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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
 
 
 
 

  FORM 10-K
(Mark One)
 
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2012
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 001-16017
 
 
 
 
 
ORIENT-EXPRESS HOTELS LTD.
(Exact name of registrant as specified in its charter) 
Bermuda
 
98-0223493
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
22 Victoria Street,
Hamilton HM 12, Bermuda
(Address of principal executive offices)
Registrant’s telephone number, including area code:   (441) 295-2244
 
 
 
 
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
 
Name of each exchange on which registered
Class A Common Shares, $0.01 par value each
 
New York Stock Exchange
Preferred Share Purchase Rights
 
New York Stock Exchange
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None .
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x   No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o   No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable. See third paragraph under Item 1—Business.)
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large Accelerated Filer  x
 
Accelerated Filer  o
Non-Accelerated Filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x
 The aggregate market value of the class A common shares held by non-affiliates of the registrant computed by reference to the closing price on June 29, 2012 (the last business day of the registrant’s second fiscal quarter in 2012) was approximately $860,000,000 .
 As of February 15, 2013 , 103,010,639 class A common shares and 18,044,478 class B common shares of the registrant were outstanding.  All of the class B shares are owned by a subsidiary of the registrant ( see Note 16(d) to the Financial Statements (Item 8))
 
 
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE:  None
 


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FORWARD-LOOKING STATEMENTS
 
Forward-looking statements concerning the operations, performance, financial condition, plans and prospects of Orient-Express Hotels Ltd. and its subsidiaries are based on the current expectations, assessments and assumptions of management, are not historical facts, and are subject to various risks and uncertainties.
 
Forward-looking statements can be identified by the fact that they do not relate only to historical or current facts, and often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe” or other words of similar meaning.
 
Actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors, including those described in Item 1—Business, Item 1A—Risk Factors, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A—Quantitative and Qualitative Disclosures about Market Risk.
 
Investors are cautioned not to place undue reliance on these forward-looking statements which are not guarantees of future performance.  Orient-Express Hotels Ltd. undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise .


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PART I


ITEM 1.        Business
 
Orient-Express Hotels Ltd. (the “Company” and, together with its subsidiaries, “OEH”) is incorporated in the Islands of Bermuda and is a “foreign private issuer” as defined in Rule 3b-4 promulgated by the U.S. Securities and Exchange Commission (“SEC”) under the U.S. Securities Exchange Act of 1934 (the “1934 Act”) and in SEC Rule 405 under the U.S. Securities Act of 1933.  As a result, it is eligible to file its annual reports pursuant to Section 13 of the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file its interim reports on Form 6-K (in lieu of Forms 10-Q and 8-K).  However, the Company elects to file its annual and interim reports on Forms 10-K, 10-Q and 8-K, including any instructions therein that relate specifically to foreign private issuers.  The class A common shares of the Company are listed on the New York Stock Exchange (“NYSE”).
 
These reports and amendments to them are available free of charge on the Internet website of the Company as soon as reasonably practicable after they are filed electronically with the SEC.  The Internet website address is http://www.orient-express.com.  Unless specifically noted, information on the OEH website is not incorporated by reference into this Form 10-K annual report.
 
Pursuant to SEC Rule 3a12-3 under the 1934 Act regarding foreign private issuers, the proxy solicitations of the Company are not subject to the disclosure and procedural requirements of SEC Regulation 14A under the 1934 Act, and transactions in the Company’s equity securities by its officers, directors and significant shareholders are exempt from the reporting and liability provisions of Section 16 of the 1934 Act.
 
Introduction
 
OEH is a leading luxury hotel company and sophisticated adventure travel operator with exposure to both mature and emerging national economies.  The Company’s predecessor began acquiring hotels in 1976 and organized the Company in 1995.  OEH currently manages 46 properties (all but two of which it owns or part owns), consisting of 36 highly individual deluxe hotels, one stand-alone restaurant, six tourist trains and three river/canal cruise businesses.  These are located in 22 countries worldwide.  One hotel was sold in December 2012, but OEH is continuing to manage it for up to 12 months, another hotel is being renovated for scheduled opening in March 2013, and one river cruise ship is currently under construction and is scheduled to commence operation in mid-2013. OEH acquires or manages only very distinctive properties in areas of outstanding cultural, historic or recreational interest in order to provide luxury lifestyle experiences for the discerning traveler. 
 
The locations of OEH’s 46 properties are shown in the map on the preceding page, where they number 43 because the Hotel Splendido and Splendido Mare are both in Portofino, and three separate safari lodges operate as a unit in Botswana.  These five properties bring the total to 46 .
 
Hotels and restaurants represent the largest segment of OEH’s business, contributing 86% of revenue in 2012 , 86% of revenue in 2011 and 87% in 2010 .  Tourist trains and cruises accounted for 14% of revenue in 2012 , 14% of revenue in 2011 and 13% in 2010 .  Real estate activities accounted for the remaining revenue in each year. Approximately 90% of OEH’s customer revenue in 2012 was from leisure travelers, with approximately 35% originating from North America, 47% from Europe and the remaining 18% from elsewhere in the world.
 
OEH’s worldwide portfolio of hotels currently consists of 3,314 individual guest rooms and multiple-room suites, each known as a “key”.  Hotels owned by OEH in 2012 achieved an average daily room rate (“ADR”) of $469 ( 2011 - $465 ) and a revenue per available room (“RevPAR”) of $271 ( 2011 - $273 ).
 
Revenue, earnings and identifiable assets of OEH in 2012 , 2011 and 2010 for its business segments and geographic areas are presented in Note 22 to the Financial Statements (Item 8).
 
In recent years, OEH has sold to third parties a number of non-core properties not considered key to OEH’s portfolio of unique, high valued properties.  These have included Lilianfels Blue Mountains Resort in Australia west of Sydney and La Cabana restaurant in Buenos Aires sold during 2010, Hôtel de la Cité in Carcassonne, France sold during 2011, and Keswick Hall near Charlottesville, Virginia, Bora Bora Lagoon resort in French Polynesia, The Observatory Hotel in Sydney, and The Westcliff in Johannesburg sold during 2012.  OEH also contracted in 2012 to sell the Porto Cupecoy property development in Sint Maarten, Dutch West Indies, a sale completed in January 2013. These properties have been accounted for as discontinued operations in

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the three years ended December 31, 2012. See Note 2 to the Financial Statements. In addition, OEH's Peru hotel joint venture sold its Las Casitas del Colca hotel near Arequipa during 2012. See Note 5 to the financial statements.

Owned Hotels—Europe
 
Italy
 
Hotel Cipriani 95 keys—in Venice was built for the most part in the 1950s and is located on about five acres (part on long-term lease) on Giudecca Island across from the Piazza San Marco which is accessible by a free private boat service.  Most of the rooms have views overlooking the Venetian lagoon.  Features include fine cuisine in three indoor and outdoor restaurants, gardens and terraces encompassing an Olympic-sized swimming pool, a tennis court, a spa and a large banquet and meeting facility situated in an historic refurbished warehouse. Six guest rooms were refurbished in early 2012, bringing to 70 the total number of keys renovated in the last five years.
 
Hotel Splendido and Splendido Mare 85 keys—overlook picturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was built in 1901 and is surrounded by gardens and terraces which include a swimming pool and tennis court.  There are two restaurants each with open-air dining as well as banquet/meeting rooms, and a shuttle service linking the main hotel with the smaller Splendido Mare on the harbor below.  During the 2011-2012 winter closure, five new suites were built on the top floor of the main hotel.
 
Villa San Michele 46 keys—is located in Fiesole, a short distance from Florence.  Originally built as a monastery in the 15th century with a façade attributed to Michelangelo, it has stunning views over historic Florence and the Arno River Valley.  OEH has remodeled and expanded the guest accommodation to luxury standards in recent years including the addition of a swimming pool.  A shuttle service is provided into Florence.  The property occupies ten acres.
 
Hotel Caruso 50 keys—in Ravello is located on three hill-top acres overlooking the Amalfi coast near Naples and ancient Roman and Greek archaeological sites such as Pompeii and Paestum.  Once a nobleman’s palace, parts of the building date back to the 11th century.  Operated as a hotel for many years, OEH rebuilt the property after acquiring it and reopened in 2005.  Amenities include two restaurants, an outdoor swimming pool, spa and extensive gardens.

Grand Hotel Timeo 70 keys—in Taormina, Sicily was purchased in January 2010 and renovated during the winter closure periods since then.  With panoramic views of Mount Etna and the Gulf of Naxos from its main terrace, this hotel is widely considered the most luxurious hotel in Taormina and is situated in the city center next to the second century Greek Theater.  Built in 1873 on a total site of about ten acres, the hotel features a restaurant serving regional specialties, a spa and fitness center, outdoor swimming pool, and banqueting and conference facilities, all surrounded by six acres of parkland.
 
Villa Sant’Andrea 60 keys—was purchased and renovated at the same time as Grand Hotel Timeo. Built in 1830 on Taormina's Bay of Mazzarò with a private beach, the hotel has the atmosphere of a private villa set in lush gardens, a total site of about two acres, with many of the guest rooms and the hotel’s seafood restaurant looking onto the Calabrian coast.  OEH has built an outdoor swimming pool and began construction in late 2012 of six new poolside suites for completion in 2014. Grand Hotel Timeo and Villa Sant’Andrea are linked by a shuttle service so that guests may enjoy the facilities at both hotels.
 
All of these Italian properties operate seasonally, closing for varying periods during the winter.
 
Spain
 
La Residencia 67 keys—is located in the charming village of Deià on the rugged northwest coast of the island of Mallorca, Spain with stunning views of the Tramuntana Mountains, a UNESCO World Heritage site.  The core of La Residencia was originally created from two adjoining 16th and 17th century country houses set on an owned hillside site of 30 acres. The hotel features three restaurants including the gastronomic El Olivio, as well as two large outdoor swimming pools, tennis courts and a spa with an indoor pool.  It closes about two months each winter.
 
Portugal
 
Reid’s Palace 163 keys—is a famous hotel on the island of Madeira, situated on ten acres of semitropical gardens on a cliff top above the sea and the bay of Funchal, the main port city.  Opened in 1891, the hotel has five restaurants and banquet/meeting facilities.  Leisure and sports amenities include fresh and sea water swimming pools, a third tide-filled pool, tennis courts, ocean water sports, a spa and access to two championship golf courses.  It has year-round appeal, serving both winter escapes to the sun and regular summer holidays.

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United Kingdom
 
Le Manoir aux Quat’Saisons 32 keys—is located in a picturesque village in Oxfordshire, England about an hour’s drive west of London.  The main part of the hotel is a 16th century manor house set in 27 acres of gardens. Each suite has an entirely individual design.  The property was developed by Raymond Blanc, one of Britain’s famous chef-patrons, and the hotel’s restaurant has two stars in the Michelin Guide.  Mr. Blanc has given a commitment to remain the chef at the hotel and advises the restaurants at other OEH hotels.
 
Russia
 
Grand Hotel Europe 275 keys—in St. Petersburg, Russia was originally built in 1875. The hotel occupies one side of an entire city block on the fashionable Nevsky Prospect in the heart of the city near the Russian Museum, Philharmonic Society, Mikhailovsky Theater and other tourist and cultural attractions as well as the business center.  There are five restaurants on the premises, as well as a grand ballroom, meeting facilities, a health club and spa and several retail shops.  Luxury historic suites reflect the rich history of the hotel and city, named after famous guests like Pavarotti, Stravinsky and the Romanov tsars. The City of St. Petersburg owns a 6.5% minority interest in the hotel. During 2013, OEH plans to commence a three-year enhancement project at the hotel including creation of six ultra-luxury suites, a new food and beverage concept restaurant by a top designer, a renovated and expanded spa, and improved meeting rooms.
 
Owned Hotels—North America
 
United States
 
Charleston Place 435 keys—is located in the heart of historic Charleston, South Carolina, a popular destination for tourists and business meetings.  Opened in 1986, the hotel has two restaurants, extensive banqueting and conference space including a grand ballroom, a fitness center with spa and indoor swimming pool, and a shopping arcade of 20 retail outlets leased to unaffiliated parties.  The hotel also owns the adjacent historic Riviera Theater remodeled as additional conference space and retail shops. During 2013, OEH plans to start a three-year phased refurbishment of guest rooms, initially 145 keys.
 
While OEH has only a 19.9% equity interest in Charleston Place, OEH manages the property under an exclusive long-term contract and has a number of loans to the hotel outstanding . On evaluating its various interests in the hotel, OEH has concluded that it is the primary beneficiary of this variable interest entity and, accordingly, consolidates the assets and liabilities of the hotel in OEH’s balance sheets and consolidates the hotel’s results in OEH’s statements of operations, comprehensive income and cash flows.  See Note 3 to the Financial Statements.
 
The Inn at Perry Cabin 78 keys—was built in 1812 as a country inn located in St. Michaels, Maryland on the eastern shore of Chesapeake Bay.  Set on 25 waterfront acres that include an outdoor swimming pool as well as boating and fishing on the bay, it is an attractive conference and vacation destination, particularly for guests from the Washington, D.C., Baltimore and Philadelphia areas.  OEH expanded the hotel, including the addition of guest rooms, a conference facility, and spa, and during the 2011-2012 winter, refurbished 39 rooms in the historic part of the main building.  Vacant available land may be used in the future to expand the hotel or build other improvements.  See “Real Estate” below.
 
El Encanto 92 keys—in Santa Barbara, California is located in the hills above the restored Santa Barbara Mission, with views out to the Pacific Ocean.  Built in 1913 on a seven-acre owned site, the guest rooms are in cottages and low rise buildings spread throughout mature gardens.  OEH closed this hotel in late 2006 for significant renovation, including the addition of guest rooms, a new concept restaurant, and a spa, pool and fitness center.  During 2011, OEH recommenced the renovation and expansion and currently expects to reopen El Encanto in March 2013.
 
Caribbean
 
La Samanna 83 keys—is located on the island of St. Martin in the French West Indies.  Built in 1973, the hotel consists of several buildings on 16 acres of owned land along a 4,000-foot beach.  Amenities include two restaurants, two swimming pools, a spa, tennis courts, fitness and conference centers, boating and ocean water sports, and extensive gardens.  The hotel is open most of the year, seasonally closing during the autumn months.  During the 2011 closure, 46 guest rooms were refurbished, and during the 2012 closure, OEH renovated and reconfigured the lobby, main restaurant and bar.  As described under “Real Estate” below, OEH has developed part of the land adjoining La Samanna on the French side of St. Martin as for-sale residences.  Unsold villas next to La Samanna provide additional room stock for the hotel.
 

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Mexico
 
Maroma Resort and Spa 64 keys—is on Mexico’s Riviera Maya on the Caribbean coast of the Yucatan Peninsula, about 30 miles south of Cancun.  The resort opened in 1995 and is set in 25 owned acres of verdant jungle along a 1,000-foot beach.  The Cozumel barrier reef is offshore where guests may fish, snorkel and scuba-dive.  Important Mayan archaeological sites are nearby.  Rooms are arranged in low-rise villas and there are two restaurants, three swimming pools, tennis courts and extensive spa facilities.  OEH also owns a 28-acre tract adjacent to Maroma for hotel expansion or construction of other improvements.  See “Real Estate” below.
 
Casa de Sierra Nevada 37 keys—is a luxury resort in the colonial town of San Miguel de Allende, a UNESCO World Heritage site.  Opened in 1952, the hotel consists of nine owned Spanish colonial buildings built in the 16th and 18th centuries.  OEH has renovated the hotel, including its two restaurants, and has built new suites as well as a pool, spa and garden area.  The total site is approximately two acres.  OEH also owns a nearby cooking school and retail shop operated in conjunction with the hotel.
 
Owned Hotels—Rest of the World
 
South America
 
Copacabana Palace 239 keys—was built in the 1920s on a three-acre owned site facing Copacabana Beach near the central business district of Rio de Janeiro, Brazil. It is a famous hotel in South America and features two fine-dining restaurants, spacious function and banqueting rooms including the hotel’s refurbished former casino rooms with space for up to 1,800 persons, a 500-seat theater, a large swimming pool, spa and fitness center, and a roof-top tennis court and plunge pool. In 2011, 26 guest rooms in the main building and the Cipriani restaurant were refurbished and, during 2012, 119 additional guest rooms were refurbished and the lobby area was restyled and expanded, necessitating temporary closure of the main building for part of the year.  These improvements were undertaken in advance of Rio’s hosting the 2014 World Cup soccer tournament and 2016 Summer Olympics.
 
Hotel das Cataratas 193 keys—is located beside the famous Iguassu Falls in Brazil on the border with Argentina, OEH having been awarded a 20-year lease of the hotel by the Brazilian government in 2007.  It is the only hotel in the national park surrounding the falls, a UNESCO World Heritage site.  First opened in 1958 on about four acres, the hotel has two restaurants, conference facilities, a swimming pool, spa and tennis court, and tropical gardens looking onto the falls.  OEH recently completed a two-year renovation of the hotel and applied to the government to amend the lease including extension of the lease term.
 
Miraflores Park Hotel 82 keys—is located in the fashionable Miraflores residential district of Lima, Peru surrounded by parkland and facing the Pacific Ocean, yet near the commercial and cultural center of the city.  Opened in 1997, this all-suite owned hotel has two restaurants, a large ballroom, conference and meeting rooms, a rooftop outdoor pool, health and beauty facilities and a business center for guests, and occupies about one acre of land. OEH has arranged financing for planned renovation of the hotel in late 2013.
 
Southern Africa
 
Mount Nelson Hotel 209 keys—in Cape Town, South Africa is a famous historic property opened in 1899.  With beautiful gardens and pools, it stands just below Table Mountain and is within walking distance of the main business, civic and cultural center of the city.  The hotel has two restaurants (including the new concept Planet Restaurant opened in 2010), a ballroom, two swimming pools, tennis courts, and a fitness center and spa, all situated on ten acres of owned grounds.  In 2012, OEH renovated 30 guest rooms and the restaurant overlooking the main swimming pool and gardens. There is expansion potential for the hotel through conversion of adjacent residential properties owned by OEH into additional keys.
 
Khwai River Lodge, Eagle Island Camp and Savute Elephant Camp 39 keys in total—comprise OEH’s African safari experience in Botswana consisting of three separate game-viewing lodges.  Established in 1971, OEH long-term leases the lodge sites in the Okavango River delta and nearby game reserves, where African wildlife can be observed from open safari vehicles or boats.  Each camp has 12 or 15 twin-bedded deluxe tents under thatched roofs, and guests travel between the camps by light aircraft. Boating, fishing, hiking and swimming are offered at the various sites.
 

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Asia Pacific
 
Napasai 55 keys—is located on its own beach on the north side of Koh Samui island of Thailand in the Gulf of Siam.  It originally opened in 2004 and features two restaurants, tennis courts, a swimming pool, a spa and water sports such as diving and snorkeling in the nearby coral reef.  The guest rooms are arranged in seaview and garden cottages on a total site of about 40 owned acres on which 14 private villas have been built, some of which have been sold to third parties.  There is vacant land available to expand the hotel or build additional villas.  See “Real Estate” below.  The hotel rents the existing villas to its guests as additional room stock on a revenue-sharing basis with the owners.
 
Jimbaran Puri Bali 64 keys—is on the island of Bali in Indonesia and occupies seven beachfront acres under long-term lease on the south coast of the island.  Guest rooms are situated in cottages, and there are two restaurants, a swimming pool and ocean water sports.  OEH built 22 one- and two-bedroom thatched villas, each with a private plunge pool.
 
Ubud Hanging Gardens 38 keys—also on Bali is located on terraces on about seven steep hillside acres above the Ayung River gorge in the rain forest interior of the island.  This long-term leased hotel opened in 2005 and offers two restaurants, a swimming pool and spa, and a free shuttle bus to the nearby town of Ubud, a cultural and arts center.  Each key has its own private plunge pool.
 
La Résidence d’Angkor 62 keys—opened in 2002 and is situated in walled gardens in Siem Reap, Cambodia.  The hotel occupies a site of about two acres under long-term lease.  The ancient Temples of Angkor Wat, a UNESCO World Heritage site and the principal tourist attraction in the area, are near the hotel which has an indoor/outdoor restaurant and swimming pool.  OEH added eight suites and a spa to this property.
 
The Governor’s Residence 48 keys—was built in 1920 in the embassy district of Yangon, Myanmar (Burma) originally as the official home of one of the Burmese state governors.  It is a teak two-story mansion surrounded by verandas overlooking lotus gardens, a long-term leased site of about two acres that opened as a hotel in 1997.  It includes a restaurant and swimming pool.
 
La Résidence Phou Vao 34 keys—is in Luang Prabang, the ancient capital of Laos and a UNESCO World Heritage site. OEH owns a 69% interest in the property. The hotel opened in 2001 and occupies about eight hillside acres under long-term lease.  Guest rooms are in four two-story buildings surrounded by lush gardens that include a restaurant, spa and swimming pool.
 
Hotel Management Interests
 
Hotel Ritz 167 keys—is located in central Madrid near the financial district, Spanish parliament and many of the city’s well known tourist attractions.  The hotel is managed by OEH and is owned by a 50%/50% joint venture between OEH and a Spanish investment company. Opened in 1910, the hotel has four spacious conference and banqueting suites, an indoor restaurant and the popular Ritz Terrace restaurant outdoors in the gardens.  OEH and its 50% partner renovated the public areas of the hotel and are working on plans for future refurbishment of the guest rooms.
 
OEH has a 50%/50% joint venture with local investors in Peru which operates the following four hotels under OEH’s exclusive management.
 
Hotel Monasterio 126 keys—is located in the ancient Inca capital of Cuzco, an important tourist destination in Peru and a UNESCO World Heritage site.  The hotel was originally built as a Spanish monastery in the 16th century, converted to hotel use in 1995, and has been upgraded since then.  The deluxe guest rooms and two restaurants are arranged around open-air cloisters.  Many of the guest rooms are specially oxygenated due to Cuzco's high altitude.  The site measures approximately three acres under long-term lease.
 
Palacio Nazarenas 55 keys—is located next door to Hotel Monasterio on the same site and is a former palace and convent which the joint venture, using its own financial resources, has rebuilt as a separate hotel and opened in June 2012.  This is an all-suite hotel arranged around courtyards and featuring oxygenated guest rooms, an outdoor heated swimming pool, spa, and poolside restaurant and bar. During construction, archeologists discovered Incan artifacts and foundations which have been preserved and displayed in the hotel.


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Machu Picchu Sanctuary Lodge 31 keys—is the only hotel at the famous mountaintop Inca ruins at Machu Picchu, a UNESCO World Heritage site.  All of the rooms have been refurbished to a high standard.  The joint venture leases the hotel as well as seven acres for possible future expansion at the foot of the ruins, close to the town on the Urubamba River where tourists arrive by train.
 
Hotel Rio Sagrado 23 keys—is owned by OEH's Peru hotel joint venture and is located in the Sacred Valley of the Incas between Cuzco and Machu Picchu.  Opened in 2009, this rustic hotel has a spa with small swimming pool and extensive gardens beside the Urubamba River on a site of about six acres set against an imposing mountain backdrop.  The Sacred Valley is a popular part of holiday itineraries in Peru, and a station on OEH’s Peru Rail train service is a short distance from the hotel. Early in 2013, OEH will begin a program of improvements to the guest rooms and spa and construction of an outdoor swimming pool.

The Westcliff 117 keys—in Johannesburg, South Africa, was formerly owned by OEH and is situated on six hillside acres with views over the city’s zoo and parkland.  Its resort amenities include two swimming pools, a tennis court and a spa and health club.  The hotel attracts business guests because of its proximity to the city center.  A banquet and conference center occupies part of adjacent expansion land. OEH sold The Westcliff in December 2012, and will continue to manage it for up to 12 months while the new owner develops its long-term refurbishment plans.

Restaurants
 
‘21’ Club is the famous landmark restaurant at 21 West 52nd Street in midtown Manhattan in New York City near the Broadway theater district and many top tourist attractions.  Originally a speakeasy during Prohibition in the 1920s, this restaurant is open to the public, occupies three brownstone buildings and features fine American cuisine.  It serves à la carte meals in the original bar restaurant and a separate dining room upstairs, and also has ten banqueting rooms used for functions, including the famous secret wine cellar.  During 2011, a new Bar ‘21’ was created in the restaurant’s ground floor lobby serving refreshments and light meals and, during 2012, two event spaces on the first floor were reconfigured and improved for private receptions.
 
Tourist Trains and Cruises
 
Venice Simplon-Orient-Express , OEH’s principal European tourist train, operates in two parts in a regularly scheduled overnight service between London and Venice and on short excursions in southern England.  OEH owns 30 historic railway cars originally used on “Orient-Express” and other famous European trains.  All have been refurbished in original 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuation of the Orient-Express trains of pre-World War II years.  One train is based in Great Britain and composed entirely of Pullman day coaches with a capacity for up to 230 passengers.  The other train is based on the European Continent and made up of Wagons-Lits sleeping cars, three dining cars and a bar car with capacity for up to 190 passengers.  They operate once or twice weekly principally between London and Venice from March to November each year via Paris, Zurich and Innsbruck on a scenic route through the Alps.  Passengers travel across the English Channel by coach on the Eurotunnel shuttle train.  Occasional trips are also made to Vienna, Prague, Dresden, Krakow, Copenhagen, Stockholm, Budapest and Istanbul.
 
The ten British Pullman dining cars of Venice Simplon-Orient-Express with capacity up to 230 passengers operate all year, originating out of London on short excursions to places of historic or scenic interest in southern England, including some overnight trips when passengers stay at local hotels.  Both the British and Continental trains are available for private charter.
 
The Northern Belle tourist train offers day trips and charter service principally in the north of England.  It builds on the success of OEH’s British Pullman business, which focuses on the south of England around London.  This train consists of six owned dining cars elegantly decorated to be reminiscent of old British “Belle” trains of the 1930s, plus three kitchen and service cars, and can carry up to 250 passengers.  Full course meals are served on board and passengers stay in local hotels on overnight itineraries.
 
The Royal Scotsman luxury tourist train owned by OEH is composed of nine Edwardian-style cars, including five sleeping cars (each compartment with private bathroom), two dining cars and a lounge car, and accommodating up to 36 passengers.  Operating from April to October, the train travels on itineraries of up to seven nights through the Scottish countryside affording passengers the opportunity to visit clan castles, historic battlegrounds, famous Scotch whiskey distilleries and other points of interest.


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Peru Rail: OEH and local Peruvian investors formed two 50%/50% owned companies (Peru Rail S.A. and Ferrocarril Transandino S.A., together "Peru Rail"), as a joint venture that was awarded in 1999 a 30-year franchise to operate the track and other infrastructure of the state-owned railways in southern and southeastern Peru and a license to operate passenger and freight services in those areas. The franchise may be extended every five years upon Peru Rail's application, up to 25 additional years.  Peru Rail pays the Peruvian government a fee related to traffic levels which can be partially offset against investment in track improvements.  The 70-mile Cuzco-Machu Picchu line, carrying mainly tourists as well as local passenger traffic, is the principal means of access to the famous Inca ruins because there is no convenient road.  Other carriers operate on this line in competition with Peru Rail.  A second rail line runs from Cuzco to Matarani on the Pacific Ocean (via Arequipa) and to Puno on Lake Titicaca, and principally serves freight traffic under contract, an activity Peru Rail is seeking to expand hauling the output of local mines in southern Peru for export.  The Cuzco-Machu Picchu line connects four of OEH’s Peruvian hotels, allowing inclusive tours served by OEH’s Hiram Bingham luxury daytime tourist train composed of two dining cars and a bar/observation car with capacity up to 84 passengers.  OEH also operates a daytime tourist train called the Andean Explorer on the Cuzco-Puno route through the High Andes mountains.
 
The Eastern & Oriental Express in Southeast Asia travels up to one round trip each week between Singapore, Kuala Lumpur and Bangkok.  The journey includes two or three nights on board and side trips to Penang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made from Bangkok to Chiang Mai and elsewhere in Thailand and to Vientiane, Laos. Longer itineraries, up to six nights on board, are offered to places of historic, scenic and cultural interest in the region.  Originally built in 1970, the 24 cars were substantially rebuilt to an elegant oriental style of décor and fitted with modern facilities such as air conditioning and private bathrooms.  The train is made up of sleeping cars, three restaurant cars, a bar car and an open air observation car and can carry up to 130 passengers.  The Eastern & Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a 25% shareholding in the owning company.
 
The Road To Mandalay is a deluxe river cruise ship on the Irrawaddy River in central Myanmar.  The ship was a Rhine River cruiser built in 1964 that OEH bought and refurbished.  It has 43 air conditioned cabins with private bathrooms, spacious restaurant and lounge areas, and a canopied sun deck with swimming pool.  The ship travels between Mandalay and Bagan up to eight times each month and carries up to 82 passengers who may enjoy sightseeing along the river and guided shore excursions to places of cultural interest.  Three- to seven-night itineraries are offered, including airfare to and from the ship.  The ship does not operate in the hottest summer months and occasionally when the water level of the Irrawaddy River falls too low due to lack of rainfall.

Orcaella will be a second river cruise ship in Myanmar. The ship is currently being built in Yangon to OEH's deluxe accommodation standards and will be long-term chartered by OEH. The ship is named after the dolphins found in the inland waterways of the country, and will offer 25 spacious river-facing cabins, restaurant, lounge and bar, and sundeck with plunge pool. It will cruise between Yangon and the far north of Myanmar on the Irrawaddy and Chindwin Rivers to areas accessible to Orcaella because of its shallow draft and greater maneuverability compared to Road to Mandalay. Seven- to 11-night itineraries are planned, commencing in mid-2013.
 
Afloat in France is composed of five luxury river and canal boats (called péniche-hôtels) owned by OEH and operating in Burgundy, Provence and other rural regions of France.  They accommodate between four and 12 passengers each in double berth compartments with private bathrooms, and some have small plunge pools on deck.  They operate seasonally between April and October on three- to six-night itineraries with guests dining on board or in nearby restaurants.  Shore excursions are organized each day.
 
Real Estate
 
OEH has pursued opportunities in the past to develop the real estate adjoining its hotels.  In addition to expansion by adding guest rooms and other facilities at the hotels, certain of OEH’s properties have vacant land suitable for construction of deluxe for-sale residential homes.  At present, OEH has no plans to build new residential projects.
 
On a portion of 37 available acres on the French side of St. Martin, OEH built the Villas at La Samanna consisting of eight large homes in three- or four-bedroom configurations, each with a private swimming pool and access to La Samanna’s amenities and services as well as a hotel-sponsored rental program.  OEH entered into a deferred sale agreement covering four of the villas under which a third party has the option to acquire them in late 2013. The remaining four villas are currently being leased in the hotel’s rental program.
 
When OEH acquired Napasai in Thailand in 2006, development of 14 private villas was already underway on the hotel’s 40-acre site.  Two villas remain for sale, and land is available to expand the hotel or build more residences in the future.
 

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In 2012, OEH agreed to sell its Porto Cupecoy development on the Dutch side of St. Martin near La Samanna. It consisted of 184 condominium units and 35,000 square feet of commercial space around a Mediterranean-style piazza, and a marina with pleasure boat slips. The sale was completed in January 2013 and, at the time of sale, about one third of the condominiums remained unsold. In addition, OEH's sale of Keswick Hall in Virginia in 2012 included the hotel's Keswick Club golf course and an adjacent subdivision of 87 home sites including roads and other infrastructure, about half of which remained unsold. See Note 2 to the Financial Statements.

Management Strategies
 
As the foregoing indicates, OEH has a global mix of deluxe hotel and travel products that are geographically diverse and appeal to the high-end leisure market, reflecting an important management strategy.  Leisure customers produce about 67% of the hotel room nights, while corporate/business travelers account for the rest.  OEH’s properties are distinctive as well as luxurious and tend to attract guests prepared to pay higher rates for the travel experiences OEH offers compared to its competitors.
 
OEH benefits from long-term trends and developments favorably impacting the global hotel, travel and leisure markets, including growth trends in the luxury hotel market in many parts of the world, increased travel and leisure spending by consumers, favorable demographic trends in relevant age and income brackets of U.S., European and other populations, and increased online travel bookings.  These long-term trends suffered setbacks at various times in recent years due to the global economic downturn, preceded by the shock of terrorist attacks and resulting public concerns about travel safety, regional conflicts in Iraq, Afghanistan and other parts of the world, and the threatened SARS and swine flu epidemics.  Management believes, however, that the public’s confidence in international travel and demand for luxury hotel and tourist products will be sustained over the long term.
 
OEH’s mission is to be recognized as a top luxury hotel company and sophisticated adventure travel operator in its markets, delivering memorable guest experiences that are the ultimate expression of each destination’s authentic culture, through the individual character and creativity of the OEH team.  OEH plans to grow the business in the long term by:
 
increasing revenue and earnings at its established properties and recent acquisitions, including by increasing occupancy and ADR while controlling costs associated with incremental revenue,

investing in capital improvements at existing hotels and expanding where land or space is available, in both cases when potential investment returns are relatively high,
 
increasing the utilization of its tourist trains and cruises by adding departures,
 
acquiring additional distinctive luxury properties throughout the world that have attractive potential investment returns,
 
entering into contracts to manage hotels owned by others and which meet OEH’s selection criteria, and
 
disposing of underperforming assets to reduce leverage and redeploy the capital in properties with higher potential returns.
 
Factors in OEH’s evaluation of a potential acquisition or management opportunity include the uniqueness and deluxe nature of the property, attractions and experiences for guests in the vicinity, acceptability of financial returns, upside potential through pricing, expansion or improved marketing, limitations on nearby competition, and convenient access.  Expansion at existing properties by adding rooms and facilities such as spas and conference space can provide attractive investment returns because incremental operating costs are usually low.
 
OEH plans to continue owning or part-owning and operating most of its properties, which allows OEH to develop the properties’ distinctive local character and to benefit from current cash flow and potential future gains on sale.  OEH considers its combined owner/operator role as efficient and consistent with the long-term nature of its assets.  Self-management or management with equity interest has enabled OEH to capture the economic benefits otherwise shared with a third-party manager, to control the operations, quality and expansion of the hotels, and to use its experience with market adjustments, price changes, expansions and renovations to improve cash flow and enhance asset values.
 
OEH also plans to pursue long-term contracts to manage hotels principally on a fee basis where OEH may have only a small or no ownership interest and where the hotels would otherwise meet OEH’s selection criteria.  Management contracts would facilitate OEH’s entry into new markets, such as gateway cities in the Americas, Europe and Asia, and allow OEH to conserve

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investment capital.  As owner of many unique and deluxe properties that OEH operates itself, OEH believes it is well positioned to manage comparable hotels for others.
 
Management has been executing a strategy to reduce OEH’s long-term debt position.  A number of non-core assets not considered key to OEH’s portfolio of unique, high valued properties have been identified, and management is seeking to sell these in a measured timescale with the primary purposes of de-leveraging OEH’s balance sheet and providing working capital and capital for refurbishment and growth opportunities. In the last three years, OEH has sold the Porto Cupecoy property development in Sint Maarten, The Westcliff in Johannesburg, The Observatory Hotel in Sydney, Bora Bora Lagoon Resort in French Polynesia, Keswick Hall in Virginia, Hôtel de la Cité in Carcassonne, France, La Cabana restaurant in Buenos Aires, Lilianfels Blue Mountains Resort in Australia west of Sydney, and has removed the debt related to these properties from its balance sheets. See Note 2 to the Financial Statements. At the same time, OEH has restructured or reduced its remaining long-term debt, although new debt was incurred in 2010 when Grand Hotel Timeo and Villa Sant’Andrea were purchased and is being incurred for completion of the El Encanto renovation.  See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Many of OEH’s individual properties, such as the Hotel Cipriani, Copacabana Palace and ‘21’ Club, have distinctive local character and brand identity.  Management believes that discerning travelers will choose an individually styled property in preference to a chain brand characterized by uniform standards across the portfolio.  OEH promotes its individual hotel properties and the Venice Simplon-Orient-Express tourist train through the “Orient-Express” umbrella brand which originated with the legendary luxury European train in the late 19th and early 20th centuries and which is recognizable worldwide and synonymous with sophisticated travel and refined elegance.
 
Société Nationale des Chemins de Fer Français, the French national railways (“SNCF”), owns the trademark “Orient-Express” and has licensed OEH to use it on an exclusive and long-term basis for OEH's hotels and cruises, including food and beverage service. SNCF has also licensed the trademark for the Venice Simplon-Orient-Express tourist train on an exclusive basis while OEH operates the Venice Simplon-Orient-Express. In addition, OEH has permission from SNCF to use “Orient-Express” in its corporate name and its various Internet domain names.

Marketing, Sales and Public Relations
 
OEH’s sales and marketing function is primarily based upon direct sales (prioritizing strategic third-party travel agents, sales representatives and tour operators and electronic channels such as the Internet and digital marketing), cross-selling to customers, and public relations.  OEH has a corporate sales force located in 18 cities in the U.S., Brazil, Mexico, various European countries, Australia and Japan.  OEH also has local sales representatives responsible for the properties where they are based.
 
OEH’s sales staff identify and train preferred travel industry and distribution partners, negotiate with group and corporate account representatives, and conduct marketing initiatives such as direct mailings, e-commerce, trade show participation and event sponsorship.  In 2012, for example, OEH contracted with new third-party sales representatives in China and the Middle East. OEH participates in a number of luxury travel partner programs, such as “American Express Centurion” and the “Virtuoso” travel agent consortium.  OEH offers its top travel agents and other industry partners free participation in OEH’s “Bellini Club” providing training courses, special commissions and sales support for all OEH products worldwide.
 
Websites and digital marketing are important direct sales and marketing tools for OEH.  Through its principal website (www.orient-express.com) and the websites of the individual properties, OEH provides extensive descriptions and images of the properties and guest activities in English and other languages.  OEH operates other Internet travel portals that direct customers to OEH’s properties, and works with other selected electronic distribution channels.  Social media such as Facebook and Twitter are becoming increasingly significant marketing tools.
 
Because repeat customers appreciate the consistent quality of OEH’s hotels, restaurants, trains and cruises, an important part of OEH’s strategy is to promote OEH properties through various cross-selling efforts.  These include the in-house “Orient-Express Traveller” directory, enhanced customer relationship management systems and other customer recognition programs, worldwide preferred travel agent programs, and direct communications with customers. In addition, OEH sells luxury souvenir goods branded with the names of its travel products.
 
OEH’s marketing strategy also focuses on public relations, which management believes is a highly cost-effective marketing tool for luxury properties.  Because of the unique nature of OEH’s properties, guests often hear about OEH’s hotels and other travel products through word-of-mouth or published articles.  OEH has an in-house public relations office in London and

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representatives in 15 countries worldwide, including third-party public relations firms under contract, to promote its properties through targeted newspapers, general interest and travel magazines, and broadcast, online and other media.

Corporate Social Responsibility
 
OEH is a member of the International Tourism Partnership and pursues responsible business practices furthering the sustainability of tourism by seeking to minimize any negative impact on the environment and to increase contributions to conservation, cultural heritage preservation and local community development.  OEH’s activity in this area has included the following examples:

In Brazil, Copacabana Palace has been awarded a sustainability prize from the Brazilian Association of Hotels for its effective recycling and residue management programs. Hotel das Cataratas is committed to environmental conservation and ecological operating programs and has been certified for ISO14001-Sustainability and SA8000-Social Responsibility, the first South American hotel to do so.

In the U.S., Charleston Place created the Charleston Chefs’ “Feed the Need” Program in which local hotels, restaurants and caterers provide weekly meals for up to 500 persons following food shelter closures, helping to alleviate the strain on local emergency food providers.  This successful program has been adopted in other U.S. cities.
 
In Russia, Grand Hotel Europe has established its own charitable foundation to help underprivileged youth, working closely with local orphanages and organizations to identify those in need. The hotel assists by providing early employment, training and social benefits.
  
In Peru, Machu Picchu Sanctuary Lodge operates an agriculture school on its own land so individuals from poor neighboring communities can learn to grow and produce vegetables and herbs.  The hotel then buys their produce, both to provide a source of income for local people and to reduce the carbon footprint by avoiding the need to transport from other parts of the country.

In Myanmar, Road to Mandalay supports a free clinic in Bagan on the Irrawaddy River, a long-term initiative of the ship's medical officer. The clinic provides medical services normally unavailable in rural areas, treating thousands of persons each year.
 
Industry Awards
 
OEH has gained a worldwide reputation for quality and service in the luxury segment of the leisure and business travel markets.  Over the years, OEH’s properties have won numerous national and international awards given by consumer or trade publications such as Condé Nast Traveller, Travel & Leisure and Tatler and by private subscription newsletters such as Andrew Harper’s Hideaway Report, or industry bodies such as the American Automobile Association.  The awards are based on opinion polls of the publications’ readers or the professional opinion of journalists or panels of experts.  The awards are believed to influence consumer choice and are therefore highly prized.
 
