended June 30,2005 and 2004, which are all of a normal recurring nature, have been reflectedin the information provided.  Due to theseasonal nature of OEH’s business, operating results for the interim period arenot necessarily indicative of a full year’s operating results.

 

*(b) Net earnings per share*

 

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

 
| **Three months ended  June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Basic                                 |       | 39,311   |       | 34,250   |       |
| Effect of dilution                    |       | 369      |       | 89       |       |
| Diluted                               |       | 39,680   |       | 34,339   |       |

 

7

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| **Six months ended June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Basic                              |       | 37,049   |       | 34,250   |       |
| Effect of dilution                 |       | 324      |       | 109      |       |
| Diluted                            |       | 37,373   |       | 34,359   |       |

 

For the three months ended June 30, 2005 and 2004, theanti-dilutive effect of stock options on 1,127 and 47,442 class A commonshares, respectively, was excluded from the computation of diluted earnings pershare.  For the six months ended June 30,2005 and 2004, the anti-dilutive effect of stock options on 5,879 and 33,701class A common shares, respectively, was excluded from the computation ofdiluted earnings per share.

 

*(c)  Stock-based compensation*

 

OEH had previously accounted for stock-based compensation under theguidelines of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees”, and followed the disclosure-only provisions of SFASNo. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure”.

 

With effect from January 1, 2005, the Company adopted SFAS No. 123R,“Stock-Based Payment”, and chose the modified prospective application as itstransition method.  Prior to January 1,2005, the Company has historically reflected the pro-forma impact to net incomehad all previously issued stock-based compensation been expensed under theprovisions of SFAS No. 123.  Uponadoption of SFAS No. 123R, all previously issued stock-based compensationvesting during the three and six months ended June 30, 2005 has beenreflected in the Company’s net earnings, as reported for each period.  This resulted in an expense in the three andsix months ended June 30, 2005 of $300,000 and $561,000,respectively.  The following tablesillustrate the effect on income attributable to common shares and earnings pershare for the three and six months ended June 30, 2004 had the fair-valuebased provisions of SFAS No. 123R been applied (dollars in thousandsexcept per share amounts):

 

8

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| **Three months ended June 30**                                                                           | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                          |       |     |       |
| Net earnings on common shares:                                                                                |       |     |       |
| As reported                                                                                                   |       | $        | 12,911     |   |
| Add:                                                                                                          |       |     |       |
| Stock-based compensation expense included  in reported net income, net of related tax effects                 |       | —   |       |
| Deduct:                                                                                                       |       |     |       |
| Total stock-based employee compensation  expense determined under fair value based method, net of related tax |       | (187     | )          |
| Pro-forma                                                                                                     |       | $        | 12,724     |   |
|                                                                                                          |       |     |       |   |
| Basic and diluted earnings per share:                                                                         |       |     |       |
| As reported:                                                                                                  |       |     |       |   |
| Basic and diluted                                                                                             |       | $        | 0.38       |   |
| Proforma:                                                                                                     |       |     |       |   |
| Basic and diluted                                                                                             |       | $        | 0.37       |   |

 
| **Six months ended June 30**                                                                             | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                          |       |     |       |
| Net earnings on common shares:                                                                                |       |     |       |
| As reported                                                                                                   |       | $        | 8,305      |   |
| Add:                                                                                                          |       |     |       |
| Stock-based compensation expense included  in reported net income, net of related tax effects                 |       | —   |       |
| Deduct:                                                                                                       |       |     |       |
| Total stock-based employee compensation  expense determined under fair value based method, net of related tax |       | (374     | )          |
| Pro-forma                                                                                                     |       | $        | 7,931      |   |
|                                                                                                          |       |     |       |
| Basic and diluted earnings per share:                                                                         |       |     |       |
| As reported:                                                                                                  |       |     |       |
| Basic and diluted                                                                                             |       | $        | 0.24       |   |
| Proforma:                                                                                                     |       |     |       |
| Basic and diluted                                                                                             |       | $        | 0.23       |   |

 

*(d) **Dividends*

 

On January 5, 2005, the Company declared a dividend of $0.025 percommon share payable February 4, 2005 to shareholders of record January 20,2005.  On April 5, 2005, the Companydeclared a dividend of $0.025 per common share payable May 5, 2005 toshareholders of record April 20, 2005.

 

9

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*(e)  Earnings from unconsolidated companies*

 

Earnings from unconsolidated companies include OEH’s share of the netearnings of its equity investments as well as interest income related to loansand advances to the equity investees amounting to $2,480,000 and $2,020,000 forthe three months ended June 30, 2005 and 2004, respectively, and$4,668,000 and $3,949,000 for the six months ended June 30, 2005 and 2004,respectively.

 

*(f)            Recentaccounting pronouncements*

 

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

 

*(g)          Reclassifications*

 

Certain items in 2004 have been reclassified to conform to the 2005presentation.

 

**2.             Acquisitions**

 

Effective February 8, 2005, OEH purchased 100% of the issuedequity of LLC Europe Hotel which owns a 93.5% interest in the property operatingas the Grand Hotel Europe, St Petersburg, Russia.  The remaining interest in the property isowned by the City of St. Petersburg.  Inaddition, OEH acquired full management and operational control of the hotel andacquired 100% of a Cyprus company which has agreements with the hotel toprovide various management services.  Thetotal purchase price, including acquisition costs, was $95,000,000 paid in cashof which $57,500,000 was financed by a syndicate of banks led by theInternational Finance Corporation.

 

The following table summarizes the initial estimated fair values of theassets acquired and liabilities assumed at the date of acquisition (dollars inthousands):

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

 

10

----

 

The assets and liabilities of the Grand Hotel Europe have been fairvalued and goodwill of $37,000,000 has been recorded of which $ nil will bedeductible for tax purposes.  The fairvalue of the building has been based on its estimated replacement cost.

 

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

 

**3.             Investments**

 

On April 29, 2005, OEHacquired 50% of the equity in the Great Scottish and Western Railway Co. Ltd.which currently operates the Royal Scotsman luxury tourist train on a seasonalservice largely within Scotland.  The initialinvestment was $2,700,000 of which $1,300,000 was paid in cash and the balancerepresents 50% of the long-term debt within the company in which OEH hasinvested.  OEH has an option to acquirethe remaining 50% of the equity in three years time at an enterprise valuationof 5.5 times the average EBITDA for the previous 36 months, as defined in thepurchase agreement.  This investment hasbeen accounted for under the equity method of accounting.

 

On February 2, 2004, OEHentered into an agreement with the Pansea Hotel group, the owner of six deluxehotels in Southeast Asia.  Under thisagreement, OEH is to provide a maximum of $8,000,000 in loans to the hotelholding company which are convertible after three years into approximately 25%of the holding company’s shares.  As of June 30,2005, OEH had provided $5,125,000 (December 31, 2004-$4,625,000) in loansin Pansea which are recorded in other assets. The conversion price of the loans is determined at a multiple of EBITDAless existing debt on the exercise date (as defined in the investmentagreement).  OEH is not managing thehotels but is marketing them along with its other properties.