Competition
 
Some of OEH’s properties are located in areas with numerous competitors.  Competition for guests in the hospitality industry is based generally on the convenience of location, the quality of the property and services offered, room rates and menu prices, the range and quality of food services and amenities offered, types of cuisine, and reputation and name recognition.
 
OEH’s strategy is to acquire or manage only hotels which have special locations and distinctive character, offering unique travel experiences.  Many are in areas with interesting local history or high entry barriers because of zoning restrictions.  OEH builds its competitive advantage by offering high quality service and cuisine, usually with a local flavor.  Typically, therefore, OEH competes by providing a special combination of location, character, cuisine, service and experiential activities rather than relying on price competition.
 
OEH’s luxury tourist trains have no direct competitors.  Other passenger trains operate on the same or similar routes, including the Cuzco-Machu Picchu line of Peru Rail, but management believes OEH’s trains and onboard service are unique and of such superior quality that guests consider an OEH train journey more of a luxury experience and an end in itself than merely a means of transport.
 

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Employees
 
OEH currently employs about 7,700 full-time-equivalent persons.  Approximately 6,100 persons are employed in the hotels and restaurants segment, 1,400 in the trains and cruises business, and 200 in central administration, sales and marketing and other activities.  Management believes that OEH’s ongoing labor relations are satisfactory.  Through its various training and other human resources programs, OEH seeks to attract, develop and retain top employees providing authentic local experiences to guests and to promote internal candidates for leadership positions.

Government Regulation
 
OEH and its properties are subject to numerous laws and government regulations such as those relating to the preparation and sale of food and beverages, liquor service, health and safety of premises and employees, employee relationships, environmental matters, waste and hazardous substance handling and disposal, and planning and zoning rules. Management believes that OEH is in compliance in all material respects with relevant laws and regulations with respect to its business.

ITEM 1A.       Risk Factors
 
OEH’s business is subject to various risks, including those described below.  Investors should carefully consider the “Risk Factors” below.  These are separated into three general groups:
 
risks of OEH’s business,
 
risks relating to OEH’s financial condition and results of operations, and
 
risks of investing in class A common shares.
 
The risks described below are only those that management considers to be the most significant.  There may be additional risks that management currently regards as less material or that are not presently known.
 
If any of these risks occurs, OEH’s business, prospects, financial condition, results of operations or cash flows could be materially adversely affected.  When OEH states below that a risk may have a material adverse effect, this means the risk may have one or more of these effects. In that case, the market price of the class A common shares could decline.
 
This report also contains forward-looking statements that involve risks and uncertainties.  See “Forward-Looking Statements” above.  OEH’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this report.
 
Risks of OEH’s Business
 
OEH’s operations are subject to adverse factors generally encountered in the international lodging, hospitality and travel industries.
 
Besides the specific conditions discussed in the risk factors below, these adverse factors include:
 
cyclical downturns arising from changes in economic conditions and general business activities in the United States and European and other countries which impact levels of travel and demand for travel products,
 
rising travel costs such as increased air travel fares and higher fuel costs, and reduced capacities of airlines and other transport services to specific destinations,
 
political instability of the governments of some countries where OEH’s properties are located, resulting in depressed demand,
 
less disposable income of consumers and the traveling public,
 
dependence on varying levels of tourism, business travel and corporate entertainment,
 
changes in popular travel patterns,
 

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competition from other hotels, trains, cruises and leisure time activities,
 
periodic local oversupply of guest accommodation in specific locations, which may adversely affect occupancy and actual rates achieved,
 
increases in operating costs at OEH’s properties due to inflation and other factors which may not be offset by increased revenues,
 
economic and political conditions affecting market demand for travel products, including recessions, civil disorder, and acts or threats of terrorism,

restrictive changes in laws and regulations applicable to zoning and land use and to health, safety and the environment, and related governmental and regulatory action,

costs and administrative burdens associated with compliance with applicable laws and regulations relating to privacy, licensing, labor and employment, and other operating matters,

changing national and local governmental tax laws and regulations thereof, which may increase the taxes OEH is required to pay,

expropriation or nationalization of properties by foreign governments, and limitations on repatriation of local earnings or withdrawal of local investment,
 
failure to comply with applicable anti-corruption laws or trade sanctions, exposing OEH to claims for damages, financial penalties and reputational harm,
 
foreign exchange rate movements causing fluctuations in reported revenues, costs and earnings and impacting demand for OEH’s properties,

availability and cost of capital to fund construction, renovations and investments,
 
adverse weather conditions such as severe storms that may temporarily impact demand or destructive forces like fire or flooding that may result in temporary closure of properties,
 
reduction in domestic or international travel and demand for OEH’s properties due to actual or threatened acts of terrorism or war, or actual or threatened outbreak of contagious disease, and heightened travel security measures and restrictions instituted in response to these events,
 
interference with customer travel due to accidents or industrial action, increased transportation and fuel costs, and natural disasters, and
 
seasonality, in that many of OEH’s hotels and tourist trains are located in the northern hemisphere where they operate at low revenue or close during the winter months.
 
The effects of many of these factors vary among OEH’s hotels and other properties because of their geographic diversity.
 
The weakened economies of North America, Europe and other regions in 2008-2009 and the simultaneous disruption of financial markets resulted in earnings declines at most of OEH’s properties and in shorter lead times for reservations due to customers’ economic uncertainty.  As a result, OEH’s ability to forecast operating results and cash flows was reduced.  These factors also affected OEH’s liquidity outlook.  See “Risks Relating to OEH’s Financial Condition and Results of Operations’ below. See also Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the effect on OEH of foreign exchange rate movements in 2010-2012.
 
If revenue decreases at OEH’s properties, its expenses may not decrease at the same rate, thereby adversely affecting OEH’s profitability and cash flow.
 
Ownership and operation of OEH’s properties involve many relatively fixed expenses such as personnel costs, interest, rent, property taxes, insurance and utilities.  If revenue declines when demand weakens, OEH may not be able to reduce these expenses to the same degree to preserve profitability.

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The hospitality industry is highly competitive, both for customers and for acquisitions of new properties.
 
Some of OEH’s properties are located in areas where there are numerous competitors seeking to attract customers, particularly in city centers. Competitive factors in the hospitality industry include:
 
convenience of location,
 
the quality of the property and services offered,
 
room rates and menu prices,
 
the range and quality of food services and amenities offered,
 
types of cuisine, and

reputation and name recognition.
 
New or existing competitors could significantly lower rates or offer greater conveniences, services or amenities, or significantly expand, improve or introduce new facilities in the markets where OEH operates, thereby adversely affecting profitability. Also,
demographic, geographic or other changes in one or more of OEH’s markets could impact the convenience or desirability of its hotels and restaurants, and so could adversely affect their operations and OEH's local market share.
 
OEH competes for hotel acquisition and management contract opportunities with others such as real estate investors and hotel operators.  These competitors may be prepared to accept a higher level of financial risk than OEH can prudently manage.  This competition may have the effect of reducing the number of suitable acquisition and management contract opportunities offered to OEH or on which it could successfully bid, and the effect of increasing OEH's costs or reducing its operating margins because the bargaining power of property owners seeking to sell or to enter into management agreements is increased.
 
The hospitality industry is heavily regulated, including with respect to food and beverage sales, employee relations, development and construction, and environmental matters, and compliance with these laws and regulations and with future changes to them could reduce profitability of properties that OEH owns or manages.
 
OEH’s various properties are subject to numerous laws and government regulations, including those relating to the preparation and sale of food and beverages, liquor service, and health and safety of premises.  The properties are also subject to laws governing OEH’s relationship with employees in such areas as minimum wage and maximum working hours, overtime, working conditions, health and safety, hiring and firing employees and work permits.
 
The success of renovating and expanding existing properties depends upon obtaining necessary construction permits, approvals or zoning variances from local authorities.  Failure to obtain or delay in obtaining these permits could adversely affect OEH’s strategy of increasing revenues and earnings through renovation and expansion of existing properties.
 
OEH is also subject to laws and regulations relating to the environment and the handling of hazardous substances that may impose or create significant potential environmental liabilities, even in situations where the environmental problem or violation occurred at a property before OEH acquired it or without OEH’s knowledge.  Environmental laws may also impose liability for improper handling or disposal of hazardous substances or improper management of certain hazardous material which might be present at OEH properties, such as asbestos or lead-based paint.  OEH’s trains and cruises must comply with environmental regulation of air emissions, wastewater discharges and fueling. Existing environmental laws and regulations may be revised or new laws and regulations related to global climate change, air quality, hazardous substances, wastes, or other environmental and health concerns may be adopted or become applicable to OEH.
 
Although OEH does not currently anticipate that the costs of complying with environmental laws will materially adversely affect its businesses, OEH cannot assure that it will not incur material costs or liabilities in the future, due to the discovery of new facts or conditions, the occurrence of new releases of hazardous materials, or a change in environmental laws.
 

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OEH’s acquisition, expansion and development strategy may be less successful than expected and, therefore, OEH's growth may be limited.
 
OEH intends to increase its revenues and earnings in the long term by acquiring new properties, managing new properties under contract, and expanding existing properties.  The ability to pursue new growth opportunities successfully will depend on management’s ability to:
 
identify properties suitable for acquisition, management and expansion,
 
negotiate purchases or construction on commercially reasonable terms or successfully negotiate management contracts of properties OEH does not own or in which it has only a non-controlling interest,
 
obtain the necessary financing and government permits or approvals,

build on schedule and with minimum disruption to guests, and
 
integrate new properties into OEH’s operations.
 
Also, the acquisition of properties in new locations may present operating and marketing challenges that are different from those experienced at OEH’s existing locations.  OEH can provide no assurance that management will succeed in this growth strategy.
 
Successful new project development and major expansions depend on timely completion within budget and satisfactory market conditions. Risks that could affect a project include:

construction delays or cost overruns that may increase project costs,

delay or denial of zoning, occupancy and other required government permits and authorizations,

write-off of development costs incurred for projects that are not pursued to completion,

natural disasters such as earthquakes, hurricanes, floods or fires that could adversely impact a project,

defects in design or construction that may result in additional costs to remedy, or that require all or a portion of a property to be closed during the period needed to rectify the situation,

inability to raise capital to fund a project because of poor economic or financial conditions,

claims and disputes between OEH and other contracting parties resulting in delay, monetary loss or project termination,

governmental restrictions on the nature or size of a project or timing of completion,

changes in market conditions such as oversupply that may affect a project's profitability, and

discovery or identification of environmental conditions that could require unanticipated studies, cleanups, approvals, increased costs, time delays or even project termination.

Occurrence of any of these events could adversely affect the profitability of planned expansions and new developments.
 
OEH may be unable to obtain the necessary additional capital to finance the growth of its business.
 
The acquisition, expansion and development of leisure properties, as well as the ongoing renovations, refurbishments and improvements required to maintain or upgrade those properties, are capital intensive.  The availability of internally generated cash flow, future borrowings and access to equity capital markets to fund these acquisitions, expansions and projects depend on prevailing market conditions and the acceptability of financing terms on offer.  OEH can give no assurance that future borrowings or capital raising will be available to OEH, or available on acceptable terms, in an amount sufficient to fund its needs. Failure to make investments necessary to maintain or improve OEH's properties could adversely affect the performance of OEH's properties.

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Future equity financings may be dilutive to the existing holders of common shares.  Future debt financings may require restrictive covenants that would limit OEH’s flexibility in operating its business.  See also “Risks Relating to OEH’s Financial Condition and Results of Operations” below.
 
OEH’s operations may be adversely affected by extreme weather conditions and the impact of natural disasters, and insurance may not fully cover these and other risks.
 
OEH operates properties in many locations, each of which is subject to local weather patterns affecting the properties and customer travel.  As OEH’s revenues and operating performance are dependent on the revenues and performance of individual properties, extreme weather conditions from time to time can have a major adverse impact upon individual properties or particular regions, resulting in temporary loss of revenue or even closure while repairs are made. Furthermore, depending on the location and configuration of certain OEH properties, such as along coasts, lagoons or rivers, they may be subject to possible adverse consequences of global climate change, including high water or increased extreme weather patterns.
 
OEH carries property, loss of earnings, liability and other kinds of insurance in amounts management deems reasonably adequate, but claims may exceed the insurance limits or be outside the scope of coverage.  Also, insurance against some risks may not be available to OEH on commercially reasonable terms, or available at all, requiring OEH to self-insure against possible loss.
 
If the relationships between OEH and its employees were to deteriorate, OEH may be faced with labor shortages or stoppages, which would adversely affect the ability to operate its facilities and could cause reputational harm to OEH.
 
OEH’s relations with its employees in various countries could deteriorate due to disputes related to, among other things, wage or benefit levels, working conditions or management’s response to changes in government regulation of workers and the workplace.  Operations rely heavily on employees’ providing a high level of personal service, and any labor shortage or stoppage caused by poor relations with employees, including unionized labor, could adversely affect the ability to provide those services, which could reduce occupancy and revenue and tarnish OEH’s reputation.
 
OEH’s owned hotels and restaurants are subject to risks generally incidental to the ownership and operation of commercial real estate and often beyond OEH's control.
 
These include:
 
fluctuating values of commercial real estate and potential asset value impairments due to operating performance falling short of expectation or other triggering events,
 
changes in national, regional and local economic and political conditions,
 
changes in interest rates and the availability, cost and terms of financing,
 
the impact of present or future government legislation and regulation (including environmental and eminent domain laws),
 
the ongoing need for capital improvements to maintain or upgrade properties,
 
potential discovery of environmental conditions associated with prior or present operations on site or nearby, and proper management and disposal of wastes and hazardous substances,
 
changes in property taxes and operating expenses,
 
the potential for uninsured or underinsured losses, and
 
limited ability to reduce the relatively high fixed costs of operating owned commercial real estate if revenue declines.
 
OEH has undertaken a program to sell owned properties that are non-core to its business.  In an unfavorable commercial and residential real estate market, OEH may be unable to sell properties at values it is seeking, particularly during an economic downturn and weakness in credit markets, or sell them at the pace OEH had planned.


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

OEH does not own the “Orient-Express” trademark but has long-term licenses from the owner SNCF to use the trademark as a brand in OEH's businesses. While OEH believes these arrangements adequately protect OEH in using the trademark, a material breach by OEH of its licenses could expose OEH to damages claims by SNCF or even result in the termination of the licenses and the loss of the brand.
 
Failures in OEH’s information technology systems or in protecting the integrity of data could reduce revenue and earnings and result in reputational harm.
 
OEH’s business depends on the efficient operation of its IT systems such as those used for reservations, hotel services, data storage and financial reporting.  These systems are vulnerable to damage or interruption from natural disasters, power loss, telecommunications failures, computer viruses, security breaches and similar events.  These could cause service delays or disruptions in OEH’s business or loss of data and result in lost revenue, added remedial costs and reputational harm.
 
Also, OEH collects personal data relating to its customers, employees and other persons for its business purposes such as customer sales, marketing and promotions.  The collection and use of this information is governed by various privacy laws which are evolving and may vary between countries.  Compliance with these laws may increase OEH’s operating costs or limit OEH's use of the data.  In addition, non-compliance or a security breach involving systems using personal data may result in claims for monetary damages or fines and in restrictions on the use or transfer of the data.

OEH could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and similar anti-corruption laws.

OEH's business operations in countries outside the United States are subject to anti-corruption laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act 2010 ("UKBA"). The FCPA, UKBA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. OEH operates in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. OEH trains its employees concerning anti-corruption laws and issues and also requires its third-party business partners and agents and others who work with OEH or on its behalf that they must comply with OEH's anti-corruption policies. OEH also has procedures and controls in place to monitor internal and external compliance. OEH cannot provide assurance, however, that its internal controls and procedures will adequately protect against against reckless or criminal acts committed by employees or third parties with whom OEH works. If OEH were found to be liable for violations of the FCPA, UKBA or similar anti-corruption laws in international jurisdictions, either due to its acts or out of inadvertence, or due to the acts or inadvertence of others, OEH could be subject to criminal or civil penalties which could have a material adverse effect on OEH's results of operations, financial condition and cash flows.

Some OEH properties are geographically concentrated in countries where national economic downturns, political events or other changing conditions beyond OEH’s control could disproportionately affect OEH’s business.
 
While OEH’s geographic diversification in 22 countries lessens the dependence of its results of operations on any particular region, OEH owns seven hotels in Italy and one hotel in Peru and its 50%/50% joint ventures in Peru operate a further four hotels as well as Peru Rail.  Due to this concentration of properties in these two countries, OEH’s performance and profitability are more exposed to national events or conditions in Italy and Peru than other countries where OEH operates, such as:
 
changing local economic and competitive conditions,
 
weakening local currencies compared to the U.S. dollar

natural and other disasters,
 
new government laws and regulations, and

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changes in government administrations.
 
OEH may be unable to manage effectively the risks associated with its joint venture investments, which may adversely impact the operations and profitability of those joint ventures.
 
Five of OEH’s hotels and two of its tourist train operations are owned by joint venture companies in which OEH has an investment of 50% or less and shares control of at least some significant aspects of their businesses, such as expenditure for capital improvements.  These joint venture investments of OEH involve risks different from 100% ownership because OEH’s partners:
 
may be unable to meet their financial obligations to the joint venture,
 
may have business interests inconsistent with those of OEH or act contrary to OEH’s objectives and policies,
 
may cause properties to incur unplanned liabilities or commitments, or
 
may take actions binding on the joint venture without OEH’s consent or that otherwise impair OEH’s operation of the business.
 
If any of these events occurs, the joint ventures may be subjected to additional risk, and OEH’s operations could be adversely affected because it may have limited ability to rectify resulting problems within the joint venture and even to dispose of its joint venture investment.  Also, disputes with joint venture partners may result in litigation costly to OEH.
 
Risks Relating to OEH’s Financial Condition and Results of Operations
 
Economic downturns and disruption in the financial markets could adversely affect OEH’s financial condition and results of operations.
 
Financial markets in the United States, Europe and Asia experienced significant disruption in 2008 and 2009, including volatility in securities prices and diminished liquidity and credit availability.  Furthermore, the economic slowdown during this period in the United States and other countries weakened consumer confidence and led to significant reductions in the amounts persons and businesses spent on travel, hotels, dining and entertainment.  Largely as a result, OEH experienced pressure on pricing, reduced occupancy at its properties, and fewer customers from traditional markets for OEH’s hotels and other travel products.  OEH’s consolidated revenue and earnings from continuing operations declined in 2008 and 2009.  Although revenue increased in 2010 and 2011, OEH incurred losses or reduced earnings in 2010, 2011 and 2012 due mainly to higher costs and impairment charges.
 
While the global economy has improved since the 2008-2009 recession, if the recovery slows or adverse economic conditions recur, OEH’s future revenue, profitability and cash flow from operations could decrease and its liquidity and financial condition, including OEH’s ability to comply with financial covenants in its loan facilities, could be adversely impacted and its future growth plans curtailed.
 
This risk exists in euro-zone countries where OEH has ten hotels, the Venice-Simplon-Orient-Express tourist train and the Afloat in France cruise business. If current uncertainty regarding sovereign euro-zone debt persists and measures taken by European governments contribute to weakness of national economies, financial markets could experience disruption and consumer confidence could decline, resulting in less demand for these properties and negatively impacting OEH's results of operations and financial condition.
 
Financial uncertainty and economic weakness identified in the previous risk factor could adversely impact OEH’s liquidity and financial condition, in particular OEH’s ability to raise additional funds for its cash requirements for working capital, commitments and debt service.
 
During the 12 months ending December 31, 2013, OEH will have $91,910,000 of scheduled debt repayments including capital lease payments and debt held by consolidated variable interest entities.  In 2014, OEH will have $170,843,000 of scheduled debt repayments including capital lease payments.  Additionally, OEH’s capital commitments at December 31, 2012 amounted to $9,650,000 .
 

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OEH expects to fund its working capital requirements, debt service and capital expenditure commitments for the foreseeable future from operating cash flow, available committed borrowing facilities, issuing new debt or equity securities, rescheduling loan repayments or capital commitments, and disposing of non-core assets.  See “Liquidity and Capital Resources” in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations. OEH can give no assurance, however, that additional sources of financing for its unfunded commitments will be available on commercially acceptable terms, or available at all, or that OEH will be able to refinance maturing debt or to reschedule loan repayments or capital commitments, or that other cash-saving steps management may take to enhance OEH’s liquidity and capital position will bridge any shortfall.  If additional sources of financing are unavailable, including because of possible future breach of loan financial covenants, OEH may be unable to fund its cash requirements for working capital, commitments and debt service.
 
Covenants in OEH’s financing agreements could be breached or could limit management’s discretion in operating OEH’s businesses, causing OEH to make less advantageous business decisions; OEH’s indebtedness is collateralized by substantially all of its properties.
 
OEH has several loan facilities with commercial banks. Most of these loan facilities relate to specific hotel or other properties and are secured by a mortgage on the particular property.  In most cases, the Company is either the borrower or the subsidiary owning the property is the borrower and the loan is guaranteed by the Company. The loan facilities generally place restrictions on the property-owning company’s ability to incur additional debt and limit liens, and to effect mergers and asset sales, and include financial covenants.  Where the property-owning subsidiary is the borrower, the financial covenants relate to the financial performance of the property financed and generally include covenants relating to interest coverage, debt service, and loan-to-value and debt-to-EBITDA ratio tests. Most of the facilities under which the Company is the borrower or the guarantor also contain financial covenants which are based on OEH’s performance on a consolidated basis.  The covenants include a quarterly interest coverage test and a quarterly net worth test.
 
If OEH fails to comply with the restrictions in present or future financing agreements, a default may occur.  A default could allow the creditors to accelerate the related debt as well as any other debt which contains cross-default provisions.  A default could also allow the creditors to foreclose on the properties collateralizing the debt. See “Liquidity and Capital Resources - Covenant Compliance” in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations regarding non-compliance with certain financial covenants at December 31, 2012.
 
Many of OEH’s bank loan facilities include cross-default provisions under which a failure to pay principal or interest by the borrower or guarantor under other indebtedness in excess of a specified threshold amount would cause a default under the facilities.  Under OEH’s largest loan facility, the specified cross-default threshold amount is $25,000,000.
 
OEH recognizes the risk that a property-specific or group consolidated loan covenant could be breached.  OEH regularly prepares cash flow projections which are used to forecast covenant compliance under all loan facilities.  If there is any likelihood of potential non-compliance with a covenant, OEH takes proactive steps to meet with the lending bank to seek an amendment to, or a waiver of, the financial covenant at risk.  Obtaining an amendment or waiver may result in an increase in the borrowing costs, or may not be obtainable at all.  If a covenant breach occurred in a material loan facility and OEH was unable to agree with its bankers how the particular financial covenant should be amended or how the breach could be cured or waived, OEH’s liquidity would be materially adversely affected.
 
In order to assure that OEH has sufficient liquidity in the future, OEH’s cash flow projections and available funds are discussed with the Company’s board of directors and OEH’s advisors to consider the most appropriate way to develop OEH’s capital structure and generate additional sources of liquidity. The options available to OEH will depend on the current economic and financial environment and OEH’s continued compliance with financial covenants. Options currently available to OEH include increasing the leverage on certain under-leveraged assets, issuing equity or debt instruments and disposing of non-core assets.
 
OEH can give no assurance that its loan facility lenders would agree to modify any affected covenant, which could impact OEH’s ability to fund its cash requirements for working capital, commitments and debt service and could cause an event of default under any affected loan facility.
 
OEH’s substantial indebtedness could adversely affect its financial health.
 
OEH has a large amount of debt in its capital structure and may incur additional debt from time to time.  As of December 31, 2012 , OEH’s consolidated long-term indebtedness was $521,560,000 (including the current portion and excluding debt of consolidated variable interest entities). Long-term indebtedness of OEH’s consolidated variable interest entities was $97,945,000 (including the current portion). This substantial indebtedness could:
 

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require OEH to dedicate much of its cash flow from operations to debt service payments, and so reduce the availability of cash flow to fund working capital, capital expenditures, product and service development and other general corporate purposes,
 
limit OEH’s ability to obtain additional financing for its business or to repay or refinance its existing indebtedness on satisfactory terms,
 
increase OEH’s vulnerability to adverse economic and industry conditions, including the seasonality of some of OEH’s activities, or
 
limit OEH’s flexibility in planning for, or reacting to, changes in its business and industry as well as the economy generally.
 
OEH’s failure to repay indebtedness when due may result in a default under that indebtedness and cause cross-defaults under other OEH indebtedness. See the risk factor immediately above.
 
Increases in interest rates may increase OEH’s interest payment obligations under its existing floating rate debt, and refinanced debt may have higher interest rates than the debt refinanced.
 
After taking into account OEH’s fixed interest rate swaps, approximately 51% of OEH’s consolidated long-term debt at December 31, 2012 bears interest that fluctuates with prevailing interest rates, so that any rate increases may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedging transactions in order to manage its floating interest rate exposure, but OEH can give no assurance that those hedges will lessen the impact on OEH of rising interest rates. Also, as OEH refinances its long-term debt with new debt, the interest payable on the new debt may be at a higher rate than the debt refinanced.

Fluctuations in foreign currency exchange rates may have a material adverse effect on OEH’s financial statements.
 
Substantial portions of OEH’s revenue and expenses are denominated in non-U.S. currencies such as European euros, British pounds sterling, Russian rubles, South African rand, Peruvian nuevos soles, Botswana pula, Brazilian reals, Mexican pesos and various Southeast Asian currencies.  In addition, OEH buys assets and incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have a material adverse effect on OEH’s financial statements. OEH’s financial statements are presented in U.S. dollars and can be impacted by foreign exchange fluctuations through both:
 
translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and
 
transaction risk, which is the risk that the currency of costs and liabilities fluctuates in relation to the currency of revenue and assets, which fluctuations may adversely affect OEH’s operating margins.
 
OEH’s ability to pay dividends on its common shares is limited.
 
OEH paid quarterly cash dividends on the Company’s class A and B common shares in the amount of $0.025 per share in 2004 through 2008 but suspended dividends beginning in 2009.  OEH can give no assurance that it will be able to resume dividend payments in the future because of debt repayment requirements, a downturn to OEH’s business or other reasons.
 
Under the law of Bermuda where the Company is incorporated, it may not pay dividends or make other distributions on the class A and B common shares if there are reasonable grounds for believing that the Company is, or after the payment would be, unable to pay its liabilities as they become due, or if the realizable value of OEH’s assets is less than the aggregate of its liabilities, issued share capital and “share premium accounts” (share premium is defined as the amount of shareholders’ equity over and above the aggregate par value of issued shares).  OEH can give no assurance that the Company will not be restricted by Bermuda law from paying dividends.
 
OEH is subject to accounting regulations and uses certain accounting estimates and judgments that may differ significantly from actual results.
 
Implementation of existing and future standards and rules of the U.S. Financial Accounting Standards Board (“FASB”) or other regulatory bodies could affect the presentation of OEH’s financial statements and related disclosures.  Future regulatory requirements could significantly change OEH’s current accounting practices and disclosures.  These changes in the presentation

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of OEH’s financial statements and related disclosures could change an investor’s interpretation or perception of OEH’s financial position and results of operations.
 
OEH uses many methods, estimates and judgments in applying its accounting policies.  By their nature, these are subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead OEH to change its methods, estimates and judgments which could significantly affect the presentation of OEH’s results of operations.
 
As an example of these estimates and judgments, OEH evaluates goodwill at least annually, or when triggering events or changes in circumstances, such as adverse changes in the industry or economic trends or an underperformance relative to historical or projected future operating results, indicate the carrying value may not be recoverable.  OEH’s impairment analysis incorporates various assumptions and uncertainties that management believes are reasonable and supportable considering all available evidence, such as the future cash flows of the business, future growth rates and the related discount rates.  However, these assumptions and uncertainties are, by their very nature, highly judgmental.  OEH cannot guarantee that its business will achieve the forecasted results which have been included in its impairment analysis.  If OEH is unable to meet these assumptions in future reporting periods, it may be required to record a further charge in a future statement of operations for goodwill impairment losses.
 
If OEH fails to establish and maintain proper and effective internal controls, its ability to produce accurate financial statements could be impaired, which could adversely affect OEH’s operating results, and investor, supplier and customer confidence in its reported financial information.
 
As described in Item 9A—Controls and Procedures, during the fourth quarter of 2011, management determined that OEH had a material weakness in its system of internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control that results in a reasonable possibility that a material misstatement of OEH’s annual or interim financial statements will not be prevented or detected on a timely basis.  Specifically, OEH did not maintain effective controls over the preparation and review of the calculations and related supporting documentation for certain deferred tax assets and liabilities and its current and deferred tax expense. As a result, there were errors in the tax accounts in the preliminary consolidated financial statements that were corrected prior to issuance of OEH’s consolidated financial statements for the year ended December 31, 2011.  During 2012, OEH implemented a plan to remediate this material weakness in internal control relating to tax and, as reported in Item 9A and the accompanying report by Deloitte LLP, OEH maintained effective internal control over financial reporting as of December 31, 2012.

While the material weakness in internal control in 2011 has been remediated, one or more material weaknesses may be identified in future fiscal years. A material weakness in internal control could lead to errors in OEH’s reported financial results and could have a material adverse effect on OEH’s operations, on investor, supplier and customer confidence in its reported financial information and on the trading price of OEH’s class A common shares.

Risks of Investing in Class A Common Shares
 
The Company is not restricted from issuing additional class A or class B common shares, and any sales could negatively affect the trading price and book value of the class A common shares outstanding.
 
The Company may in its discretion sell newly issued class A or B common shares from time to time in the future.    There can be no assurance that the Company will not make significant sales of class A or B common shares in public offerings or private placements to raise capital, for funding future acquisitions, in employee equity compensation programs or for other corporate purposes.  Any sales could materially and adversely affect the trading price of the class A shares outstanding or result in dilution of the ownership interests of existing shareholders.
 
The price of the class A common shares may fluctuate significantly, which may make it difficult for shareholders to sell the class A common shares when they want or at desired prices.
 
The price of the class A shares on the New York Stock Exchange constantly changes.  OEH management expects that the market price of the class A shares will continue to fluctuate.  Holders of class A shares will be subject to the risk of volatility and depressed prices.
 
The price of class A shares can fluctuate as a result of a variety of factors, many of which are beyond OEH’s control.  These factors include:
 
quarterly variations in operating results,

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operating results that vary from the expectations of management, securities analysts and investors,
 
changes in expectations as to future financial performance, including financial estimates by securities analysts and investors,
 
developments generally affecting OEH’s business or the hospitality industry,
 
market speculation about a potential acquisition of OEH or all or part of its business, such as the unsolicited proposal by The Indian Hotels Company Ltd. announced in October 2012 to acquire all outstanding class A shares,
 
announcements by OEH or its competitors of significant contracts, acquisitions, joint ventures or capital commitments,
 
announcements by third parties of significant claims or proceedings against OEH,
 
the dividend policy for the class A and B common shares,
 
future sales of equity or equity-linked securities including by holders of large positions in the outstanding class A shares, and
 
general domestic and international economic conditions.
 
In addition, the stock market in general can experience volatility that is often unrelated to the operating performance of a particular company.  This volatility can arise, for example, because of disruption in capital markets and contraction of credit availability, and can be significant.  These broad market fluctuations may adversely affect the market price of the class A shares.
 
Investors in an offering of class A common shares by the Company may pay a much higher price than the book value of the outstanding class A common shares.
 
If investors purchase class A shares in an offering by the Company, they may incur immediate and substantial dilution representing the difference between OEH’s net book value and the as-adjusted net book value per share after giving effect to the offering price.  The Company may also in the future issue additional class A shares in connection with compensation of OEH’s management, future acquisitions, future public offerings or private placements of class A shares for capital raising purposes or for other business purposes, all of which may result in the dilution of the ownership interests of holders of outstanding class A shares.  Issuance of additional class A shares may also create downward pressure on the trading price of outstanding class A shares that may in turn require the Company to issue additional shares to raise funds through sales of its securities.  This may further dilute the ownership interests of holders of outstanding class A shares.

OEH may have broad discretion over the use of the net proceeds from any offering of class A common shares.
 
OEH may have broad discretion as to the use of the proceeds from any offering by the Company of its class A shares.  Accordingly, investors would be relying on the judgment of the Company’s board of directors and OEH’s management with regard to the use of these net proceeds, and may not have the opportunity, as part of the investment decision, to assess whether the proceeds are being used appropriately.  It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for OEH.
 
A subsidiary of the Company, which has two Company directors on its board of directors, may control the outcome of most matters submitted to a vote of the Company’s shareholders.
 
A wholly-owned subsidiary of the Company, Orient-Express Holdings 1 Ltd. (“Holdings”), currently holds all 18,044,478 outstanding class B common shares in the Company representing about 64% of the combined voting power of class A and B common shares for most matters submitted to a vote of shareholders, and the directors and officers of the Company hold class A shares representing an additional 0.3% of the combined voting power.  In general, holders of class A common shares and holders of class B common shares vote together as a single class, with holders of class A shares having one-tenth of one vote per share and holders of class B shares having one vote per share.  Therefore, as long as the number of outstanding class B shares exceeds one-tenth the number of outstanding class A shares, Holdings could control the outcome of most matters submitted to a vote of the shareholders.

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Under Bermuda law, common shares of the Company owned by Holdings are outstanding and may be voted by Holdings.  The manner in which Holdings votes its shares is determined by the four directors of Holdings, two of whom, John D. Campbell and Prudence M. Leith, are also directors of the Company, consistently with the exercise by those directors of their fiduciary duties to Holdings.  Those directors, should they choose to act together, will be able to control substantially all matters affecting the Company, and to block a number of matters relating to any potential change of control of the Company.  See Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Certain institutional shareholders representing two hedge fund groups challenged the Company’s corporate governance structure as it relates to the ownership and voting of class B common shares, including by proposing shareholder resolutions to amend the Company’s bye-laws to treat the class B shares as “treasury shares” with no voting rights and to cancel the class B shares.  Those resolutions were rejected at the October 10, 2008 special general meeting of shareholders of the Company by a majority of the votes of the outstanding class A and class B common shares, voting together as a single class. Following the defeat of the resolutions at the special general meeting, these shareholders filed a petition in the Supreme Court of Bermuda on January 12, 2009 against the Company, Holdings and certain of the Company’s directors seeking similar and related relief, including a declaration that the Company holding or voting class B shares, directly or indirectly, was unlawful and an order restraining Holdings from exercising its voting rights attached to the class B shares.  After a trial on preliminary issues relating to the legality of the holding of class B shares in the Company by Holdings, the Court ruled on June 1, 2010 that it is lawful for Holdings to hold and exercise voting rights in respect of class B shares in the Company held by Holdings and struck out the petition in its entirety.  The Court also awarded the respondents their defense costs incurred in the proceedings.  The foregoing description of the Court’s judgment does not purport to be complete and is qualified in its entirety by reference to the judgment, which the Company filed as Exhibit 99.2 to its Current Report on Form 8-K dated June 1, 2010 on the front cover and is incorporated herein by reference.
 
The corporate governance structure of the Company, with dual class A and B common shares and ownership and voting of the class B shares by Holdings, has been analyzed by legal counsel, and the Company’s board of directors and management believe that the structure is valid under Bermuda law.  The judgment of the Bermuda Supreme Court on June 1, 2010 confirms this belief.  The structure enables OEH to oppose any proposals that OEH believes are contrary to the best interests of the Company and its shareholders, including coercive or unfair offers to acquire the Company, and thus preserve the value of OEH for all shareholders.  The structure has been in place since the Company’s initial public offering in 2000, and has been fully described in the Company’s public filings and clearly disclosed to investors considering buying the class A common shares.
 
However, new litigation against the Company involving its corporate governance structure or other future challenges may occur, the outcome of which may be uncertain.  Furthermore, new litigation or future challenges may cause the Company to incur additional costs, such as legal expenses, to defend its corporate governance structure and these costs may be substantial in amount.
 
Provisions in the Company’s charter documents, and the preferred share purchase rights currently attached to the class A and class B common shares, may discourage a potential acquisition of OEH, even one that the holders of a majority of the class A common shares might favor.
 
The Company’s memorandum of association and bye-laws contain provisions that could make it more difficult for a third party to acquire OEH or to engage in another form of transaction involving a change of control of the Company without the consent of the Company’s board of directors.  These provisions include:

a supermajority shareholder voting provision for the removal of directors from office with or without cause,
 
a supermajority shareholder voting provision for “business combination” transactions with beneficial owners of shares carrying 15% or more of the votes which may be cast at any general meeting of shareholders, and
 
limitations on the voting rights of such 15% beneficial owners.
 
Also, the Company’s board of directors has the right under Bermuda law to issue preferred shares without shareholder approval, which could be done to dilute the share ownership of a potential hostile acquirer.  Although management believes these provisions provide the shareholders an opportunity to receive a higher price by requiring potential acquirers to negotiate with the Company’s board of directors, these provisions apply even if the offer is favored by shareholders holding a majority of the Company’s equity.
 

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The Company has in place a shareholder rights agreement providing for rights to purchase series A junior participating preferred shares of the Company.  The rights are not currently exercisable, and they are attached to and transferable with the class A and B common shares on a one-to-one basis.  These rights may have anti-takeover effects on a potential acquirer holding 15% or more of the outstanding class A or B common shares.
 
These anti-takeover provisions are in addition to the ability of Holdings and directors and officers of the Company to vote shares representing a significant majority of the total voting power of the Company’s common shares. See the risk factor immediately above.
 
A judgment of a United States court for liabilities under U.S. securities laws might not be enforceable in Bermuda, or an original action might not be brought in Bermuda against the Company for liabilities under U.S. securities laws.
 
The Company is incorporated in Bermuda, a majority of its directors and officers are residents of Bermuda and Europe, and most of its assets and the assets of its directors and officers are located outside the United States.  As a result, it may be difficult for shareholders to:
 
effect service of process within the United States upon the Company or its directors and officers, or
 
enforce judgments obtained in United States courts against the Company or its directors and officers based upon the civil liability provisions of the United States federal securities laws.
 
OEH has been advised by its Bermuda legal counsel that there is doubt as to:
 
whether a judgment of a United States court based solely upon the civil liability provisions of the United States federal securities laws would be enforceable in Bermuda against the Company or its directors and officers, and
 
whether an original action could be brought in Bermuda against the Company or its directors and officers to enforce liabilities based solely upon the United States federal securities laws.

ITEM 1B.       Unresolved Staff Comments

None.

ITEM 2.       Properties

As described in Item 1—Business OEH owns 29 hotels worldwide (including nine under long-term lease), four European tourist trains, its larger cruise ship in Myanmar and five small French canal boats, and one stand-alone restaurant in the United States; owns interests of 50% or less in six hotels in Peru, Spain and the U.S. (including three under long-term lease), its Southeast Asian tourist train and Peru Rail; and has no ownership interest in its smaller river cruise ship in Myanmar (under long-term charter) and one hotel in South Africa (under short-term management agreement). The small regional sales, marketing and operating offices of the hotels, tourist trains and cruise businesses are occupied under operating leases.

ITEM 3.       Legal Proceedings

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

ITEM 4.       Mine Safety Disclosures

None.


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PART II

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

The class A common shares of the Company are traded on the New York Stock Exchange under the symbol OEH.  All of the class B common shares of the Company are owned by a subsidiary of the Company and are not listed.  See Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.  The following table presents the quarterly high and low sales prices of a class A common share in 2012 and 2011 as reported for New York Stock Exchange composite transactions:
 
 
 
2012
 
2011
 
 
High
 
Low
 
High
 
Low
First quarter
 
$
10.55

 
$
7.17

 
$
14.24

 
$
11.44

Second quarter
 
11.10

 
7.52

 
12.58

 
9.66

Third quarter
 
9.85

 
7.96

 
11.42

 
6.50

Fourth quarter
 
13.13

 
8.51

 
9.05

 
6.02

 
The Company paid no cash dividends in 2012 and 2011 and has no present intention to pay dividends in the future. See “Risks Relating to OEH's Financial Condition and Results of Operations” in Item 1A—Risk Factors.
 
The Islands of Bermuda where the Company is incorporated have no applicable government fiscal or monetary laws, decrees or regulations which restrict the export or import of capital or affect the payment of dividends or other distributions specifically to nonresident holders of the class A and B common shares of the Company or which subject United States holders to taxes.
 
At February 15, 2013 , the number of record holders of the class A common shares of the Company was approximately 60.
 
During 2012, the Company made no offering of securities including its class A common shares that was not registered in the United States.  Also, during the fourth quarter of 2012, no purchases of the Company’s equity securities were made by or on behalf of the Company or any affiliated person.
 
Information responding to Item 201(d) and (e) of SEC Regulation S-K is omitted because the Company is a “foreign private issuer” as defined in SEC Rule 3b-4 under the 1934 Act.


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ITEM 6.       Selected Financial Data

Orient-Express Hotels Ltd. and Subsidiaries
 
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
$’000
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
545,518

 
554,736

 
469,595

 
420,826

 
475,694

 
 
 
 
 
 
 
 
 
 
 
Impairments (1)
 
(5,892
)
 
(20,060
)
 
(13,351
)
 
(6,226
)
 
(28,262
)
 
 
 
 
 
 
 
 
 
 
 
Gain on disposal of fixed assets (2)
 
1,514

 
16,544

 

 
1,385

 

 
 
 
 
 
 
 
 
 
 
 
Earnings from unconsolidated companies, net of tax
 
2,124

 
4,357

 
2,258

 
4,183

 
16,771

 
 
 
 
 
 
 
 
 
 
 
Net (losses)/earnings from continuing operations
 
(10,617
)
 
(18,833
)
 
(28,281
)
 
(13,125
)
 
12,162

 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) from discontinued operations, net of tax (3)
 
3,729

 
(68,763
)
 
(34,299
)
 
(55,612
)
 
(38,516
)
 
 
 
 
 
 
 
 
 
 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
 
(68,737
)
 
(26,354
)
 
 
 
 
 
 
 
 
 
 
 
Net earnings attributable to non-controlling interests
 
(173
)
 
(184
)
 
(179
)
 
(60
)
 
(197
)
 
 
 
 
 
 
 
 
 
 
 
Net losses attributable to Orient-Express Hotels Ltd.
 
(7,061
)
 
(87,780
)
 
(62,759
)
 
(68,797
)
 
(26,551
)

 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
$
 
$
 
$
 
$
 
$
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share: (4)
 
 

 
 

 
 
 
 

 
 

Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
 
(0.19
)
 
0.28

Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
 
(0.82
)
 
(0.89
)
Basic net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 
(1.01
)
 
(0.61
)
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 

 
 

 
 

 
 

 
 

Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
 
(0.19
)
 
0.28

Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
 
(0.82
)
 
(0.89
)
Diluted net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 
(1.01
)
 
(0.61
)
 
 
 
 
 
 
 
 
 
 
 
Dividends per share
 

 

 

 

 
0.10

 

28

Table of Contents

 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
$’000
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
1,892,027

 
1,930,869

 
2,137,714

 
2,072,690

 
2,068,796

 
 
 
 
 
 
 
 
 
 
 
Long-term obligations
 
619,505

 
634,417

 
728,445

 
809,079

 
788,867

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
935,956

 
950,330

 
1,064,973

 
878,709

 
782,598

 
 
 
 
 
(1)
The impairments in 2012 consisted of impairment of property, plant and equipment of $2,538,000 and impairment of other assets of $1,299,000 related to the write-down to fair value of train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service, and impairment of goodwill at Reid's Palace of $2,055,000 .

The impairments in 2011 consisted of impairment of property, plant and equipment at Casa de Sierra Nevada of $8,153,000 , and impairment of goodwill at Maroma Resort and Spa, Mount Nelson Hotel, and La Residencia of $11,907,000 .

The impairments in 2010 consisted of impairment of property, plant and equipment related to the New York hotel project of $6,386,000 , impairment of goodwill at La Samanna and Napasai of $5,895,000 , and impairment of other intangible assets of O.E. Interactive Ltd. and Luxurytravel.com UK Ltd. of $1,070,000 .

The impairments in 2009 consisted of impairment of goodwill and intangible assets at Miraflores Park Hotel and Casa de Sierra Nevada amounting to $6,226,000 .

The impairments in 2008 consisted of impairment of goodwill at Le Manoir aux Quat’Saisons of $5,270,000, and impairment of the equity investment in Hotel Ritz in Madrid of $22,992,000.

(2)
The 2012 gain is related to a capital lease on Grand Hotel Europe that was extinguished as part of a refinancing of its debt facilities.

The 2011 gain is related to the assignment of OEH’s purchase and development agreements for its proposed New York hotel project in April 2011, along with the exercise of a call option by the assignee for excess development rights of the ‘21’ Club restaurant.

The 2009 gain is related to settlement of insurance proceeds for cyclone-damaged assets on the Road to Mandalay ship.

(3)
The results of Lapa Palace Hotel, Windsor Court Hotel, Lilianfels Blue Mountains, Bora Bora Lagoon Resort, Hôtel de la Cité, La Cabana, Keswick Hall, The Observatory Hotel, The Westcliff and Porto Cupecoy have been presented as discontinued operations for all periods presented.

Included in the loss from discontinued operations are real estate, goodwill and property, plant and equipment impairment losses of $3,166,000 in 2012, $65,144,000 in 2011, $30,900,000 in 2010, $54,058,000 in 2009, and $16,453,000 in 2008; gain on sales of Keswick Hall, Bora Bora Lagoon Resort, The Observatory Hotel and The Westcliff in 2012 of $15,384,000 , gain on sale of Hôtel de la Cité in 2011 of $2,182,000 , net gain on sale of Lilianfels Blue Mountains and La Cabana of $6,723,000 in 2010, and gain on sale of Lapa Palace Hotel and Windsor Court Hotel in 2009 of $3,737,000; and insurance loss at Windsor Court Hotel in 2009 of $2,883,000 and an insurance gain at Bora Bora Lagoon Resort in 2010 of $5,750,000, partly offset by restructuring costs of $2,187,000.

(4)
Earnings per share is presented based on net losses attributable to OEH. Presentation based on net losses is not presented because it is not materially different. 

See notes to consolidated financial statements (Item 8).



29

Table of Contents

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

Introduction
 
OEH has three business segments: (1) hotels and restaurants, (2) tourist trains and cruises and (3) real estate.
 
Hotels in 2012 consisted of 35 deluxe hotels (excluding Keswick Hall, Bora Bora Lagoon Resort, The Observatory Hotel and The Westcliff, which were sold during the year), 30 of which were wholly or majority owned or, in the case of Charleston Place Hotel, owned by a consolidated variable interest entity. Of the 30 owned hotels, two were purchased in 2010 and another one is scheduled to reopen in early 2013 after renovation. The 30 owned hotels are referred to in this discussion as “owned hotels” of which 11 were located in Europe, six in North America and 13 in the rest of the world.
 
The other five hotels, in which OEH has unconsolidated equity interests and which it operates under management contracts, are referred to in this discussion as “hotel management interests”. 
 
OEH currently owns and operates the stand-alone restaurant ‘21’ Club in New York, New York.
 
During 2012 , OEH sold Keswick Hall in Charlottesville, Virginia, Bora Bora Lagoon Resort in French Polynesia, The Observatory Hotel in Sydney, Australia and The Westcliff in Johannesburg, South Africa. During 2011 OEH sold Hôtel de la Cité in Carcassonne, France. During 2010 OEH sold Lilianfels Blue Mountains in New South Wales, Australia and La Cabana restaurant in Buenos Aires, Argentina.  While The Westcliff was sold in December 2012, OEH is continuing to manage the property for for up to 12 months. None of these properties was considered a long-term fit with OEH’s portfolio and strategy.  Accordingly, the results of Keswick Hall, Bora Bora Lagoon Resort, The Observatory Hotel, The Westcliff, Hôtel de la Cité, Lilianfels Blue Mountains and La Cabana have been reflected as discontinued operations for all periods presented.
 
OEH’s tourist trains and cruises segment operates six tourist trains — four of which are owned and operated by OEH, one in which OEH has an equity interest and an exclusive management contract, and one in which OEH has an equity investment — and two river cruise ships and five canal boats.
 
OEH's small real estate projects are in St. Martin, French West Indies, and Koh Samui, Thailand. Another project, a residential development adjoining Keswick Hall, was sold with the hotel in January 2012. OEH's real estate project at Porto Cupecoy on the Dutch side of St. Martin was classified as held for sale at December 31, 2012 and has been reflected as discontinued operations for all periods presented. Porto Cupecoy was sold in January 2013.
 
In 2012 , 86% of OEH’s revenue was derived from the hotels and restaurants segment and 14% from tourist trains and cruises.  In the hotels and restaurants segment, 96% of revenue was from owned hotels, 3% from restaurants and 1% from hotel management interests.
 
Average daily rate, or ADR, is the average amount achieved for rooms sold. ADR is used by management to gauge the level of pricing achieved by a specific hotel or group of hotels in a given period.

Occupancy represents the total number of rooms sold divided by the total number of rooms available at a hotel or group of hotels. Occupancy measures the utilization of a hotel's available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period.

RevPAR is revenue per available room, which for any hotel in a given period is the total rooms' revenue divided by the number of available rooms. Management uses RevPAR to identify trend information with respect to room revenues and to evaluate hotel performance. RevPAR is a commonly used performance measure in the industry. It is often used in comparison to competitors within a custom defined market or a competitive set.

Same store RevPAR is a comparison of RevPAR based on the operations of the same units in each period, by excluding the effect of any hotel acquisitions in the period or major refurbishments where a property is closed for the whole period.  The comparison also excludes the effect of dispositions (including discontinued operations) or closures.

ADR and RevPAR are measures for a point in time (a day, month or year) and are most often compared across like time periods. Current ADR and RevPAR are not necessarily indicators of future performance.


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Table of Contents

In 2012 , OEH saw same store RevPAR decline of 1% in U.S. dollars, but growth of 3% in local currency. Average occupancy was 58% and ADR was $469 . In 2011 , same store RevPAR increased 17% in both U.S. dollars and local currency. Average occupancy was 59% and ADR was $465 .

OEH’s long-term strategy to grow its business includes:
 
RevPAR growth:  the unique nature of OEH’s individual properties and the avoidance of a chain brand have historically enabled OEH to charge premium rates for rooms;
 
Expansion of hotels:  the returns on investment by adding new rooms or other facilities to a hotel are high as the incremental operating costs are low;
 
Acquisitions and management contracts:  OEH looks to invest in unique properties at reasonable prices with expansion potential and near-term upside potential in earnings through increasing room rates and/or reducing costs, including entering into contracts to manage hotels that meet OEH’s selection criteria;
 
Trains and cruises: increasing the utilization of its tourist trains and cruises by adding departures; and
  
Dispositions: disposing of underperforming assets to reduce leverage and redeploy the capital in properties with higher potential returns.
 
Revenue and Expenses
 
OEH derives revenue from owned hotel operations primarily from the sale of rooms and the provision of food and beverages.  The main factors for analyzing rooms revenue are the number of room nights sold, or occupancy, and the ADR, and RevPAR referred to above which is a measure of both these factors.
 
Revenue from restaurants is derived from food and beverages sold to customers.
 
Revenue from hotel management interests includes fees received under management contracts, which are based upon a combination of a percentage of the revenue from operations and operating earnings calculated before specified fixed charges.
 
The revenue from the tourist trains and cruises segment primarily comprises tickets sold for travel and food and beverage sales.
 
The revenue from real estate is primarily derived from the sale of land and buildings.
 
Cost of services includes labor, repairs and maintenance, energy and the costs of food and beverages sold to customers in respect of owned hotel operations, restaurants, tourist trains and cruises.
 
Selling, general and administrative expenses include travel agents’ commissions, the salaries and related costs of the sales teams, advertising and public relations costs, and the salaries and related costs of management.
 
Depreciation and amortization includes depreciation of owned hotels, restaurants, tourist trains and the owned cruise ship and canal boats.
 
Impact of Foreign Currency Exchange Rate Movements
 
As reported below in the comparisons of the 2012 , 2011 and 2010 financial years under “Results of Operations”, OEH has exposure arising from the impact of translating its global foreign currency earnings and expenses into U.S. dollars. Nine of OEH’s owned hotels in 2012 operated in European euros, one operated in South African rand, one in British pounds sterling, three in Botswana pula, one in Mexican pesos, one in Peruvian nuevo soles, six in various Southeast Asian currencies and one in Russian rubles. Revenue of the Venice Simplon-Orient-Express, British Pullman, Northern Belle and Royal Scotsman tourist trains was primarily in British pounds sterling, but the operating costs of the Venice Simplon-Orient-Express were mainly denominated in euros. Revenue of the Copacabana Palace and Hotel das Cataratas in Brazil was earned in U.S. dollars, but substantially all of the hotels’ expenses were denominated in Brazilian reals. Revenue derived by Maroma Resort and Spa and La Samanna was recorded in U.S. dollars, but the majority of the hotels’ expenses were denominated in Mexican pesos and European euros, respectively.


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Table of Contents

Except for the specific instances described above, OEH’s properties match foreign currency earnings and costs to provide a natural hedge against currency movements. The reporting of OEH’s revenue and costs translated into U.S. dollars, however, can be materially affected by foreign exchange rate fluctuations from period to period.
 
Market Capitalization
 
The Company’s class A common share price increased during 2012 from $7.47 at December 31, 2011 to $11.69 at December 31, 2012 , and OEH’s market capitalization increased from $767 million at December 31, 2011 to $1.20 billion at December 31, 2012 . OEH’s fixed assets are carried in the balance sheet on a historical depreciated cost basis, and OEH management performs impairment tests on all long-lived assets. OEH management believes the aggregate market value of these assets exceeds their carrying value, in part because many of OEH’s assets were acquired many years ago.
 
Asset and Investment Impairments
 
OEH regularly compares the carrying value of its property, plant and equipment and goodwill to its own undiscounted and discounted cash flow projections, in order to determine whether any of these assets are impaired.  OEH also periodically obtains third-party valuations of property, plant and equipment to comply with bank loan requirements. The impairments described below had no direct cash effect on OEH.

At December 31, 2012, OEH completed its annual goodwill impairment review and identified and recorded goodwill impairments of $2.1 million within its continuing operations, relating to Reid's Palace (mainly due to the effect of ongoing economic factors in Portugal affecting the tourist market in Madeira).

At December 31, 2011, OEH completed its annual goodwill impairment review and identified and recorded goodwill impairments of $11.9 million within its continuing operations, comprised of $7.9 million at Maroma Resort and Spa (mainly due to security concerns in Mexico depressing occupancy), $2.8 million at La Residencia (mainly due to the effect of ongoing economic factors in Spain affecting the tourist market in Mallorca) and $1.2 million at Mount Nelson Hotel (earning less revenue due to the absence of the World Cup football tournament in 2010 and increased competition in Cape Town).  A goodwill impairment of $0.5 million was recorded within discontinued operations, relating to The Westcliff .

At December 31, 2010, OEH did not identify any goodwill impairments during its annual impairment review. However, during 2010, OEH identified goodwill impairments of $5.9 million, comprising $5.4 million at La Samanna and $0.5 million at Napasai. These impairments considered discounted future cash flows prepared as of the balance sheet date or date of a triggering event if earlier.
 
At December 31, 2012, OEH reclassified real estate assets at Porto Cupecoy for all periods presented as assets held for sale, with results presented within discontinued operations, because the Company anticipated selling to a third party the assets not already encumbered by existing sales contracts. Based on the agreed sales price of $19.0 million, OEH recorded an non-cash impairment charge of $3.2 million for the year ended December 31, 2012. In the year ended December 31, 2011, OEH identified a non-cash real estate asset and property, planet and equipment impairment charge of $38.5 million (2010 - $24.6 million) in respect of its Porto Cupecoy development project. OEH determined that the fair value of assets, less costs to sell, no longer exceeded the carrying value.  The charge was computed using Level 3 inputs, namely the estimated selling prices and estimated selling costs based on OEH’s recent experience with sales of condominiums already completed.   This impairment charge principally resulted from changes in future sales estimates as a result of current economic conditions and in light of recent sales experience after completion of the project.
 
In the year ended December 31, 2011, OEH identified a non-cash property, plant and equipment impairment charge of $23.9 million in respect of Keswick Hall, Virginia. The carrying value was written down to the hotel’s estimated fair value. In 2010, OEH recorded an impairment charge against the carrying value of the two model homes on the residential development adjacent to Keswick Hall.  This non-cash impairment charge of $1.6 million resulted from, primarily, a recent offer on one of the two model homes that did not exceed the carrying value of those assets. This is included within losses from discontinued operations. In January 2012, OEH sold Keswick Hall for $22.0 million.
 
Also in the year ended December 31, 2011, OEH identified a non-cash property, plant and equipment impairment charge of $8.2 million in respect of Casa de Sierra Nevada, San Miguel de Allende, Mexico.  The carrying value was written down to the hotel’s fair value.

Also in the year ended December 31, 2011, OEH identified a non-cash property, plant and equipment impairment charge of $2.2 million in respect of Bora Bora Lagoon Resort, French Polynesia.  The carrying value was written down to the hotel’s fair

32

Table of Contents

value. This is included within losses from discontinued operations. In June 2012, OEH sold Bora Bora Lagoon Resort for $3.0 million .
 
OEH completed the assignment of the purchase and development agreements relating to its proposed New York hotel project in April 2011. However, based on terms under negotiation with interested parties in 2010, OEH recorded a non-cash impairment charge of $6.4 million at December 31, 2010 on land and buildings for the capitalized pre-development expenses incurred in the project.

In the year ended December 31, 2010, OEH identified and recorded a non-cash property, plant and equipment impairment charge of $6.0 million in respect of Hôtel de la Cité . The carrying values of the assets were written down to the fair value to reflect the level of offers received at the time for the purchase of the hotel. This is included within losses from discontinued operations. In August 2011, OEH sold Hôtel de la Cité for $12.9 million .
 
Liquidity and Financial Condition
 
As reported below under “Liquidity and Capital Resources”, OEH has substantial scheduled debt repayments and capital commitments in 2013 and is working to improve its liquidity and capital position.  OEH plans to utilize cash on the balance sheet and from operations, sales of non-core assets, appropriate debt or equity finance or other funding sources or, if necessary, to reschedule loan repayments and capital commitments. As reported, one OEH subsidiary and two unconsolidated joint ventures were out of compliance with financial covenants in their loan agreements at December 31, 2012.  It is expected that the non-compliance will be resolved with the relevant lenders.  OEH recognizes that in the current economic climate it is exposed to enhanced risk of a covenant breach under loan agreements during 2013 if weak trading conditions in the luxury hospitality business lead to a deterioration of OEH’s results.  OEH expects to take proactive steps with its bankers to resolve prospectively any likely breach.
 

33

Table of Contents

Results of Operations

OEH’s operating results for the years 2012 , 2011 and 2010 , expressed as a percentage of revenue, are as follows:
 
 
2012
 
2011
 
2010
Year ended December 31,
 
%
 
%
 
%
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
Owned hotels - Europe
 
37

 
38

 
36

- North America
 
20

 
19

 
21

- Rest of World
 
25

 
25

 
26

Hotel management/part ownership interests
 
1

 
1

 
1

Restaurants
 
3

 
3

 
3

Hotels and restaurants
 
86

 
86

 
87

Tourist trains and cruises
 
14

 
14

 
13

Real estate
 

 

 

 
 
100

 
100

 
100

Expenses:
 
 

 
 

 
 
Cost of services
 
45

 
45

 
47

Selling, general and administrative
 
39

 
39

 
38

Depreciation and amortization
 
8

 
8

 
9

Impairment of goodwill
 

 
2

 
1

Impairment of other intangible assets, other assets and property, plant and equipment
 
1

 
1

 
2

Gain on disposal of property, plant and equipment and capital lease
 

 
(3
)
 

Net finance costs
 
6

 
8

 
6

Earnings/(losses) before income taxes
 
1

 

 
(3
)
Provision for income taxes
 
(4
)
 
(4
)
 
(4
)
Earnings from unconsolidated companies
 

 
1

 

Net losses from continuing operations
 
(3
)
 
(3
)
 
(7
)
Earnings/(losses) from discontinued operations
 
1

 
(12
)
 
(7
)
 
 
 
 
 
 
 
Net losses as a percentage of revenue
 
(2
)
 
(15
)
 
(14
)
 


34


Operating information for OEH’s owned hotels for the years ended December 31, 2012 , 2011 and 2010 is as follows:
 
Year ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Average Daily Rate (in dollars)
 
 

 
 

 
 
Europe
 
699

 
710

 
637

North America
 
382

 
355

 
333

Rest of the world
 
369

 
366

 
340

Worldwide
 
469

 
465

 
420

 
 
 
 
 
 
 
Rooms Available
 
 

 
 

 
 
Europe
 
285,842

 
287,200

 
280,454

North America
 
251,172

 
251,869

 
250,423

Rest of the world
 
404,680

 
399,511

 
384,905

Worldwide
 
941,694

 
938,580

 
915,782

 
 
 
 
 
 
 
Rooms Sold
 
 

 
 

 
 
Europe
 
158,160

 
164,380

 
139,442

North America
 
165,750

 
165,017

 
160,332

Rest of the world
 
220,093

 
221,724

 
202,863

Worldwide
 
544,003

 
551,121

 
502,637

 
 
 
 
 
 
 
Occupancy (percentage)
 
 

 
 

 
 
Europe
 
55

 
57

 
50

North America
 
66

 
66

 
64

Rest of the world
 
54

 
55

 
53

Worldwide
 
58

 
59

 
55

 
 
 
 
 
 
 
RevPAR (in dollars)
 
 

 
 

 
 
Europe
 
387

 
406

 
317

North America
 
252

 
232

 
213

Rest of the world
 
200

 
203

 
179

Worldwide
 
271

 
273

 
231

 
2012 compared to 2011
 
 
 
 
 
 
Change %
Year ended December 31,
 
2012
 
2011
 
Dollars
 
Local
currency
 
 
 
 
 
 
 
 
 
Same Store RevPAR (in dollars)
 
 

 
 

 
 

 
 

Europe
 
387

 
406

 
(5
)%
 
2
%
North America
 
252

 
232

 
9
 %
 
9
%
Rest of the world
 
200

 
203

 
(1
)%
 
1
%
Worldwide
 
271

 
273

 
(1
)%
 
3
%

There were no exclusions from the same store RevPAR data for 2012 and 2011 .

 

35


2011 compared to 2010
 
 
 
 
 
 
Change %
Year ended December 31,
 
2011
 
2010
 
Dollars
 
Local
currency
 
 
 
 
 
 
 
 
 
Same Store RevPAR (in dollars)
 
 

 
 

 
 

 
 

Europe
 
403

 
323

 
25
%
 
19
%
North America
 
232

 
213

 
9
%
 
9
%
Rest of the world
 
203

 
179

 
13
%
 
13
%
Worldwide
 
268

 
230

 
17
%
 
14
%
 
The same store RevPAR data for 2011 and 2010 exclude the operations of Grand Hotel Timeo and Villa Sant'Andrea.
 
Year Ended December 31, 2012 compared to Year Ended December 31, 2011 and
Year Ended December 31, 2011 compared to Year Ended December 31, 2010

Overview

2012 compared to 2011

The net loss attributable to Orient-Express Hotels Ltd. for the year ended December 31, 2012 was $7.1 million ( $0.07 per common share) on revenue of $545.4 million , compared with net loss of $87.8 million ( $0.86 per common share) on revenue of $554.7 million in the prior year. OEH's decreased revenue reflects the weakening of the euro and other currencies against the U.S. dollar as well as small decreases in occupancy. The net loss in 2012 includes impairment of goodwill, other assets and property, plant and equipment of $5.9 million and earnings from discontinued operations of $3.7 million . Impairment of goodwill and property, plant and equipment was $20.1 million and losses from discontinued operations were $68.8 million in the year ended December 31, 2011 .

2011 compared to 2010

The net loss attributable to Orient-Express Hotels Ltd. for the year ended December 31, 2011 was $87.8 million ( $0.86 per common share) on revenue of $554.7 million , compared with net loss of $62.8 million ( $0.69 per common share) on revenue of $469.6 million in the prior year. OEH’s revenue in the year ended December 31, 2011 experienced growth as business conditions in the global lodging industry improved from 2010, following the global economic downturn in 2008 and 2009. The net loss in 2011 includes impairment of goodwill and property, plant and equipment of $20.1 million and losses from discontinued operations of $68.8 million .  Impairment of goodwill, other intangible assets, and property, plant and equipment was $13.4 million and losses from discontinued operations were $34.3 million in the year ended December 31, 2010 .
 
Revenue  
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$ millions
 
$ millions
 
$ millions
 
 
 

 
 

 
 
Owned hotels - Europe
 
202.3

 
213.2

 
169.8

- North America
 
107.4

 
102.7

 
96.7

- Rest of World
 
138.7

 
141.0

 
121.3

Hotel management/part ownership interests
 
5.5

 
5.8

 
4.3

Restaurants
 
16.2

 
16.3

 
15.8

Hotels and restaurants
 
470.0

 
479.0

 
407.9

Tourist trains and cruises
 
74.7

 
75.8

 
61.7

Real estate
 
0.7

 

 

 
 
545.4

 
554.7

 
469.6



36


2012 compared to 2011

Total revenue decreased by $9.3 million , or 2% , from $554.7 million in 2011 to $545.4 million in 2012 . Hotels and restaurants revenue decreased by $9.0 million , or 2% , from $479.0 million in 2011 to $470.0 million in 2012 . Revenue from tourist trains and cruises decreased by $1.1 million , or 1% , from $75.8 million in 2011 to $74.7 million in 2012 . The decrease in revenue is generally due to the weakening of the euro and other currencies against the U.S. dollar and small decreases in occupancy.

2011 compared to 2010

Total revenue increased by $85.1 million , or 18% , from $469.6 million in 2010 to $554.7 million in 2011 .  Hotels and restaurants revenue increased by $71.1 million , or 17% , from $407.9 million in 2010 to $479.0 million in 2011 . Revenue from tourist trains and cruises increased by $14.1 million , or 23% , from $61.7 million in 2010 to $75.8 million in 2011 . The increase in revenue is generally due to the continued growth from 2010 following the global economic downturn in 2008 and 2009 and the negative impact this had on the hotel industry.
 
Owned Hotels:  The change in revenue at owned hotels is analyzed on a regional basis as follows:
 
Europe  
Year ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Average daily rate (in dollars)
 
699

 
710

 
637

Rooms available (in thousands)
 
285,842

 
287,200

 
280,454

Rooms sold (in thousands)
 
158,160

 
164,380

 
139,442

Occupancy (percentage)
 
55

 
57

 
50

RevPAR (in dollars)
 
387

 
406

 
317


Europe - 2012 compared to 2011

Revenue decreased by $10.9 million , or 5% , from $213.2 million for the year ended December 31, 2011 to $202.3 million for the year ended December 31, 2012 due to the weakening of the euro and the Russian ruble against the U.S. dollar as well as a small decrease in occupancy at the Italian hotels. Exchange rate movements caused revenue to decrease by $14.0 million in 2012 compared with 2011 . ADR in U.S. dollars decreased by 2% from $710 in the year ended December 31, 2011 to $699 in the year ended December 31, 2012 . Occupancy decreased from 57% in the year ended December 31, 2011 to 55% in the year ended December 31, 2012 . On a same store basis, RevPAR in local currency increased by 2% for the year ended December 31, 2012 , but decreased by 5% when measured in U.S. dollars.

Europe - 2011 compared to 2010

Revenue increased by $43.4 million , or 26% , from $169.8 million for the year ended December 31, 2010 to $213.2 million for the year ended December 31, 2011 . Improved trading conditions across Europe caused the ADR to increase by 11% from $637 in the year ended December 31, 2010 to $710 in the year ended December 31, 2011 . Occupancy increased from 50% in the year ended December 31, 2010 to 57% in the year ended December 31, 2011 . On a same store basis, RevPAR in local currency increased by 19% for the year ended December 31, 2011 , and by 25% when measured in U.S. dollars. Exchange rate movements caused revenue to increase by $7.9 million in the year ended December 31, 2011 compared with the same period in 2010 .

North America  
Year ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Average daily rate (in dollars)
 
382

 
355

 
333

Rooms available (in thousands)
 
251,172

 
251,869

 
250,423

Rooms sold (in thousands)
 
165,750

 
165,017

 
160,332

Occupancy (percentage)
 
66

 
66

 
64

RevPAR (in dollars)
 
252

 
232

 
213

 

37


North America - 2012 compared to 2011

Revenue increased by $4.7 million , or 5% , from $102.7 million in the year ended December 31, 2011 to $107.4 million in the year ended December 31, 2012 , driven by revenue growth of $2.3 million at Charleston Place and $1.2 million at La Samanna.  North American ADR increased by 8% from $355 in the year ended December 31, 2011 to $382 in the year ended December 31, 2012 . Occupancy remained flat at 66% for the years ended December 31, 2012 and 2011 . On a same store basis, RevPAR increased from $232 in the year ended December 31, 2011 to $252 for the year ended December 31, 2012 . This translated to an increase of 9% in both local currency and U.S. dollars.

North America - 2011 compared to 2010

Revenue increased by $6.0 million , or 6% , from $96.7 million in the year ended December 31, 2010 to $102.7 million in the year ended December 31, 2011 . In the year ended December 31, 2011 , Charleston Place hotel had a revenue increase of $4.5 million, or 9%, over the prior year, primarily from increases in ADR and occupancy. North American ADR increased by 7% from $333 in the year ended December 31, 2010 to $355 in the year ended December 31, 2011 . Occupancy increased from 64% in the year ended December 31, 2010 to 66% in the year ended December 31, 2011 . On a same store basis, RevPAR increased from $213 in the year ended December 31, 2010 to $232 for the year ended December 31, 2011 . This translated to an increase of 9% in both local currency and U.S. dollars.
 
Rest of the World  
Year ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Average daily rate (in dollars)
 
369

 
366

 
340

Rooms available (in thousands)
 
404,680

 
399,511

 
384,905

Rooms sold (in thousands)
 
220,093

 
221,724

 
202,863

Occupancy (percentage)
 
54

 
55

 
53

RevPAR (in dollars)
 
200

 
203

 
179


Total Rest of the World - 2012 compared to 2011

Revenue decreased by $2.3 million , or 2% , from $141.0 million in the year ended December 31, 2011 to $138.7 million in the year ended December 31, 2012 .  Exchange rate movements caused revenue to decrease by $3.4 million. The ADR for the Rest of the World region on a same store basis in U.S. dollars increased from $366 in the year ended December 31, 2011 to $369 for the year ended December 31, 2012 . Occupancy decreased from 55% to 54% . RevPAR on a same store basis decreased by 1% in U.S. dollars from $203 in the year ended December 31, 2011 to $200 for the year ended December 31, 2012 , but increased by 1% when measured in local currency.

Total Rest of the World - 2011 compared to 2010

Revenue increased by $19.7 million , or 16% , from $121.3 million in the year ended December 31, 2010 to $141.0 million in the year ended December 31, 2011 .  Exchange rate movements were responsible for $0.7 million of the revenue increase. The ADR for the Rest of the World region on a same store basis in U.S. dollars increased from $340 in the year ended December 31, 2010 to $366 for the year ended December 31, 2011 . Occupancy also increased, from 53% to 55% , which resulted in an increase in RevPAR on a same store basis in U.S. dollars of 13% from $179 in the year ended December 31, 2010 to $203 for the year ended December 31, 2011 , and 13% when measured in local currency.

South America - 2012 compared to 2011

Revenue at OEH’s hotels in South America collectively decreased by $6.5 million, or 7%, from $91.0 million in the year ended December 31, 2011 to $84.5 million in the year ended December 31, 2012 . A $10.2 million decrease at Copacabana Palace, which was partially closed for the second half of 2012 due to major renovation works, was partially offset by revenue growth at OEH's other South American properties.


38


South America - 2011 compared to 2010
 
Revenue at OEH’s hotels in South America collectively increased by $16.8 million, or 23%, from $74.2 million in the year ended December 31, 2010 to $91.0 million in the year ended December 31, 2011 . Copacabana Palace had a revenue increase of $11.0 million, or 20%, primarily from increases in occupancy and ADR.

Asia - 2012 compared to 2011

Revenue at OEH’s six Asian hotels collectively increased by $3.9 million, or 14%, from $28.3 million in the year ended December 31, 2011 to $32.2 million in the year ended December 31, 2012 . Exchange rate movements across the region were responsible for a revenue decrease of $0.9 million. Occupancy for the year increased by two percentage points, from 59% in the year ended December 31, 2011 to 61% for the year ended December 31, 2012 . ADR in U.S. dollars increased by 12% from $274 in the year ended December 31, 2011 to $307 for the year ended December 31, 2012 . This translated into an increase in RevPAR in U.S. dollars of $24, or 15%, from $163 in the year ended December 31, 2011 to $187 for the year ended December 31, 2012 .

Asia - 2011 compared to 2010

Revenue at OEH’s six Asian hotels collectively increased by $5.7 million, or 25%, from $22.6 million in the year ended December 31, 2010 to $28.3 million in the year ended December 31, 2011 . Exchange rate movements across the region were responsible for $0.7 million of the revenue increase. Occupancy increased from 56% in the year ended December 31, 2010 to 59% for the year ended December 31, 2011 . ADR in U.S. dollars increased by 17%, from $234 in the year ended December 31, 2010 to $274 for the year ended December 31, 2011 . This translated into an increase in RevPAR in U.S. dollars of $33, or 25%, from $130 in the year ended December 31, 2010 to $163 for the year ended December 31, 2011 .
 
Southern Africa - 2012 compared to 2011

Southern Africa revenue increased by $0.3 million, or 1%, from $21.6 million in the year ended December 31, 2011 to $21.9 million in the year ended December 31, 2012 . During 2012, there was a 2% increase in ADR, offset by a 1% decrease in occupancy when compared to 2011. Exchange rate movements across the region also caused a revenue decrease of $2.4 million. RevPAR in U.S. dollars for the year ended December 31, 2012 was $134, a decrease of 1% from $136 for the same period in 2011 , but an increase of 11% from $121 in the year ended December 31, 2011 to $134 for the year ended December 31, 2012 when measured in local currency.

Southern Africa - 2011 compared to 2010

Southern Africa revenue decreased by $2.9 million, or 12%, from $24.5 million in the year ended December 31, 2010 to $21.6 million in the year ended December 31, 2011 . This decrease was net of $0.1 million of exchange rate gains on the translation of the South African rand and Botswana pula to U.S. dollars. The revenue decrease was primarily due to the absence of the World Cup football tournament which was hosted by South Africa in 2010 and to increased competition in Cape Town. RevPAR in U.S. dollars for the year ended December 31, 2011 was $136, a decrease of 7% in both U.S. dollars and local currency from $146 for the same period in 2010 .
 
Hotel Management and Part-Ownership Interests: 

2012 compared to 2011

Revenue decreased by $0.3 million , or 5% , from $5.8 million in the year ended December 31, 2011 to $5.5 million in the year ended December 31, 2012 .

2011 compared to 2010

Revenue increased by $1.5 million , or 35% , from $4.3 million in the year ended December 31, 2010 to $5.8 million in the year ended December 31, 2011 , primarily due to higher management fees from the managed hotels in Peru as they experienced improved results.


39


Restaurants: 

2012 compared to 2011

Revenue decreased by $0.1 million , or 1% , from $16.3 million in the year ended December 31, 2011 to $16.2 million in the year ended December 31, 2012 , primarily from a decrease in the number of covers being served at ‘21’ Club resulting from the aftermath of Hurricane Sandy.

2011 compared to 2010

Revenue increased by $0.5 million , or 3% , from $15.8 million in the year ended December 31, 2010 to $16.3 million in the year ended December 31, 2011 , primarily due to an increase in the number of covers being served at ‘21’ Club.
 
Trains and Cruises: 
 
2012 compared to 2011

Revenue decreased by $1.1 million , or 1% , from $75.8 million in the year ended December 31, 2011 to $74.7 million in the year ended December 31, 2012 . A decrease of $2.9 million from U.K.-based trains was partially offset by gains from other businesses, most notably Road to Mandalay where revenue grew by $1.2 million. Exchange rate movements across the segment were responsible for $0.8 million of the revenue decrease.

2011 compared to 2010

Revenue increased by $14.1 million , or 23% , from $61.7 million in the year ended December 31, 2010 to $75.8 million in the year ended December 31, 2011 . All businesses included within the trains and cruises segment showed increases compared to 2010, mainly from improved customer demand. The largest increase was from Venice Simplon-Orient-Express, which grew by $5.0 million, or 25%, from $19.7 million in the year ended December 31, 2010 to $24.7 million in the year ended December 31, 2011 . Exchange rate movements across the segment were responsible for $2.0 million of the revenue increase.
 
Real Estate:  

2012 compared to 2011

Revenue of $0.7 million for the year ended December 31, 2012 relates to the sale of the final two residential lots at Keswick Hall estate which did not form part of the sale of the hotel property in January 2012. Formerly, real estate revenues were primarily from the Porto Cupecoy property development, which are now presented within discontinued operations for all periods presented.

2011 compared to 2010

Real estate revenue was $Nil for the years ended December 31, 2011 and 2010 , as revenues for Porto Cupecoy property development are now within discontinued operations for all periods presented.
 
Depreciation and amortization
 
2012 compared to 2011

Depreciation and amortization increased by $0.1 million from $43.8 million in the year ended December 31, 2011 to $43.9 million in the year ended December 31, 2012 . Exchange rate movements were responsible for a decrease of $1.7 million.

2011 compared to 2010

Depreciation and amortization increased by $1.2 million , or 3% , from $42.6 million in the year ended December 31, 2010 to $43.8 million in the year ended December 31, 2011 . Exchange rate movements were responsible for an increase of $1.4 million.
 

40


Cost of services

2012 compared to 2011

Cost of services decreased by $4.6 million , or 2% , from $249.8 million in the year ended December 31, 2011 to $245.2 million in the year ended December 31, 2012 . Exchange rate movements were responsible for a decrease of $8.2 million. Cost of services were 45% of revenue in the years ended December 31, 2012 and 2011 .

2011 compared to 2010

Cost of services increased by $30.4 million , or 14% , from $219.4 million in the year ended December 31, 2010 to $249.8 million in the year ended December 31, 2011 . Exchange rate movements were responsible for $8.2 million of the total increase. Cost of services were 45% of revenue in the year ended December 31, 2011 and 47% of revenue in the year ended December 31, 2010 .
 
Selling, general and administrative expenses
 
2012 compared to 2011

Selling, general and administrative expenses decreased by $5.9 million , or 3% , from $215.9 million in the year ended December 31, 2011 to $210.0 million in the year ended December 31, 2012 . Exchange rate movements were responsible for $5.0 million of the total decrease. Selling, general and administrative expenses were 39% of revenue in the years ended December 31, 2012 and 2011.

2011 compared to 2010

Selling, general and administrative expenses increased by $37.5 million , or 21% , from $178.4 million in the year ended December 31, 2010 to $215.9 million in the year ended December 31, 2011 . In 2011, an expense of $2.5 million was recorded to settle litigation associated with the ‘21’ Club. Exchange rate movements were responsible for $5.4 million of the total increase. Selling, general and administrative expenses were 39% of revenue in the year ended December 31, 2011 and 38% of revenue in the year ended December 31, 2010 .

Impairment of goodwill

2012 compared to 2011

Impairment of goodwill decreased by $9.8 million , from $11.9 million in the year ended December 31, 2011 to $2.1 million in the year ended December 31, 2012 . On October 1, 2012, OEH performed its annual goodwill impairment review. OEH identified and recorded goodwill impairments of $2.1 million within its continuing operations, which related entirely to Reid's Palace . At December 31, 2011 , OEH identified and recorded goodwill impairments of $11.9 million within its continuing operations, comprising $7.9 million at Maroma Resort and Spa , $2.8 million at La Residencia and $1.2 million at Mount Nelson Hotel .

2011 compared to 2010

Impairment of goodwill increased by $6.0 million , from $5.9 million in the year ended December 31, 2010 to $11.9 million in the year ended December 31, 2011 . At December 31, 2011 , OEH identified and recorded goodwill impairments of $11.9 million within its continuing operations, comprising $7.9 million at Maroma Resort and Spa , $2.8 million at La Residencia and $1.2 million at Mount Nelson Hotel . At December 31, 2010 , OEH had not identified any goodwill impairments during its annual impairment review. However, during 2010 OEH did identify and record goodwill impairments of $5.9 million in its continuing operations, comprising $5.4 million at La Samanna and $0.5 million at Napasai .


41


Impairment of other intangible assets, other assets and property, plant and equipment

2012 compared to 2011

Impairment of other intangible assets, other assets and property, plant and equipment decreased by $4.4 million from $8.2 million in the year ended December 31, 2011 to $3.8 million in the year ended December 31, 2012 . In the year ended December 31, 2012 , OEH identified a non-cash property, plant and equipment and other assets charge of $3.8 million relating to the write down to fair value of train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service. In the year ended December 31, 2011 , OEH identified a non-cash property, plant and equipment charge of $8.2 million in respect of Casa de Sierra Nevada. The carrying value was written down to the hotel’s fair value.
 
2011 compared to 2010

Impairment of other intangible assets and property, plant and equipment increased by $0.7 million from $7.5 million in the year ended December 31, 2010 to $8.2 million in the year ended December 31, 2011 . In the year ended December 31, 2011 , OEH identified a non-cash property, plant and equipment charge of $8.2 million in respect of Casa de Sierra Nevada. The carrying value was written down to the hotel’s fair value.