 

Summarized financial data forOEH’s unconsolidated companies for the periods during which the investmentswere held and accounted for under the equity method of accounting by OEH are asfollows (dollars in thousands):

 

11

----

 
| ** **                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Current assets                                  |       | $                       | 48,607     |                        | $          | 39,993 |   |
| Property, plant and equipment, net              |       | 348,490                 |       | 357,949                     |       |
| Other assets                                    |       | 6,659                   |       | 5,469                       |       |
| Total assets                                    |       | $                       | 403,756    |                        | $          | 403,411 |   |
|                                            |       |                    |       |                        |       |
| Current liabilities                             |       | $                       | 52,965     |                        | $          | 41,290 |   |
| Long-term debt                                  |       | 204,623                 |       | 216,251                     |       |
| Other liabilities                               |       | 83,151                  |       | 79,403                      |       |
| Total shareholders’ equity                 |       | 63,017                  |       | 66,467                      |       |
| Total liabilities and shareholders’ equity |       | $                       | 403,756    |                        | $          | 403,411 |   |

 
| **Three months ended June 30**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 43,500     |     | $          | 36,605 |   |
| Earnings from operations before net finance  costs |       | $        | 6,930      |     | $          | 7,322 |   |
| Net losses                                         |       | $        | 448        |     | $          | 1,126 |   |

 
| **Six months ended June 30**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 77,314     |     | $          | 65,257 |   |
| Earnings from operations before net finance  costs |       | $        | 9,250      |     | $          | 9,610 |   |
| Net losses                                         |       | $        | (2,783     | )        | $          | (741 | ) |

 

**4.  Property, plant and equipment**

 

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

 
| ** **                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Freehold and leased land and buildings  |       | $                       | 835,762    |                   | $          | 769,951 |   |
| Machinery and equipment                 |       | 152,943                 |       | 149,191                |       |
| Fixtures, fittings and office equipment |       | 139,162                 |       | 134,935                |       |
| River cruiseship and canalboats         |       | 18,343                  |       | 18,316                 |       |
|                                    |       | 1,146,210               |       | 1,072,393              |       |
| Less: accumulated depreciation          |       | (160,357                | )          | (155,582               | )          |
|                                    |       | $                       | 985,853    |                   | $          | 916,811 |   |

 

12

----

 

The major classes of assetsunder capital leases included above are as follows (dollars in thousands):

 
| ** **                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land and buildings                      |       | $                       | 10,035     |                        | $          | 14,612 |   |
| Machinery and equipment                 |       | 2,088                   |       | 2,410                       |       |
| Fixtures, fittings and office equipment |       | 4,848                   |       | 4,886                       |       |
|                                    |       | 16,971                  |       | 21,908                      |       |
| Less: accumulated depreciation          |       | (2,163                  | )          | (2,591                      | )          |
|                                    |       | $                       | 14,808     |                        | $          | 19,317 |   |

 

**5.  Goodwill**

 

OEH’s goodwill consists of $767,000 related to the trains and cruisesreporting segment and $63,350,000 related to the hotels and restaurantsreporting segment, of which $37,000,000 relates to the acquisition of the GrandHotel Europe effective February 8, 2005 (see Note 2).

 

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

 

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

 
| ** **                                                                                                                                                                                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Loans from banks collateralized by  property, plant and equipment payable over periods of 1 to 11 years, with a  weighted average interest rate of 5.16% and 4.18%, respectively, primarily  based on LIBOR |       | $                       | 540,706    |                        | $          | 567,012 |   |
| Obligations under capital lease                                                                                                                                                                             |       | 13,352                  |       | 16,694                      |       |
|                                                                                                                                                                                                        |       | 554,058                 |       | 583,706                     |       |
| Less: current portion                                                                                                                                                                                       |       | 54,436                  |       | 46,245                      |       |
|                                                                                                                                                                                                        |       | $                       | 499,622    |                        | $          | 537,461 |   |

 

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

 

13

----

 

The following is a summary ofthe aggregate maturities of long-term debt, including obligations under capitallease, at June 30, 2005 (dollars in thousands):

 
| **Year  ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2006                               |       | $          | 84,315     |   |
| 2007                               |       | 121,767    |       |
| 2008                               |       | 132,440    |       |
| 2009                               |       | 68,005     |       |
| 2010 and thereafter                |       | 93,095     |       |
|                               |       | $          | 499,622    |   |

 

The interest rates onsubstantially all of OEH’s long-term debt are adjusted regularly to reflectcurrent market rates.  Accordingly, thecarrying amounts of OEH’s long-term debt also approximate fair value.

 

**7.             Income taxes**

 

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

 
| **Three months ended  June 30, 2005** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                       |       |        |       |         |       |      |       |
| United States                              |       | $           | 289        |         | $          | 504       |       | $ | 793 |   |
| Other foreign                              |       | 1,776       |       | 851          |       | 2,627     |       |
|                                       |       | $           | 2,065      |         | $          | 1,355     |       | $ | 3,420 |   |

 
| **Three months ended  June 30, 2004** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                       |       |        |       |         |       |      |       |
| United States                              |       | $           | 414        |         | $          | (218      | )          | $ | 196 |   |
| Other foreign                              |       | 664         |       | 1,515        |       | 2,179     |       |
|                                       |       | $           | 1,078      |         | $          | 1,297     |       | $ | 2,375 |   |

 
| **Six months ended June 30,  2005** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                     |       |        |       |         |       |      |       |
| United States                            |       | $           | 610        |         | $          | 1,157     |       | $ | 1,767 |   |
| Other foreign                            |       | 3,328       |       | (1,973       | )          | 1,355     |       |
|                                     |       | $           | 3,938      |         | $          | (816      | )          | $ | 3,122 |   |

 

14

----

 
| **Six months ended June 30,  2004** | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
|                                     |       |        |       |         |       |      |       |
| United States                            |       | $           | 590        |         | $          | (33       | )          | $ | 557 |   |
| Other foreign                            |       | 1,578       |       | (772         | )          | 806       |       |
|                                     |       | $           | 2,168      |         | $          | (805      | )          | $ | 1,363 |   |

 

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

 

Deferred income taxes reflectthe net tax effects of temporary differences between the carrying amount ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  The followingrepresents OEH’s net deferred tax liabilities (dollars in thousands):

 
| ** **                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                         |       |                    |       |                        |       |
| Gross deferred tax assets    |       | $                       | 66,143     |                        | $          | 64,493 |   |
| Less: Valuation allowance    |       | (32,831                 | )          | (31,996                     | )          |
| Net deferred tax assets      |       | 33,313                  |       | 32,497                      |       |
| Deferred tax liabilities     |       | (47,670                 | )          | (35,207                     | )          |
| Net deferred tax liabilities |       | $                       | (14,357    | )                           | $          | (2,710 | ) |

 

The deferred tax assets consistprimarily of tax loss carry forwards.   Avaluation allowance had been provided against gross deferred tax assets whereit is thought more likely than not that the benefits associated with theseassets will not be realized.

 

The deferred tax liabilitiesconsist primarily of differences between the tax basis of depreciable assetsand the adjusted basis reflected in the condensed consolidated financialstatements.

 

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

 

**8.             Pensions**

 

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

 

15

----

 
| **Three months ended  June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |   |   |
| Service cost                          |       | $        | 225        |     | $          | 205 |   |
| Interest cost                         |       | 179      |       | 95       |       |
| Expected return on plan assets        |       | (133     | )          | (108     | )          |
| Amortization of net loss              |       | 63       |       | 33       |       |
| Net periodic benefit cost             |       | $        | 334        |     | $          | 225 |   |

 
| **Six months ended June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |   |   |
| Service cost                       |       | $        | 454        |     | $          | 413 |   |
| Interest cost                      |       | 360      |       | 192      |       |
| Expected return on plan assets     |       | (271     | )          | (218     | )          |
| Amortization of net loss           |       | 129      |       | 68       |       |
| Net periodic benefit cost          |       | $        | 672        |     | $          | 455 |   |

 

As reported in Note 7 to the financial statements in the Company’s 2004Form 10-K annual report, OEH expected to contribute $833,000 to itspension plans in 2005.  As of June 30,2005, $450,000 of contributions were made. OEH anticipates contributing an additional $383,000 to fund its pensionplans in 2005 for a total of $833,000.