In the year ended December 31, 2010, based on terms under negotiation with interested parties for the assignment of OEH's purchase and development agreements relating to its proposed New York hotel project, OEH recorded a non-cash impairment charge of $6.4 million on land and buildings for the capitalized pre-development expenses incurred in the project. The assignment was completed in 2011. Also, OEH identified and recorded a non-cash Internet sites impairment charge of $1.1 million in respect of its two Internet-based businesses. The carrying values of the intangible assets were written down to reflect the level of offers being received at the time they were considered held for sale. Subsequent to December 31, 2010, these assets were returned to continuing operations as all the criteria for held for sale treatment were subsequently not met.

Gain on disposal of property, plant and equipment and capital lease

2012 compared to 2011

In December 2012, OEH signed agreements for a new loan facility of $50.0 million secured by the assets of Grand Hotel Europe. A capital lease on the hotel was extinguished as part of that refinancing, resulting in a gain of $1.5 million in the year ended December 31, 2012 .

OEH completed the assignment of the purchase and development agreements relating to its proposed New York hotel project in April 2011, resulting in a gain, net of costs, of $0.5 million in the year ended December 31, 2011. As part of this assignment, the assignee in December 2011 also acquired excess development rights held by ‘21’ Club. Cumulative gain on the sale of the purchase and development agreements and the excess development rights was $16.5 million .

2011 compared to 2010

OEH completed the assignment of the purchase and development agreements relating to its proposed New York hotel project in April 2011, resulting in a gain, net of costs, of $0.5 million in the year ended December 31, 2011. As part of this assignment, the assignee in December 2011 also acquired excess development rights held by ‘21’ Club. Cumulative gain on the sale of the purchase and development agreements and the excess development rights was $16.5 million . There were no gains or losses on disposal in the year ended December 31, 2010.

 

42


Adjusted earnings by segment

Segment performance is evaluated based upon segment earnings before gains/(losses) on disposal, impairments, central overheads, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“adjusted earnings by segment”). Segment performance for the years 2012 , 2011 and 2010 is analyzed as follows:
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$ millions
 
$ millions
 
$ millions
 
 
 
 
 
 
 
Adjusted earnings by segment:
 
 

 
 

 
 

Owned hotels - Europe
 
56.3

 
60.3

 
37.4

- North America
 
19.5

 
13.6

 
15.0

- Rest of World
 
34.7

 
33.5

 
28.6

Hotel management/part ownership interests
 
2.8

 
5.3

 
2.2

Restaurants
 
2.2

 
(0.1
)
 
2.5

Hotels and restaurants
 
115.5

 
112.6

 
85.7

Tourist trains and cruises
 
22.2

 
20.9

 
17.4

Real estate
 
(0.6
)
 

 
(0.3
)
 
 
 
 
 
 
 
Reconciliation to net losses:
 
 
 
 
 
 
Total adjusted earnings by segment
 
137.1

 
133.5

 
102.8

 
 
 
 
 
 
 
Gain on disposal
 
1.5

 
16.5

 

Impairment of goodwill
 
(2.1
)
 
(11.9
)
 
(5.9
)
Impairment of other intangible assets, other assets and property, plant and equipment
 
(3.8
)
 
(8.2
)
 
(7.5
)
Impairment of property, plant and equipment in unconsolidated company
 

 
(0.6
)
 

Central overheads
 
(39.0
)
 
(37.1
)
 
(26.5
)
Depreciation and amortization
 
(43.9
)
 
(43.8
)
 
(42.6
)
Interest income
 
1.1

 
2.4

 
1.3

Interest expense
 
(30.9
)
 
(42.6
)
 
(34.2
)
Foreign currency, net
 
(2.8
)
 
(4.6
)
 
4.7

Provision for income taxes
 
(22.0
)
 
(20.1
)
 
(18.2
)
Share of provision for income taxes of unconsolidated companies
 
(5.8
)
 
(2.3
)
 
(2.2
)
 
 
 
 
 
 
 
Losses from continuing operations
 
(10.6
)
 
(18.8
)
 
(28.3
)
Earnings/(losses) from discontinued operations
 
3.7

 
(68.8
)
 
(34.3
)
 
 
 
 
 
 
 
Net losses
 
(6.9
)
 
(87.6
)
 
(62.6
)

2012 compared to 2011

The European hotels collectively reported adjusted earnings by segment of $56.3 million for the year ended December 31, 2012 , a decrease of $4.0 million , or 7% , from $60.3 million for the same period in 2011 . $4.0 million of the decrease was attributable to exchange rate movements. As a percentage of European hotels revenue, the European adjusted earnings by segment margin remained flat at 28% for the years ended December 31, 2012 and 2011 .

Adjusted earnings by segment in the North American hotels region increased $5.9 million , or 43% , from $13.6 million in the year ended December 31, 2011 to $19.5 million in the year ended December 31, 2012 . As a percentage of North American hotels revenue, the North American segment adjusted earnings by segment margin increased from 13% in 2011 to 18% in 2012 .


43


Adjusted earnings by segment in the Rest of the World hotels region increased by $1.2 million , or 4% , from $33.5 million in the year ended December 31, 2011 to $34.7 million in the year ended December 31, 2012 . As a percentage of Rest of the World hotels revenue, the adjusted earnings by segment margin increased from 24% for 2011 to 25% for 2012 .

Adjusted earnings by segment in restaurants increased by $2.3 million from a loss of $0.1 million in the year ended December 31, 2011 to earnings of $2.2 million in the year ended December 31, 2012 . The movement was due to a $2.5 million charge in 2011 related to settlement of employee litigation.

Adjusted earnings by segment in tourist trains and cruises increased by $1.3 million , or 6% , from $20.9 million in the year ended December 31, 2011 to $22.2 million in the year ended December 31, 2012 . As a percentage of revenue from tourist trains and cruises, adjusted earnings by segment margin increased from 28% in 2011 to 30% in 2012 .

Central overheads increased by $1.9 million , or 5% , from $37.1 million in the year ended December 31, 2011 to $39.0 million in the year ended December 31, 2012 . The significant variances included professional advisory fees of $1.2 million related to the unsolicited proposal from The Indian Hotels Company Limited received on October 18, 2012 to acquire OEH, and CEO search fees of $0.8 million. As a percentage of revenue, central overheads were 7% in both 2012 and 2011 .

2011 compared to 2010

The European hotels collectively reported adjusted earnings by segment of $60.3 million for the year ended December 31, 2011 , an increase of $22.9 million , or 61% , from $37.4 million in the year ended December 31, 2010 . Improvement was largely due to the Italian hotels. As a percentage of European hotels revenue, the European adjusted earnings by segment margin increased from 22% in 2010 to 28% in 2011 .
 
Adjusted earnings by segment in the North American hotels region decreased by $1.4 million , or 9% , from $15.0 million in the year ended December 31, 2010 to $13.6 million in the year ended December 31, 2011 . As a percentage of North American hotels revenue, the North American adjusted earnings by segment margin decreased from 15% in 2010 to 13% in 2011 .
 
Adjusted earnings by segment in the Rest of the World hotels region increased by $4.9 million , 17% , from $28.6 million in the year ended December 31, 2010 to $33.5 million in the year ended December 31, 2011 . As a percentage of Rest of the World hotels revenue, the adjusted earnings by segment margin remained flat at 24% for 2011 and 2010 .
 
Adjusted earnings by segment in restaurants decreased by $2.6 million from earnings of $2.5 million in the year ended December 31, 2010 to a loss of $0.1 million in the year ended December 31, 2011 . The movement was due to a $2.5 million charge in 2011 related to settlement of employee litigation.

Adjusted earnings by segment in tourist trains and cruises increased by $3.5 million , or 20% , from $17.4 million in the year ended December 31, 2010 to $20.9 million in the year ended December 31, 2011 . As a percentage of revenue from tourist trains and cruises, adjusted earnings by segment margin was 28% in both 2011 and 2010 .

Central overheads increased by $10.6 million , or 40% , from $26.5 million in the year ended December 31, 2010 to $37.1 million in the year ended December 31, 2011 . The significant variances included compensation and performance-related employee incentives of $2.6 million (including bonuses for exceeding OEH’s 2011 budget), management restructuring, CEO search and other professional fees of $2.0 million, share option expense of $1.2 million and premises and moving costs associated with the relocation of the London office of $0.9 million. In the year ended December 31, 2010, there were litigation and other one-time credits of $2.0 million. As a percentage of revenue, central overheads increased from 6% in 2010 to 7% in 2011 .

Earnings from operations

2012 compared to 2011

Earnings from operations increased by $0.2 million , from $41.7 million in the year ended December 31, 2011 to $41.9 million in the year ended December 31, 2012 , due to the factors described above.

2011 compared to 2010

Earnings from operations increased by $25.9 million , from $15.8 million in the year ended December 31, 2010 to $41.7 million in the year ended December 31, 2011 , due to the factors described above.

44


 
Net finance costs
 
2012 compared to 2011

Net finance costs decreased by $12.2 million , or 27% , from $44.8 million for the year ended December 31, 2011 to $32.6 million for the year ended December 31, 2012 . The year ended December 31, 2011 included a foreign exchange loss of $4.6 million compared to a foreign exchange loss of $2.8 million in the year ended December 31, 2012 . Interest expense decreased by $11.7 million , or 27% , from $42.6 million in the year ended December 31, 2011 to $30.9 million in the year ended December 31, 2012 . Interest expense for the year ended December 31, 2011 included swap and loan termination costs of $3.5 million related to loan facilities in Brazil and Italy and a write-off of deferred financing costs of $1.7 million at La Samanna, compared to $1.8 million of similar costs related to the Sicilian properties for the year ended December 31, 2012 . Also, in the year ended December 31, 2011 , interest was capitalized of $0.9 million , while $4.2 million was capitalized in the year ended December 31, 2012 . The remaining reduction in interest expense was due to lower interest rates and a reduction of debt over the last 12 months.

2011 compared to 2010

Net finance costs increased by $16.6 million , or 59% , from $28.2 million for the year ended December 31, 2010 to $44.8 million for the year ended December 31, 2011 . The year ended December 31, 2010 included a foreign exchange gain of $4.7 million compared to a foreign exchange loss of $4.6 million in the year ended December 31, 2011 . Excluding these foreign exchange items, net interest expense increased by $8.4 million , or 25% , from $34.2 million in the year ended December 31, 2010 to $42.6 million in the year ended December 31, 2011 . This increase in the 2011 period was primarily as a result of higher interest rates on debt refinanced in 2010, the write-off of deferred financing costs of $1.7 million at La Samanna and swap and loan termination costs of $3.5 million related to loan facilities in Brazil and Italy. Also, in the year ended December 31, 2010 , interest was capitalized of $2.2 million , while $0.9 million was capitalized in the year ended December 31, 2011 .
 
Provision for income taxes

2012 compared to 2011

The provision for income taxes increased by $1.9 million , or 9% , from $20.1 million in 2011 to $22.0 million in 2012 .
 
The Company is incorporated in Bermuda, which does not impose an income tax. OEH's effective tax rate is significantly affected by its mix of income and loss in various jurisdictions as there is significant variation in the income tax rates imposed and also by the effect of losses in jurisdictions for which it is expected that the tax benefit of losses will not be recognized at year end.
 
Accordingly, the income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax and also attributable to the relative amount of earnings or loss in various jurisdictions, the effect of valuation allowances, and uncertain tax positions. The income tax provision is also affected by discrete items that may occur in any given year, but are not consistent from year to year. Discrete items which had the most significant impact on the tax rate include a deferred tax charge of $0.1 million in 2012 (2011 - credit of $2.1 million) arising in respect of foreign exchange gain/loss on the measurement of deferred taxes on temporary differences in subsidiaries operating in jurisdictions where the local currency differs from the functional currency.
 
The provision for income taxes for 2012 included a deferred tax provision of $6.1 million in respect of valuation allowances due to a change in the estimate concerning OEH's ability to realize loss carry-forwards in certain jurisdictions compared to a $11.8 million provision in 2011.

2011 compared to 2010

The provision for income taxes increased by $1.9 million , or 10% , from $18.2 million in 2010 to $20.1 million in 2011.
 
The provision for income taxes for 2011 included a deferred tax provision of $11.8 million in respect of valuation allowances due to a change in the estimate concerning OEH's ability to realize loss carry-forwards in certain jurisdictions compared to a $19.0 million provision in 2010.


45


Earnings from unconsolidated companies
 
2012 compared to 2011

Earnings from unconsolidated companies net of tax decreased by $2.3 million , or 52% , from $4.4 million in the year ended December 31, 2011 to $2.1 million in the year ended December 31, 2012 . The tax expense associated with earnings from unconsolidated companies was $2.3 million in 2011 and $5.8 million in 2012 .

2011 compared to 2010

Earnings from unconsolidated companies net of tax increased by $2.1 million , or 91% , from $2.3 million in the year ended December 31, 2010 to $4.4 million in the year ended December 31, 2011 . Earnings from the Peru hotels joint venture increased by $2.1 million, as the hotels recovered from property damage and business interruption caused by floods in 2010. This was offset by a non-cash property, plant and equipment charge of $0.6 million in respect of Las Casitas del Colca, one of the hotels within the Peru hotels joint venture, which reduced the amount of earnings recorded by OEH related to unconsolidated companies.  The carrying value was written down to the hotel’s fair value based on the joint venture’s best estimates. The tax expense associated with earnings from unconsolidated companies was $2.2 million in 2010 and $2.3 million in 2011 .
 
Net earnings/(losses) from discontinued operations
 
2012 compared to 2011

The earnings from discontinued operations for the year ended December 31, 2012 were $3.7 million , an increase of $72.5 million from the losses recognized for the year ended December 31, 2011 of $68.8 million .

Earnings from discontinued operations for the year ended December 31, 2012 include a gain of $5.4 million on the disposal of The Westcliff , which was sold in December 2012 , a gain of $5.4 million on the disposal of The Observatory Hotel , which was sold in August 2012 , a gain of $0.7 million on the disposal of Bora Bora Lagoon Resort , which was sold in June 2012 , and a gain of $4.0 million on the disposal of Keswick Hall , which was sold in January 2012 . These gains were partially offset by operating losses of $5.2 million from Porto Cupecoy which was reclassified to discontinued operations in December 2012.

Losses from discontinued operations for the year ended December 31, 2011 include impairment charges of $38.5 million at Porto Cupecoy , $23.9 million at Keswick Hall and $2.2 million at Bora Bora Lagoon Resort , as the carrying values were written down to the fair values of the properties. These losses were offset by a gain of $2.2 million on the disposal of Hôtel de la Cité , which was sold in August 2011 .

2011 compared to 2010

The losses from discontinued operations for the year ended December 31, 2011 were $68.8 million , an increase of $34.5 million from the losses recognized the year ended December 31, 2010 of $34.3 million .

Losses from discontinued operations for the year ended December 31, 2011 include impairment charges of $38.5 million at Porto Cupecoy , $23.9 million at Keswick Hall and $2.2 million at Bora Bora Lagoon Resort , as the carrying values were written down to the fair values of the properties. These losses were offset by a gain of $2.2 million on the disposal of Hôtel de la Cité , which was sold in August 2011 .

Losses from discontinued operations for the year ended December 31, 2010 include impairment charges of $24.6 million at Porto Cupecoy , $6.0 million at Hôtel de la Cité and $1.6 million at Keswick Hall , as the carrying values were written down to the fair values of the properties. In addition, a loss of $0.5 million was recognized on the disposal of La Cabana restaurant, which was sold in May 2010 . These losses were offset by a gain of $7.2 million on the disposal of Lilianfels Blue Mountains , which was sold in January 2010 .


46


Liquidity and Capital Resources
 
Overview

OEH's primary short-term cash needs include payment of compensation, general business expenses, servicing of finance and capital commitments and contractual payment obligations which includes principal and interest payment on its debt facilities. Long-term liquidity needs may include existing and ongoing property refurbishments, potential investment in strategic acquisitions, and the repayment of current and long-term debt. At December 31, 2012 , total debt and obligations under capital leases amounted to $521.6 million ( 2011 - $543.9 million ), including a current portion of $90.1 million ( 2011 - $77.1 million ) repayable within 12 months. Additionally, OEH had capital commitments at December 31, 2012 amounting to $9.7 million ( 2011 - $15.4 million ).

OEH had cash and cash equivalents of $93.4 million at December 31, 2012 , $3.3 million more than the $90.1 million at December 31, 2011 . In addition, OEH had restricted cash balances of $21.1 million ( 2011 - $13.2 million ). At December 31, 2012 , there were undrawn amounts available to OEH under committed short-term lines of credit of $4.5 million ( 2011 - $4.4 million ), bringing total cash availability at December 31, 2012 to $97.9 million , excluding the restricted cash of $21.1 million . When assessing cash and cash equivalents within OEH, management considers the availability of those cash resources held within local business units to meet the strategic needs of OEH.

OEH believes that the cash position of OEH together with projected available cash flows from operations, the availability of cash through revolving lines of credit and debt facilities, and other options available to OEH to respond to challenging economic conditions provide sufficient financial resources to fund current cash requirements as well as OEH's capital objectives in 2013 and the foreseeable future.

OEH expects to fund working capital requirements, debt service and capital expenditure commitments for the foreseeable future from cash resources, operating cash flow, available committed borrowing facilities, issuing new debt or equity securities and disposing of non-core assets.

Currently, OEH's long-term liquidity is constrained due to the uncertainty in the economic environment. In addition to operating cash flows generated from the core business, OEH has other sources of liquidity such as sale of non-core assets, potential debt and equity issuances and obtaining new debt facilities to meet its cash needs. If OEH's long-term cash flow is still insufficient, then OEH may need to extend the term of maturing debt facilities. OEH has had a strong track record of being able to refinance existing facilities and complete planned sales of non-core assets to generate additional liquidity. However, these options are dependent on third parties and are not solely within OEH's control.

In recent years, OEH has raised substantial cash resources from the sale of non-core assets. While the sale of other non-core assets is under consideration, this may not continue to be a source of cash at similar levels in the future. Therefore, the performance of OEH's underlying business and OEH's ability to raise new capital, including refinancing its existing debt facilities, are key sources of liquidity to fund cash flow requirements.

Recent Events Affecting OEH's Liquidity and Capital Resources

In January 2012 , OEH completed the sale of Keswick Hall, Virginia, for gross proceeds of $22.0 million , repaying associated debt of $10.0 million . In June 2012 , OEH completed the sale of Bora Bora Lagoon Resort, French Polynesia, for gross proceeds of $3.0 million . In August 2012 , OEH completed the sale of The Observatory Hotel, Sydney, for gross proceeds of A$40.0 million ( $42.1 million ), of which A$10.7 million ( $11.2 million ) was used to repay a bank loan secured by the hotel. In December 2012 , OEH completed the sale of The Westcliff, Johannesburg, for gross proceeds of $26.0 million . Total consideration for sales of non-core assets completed in 2012 was $93.1 million and $71.9 million after repayment of associated loans. In addition, in January 2013, OEH completed the sale of Porto Cupecoy, its real estate development on the Dutch side of St. Martin, for gross proceeds of $19.0 million. OEH is also currently considering the sales prospects of other non-core properties.

In June 2012, OEH refinanced a $13.3 million facility secured by Napasai, Koh Samui, extending the maturity from 2012 to 2017.

In September 2012, OEH obtained a new loan of €35 million ($44.4 million) that matures in three years and bears interest at EURIBOR plus 5%, to refinance €36.8 million ($46.8 million) of long-term debt that was due to mature in 2013 related to the two Sicilian hotels.

Also in September 2012, OEH obtained a new loan of $12.0 million secured on the cash flows of its two hotels in Bali. The loan is expected to be drawn in the third quarter of 2013 and will be used to refurbish Jimbaran Puri Bali hotel. The loan has an interest rate of LIBOR plus 3.75% and matures in September 2015 .

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In December 2012, OEH signed a new $50.0 million loan bearing interest at LIBOR plus 7.00% and maturing in December 2017 , secured by Grand Hotel Europe, that will provide approximately $20.0 million for general corporate purposes, $4.0 million for repayment of existing debt and $26.0 million for refurbishment of the hotel.

Also in December 2012, an additional $9.2 million was borrowed from existing lenders to Charleston Place Hotel. These funds will be used to finance the first phase of a three-year rooms refurbishment program at the hotel.

Altogether in 2012, OEH raised $118.3 million of new debt and had repayments of principal, including normal amortization, of $134.7 million.

Covenant Compliance

OEH has several loan facilities with commercial banks, most of which relate to specific hotel operations or other properties and are secured by a mortgage on particular properties. In most cases, the borrower is either the Company or a subsidiary owning the property and the loan is guaranteed by the Company.

The loan facilities generally place restrictions on the property-owning subsidiary's ability to incur additional debt and limit liens, and to effect mergers and asset sales, and include financial covenants. Where the property-owning subsidiary is the borrower, the financial covenants relate to the financial performance of the property financed and generally include covenants relating to interest coverage, debt service, and loan-to-value and debt-to-EBITDA ratio tests. Where the Company is the borrower or the guarantor, most facilities contain financial covenants which are based on OEH's performance on a consolidated basis and typically include a quarterly interest coverage test and a quarterly net worth test.

OEH recognizes the risk that a property-specific or group-consolidated loan covenant could be breached. Given the current economic environment and recent performance of OEH's business, compliance with loan covenants is closely monitored as certain facilities are experiencing low headroom. In order to minimize this risk, OEH regularly prepares cash flow and other projections which are used to forecast covenant compliance under all loan facilities. If there is any likelihood of potential non-compliance with a covenant, OEH takes proactive steps to meet with the lending bank to seek an amendment to, or a waiver of, the financial covenant at risk.  Obtaining an amendment or waiver may result in an increase in the borrowing costs.

Many of OEH's bank loan facilities include cross-default provisions under which a failure to pay principal or interest by the borrower or guarantor under other indebtedness in excess of a specified threshold amount would cause a default under the facilities.  Under OEH's largest loan facility, the specified cross-default threshold amount is $25.0 million. None of the facilities out of covenant compliance described below have triggered cross-default provisions of other OEH facilities.

At December 31, 2012 , one of OEH’s subsidiaries had not complied with certain financial covenants in a loan facility. The $1.7 million outstanding on this loan has been classified as a current portion of debt and OEH expects to rectify this non-compliance in the first half of 2013. In addition, two unconsolidated joint venture companies for which OEH provides guarantees were out of compliance with debt covenants as follows:

The unconsolidated rail joint venture in Peru in which OEH has a 50% interest was out of compliance with a debt service coverage ratio covenant for a loan of $7.6 million , which could require the Company to fund its guarantee should the banks call the loan facility. Discussions with the banks are ongoing to bring the joint venture back into compliance and OEH anticipates rectifying the breach through refinancing or renegotiating covenant terms in the second half of 2013. Although the banks currently remain entitled to do so, OEH does not expect the banks to call the loan or that the Company will be required to fund the guarantee as the cash flows from the joint venture remain strong.

The Hotel Ritz, Madrid, 50% owned by OEH, was out of compliance at December 31, 2012 with the debt service coverage ratio in its first mortgage loan facility amounting to $85.0 million .  Although the loan is non-recourse to and not credit-supported by OEH or the joint venture partner in the hotel, each has provided separate partial guarantees of $9.9 million and a working capital guarantee of $1.2 million as of December 31, 2012 , which may be required to be funded should the bank call the loan. Although covenant waivers have been obtained in the past, there currently is no waiver in place for the breached covenant. However, discussions continue to progress with the lender as to how to bring the hotel into long-term compliance. OEH does not expect the bank to call the loan and, therefore, does not believe the Company will be required to fund the guarantees.

Based on its current financial forecasts, OEH believes it will continue to comply with substantially all financial covenants in its loan facilities, except for the instances of non-compliance noted above. While there is forecast low covenant compliance

48


headroom under certain other small facilities, OEH believes an event of default under those other facilities can be avoided through OEH's mitigating actions. However, if OEH does not comply with the covenants and obligations in its loan agreements, its lenders may choose to declare a default and exercise their rights, including acceleration of the debt obligations, and as a consequence OEH may determine it necessary to pursue alternative means to meet business obligations.
In addition to operating cash flows, OEH has various options available to obtain additional cash resources should economic conditions deteriorate or loan covenants be breached and OEH was unable to obtain a waiver of or renegotiate a financial covenant breach. Among these options are refinancing loan facilities, reducing expenditures such as refurbishment and property maintenance projects, issuing new debt or equity securities, or selling remaining non-core assets. Although OEH does not anticipate this to be the case, if circumstances were to arise in which cash is needed immediately, OEH may sell properties below fair market value in order to timely generate additional cash to meet business needs.

In the unlikely event OEH's future results of operations are significantly less than forecast and mitigating actions by OEH are unsuccessful, breaches of one or more financial covenants could occur that result in loan facility defaults and cross-defaults. In that circumstance, OEH could be required to repay a large amount of its bank debt at a time when its cash resources would be insufficient to fund the repayment.

Working Capital
  
Current assets less current liabilities, including the current portion of long-term debt, resulted in a working capital balance of $28.7 million at December 31, 2012 , a decrease from $132.4 million at December 31, 2011 . The main factor that contributed to the decrease in working capital was a decrease in assets of discontinued operations held for sale.

Cash Flow - Sources and Uses of Cash

At December 31, 2012 and 2011 , OEH had cash and cash equivalents of $93.4 million and $90.1 million , respectively. In addition, OEH had restricted cash of $21.1 million and $13.2 million as of December 31, 2012 and 2011 , respectively.

Operating Activities . Net cash provided by operating activities for the year ended December 31, 2012 was $45.6 million compared to $42.2 million for the year ended December 31, 2011 and $57.1 million for the year ended December 31, 2010 .
 
The results of operations are the primary driver of operating cash flows, as further described below. Losses from continuing operations of $10.6 million were recorded for the year ended December 31, 2012 compared to $18.8 million for the year ended December 31, 2011 and $28.3 million for the year ended December 31, 2010 .

Expenses for the year ended December 31, 2012 were adversely affected by non-cash impairments of property, plant and equipment of $2.5 million and other assets of $1.3 million related to the write-down to fair value of train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service, and a non-cash impairment of goodwill at Reid's Palace of $2.1 million .

Expenses for the year ended December 31, 2011 were adversely affected by non-cash impairments of property, plant and equipment at Casa de Sierra Nevada of $8.2 million and goodwill at Maroma Resort and Spa, Mount Nelson Hotel, and La Residencia of $11.9 million .

The non-cash impairments in 2010 consisted of property, plant and equipment related to the New York hotel project of $6.4 million , goodwill at La Samanna and Napasai of $5.9 million , and other intangible assets of O.E. Interactive Ltd. and Luxurytravel.com UK Ltd. of $1.1 million .

The 2012 gain of $1.5 million is related to a capital lease on Grand Hotel Europe that was extinguished when a new loan secured by the hotel was put in place.

The 2011 gain of $16.5 million related to the assignment of OEH's purchase and development agreements for its proposed New York hotel project in April 2011, along with the sale to the assignee of excess development rights of the '21' Club restaurant.

The interest expense was $11.7 million higher in the year ended December 31, 2011 than in 2012 due to swap and loan termination costs related to loan facilities in Brazil and Italy. Further, the interest expense has been reduced by $4.2 million in the year ended December 31, 2012 due to the capitalization of interest during renovation of the El Encanto property.


49


The interest expense was $8.4 million higher in the year ended December 31, 2011 than in 2010 due to higher swap and loan termination costs related to loan facilities in Europe and the U.S. Further, the interest expense in the year ended December 31, 2010 was reduced by $2.2 million due to the capitalization of interest for the Sicilian properties which did not continue into 2011 .

Investing Activities . Cash used in investing activities was $23.1 million for the year ended December 31, 2012 , compared to $13.2 million for the year ended December 31, 2011 and $90.5 million for the year ended December 31, 2010 .

Proceeds from sale of property, plant and equipment in the year ended December 31, 2011 of $42.0 million were the result of the assignment of the New York hotel development project for gross proceeds of $25.5 million and the sale of excess development rights for gross proceeds of $16.5 million.

In 2010, $46.4 million, net of cash acquired, was used for the acquisition of the Grand Hotel Timeo and Villa Sant'Andrea. There were no acquisitions in 2012 and 2011 .

Capital expenditure of $97.1 million during the year ended December 31, 2012 included capital expenditure of $40.4 million at El Encanto, $16.3 million at Copacabana Palace, $4.0 million at Hotel Splendido, $4.0 million at the Sicilian hotels and $3.8 million at La Samanna.

Capital expenditure of $60.0 million during the year ended December 31, 2011 included $2.0 million at Hotel das Cataratas, $9.8 million at El Encanto, $1.4 million at Le Manoir aux Quat'Saisons, $1.9 million at Mount Nelson Hotel, $5.0 million at Copacabana Palace, $2.2 million at Grand Hotel Europe, and $4.1 million at the Sicilian properties. In addition, $2.5 million was spent investing in the Venice Simplon-Orient-Express.

Capital expenditure of $64.6 million during the year ended December 31, 2010 included $9.3 million at Hotel das Cataratas, $3.1 million at El Encanto, $3.0 million at Le Manoir aux Quat'Saisons, $3.9 million at Mount Nelson Hotel, $2.3 million at Copacabana Palace, $3.0 million at Grand Hotel Europe, and $9.7 million at the Sicilian properties. In addition, $3.2 million was spent investing in U.K. train operations.

Financing Activities . Cash used in financing activities for the year ended December 31, 2012 was $19.0 million compared to $89.8 million for the year ended December 31, 2011 and cash provided by financing activities of $111.8 million for the year ended December 31, 2010 .

During the year ended December 31, 2012, € 36.8 million ($ 46.8 million ) of debt secured by the Sicilian hotels was refinanced with a € 35.0 million ($ 44.4 million ) facility maturing in 2015. In addition, $3.1 million of debt secured by the Miraflores Park Hotel was refinanced with a $10.1 million facility with tranches maturing in 2014 and 2022. The $15.0 million capital expenditure facility secured by Copacabana Palace was fully drawn, $ 25.7 million was borrowed for El Encanto construction, and $11.4 million was repaid upon sale of The Observatory Hotel. The remaining debt payments were scheduled repayments on existing debt.

During the year ended December 31, 2011, €30.0 million ($43.5 million) of debt secured by La Residencia, maturing in September 2011, was refinanced with a €18.0 million ($26.1 million) facility maturing in 2014. In addition, an $88 million loan secured by the Brazilian properties was refinanced with a $115.0 million loan which includes a $15.0 million capital expenditure facility for refurbishment of Copacabana Palace. The remaining debt payments were scheduled repayments on existing debt.

Loans secured by Charleston Place and other U.S. properties, totaling $113.4 million, were refinanced in 2010 with two new loans totaling $122.9 million, one of which matures in 2013, and the other in 2013 with two one-year extension options available to OEH.  A further loan secured by certain European hotels totaling €238.7 million ($320.2 million at the exchange rate at December 31, 2010) was refinanced in 2010 with two new loan facilities totaling €187.5 million ($251.5 million at the exchange rate of December 31, 2010), which have maturities in 2013 and 2015.  Altogether, these refinancings required a net repayment, excluding fees, of $59.2 million, which was paid out of cash resources. The remaining debt payments were scheduled repayments on existing debt.

Proceeds from issuances of common shares, net of issuance costs in 2010 resulted in net proceeds of $248.1 million. 

Cash Flows from Discontinued Operations. The results of Porto Cupecoy, The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, Keswick Hall, Hôtel de la Cité, La Cabana and Lilianfels Blue Mountains have been presented as discontinued operations for all periods presented.

Net cash provided by/(used in) operating activities comprises the results of operations for the discontinued operations noted above and the movement in their assets and liabilities held for sale. Included in the earnings/loss from discontinued operations

50


are real estate, goodwill and property, plant and equipment impairment losses of $3.2 million in 2012 , $65.1 million in 2011 and $30.9 million in 2010 .

During the year ended December 31, 2012, disposal of non-core assets The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort and Keswick Hall resulted in net cash proceeds of $ 88.7 million (gain on sale of $ 15.4 million ) being realized within net cash provided by investing activities from discontinued operations.

During the year ended December 31, 2011, disposal of non-core asset Hôtel de la Cité resulted in net cash proceeds of $ 12.1 million (gain on sale of $ 2.2 million ) being realized within net cash provided by investing activities from discontinued operations.

During the year ended December 31, 2010, disposals of non-core assets La Cabana and Lilianfels Blue Mountains resulted in net cash proceeds of $ 20.4 million (net gain on sales of $ 6.7 million ) being recognized as being realized within net cash provided by investing activities from discontinued operations.

Capital Commitments

OEH routinely makes capital expenditures to enhance its business. These capital expenditures relate to maintenance, improvements to existing properties and investment in new properties. These capital commitments are expected to be funded through current cash balances, cash flows from operations, existing debt facilities, issuance of new debt or equity securities, and disposal of non-core assets.
 
There were $9.7 million of capital commitments outstanding at December 31, 2012 ( 2011 - $15.4 million ) relating to project developments and refurbishment for existing properties.
 
OEH agreed in January 2010 to pay the vendor of the two Sicilian hotels a further $7.1 million if, by 2015, additional rooms are constructed at Grand Hotel Timeo and certain required permits are granted to add additional rooms and add a swimming pool to Villa Sant'Andrea.  In February 2011, OEH paid $2.1 million of the contingent liability as the appropriate permits to add a swimming pool to Villa Sant'Andrea were granted.  In November 2012, OEH also paid the vendor $3.2 million of the contingent liability as the appropriate permits to add guest rooms to Villa Sant’Andrea have been granted. OEH has provided $1.2 million for the expected remaining liability for this contingency.
 
Indebtedness
 
At December 31, 2012 , OEH had $521.6 million ( 2011 - $543.9 million ) of consolidated debt, including the current portion and excluding debt held by consolidated variable interest entities. This debt is largely collateralized by OEH assets and is held by a number of commercial bank lenders. The debt is repayable over periods of 1 to 20 years with a weighted average interest rate of 4.14% , which incorporates derivatives used to mitigate interest rate risk .   See Note 11 to the Financial Statements regarding the maturity of long-term debt.

Debt of consolidated variable interest entities at December 31, 2012 comprised $97.9 million ( 2011 - $90.5 million ), including the current portion, of debt obligations of Charleston Center LLC, owner of the Charleston Place Hotel in which OEH has a 19.9% equity investment. There is no recourse to OEH for debt obligations of Charleston Center LLC and the principal and interest payments on that debt are funded primarily from the operations of the Charleston Place Hotel.
 
Including debt of consolidated variable entities, approximately 48% of the outstanding principal was drawn in European euros and the balance primarily in U.S. dollars. At December 31, 2012 , 51% of borrowings of OEH were in floating interest rates.

OEH has guaranteed or contingently guaranteed debt obligations of certain of its joint ventures. The following table summarizes these commitments at December 31, 2012 :

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Guarantee
 
Contingent Guarantee
 
Duration
December 31, 2012
 
$ millions
 
$ millions
 
 
 
 
 
 
 
 
 
Hotel Ritz, Madrid:
 
 
 
 
 
 
Debt obligations
 
9.9

 

 
ongoing
Working capital loan
 
1.2

 

 
ongoing
Peru rail joint venture:
 
 
 
 
 
 
Debt obligations
 
7.6

 
10.7

 
through 2016
Concession performance
 

 
6.5

 
through May 2013
Peru hotel joint venture:
 
 
 
 
 
 
Debt obligations
 

 
15.5

 
through 2018
Debt obligations
 

 
2.7

 
through 2014
Total
 
18.6

 
35.4

 
 

OEH has guaranteed debt obligations and a working capital loan facility for the Hotel Ritz, Madrid, in which OEH has a 50% equity investment.

OEH has guaranteed and contingently guaranteed the debt obligations of the rail joint venture in Peru through 2016. OEH has also guaranteed the rail joint venture's contingent obligations relating to the performance of its governmental rail concessions through May 2013. In addition, OEH has contingently guaranteed, through 2018 and 2014, debt obligations of the Peru hotels joint venture that operates four hotels. The contingent guarantees for each Peruvian joint venture may only be enforced in the event there is a change in control of the relevant joint venture, which would occur only if OEH's ownership of the economic and voting interests in the joint venture falls below 50%, an event which has not occurred and is not expected to occur.

Liquidity
 
For the year ended December 31, 2013, OEH will have approximately $90.1 million of scheduled debt repayments including capital lease payments. Additionally, OEH has scheduled debt repayments of $1.8 million relating to debt held by consolidated variable interest entities.
 
As discussed above in “Results of Operations,” OEH has experienced decreased revenues and adjusted earnings by segment in part reflecting the continued economic uncertainties in the Eurozone and the weakening of the euro and other currencies against the U.S. dollar. In order to ensure that OEH has sufficient liquidity in the future, OEH's cash flow projections and available funds are discussed with the Company's board of directors and OEH's advisers to consider the most appropriate way to develop OEH's capital structure and generate additional sources of liquidity. The availability of additional liquidity options to OEH will depend on the current economic and financial environment, OEH's continued financial and operating performance and its continued compliance with financial covenants. However, due to the economic declines and current and potential non-compliance with debt covenants, OEH may have less flexibility in determining when and how to use the available cash flows to satisfy obligations and fund capital expenditures as debt may be called by the banks or OEH may be unable to refinance or obtain additional debt.

Some currently identified options are dependent on third parties, while others are within the control of OEH. Options currently available to OEH include increasing the leverage on certain under-leveraged assets, issuing equity or debt instruments and disposing of non-core assets. For example, OEH completed the sale of The Westcliff hotel in the fourth quarter of 2012 and the Porto Cupecoy property development in January 2013 and expects to fund the refinancing of Grand Hotel Europe in the first quarter of 2013. These actions contribute significant unrestricted cash resources to OEH which can be utilized as required.


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Contractual Obligations Summary
 
The following table summarizes OEH’s material known contractual obligations in 2013 and later years as of December 31, 2012 , excluding accounts payable and accrued liabilities:
 
 
 
2013
 
2014-2015
 
2016-2017
 
Thereafter
 
Total
Year ended December 31,
 
$ millions
 
$ millions
 
$ millions
 
$ millions
 
$ millions
 
 
 
 
 
 
 
 
 
 
 
Debt
 
90.1

 
390.1

 
18.5

 
22.8

 
521.5

Capital leases
 
0.1

 

 

 

 
0.1

Debt of consolidated variable interest entities
 
1.8

 
84.8

 
0.5

 
10.9

 
97.9

Operating leases
 
9.5

 
19.0

 
17.9

 
81.3

 
127.8

Rental payments
 
0.8

 
1.5

 
1.5

 
7.7

 
11.6

Capital commitments
 
9.7

 

 

 

 
9.7

Interest payments
 
22.6

 
31.2

 
5.7

 
11.1

 
70.6

Pension obligations
 
0.5

 
1.1

 
1.2

 
3.6

 
6.4

 
 
134.9

 
527.8

 
45.3

 
137.5

 
845.5

 
Interest payments have been calculated using the amortization profile of the debt outstanding at December 31, 2012, taking into account the fixed rate paid under interest rate swaps and the prevailing floating rates of interest at the year end.
 
At December 31, 2012 , OEH has a provision of $4.6 million in respect of its uncertain tax positions in accordance with ASC 740.  OEH is unable to estimate with any certainty when, or if, these liabilities will fall due.  Accordingly, they are excluded from the contractual obligations table.
 
Off-Balance Sheet Arrangements
 
OEH had no material off-balance sheet arrangements at December 31, 2012 other than those involving its equity investees reported in Notes 1, 3, 5 and 23 to the Financial Statements, and those described in commitments and contingencies in Note 18.

Critical Accounting Policies and Estimates

The preceding discussion and analysis of OEH’s financial condition and results of operations is based on its consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these financial statements requires OEH management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, OEH management evaluates these estimates.  Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the result of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
 
Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions.  OEH management believes the following are OEH’s most critical accounting policies and estimates.
 
Long-lived assets and goodwill
 
OEH management periodically evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  These evaluations include analyses based on the undiscounted cash flows generated by the underlying assets, profitability information including estimated future operating results, trends or other determinants of fair value.  If the value of the asset determined by these evaluations is less than its carrying amount, a loss, if any, is recognized for the difference between the fair value and the carrying value of the asset.  Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the asset, thereby possibly requiring an impairment charge in the future.

During the year ended December 31, 2012, OEH recognized a non-cash property, plant and equipment and other assets charge of $3.8 million for Great South Pacific Express tourist train carriages. The carrying values of the assets were written down to

53


the fair value as these assets are currently not in use. During the year ended December 31, 2011, OEH recognized a non-cash property, plant and equipment charge of $23.9 million for Keswick Hall. The carrying values of the assets were written down to the fair value to reflect the level of purchase offers received on the hotel and the price at which OEH was currently negotiating a sale at the time of the impairment. This hotel was classified as an asset held for sale at December 31, 2011 and any impairments were included within discontinued operations.  Subsequent to year ended December 31, 2011, OEH sold the hotel in January 2012 for $22.0 million.  See Note 2 to the Financial Statements.
 
In accordance with guidance, goodwill must be evaluated annually for impairment.  OEH’s goodwill impairment testing is performed in two steps, first, the determination of impairment based upon the fair value of each reporting unit as compared with its carrying value and, second, if there is an implied impairment, the measurement of the amount of the impairment loss is determined by comparing the implied fair value of goodwill with the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, the goodwill is deemed to be impaired and is written down to the extent of the difference. The determination of impairment incorporates various assumptions and uncertainties that OEH believes are reasonable and supportable considering all available evidence, such as the future cash flows of the business, future growth rates and the related discount rate. However, these assumptions and uncertainties are, by their very nature, highly judgmental. If the assumptions are not met, OEH may be required to recognize additional goodwill impairment losses.

During the year ended December 31, 2012, OEH identified a goodwill impairment within its continuing operations of $2.1 million at Reid's Palace hotel. During the year ended December 31, 2011, OEH identified goodwill impairments within its continuing operations of $7.9 million at Maroma Resort and Spa, $2.8 million at La Residencia and $1.2 million at Mount Nelson Hotel. OEH determined these impairments were triggered as the hotels had circumstances relating to performance that required a reassessment and arose primarily because of expected reductions in future profits.  See Note 8 to the Financial Statements.
 
Other intangible assets with indefinite useful lives are also reviewed for impairment in accordance with the applicable guidance.
 
Depreciation
 
Real estate and other fixed assets are recorded at cost and are depreciated over their estimated useful lives by the straight-line method.  The depreciation rates on freehold buildings are up to 60 years with a 10% residual value, on trains are up to 75 years, and on machinery and other remaining assets range from 5 to 25 years.  Leasehold improvements are depreciated over the shorter of the estimated useful life or the respective lease terms including lease extensions that are reasonably assured.
 
Pensions
 
OEH’s primary defined benefit pension plan operates in the United Kingdom and is accounted for using actuarial valuations as required under applicable accounting guidance. Management considers accounting for pensions critical to all of OEH’s operating segments because management is required to make significant subjective judgments about a number of actuarial assumptions, which include discount rates, long-term return on plan assets and mortality rates.  On May 31, 2006, the plan was closed to future benefit accrual.
 
Management believes that a 4.7% discount rate in 2012 is reasonable as an estimate of the rate at which the pension benefits could effectively be settled. In determining the discount rate, management has considered the rates of return available on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. The discount rate is based on U.K. corporate bond indices of long-term duration.

Management believes that a 5.3% long-term return on plan assets in 2012 is reasonable despite the recent market volatility.  In determining the expected long-term rate of return on assets, management has reviewed anticipated future long-term performance of individual asset classes and the consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested. The projected returns are based on broad equity and bond indices, including fixed interest rate gilts (U.K. government issued securities) of long-term duration.
 
Management regularly reviews OEH’s actual asset allocation and periodically rebalances investments to targeted allocations when considered appropriate.  While the analysis considers recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.  Management will continue to evaluate the expected rate of return at least annually, and will adjust as necessary.
 

54


Depending on the assumptions and estimates used, pension expense could vary within a range of outcomes and have a material effect on OEH’s consolidated financial statements.  Management is currently monitoring and evaluating the level of pension contributions based on various factors that include investment performance, actuarial valuation and tax deductibility.  Management will evaluate the need for additional contributions in 2013 based on these factors.  Management believes that the cash flows from OEH’s operations will be sufficient to fund additional contributions, if any, to the plan.
 
Foreign currency
 
The functional currency for each of the Company’s foreign subsidiaries is the applicable local currency, except for French West Indies, Brazil, Peru, Cambodia, Myanmar and one property in Mexico where the functional currency is U.S. dollars.
 
For foreign subsidiaries with a functional currency other than the U.S. dollar, income and expenses are translated into U.S. dollars, the reporting currency of the Company, at the average rates of exchange prevailing during the year.  The assets and liabilities are translated into U.S. dollars at the rates of exchange on the balance sheet date and the related translation adjustments are included in accumulated other comprehensive income/(loss).  Translation adjustments arising from intercompany financing that is long-term in nature are accounted for similarly.  Foreign currency transaction gains and losses are recognized in earnings as they occur.
 
Income Taxes
 
OEH’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.
 
Deferred income taxes arise from temporary differences between the carrying value of assets and liabilities, and their tax basis. In evaluating OEH’s ability to recover deferred tax assets within the jurisdiction from which they arise, OEH considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, OEH begins with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporates assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates OEH is using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, OEH considers three years of cumulative operating income or loss.  OEH maintains a valuation allowance to reduce its deferred tax assets to reflect the amount, based upon OEH’s estimates that would more likely than not be realized.  If OEH’s future operations differed from those in the estimates, OEH may need to increase or decrease the valuation allowance, which could affect its reported results.

The calculation of OEH’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations.  ASC 740 addresses accounting for uncertainty in income taxes recognized in the financial statements.  ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  OEH recognizes tax liabilities in accordance with ASC Topic 740 and OEH adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from OEH’s current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
 
Fair value measurements
 
Guidance on fair value measurements and disclosures (i) applies to certain assets and liabilities that are being measured and reported on a fair value basis, (ii) defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosure about fair value measurements and (iii) enables the reader of the financial statements to assess the inputs to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.
 
Guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, namely quoted market prices in active markets for identical assets or liabilities (Level 1), observable market-based inputs or unobservable inputs that are corroborated by market data (Level 2), and unobservable inputs that are not corroborated by market data (Level 3).

55


 
OEH reviews its fair value hierarchy classifications quarterly.  Changes in significant observable valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities.  These reclassifications are reported as transfers in Level 3 at their fair values at the beginning of the period in which the change occurs and as transfers out at their fair values at the end of the period.
 
The fair value of OEH’s derivative financial instruments is computed based on an income approach using appropriate valuation techniques including discounting future cash flows and other methods that are consistent with accepted economic methodologies for pricing financial instruments.  Where credit value adjustments exceeded 20% of the fair value of the derivatives, Level 3 inputs are assumed to have a significant impact on the fair value of the derivatives in their entirety and the valuation has been included in the Level 3 category.

OEH uses fair value measurements that are based on observable inputs wherever possible. Its valuation approaches are consistently applied and the assumptions used are reasonable in management's judgment.
OEH uses third-party valuation specialists to estimate fair value of some of its financial assets and liabilities. These specialists are primarily used to estimate the fair value for debt and derivatives, as well as for asset valuation. Management performs various reviews and validation procedures prior to utilizing these fair values in OEH's reporting process. Based on its due diligence discussions with these specialists, OEH maintains a current understanding of the valuation processes and related assumptions and inputs that these specialists use in developing fair values. If OEH determines that a fair value provided is outside established parameters, management will further examine the fair value including having follow-up discussions with the specialists. All of these procedures are executed before OEH uses the valuations in preparing its financial statements.
Recent Accounting Pronouncements
 
As of December 31, 2012, OEH had adopted all the relevant standards that impacted the fair value measurements and disclosures, the presentation of comprehensive income, and annual goodwill impairment assessments, as reported in Note 1 to the Financial Statements.
 
Accounting pronouncements to be adopted
 
In July 2012, the FASB issued guidance related to annual impairment assessment of intangible assets, other than goodwill, that gives companies the option to perform a qualitative assessment before calculating the fair value of the asset. Although the guidance revises the examples of events and circumstances that an entity should consider in interim periods, it does not revise the requirements to test indefinite-lived intangible assets (1) annually for impairment and (2) between annual tests if there is a change in events or circumstances that would indicate an impairment. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial position, results of operations and cash flows.

In December 2011, the FASB issued accounting guidance that requires companies to provide new disclosures about offsetting assets and liabilities and related arrangements for financial instruments and derivatives. The provisions of this guidance are effective for annual reporting periods beginning on or after January 1, 2013, and are required to be applied retrospectively. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial position, results of operations and cash flows.
 
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
 
OEH is exposed to market risk from changes in interest rates and foreign currency exchange rates.  These exposures are monitored and managed as part of its overall risk management program, which recognizes the unpredictability of financial markets and seeks to mitigate material adverse effects on consolidated earnings and cash flow.  OEH does not hold market rate sensitive financial instruments for trading purposes.
 
The market risk relating to interest rates arises mainly from the financing activities of OEH.  Earnings are affected by changes in interest rates on floating rate borrowings, principally based on U.S. dollar LIBOR and EURIBOR, and on short-term cash investments.  OEH management assesses market risk based on changes in interest rates using a sensitivity analysis.  If interest rates increased by 10% with all other variables held constant, annual net finance costs of OEH would have increased by approximately $0.8 million based on borrowings outstanding at December 31, 2012.
 

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Table of Contents

The market risk relating to foreign currencies arises from holding assets, buying, selling and financing in currencies other than the U.S. dollar, principally the European euro, British pound, South African rand and Brazilian real.  Some non-U.S. subsidiaries of the Company borrow in local currencies, and OEH may in the future enter into forward exchange contracts relating to purchases denominated in foreign currencies.
 
Nine of OEH’s owned hotels in 2012 operated in European euros, one operated in South African rand, one in British pounds sterling, three in Botswana pula, one in Mexican pesos, one in Peruvian nuevo soles, six in various Southeast Asian currencies and one in Russian rubles. Revenue of the Venice Simplon-Orient-Express, British Pullman, Northern Belle and Royal Scotsman tourist trains was primarily in British pounds sterling, but the operating costs of the Venice Simplon-Orient-Express were mainly denominated in euros. Revenue of the Copacabana Palace and Hotel das Cataratas in Brazil was recorded in U.S. dollars, but substantially all of the hotels’ expenses were denominated in Brazilian reals. Revenue derived by Maroma Resort and Spa and La Samanna was recorded in U.S. dollars, but the majority of the hotels’ expenses were denominated in Mexican pesos and the euro, respectively.
 
OEH’s properties generally match foreign currency earnings and costs to provide a natural hedge against currency movements.  In addition, a significant proportion of the guests at OEH hotels located outside of the United States originate from the United States.  When a foreign currency in which OEH operates devalues against the U.S. dollar, OEH has some flexibility to increase prices in local currency, or vice versa.  Management believes that when these factors are combined, OEH does not face a material exposure to its net earnings from currency movements, although the reporting of OEH’s revenue and costs translated into U.S. dollars can, from period to period, be materially affected.
 
OEH management uses a sensitivity analysis to assess the potential impact on net earnings of changes in foreign currency financial instruments from hypothetical changes in the foreign currency exchange rates.  The primary assumption used in this model is a hypothetical 10% weakening or strengthening of the foreign currencies against the U.S. dollar.  At December 31, 2012, as a result of this analysis, OEH management determined that the impact on foreign currency financial instruments of a 10% strengthening of foreign currency exchange rates in relation to the U.S. dollar would decrease OEH’s net earnings by approximately $1.8 million, consisting of Russian ruble $0.5 million, Mexican peso $0.4 million and Thai baht $0.9 million.


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Table of Contents

ITEM 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm
 
Board of Directors and Shareholders
Orient-Express Hotels Ltd.
Hamilton, Bermuda
 
We have audited the accompanying consolidated balance sheets of Orient-Express Hotels Ltd. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related statements of consolidated operations, comprehensive income, total equity and cash flows for each of the three years in the period ended December 31, 2012.  Our audits also included the financial statement schedule listed in the Index at Item 15.  These financial statements and the financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orient-Express Hotels Ltd. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the accompanying 2011 and 2010 statements of consolidated cash flows have been restated to reflect certain reclassifications between operating, investing and financing activities.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
 
/s/ Deloitte LLP
 
 
 
London, England
 
February 26, 2013
 



58


Orient-Express Hotels Ltd. and Subsidiaries
Consolidated Balance Sheets

 
 
2012
 
2011
December 31,
 
 $’000
 
 $’000
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
93,382

 
90,104

Restricted cash
 
21,080

 
13,214

Accounts receivable, net of allowances of $472 and $602
 
36,533

 
44,599

Due from unconsolidated companies
 
15,200

 
10,754

Prepaid expenses and other
 
21,244

 
20,089

Inventories
 
44,555

 
44,499

Assets of discontinued operations held for sale
 
22,078

 
135,390

Real estate assets
 
1,924

 
1,866

 
 
 
 
 
Total current assets
 
255,996

 
360,515

 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $300,899 and $269,024
 
1,171,603

 
1,107,595

Property, plant and equipment of consolidated variable interest entities
 
183,793

 
185,788

Investments in unconsolidated companies
 
58,924

 
60,012

Goodwill
 
161,278

 
161,460

Other intangible assets
 
18,608

 
19,465

Other assets
 
41,825

 
36,034

 
 
 
 
 
 
 
1,892,027

 
1,930,869

 
 
 
 
 
Liabilities and Equity
 
 

 
 

Accounts payable
 
25,182

 
28,998

Accrued liabilities
 
77,519

 
87,617

Deferred revenue
 
30,519

 
25,644

Liabilities of discontinued operations held for sale
 
2,174

 
7,018

Current portion of long-term debt and obligations under capital leases
 
90,115

 
77,058

Current portion of long-term debt of consolidated variable interest entities
 
1,795

 
1,784

 
 
 
 
 
Total current liabilities
 
227,304

 
228,119

 
 
 
 
 
Long-term debt and obligations under capital leases
 
431,445

 
466,830

Long-term debt of consolidated variable interest entities
 
96,150

 
88,745

Liability for pension benefit
 
8,275

 
8,642

Other liabilities
 
21,511

 
26,145

Deferred income taxes
 
104,112

 
94,036

Deferred income taxes of consolidated variable interest entities
 
60,326

 
61,072

Liability for uncertain tax positions
 
4,581

 
4,755

 
 
 
 
 
 
 
953,704

 
978,344

 
 
 
 
 
Commitments and contingencies (Note 18)
 


 


 
 
 
 
 
Equity:
 
 

 
 

 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Preferred shares $0.01 par value (30,000,000 shares authorized, issued Nil)
 

 

Class A common shares $0.01 par value (240,000,000 shares authorized):
 
 

 
 

Issued — 102,897,311 (2011 — 102,625,857)
 
1,029

 
1,026

Class B common shares $0.01 par value (120,000,000 shares authorized):
 
 

 
 

Issued — 18,044,478 (2011 — 18,044,478)
 
181

 
181

 
 
 
 
 
Additional paid-in capital
 
982,106

 
975,330

Retained earnings
 
39,202

 
46,263

Accumulated other comprehensive loss
 
(86,381
)
 
(72,289
)
Less: Reduction due to class B common shares owned by a subsidiary — 18,044,478
 
(181
)
 
(181
)
Total shareholders’ equity
 
935,956

 
950,330

Non-controlling interests
 
2,367

 
2,195

 
 
 
 
 
Total equity
 
938,323

 
952,525

 
 
 
 
 
 
 
1,892,027

 
1,930,869


See notes to consolidated financial statements.
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Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Operations

 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Revenue
 
545,418

 
554,736

 
469,595

 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

Cost of services
 
245,211

 
249,780

 
219,385

Selling, general and administrative
 
210,010

 
215,885

 
178,392

Depreciation and amortization
 
43,934

 
43,835

 
42,630

Impairment of goodwill
 
2,055

 
11,907

 
5,895

Impairment of other intangible assets, other assets and property, plant and equipment
 
3,837

 
8,153

 
7,456

 
 
 
 
 
 
 
Total expenses
 
505,047

 
529,560

 
453,758

 
 
 
 
 
 
 
Gain on disposal of property, plant and equipment and capital lease
 
1,514

 
16,544

 

 
 
 
 
 
 
 
Earnings from operations
 
41,885

 
41,720

 
15,837

 
 
 
 
 
 
 
Interest income
 
1,067

 
2,365

 
1,295

Interest expense
 
(30,862
)
 
(42,599
)
 
(34,165
)
Foreign currency, net
 
(2,844
)
 
(4,596
)
 
4,678

 
 
 
 
 
 
 
Net finance costs
 
(32,639
)
 
(44,830
)
 
(28,192
)
 
 
 
 
 
 
 
Earnings/(losses) before income taxes and earnings from unconsolidated companies, net of tax
 
9,246

 
(3,110
)
 
(12,355
)
 
 
 
 
 
 
 
Provision for income taxes
 
(21,987
)
 
(20,080
)
 
(18,184
)
 
 
 
 
 
 
 
Losses before earnings from unconsolidated companies, net of tax
 
(12,741
)
 
(23,190
)
 
(30,539
)
 
 
 
 
 
 
 
Earnings from unconsolidated companies, net of tax provision of $5,771, $2,270 and $2,228
 
2,124

 
4,357

 
2,258

 
 
 
 
 
 
 
Losses from continuing operations
 
(10,617
)
 
(18,833
)
 
(28,281
)
 
 
 
 
 
 
 
Net earnings/(losses) from discontinued operations, net of tax provision/(benefit) of $1,282, $(3,635),and $4,886
 
3,729

 
(68,763
)
 
(34,299
)
 
 
 
 
 
 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
 
 
 
 
 
 
 
Net earnings attributable to non-controlling interests
 
(173
)
 
(184
)
 
(179
)
 
 
 
 
 
 
 
Net losses attributable to Orient-Express Hotels Ltd.
 
(7,061
)
 
(87,780
)
 
(62,759
)
 









See notes to consolidated financial statements.
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Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Operations (continued)

 
 
2012
 
2011
 
2010
Year ended December 31,
 
$
 
$
 
$
 
 
 
 
 
 
 
Basic earnings per share:
 
 

 
 

 
 
Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
Basic net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 
 
 
 
 
 
 
Diluted earnings per share:
 
 

 
 

 
 

Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
Diluted net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 
 
 
 
 
 
 
Dividends per share
 

 

 

 

See notes to consolidated financial statements.
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Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Comprehensive Income

 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
 
 
 
 
 
 
 
Other comprehensive income/(losses), net of tax:
 
 

 
 

 
 

Foreign currency translation adjustments, net of tax provision of $(43), $(477) and $Nil
 
(14,525
)
 
(32,488
)
 
(1,942
)
Change in fair value of derivatives, net of tax provision/(benefit) of $(1,367), $(1,082) and $112
 
464

 
2,305

 
2,530

Change in pension liability, net of tax (benefit)/provision of $176, $644 and $(555)
 
(32
)
 
(3,432
)
 
615

Total other comprehensive (losses)/income, net of tax
 
(14,093
)
 
(33,615
)
 
1,203

 
 
 
 
 
 
 
Total comprehensive losses
 
(20,981
)
 
(121,211
)
 
(61,377
)
 
 
 
 
 
 
 
Comprehensive income attributable to non-controlling interests
 
(172
)
 
(273
)
 
(153
)
 
 
 
 
 
 
 
Comprehensive losses attributable to Orient-Express Hotels Ltd.
 
(21,153
)
 
(121,484
)
 
(61,530
)


See notes to consolidated financial statements.
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Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Cash Flows


 
 
 
 
Restated (1)
 
Restated (1)
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 

 
 

 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
Less: Net earnings/(losses) from discontinued operations, net of tax
 
3,729

 
(68,763
)
 
(34,299
)
 
 
 
 
 
 
 
Net losses from continuing operations
 
(10,617
)
 
(18,833
)
 
(28,281
)
Adjustments to reconcile net earnings/(losses) to net cash provided by operating activities:
 
 

 
 

 
 
Depreciation and amortization
 
43,934

 
43,835

 
42,630

Amortization of finance costs
 
5,375

 
6,893

 
4,785

Impairment of goodwill
 
2,055

 
11,907

 
5,895

Impairment of other intangible assets, other assets and property, plant and equipment
 
3,837

 
8,153

 
7,456

Undistributed earnings of unconsolidated companies
 
(7,895
)
 
(6,627
)
 
(4,486
)
Tax on earnings of unconsolidated companies
 
5,771

 
2,270

 
2,228

Share-based compensation
 
6,761

 
6,752

 
5,965

Change in deferred income tax
 
4,204

 
(11,328
)
 
13,840

Gain from disposal of property, plant and equipment and capital lease
 
(1,514
)
 
(13,372
)
 

Change in provisions for uncertain tax positions
 
160

 
(3,004
)
 
1,153

Dividends from equity method investees
 
2,524

 
2,428

 
1,759

Effect of exchange rates on net earnings/(losses)
 
(1,046
)
 
(6,201
)
 
(3,167
)
Change in assets and liabilities, net of effects from acquisitions:
 
 

 
 

 
 
Accounts receivable
 
8,546

 
3,667

 
7,234

Due from unconsolidated companies
 
(3,232
)
 
(3,519
)
 
2,018

Prepaid expense and other
 
4,498

 
3,307

 
(1,260
)
Inventories
 
611

 
(2,600
)
 
(1,204
)
Escrow and prepaid customer deposits
 
(1,221
)
 
(664
)
 
6,721

Accounts payable
 
(4,891
)
 
3,548

 
2,430

Accrued liabilities
 
(9,345
)
 
13,000

 
(9,453
)
Deferred revenue
 
4,401

 
1,286

 
1,589

Other, net
 
(6,400
)
 
5,979

 
16,367

 
 
 
 
 
 
 
Net cash provided by operating activities from continuing operations
 
46,516

 
46,877

 
74,219

Net cash provided by/(used in) operating activities from discontinued operations
 
(904
)
 
(4,723
)
 
(17,071
)
 
 
 
 
 
 
 
Net cash provided by operating activities
 
45,612

 
42,154

 
57,148

 
 
 
 
 
 
 
(1)  Certain cash flow balances in 2011 and 2010 have been restated. See Note 1.
 
 
 
 
 
 

See notes to consolidated financial statements.
63

Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Cash Flows (continued)

 
 
 
 
Restated (1)
 
Restated (1)
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

 
 
Capital expenditures
 
(97,131
)
 
(59,997
)
 
(64,578
)
Acquisitions, net of cash acquired
 
(3,296
)
 
(1,605
)
 
(46,402
)
Investments in unconsolidated companies
 
(4,858
)
 
(1,541
)
 
(4,413
)
Increase in restricted cash
 
(7,523
)
 
(5,805
)
 
6,177

Release of restricted cash
 
1,013

 
1,558

 
(1,666
)
Proceeds from sale of property, plant and equipment
 

 
42,036

 

 
 
 
 
 
 
 
Net cash used in investing activities from continuing operations
 
(111,795
)
 
(25,354
)
 
(110,882
)
Net cash provided by investing activities from discontinued operations
 
88,738

 
12,146

 
20,410

 
 
 
 
 
 
 
Net cash used in investing activities
 
(23,057
)
 
(13,208
)
 
(90,472
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

 
 
Proceeds from working capital loans
 

 

 
1,065

Payments on working capital loans
 

 
(1,072
)
 
(6,149
)
Issuance of common shares
 

 

 
261,878

Issuance costs of common shares
 

 
(157
)
 
(13,826
)
Share options exercised
 
3

 
3

 
1

Issuance of long-term debt
 
105,008

 
125,209

 
386,265

Debt issuance costs
 
(2,613
)
 
(4,036
)
 
(10,101
)
Principal payments under long-term debt
 
(121,372
)
 
(209,794
)
 
(507,363
)
 
 
 
 
 
 
 
Net cash (used in)/provided by financing activities from continuing operations
 
(18,974
)
 
(89,847
)
 
111,770

Net cash provided by financing activities from discontinued operations
 

 

 

 
 
 
 
 
 
 
Net cash (used in)/provided by financing activities
 
(18,974
)
 
(89,847
)
 
111,770

 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(303
)
 
898

 
50

 
 
 
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
 
3,278

 
(60,003
)
 
78,496

 
 
 
 
 
 
 
Cash and cash equivalents at beginning of year
 
90,104

 
150,107

 
71,611

 
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
93,382

 
90,104

 
150,107

 
 
 
 
 
 
 
(1) Certain cash flow balances in 2011 and 2010 have been restated. See Note 1.
 
 
 
 
 
 



See notes to consolidated financial statements.
64

Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Total Equity
 
 
 
Preferred
shares at
par value
$’000
 
Class A
common
shares at
par value
$’000
 
Class B
common
shares at
par value
$’000
 
Additional
paid-in
capital
$’000
 
Retained
earnings
$’000
 
Accumulated
other
comprehensive
income/
(loss)
$’000
 
Common
shares
held by a
subsidiary
$’000
 
Non-
controlling
interests
$’000
 
Total
$’000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2010
 

 
769

 
181

 
714,980

 
196,802

 
(39,814
)
 
(181
)
 
1,769

 
874,506

Issuance of class A common shares in public offering, net of issuance costs
 

 
253

 

 
247,799

 

 

 

 

 
248,052

Share based compensation
 

 

 

 
5,713

 

 

 

 

 
5,713

Share options exercised
 

 
1

 

 

 

 

 

 

 
1

Comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net losses on common shares
 

 

 

 

 
(62,759
)
 

 

 
179

 
(62,580
)
Other comprehensive income
 

 

 

 

 

 
1,229

 

 
(26
)
 
1,203

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 

 
1,023

 
181

 
968,492

 
134,043

 
(38,585
)
 
(181
)
 
1,922

 
1,066,895

Issuance of class A common shares in public offering, net of issuance costs
 

 

 

 
(157
)
 

 

 

 

 
(157
)
Share based compensation
 

 

 

 
6,995

 

 

 

 

 
6,995

Share options exercised
 

 
3

 

 

 

 

 

 

 
3

Comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net losses on common shares
 

 

 

 

 
(87,780
)
 

 

 
184

 
(87,596
)
Other comprehensive loss
 

 

 

 

 

 
(33,704
)
 

 
89

 
(33,615
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
 

 
1,026

 
181

 
975,330

 
46,263

 
(72,289
)
 
(181
)
 
2,195

 
952,525

Share based compensation
 

 

 

 
6,776

 

 

 

 

 
6,776

Share options exercised
 

 
3

 

 

 

 

 

 

 
3

Comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net losses on common shares
 

 

 

 

 
(7,061
)
 

 

 
173

 
(6,888
)
Other comprehensive loss
 

 

 

 

 

 
(14,092
)
 

 
(1
)
 
(14,093
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2012
 

 
1,029

 
181

 
982,106

 
39,202

 
(86,381
)
 
(181
)
 
2,367

 
938,323

 


See notes to consolidated financial statements.
65

Table of Contents

Orient-Express Hotels Ltd. and Subsidiaries
 
Notes to Consolidated Financial Statements
 
1.    Basis of financial statement presentation
 
Business
 
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 December 31, 2012 , OEH owned, invested in or managed 36 deluxe hotels and resorts located in the United States, Mexico, Caribbean, Europe, Southern Africa, South America, and Southeast Asia, a stand-alone restaurant in New York, six tourist trains in Europe, Southeast Asia and Peru, and two river cruise businesses in Myanmar (Burma) and a canal boat business in France.
 
Basis of presentation
 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the results of operations, financial position and cash flows of the Company and all its majority-owned subsidiaries and variable interest entities in which OEH is the primary beneficiary.  The consolidated financial statements have been prepared using the historical basis in the assets and liabilities and the historical results of operations directly attributable to OEH, and all intercompany accounts and transactions between the Company and its subsidiaries have been eliminated.  Unconsolidated companies that are 20% to 50% owned are accounted for on an equity basis.
 
“FASB” means Financial Accounting Standards Board.  “ASC” means the Accounting Standards Codification of the FASB and “ASU” means an Accounting Standards Update of the FASB.
 
Change in accounting principle

During the fourth quarter of 2012, the Company changed the date of its annual goodwill impairment test from December 31 to October 1.  The change in goodwill impairment test date will lessen resource constraints that exist in connection with the Company's year-end close and financial reporting process, provide for additional time to complete the required goodwill impairment testing, and better align with the Company's annual planning and budgeting process, which takes place early in the fourth quarter each year.  Accordingly, the Company believes the change in the annual goodwill impairment testing date is preferable. The change in accounting principle did not delay, accelerate or avoid an impairment charge.  The Company determined it was impracticable to determine objectively projected cash flows and related valuation estimates that would have been used as of each October 1 for periods prior to October 1, 2012 without the use of hindsight.  As such, the Company has prospectively applied the change in annual goodwill impairment testing date from October 1, 2012, which resulted in a goodwill impairment of $2,055,000 . See Note 8.
 
Reclassifications

Certain prior period amounts have been reclassified or disaggregated to conform to the current period's presentation. The reclassifications had no effect on net earnings, net assets or retained earnings.

OEH's reclassifications in the statements of consolidated operations were:
 
Discontinued operations were reclassified for all years presented. See Note 2 for a summary of the results of discontinued operations, certain assets held for sale and the balances and results associated with discontinued operations.
Certain expenses that were previously recorded within costs of sales were reclassified into selling, general and administrative expenses to correct for an error in classification. The balances reclassified were $4,785,000 for 2011 and $3,898,000 for 2010.


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During 2012, management determined that certain amounts previously reported in the statements of consolidated cash flows for the years ended December 31, 2011 and 2010 should be reclassified, which had the following effects in 2011 and 2010:

Debt issuance costs, which were previously included in cash flows from operating activities, are separately stated as a cash flow from financing activities for all periods. The effect in 2011 and 2010 was a decrease in cash flows from financing activities of $4,036,000 and $10,101,000 , respectively, with a corresponding increase to cash flows from operating activities.
Escrow and prepaid customer deposits, which were previously included in movements in restricted cash and included in cash flows from investing activities, were disaggregated from these balances and are separately stated in cash flows from operating activities. The effect in 2011 and 2010 was a decrease in cash flows from operating activities of $664,000 and an increase in cash flows from operating activities of $6,721,000 , respectively, with a corresponding change to cash flows from investing activities.
OEH has provided loans to its unconsolidated Hotel Ritz, Madrid joint venture company. Due to the long-term nature of these loans, OEH has moved this balance from amounts due from unconsolidated companies in cash flows from operating activities to investment in unconsolidated companies in cash flows from investing activities. The effect in 2011 and 2010 was a decrease in cash flows from investing activities of $1,541,000 and $4,413,000 , respectively, with a corresponding increase in cash flows from operating activities.
Debt repaid when a business is sold was previously included as part of net cash provided by financing activities from discontinued operations. This has been included as net cash provided by investing activities from discontinued operations for all periods presented. The effect in 2010 was a decrease in net cash provided by financing activities from discontinued operations of $6,757,000 . This change had no effect on cash flows in 2011.

Accounting Policies

Assets held for sale and discontinued operations

Assets held for sale represent assets of an operating segment that are to be disposed of, together as a group in a single transaction, and liabilities directly associated with the assets of the operating segment that will be transferred in the transaction. OEH considers properties to be assets held for sale when management approves and commits to a formal plan actively to market a property for sale and OEH has a signed sales contract and received a significant non-refundable deposit. Upon designation as an asset held for sale, OEH records the carrying value of each property at the lower of its carrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and OEH stops recording depreciation expense. The results of operations of an entity in an operating segment that either has been disposed of or is classified as held for sale is reported in discontinued operations where the operations and cash flows of the entity will be eliminated from continuing operations of the operating segment as a result of the disposal transaction and OEH will not have any significant continuing involvement in the operations of the entity after the disposal transaction.
 
Cash and cash equivalents
 
Cash and cash equivalents include all cash balances and highly-liquid investments having original maturities of three months or less.

Restricted cash

Restricted cash is the carrying amount of cash and cash equivalents which are bindingly restricted as to withdrawal or usage. These include deposits held as compensating balances against borrowing arrangements or under contracts entered into with others, but exclude compensating balance arrangements that do not legally restrict the use of cash amounts shown on the balance sheet.
 
Foreign currency
 
The functional currency for each of the Company’s foreign subsidiaries is the applicable local currency, except for properties in French West Indies, Brazil, Peru, Cambodia, Myanmar and one property in Mexico, where the functional currency is U.S. dollars.
 
For foreign subsidiaries with a functional currency other than the U.S. dollar, income and expenses are translated into U.S. dollars, the reporting currency of the Company, at the average rates of exchange prevailing during the year.  The assets and liabilities are translated into U.S. dollars at the rates of exchange on the balance sheet date and the related translation adjustments are included in accumulated other comprehensive income/(loss).  Translation adjustments arising from

67


intercompany financing of a subsidiary that is considered to be long-term in nature are accounted for and are also recorded in other comprehensive income/(loss) as they are considered part of the net investment in the subsidiary.  Foreign currency transaction gains and losses are recognized in earnings as they occur. Transactions in currencies other than an entity’s functional currency (foreign currencies) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the reporting date. Non-monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Non-monetary items carried at fair value are translated at the exchange rate prevailing on the date on which the most recent fair value was determined. Exchange differences arising from changes in exchange rates are recognized in earnings as they occur.

Foreign currency, net consists entirely of foreign currency exchange transaction loss of $2,844,000 in 2012 ( 2011 - loss of $4,596,000 ; 2010 - gain of $4,678,000 ).
 
Estimates
 
OEH bases its estimates on historical experience and also on assumptions that OEH believes are reasonable based on the relevant facts and circumstances of the estimate. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Estimates include, among others, the allowance for doubtful accounts, fair value of derivative instruments, estimates for determining the fair value of goodwill, long-lived and other intangible asset impairment, share-based compensation, depreciation and amortization, carrying value of assets including intangible assets, employee benefits, taxes, contingencies, and projected revenue and costs for real estate revenue recognition.  Actual results may differ from those estimates.
 
Share-based compensation
 
Equity-settled transactions
 
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which equity instruments are granted and is recognized as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. The grant date fair value of share-based payment awards is determined using the Black-Scholes model.  See Note 17.
 
OEH also granted share-based payment awards with and without performance and market conditions to certain employees.  The fair value of the awards at the grant date is determined using the Monte Carlo simulation model.  For awards with market conditions, the conditions are incorporated into the calculations and the compensation value is not adjusted if the conditions are not met.  For awards with performance conditions, compensation expense is recognized when it becomes probable that the performance criteria specified in the awards will be achieved and, accordingly, the compensation value is adjusted following the changes in the estimates of shares likely to vest based on the performance criteria. For awards without performance criteria, the grant date fair value of these awards is determined using the Black-Scholes model.
 
At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions and the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognized in the income statement, with a corresponding entry in equity.
 
Previously recognized compensation cost is not reversed if an employee share option for which the requisite service has been rendered expires unexercised (or unconverted).
 
If stock options are forfeited, then the compensation expense accrued is reversed.  OEH does not estimate a future forfeitures rate and does not incorporate it into the grant value on issue of the awards on the grounds of materiality. The forfeitures are recorded on date of occurrence.
 
Cash-settled transactions
 
The cost of cash-settled transactions is measured at fair value and recognized as an expense over the vesting period, with a corresponding liability recognized on the balance sheet.

68


 
Revenue recognition
 
Hotel and restaurant revenue is recognized when the rooms are occupied and the services are performed.  Tourist train and cruise revenue is recognized upon commencement of the journey.  Deferred revenue consisting of deposits paid in advance is recognized as revenue when the services are performed for hotels and restaurants and upon commencement of tourist train and cruise journeys.  Revenue under management contracts is recognized based upon on an agreed base fee and additional revenue is recognized on the attainment of certain financial results, primarily revenue and operating earnings, in each contract as defined.

Earnings from unconsolidated companies
 
Earnings from unconsolidated companies include OEH’s share of the net earnings of its equity investments. In 2010 earnings from unconsolidated companies also included interest income related to loans and advances to the Hotel Ritz, Madrid of $372,000 . See Note 23.
 
Marketing costs
 
Marketing costs are expensed as incurred, and are reported in selling, general and administrative expenses.  Marketing costs include costs of advertising and other marketing activities.  These costs were $35,960,000 in 2012 ( 2011 - $36,413,000 ; 2010 - $30,619,000 ).
 
Interest expense
 
OEH capitalizes interest during the construction of assets. Interest expense excludes interest which has been capitalized in the amount of $4,193,000 in 2012 ( 2011 - $863,000 ; 2010 - $2,201,000 ).

Income taxes
 
OEH accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of transactions and events that have been recognized in the financial statements but have not yet been reflected in OEH’s income tax returns, or vice versa.
 
Deferred income taxes result from temporary differences between the carrying value of assets and liabilities recognized for financial reporting purposes and their respective tax bases.  Deferred taxes are measured at enacted statutory rates and are adjusted as enacted rates change. Classification of deferred tax assets and liabilities corresponds with the classification of the underlying assets and liabilities giving rise to the temporary differences or the period of expected reversal, as applicable.  A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on available evidence.
 
In evaluating OEH’s ability to recover deferred tax assets within the jurisdiction in which they arise, management considers all available evidence, both positive and negative, which includes reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Management reassesses the need for valuation allowances at each reporting date. Any increase or decrease in a valuation allowance will increase or reduce respectively the income tax expense in the period in which there has been a change in judgment.
 
Income tax positions must meet a more-likely-than-not threshold to be recognized in the financial statements. Management recognizes tax liabilities in accordance with U.S. GAAP applicable to uncertain tax positions, and adjusts these liabilities when judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from OEH’s current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which the actual tax liabilities are determined or the statute of limitations has expired.  OEH recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations. Liabilities for uncertain tax benefits are included in the consolidated balance sheets and classified as current or non-current liabilities depending on the expected timing of payment.
 

69


Earnings per share
 
Basic earnings per share are based upon net earnings/(losses) attributable to OEH divided by the weighted average number of class A and B common shares outstanding for the period. Diluted earnings/(losses) per share reflect the increase in shares using the treasury stock method to reflect the impact of an equivalent number of shares as if share options were exercised and share-based awards were converted into common shares. Potentially dilutive shares are excluded when the effect would be to increase diluted earnings per share or reduce the diluted loss per share. 
A reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share is as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$‘000
 
$‘000
 
$‘000
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
Losses from continuing operations
 
(10,617
)
 
(18,833
)
 
(28,281
)
Earnings/(losses) from discontinued operations
 
3,729

 
(68,763
)
 
(34,299
)
 
 
 
 
 
 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
Net earnings attributable to non-controlling interests
 
(173
)
 
(184
)
 
(179
)
 
 
 
 
 
 
 
Net losses attributable to Orient-Express Hotels Ltd.
 
(7,061
)
 
(87,780
)
 
(62,759
)
 
 
 
 
 
 
 
 
 
'000
 
'000
 
'000
Denominator
 
 
 
 
 
 
Basic weighted average shares outstanding
 
102,849

 
102,531

 
91,545

Effect of dilution
 

 

 

 
 
 
 
 
 
 
Diluted weighted average shares outstanding
 
102,849

 
102,531

 
91,545

 
For each year ended December 31, 2012 , 2011 and 2010 , all share options and share-based awards were excluded from the calculation of the diluted weighted average number of shares because OEH incurred a net loss in all periods and the effect of their inclusion would be anti-dilutive.

The total number of share options and share-based awards excluded from computing diluted earnings per share were as follows:
 
Year ended December 31,
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Share options
 
3,430,800

 
3,074,450

 
2,818,850

Share-based awards
 
1,343,648

 
657,249

 
642,220

 
 
 
 
 
 
 
 
 
4,774,448

 
3,731,699

 
3,461,070

 
The numbers of share options and share-based awards unexercised at December 31, 2012 was 4,774,448 ( 2011 - 3,731,699 ; 2010 - 3,461,070 ).
 
Inventories
 
Inventories include food, beverages, certain operating stocks and retail goods.  Inventories are valued at the lower of cost or market value under the first-in, first-out method.
 

70


Property, plant and equipment, net
 
Property, plant and equipment, net are stated at cost less accumulated depreciation.  The cost of significant renewals and betterments is capitalized and depreciated, while expenditures for normal maintenance and repairs are expensed as incurred.
 
Depreciation expense is computed using the straight-line method over the following estimated useful lives:
 
Description
 
Useful lives
Buildings
 
Up to 60 years and 10% residual value
Tourist trains
 
Up to 75 years
River cruise ship and canal boats
 
25 years
Furniture, fixtures and equipment
 
5 to 25 years
Equipment under capital lease and leasehold improvements
 
Lesser of initial lease term or economic life
 
Land and certain art and antiques are not depreciated.

Real estate assets
 
Real estate assets consist primarily of inventory costs of real estate property developments.  Expenditures directly related to non-hotel real estate developments, such as real estate taxes and capital improvements, are capitalized.  Inventory costs of real estate developments include construction costs and ancillary costs, which are expensed as real estate revenue is recorded.  Direct selling costs, such as the costs of model apartments and their furnishings and semi-permanent signs, are capitalized within the cost of real estate assets for sale.  Other costs directly associated with sales, such as direct sales commissions, are recorded as prepaid expenses and charged to expense in the period in which the related revenue is recognized as earned.  Costs that do not meet the criteria for capitalization, such as the salaries of sales personnel, general and administrative expenses of the sales office, advertising and promotions, are expensed as incurred.  Land property development costs are accumulated by project and are allocated to individual residential units, principally using the relative sales value method.
 