 

**9.             Supplemental cash flow information**

(Dollarsin thousands):

 
| **Six months ended June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Cash paid for:                     |       |     |       |     |       |
| Interest                           |       | $        | 12,501     |     | $          | 9,838 |   |
| Income taxes                       |       | $        | 4,901      |     | $          | 2,323 |   |

 

In conjunction with acquisitions(see Note 2) liabilities were assumed as follows (dollars in thousands):

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

 

**10.          Accumulated other comprehensive loss**

 

The accumulated balances foreach component of other comprehensive loss are as follows (dollars inthousands):

 
| ** **                                      | ** ** | ** ** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| Foreign  currency translation adjustments       |       |       |       | $                       | (40,189    | )                           | $          | (12,636 | ) |
| Net change  on derivative financial instruments |       |       |       | (193                    | )          | (209                        | )          |
|                                            |       |       |       | $                       | (40,382    | )                           | $          | (12,845 | ) |

 

16

----

 

The components of comprehensiveloss are as follows (dollars in thousands):

 
| **Six months ended June 30,**       | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Net earnings on common shares            |       | $        | 16,900     |     | $          | 8,305 |   |
| Foreign currency translation adjustments |       | (27,553  | )          | (672     | )          |
| Change in fair value of derivatives      |       | 16       |       | (52      | )          |
| Comprehensive loss                       |       | $        | (10,637    | )        | $          | 7,581 |   |

 

**11.          Commitments**

 

Outstanding contracts topurchase fixed assets were approximately $21,119,000 at June 30, 2005 (December 31,2004 - $27,200,000).

 

**12.          Information concerning financialreporting for segments and operations in different geographical areas**

 

As reported in the Company’s2004 Form 10-K annual report, OEH has two reporting segments, (i) hotelsand restaurants and (ii) tourist trains and cruises.  Segment performance is evaluated based uponsegment net earnings before interest, tax (including tax on earnings fromunconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):

 
| **Three  months ended June 30,**      | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                   |       |     |       |     |       |
| Hotels and  restaurants                    |       |     |       |     |       |
| Owned hotels  – Europe                |       | $        | 54,688     |     | $          | 37,298 |   |
| – North  America                      |       | 23,439   |       | 19,972   |       |
| – Rest of  world                      |       | 20,229   |       | 17,431   |       |
| Hotel management/part  ownership interests |       | 2,599    |       | 2,106    |       |
| Restaurants                                |       | 5,800    |       | 5,392    |       |
|                                       |       | 106,755  |       | 82,199   |       |
| Tourist  trains and cruises                |       | 19,497   |       | 18,337   |       |
|                                       |       | $        | 126,252    |     | $          | 100,536 |   |
|                                       |       |     |       |     |       |
| Segment  EBITDA:                           |       |     |       |     |       |
| Owned hotels  – Europe                |       | $        | 21,082     |     | $          | 12,936 |   |
| – North  America                      |       | 5,336    |       | 4,714    |       |
| – Rest of  world                      |       | 2,944    |       | 2,497    |       |
| Hotel management/part  ownership interests |       | 5,687    |       | 4,767    |       |
| Restaurants                                |       | 1,638    |       | 1,272    |       |
| Tourist  trains and cruises                |       | 5,166    |       | 4,597    |       |
| Central  overheads                         |       | (4,654   | )          | (3,607   | )          |
|                                       |       | $        | 37,199     |     | $          | 27,176 |   |
|                                            |            |          |            |          |            |  |  |  |  |

 

17

----

 
| **Three  months ended June 30,**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                          |       |     |       |     |       |
| Segment  EBITDA                                                       |       | $        | 37,199     |     | $          | 27,176 |   |
| Less:                                                                 |       |     |       |     |       |
| Depreciation  and amortization                                        |       | 8,632    |       | 7,014    |       |
| Net finance  costs                                                    |       | 6,231    |       | 4,876    |       |
| Provision  for income taxes                                           |       | 3,420    |       | 2,375    |       |
| Share of  provision for income taxes of unconsolidated companies |       | 459      |       | —   |       |
| Net earnings                                                          |       | $        | 18,457     |     | $          | 12,911 |   |

 

Financial information regardinggeographic areas based on the location of properties is as follows (dollars inthousands):

 
| **Three  months ended June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                              |       |     |       |     |       |
| Europe                                |       | $        | 73,930     |     | $          | 55,103 |   |
| North  America                        |       | 30,356   |       | 26,430   |       |
| Rest of  world                        |       | 21,966   |       | 19,003   |       |
|                                  |       | $        | 126,252    |     | $          | 100,536 |   |

 
| **Six  months ended June 30,**        | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| Revenue:                                   |       |     |       |     |       |
| Hotels and  restaurants                    |       |     |       |     |       |
| Owned hotels  – Europe                |       | $        | 71,475     |     | $          | 49,134 |   |
| – North  America                      |       | 46,932   |       | 39,461   |       |
| – Rest of  world                      |       | 45,430   |       | 37,503   |       |
| Hotel  management/part ownership interests |       | 4,418    |       | 3,429    |       |
| Restaurants                                |       | 10,989   |       | 9,981    |       |
|                                       |       | 179,244  |       | 139,508  |       |
| Tourist  trains and cruises                |       | 27,497   |       | 24,862   |       |
|                                       |       | $        | 206,741    |     | $          | 164,370 |   |
|                                       |       |     |       |     |       |
| Depreciation  and amortization:            |       |     |       |     |       |
| Hotels and  restaurants                    |       |     |       |     |       |
| Owner hotels  – Europe                |       | $        | 6,297      |     | $          | 4,927 |   |
| – North  America                      |       | 3,543    |       | 3,128    |       |
| – Rest of  world                      |       | 4,320    |       | 3,898    |       |
| Restaurants                                |       | 437      |       | 391      |       |
|                                       |       | 14,597   |       | 12,344   |       |
| Tourist  trains and cruises                |       | 1,853    |       | 1,625    |       |
|                                       |       | $        | 16,450     |     | $          | 13,969 |   |

 