Impairment of long-lived assets
 
OEH management evaluates the carrying value of long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, sales of similar assets, appraisals and, if appropriate, current estimated net sales proceeds from pending offers.  OEH evaluates the carrying value of long-lived assets based on its plans, at the time, for such assets and such qualitative factors as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to OEH’s plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset.
 
Investments
 
Investments include equity interests in and advances to unconsolidated companies and are accounted for under the equity method of accounting when OEH has a 20% to 50% ownership interest or exercises significant influence over the investee. Under the equity method, the investment in the equity method investee or joint venture is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize OEH’s share of net earnings or losses and other comprehensive income or loss of the investee. OEH will continue to report losses up to its investment carrying amount, including any additional financial support made or committed to by OEH. OEH’s share of earnings or losses is included in the determination of net earnings, and net investment in investees and joint ventures is included within investments in unconsolidated companies in the consolidated balance sheet.
 
Investments accounted for using the equity method are considered impaired when a loss in the value of the equity method investment is other than temporary.  Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain its earnings capacity that would justify the carrying amount of the investment. If OEH determines that the decline in value of its investment is other than temporary, the carrying amount of the investment is written down to its fair value through earnings.
 

71


All other unconsolidated investments are generally accounted for under the cost method.
 
Goodwill and other intangible assets
 
Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. To test goodwill for impairment, the Company first compares the carrying value of each reporting unit to its fair value to determine if an impairment is indicated. The fair value of reporting units is determined using internally developed discounted future cash flow models, which incorporate third party appraisals and industry/market data (to the extent available).  If an impairment is indicated, the Company compares the implied fair value of the reporting unit's goodwill to its carrying amount.  An impairment loss is measured as the excess of the carrying value of a reporting unit's goodwill over its implied fair value. The determination of impairment incorporates various assumptions and uncertainties that the Company believes are reasonable and supportable considering all available evidence, such as the future cash flows of the business, future growth rates, and the related discount rate.
 
Other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company uses internally developed discounted future cash flow models in determining the fair value of indefinite-lived intangible assets. 

Concentration of credit risk
 
Due to the nature of the leisure industry, concentration of credit risk with respect to trade receivables is limited.  OEH’s customer base is comprised of numerous customers across different geographic areas.
 
Pensions
 
OEH’s primary defined benefit pension plan is accounted for using actuarial valuations.  Net funded status is recognized on the balance sheet and any unrecognized prior service costs, actuarial gains and losses, or transition obligation are reported as a component of other comprehensive income/(loss) in shareholders’ equity. See Note 13.
 
In determining the expected long-term rate of return on assets, management has reviewed anticipated future long-term performance of individual asset classes and the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings expected on the funds invested.  The projected returns are based on broad equity and bond indices, including fixed interest rate gilts (United Kingdom Government issued securities) of long-term duration since the plan operates in the U.K.
 
Management reviews OEH’s actual asset allocation on an annual basis and rebalances investments to targeted allocations when considered appropriate.  While the analysis considers recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.
 
Management continues to monitor and evaluate the level of pension contributions based on various factors that include investment performance, actuarial valuation and tax deductibility.
 
Derivative financial instruments
 
All derivative instruments are recorded on the balance sheet at fair value.  If a derivative instrument is not designated as a hedge for accounting purposes, the fluctuations in the fair value of the derivative are recorded in earnings.
 
If a derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income/(loss) and is recognized in the statements of consolidated operations when the hedged item affects earnings.  The ineffective portion of a hedging derivative’s change in the fair value will be immediately recognized in earnings.
 
OEH management formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions.  OEH links all hedges that are designated as fair value hedges to specific assets or liabilities on the consolidated balance sheet or to specific firm commitments.  OEH links all hedges that are designated as cash flow hedges to forecasted transactions or to floating rate liabilities on the balance sheet.  OEH management also assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are designated in hedging relationships are highly effective in offsetting changes in fair values or cash flows of hedged items.  OEH

72


discontinues hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is terminated, or exercised.
 
OEH is exposed to interest rate risk on its floating rate debt and management uses derivatives to manage the impact of interest rate changes on earnings and cash flows.  OEH’s policy is to enter into interest rate swap and interest rate cap agreements from time to time to hedge the variability in interest rate cash flows on floating rate debt.  These swaps effectively convert the floating rate interest payments on a portion of the outstanding debt into fixed payments.
 
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.  Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recorded in other comprehensive income/(loss) within foreign currency translation adjustment.  The gain or loss relating to the ineffective portion will be recognized immediately in earnings within foreign currency, net. Gains and losses deferred in accumulated other comprehensive income/(loss) are recognized in earnings upon disposal of the foreign operation.  OEH links all hedges that are designated as net investment hedges to specifically identified net investments in foreign subsidiaries.
 
Fair value measurements
 
Guidance on fair value measurements and disclosures (i) applies to certain assets and liabilities that are being measured and reported on a fair value basis, (ii) defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosure about fair value measurements and (iii) enables the reader of the financial statements to assess the inputs to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.

Guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, namely quoted market prices in active markets for identical assets or liabilities (Level 1), observable market-based inputs or unobservable inputs that are corroborated by market data (Level 2), and unobservable inputs that are not corroborated by market data (Level 3).
 
OEH reviews its fair value hierarchy classifications quarterly.  Changes in significant observable valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities.  These reclassifications are reported as transfers in Level 3 at their fair values at the beginning of the period in which the change occurs and as transfers out at their fair values at the end of the period.
 
The fair value of OEH’s derivative financial instruments is computed based on an income approach using appropriate valuation techniques including discounting future cash flows and other methods that are consistent with accepted economic methodologies for pricing financial instruments.  Where credit value adjustments exceeded 20% of the fair value of the derivatives, Level 3 inputs are assumed to have a significant impact on the fair value of the derivatives in their entirety and the valuation has been included in the Level 3 category.
 
Accounting pronouncements adopted during the year
 
In May 2011, the FASB issued guidance on fair value measurement and disclosure requirements under U.S. GAAP. The amendments in this update result in common fair value measurement and disclosure requirements under both U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update changed, in certain circumstances, the application of the requirements of fair value measurement. This guidance became effective for interim and annual periods beginning after December 15, 2011. The adoption of the guidance did not materially impact the Company’s consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued guidance concerning the presentation of comprehensive income in the financial statements.  Under the amendments to the existing guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either option, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments eliminate the option to present the components of other comprehensive income as part of the statement of changes in total equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance became effective for fiscal years and interim periods beginning after December 15, 2011.  However, in December 2011, the FASB issued guidance that defers only those changes that relate to the

73


presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of this deferral guidance are also effective for public companies in fiscal years beginning after December 15, 2011.  The Company adopted this guidance as of January 1, 2012, and has presented total comprehensive income as separate statements of consolidated comprehensive income. There was no other impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance related to annual goodwill impairment assessments that gives companies the option to perform a qualitative assessment before calculating the fair value of the reporting unit. Under this guidance, if this option is selected, a company is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This guidance became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, but early adoption was permitted. The adoption of the guidance did not materially impact the Company’s consolidated financial position, results of operations or cash flows.

In August 2012, the FASB issued guidance to make technical corrections to various sections of the ASC. This update amends various paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 114 of the U.S. Securities and Exchange Commission. The adoption of the guidance did not materially impact the Company’s consolidated financial position, results of operations or cash flows.

Accounting pronouncements to be adopted

In July 2012, the FASB issued guidance related to annual impairment assessment of intangible assets, other than goodwill, that gives companies the option to perform a qualitative assessment before calculating the fair value of the asset. Although the guidance revises the examples of events and circumstances that an entity should consider in interim periods, it does not revise the requirements to test indefinite-lived intangible assets (1) annually for impairment and (2) between annual tests if there is a change in events or circumstances that would indicate an impairment. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial position, results of operations and cash flows.

In December 2011, the FASB issued accounting guidance that requires companies to provide new disclosures about offsetting assets and liabilities and related arrangements for financial instruments and derivatives. The provisions of this guidance are effective for annual reporting periods beginning on or after January 1, 2013, and are required to be applied retrospectively. The Company is currently evaluating the impact that adoption of this guidance will have on its consolidated financial position, results of operations and cash flows.

2.    Assets held for sale and discontinued operations

At December 31, 2012 , Porto Cupecoy remained classified as held for sale. During the year ended December 31, 2012 , The Westcliff, Johannesburg, South Africa; The Observatory Hotel, Sydney, Australia; Bora Bora Lagoon Resort, French Polynesia; and Keswick Hall, Charlottesville, Virginia were sold. For the year ended December 31, 2012 the results of operations of Porto Cupecoy, The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, and Keswick Hall have been presented as discontinued operations.

At December 31, 2011 , Keswick Hall and Bora Bora Lagoon Resort remained classified as held for sale. During the year ended December 31, 2011 , Hôtel de la Cité, Carcassonne, France was sold. For the year ended December 31, 2011 the results of operations of Porto Cupecoy, The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, Keswick Hall and Hôtel de la Cité have been presented as discontinued operations.

At December 31, 2010 , Bora Lagoon Resort and Hôtel de la Cité remained classified as held for sale. During the year ended December 31, 2010 , Lilianfels Blue Mountains, New South Wales, Australia and La Cabana restaurant, Buenos Aires, Argentina were sold. For the year ended December 31, 2010 the results of operations of Porto Cupecoy, The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, Keswick Hall, Hôtel de la Cité, Lilianfels Blue Mountains and La Cabana have been presented as discontinued operations.


74


(a)    Properties sold: The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, Keswick Hall, Hôtel de la Cité, Lilianfels Blue Mountains and La Cabana

On December 14, 2012 , OEH completed the sale of the property, operations and shares of The Westcliff in Johannesburg, South Africa for a consideration of $26,000,000 . The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain on sale of $5,406,000 , which is reported within earnings/(losses) from discontinued operations, net of tax. OEH will continue to operate The Westcliff for a period of not more than 12 months after completion. OEH considers the hotel as non-core to the future business, with the sale releasing funds for debt reduction, cash reserves and reinvestment in other OEH properties.
 
On August 8, 2012, OEH completed the sale of the property and operations of The Observatory Hotel in Sydney, Australia for a consideration of A$40,000,000 ( $42,106,000 ), of which A$29,350,000 ( $30,895,000 ) was paid in cash and A$10,650,000 ( $11,211,000 ) was settled directly with the lender to repay the debt facility secured by the property. The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain on sale of $5,359,000 (including a $12,147,000 transfer of foreign currency translation amounts from accumulated other comprehensive loss), which is reported within earnings/(losses) from discontinued operations, net of tax.

On June 1, 2012, OEH completed the sale of the shares of Bora Bora Lagoon Resort in French Polynesia for a cash consideration of $3,000,000 . The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain on sale of $662,000 (including a $13,074,000 transfer of foreign currency translation amounts from accumulated other comprehensive loss), which is reported within earnings/(losses) from discontinued operations, net of tax.
 
On January 23, 2012, OEH completed the sale of the property and operations of Keswick Hall in Charlottesville, Virginia for consideration of $22,000,000 , of which $12,000,000 was paid in cash and $10,000,000 was settled directly with the lender as a reduction in the debt facility secured by the property. The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain of $3,957,000 , which is reported within earnings/(losses) from discontinued operations, net of tax.

On August 1, 2011, OEH completed the sale of the property and operations of Hôtel de la Cité in Carcassonne, France, for a cash consideration of €9,000,000 ( $12,933,000 ). The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain on sale of $2,182,000 (including a $3,018,000 transfer of foreign currency translation amounts from accumulated other comprehensive loss), which is reported within earnings/(losses) from discontinued operations, net of tax.

On May 25, 2010, OEH completed the sale of the restaurant La Cabana in Buenos Aires, Argentina for cash consideration of $2,712,000 . The restaurant was a part of OEH’s hotels and restaurants segment. The disposal resulted in a loss on sale of $460,000 (including a $294,000 transfer of foreign currency gain from other comprehensive income) which is reported within earnings/(losses) from discontinued operations, net of tax. The assets of La Cabana were sold in December 2009 and the shares in the restaurant-owning company in May 2010.

On January 29, 2010, OEH completed the sale of the property and operations of Lilianfels Blue Mountains in Katoomba, Australia for a consideration of $18,667,000 , of which $6,726,000 was settled directly with the lender as a reduction in the debt facility secured by the property. The hotel was a part of OEH’s hotels and restaurants segment. The disposal resulted in a gain of $7,183,000 (including a $7,292,000 transfer of foreign currency translation gain from other comprehensive income) which is reported within earnings/(losses) from discontinued operations, net of tax.
 

75


The following is a summary of net assets sold and the gain recorded on sale for The Westcliff, The Observatory Hotel, Bora Bora Lagoon Resort, Keswick Hall, Hôtel de la Cité, La Cabana and Lilianfels Blue Mountains:

 
 
The Westcliff
 
The Observatory Hotel
 
Bora Bora Lagoon Resort
 
Keswick Hall
 
 
December 14,
2012
 
August 8,
2012
 
June 1,
2012
 
January 23,
2012
 
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Property, plant & equipment, net
 
17,911

 
48,096

 
15,827

 
18,590

Net working capital (deficit)/surplus
 
(207
)
 
(299
)
 
(720
)
 
401

Other assets/(liabilities)
 

 

 

 
(1,891
)
Deferred income taxes
 

 

 

 

Net assets
 
17,704

 
47,797

 
15,107

 
17,100

Transfer of foreign currency translation loss/(gain)
 
1,308

 
(12,147
)
 
(13,074
)
 

 
 
19,012

 
35,650

 
2,033

 
17,100

Consideration:
 
 
 
 
 
 
 
 
Cash
 
26,000

 
30,895

 
3,000

 
12,000

Reduction in debt facility on sale of hotel
 

 
11,211

 

 
10,000

Less: Working capital adjustment
 
(628
)
 
(447
)
 

 
(430
)
Less: Costs to sell
 
(954
)
 
(650
)
 
(305
)
 
(513
)
 
 
24,418

 
41,009

 
2,695

 
21,057

 
 
 
 
 
 
 
 
 
Gain/(loss) on sale
 
5,406

 
5,359

 
662

 
3,957

 
(continued)
 
Hôtel de la Cité
 
La Cabana
 
Lilianfels Blue Mountains
 
 
August 1,
2011
 
May 25,
2010
 
January 29,
2010
 
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Property, plant & equipment, net
 
13,147

 
2,985

 
18,582

Net working capital (deficit)/surplus
 
266

 
170

 
66

Other assets/(liabilities)
 

 
43

 
158

Deferred income taxes
 

 

 
(730
)
Net assets
 
13,413

 
3,198

 
18,076

Transfer of foreign currency translation loss/(gain)
 
(3,018
)
 
(294
)
 
(7,292
)
 
 
10,395

 
2,904

 
10,784

Consideration:
 
 
 
 
 
 
Cash
 
12,933

 
2,712

 
11,941

Reduction in debt facility on sale of hotel
 

 

 
6,726

Less: Working capital adjustment
 

 

 

Less: Costs to sell
 
(356
)
 
(268
)
 
(700
)
 
 
12,577

 
2,444

 
17,967

 
 
 
 
 
 
 
Gain/(loss) on sale
 
2,182

 
(460
)
 
7,183



76


(b)    Results of discontinued operations

In December 2012, OEH decided to sell Porto Cupecoy, its real estate development on the Dutch side of St. Martin, as an asset non-core to its future business, with the sale releasing funds for debt reduction, cash reserves and reinvestment in other OEH properties. The property development was included in the real estate segment. The property development has been reclassified as held for sale and its results have been presented as discontinued operations for all periods shown. The sale was completed in January 2013.

Summarized operating results of the properties classified as discontinued operations for the years ended December 31, 2012 , 2011 and 2010 (including residual transactions relating to properties disposed of in prior periods which are recorded in “Other”) are as follows:
 
 
 
Year ended December 31, 2012
 
 
Porto Cupecoy
 
The Westcliff
 
The Observatory Hotel
 
Bora Bora Lagoon Resort
 
Keswick Hall
 
Total
 
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
8,163

 
9,088

 
9,194

 

 
412

 
26,857

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax, gain on sale and impairment
 
(5,187
)
 
215

 
(1,080
)
 
(166
)
 
(989
)
 
(7,207
)
Impairment
 
(3,166
)
 

 

 

 

 
(3,166
)
Gain on sale
 

 
5,406

 
5,359

 
662

 
3,957

 
15,384

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax
 
(8,353
)
 
5,621

 
4,279

 
496

 
2,968

 
5,011

Tax (provision)/benefit
 

 
(1,025
)
 
426

 

 
(683
)
 
(1,282
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings/(losses) from discontinued operations
 
(8,353
)
 
4,596

 
4,705

 
496

 
2,285

 
3,729

 

 
 
Year ended December 31, 2011
 
 
Porto Cupecoy
 
The Westcliff
 
The Observatory Hotel
 
Bora Bora Lagoon Resort
 
Keswick Hall
 
Hôtel de la Cité
 
Other
 
Total
 
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
7,871

 
9,523

 
16,429

 

 
15,359

 
3,743

 

 
52,925

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses before tax, gain on sale and impairment
 
(6,169
)
 
(585
)
 
(726
)
 
(403
)
 
(1,330
)
 
(212
)
 
(11
)
 
(9,436
)
Impairment
 
(38,545
)
 
(515
)
 

 
(2,150
)
 
(23,934
)
 

 

 
(65,144
)
Gain on sale
 

 

 

 

 

 
2,182

 

 
2,182

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax
 
(44,714
)
 
(1,100
)
 
(726
)
 
(2,553
)
 
(25,264
)
 
1,970

 
(11
)
 
(72,398
)
Tax (provision)/benefit
 

 
(87
)
 

 

 
4,506

 
(784
)
 

 
3,635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings/(losses) from discontinued operations
 
(44,714
)
 
(1,187
)
 
(726
)
 
(2,553
)
 
(20,758
)
 
1,186

 
(11
)
 
(68,763
)
 

77


 
 
Year ended December 31, 2010
 
 
Porto Cupecoy
 
The Westcliff
 
The Observatory Hotel
 
Bora Bora Lagoon Resort
 
Keswick Hall
 
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
64,019

 
13,257

 
14,271

 
179

 
11,185

 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax, gain on sale and impairment
 
(3,355
)
 
3,015

 
(859
)
 
(137
)
 
(2,152
)
(Impairment)/reversal of previous impairment
 
(24,616
)
 

 

 
1,305

 
(1,600
)
Gain/(loss) on sale
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax
 
(27,971
)
 
3,015

 
(859
)
 
1,168

 
(3,752
)
Tax (provision)/benefit
 
266

 
(87
)
 
(6,653
)
 

 
(96
)
 
 
 
 
 
 
 
 
 
 
 
Net earnings/(losses) from discontinued operations
 
(27,705
)
 
2,928

 
(7,512
)
 
1,168

 
(3,848
)

(continued)
 
Year ended December 31, 2010
 
 
Hôtel de la Cité
 
Lilianfels Blue Mountains
 
La Cabana
 
Other
 
Total
 
 
$'000
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
6,165

 
856

 

 
(19
)
 
109,913

 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax, gain on sale and impairment
 
(197
)
 
(132
)
 

 
(1,419
)
 
(5,236
)
(Impairment)/reversal of previous impairment
 
(5,989
)
 

 

 

 
(30,900
)
Gain/(loss) on sale
 

 
7,183

 
(460
)
 

 
6,723

 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before tax
 
(6,186
)
 
7,051

 
(460
)
 
(1,419
)
 
(29,413
)
Tax (provision)/benefit
 
1,684

 

 

 

 
(4,886
)
 
 
 
 
 
 
 
 
 
 
 
Net earnings/(losses) from discontinued operations
 
(4,502
)
 
7,051

 
(460
)
 
(1,419
)
 
(34,299
)

Assets of Porto Cupecoy include condominiums and marina slips remaining to be sold. In the year ended December 31, 2012 , OEH identified and recorded a non-cash real estate assets impairment charge of $3,166,000 ( 2011 - $36,868,000 ; 2010 - $24,616,000 ). See Note 6. Additionally as part of the overall impairment calculation for the year ended December 31, 2011 , property, plant and equipment at the Porto Cupecoy development with a carrying value of $1,677,000 was written down to a fair value of $ Nil .

Revenue from the Keswick Hall property development in 2011 included the sales of two model homes for $1,876,000 and $1,250,000 in the first and fourth quarters of the year, respectively. These sales resulted in a loss on disposal of $16,000 in the year ended December 31, 2011. In the year ended December 31, 2010, OEH recorded a non-cash impairment charge of $1,600,000 against the carrying value of the two model homes. This charge resulted primarily from offers on one of the model homes that did not exceed the carrying value of those assets.
 
Also in the year ended December 31, 2011, OEH identified and recorded non-cash property, plant and equipment impairment charges of $23,934,000 in respect of Keswick Hall and $2,150,000 in respect of Bora Bora Lagoon Resort. The carrying values of the assets were written down to the fair value to reflect the level of offers received at the time for the purchase of each hotel.

78



In the year ended December 31, 2011, OEH identified a non-cash goodwill impairment of $515,000 at The Westcliff . Management’s estimates at the time considered future profitability of the business, future growth rates and the related discount rates.  OEH determined this impairment was triggered due to performance that required a reassessment. 

In the year ended December 31, 2010, OEH identified and recorded a non-cash property, plant and equipment impairment charge of $5,989,000 in respect of Hôtel de la Cité . The carrying values of the assets were written down to the fair value to reflect the level of offers received at the time for the purchase of the hotel.

(c)    Assets and liabilities held for sale
 
Assets and liabilities of the properties classified as held for sale consist of the following:
 
 
 
December 31, 2012
 
December 31, 2011
 
 
Porto Cupecoy
 
Porto Cupecoy
 
The
Westcliff
 
The
Observatory Hotel
 
Bora Bora
Lagoon
Resort
 
Keswick
Hall
 
Total
 
 
$’000
 
$’000
 
$’000
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 

 

 
87

 
373

 
45

 
3,260

 
3,765

Real estate assets
 
22,040

 
30,155

 

 

 

 
4,741

 
34,896

Property, plant and equipment, net
 
38

 
62

 
19,273

 
47,189

 
16,427

 
13,778

 
96,729

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets held for sale
 
22,078

 
30,217

 
19,360

 
47,562

 
16,472

 
21,779

 
135,390

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
(2,174
)
 
(3,756
)
 
(269
)
 
(1,212
)
 
(843
)
 
(938
)
 
(7,018
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities held for sale
 
(2,174
)
 
(3,756
)
 
(269
)
 
(1,212
)
 
(843
)
 
(938
)
 
(7,018
)
 
3.    Variable interest entities
 
OEH analyzes its variable interests, including loans, guarantees and equity investments, to determine if an entity is a variable interest entity (“VIE”).  In that assessment, OEH's analysis includes both quantitative and qualitative considerations. OEH bases its quantitative analysis on the forecast cash flows of the entity, and its qualitative analysis on a review of the design of the entity, organizational structure including decision-making ability, and relevant financial agreements.  OEH also uses its quantitative and qualitative analysis to determine if OEH is the primary beneficiary and required to consolidate the VIE.
 
(a)    VIEs of which OEH is the primary beneficiary
 
OEH holds a 19.9% equity investment in Charleston Center LLC, owner of Charleston Place Hotel.  OEH has also made a number of loans to the hotel.  OEH concluded that Charleston Center LLC is a variable interest entity because the total equity at risk is insufficient for the entity to fund its operations without additional subordinated financial support, the majority of which has been provided by OEH. OEH is the primary beneficiary of this VIE because it is expected to absorb a majority of the VIE's expected losses and residual gains through the subordinated financial support it has provided, and has the power to direct the activities that impact the VIE's performance, based on the current organizational structure.


79


The carrying amount of consolidated assets and liabilities of Charleston Center LLC included within OEH’s consolidated balance sheets as of December 31, 2012 and 2011 are summarized as follows:

 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Current assets
 
18,511

 
8,167

Property, plant and equipment
 
183,793

 
185,788

Goodwill
 
40,395

 
40,395

Other assets
 
2,114

 
2,185

 
 
 
 
 
Total assets
 
244,813

 
236,535

 
 
 
 
 
Current liabilities
 
6,382

 
6,101

Third-party debt, including $1,795 and $1,784 current portion
 
97,945

 
90,529

Other liabilities
 
14,740

 
14,139

Deferred income taxes
 
60,326

 
61,072

 
 
 
 
 
Total liabilities
 
179,393

 
171,841

 
 
 
 
 
Net assets (before amounts payable to OEH of $90,807 and $92,263)
 
65,420

 
64,694

 
The third-party debt of Charleston Center LLC is secured by its net assets and is non-recourse to its members, including OEH. The hotel's separate assets are not available to pay the debts of OEH and the hotel's separate liabilities do not constitute obligations of OEH.  This non-recourse obligation is presented separately on the consolidated balance sheet of OEH.

(b)    VIEs of which OEH is not the primary beneficiary
 
OEH holds a 50% equity investment in its rail joint venture in Peru which operates the infrastructure, rolling stock, stations and services on a portion of the state-owned railways in Peru. OEH concluded that the Peru rail joint venture is a variable interest entity because the total equity at risk is insufficient for it to fund its operations without additional subordinated financial support. The joint venture is under joint control as all the budgetary and capital decisions require a majority of approval of the joint venture's board of directors. The joint venture is accounted for under the equity method of accounting and included in earnings/(losses) before income taxes and earnings from unconsolidated companies in the statements of consolidated operations.

The carrying amounts and maximum exposures to loss as a result of OEH's involvement with its Peru rail joint venture are as follows:
 
 
Carrying Amounts
 
Maximum Exposure
 
 
2012
 
2011
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Investment
 
32,973

 
35,001

 
32,973

 
35,001

Due from unconsolidated company
 
4,803

 
4,917

 
4,803

 
4,917

Guarantees
 

 

 
7,558

 
9,052

Contingent guarantees
 

 

 
17,149

 
16,632

 
 
 
 
 
 
 
 
 
Total
 
37,776

 
39,918

 
62,483

 
65,602


The maximum exposure to loss for the Peru rail joint venture exceeds the carrying amount due to guarantees, discussed below, which are not recognized in the consolidated financial statements. The contingent guarantees may only be enforced in the event

80


there is a change in control in the joint venture, which would occur only if OEH’s ownership of the economic and voting interests in the joint venture falls below 50% , an event which has not occurred. As at December 31, 2012 , OEH does not expect that it will be required to fund these guarantees relating to this joint venture as the entity has the ability to repay the loans.

The Company has guaranteed $7,558,000 and contingently guaranteed $10,696,000 of the debt obligations of the rail joint venture in Peru through 2016. The Company has also guaranteed the rail joint venture’s contingent obligations relating to the performance of its governmental rail concessions, currently in the amount of $ 6,453,000 , through May 2013.

Long-term debt obligations of the rail joint venture in Peru at December 31, 2012 totaling $7,558,000 have been classified within current liabilities of the joint venture in its stand-alone financial statements, as it was out of compliance with a debt service coverage ratio covenant in its loan facilities. Discussions with the lenders to bring the joint venture into compliance are continuing.

4.    Acquisitions
 
No new acquisitions occurred during the years ended December 31, 2012 and 2011.
 
2010 Acquisitions
 
(a)      Grand Hotel Timeo and Villa Sant’Andrea
 
On January 22, 2010, OEH acquired 100% of the share capital of two hotels in Taormina, Sicily (Italy) — the Grand Hotel Timeo and the Villa Sant’Andrea — at a purchase price of €41,874,000 ( $59,162,000 ) comprised of agreed consideration of €81,512,000 ( $115,165,000 ) less existing indebtedness assumed and including estimated contingent consideration.  OEH purchased the two hotels to enhance both its presence in the Italian hotel market and its portfolio of leading luxury hotels globally.  No intangible assets were identified and the goodwill arising from the acquisition consists largely of profit growth opportunities these hotels are expected to generate. All of the goodwill was assigned to OEH’s hotels and restaurants segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
 
OEH performed a preliminary fair value exercise to allocate the purchase price to the acquired assets and liabilities as at January 22, 2010, which was finalized in the quarter ended December 31, 2010. This resulted in a $468,000 increase in goodwill from settlement of outstanding tax positions and working capital items with the vendor of the properties.


81


The following table summarizes the consideration paid for the hotels and the fair values of the assets acquired and liabilities assumed, converted to U.S. dollars at the exchange rate effective at the date of acquisition:
 
 
 
Fair value on January 22, 2010
 
 
$’000
Consideration:
 
 
Total agreed consideration
 
115,165

Less: Existing debt assumed
 
(61,654
)
Plus: Contingent additional consideration
 
5,651

 
 
 
Purchase price
 
59,162

 
 
 
Assets acquired and liabilities assumed:
 
 
Cash and cash equivalents
 
45

Property, plant and equipment
 
101,173

Inventories
 
215

Prepaid expenses and other
 
406

Other assets
 
1,434

Accrued liabilities
 
(8,968
)
Deferred income taxes
 
(10,541
)
Other liabilities
 
(304
)
Long-term debt
 
(61,654
)
Goodwill
 
37,356

 
 
 
Net assets acquired
 
59,162

 
Acquisition-related costs which are included within selling, general and administrative expenses for the year ended December 31, 2010 were $684,000 . The purchase price of €41,874,000 ( $59,162,000 ), net of contingent consideration of €4,000,000 ( $5,651,000 ) described below, was €37,874,000 ( $53,511,000 ) which was funded by cash payments and new indebtedness totaling €32,843,000 ( $46,402,000 ), vendor financing of €5,000,000 ( $7,064,000 ) and cash acquired of €31,000 ( $45,000 ).
 
The acquisition of the two hotels has been accounted for using the acquisition method of accounting for business combinations. The results of operation of the hotels have been included in the consolidated financial results since the date of acquisition.
 
OEH has agreed to pay the vendor up to a further €5,000,000 (equivalent to $7,064,000 at January 22, 2010) if, by 2015, additional rooms are constructed at Grand Hotel Timeo and certain required permits are granted to expand and add a swimming pool to Villa Sant’Andrea.  The fair value of the contingent additional consideration at January 22, 2010 was €4,000,000 ( $5,651,000 ) (determined using an income approach) based on an analysis of the likelihood of the conditions for payment being met. In February 2011, OEH paid the vendor €1,500,000 (equivalent to $2,062,000 at February 28, 2011) of the contingent liability as the appropriate permits to add a swimming pool to Villa Sant' Andrea have been granted. In November 2012, OEH paid the vendor €2,500,000 (equivalent to $3,188,000 at November 15, 2012) of the contingent liability as the appropriate permits to add additional rooms to Villa Sant’Andrea have been granted.
 
The following table presents information for Grand Hotel Timeo and Villa Sant’Andrea included in OEH’s consolidated statements of operations from the acquisition date (January 22, 2010) for the year ended December 31, 2010:
 
 
 
2010
Year ended December 31,
 
$’000
 
 
 
Revenue
 
10,960

 
 
 
Losses from continuing operations
 
(3,491
)

82


 
As the acquisition of the Grand Hotel Timeo and Villa Sant’Andrea occurred on January 22, 2010, the pro forma results of operations for the year ended December 31, 2010, assuming acquisition of these hotels had taken place at the beginning of 2010, would not differ significantly from actual reported results.
 
(b)      Land at La Samanna
 
In June 2010, OEH purchased land adjacent to La Samanna in St. Martin from a third party. The consideration paid was a combination of cash and three condominium units and two boat slips at OEH’s Porto Cupecoy development. Presented below is a summary of the transaction:
 
 
 
2010
Year ended December 31,
 
$’000
 
 
 
Non-cash value of assets exchanged
 
2,932

Cash paid
 
1,641

 
 
 
Assumed basis for land received
 
4,573



5.    Investments in unconsolidated companies
 
Investments in unconsolidated companies represent equity interests of 50% or less and in which OEH exerts significant influence, but does not have effective control of these unconsolidated companies and, therefore, accounts for these investments using the equity method. These investments include the 50% ownership in rail and hotel joint venture operations in Peru and in Hotel Ritz, Madrid, and the 19.9% ownership in Eastern and Oriental Express Ltd. The Buzios land joint venture is 50% owned and accounted for at cost.
 
OEH’s Peru hotel joint venture has completed the sale of Las Casitas del Colca for $5,590,000 on April 17, 2012.  Additionally, on June 15, 2012, the Peru hotel joint venture opened Palacio Nazarenas, a 55 -key hotel in Cuzco, Peru.

In June 2007, OEH acquired 50% of a company holding real estate in Buzios, Brazil for a cash consideration of $5,000,000 .  OEH planned to build a hotel and villas on the acquired land and to purchase the remaining 50% of the company when the building permits were obtained from the local authorities. In February 2009, the Municipality of Buzios commenced a process for the compulsory purchase of the land by the municipality in exchange for a payment of fair compensation to the owners. In April 2011, the State of Rio de Janeiro declared the land an area of public interest, with the intention that it will become part of a State Environmental Park which is being created in the area. The compulsory purchase of the land will therefore be carried out by the State of Rio de Janeiro. OEH is currently in negotiation to recover its investment in the project based on the State’s decision to purchase the land.
 

83


Summarized financial data for OEH’s unconsolidated companies are as follows:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Current assets
 
75,339

 
70,536

 
 
 
 
 
Property, plant and equipment, net
 
354,640

 
344,576

Other assets
 
3,806

 
5,536

Non-current assets
 
358,446


350,112

 
 
 
 
 
Total assets
 
433,785

 
420,648

 
 
 
 
 
Current liabilities
 
165,413

 
195,529

 
 
 
 
 
Long-term debt
 
45,985

 
17,346

Other liabilities
 
115,763

 
99,643

Non-current liabilities
 
161,748

 
116,989

 
 
 
 
 
Total shareholders’ equity
 
106,624

 
108,130

 
 
 
 
 
Total liabilities and shareholders’ equity
 
433,785

 
420,648


 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Revenue
 
157,270

 
145,254

 
113,953

 
 
 
 
 
 
 
Earnings from operations before finance costs
 
27,463

 
24,868

 
19,602

 
 
 
 
 
 
 
Net earnings
 
4,181

 
7,694

 
3,977

 
Included in unconsolidated companies are OEH’s hotel and rail joint ventures in Peru, under which OEH and the other 50% participant must contribute equally additional equity needed for the businesses.  If the other participant does not meet this obligation, OEH has the right to dilute the other participant and obtain a majority equity interest in the affected joint venture company.  OEH also has rights to purchase the other participant’s interests, which rights are exercisable in limited circumstances such as the other participant’s bankruptcy.

OEH’s investments in and loans and advances to unconsolidated companies amounted to $58,924,000 at December 31, 2012 ( 2011 - $60,012,000 ). OEH’s earnings from unconsolidated companies, net of tax were $2,124,000 in 2012 ( 2011 - $4,357,000 ; 2010 - $2,258,000 ).  See Note 23.

There are guarantees and contingent guarantees to unconsolidated companies which are not recognized in the consolidated financial statements. The contingent guarantees for each Peruvian joint venture may only be enforced in the event there is a change in control of the relevant joint venture, which would occur only if OEH’s ownership of the economic and voting interests in the joint venture falls below 50% , an event which has not occurred. As at December 31, 2012, OEH does not expect that it will be required to fund these guarantees relating to these joint venture companies.

The Company has contingently guaranteed, through 2018, $15,500,000 of debt obligations of the joint venture in Peru that operates four hotels and, through 2014, a further $2,706,000 of its debt obligations. See Note 3 for information regarding guarantees and long-term debt of the rail joint venture in Peru.

84



At December 31, 2012 , long-term debt obligations totalling $85,036,000 of the Hotel Ritz, Madrid, in which OEH has a 50% equity investment, have been classified within current liabilities in the joint venture’s stand-alone financial statements as it was out of compliance with the debt service coverage ratio covenant in its first mortgage loan facility. Discussions with the lender to bring the hotel into long-term compliance are continuing.  OEH and its joint venture partner have each guaranteed $9,888,000 of the debt obligations, and $1,163,000 of a working capital loan facility.

6.
Real estate impairment

Real estate assets at December 31, 2012 and 2011 include condominiums and marina slips remaining to be sold at Porto Cupecoy on the Dutch side of St. Martin. OEH records impairment charges against the carrying value of real estate assets if the carrying value exceeds the fair value less costs to sell.  As at December 31, 2012, OEH reclassified Porto Cupecoy real estate assets for all periods presented as assets held for sale, as the Company anticipated a sale to a third party of assets not already encumbered by existing sales contracts. This sale closed in January 2013. Based on the agreed sales price of $19,000,000 , OEH recorded an impairment of $3,166,000 for the year ended December 31, 2012. For the year ended December 31, 2011, OEH had determined that the fair value less costs to sell of real estate assets was less than the carrying value, which resulted in the recognition of a non-cash impairment charge of $36,868,000 (2010 - $24,616,000 ), computed using Level 3 inputs, namely the estimated selling prices and estimated selling costs based on OEH’s recent experience with sales of condominiums and marina slips already completed.  This impairment charge resulted primarily from changes in the estimates of price and pace of future sales as a result of current market conditions.  Additionally as part of the overall impairment calculation for the year ended December 31, 2011, property, plant and equipment at the Porto Cupecoy development with a carrying value of $1,677,000 were written down to a fair value of $ Nil
 
The total impairment charges of $3,166,000 (2011 - $38,545,000 ; 2010 - $24,616,000 ) relate to the real estate segment, and are reported within discontinued operations in the statements of consolidated operations. See Note 2.
 

7.    Property, plant and equipment
 
The major classes of property, plant and equipment are as follows:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Land and buildings
 
1,054,171

 
992,724

Machinery and equipment
 
193,941

 
181,467

Fixtures, fittings and office equipment
 
206,135

 
184,367

River cruise ship and canal boats
 
18,255

 
18,061

 
 
 
 
 
 
 
1,472,502

 
1,376,619

Less: Accumulated depreciation
 
(300,899
)
 
(269,024
)
 
 
 
 
 
 
 
1,171,603

 
1,107,595

 

85


The major classes of assets under capital leases included above are as follows:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Freehold and leased land and buildings
 

 
4,461

Machinery and equipment
 
918

 
828

Fixtures, fittings and office equipment
 
103

 
102

 
 
 
 
 
 
 
1,021

 
5,391

Less: Accumulated depreciation
 
(829
)
 
(1,164
)
 
 
 
 
 
 
 
192

 
4,227

 
The depreciation charge on property, plant and equipment for the year ended December 31, 2012 was $43,444,000 ( 2011 - $43,335,000 ; 2010 - $42,029,000 ).

In the year ended December 31, 2012 , OEH identified a non-cash property, plant and equipment and other assets charge of $3,837,000 relating to the write down to fair value of train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service.

Also, in the year ended December 31, 2011 , OEH identified a non-cash property, plant and equipment charge of $8,153,000 in respect of Casa de Sierra Nevada, San Miguel de Allende, Mexico.  The carrying value was written down to the hotel’s fair value.
 
The impairments above are included in impairment of other intangible assets, other assets and property, plant and equipment in the statements of consolidated operations.
 
The property, plant and equipment of Charleston Center LLC, a consolidated VIE, of $183,793,000 ( 2011 - $185,788,000 ) is separately disclosed on the consolidated balance sheets. See Note 3.
 
For the year ended December 31, 2012 , OEH capitalized interest in the amount of $4,193,000 ( 2011 - $863,000 ; 2010 - $2,201,000 ). All amounts capitalized were recorded in property, plant and equipment.

New York hotel project

On March 18, 2011, OEH agreed to assign its purchase and development agreements previously made with the New York Public Library relating to the site of the Donnell branch of the Library adjacent to OEH’s ‘21’ Club restaurant to an affiliate (the “Assignee”) of Tribeca Associates, LLC and Starwood Capital Group Global LLC.  The Assignee agreed to assume all the terms and obligations of the contracts and to reimburse all previous deposit payments made by OEH and a $2,000,000 contribution toward fees incurred by OEH.  The transaction closed on April 7, 2011, resulting in gross proceeds received by OEH of $25,500,000 . This transaction resulted in a gain, net of costs, of $492,000 in the year ended December 31, 2011.  Based on the terms under negotiations with interested parties in 2010, OEH recorded a non-cash impairment charge of $6,386,000 at December 31, 2010 on land and buildings for the capitalized pre-development expenses incurred in the period.
 
As part of this assignment, OEH entered into an option agreement which granted the Assignee a “call” option to acquire 45,000 square feet of the approximately 52,000 square feet of excess development rights held by ‘21’ Club at a price to the Assignee of $13,500,000 and, alternatively, a “put” option to sell to OEH the excess development rights (approximately 65,000 square feet) of the Donnell branch site at a price to OEH of $16,000,000 .  The option agreement expiration date was extended several times and included a further call option on approximately 4,800 additional square feet of excess development rights at a price to the Assignee of approximately $2,850,000 .  The Assignee exercised the call option on December 16, 2011 for $16,350,000 . Of these proceeds, $4,514,000 was used to repay a portion of the existing loan facility secured by ‘21’ Club, and the gain realized by OEH was taxable in the U.S.  Cumulative gain on the sale of the purchase and development agreements as well as the exercise of the call option is $16,544,000 .