18

----

 
| **Six  months ended June 30,**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Segment  EBITDA:                                                      |       |     |       |     |       |
| Owned hotels  – Europe                                           |       | $        | 17,958     |     | $          | 9,808 |   |
| – North  America                                                 |       | 11,494   |       | 9,015    |       |
| – Rest of  world                                                 |       | 10,038   |       | 8,089    |       |
| Hotel management/part  ownership interests                            |       | 8,614    |       | 7,684    |       |
| Restaurants                                                           |       | 2,650    |       | 1,970    |       |
| Tourist  trains and cruises                                           |       | 5,058    |       | 4,341    |       |
| Central  overheads                                                    |       | (9,151   | )          | (7,414   | )          |
|                                                                  |       | $        | 46,661     |     | 33,493     |   |
|                                                                  |       |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                          |       |     |       |     |       |
| Segment  EBITDA                                                       |       | $        | 46,661     |     | $          | 33,493 |   |
| Less:                                                                 |       |     |       |     |       |
| Depreciation  and amortization                                        |       | 16,450   |       | 13,969   |       |
| Net finance  costs                                                    |       | 9,730    |       | 9,856    |       |
| Provision  for income taxes                                           |       | 3,122    |       | 1,363    |       |
| Share of  provision for income taxes of unconsolidated companies |       | 459      |       | —   |       |
| Net earnings                                                          |       | $        | 16,900     |     | $          | 8,305 |   |
|                                                                  |       |     |       |     |       |
| Earnings  from unconsolidated companies:                              |       |     |       |     |       |
| Hotels and  restaurants                                               |       |     |       |     |       |
| Hotel  management/part ownership interests                            |       | $        | 4,071      |     | $          | 4,255 |   |
| Restaurants                                                           |       | 157      |       | 157      |       |
|                                                                  |       | 4,228    |       | 4,412    |       |
| Tourist  trains and cruises                                           |       | 1,311    |       | 1,516    |       |
|                                                                  |       | $        | 5,539      |     | $          | 5,928 |   |
|                                                                  |       |     |       |     |       |
| Capital  expenditure:                                                 |       |     |       |     |       |
| Owned hotels  – Europe                                           |       | $        | 35,891     |     | $          | 16,274 |   |
| – North  America                                                 |       | 11,686   |       | 4,559    |       |
| – Rest of  world                                                 |       | 7,061    |       | 7,314    |       |
| Hotel management/part  ownership interests                            |       | —   |       | —   |       |
| Restaurants                                                           |       | 462      |       | 146      |       |
| Tourist  trains and cruises                                           |       | 2,925    |       | 636      |       |
|                                                                  |       | $        | 58,025     |     | $          | 28,929 |   |

 

Financial information regardinggeographic areas based on the location of properties is as follows (dollars inthousands):

 
| **Six  months ended June 30,** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                            |       |     |       |     |       |
| Europe                              |       | $        | 96,672     |     | $          | 72,239 |   |
| North  America                      |       | 59,502   |       | 51,045   |       |
| Rest of  world                      |       | 50,567   |       | 41,086   |       |
|                                |       | $        | 206,741    |     | $          | 164,370 |   |

 

19

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**13.  Related party transactions**

 

For the three months ended June 30,2005, OEH paid subsidiaries of SCL $1,456,000 (2004 - $1,307,000) for theprovision of various services under a services agreement between OEH andSCL.  For the six months ended June 30,2005, OEH paid subsidiaries of SCL $2,979,000 (2004 - $2,676,000) for theprovision of various services under a services agreement between OEH andSCL.  These amounts have been settled inaccordance with the services agreement and are included in selling, general andadministrative expenses.

 

OEH guarantees a $3,000,000 bankloan to Eastern and Oriental Express Ltd. in which OEH has a minorityshareholder interest.  This guarantee wasin place before December 31, 2002.

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method) and has made loans to the hotel-owningcompany.  For the three months ended June 30,2005, OEH earned $1,520,000 (2004 - $1,371,000) in management fees which arerecorded in revenue, and $2,480,000 (2004 - $2,020,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.  For the six months ended June 30,2005, OEH earned $2,456,000 (2004 - $2,231,000) in management fees which arerecorded in revenue, and $4,668,000 (2004 - $3,949,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.

 

OEH manages under long-term contracts the Hotel Monasterio and theMachu Picchu Sanctuary Lodge owned by its 50/50 joint venture with localPeruvian interests, as well as the 50/50-owned PeruRail operation, and providesloans, guarantees and other credit accommodation to these joint ventures.  In the three months ended June 30, 2005,OEH earned management and guarantee fees of $1,174,000 (2004 - $1,155,000) andloan interest of $29,000 (2004 - $26,000) which are recorded in earnings fromunconsolidated companies.  In the sixmonths ended June 30, 2005, OEH earned management and guarantee fees of$2,068,000 (2004 - $1,606,000) and loan interest of $58,000 (2004 - $50,000)which are recorded in earnings from unconsolidated companies.  At June 30, 2005, loans to the hotelsaggregated $2,000,000, bear interest at a spread over LIBOR and come due in2005.  At the same date, OEH had a$750,000 subordinated loan to the PeruRail operation with an indefinite maturitydate and interest also at a spread over LIBOR. All of the guarantees relating to the Company’s investments in Peru werein place prior to December 31, 2002.

 

OEH manages, under a long-term contract, the Hotel Ritz in Madrid,Spain, in which OEH owns a 50% interest and is accounted for under the equitymethod.  For the three months endedJune 30, 2005, OEH earned $328,000 (2004 - $270,000) in management fees,which are included in revenue.  For thesix months ended June 30, 2005, OEH earned $569,000 (2004 - $448,000) inmanagement fees, which are included in revenue.

 

20

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# **ITEM 2.****                  ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

#  

**Results ofOperations**

 

Three Months ended June 30,2005 compared to Three months ended June 30, 2004

 

OEH’s operating results for the three monthsended June 30, 2005 and 2004, expressed as a percentage of revenue, wereas follows:

 
| ** **                                       | ** ** | **Three months  ended June 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **%**                                 | ** ** | **%** | ** ** |
| Revenue:                                         |       |                                  |       |   |   |
| Hotels and  restaurants                          |       | 84                                    |       | 82 |   |
| Tourist  trains and cruises                      |       | 16                                    |       | 18 |   |
|                                             |       | 100                                   |       | 100 |   |
| Expenses:                                        |       |                                  |       |   |   |
| Depreciation  and amortization                   |       | 6                                     |       | 7 |   |
| Operating                                        |       | 46                                    |       | 48 |   |
| Selling,  general and administrative             |       | 28                                    |       | 29 |   |
| Net finance  costs                               |       | 5                                     |       | 5 |   |
| Earnings  before income taxes                    |       | 15                                    |       | 11 |   |
| Provision  from income taxes                     |       | (3                                    | )          | (2 | ) |
| Earnings  from unconsolidated companies          |       | 3                                     |       | 4 |   |
| Net earnings  as a percentage of total revenue . |       | 15                                    |       | 13 |   |

 

Segment net earnings before interest, tax(including tax on unconsolidated companies), depreciation and amortization(“segmentEBITDA”) of OEH’s operations for the three months ended June 30, 2005 and2004 are analyzed as follows (dollars in millions):

 
| ** **                  | ** ** | **Three months ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Segment  EBITDA:            |       |                                  |       |   |   |
| Owned hotels                |       |                                  |       |   |   |
| Europe                      |       | $                                     | 21.1       |   | $ | 12.9 |   |
| North  America              |       | 5.3                                   |       | 4.7 |   |
| Rest of the world           |       | 2.9                                   |       | 2.5 |   |
| Hotel  management interests |       | 5.7                                   |       | 4.8 |   |
| Restaurants                 |       | 1.6                                   |       | 1.3 |   |
| Tourist  trains and cruises |       | 5.2                                   |       | 4.6 |   |
| Central  overheads          |       | (4.6                                  | )          | (3.6 | ) |
| Segment  EBITDA             |       | $                                     | 37.2       |   | $ | 27.2 |   |

 

21

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Theforegoing segment EBITDA reconciles to net earnings as follows (dollars inmillions):

 
| ** **                     | ** ** | **Three months ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Segment net  earnings          |       | $                                     | 18.5       |   | $ | 12.9 |   |
| Add:                           |       |                                  |       |   |   |
| Depreciation  and amortization |       | 8.6                                   |       | 7.0 |   |
| Net finance  costs             |       | 6.2                                   |       | 4.9 |   |
| Provision  for income taxes    |       | 3.9                                   |       | 2.4 |   |
| Segment  EBITDA                |       | $                                     | 37.2       |   | $ | 27.2 |   |

 

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

 

Operating information for OEH’s owned hotelsfor the three months ended June 30, 2005 and 2004 is as follows:

 

22

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| ** **                      | ** ** | **Three months  ended  June 30,** | ** ** | ** ** | ** ** | ** **    | ** ** |
|---------------------------------|------------|----------------------------------------|------------|------------|------------|---------------|------------|
| ** **                      | ** ** | **2005**                               | ** ** | **2004**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|                            |       |                                   |       |       |       |          |       |   |   |
| Average Daily Rate (in dollars) |       |                                   |       |       |       |          |       |   |   |
| Europe                          |       | 582                                    |       | 657        |       |          |       |   |   |
| North  America                  |       | 315                                    |       | 317        |       |          |       |   |   |
| Rest of the  world              |       | 239                                    |       | 215        |       |          |       |   |   |
| Worldwide                       |       | 395                                    |       | 377        |       |          |       |   |   |
|                            |       |                                   |       |       |       |          |       |   |   |
| Rooms Sold (in thousands)       |       |                                   |       |       |       |          |       |   |   |
| Europe                          |       | 55                                     |       | 34         |       |          |       |   |   |
| North  America                  |       | 43                                     |       | 39         |       |          |       |   |   |
| Rest of the world               |       | 45                                     |       | 44         |       |          |       |   |   |
| Worldwide                       |       | 143                                    |       | 117        |       |          |       |   |   |
|                            |       |                                   |       |       |       |          |       |   |   |
| RevPAR (in  dollars)            |       |                                   |       |       |       |          |       |   |   |
| Europe                          |       | 373                                    |       | 375        |       |          |       |   |   |
| North  America                  |       | 224                                    |       | 229        |       |          |       |   |   |
| Rest of the  world              |       | 129                                    |       | 114        |       |          |       |   |   |
| Worldwide                       |       | 246                                    |       | 225        |       |          |       |   |   |
|                            |       |                                   |       |       |       |          |       |   |   |
| ** **                      | ** ** | ** **                             | ** ** | ** ** | ** ** | **Change  %** | ** ** |
| ** **                      | ** ** | ** **                             | ** ** | ** ** | ** ** | **Dollars**   | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in dollars)  |       |                                   |       |       |       |          |       |   |   |
| Europe                          |       | 423                                    |       | 377        |       | 12            | %          | 7 | % |
| North America                   |       | 234                                    |       | 229        |       | 2             | %          | 2 | % |
| Rest of the world               |       | 129                                    |       | 114        |       | 13            | %          | 11 | % |
| Worldwide                       |       | 244                                    |       | 223        |       | 9             | %          | 7 | % |

 

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

 

*Overview*

 

The net earnings for the period were $18.5million ($0.47 per common share) on revenue of $126.3 million, compared withnet earnings of $12.9 million ($0.38 per common share) on revenue of $100.5million in the prior year second quarter. The results for the quarter represent a 43% increase in net earningsover the prior year quarter and a 24% increase in earnings per share.

 

23

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This is largely due to improved tradingconditions in all businesses in which OEH operates and is the general trend inthe lodging and hospitality business worldwide as well as the acquisition ofthe Grand Hotel Europe.  With little forecastgrowth in additional supply over the next few years in luxury hotel roomscombined with an increasing demand for luxury travel experiences from ademographically ageing and wealthier population, the outlook for continuingimprovements in trading conditions is very positive.

 

*Revenue*

 

Total revenue increased by $25.8 million, or26%, from $100.5 million in the three months ended June 30, 2004 to $126.3million in the three months ended June 30, 2005.  Hotels and restaurants revenue increased by$24.7 million, or 30%, from $82.2 million in the three months ended June 30,2004 to $106.8 million in the three months ended June 30, 2005, andtourist trains and cruises increased by $1.2 million, or 7%, from $18.3 millionfor the three months ended June 30, 2004 to $19.5 million for the threemonths ended June 30, 2005.

 

The increase for hotels and restaurants wasmainly due to an increase at OEH’s owned hotels of $23.7 million, or 32%, from$74.7 million in the three months ended June 30, 2004 to $98.4 million inthe three months ended June 30, 2005. The revenue from restaurants increased by $0.4 million, or 8%, from $5.4million in the three months ended June 30, 2004 to $5.8 million in thethree months ended June 30, 2005 which was mainly due to the ‘21’ Club inNew York which has seen improvements in its banqueting business followingincreased corporate entertainment activity.

 

For owned hotels overall, same store RevPAR inU.S. dollars increased by 9% in the three months ended June 30, 2005compared to the three months ended June 30, 2004.  Measured in local currencies this increasewas 7%, of which around 3% was due to improved occupancy and 4% to higherachieved daily rate.

 

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

 

*Europe*.  Revenue increased by $17.4 million, or 47%,from $37.3 million for the three months ended June 30, 2004 to $54.7million for the three months ended June 30, 2005.  This increase included revenue from the GrandHotel Europe, St Petersburg, which was acquired on February 8, 2005.  The revenue from this hotel for the threemonths ended June 30, 2005 was $11.3 million.

 

24

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On a same store basis, RevPAR in local currencyincreased by 7%, but in U.S. dollars this translated into an increase of 12% asthe euro was stronger against the dollar in the second quarter of 2005 comparedto the second quarter of 2004.  TheRevPAR increase in local currency was principally due to increased occupancy atthe hotels.

 

*NorthAmerica*.  Revenueincreased by $3.5 million, or 17%, from $19.9 million in the three months endedJune 30, 2004 to $23.4 million in the three months ended June 30,2005.  This increase included revenuefrom El Encanto which was acquired on November 1, 2004.  The revenue from this hotel in the secondquarter of 2005 was $1.9 million. Excluding revenue from El Encanto, revenue increased by $1.6 million, or8%, from $20.0 million for the three months ended June 30, 2004 to $21.6million for the three months ended June 30, 2005.

 

On a same store basis, RevPAR increased by 2%which was driven almost entirely by increased occupancy.

 

*Rest ofthe World*.  Revenueincreased by $2.8 million, or 16%, from $17.4 million in the three months endedJune 30, 2004 to $20.2 million in the three months ended June 30,2005.

 

The RevPAR on a same store basis for the restof the world region increased by 11% in local currencies in the three monthsended June 30, 2005 compared to the three months ended June 30,2004.  Approximately 1% of this increasewas due to increased occupancies at the hotels and the rest was due to a higherachieved average daily rate.  This RevPARincrease in local currencies translated to a 13% increase when expressed inU.S. dollars primarily as the South African rand and Australian dollar werestronger against the U.S. dollar in the period over the comparable period of2004.

 

*Depreciationand amortization*

 

Depreciation and amortization increased by $1.6million, or 23%, from $7.0 million in the three months ended June 30, 2004to $8.6 million in the three months ended June 30, 2005, primarily due tothe effect of acquisitions and capital expenditures in 2004 and 2005 as well asthe effect of the weakness of the U.S. dollar against currencies in which OEHrecords some of its assets.

 

25

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*Operatingexpenses*

 

Operating expenses increased by $10.4 million,or 22%, from $47.9 million in the three months ended June 30, 2004 to$58.3 million in the three months ended June 30, 2005, mainly due to theeffect of the weakness of the U.S. dollar against currencies in which OEHincurs operating expenses, increased occupancies at the hotels and acquisitionof additional hotels in 2004 and 2005.