86


8.    Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:
 
 
 
Hotels & Restaurants
 
Trains & Cruises
 
Total
Year ended December 31, 2012
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Balance as of January 1, 2012
 
153,605

 
7,855

 
161,460

Impairment
 
(2,055
)
 

 
(2,055
)
Foreign currency translation adjustment
 
1,737

 
136

 
1,873

 
 
 
 
 
 
 
Balance as at December 31, 2012
 
153,287

 
7,991

 
161,278

 
 
 
Hotels & Restaurants
 
Trains & Cruises
 
Total
Year ended December 31, 2011
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Balance as of January 1, 2011
 
168,982

 
7,888

 
176,870

Impairment
 
(11,907
)
 

 
(11,907
)
Foreign currency translation adjustment
 
(3,470
)
 
(33
)
 
(3,503
)
 
 
 
 
 
 
 
Balance as at December 31, 2011
 
153,605

 
7,855

 
161,460

 
The gross goodwill amount at January 1, 2012 was $190,545,000 ( 2011 - $194,048,000 ) and the accumulated impairment at that date was $29,085,000 ( 2011 - $17,178,000 ). All impairments to that date related to hotel and restaurant operations.
 
The assessment and, if required, the determination of goodwill impairment to be recognized uses a discounted cash flow analysis to compute the fair value of the reporting unit. When determining the fair value of a reporting unit, OEH is required to make significant judgments that OEH believes are reasonable and supportable considering all available internal and external evidence at the time.  However, these estimates and assumptions are, by their nature, highly judgmental.  Fair value determinations are sensitive to changes in the underlying assumptions and factors including those relating to estimating future operating cash flows to be generated from the reporting unit which are dependent upon internal forecasts and projections developed as part of OEH’s routine, long-term planning process, available industry/market data (to the extent available), OEH’s strategic plans, estimates of long-term growth rates taking into account OEH’s assessment of the current economic environment and the timing and degree of any economic recovery, estimation of the useful life over which the cash flows will occur, and market participant assumptions.  The assumptions with the most significant impact to the fair value of the reporting unit are those related to future operating cash flows which are forecast for a five -year period from management’s budget and planning process, the terminal value which is included for the period beyond five years from the balance sheet date based on the estimated cash flow in the fifth year and a terminal growth rate ranging from 2.5% to 5.9% ( December 31, 2011 - 2.0% to 10.7% ), and pre-tax discount rates which for the year ended December 31, 2012 range from 9.2% to 16.5% ( December 31, 2011 - 8.8% to 17.3% ).
 
Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair values of OEH’s  reporting units may include such items as (i) a prolonged weakness in the general economic conditions in which the reporting units operate and therefore negatively impacting occupancy and room rates, (ii) an economic recovery that significantly differs from OEH’s assumptions in timing and/or degree, (iii) volatility in the equity and debt markets which could result in a higher discount rate, (iv) shifts or changes in future travel patterns from the OEH’s significant demographic markets that have not been anticipated, (v) changes in competitive supply, (vi) political and security instability in countries where OEH operates and (vii) deterioration of local economies due to the uncertainty over currencies or currency unions and other factors which could lead to changes in projected cash flows of OEH’s properties as customers reduce their discretionary spending.  If the assumptions used in the impairment analysis are not met or materially change, OEH may be required to recognize additional goodwill impairment losses which may be material to the financial statements.
 

87


Under the first step of the goodwill impairment testing for the year ended December 31, 2012 , the fair value of the Sicilian hotels was approximately $163,795,000 which was 4% in excess of its carrying value of $156,842,000 .  Factors that could be reasonably expected to impact negatively the fair value of the reporting unit are outlined above and specifically sensitive for the Sicilian reporting unit are the continued improvements in occupancy and ADR growth as it becomes a more established location within OEH’s portfolio.

During the year ended December 31, 2012 , OEH identified a non-cash goodwill impairment of $2,055,000 at Reid's Palace. Management’s estimates considered future profitability of the business, future growth rates and the related discount rates.  OEH determined this impairment was triggered due to performance that required a reassessment.
 
Year ended December 31, 2012
 
$’000
 
 
 
Reid's Palace
 
2,055

 
 
 
 
 
2,055

 
During the year ended December 31, 2011 , OEH identified non-cash goodwill impairments of $11,907,000 at three hotels. Management’s estimates considered future profitability of the businesses, future growth rates and the related discount rates.  OEH determined these impairments were triggered in each case due to performance that required a reassessment.  The impairment loss consisted of the following:
 
Year ended December 31, 2011
 
$’000
 
 
 
Maroma Resort and Spa
 
7,904

La Residencia
 
2,779

Mount Nelson Hotel
 
1,224

 
 
 
 
 
11,907

 
During the year ended December 31, 2010 , OEH identified non-cash goodwill impairments of $5,895,000 at two hotels. Management’s estimates considered future profitability of the businesses, future growth rates and the related discount rates.  OEH determined these impairments were triggered in each case due to performance that required a reassessment.  There was no goodwill impairments recorded as part of OEH’s annual impairment analysis.  The impairment loss consisted of the following:
 
Year ended December 31, 2010
 
$’000
 
 
 
La Samanna
 
5,401

Napasai
 
494

 
 
 
 
 
5,895

 

88


9.
Other intangible assets
 
Other intangible assets consist of the following as of December 31, 2012 and 2011 :
 
 
 
Favorable Lease Assets
 
Internet Sites
 
Trade Names
 
Total
Year ended December 31, 2012
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Carrying amount:
 
 
 
 
 
 
 
 
Balance at January 1, 2012
 
13,460

 
1,609

 
7,100

 
22,169

Foreign currency translation adjustment
 
(489
)
 
83

 

 
(406
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
12,971

 
1,692

 
7,100

 
21,763

 
 
 
 
 
 
 
 
 
Accumulated amortization:
 
 
 
 
 
 
 
 
Balance at January 1, 2012
 
1,972

 
732

 

 
2,704

Charge for the year
 
354

 
136

 

 
490

Foreign currency translation adjustment
 
(78
)
 
39

 

 
(39
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
2,248

 
907

 

 
3,155

 
 
 
 
 
 
 
 
 
Net book value:
 
 
 
 
 
 
 
 
As at December 31, 2012
 
10,723

 
785

 
7,100

 
18,608

 
 
 
 
 
 
 
 
 
As at December 31, 2011
 
11,488

 
877

 
7,100

 
19,465

 

89


 
 
Favorable Lease Assets
 
Internet Sites
 
Trade Names
 
Total
Year ended December 31, 2011
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Carrying amount:
 
 
 
 
 
 
 
 
Balance at January 1, 2011
 
13,503

 
1,630

 
7,100

 
22,233

Foreign currency translation adjustment
 
(43
)
 
(21
)
 

 
(64
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
13,460

 
1,609

 
7,100

 
22,169

 
 
 
 
 
 
 
 
 
Accumulated amortization:
 
 
 
 
 
 
 
 
Balance at January 1, 2011
 
1,616

 
610

 

 
2,226

Charge for the year
 
368

 
132

 

 
500

Foreign currency translation adjustment
 
(12
)
 
(10
)
 

 
(22
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
1,972

 
732

 

 
2,704

 
 
 
 
 
 
 
 
 
Net book value:
 
 
 
 
 
 
 
 
As at December 31, 2011
 
11,488

 
877

 
7,100

 
19,465

 
 
 
 
 
 
 
 
 
As at December 31, 2010
 
11,887

 
1,020

 
7,100

 
20,007


Favorable lease intangible assets are amortized over the terms of the leases, which are between 19 and 60 years . Internet sites are amortized over 10 years . Trade names have an indefinite life and therefore are not amortized, but are assessed for impairment annually or when events indicate that impairment may have occurred.

No impairments were recognized for the years ended December 31, 2012 and 2011 . In the year ended December 31, 2010 , OEH identified and recorded a non-cash impairment charge of $1,070,000 in respect of two Internet-based subsidiaries. The carrying values of the intangible assets were written down to reflect the level of offers being received at the time they were considered held for sale.  Subsequent to December 31, 2010 , these assets were returned to continuing operations as all the criteria for held for sale treatment were subsequently not met.
 
Amortization expense for the year ended December 31, 2012 was $490,000 ( 2011 - $500,000 ; 2010 - $601,000 ).  Estimated amortization expense for each of the years ending December 31, 2013 to December 31, 2017 is $490,000 .

10.    Working capital facilities
 
OEH had approximately $4,473,000 of working capital lines of credit at December 31, 2012 ( 2011 - $4,439,000 ) repayable within one year issued by various financial institutions and having various expiration dates, of which $4,473,000 was undrawn ( 2011 - $4,439,000 ).
 

90



11.    Long-term debt and obligations under capital lease
 
(a)    Long-term debt and obligations under capital lease

Long-term debt and obligations under capital lease consists of the following:
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Loans from banks and other parties collateralized by property, plant and equipment payable over periods of one to 20 years, with a weighted average interest rate of 4.14% and 4.32%, respectively
 
521,494

 
538,730

Obligations under capital lease (See Note 11 (b))
 
66

 
5,158

 
 
 
 
 
 
 
521,560

 
543,888

Less: Current portion
 
90,115

 
77,058

 
 
 
 
 
Total long-term debt and obligations under capital lease
 
431,445

 
466,830

 
For the renovation of El Encanto hotel, OEH entered into a loan agreement in August 2011 for $45,000,000 to be drawn as construction progresses. During the year ended December 31, 2012 , OEH borrowed $25,749,000 ( 2011 - $ Nil ) under this facility.  The loan has a maturity of three years , with two one year extensions, at an annual interest rate based on monthly LIBOR plus 3.65% .

In June 2012, OEH renewed a loan secured by the Napasai property in Thailand. The loan consists of two tranches, a $9,000,000 facility and a THB 135,000,000 ( $4,251,000 ) facility. Annual interest on both tranches is 3.00% over LIBOR and BIBOR , the respective reference rates, and both mature in July 2017 .

In September 2012, OEH drew a new loan facility of €35,000,000 ( $44,400,000 ) to refinance €36,844,000 ( $46,757,000 ) of long-term debt maturing in 2013 secured by the two Sicilian hotels.  The loan matures in three years and bears interest at a rate of EURIBOR plus 5.00% per annum. OEH has entered into interest rate swaps to fix the variable interest rate of the full amount on the loan at 5.59% .

Also in September 2012, OEH obtained a new loan of $12,000,000 secured by the cash flows of its two hotels in Bali. The loan will be drawn in the third quarter of 2013 and will be used to refurbish Jimbaran Puri Bali hotel. The loan has an annual interest rate of LIBOR plus 3.75% and matures in September 2015 .

In December 2012, OEH entered into a $50,000,000 loan secured by Grand Hotel Europe. The facility consists of two tranches, of which one tranche of $24,000,000 will be used for general corporate purposes and repaying $4,000,000 existing debt, and the second tranche of $26,000,000 will be used for the hotel's refurbishment project. Annual interest on both tranches is 7.00% over LIBOR and the facility matures in December 2017 . A capital lease on the hotel was extinguished as part of the refinancing, resulting in a gain of $1,514,000 in the year ended December 31, 2012 .

At December 31, 2012 , one of OEH’s subsidiaries had not complied with certain financial covenants in a loan facility. The $1,666,000 outstanding on this loan has been classified as a current portion of debt and OEH expects to rectify this non-compliance in the first half of 2013.

During the year ended December 31, 2011 , two loan facilities were refinanced and accounted for as an extinguishment of debt, resulting in the write-off of deferred financing costs of $693,000 . One loan totaling $100,000,000 (of which $88,000,000 was drawn) was refinanced with a new loan of $115,000,000 .  The new loan has two tranches, one of $100,000,000 which was used to repay the previous debt, and a second tranche of $15,000,000 which was used to fund the renovations at Copacabana Palace.  The loan matures in August 2014 and has an interest rate of LIBOR plus 3.15% per annum. OEH has entered into interest rate swaps to fix the interest rate of approximately 60% of the drawn loan at 0.81% .


91


The second 2011 loan of €18,000,000 ( $26,100,000 ) refinanced a maturing loan of €30,000,000 ( $43,500,000 ) secured by La Residencia. The new loan, which matures in June 2014 , has an interest rate of EURIBOR plus 2.75% per annum. OEH has entered into interest rate swaps to fix the interest rate of approximately 50% of the drawn loan at 2.29% .
 
Most of OEH’s loan facilities relate to specific hotel or other properties and are secured by a mortgage on the particular property.  In most cases, the Company is either the borrower or the subsidiary owning the property is the borrower, with the loan guaranteed by the Company.
 
The loan facilities generally place restrictions on the property-owning company’s ability to incur additional debt and limit liens, and restrict mergers and asset sales, and include financial covenants. Where the property-owning subsidiary is the borrower, the financial covenants relate to the financial performance of the property financed and generally include covenants relating to interest coverage, debt service, and loan-to-value and debt-to-EBITDA tests.  Most of the facilities under which the Company is the borrower or the guarantor also contain financial covenants which are based on the performance of OEH on a consolidated basis. The covenants include a quarterly interest coverage test and a quarterly net worth test.

Many of OEH's bank loan facilities include cross-default provisions under which a failure to pay principal or interest by the borrower or guarantor under other indebtedness in excess of a specified threshold amount would cause a default under the facilities.  Under OEH's largest loan facility, the specified cross-default threshold amount is $25,000,000 . At December 31, 2012 , no cross-default provision in a loan facility had been triggered.
 
The following is a summary of the aggregate maturities of consolidated long-term debt, excluding obligations under capital lease, at December 31, 2012 :
 
Year ended December 31,
 
$’000
 
 
 
2013
 
90,064

2014
 
169,023

2015
 
221,113

2016
 
4,442

2017
 
14,017

2018 and thereafter
 
22,835

 
 
 
 
 
521,494

 
The Company has guaranteed $341,078,000 of the long-term debt of its subsidiary companies as at December 31, 2012 ( 2011 - $347,850,000 ).
 
The fair value of the debt excluding obligations under capital leases at December 31, 2012 has been estimated in the amount of $533,783,000 ( 2011 - $509,866,000 ).
 
Deferred financing costs related to the above outstanding long-term debt are $13,694,000 at December 31, 2012 ( 2011 - $13,689,000 ) and are amortized to interest expense over the term of the corresponding long-term debt.

The debt of Charleston Center LLC, a consolidated VIE, of $97,945,000 at December 31, 2012 ( 2011 - $90,529,000 ) is non-recourse to OEH and separately disclosed on the consolidated balance sheet.  The debt was entered into in October 2010 and has a maturity of three years , with two one year extensions and the interest rate is at LIBOR plus a margin of 3.50% per annum. See Note 3.


92


(b)                               Obligations under capital leases
 
The following is a summary of future minimum lease payments under capital leases together with the present value of the minimum lease payments at December 31, 2012 :
 
Year ended December 31,
 
$’000
 
 
 
2013
 
57

2014
 
15

2015
 

2016
 

2017
 

2018 and thereafter
 

Minimum lease payments
 
72

Less: Amount of interest contained in above payments
 
(6
)
Present value of minimum lease payments
 
66

Less: Current portion
 
(51
)
 
 
 
 
 
15

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

12.    Other liabilities
 
The major balances in other liabilities are as follows:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Interest rate swaps (see Note 20)
 
5,021

 
7,511

Long-term accrued interest on subordinated debt at Charleston Place Hotel
 
14,740

 
14,139

Cash-settled stock appreciation rights plan
 
96

 
111

Deferred lease incentive
 
468

 
489

Contingent consideration on acquisition of Grand Hotel Timeo and Villa Sant’Andrea (see Note 4)
 
1,186

 
3,895

 
 
21,511

 
26,145

 
13.    Pensions
 
From January 1, 2003, a number of non-U.S. OEH employees participated in a funded defined benefit pension plan in the United Kingdom called Orient-Express Services 2003 Pension Scheme.  On May 31, 2006, the plan was closed for future benefit accruals.
 
The significant weighted-average assumptions used to determine net periodic costs of the plan during the year were as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
%
 
%
 
%
Discount rate
 
4.70
%
 
5.40
%
 
5.80
%
Expected long-term rate of return on plan assets
 
5.30
%
 
6.40
%
 
6.60
%
 

93


The significant weighted-average assumptions used to determine benefit obligations of the plan at year end were as follows:
 
 
 
2012
 
2011
December 31,
 
%
 
%
Discount rate
 
4.50
%
 
4.70
%
 
The discount rate effectively represents the average rate of return on high quality corporate bonds at the end of the year in the country in which the assets are held.

The expected rate of return on the pension fund assets, net of expenses has been determined by considering the actual asset classes held by the plan at December 31, 2012 and the yields available on U.K. government bonds at that date.
 
For equities and corporate bonds, management has assumed that long-term returns will exceed those expected on U.K. government bonds by a risk premium. This is based on historical equity and bond returns over the long term. As these returns are long-term expected returns, the total returns on equities and corporate bonds only vary in line with the U.K. government bond yields and are not further adjusted for current market trends.
 
The expected returns on annuities are set equal to the end of year discount rate as the value of annuities is tied to that rate. The fair value of OEH’s pension plan assets at December 31, 2012 and 2011 by asset category is as follows:
 
 
 
Total
 
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2012
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Cash
 
87

 
87

 

 

Equity securities:
 
 
 
 
 
 
 
 
U.K. managed funds
 
5,232

 
5,232

 

 

Overseas managed funds
 
4,869

 
4,869

 

 

Fixed income securities:
 
 
 
 
 
 
 
 
U.K. government bonds
 
1,651

 
1,651

 

 

Corporate bonds
 
4,233

 
4,233

 

 

Other types of investments:
 
 
 
 
 
 
 
 
Hedge funds
 
1,534

 

 
1,534

 

Annuities
 
2,046

 

 

 
2,046

 
 
 
 
 
 
 
 
 
 
 
19,652

 
16,072

 
1,534

 
2,046

 

94


 
 
Total
 
Quoted
prices in
active
markets for
identical
assets
(Level 1)
 
Significant
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
December 31, 2011
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Cash
 
90

 
90

 

 

Equity securities:
 
 
 
 
 
 
 
 
U.K. managed funds
 
4,324

 
4,324

 

 

Overseas managed funds
 
4,072

 
4,072

 

 

Fixed income securities:
 
 
 
 
 
 
 
 
U.K. government bonds
 
1,618

 
1,618

 

 

Corporate bonds
 
2,144

 
2,144

 

 

Other types of investments:
 
 
 
 
 
 
 
 
Hedge funds
 
1,428

 

 
1,428

 

Annuities
 
1,871

 

 

 
1,871

 
 
 
 
 
 
 
 
 
 
 
15,547

 
12,248

 
1,428

 
1,871


Fair value measurements using significant unobservable inputs (Level 3) at December 31, 2012 and 2011 are as follows:
 
 
 
Annuities
 
Total
December 31, 2012
 
$’000
 
$’000
 
 
 
 
 
Beginning balance at January 1, 2012
 
1,871

 
1,871

Actual return on assets:
 
 
 
 
Assets still held at the reporting date
 
158

 
158

Purchases, sales and settlements
 
(75
)
 
(75
)
Gain/ (loss) recorded in earnings
 

 

Gain/ (loss) recorded in other comprehensive income
 

 

Foreign exchange
 
92

 
92

 
 
 
 
 
Ending balance at December 31, 2012
 
2,046

 
2,046

 
 
 
Annuities
 
Total
December 31, 2011
 
$’000
 
$’000
 
 
 
 
 
Beginning balance at January 1, 2011
 
1,669

 
1,669

Actual return on assets:
 
 
 
 
Assets still held at the reporting date
 
286

 
286

Purchases, sales and settlements
 
(67
)
 
(67
)
Gain/ (loss) recorded in earnings
 

 

Gain/ (loss) recorded in other comprehensive income
 

 

Foreign exchange
 
(17
)
 
(17
)
 
 
 
 
 
Ending balance at December 31, 2011
 
1,871

 
1,871

 

95


The allocation of the assets was in compliance with the target allocation set out in the plan investment policy, the principal objectives of which are to deliver returns above those of government and corporate bonds and to minimize the cost of providing pension benefits.  OEH is currently purchasing annuities to match the benefits of pensioners.  OEH is allocating a majority of the plan’s assets to equities as they have historically outperformed bonds over the long term.  OEH will allocate plan assets to bonds and cash to help reduce the volatility of the portfolio and reflect the age profile of the membership.

The changes in the benefit obligation, the plan assets and the funded status for the plan were as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Change in benefit obligation:
 
 
 
 
 
 
Benefit obligation at beginning of year
 
24,189

 
20,074

 
19,235

Service cost
 

 

 

Interest cost
 
1,154

 
1,062

 
1,067

Plan participants’ contributions
 

 

 

Net transfer in
 

 

 

Actuarial loss
 
1,869

 
4,259

 
471

Benefits paid
 
(560
)
 
(839
)
 
(246
)
Curtailment gain
 

 

 

Settlement
 

 

 

Foreign currency translation
 
1,275

 
(367
)
 
(453
)
 
 
 
 
 
 
 
Benefit obligation at end of year
 
27,927

 
24,189

 
20,074

 
 
 
 
 
 
 
Change in plan assets:
 
 
 
 
 
 
Fair value of plan assets at beginning of year
 
15,547

 
14,457

 
11,833

Actual return on plan assets
 
1,958

 
347

 
1,538

Employer contributions
 
1,854

 
1,770

 
1,571

Plan participants’ contributions
 

 

 

Net transfer in
 

 

 

Benefits paid
 
(560
)
 
(839
)
 
(246
)
Settlement
 

 

 

Foreign currency translation
 
853

 
(188
)
 
(239
)
 
 
 
 
 
 
 
Fair value of plan assets at end of year
 
19,652

 
15,547

 
14,457

 
 
 
 
 
 
 
Funded status at end of year
 
(8,275
)
 
(8,642
)
 
(5,617
)
 
 
 
 
 
 
 
Net actuarial loss/(gain) recognized in other comprehensive loss
 
(141
)
 
4,310

 
(879
)
 
Amounts recognized in the consolidated balance sheets consist of the following:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Non-current assets
 

 

 
 
 
 
 
Current liabilities
 

 

 
 
 
 
 
Non-current liabilities
 
8,275

 
8,642


96


 
Amounts recognized in accumulated other comprehensive income/(loss) consist of the following:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Net loss
 
(13,975
)
 
(14,116
)
Prior service cost
 

 

Net transitional obligation
 

 

 
 
 
 
 
Total amount recognized in other comprehensive loss
 
(13,975
)
 
(14,116
)

The following table details certain information with respect to OEH’s U.K. defined benefit pension plan:
 
 
 
2012
 
2011
Year ended December 31,
 
$’000
 
$’000
 
 
 
 
 
Projected benefit obligation
 
27,927

 
24,189

 
 
 
 
 
Accumulated benefit obligation
 
27,927

 
24,189

 
 
 
 
 
Fair value of plan assets
 
19,652

 
15,547

 
Components of net periodic pension benefit cost are as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Service cost
 

 

 

Interest cost on projected benefit obligation
 
1,154

 
1,062

 
1,088

Expected return on assets
 
(846
)
 
(1,006
)
 
(805
)
Net amortization and deferrals
 
899

 
608

 
678

 
 
 
 
 
 
 
Net periodic benefit cost
 
1,207

 
664

 
961


OEH expects to contribute $2,618,000 to the U.K. defined benefit pension plan in 2013.  The following benefit payments, which reflect assumed future service, are expected to be paid:
 
Year ended December 31,
 
$’000
 
 
 
2013
 
460

2014
 
517

2015
 
548

2016
 
577

2017
 
628

Next five years
 
3,643

 
The estimated net loss amortized from accumulated other comprehensive income/(loss) into net periodic pension cost in the next fiscal year is $968,000 .
 

97


OEH has certain other post-retirement benefit obligations, of which the most significant relates to Mount Nelson Hotel in South Africa.

OEH has a defined benefit pension plan in South Africa for certain employees of the Mount Nelson Hotel.  The total number of active members is one , and the remaining members are retired pensioners.  The latest actuarial valuation performed as at December 31, 2011 and updated for foreign exchange rates at December 31, 2012 showed a net pension plan deficit of approximately $77,000 ( 2011 - surplus of $15,000 ) based on fair value of plan assets of $700,000 ( 2011 - $971,000 ) and projected benefit obligation of $777,000 ( 2011 - $956,000 ).
 
Certain employees of OEH were members of defined contribution pension plans.  Total contributions to the plans were as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Employers’ contributions
 
2,719

 
3,023

 
2,552



14.    Income taxes
 
The Company is incorporated in Bermuda, which does not impose an income tax.  OEH’s effective tax rate is significantly affected by its mix of income and loss in various jurisdictions as there is significant variation in the income tax rate imposed and also by the effect of losses in jurisdictions for which it is expected that the tax benefit of losses will not be recognizable at year end.
 
Accordingly, the income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax and also attributable to the relative amount of earnings or loss in various jurisdictions, the effect of valuation allowances, and uncertain tax positions. The income tax provision is also affected by discrete items that may occur in any given year, but are not consistent from year to year. Discrete items which had the most significant impact on the tax rate include a deferred tax charge of $83,000 in 2012 ( 2011 - credit of $2,094,000 ) arising in respect of foreign exchange gain/loss on the remeasurement of deferred taxes on temporary differences in subsidiaries operating in jurisdictions where the local currency differs from the functional currency.
 
The provision for income taxes consists of the following:
 
Year ended December 31, 2012
 
Pre-Tax
(Loss)/
Income
$’000
 
Current
$’000
 
Deferred
$’000
 
Total
$’000
 
 
 
 
 
 
 
 
 
Bermuda
 
(8,244
)
 

 

 

United States
 
1,290

 
3,656

 
(647
)
 
3,009

Rest of the world
 
16,200

 
16,744

 
2,234

 
18,978

 
 
 
 
 
 
 
 
 
 
 
9,246

 
20,400

 
1,587

 
21,987

 
Year ended December 31, 2011
 
Pre-Tax
(Loss)/
Income
$’000
 
Current
$’000
 
Deferred
$’000
 
Total
$’000
 
 
 
 
 
 
 
 
 
Bermuda
 
(23,436
)
 

 

 

United States
 
13,918

 
3,986

 
(561
)
 
3,425

Rest of the world
 
6,408

 
17,132

 
(477
)
 
16,655

 
 
 
 
 
 
 
 
 
 
 
(3,110
)
 
21,118

 
(1,038
)
 
20,080


98


 
Year ended December 31, 2010
 
Pre-Tax
(Loss)/
Income
$’000
 
Current
$’000
 
Deferred
$’000
 
Total
$’000
 
 
 
 
 
 
 
 
 
Bermuda
 
(16,208
)
 

 

 

United States
 
(7,431
)
 
1,510

 
(1,882
)
 
(372
)
Rest of the world
 
11,284

 
7,618

 
10,938

 
18,556

 
 
 
 
 
 
 
 
 
 
 
(12,355
)
 
9,128

 
9,056

 
18,184


The reconciliation of earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax at the statutory tax rate to the provision for income taxes is shown in the table below:

 
 
2012
 
2011
 
2010
Year ended December 31,
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
Earnings/(losses) before provision for income taxes and earnings from unconsolidated companies, net of tax
 
9,246

 
(3,110
)
 
(12,355
)
 
 
 
 
 
 
 
Tax charge at statutory tax rate of Nil% (1)
 

 

 

 
 
 
 
 
 
 
Non-deductible/(taxable) items:
 
 
 
 
 
 
Exchange rate movements on deferred tax
 
83

 
(2,094
)
 
990

Other permanent items
 
3,054

 
193

 
(734
)
Change in valuation allowance
 
6,093

 
11,795

 
19,019

Difference in taxation rates
 
11,645

 
9,449

 
(2,177
)
Change in provisions for uncertain tax positions
 
(174
)
 
817

 
1,153

Change in tax rates
 
600

 
(222
)
 
(107
)
Other
 
686

 
142

 
40

 
 
 
 
 
 
 
Provision for income taxes
 
21,987

 
20,080

 
18,184

 
 
 
 
 
 
 
(1) The Company is resident in Bermuda, which does not impose an income tax.


99


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The following represents OEH’s deferred tax assets and liabilities:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Operating loss carry-forwards
 
93,466

 
61,708

 
52,791

Pensions
 
1,899

 
2,161

 
1,517

Share options
 
2,813

 
1,647

 

Trademarks
 
5,563

 
3,868

 

Other
 
9,197

 
2,897

 
6,975

Less: Valuation allowance
 
(97,376
)
 
(50,746
)
 
(28,201
)
 
 
 
 
 
 
 
Net deferred tax assets
 
15,562

 
21,535

 
33,082

 
 
 
 
 
 
 
Other
 
(5,267
)
 
(4,609
)
 

Depreciable assets
 
(171,016
)
 
(172,643
)
 
(195,647
)
 
 
 
 
 
 
 
Deferred tax liabilities
 
(176,283
)
 
(177,252
)
 
(195,647
)
 
 
 
 
 
 
 
Net deferred tax liabilities
 
(160,721
)
 
(155,717
)
 
(162,565
)
 
The net deferred tax balances are included in prepaid expenses and other, accrued liabilities, deferred income taxes and deferred income taxes of consolidated variable interest entities presented on the face of the consolidated balance sheets.
 
The gross amount of tax loss carry-forwards is $350,926,000 at December 31, 2012 ( 2011 - $211,851,000 ).  Of this amount, $7,126,000 will expire in the five years ending December 31, 2017 and a further $50,889,000 will expire in the five years ending December 31, 2022. The remaining losses of $292,911,000 will expire after December 31, 2022 or have no expiry date.  After weighing all positive and negative evidence, a valuation allowance has been provided against gross deferred tax assets where management believes it is more likely than not that the benefits associated with these assets will not be realized.
 
Except for earnings that are currently distributed, income taxes and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. The determination of the additional deferred taxes that have not been provided is not practicable.
 
OEH’s 2012 tax provision of $21,987,000 ( 2011 - $20,080,000 ; 2010 - $18,184,000 ) included a benefit of $174,000 ( 2011 - benefit of $3,439,000 ; 2010 - charge of $1,043,000 ) in respect of the provision for uncertain tax positions under ASC 740, of which a charge of $121,000 ( 2011 - benefit of $2,058,000 ; 2010 - charge of $547,000 ) related to the potential interest and penalty costs associated with the uncertain tax positions.
 
The 2012 provision for income taxes included a deferred tax provision of $6,093,000 in respect of valuation allowances due to a change in estimate concerning OEH’s ability to realize loss carry-forwards and other deferred tax assets in certain jurisdictions compared to a $11,795,000 provision in 2011 .


100


At December 31, 2012 , the total amounts of unrecognized tax benefits included the following:
 
 
 
Total
 
Principal
 
Interest
 
Penalties
Year ended December 31, 2012
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012
 
4,755

 
3,169

 
1,148

 
438

Additional uncertain tax provision identified during the year
 
403

 
401

 
2

 

Uncertain tax provision on prior year positions
 
444

 
151

 
168

 
125

Uncertain tax provisions paid during the year
 

 

 

 

Uncertain tax provisions settled during the year
 
(686
)
 
(622
)
 
(64
)
 

Foreign exchange
 
(335
)
 
(225
)
 
(80
)
 
(30
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
4,581

 
2,874

 
1,174

 
533

 
At December 31, 2012 , OEH recognized a $4,581,000 liability in respect of its uncertain tax positions. All of this ASC 740 provision arises in jurisdictions in which OEH conducts business other than Bermuda. The entire balance of uncertain tax benefit at December 31, 2012 , if recognized, would affect the effective tax rate.

At December 31, 2011 , the total amounts of unrecognized tax benefits included the following:
 
 
 
Total
 
Principal
 
Interest
 
Penalties
Year ended December 31, 2011
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Balance at January 1, 2011
 
8,194

 
4,550

 
1,627

 
2,017

Additional uncertain tax provision identified during the year
 

 

 

 

Uncertain tax provision on prior year positions
 
817

 
600

 
132

 
85

Uncertain tax provisions paid during the year
 
(642
)
 
(306
)
 
(192
)
 
(144
)
Uncertain tax provisions settled during the year
 
(3,178
)
 
(1,500
)
 
(358
)
 
(1,320
)
Foreign exchange
 
(436
)
 
(175
)
 
(61
)
 
(200
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
4,755

 
3,169

 
1,148

 
438


At December 31, 2010 , the total amounts of unrecognized tax benefits included the following:
 
 
 
Total
 
Principal
 
Interest
 
Penalties
Year ended December 31, 2010
 
$’000
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
 
 
Balance at January 1, 2010
 
7,151

 
4,054

 
1,219

 
1,878

Additional uncertain tax provision identified during the year
 
1,153

 
606

 
408

 
139

Uncertain tax provision on prior year positions
 

 

 

 

Uncertain tax provisions paid during the year
 

 

 

 

Uncertain tax provisions settled during the year
 

 

 

 

Foreign exchange
 
(110
)
 
(110
)
 

 

 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
 
8,194

 
4,550

 
1,627

 
2,017

 
Certain subsidiaries of the Company are subject to taxation in the United States and various states and other non-U.S. jurisdictions. As of December 31, 2012 , all tax years after 2002 are open to examination by the tax authorities.

101


OEH believes that it is reasonably possible that within the next 12 months the ASC 740 provision will decrease by approximately $500,000 as a result of expiration of uncertain tax positions in certain jurisdictions in which OEH operates. These amounts relate primarily to transfer pricing inquiries by the tax authorities.

15.    Supplemental cash flow information and restricted cash
 
(a)    Interest and income taxes
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
 
Interest
 
29,756

 
37,233

 
33,586

 
 
 
 
 
 
 
Income taxes
 
28,967

 
16,413

 
14,420


(b)    Non-cash investing and financing activities
 
In conjunction with the acquisition of the Sicilian hotels in 2010 (see Note 4), liabilities were assumed as follows:
 
 
 
2010
Year ended December 31,
 
$’000
 
 
 
Fair value of assets acquired
 
115,165

Cash paid
 
(46,285
)
 
 
 
Liabilities assumed
 
68,880

 
The purchase price, net of contingent consideration, of Grand Hotel Timeo and Villa Sant’Andrea acquired in January 2010 included vendor financing of €5,000,000 ( $7,064,000 ) at the date of acquisition.
 
OEH entered into a non-cash transaction to purchase land adjacent to its hotel at La Samanna in St. Martin from a third party during the year ended December 31, 2010 .  See Note 4.

(c)    Restricted cash
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Cash deposits required to be held with banks to support OEH’s payment of interest and principal
 
16,213

 
9,606

Escrow deposits from purchasers of units at Porto Cupecoy which will be released to OEH as sales close
 
4,079

 
2,890

Prepaid customer deposits which will be released to OEH under its revenue recognition policy
 
788

 
718

 
 
 
 
 
 
 
21,080

 
13,214

 

102


16.      Shareholders’ equity
 
(a)           Public offerings
 
On November 15, 2010, the Company issued and sold through underwriters 11,500,000 class A common shares in a public offering registered in the United States.  Net proceeds amounted to $117,277,000 .
 
On January 19, 2010, the Company issued and sold through underwriters 13,800,000 class A common shares in a public offering registered in the United States.  Net proceeds amounted to $130,775,000 .

(b)           Dual common share capitalization
 
The Company has been capitalized with class A common shares, of which there are 240,000,000 authorized, and class B common shares, of which there are 120,000,000 authorized, each convertible at any time into one class A common share.  In general, holders of class A and class B common shares vote together as a single class, with holders of class B shares having one vote per share and holders of class A shares having one-tenth of one vote per share.  In all other substantial respects, the class A and class B common shares are the same.
 
(c)           Shareholder rights agreement
 
The Company has in place a shareholder rights agreement which will be implemented not earlier than the tenth day following the first to occur of (i) the public announcement of the acquisition by a person (other than a subsidiary of the Company) of 15% or more of the outstanding class A common shares or 15% or more of the outstanding class B common shares, and (ii) the commencement or announcement of a tender offer or exchange offer by a person for 30% or more of the outstanding class A common shares or 30% or more of the outstanding class B common shares.  At that time, the rights will detach from the class A and class B common shares, and the holders of the rights will be entitled to purchase, for each right held, one one hundredth of a series A junior participating preferred share of the Company at an exercise price of $70 (the “Purchase Price”) for each one one hundredth of such junior preferred share, subject to adjustment in certain events.  From and after the date on which any person acquires beneficial ownership of 15% or more of the outstanding class A common shares or 15% or more of the outstanding class B common shares, each holder of a right (other than the acquiring person) will be entitled upon exercise to receive, at the then current Purchase Price and in lieu of the junior preferred shares, that number of class A or class B common shares (depending on whether the right was previously attached to a class A or B share) having a market value of twice the Purchase Price.  If the Company is acquired or 50% or more of its consolidated assets or earning power is sold, each holder of a right will be entitled to receive, upon exercise at the then current Purchase Price, that amount of common equity of the acquiring company which at the time of such transaction would have a market value of two times the Purchase Price.  Also, the Company’s board of directors may exchange all or some of the rights for class A and class B common shares (depending on whether the right was previously attached to a class A or B share) if any person acquires 15% beneficial ownership as described above, but less than 50% beneficial ownership.  The rights will expire on June 1, 2020 but may be redeemed at a price of $0.05 per right at any time prior to the tenth day following the date on which a person acquires beneficial ownership of 15% or more of the outstanding class A common shares or 15% or more of the outstanding class B common shares.
 
(d)           Acquired shares
 
Included in shareholders’ equity is a reduction for 18,044,478 class B common shares of the Company that a subsidiary of the Company acquired in 2002.  Under applicable Bermuda law, these shares are outstanding and may be voted, although in computing earnings per share these shares are treated as a reduction to outstanding shares.
 
(e)           Preferred shares
 
The Company has 30,000,000 authorized preferred shares, par value $0.01 each, 500,000 of which have been reserved for issuance as series A junior participating preferred shares upon exercise of preferred share purchase rights held by class A and B common shareholders in connection with the shareholder rights agreement.


103


17.    Share-based compensation plans
 
At December 31, 2012 , OEH had five share-based compensation plans, which are described below.  The compensation cost that has been charged to selling, general and administrative expense for these plans was $6,834,000 for the year ended December 31, 2012 ( 2011 - $6,752,000 ; 2010 - $5,965,000 ). Cash received from exercised options and vested awards was $3,000 for the year ended December 31, 2012 ( 2011 - $3,000 ; 2010 - $1,000 ). The total compensation cost related to unexercised options and unvested share awards at December 31, 2012 to be recognized over the period January 1, 2013 to December 31, 2015, was $13,805,000 and the weighted average period over which it is expected to be recognized is 28 months. Measured from the date of award, substantially all awards of deferred shares and stock appreciation rights have a maximum term of three years, and all awards of share options have a maximum term of 10 years.
 
(a)           2000 and 2004 stock option plans
 
Under the Company’s 2000 and 2004 stock option plans, options to purchase up to 750,000 and 1,000,000 class A common shares, respectively, could be awarded to employees of OEH at fair market value at the date of grant.  Options are exercisable three years after award and must be exercised ten years from the date of grant.  At December 31, 2012 , 23,500 class A common shares were reserved under the 2000 plan, and 453,950 class A common shares were reserved under the 2004 plan.  At December 31, 2012 , no shares remain available for future grants under the 2000 and 2004 plans as these have been transferred to the 2009 plan described below.
 
The fair value of options which were exercised in the year to December 31, 2012 was $8,000 . The number of options which vested during the year was 4,206 .