 

*Selling,general and administrative expenses*

 

Selling, general and administrative expensesincreased by $5.9 million, or 20%, from $29.1 million in the three months endedJune 30, 2004 to $35.0 million in the three months ended June 30,2005, mainly due to the effect of the weakness of the U.S. dollar againstcurrencies in which OEH incurs these expenses and acquisitions of additionalhotels in 2004 and 2005.

 

*Earningsfrom operations before net finance costs*

 

Earnings from operations increased by $7.8million from earnings of $16.5 million in the three months ended June 30,2004 to earnings of $24.3 million in the three months ended June 30, 2005,due to the factors described above.

 

*Netfinance costs*

 

Net finance costs increased by $1.3 million, or28%, from $4.9 million for the three months ended June 30, 2004 to $6.2million for the three months ended June 30, 2005.  This was due to increased interest rates onU.S. dollar borrowings and the interest on the debt for the financing ofacquisitions made in 2004 and 2005.

 

*Provision forincome taxes*

 

The provision for income taxes increased by$1.0 million, from a provision of $2.4 million in the three months ended June 30,2004 to a provision of $3.4 million in the three months ended June 30,2005. The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income taxprovision was attributable to income taxes incurred by subsidiaries operatingin jurisdictions that impose an income tax. The increased provision was due to the increased profitability of someof these subsidiaries.

 

*Earningsfrom unconsolidated companies*

 

Earnings from unconsolidated companiesincreased by $0.2 million, or 6%, from $3.6 million in the three months ended June30, 2004 to $3.8 million in the three months ended June 30, 2005.

 

26

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Six Months ended June 30,2005 compared to Six Months ended June 30, 2004

 

OEH’s operating results for the six monthsended June 30, 2005 and 2004, expressed as a percentage of revenue, were asfollows:

 
| ** **                                     | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **%**                               | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                |       |   |   |
| Hotels and  restaurants                        |       | 87                                  |       | 85 |   |
| Tourist  trains and cruises                    |       | 13                                  |       | 15 |   |
|                                           |       | 100                                 |       | 100 |   |
| Expenses:                                      |       |                                |       |   |   |
| Depreciation  and amortization                 |       | 8                                   |       | 8 |   |
| Operating                                      |       | 48                                  |       | 50 |   |
| Selling,  general and administrative           |       | 32                                  |       | 33 |   |
| Net finance  costs                             |       | 5                                   |       | 7 |   |
| Earnings  before income taxes                  |       | 7                                   |       | 2 |   |
| Provision  for income taxes                    |       | 2                                   |       | (1 | ) |
| Earnings  from unconsolidated companies        |       | 3                                   |       | 4 |   |
| Net earnings  as a percentage of total revenue |       | 8                                   |       | 5 |   |

 

Segment EBITDA of OEH’s operations for the sixmonths ended June 30, 2005 and 2004 are analyzed as follows (dollars inmillions):

 
| ** **                  | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Segment  EBITDA:            |       |                                |       |   |   |
| Owned  hotels:              |       |                                |       |   |   |
| Europe                      |       | $                                   | 18.0       |   | $ | 9.8 |   |
| North  America              |       | 11.5                                |       | 9.0 |   |
| Rest of the world           |       | 10.0                                |       | 8.1 |   |
| Hotel  management interests |       | 8.6                                 |       | 7.7 |   |
| Restaurants                 |       | 2.7                                 |       | 2.0 |   |
| Tourist  trains and cruises |       | 5.1                                 |       | 4.3 |   |
| Central  overheads          |       | (9.2                                | )          | (7.4 | ) |
| Segment  EBITDA             |       | $                                   | 46.7       |   | $ | 33.5 |   |

 

Theforegoing segment EBITDA reconciles to net earnings as follows (dollars inmillions):

 

27

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| ** **                                                       | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Segment net  earnings                                            |       | $                                   | 16.9       |   | $ | 8.3 |   |
| Add:                                                             |       |                                |       |   |   |
| Depreciation  and amortization                                   |       | 16.5                                |       | 13.9 |   |
| Net finance  costs                                               |       | 9.7                                 |       | 9.9 |   |
| Provision  for income taxes                                      |       | 3.6                                 |       | 1.4 |   |
| Share of  provision for income taxes of unconsolidated companies |       | —                              |       | — |   |
| Segment  EBITDA                                                  |       | $                                   | 46.7       |   | $ | 33.5 |   |

 

Operating information for OEH’s owned hotels forthe six months ended June 30, 2005 and 2004 is as follows:

 
| ** **                      | ** ** | **Six months ended  June 30** | ** ** | ** ** | ** ** | ** **    | ** ** |
|---------------------------------|------------|------------------------------------|------------|------------|------------|---------------|------------|
| ** **                      | ** ** | **2005**                           | ** ** | **2004**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|                            |       |                               |       |       |       |          |       |   |   |
| Average Daily Rate (in dollars) |       |                               |       |       |       |          |       |   |   |
| Europe                          |       | 518                                |       | 571        |       |          |       |   |   |
| North  America                  |       | 349                                |       | 346        |       |          |       |   |   |
| Rest of the  world              |       | 274                                |       | 236        |       |          |       |   |   |
| Worldwide                       |       | 373                                |       | 351        |       |          |       |   |   |
|                            |       |                               |       |       |       |          |       |   |   |
| Rooms Sold (in thousands)       |       |                               |       |       |       |          |       |   |   |
| Europe                          |       | 78                                 |       | 49         |       |          |       |   |   |
| North  America                  |       | 83                                 |       | 73         |       |          |       |   |   |
| Rest of the world               |       | 95                                 |       | 91         |       |          |       |   |   |
| Worldwide                       |       | 256                                |       | 213        |       |          |       |   |   |
|                            |       |                               |       |       |       |          |       |   |   |
| RevPAR (in  dollars)            |       |                               |       |       |       |          |       |   |   |
| Europe                          |       | 294                                |       | 301        |       |          |       |   |   |
| North  America                  |       | 239                                |       | 236        |       |          |       |   |   |
| Rest of the  world              |       | 158                                |       | 130        |       |          |       |   |   |
| Worldwide                       |       | 225                                |       | 205        |       |          |       |   |   |
|                            |       |                               |       |       |       |          |       |   |   |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Change  %** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | **Dollars**   | ** ** | **Local********Currency** | ** ** |
| Same Store RevPAR (in dollars)  |       |                               |       |       |       |          |       |   |   |
| Europe                          |       | 341                                |       | 306        |       | 12            | %          | 7 | % |
| North America                   |       | 254                                |       | 236        |       | 8             | %          | 8 | % |
| Rest of the world               |       | 158                                |       | 132        |       | 20            | %          | 16 | % |
| Worldwide                       |       | 233                                |       | 207        |       | 13            | %          | 10 | % |

 

28

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*Overview*

 

The net earnings for the period were $16.9million ($0.46 per common share) on revenue of $206.7 million, compared withnet earnings of $8.3 million ($0.24 per common share) on revenue of $164.4million in the prior year first half. This represents an improvement of 104% in net earnings in the periodover the prior year period and an improvement of 92% in earnings per commonshare.

 

*Revenue*

 

Total revenue increased by $42.4 million, or26%, from $164.4 million in the six months ended June 30, 2004 to $206.8million in the six months ended June 30, 2005.  Hotels and restaurants revenue increased by$39.7 million, or 29%, from $139.5 million in the six months ended June 30,2004 to $179.2 million in the six months ended June 30, 2005, and touristtrains and cruises increased by $2.7 million, or 12%, from $24.8 million forthe six months ended June 30, 2004 to $27.5 million for the six monthsended June 30, 2005.

 

The increase for hotels and restaurants wasmainly due to an increase at OEH’s owned hotels of $37.7 million, or 30%, from$126.1 million in the six months ended June 30, 2004 to $163.8 million inthe six months ended June 30, 2005. The revenue from restaurants increased by $1.0 million, or 10%, from$10.0 million in the six months ended June 30, 2004 to $11.0 million inthe six months ended June 30, 2005 which was mainly due to the ‘21’ Clubin New York which has seen improvements in its banqueting business followingincreased corporate entertainment activity.

 

For owned hotels overall, same store RevPAR inU.S. dollars increased by 13% in the six months ending June 30, 2005compared to the six months ending June 30, 2004.  Measured in local currencies this increasewas 10%, of which 5% was due to improved occupancy and 5% to higher achieveddaily rate.

 

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

 

*Europe*.  Revenue increased by $22.3 million, or 45%,from $49.1 million for the six months ended June 30, 2004 to $71.5 millionfor the six months ended June 30, 2005. This increase included revenue from the Grand Hotel Europe, StPetersburg, which was acquired on February 8, 2005.  The revenue from the hotel between this dateand June 30, 2005 was $14.3 million.

 

29

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On a same store basis, RevPAR in local currencyincreased by 7% (5% in occupancy and 2% in higher average daily rate), but inU.S. dollars this translated into an increase of 12% as the euro was strongeragainst the dollar in the second quarter of 2005 compared to the second quarterof 2004.

 

*NorthAmerica*.  Revenueincreased by $7.4 million, or 19%, from $39.5 million in the six months ended June 30,2004 to $46.9 million in the six months ended June 30, 2005.  This increase included revenue from ElEncanto which was acquired on November 1, 2004.  The revenue from this hotel in the six monthsto June 30, 2005 was $3.1 million. Excluding revenue from El Encanto, revenue increased by $4.3 million, or11%, from $39.5 million for the six months ended June 30, 2004 to $43.8million for the six months ended June 30, 2005.

 

On a same store basis, RevPAR increased by 8%which was driven by a 4% increase in occupancy and a 4% improvement in achievedaverage daily rate.

 

*Rest ofthe World*.  Revenueincreased by $7.9 million, or 21%, from $37.5 million in the six months ended June 30,2004 to $45.4 million in the six months ended June 30, 2005.

 

The RevPAR on a same store basis for the restof the world region increased by 16% in local currencies in the six monthsended June 30, 2005 compared to the six months ended June 30,2004.  Approximately 6% of this increasewas due to increased occupancies at the hotels and the rest was due to a higherachieved average daily rate.  This RevPARincrease in local currencies translated to a 20% increase when expressed in U.S.dollars primarily as the South African rand and Australian dollar were strongeragainst the U.S. dollar in the period over the comparable period of 2004.

 

*Depreciationand amortization*

 

Depreciation and amortization increased by $2.5million, or 18%, from $14.0 million in the six months ended June 30, 2004to $16.5 million in the six months ended June 30, 2005, primarily due tothe effect of acquisitions and capital expenditures in 2004 as well as theeffect of the weakness of the U.S. dollar against currencies in which OEHrecords some of its assets.

 

*Operatingexpenses*

 

Operating expenses increased by $17.9 million,or 22%, from $81.8 million in the six months ended June 30, 2004 to $99.7million in the six months ended June 30, 2005, mainly due to the effect ofthe weakness of the U.S. dollar against currencies in which OEH incursoperating expenses, increased occupancies at the hotels and acquisition ofadditional hotels in 2004 and 2005.

 

30

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*Selling, generaland administrative expenses*

 

Selling, general and administrative expensesincreased by $11.4 million, or 21%, from $55.0 million in the six months ended June 30,2004 to $66.4 million in the six months ended June 30, 2005, mainly due tothe effect of the weakness of the U.S. dollar against currencies in which OEHincurs these expenses and acquisitions of additional hotels in 2004 and 2005.

 

*Earningsfrom operations before net finance costs*

 

Earnings from operations increased by $10.6million, or 82%, from earnings of $13.6 million in the six months ended June 30,2004 to earnings of $24.2 million in the six months ended June 30, 2005,due to the factors described in the overview above.

 

*Netfinance costs*

 

Net finance costs reduced by $0.2 million, from$9.9 million for the six months ended June 30, 2004 to $9.7 million forthe six months ended June 30, 2005, which included a foreign exchange gainof $3.6 million.  Excluding this gain,net finance costs increased by $3.4 million, or 34%, from $9.9 million for thesix months ended June 30, 2004 to $13.3 million for the six months ended June 30,2005.

 

*Provisionfor income taxes*

 

The provision for income taxes increased by$1.8 million, from a provision of $1.4 million in the six months ended June 30,2004 to a provision of $3.1 million in the six months ended June 30, 2005.The Company is incorporated in Bermuda, which does not impose an incometax.  Accordingly, the entire income taxprovision was attributable to subsidiaries operating in jurisdictions thatimpose an income tax.  The increasedprovision was mainly due to the increased profitability of some of thesesubsidiaries.

 

*Earningsfrom unconsolidated companies*

 

Earnings from unconsolidated companies reducedby $0.4 million, or 7%, from $5.9 million in the six months ended June 30,2004 to $5.5 million in the six months ended June 30, 2005.  This was mainly due to lower earnings fromOEH’s investment in the Ritz, Madrid due to poor market conditions in Madrid.

 

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**Liquidityand Capital Resources**

 

*WorkingCapital*

 

OEH had cash and cash equivalents of $79.1million at June 30, 2005, $6.5 million less than the $85.6 million at December 31,2004.  At June 30, 2005, the undrawnamounts available to OEH under its short-term lines of credit were $13.2million.  In addition, at June 30,2005 there were undrawn amounts committed under long-term facilities of $85.0million.  OEH’s total cash andavailability at June 30, 2005 was, therefore, $177.3 million including theundrawn short-term lines.

 

Current assets less current liabilities,including the current portion of long-term debt, resulted in a working capitaldeficit of $21.5 million at June 30, 2005, a decrease in the workingcapital of $21.5 million from a balance of zero at December 31, 2004.

 

OEH’s business does not require the maintenanceof significant inventories or receivables and, therefore, working capital isnot regarded as the most appropriate measure of liquidity.

 

*Cash Flow*

 

*OperatingActivities*.  Net cashprovided by operating activities increased by $5.5 million from $22.7 millionfor the six months ended June 30, 2004 to $28.2 million for the six monthsended June 30, 2005, due to the increase in net earnings of $8.6 millionfor the period over the prior year period, partly offset by an increase inworking capital.

 

*InvestingActivities*.  Cash used ininvesting activities increased by $113.0 million to $153.0 million for the sixmonths ended June 30, 2005, compared to $40.0 million for the six monthsended June 30, 2004.  This wasmainly due to the acquisition of the Grand Hotel Europe on February 8,2005.

 

*FinancingActivities*.  Cash providedby financing activities for the six months ended June 30, 2005 was anincrease of $125.1 million from cash used in financing activities of $2.5million in the six months ended June 30, 2004.  In the six months ended June 30, 2005,OEH had proceeds from borrowings under long-term debt of $108.0 million whichincluded $58.5 million of finance on the Grand Hotel Europe acquisition,compared to proceeds of $13.0 million for the six months ended June 30,2004.  In the six months ended June 30,2005, OEH had net proceeds from the issuance of common shares of $122.8million, which were primarily used to pay down a revolving credit facilitysecured on OEH’s Italian hotels ($91.0 million) which can be re-drawn at anytime with the balance going to cash to be used for general corporate purposesincluding acquisitions and investments.

 

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*CapitalCommitments*.  There were$21.1 million of capital commitments outstanding as of June 30, 2005mainly on investments in owned hotels.

 

*Indebtedness*

 

At June 30, 2005, OEH had $554.1 millionof long-term debt secured by assets ($474.9 million net of cash), including thecurrent portion, which is repayable over periods of 1 to 11 years with aweighted average interest rate of 5.16**%.**  See Note 6 to the financial statementsregarding the maturity of long-term debt.

 

Approximately 35% of the outstanding principalwas drawn in Euros and the balance primarily in U.S. dollars.  At June 30, 2005, 98% of borrowings ofOEH were in floating interest rates.

 

*Liquidity*

 

OEH raised $122.0 million from the issue andsale of 5.05 million class A common shares during the first quarter of 2005 asreferred to above.

 

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

 

**RecentAccounting Pronouncements**

 

The Company has adopted SFAS No. 123R, “Share-BasedPayment”, effective January 1, 2005 and has chosen the modifiedprospective application as its transition method.  This resulted in an expense of $300,000 and $561,000in the three and six months ended June 30, 2005, respectively, relating to theamortization of the fair value of options granted prior to January 1,2005.  The expected expense in futureperiods on the outstanding non-vested share options granted prior to January 1,2005 is as follows at June 30, 2005 (dollars in thousands):

 
| **Year ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Remainder of 2005                |       | $          | 784        |   |
| 2006                             |       | 388        |       |
| 2007                             |       | 149        |       |
|                                  |            |            |            |  |

 

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The Company made no modifications tooutstanding share options prior to the adoption of SFAS No. 123R and hasapplied the valuation methodology and assumptions previously used to calculatethe pro-forma fair value of options granted as required under SFAS No. 123,“Accounting for Stock-Based Compensation”, in adopting SFAS No. 123R.  These are set out in more detail in Note 11to the financial statements in the Company’s 2004 Form 10-K annual report.  The Company expects that these assumptionswill continue to be appropriate in fair valuing options granted in thefuture.  The expected life of the optionsassumption may change over time. Currently the earliest grants to be awarded were made less than fiveyears ago.  The Company has made nochange to the quantity, types or terms of instruments used in its share-basedpayment programs.

 

Asof June 30, 2005, the Company’s significant accounting policies andestimates, which are described in Notes 1 and 15 to the financial statements inthe Company’s 2004 Form 10-K annual report, have not changed from December 31,2004 other than the change described above.

 

## **Critical Accounting Policies**

##  

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

 

**ITEM 3.****                 ****Quantitative and Qualitative Disclosures about MarketRisk**

 

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 to interest ratesarises mainly from the financing activities of OEH. Earnings are affected bychanges in interest rates on borrowings, principally based on U.S. dollar LIBORand EURIBOR, and on short-term cash investments.  If interest rates increased by 10%, with allother variables held constant, annual net finance costs of OEH would haveincreased by approximately $2,800,000 on an annual basis based on borrowings atJune 30, 2005. The interest rates on substantially all of OEH’s long-termdebt are adjusted regularly to reflect current market rates.  Accordingly, the carrying amounts approximatefair value.

 

The market risk relating to foreign currenciesand its effects have not changed materially during the three and six months endedJune 30, 2005 from those described in the Company’s 2004 Form 10-K annualreport.

 

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**ITEM 4.****                 ****Controls and Procedures**

 

The Company’s chief executive and financialofficers have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in SEC Rule 13a-15(e)) as of June 30, 2005 and,based on that evaluation, believe those disclosure controls and procedures areeffective as of that date.  There havebeen no changes in the Company’s internal control over financial reporting (asdefined in SEC Rule 13a-15(f)) during the second quarter of 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met such as preventionand detection of misstatement.  Inaddition, the design of any control system is based in part upon certainassumptions about the likelihood of future events.  Controls may become inadequate because ofchanges in conditions, or the degree of compliance with policies or proceduresmay deteriorate, for example.  Because ofthese and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

 

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**PART II - OTHER INFORMATION**

 

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

 

TheCompany convened and held an annual general meeting of shareholders on June 6,2005.  The holders of Class A and Bcommon shares, voting together, (i) duly elected John D. Campbell, James B.Hurlock, J. Robert Lovejoy, Daniel J. O’Sullivan, Georg R. Rafael, James B.Sherwood and Simon M.C. Sherwood as directors of the Company, and (ii) dulyappointed Deloitte & Touche LLP, a U.S. registered independent publicaccounting firm, as the Company’s independent auditor.  The number of votes on each matter was asfollows:

 

(i)           Election of directors:

 
| **Name**             | ** ** | **For**    | ** ** | **Authority Withheld** | ** ** |
|----------------------|------------|------------|------------|------------------------|------------|
|                 |       |       |       |                   |       |
| J.D.  Campbell       |       | 23,827,706 |       | 21,579                 |       |
| J.B. Hurlock         |       | 23,827,421 |       | 21,864                 |       |
| J.R. Lovejoy         |       | 23,827,711 |       | 21,574                 |       |
| D.J. O’Sullivan |       | 23,807,193 |       | 42,092                 |       |
| G.R. Rafael          |       | 23,827,411 |       | 21,874                 |       |
| J.B.  Sherwood       |       | 23,807,197 |       | 42,088                 |       |
| S.M.C.  Sherwood     |       | 23,807,492 |       | 41,793                 |       |

 

(ii)          Appointment of independent auditor: For23,826,500, Against 22,191, and Abstain 494.

 

# **ITEM 6.****                 ****Exhibits**

#  

Theindex to exhibits appears below, on the page immediately following thesignature page to this report.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                       | ORIENT-EXPRESS HOTELS LTD. |
|----------------------------|----------------------------|
|                       |                       |
|                       |                       |
|                       | By:                        |            /s/  J.G. Struthers |   |
|                       |                       | James G. Struthers |   |
|                       |                       | Vice President - Finance |   |
|                       |                       | and Chief Financial  Officer |   |
|                       |                       | (Principal  Accounting Officer) |   |
|                       |                       |
|                       |                       |
| Dated: August 9, 2005 |                       |

 

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# **EXHIBIT INDEX**

#  

| 3.1                                                                                                                        |   | – |   | Memorandum of Association  and Certificate of Incorporation of the Company, filed as Exhibit 3.1 to  Amendment No. 2 to |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
| the Company’s Registration  Statement on Form S-1 (Registration No. 333-12030) and incorporated herein by  reference. |
|                                                                                                                       |   |   |   |                                                                                                                    |
| 3.2                                                                                                                        |   | – |   | Bye-Laws of the Company, filed as Exhibit 3.2 to Amendment No. 4 to  the Company’s Registration Statement on       |
| Form S-1 (Registration No. 333-12030) and incorporated herein by  reference.                                               |
|                                                                                                                       |   |   |   |                                                                                                                    |
| 31                                                                                                                         |   | – |   | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                |
|                                                                                                                       |   |   |   |                                                                                                                    |
| 32                                                                                                                         |   | – |   | Section 1350 Certification.                                                                                        |

 

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