Details of share option transactions under the 2000 and 2004 stock option plans are as follows:
 
 
 
Number of shares
subject to options
 
Weighted average
exercise price
$
 
Weighted average
remaining
contractual life in
years
 
Aggregate intrinsic
value
$’000
 
 
 
 
 
 
 
 
 
Outstanding — January 1, 2011
 
808,500

 
24.57

 
 
 
 

Granted
 

 

 
 
 
 

Exercised
 
(4,677
)
 
5.89

 
 
 
 

Forfeited, cancelled or expired
 
(264,973
)
 
27.53

 
 
 
 

 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2011
 
538,850

 
23.05

 
 
 
 

Granted
 

 

 
 
 
 

Exercised
 
(4,206
)
 
5.89

 
 
 
 

Forfeited, cancelled or expired
 
(57,194
)
 
21.09

 
 
 
 

 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2012
 
477,450

 
23.44

 
4.8
 
1,330

 
 
 
 
 
 
 
 
 
Exercisable — December 31, 2012
 
477,450

 
23.44

 
4.8
 
1,330

 

104


The options outstanding under the 2000 and 2004 plans at December 31, 2012 were as follows:
 
Exercise
prices
$
 
Outstanding at
12/31/2012
 
Exercisable at
12/31/2012
 
Remaining
contractual
lives
 
Exercise prices
for outstanding
options
$
 
Exercise prices
for exercisable
options
$
 
 
 
 
 
 
 
 
 
 
 
5.89

 
229,300

 
229,300

 
5.9
 
5.89

 
5.89

13.40

 
10,000

 
10,000

 
0.4
 
13.40

 
13.40

14.70

 
29,000

 
29,000

 
1.6
 
14.70

 
14.70

28.40

 
15,000

 
15,000

 
2.7
 
28.40

 
28.40

28.50

 
16,500

 
16,500

 
2.5
 
28.50

 
28.50

34.88

 
3,200

 
3,200

 
3.2
 
34.88

 
34.88

34.90

 
8,650

 
8,650

 
3.6
 
34.90

 
34.90

35.85

 
16,500

 
16,500

 
5.7
 
35.85

 
35.85

36.50

 
22,150

 
22,150

 
3.5
 
36.50

 
36.50

42.87

 
8,050

 
8,050

 
3.9
 
42.87

 
42.87

46.08

 
14,200

 
14,200

 
5.4
 
46.08

 
46.08

51.90

 
12,600

 
12,600

 
5.2
 
51.90

 
51.90

52.51

 
7,800

 
7,800

 
4.2
 
52.51

 
52.51

52.51

 
64,900

 
64,900

 
4.7
 
52.51

 
52.51

52.59

 
9,300

 
9,300

 
4.5
 
52.59

 
52.59

59.23

 
10,300

 
10,300

 
4.9
 
59.23

 
59.23

 
 
 
 
 
 
 
 
 
 
 
 
 
477,450

 
477,450

 
 
 
 

 
 

 
The weighted average fair value of options granted during the year ended December 31, 2012 was $ Nil ( 2011 - $ Nil ; 2010 - $ Nil ).
 
(b)           2007 performance share plan
 
Under the Company’s 2007 performance share plan, awards of up to 500,000 class A common shares could be granted to OEH employees.  The shares covered by the awards were to be issued after at least one year from the grant date upon payment of a nominal amount ( $0.01 per share), subject to meeting performance criteria set forth in the awards.  Awards were also granted under the plan without any specified performance criteria. When the shares were issued under the awards, the grantees were also entitled to receive a cash equivalent of the dividends, if any, which would have been paid on the shares in respect of dividend record dates occurring during the period between the award grant date and the share issue date. At December 31, 2012 , no shares remain available for future grants as these have been transferred to the 2009 plan described below.
 

105


The status of the awards as of December 31, 2012 and 2011 and changes during the years then ended are presented as follows:
 
 
 
Number of shares
subject to awards
 
Weighted average
exercise price
$
 
Aggregate intrinsic
value
$’000
 
 
 
 
 
 
 
Outstanding — January 1, 2011
 
284,512

 
0.01

 
 

Granted
 

 

 
 

Vested and issued
 
(26,690
)
 
0.01

 
 

Forfeited, cancelled or expired
 
(85,593
)
 
0.01

 
 

 
 
 
 
 
 
 
Outstanding — December 31, 2011
 
172,229

 
0.01

 
 

Granted
 

 

 
 

Vested and issued
 
(108,802
)
 
0.01

 
 

Forfeited, cancelled or expired
 
(63,427
)
 
0.01

 
 

 
 
 
 
 
 
 
Outstanding — December 31, 2012
 

 

 

 
(c)           2007 stock appreciation rights plan
 
Under the Company’s 2007 stock appreciation rights plan, stock appreciation rights (“SARs”) may be awarded to eligible employees.  Each award is to be settled in cash measured by the increase (if any) of the publicly-quoted price of the Company’s class A common shares between the date of the award and the third anniversary of that date, multiplied by the number of SARs granted in the individual award.
 
In the year ended December 31, 2012 and 2011 , no SARs were awarded. In the year ended December 31, 2010 , OEH awarded 57,455 SARs at a price of $11.44 per SAR vesting in 2013.

Awards of SARs have been recorded as other liabilities with a fair value of $96,000 .
 
Estimates of fair values of the awards were made using the Black-Scholes valuation model based on the following assumptions:
Year ended December 31,
 
2012
 
2011
 
2010
Expected share price volatility
 
47%

 
51%-59%

 
50%-79%

Risk-free interest rate
 
0.16
%
 
0.28%-0.45%

 
1.02%

Expected annual dividends per share
 
$

 
$

 
$

Expected life of awards
 
11 months

 
1 year

 
2 years

 
(d)           2009 share award and incentive plan
 
The Company's 2009 share award and incentive plan became effective in June 2009 and replaced the 2000 stock option plan, 2004 stock option plan and 2007 performance share plan (the “Pre-existing Plans”). A total of 1,084,550 class A common shares plus the number of class A common shares subject to outstanding awards under the Pre-existing Plans which become available after June 2009 as a result of expirations, cancellations, forfeitures or terminations, were reserved for issuance for awards under the 2009 share award and incentive plan. In 2010, the 2009 plan was amended to increase by 4,000,000 the number of class A shares authorized for issuance under the plan, and in 2012 by another 5,000,000 class A shares.
 
The 2009 plan permits awards of stock options, stock appreciation rights, restricted shares, deferred shares, bonus shares and awards in lieu of obligations, dividend equivalents, other share-based awards, performance-based awards, or any combination of the foregoing. Each type of award is granted and vests based on its own terms, as determined by the Compensation Committee of the Company’s board of directors.


106


During 2012 , the following awards were made under the 2009 plan on the following dates:

March 9, 2012:

share options on 31,700 class A common shares vesting on March 9, 2015 at an exercise price of $9.95 per share,
deferred shares without performance criteria covering 107,300 class A common shares, of which 3,300 class A common shares vest on January 30, 2015 and 104,000 class A common shares vest on March 9, 2015 at a purchase price of $0.01 per share, and
deferred shares with performance criteria on up to 386,600 class A common shares vesting on March 9, 2015 at a purchase price of $0.01 per share.
 
June 7, 2012:

share options on 330,200 class A common shares vesting on June 7, 2015 at an exercise price of $8.42 per share, and
deferred shares without performance criteria on 109,000 class A common shares vesting on June 7, 2015 at a purchase price of $0.01 per share.

November 15, 2012:

share options on 449,550 class A common shares vesting on November 15, 2015 at an exercise price of $11.32 per share, and
deferred shares without performance criteria on 440,000 class A common shares vesting 110,000 equally on January 1, 2013 and on each January 1 thereafter until 2016 at a purchase price of $0.01 per share.

The fair value of option grants made in the year to December 31, 2012 was $5,041,375 .  The fair value of options which became exercisable in the year to December 31, 2012 was $2,473,000 . The fair value of options which were exercised in the year was $6,000 . The number of options which vested during the year was 593,216 .

Transactions relating to share options under the 2009 plan have been as follows:
 
 
 
Number of shares
subject to options
 
Weighted average
exercise price
$
 
Weighted average
remaining
contractual life in
years
 
Aggregate intrinsic
value
$’000
 
 
 
 
 
 
 
 
 
Outstanding — January 1, 2011
 
2,010,350

 
9.31

 
 
 
 

Granted
 
1,064,050

 
9.50

 
 
 
 

Exercised
 
(2,121
)
 
9.41

 
 
 
 

Forfeited, cancelled or expired
 
(536,679
)
 
9.51

 
 
 
 

 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2011
 
2,535,600

 
9.35

 
 
 
 

Granted
 
811,450

 
10.09

 
 
 
 

Exercised
 
(29,477
)
 
8.44

 
 
 
 

Forfeited, cancelled or expired
 
(364,223
)
 
9.55

 
 
 
 

 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2012
 
2,953,350

 
9.54

 
8.3
 
6,360

 
 
 
 
 
 
 
 
 
Exercisable — December 31, 2012
 
579,200

 
8.60

 
6.6
 
1,788

 

107


The options outstanding under the 2009 plan at December 31, 2012 were as follows:
 
Exercise
prices
$
 
Outstanding at
12/31/2012
 
Exercisable at
12/31/2012
 
Remaining
contractual
lives
 
Exercise prices
for outstanding
options
$
 
Exercise prices
for exercisable
options
$
 
 
 
 
 
 
 
 
 
 
 
8.38

 
324,300

 
324,300

 
6.4
 
8.38

 
8.38

7.71

 
5,000

 
5,000

 
6.5
 
7.71

 
7.71

8.91

 
249,900

 
249,900

 
6.9
 
8.91

 
8.91

9.93

 
5,000

 

 
7.1
 
9.93

 
9.93

8.37

 
319,300

 

 
7.5
 
8.37

 
8.37

11.44

 
372,550

 

 
7.9
 
11.44

 
11.44

11.69

 
286,400

 

 
8.4
 
11.69

 
11.69

8.06

 
592,750

 

 
8.9
 
8.06

 
8.06

9.95

 
31,700

 

 
9.2
 
9.95

 
9.95

8.42

 
316,900

 

 
9.5
 
8.42

 
8.42

11.32

 
449,550

 

 
9.9
 
11.32

 
11.32

 
 
 
 
 
 
 
 
 
 
 
 
 
2,953,350

 
579,200

 
 
 
 

 
 

 
Estimates of the fair value of share options on the grant date using the Black-Scholes option pricing model were based on the following assumptions:
 
Year ended December 31,
 
2012
 
2011
 
2010
Expected share price volatility
 
58%-60%

 
56%-58%

 
55%-58%

Risk-free interest rate
 
1.03%-1.69%

 
0.97%-1.40%

 
1.44%-2.71%

Expected annual dividends per share
 
$

 
$

 
$

Expected life of share options
 
8 years

 
5 years

 
5 years

 
Estimates of the fair value of deferred shares without performance criteria on the grant date using the Black-Scholes option pricing model were based on the following assumptions:
 
Year ended December 31,
 
2012
 
2011
 
2010
Expected share price volatility
 
52%-67%

 
37%-82%

 
51%-92%

Risk-free interest rate
 
0.10%-0.40%

 
0.13%-1.20%

 
0.14%-1.26%

Expected annual dividends per share
 
$

 
$

 
$

Expected life of awards
 
2 months - 3 years

 
4 months - 3 years

 
3 months - 3 years

 
At December 31, 2012 , awards of deferred shares on 1,343,649 class A common shares were reserved under the 2009 plan.  Of these awards, 787,200 do not specify any performance criteria and will vest up to January 2016. The remaining awards of up to 556,449 deferred shares will vest up to March 2015 and are subject to performance and market criteria. Half of the 556,449 deferred share awards is subject to performance criteria based on OEH’s earnings before tax for the three years ending December 31, 2012, 2013 or 2014, and the other half is subject to market criteria based on OEH’s total shareholder return compared to the average total shareholder return of a specified group of other hotel and leisure companies over the period of three years.
 
The fair value of deferred shares with and without performance awarded in the year to December 31, 2012 was $7,967,392 . The fair value of deferred shares vested in the year to December 31, 2012 was $1,279,000 .
 

108


The status of the deferred share awards as of December 31, 2012 and 2011 and changes during the years then ended were as follows:
 
 
Number of shares
subject to awards
 
Weighted average
exercise price
$
 
Aggregate intrinsic
value
$'000
 
 
 
 
 
 
 
Outstanding — January 1, 2011
 
357,708

 
0.01

 
 

Granted
 
387,700

 
0.01

 
 

Vested and issued
 
(219,128
)
 
0.01

 
 

Forfeited, cancelled or expired
 
(41,260
)
 
0.01

 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2011
 
485,020

 
0.01

 
 

Granted
 
1,042,900

 
0.01

 
 

Vested and issued
 
(130,134
)
 
0.01

 
 

Forfeited, cancelled or expired
 
(54,137
)
 
0.01

 
 

 
 
 
 
 
 
 
Outstanding — December 31, 2012
 
1,343,649

 
0.01

 
15,707

 
There were no vested and unissued deferred share awards as of December 31, 2012.

Estimates of fair values of deferred shares with performance and market conditions were made using the Monte Carlo valuation model based on the following assumptions:
 
Year ended December 31,
 
2012
 
2011
 
2010
Expected share price volatility
 
59
%
 
88
%
 
93
%
Risk-free interest rate
 
0.47
%
 
1.40%-0.97%

 
1.11
%
Expected annual dividends per share
 
$

 
$

 
$

Expected life of awards
 
3 years

 
3 years

 
3 years

 
18.
Commitments and contingencies
 
Outstanding contracts to purchase property, plant and equipment were approximately $9,650,000 at December 31, 2012 ( 2011 - $15,432,000 ).
 
As part of the consideration for the acquisition in January 2010 of Grand Hotel Timeo and Villa Sant’Andrea, OEH agreed to pay the vendor a further €5,000,000 (equivalent to $7,064,000 at date of acquisition) if, by 2015, additional rooms are constructed at Grand Hotel Timeo and certain required permits are granted to expand and add a swimming pool to Villa Sant’Andrea.  In February 2011, €1,500,000 (equivalent to $2,062,000 at February 28, 2011) of this amount was paid to the vendor as the appropriate permits to add a swimming pool to Villa Sant’Andrea have been obtained. In November 2012, €2,500,000 (equivalent to $3,188,000 at November 15, 2012) of this amount was paid to the vendor as the appropriate permits to add additional rooms to Villa Sant’Andrea have been obtained. See Note 4.
 
The Company and certain of its subsidiaries are parties to various legal proceedings arising in the normal course of business. The outcome of each of these matters cannot be absolutely determined, and the liability that the relevant parties may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued for with respect to these matters.
 
In May 2010, OEH settled litigation for infringement of its “Cipriani” trademark in Europe.  An amount of $3,947,000 was paid by the defendants to OEH on March 2, 2010 with the balance of $9,833,000 being payable in installments over five years with interest.  The remaining payments, totaling $5,224,000 at December 31, 2012 , have not been recognized by OEH because of the uncertainty of collectability.
 

109


Future rental payments under operating leases in respect of equipment rentals and leased premises are payable as follows:

Year ended December 31,
 
$’000
 
 
 
2013
 
10,309

2014
 
10,328

2015
 
10,244

2016
 
9,913

2017
 
9,548

2018 and thereafter
 
89,040

 
 
 
 
 
139,382

 
Rental expense for the year ended December 31, 2012 amounted to $10,538,000 ( 2011 - $9,865,000 ; 2010 - $9,459,000 ).
 
OEH has granted to James Sherwood, a former director of the Company, a right of first refusal to purchase the Hotel Cipriani in Venice, Italy in the event OEH proposes to sell it. The purchase price would be the offered sale price in the case of a cash sale or the fair market value of the hotel, as determined by an independent valuer, in the case of a non-cash sale. Mr. Sherwood has also been granted an option to purchase the hotel at fair market value if a change in control of the Company occurs. Mr. Sherwood may elect to pay 80% of the purchase price if he exercises his right of first refusal, or 100% of the purchase price if he exercises his purchase option, by a non-recourse promissory note secured by the hotel payable in ten equal annual installments with interest at LIBOR. The option is not assignable and expires one year after Mr. Sherwood's death. These agreements relating to the Hotel Cipriani between Mr. Sherwood and OEH and its predecessor companies have been in place since 1983 and were last amended and restated in 2005.

19.    Fair value measurements
 
Derivatives are recorded in the consolidated balance sheets at fair value.  The valuation process for the derivatives uses observable market data provided by third-party sources. Interest rate swaps are valued by using yield curves derived from observable interest rates to project future swap cash flows and then discount these cash flows back to present values. Interest rate caps are valued using a model that projects the probability of various levels of interest rates occurring in the future using observable volatilities. OEH incorporates credit valuation adjustments to reflect both its own and its respective counterparty’s non-performance risk in the fair value measurements.
 
In the determination of fair value of derivative instruments, a credit valuation adjustment is applied to OEH’s derivative exposures to take into account the risk of the counterparty defaulting with the derivative in an asset position and, when the derivative is in a liability position, the risk that OEH may default. The credit valuation adjustment is calculated by determining the total expected exposure of the derivatives (incorporating both the current and potential future exposure) and then applying each counterparty’s credit spread to the applicable exposure.  For interest rate swaps, OEH’s own credit spread is applied to the counterparty’s exposure to OEH and the counterparties credit spread is applied to OEH’s exposure to the counterparty, and then the net credit valuation adjustment is reflected in the determination of the fair value of the derivative instrument.  The credit spreads used as inputs in the fair values calculations represent implied credit default swaps obtained from a third-party credit data provider.  Some of the inputs into the credit valuation adjustment are not observable and, therefore, they are considered to be Level 3 inputs.  Where credit valuation adjustment exceeds 20% of the fair value of the derivatives, Level 3 inputs are assumed to have a significant impact on the fair value of the derivatives in their entirety and the derivative is classified as Level 3.  OEH reviews its fair value hierarchy classifications quarterly.  Transfers between levels are made at the fair value on the actual date of the transfer if the event or change in circumstances caused the transfer can be identified.
 

110


The following tables summarize the valuation of OEH’s assets and liabilities by the fair value hierarchy at December 31, 2012 and 2011 :
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2012
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Assets at fair value:
 
 

 
 
 
 
 
 
Derivative financial instruments
 

 
6

 

 
6

 
 
 
 
 
 
 
 
 
Total assets
 

 
6

 

 
6

 
 
 
 
 
 
 
 
 
Liabilities at fair value:
 
 

 
 
 
 

 
 
Derivative financial instruments
 

 
(8,879
)
 

 
(8,879
)
 
 
 
 
 
 
 
 
 
Total net liabilities
 

 
(8,873
)
 

 
(8,873
)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2011
 
$'000
 
$'000
 
$'000
 
$'000
 
 
 
 
 
 
 
 
 
Assets at fair value:
 
 

 
 
 
 
 
 
Derivative financial instruments
 

 
60

 

 
60

 
 
 
 
 
 
 
 
 
Total assets
 

 
60

 

 
60

 
 
 
 
 
 
 
 
 
Liabilities at fair value:
 
 

 
 

 
 

 
 
Derivative financial instruments
 

 
(10,954
)
 

 
(10,954
)
 
 
 
 
 
 
 
 
 
Total net liabilities
 

 
(10,894
)
 

 
(10,894
)
 
During the year ended December 31, 2012 , there were no transfers between levels of the fair value hierarchy. OEH's policy is to recognize transfers in and transfers out as of the end of each quarterly reporting period. The table below presents a reconciliation of the beginning and ending balances of derivatives having fair value measurements based on significant unobservable inputs (Level 3) for the year ended December 31, 2011 :

 
 
Beginning
balance
at
January 1,
2011
$’000
 
Transfers
into/(out of)
Level 3
$’000
 
Realized
losses
included
in
earnings
$’000
 
Unrealized
gains
included in
other
comprehensive
income
$’000
 
Purchases,
Sales, Issuances
or Settlements
$’000
 
Ending
balance
at
December 31,
2011
$’000
Liabilities at fair value:
 
 

 
 

 
 

 
 

 
 

 
 

Derivative financial instruments
 
(277
)
 
(1,473
)
 
305

 
1,140

 
305

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
(277
)
 
(1,473
)
 
305

 
1,140

 
305

 

 
The Level 3 opening balance in 2011 represents new swaps with a fair value close to zero where the credit valuation adjustment is greater than 20% of the fair value.
 
The amount of total losses for the year ended December 31, 2012 included in earnings that are attributable to the change in unrealized gains or losses relating to those liabilities still held was $ Nil ( 2011 - $ Nil ; 2010 - $ Nil ).


111


(a)    Fair value of financial instruments
 
Certain methods and assumptions were used to estimate the fair value of each class of financial instruments. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and working capital facilities approximates fair value because of the short maturity of those instruments.
 
The fair value of OEH’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to OEH for debt of the same remaining maturities. The fair value of debt incorporates a credit valuation adjustment to take account of OEH’s credit risk.
 
The estimated fair values of OEH’s financial instruments (other than derivative financial instruments) as of December 31, 2012 and 2011 are as follows:
 
December 31, 2012
 
Carrying
amounts
$’000
 
Fair value
$’000
 
 
 
 
 
Cash and cash equivalents
 
93,382

 
93,382

Accounts receivable
 
36,533

 
36,533

Working capital facilities
 

 

Accounts payable
 
25,182

 
25,182

Accrued liabilities
 
77,519

 
77,519

Long-term debt, including current portion, excluding obligations under capital leases
 
521,494

 
533,783

Long-term debt, including current portion, held by consolidated variable interest entities
 
97,945

 
99,656

 
December 31, 2011
 
Carrying
amounts
$’000
 
Fair value
$’000
 
 
 
 
 
Cash and cash equivalents
 
90,104

 
90,104

Accounts receivable
 
44,599

 
44,599

Working capital facilities
 

 

Accounts payable
 
28,998

 
28,998

Accrued liabilities
 
87,617

 
87,617

Long-term debt, including current portion, excluding obligations under capital leases
 
538,730

 
509,866

Long-term debt, including current portion, held by consolidated variable interest entities
 
90,529

 
89,525


(b)    Non-financial assets measured at fair value on a non-recurring basis
 
The estimated fair values of OEH’s non-financial assets measured on a non-recurring basis at December 31, 2012 , 2011 and 2010 are as follows:
 
 
 
 
 
Fair value measurements using
 
 
 
 
Fair Value (1)
at December
31, 2012
$’000
 
Quoted
prices
in active
markets
for
identical
assets
(Level 1)
$’000
 
Significant
other
observable
inputs
(Level 2)
$’000
 
Significant
unobservable
inputs
(Level 3)
$’000
 
Total losses
in year
ended
December 31,
2012
$’000
Assets of discontinued operations held for sale
 
22,040

 

 

 
22,040

 
(3,166
)
Property, plant and equipment
 
3,521

 

 

 
3,521

 
(2,538
)
Goodwill
 
7,515

 

 

 
7,515

 
(2,055
)
Other assets
 

 

 

 

 
(1,299
)
 

112


 
 
 
 
Fair value measurements using
 
 
 
 
Fair Value (1)
at December
31, 2011
$’000
 
Quoted
prices
in active
markets
for
identical
assets
(Level 1)
$’000
 
Significant
other
observable
inputs
(Level 2)
$’000
 
Significant
unobservable
inputs
(Level 3)
$’000
 
Total losses
in year
ended
December 31,
2011
$’000
Assets of discontinued operations held for sale
 
63,522

 

 

 
63,522

 
(65,144
)
Property, plant and equipment
 
6,000

 

 

 
6,000

 
(8,153
)
Goodwill
 

 

 

 

 
(11,907
)
 
 
 
 
 
Fair value measurements using
 
 
 
 
Fair Value (1)
at December
31, 2010
$’000
 
Quoted
prices
in active
markets
for
identical
assets
(Level 1)
$’000
 
Significant
other
observable
inputs
(Level 2)
$’000
 
Significant
unobservable
inputs
(Level 3)
$’000
 
Total losses
in year
ended
December 31,
2010
$’000
Assets of discontinued operations held for sale
 
108,155

 

 

 
108,155

 
(30,900
)
Property, plant and equipment
 
22,912

 

 

 
22,912

 
(6,386
)
Goodwill
 

 

 

 

 
(5,895
)
Other intangible assets
 
1,020

 

 

 
1,020

 
(1,070
)
 
 
 
 
 
 
 
 
 
 
 
 (1)   Excludes costs to sell.
 
Assets of discontinued operations held for sale

For the year ended December 31, 2012 , assets of discontinued operations held for sale related to Porto Cupecoy real estate assets with a carrying value of $25,206,000 were written down to fair value of $22,040,000 , resulting in a non-cash impairment charge of $3,166,000
 
For the year ended December 31, 2011 , assets of discontinued operations held for sale related to Keswick Hall with a carrying value of $43,934,000 (including the value of land held for property development) were written down to fair value of $20,000,000 , resulting in a non-cash impairment charge of $23,934,000 .  In the fourth quarter of 2011, a model home was sold for $1,250,000 , reducing the fair value of Keswick Hall (including the value of land held for property development) to $18,750,000 .  In addition, assets of discontinued operations held for sale at Bora Bora Lagoon Resort were written down to fair value of $2,850,000 , resulting in a non-cash impairment charge of $2,150,000 . In addition, real estate assets held for sale at the Porto Cupecoy development were written down to their fair value, resulting in a non-cash impairment charge of $36,868,000 and, as part of an overall impairment calculation, property, plant and equipment at Porto Cupecoy with a carrying value of $1,677,000 were written down to fair value of $ Nil . In addition, goodwill of The Westcliff with a carrying value of $515,000 was written down to fair value of $ Nil , resulting in a non-cash impairment charge of $515,000 .
 
For the year ended December 31, 2010 , assets of discontinued operations held for sale with a carrying amount of $5,000,000 (net of offsetting amounts within the currency translation adjustments account) of Bora Bora Lagoon Resort were increased to fair value, resulting in a gain of $1,305,000 from foreign currency fluctuations.  Assets of discontinued operations held for sale of Hôtel de la Cité with a carrying value of $18,276,000 were written down to fair value of $12,287,000 , resulting in a non-cash impairment charge of $5,989,000 . In addition, real estate assets of Porto Cupecoy were written down to fair value, resulting in a non-cash impairment charge of $24,616,000 . In addition, real estate assets held for sale of Keswick Hall (model development homes), which were transferred to assets of discontinued operations held for sale, were written down to fair value, resulting in an impairment charge of $1,600,000 .
 
Any gains or losses on movements are included in earnings/(losses) from discontinued operations in the period incurred.  See Note 2.
 

113


Property, plant and equipment

For the year ended December 31, 2012 , train carriages of OEH's former Great South Pacific Express tourist train which are held in Australia and not in service with a carrying value of $6,059,000 were written down to fair value of $3,521,000 , resulting in a non-cash impairment charge of $2,538,000
 
For the year ended December 31, 2011 , property, plant and equipment at Casa de Sierra Nevada with a carrying value of $14,153,000 was written down to fair value of $6,000,000 , resulting in a non-cash impairment charge of $8,153,000
 
See Note 7 regarding assignment of the purchase and development agreements between OEH and the New York Public Library, including discussion related to put and call options included as part of the contractual provisions under that assignment. Based on terms under negotiation with interested parties in 2010, OEH recorded a non-cash impairment charge of $6,386,000 at December 31, 2010 on land and buildings for the capitalized pre-development expenses incurred in the project.
 
These impairments are included in earnings from continuing operations in the period incurred. See Note 7.
 
Goodwill

For the year ended December 31, 2012 , goodwill of Reid's Palace hotel with a carrying value of $9,570,000 was written down to fair value of $7,515,000 , resulting in a non-cash impairment charge of $2,055,000 .
 
For the year ended December 31, 2011 , goodwill of Maroma Resort and Spa, La Residencia and Mount Nelson Hotel with a carrying value of $11,907,000 was written down to fair value of $ Nil , resulting in a non-cash impairment charge of $11,907,000 .
 
For the year ended December 31, 2010 , goodwill of La Samanna and Napasai with a carrying value of $5,895,000 was written down to fair value of $ Nil , resulting in a non-cash impairment charge of $5,895,000 .
 
These impairments are included in earnings from continuing operations in the period incurred. See Note 8.
 
Other assets
 
For the year ended December 31, 2012 , deferred costs associated with Great South Pacific Express with a carrying value of $1,299,000 were written down to fair value of $ Nil resulting in a non-cash impairment charge of $1,299,000 . These costs were written off as part of OEH's review of the uses of train carriage assets currently not in service in Australia, as described in the property, plant and equipment section above.

There were no impairments to other assets in the years ended December 31, 2011 and 2010.
 
These impairments are included in earnings from continuing operations in the period incurred. See Note 7.

Other intangible assets
 
There were no impairments to other intangible assets in the years ended December 31, 2012 and 2011.
 
For the year ended December 31, 2010 , other intangible assets of Internet-based businesses Luxurytravel.com UK Ltd. and O.E. Interactive Ltd. with a carrying value of $2,090,000 were written down to fair value of $1,020,000 , resulting in a non-cash impairment charge of $1,070,000 .
 
These impairments are included in earnings from continuing operations in the period incurred. See Note 9.

20.    Derivatives and hedging activities
 
Risk management objective of using derivatives
 
OEH enters into derivative financial instruments with the objective to manage its exposures to future movements in interest rates on its borrowings.
 

114


Cash flow hedges of interest rate risk
 
OEH’s objective in using interest rate derivatives is to add certainty and stability to its interest expense and to manage its exposure to interest rate movements. To accomplish this objective, OEH primarily uses interest rate swaps as part of its interest rate risk management strategy. An interest rate swap is a transaction between two parties in which each agrees to exchange, or swap, interest payments where the interest payment amounts are tied to different interest rates or indices for a specified period of time and are based on a notional amount of principal.  During the year ended December 31, 2012 , interest rate swaps were used to hedge the variable cash flows associated with existing variable interest rate debt.
 
Derivative instruments are recorded on the balance sheets at fair value.  The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in other comprehensive income/(loss) and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
 
As of December 31, 2012 , OEH had the following outstanding interest rate derivatives stated at their notional amounts in local currency that were designated as cash flow hedges of interest rate risk:
 
 
 
2012
 
2011
December 31,
 
’000
 
’000
 
 
 
 
 
Interest Rate Swaps
 
A$

 
A$
10,800

Interest Rate Swaps
 
142,094

 
148,332

Interest Rate Swaps
 
$
104,259

 
$
117,765

 
Non-designated hedges of interest rate risk
 
Derivatives not designated as hedges are used to manage OEH’s exposure to interest rate movements but do not meet the strict hedge accounting requirements prescribed in the authoritative accounting guidance.  As of December 31, 2012 , OEH had interest rate options with a fair value of $6,000 ( 2011 - $60,000 ) and a notional amount of €76,469,000 and $53,760,000 ( 2011 - €43,594,000 and $54,880,000 ) that were non-designated hedges of OEH’s exposure to interest rate risk.
 
The table below presents the fair value of OEH’s derivative financial instruments and their classification as of December 31, 2012 and 2011 :
 
 
 
Liability Derivatives
 
 
 
 
Fair value as of
 
Fair value as of
 
 
 
 
December 31, 2012
 
December 31, 2011
 
 
Balance Sheet location
 
$’000
 
$’000
Derivatives designated in a cash flow hedging relationship:
 
 
 
 

 
 

Interest Rate Swaps
 
Other assets
 

 

Interest Rate Swaps
 
Accrued liabilities
 
(3,858
)
 
(3,443
)
Interest Rate Swaps
 
Other liabilities
 
(5,021
)
 
(7,511
)
 
 
 
 
 
 
 
Total
 
 
 
(8,879
)
 
(10,954
)
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 

 
 

Interest Rate Options
 
Other Assets
 
6

 
60

Interest Rate Swaps
 
Accrued liabilities
 

 

Interest Rate Swaps
 
Other liabilities
 

 

 
 
 
 
 
 
 
Total
 
 
 
6

 
60

 

115


The table below (in which “OCI” means other comprehensive income) presents the effect of OEH’s derivative financial instruments on the statements of consolidated operations and the statements of consolidated comprehensive income for the years ended December 31, 2012 and 2011 :
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Interest rate swaps designated as hedging instruments:
 
 

 
 

 
 

Beginning accumulated other comprehensive loss
 
(6,440
)
 
(8,745
)
 
(11,275
)
 
 
 
 
 
 
 
Amount of loss recognized in OCI (effective portion)
 
(7,032
)
 
(7,566
)
 
(8,385
)
 
 
 
 
 
 
 
Amount of loss reclassified from accumulated OCI into interest income (effective portion)
 
6,129

 
8,789

 
11,027

 
 
 
 
 
 
 
Deferred tax on OCI movement
 
1,367

 
1,082

 
(112
)
 
 
 
 
 
 
 
Change in fair value, net of tax
 
464

 
2,305

 
2,530

 
 
 
 
 
 
 
Ending accumulated other comprehensive loss
 
(5,976
)
 
(6,440
)
 
(8,745
)
 
 
 
 
 
 
 
Amount of loss recognized in interest expense on derivatives (ineffective portion)
 
218

 
(353
)
 
(534
)
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

Amount of (loss)/gain recognized in interest expense
 
(54
)
 
484

 
(2,217
)
 
At December 31, 2012 , the amount accounted for in other comprehensive income/(loss) which is expected to be reclassified to interest expense in the next 12 months is $3,602,000 ( 2011 - $3,080,000 ).
 
Credit-risk-related contingent features
 
OEH has agreements with some of its derivative counterparties that contain provisions under which, if OEH defaults on the debt associated with the hedging instrument, OEH could also be declared in default in respect of its derivative obligations.
 
As of December 31, 2012 , the fair value of derivatives in a net liability position, which includes accrued interest and an adjustment for non-performance risk, related to these agreements was $8,879,000 ( 2011 - $10,954,000 ). As of December 31, 2012 , OEH had cash collateral of $ Nil ( 2011 - $ Nil ) with its derivative counterparties in respect of these net liability positions. If OEH breached any of the provisions, it would be required to settle its obligations under the agreements at their termination value of $8,946,000 ( 2011 - $11,551,000 ).

Non-derivative financial instruments — net investment hedges
 
OEH uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. OEH’s designates its euro-denominated indebtedness as a net investment hedge of long-term investments in its euro-functional subsidiaries.  These contracts are included in non-derivative hedging instruments. The fair values of non-derivative hedging instruments were $44,166,000 at December 31, 2012 ( 2011 - $45,919,000 ), both being liabilities of OEH. Amounts recorded in other comprehensive income/(loss) were a $806,000 loss for the year ended December 31, 2012 ( 2011 - $2,748,000 gain; 2010 - $4,398,000 gain).


116



21.    Accumulated other comprehensive loss
 
The accumulated balances for each component of other comprehensive income/(loss) are as follows:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Foreign currency translation adjustments, net of tax (benefit) of $(520) and $(477)
 
(67,135
)
 
(52,611
)
Derivative financial instruments, net of tax (benefit) of $(2,337) and $(970)
 
(5,976
)
 
(6,440
)
Pension liability, net of tax provision of $2,337 and $2,161
 
(13,270
)
 
(13,238
)
 
 
 
 
 
 
 
(86,381
)
 
(72,289
)
 
22.    Information concerning financial reporting for segments and operations in different geographical areas
 
OEH's operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by the chief operating decision maker to assess performance and make decisions regarding the allocation of resources. The chief operating decision maker is the Chief Executive Officer. OEH's operating segments are aggregated into three reporting segments, (i) hotels and restaurants - earnings derived from hotels and restaurants which it owns, jointly owns or manages, (ii) tourist trains and cruises - earnings derived from train and cruise businesses which it owns, jointly owns or manages, and (iii) real estate - earnings derived from the development and sale of real estate which it owns, which are grouped into various geographical regions. At December 31, 2012 , hotels are located in the United States, Caribbean, Mexico, Europe, southern Africa, South America, and Southeast Asia, a restaurant is located in New York, tourist trains operate in Europe, Southeast Asia and Peru, two river cruise businesses in Myanmar (Burma) and a canal boat business in France, and real estate development is loc ated in the Caribbean and Southeast Asia. Segment performance is evaluated by the chief operating decision maker based upon segment earnings before gains/(losses) on disposal, impairments, central overheads, interest income, interest expense, foreign currency, tax (including tax on earnings from unconsolidated companies), depreciation and amortization (“adjusted earnings by segment”).


117


Financial information regarding these business segments is as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Revenue:
 
 

 
 

 
 

 
 
 
 
 
 
 
Owned hotels - Europe
 
202,342

 
213,232

 
169,772

- North America
 
107,357

 
102,655

 
96,724

- Rest of World
 
138,703

 
140,951

 
121,250

Hotel management/part ownership interests
 
5,482

 
5,809

 
4,300

Restaurants
 
16,159

 
16,312

 
15,809

Hotels and restaurants
 
470,043

 
478,959

 
407,855

Tourist trains and cruises
 
74,725

 
75,777

 
61,740

Real estate
 
650

 

 

 
 
 
 
 
 
 
 
 
545,418

 
554,736

 
469,595

 
 
 
 
 
 
 
Depreciation and amortization:
 
 

 
 

 
 

 
 
 
 
 
 
 
Owned hotels - Europe
 
18,184

 
18,487

 
18,169

- North America
 
10,338

 
9,795

 
10,361

- Rest of World
 
9,292

 
9,957

 
9,182

Restaurants
 
827

 
675

 
671

Hotels and restaurants
 
38,641

 
38,914

 
38,383

Tourist trains and cruises
 
4,335

 
3,906

 
3,479

 
 
42,976

 
42,820

 
41,862

Unallocated corporate
 
958

 
1,015

 
768

 
 
 
 
 
 
 
 
 
43,934

 
43,835

 
42,630

 
 
 
 
 
 
 

118


 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Adjusted earnings by segment:
 
 

 
 

 
 

 
 
 
 
 
 
 
Owned hotels - Europe
 
56,289

 
60,264

 
37,388

- North America
 
19,481

 
13,552

 
14,986

- Rest of World
 
34,652

 
33,461

 
28,602

Hotel management/part ownership interests
 
2,818

 
5,261

 
2,228

Restaurants
 
2,203

 
(67
)
 
2,476

Hotels and restaurants
 
115,443

 
112,471

 
85,680

Tourist trains and cruises
 
22,235

 
20,948

 
17,407

Real estate
 
(612
)
 

 
(280
)
 
 
 
 
 
 
 
Reconciliation to net losses:
 
 
 
 
 
 
Total adjusted earnings by segment
 
137,066

 
133,419

 
102,807

 
 
 
 
 
 
 
Gain on disposal
 
1,514

 
16,544

 

Impairment of goodwill
 
(2,055
)
 
(11,907
)
 
(5,895
)
Impairment of other intangible assets, other assets and property, plant and equipment
 
(3,837
)
 
(8,153
)
 
(7,456
)
Impairment of property, plant and equipment in unconsolidated company
 

 
(626
)
 

Central overheads
 
(38,974
)
 
(37,095
)
 
(26,503
)
Depreciation and amortization
 
(43,934
)
 
(43,835
)
 
(42,630
)
Interest income
 
1,067

 
2,365

 
1,295

Interest expense
 
(30,862
)
 
(42,599
)
 
(34,165
)
Foreign currency, net
 
(2,844
)
 
(4,596
)
 
4,678

Provision for income taxes
 
(21,987
)
 
(20,080
)
 
(18,184
)
Share of provision for income taxes of unconsolidated companies
 
(5,771
)
 
(2,270
)
 
(2,228
)
 
 
 
 
 
 
 
Losses from continuing operations
 
(10,617
)
 
(18,833
)
 
(28,281
)
Earnings/(losses) from discontinued operations
 
3,729

 
(68,763
)
 
(34,299
)
 
 
 
 
 
 
 
Net losses
 
(6,888
)
 
(87,596
)
 
(62,580
)
 
 
 
 
 
 
 
Earnings from unconsolidated companies, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotels and restaurants
 
 

 
 

 
 

Hotel management/part ownership interests
 
1,517

 
35

 
(2,026
)
Tourist trains and cruises
 
607

 
4,322

 
4,284

 
 
 
 
 
 
 
 
 
2,124

 
4,357

 
2,258

 
 
 
 
 
 
 

119


 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Capital expenditure:
 
 

 
 

 
 

 
 
 

 
 

 
 

Owned hotels - Europe
 
17,187

 
18,660

 
29,746

- North America
 
45,758

 
16,419

 
12,185

- Rest of World
 
27,104

 
17,836

 
17,037

Restaurants
 
1,901

 
1,271

 
257

Hotels and restaurants
 
91,950

 
54,186

 
59,225

Tourist trains and cruises
 
4,410

 
3,849

 
4,229

Total segment capital expenditure
 
96,360

 
58,035

 
63,454

Unallocated corporate
 
771

 
1,962

 
1,124

 
 
 
 
 
 
 
 
 
97,131

 
59,997

 
64,578



 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Identifiable assets:
 
 
 
 
 
 
 
 
 
Owned hotels - Europe
 
736,735

 
724,547

  - North America
 
574,385

 
516,144

  - Rest of World
 
334,471

 
334,271

Hotel management/part ownership interests
 
94,343

 
75,781

Restaurants
 
29,568

 
31,352

Hotels and restaurants
 
1,769,502

 
1,682,095

Tourist trains and cruises
 
98,523

 
104,401

Real estate
 
1,924

 
8,983

Discontinued operations held for sale
 
22,078

 
135,390

 
 
 
 
 
 
 
1,892,027

 
1,930,869


Financial information regarding geographic areas based on the location of properties is as follows:
 
 
 
2012
 
2011
 
2010
Year ended December 31,
 
$’000
 
$’000
 
$’000
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
Europe
 
266,553

 
280,372

 
225,179

North America
 
124,166

 
118,967

 
112,533

Rest of World
 
154,699

 
155,397

 
131,883

 
 
 
 
 
 
 
 
 
545,418

 
554,736

 
469,595

 

120


 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Long-lived assets at book value:
 
 
 
 
Europe
 
709,750

 
694,977

North America
 
537,762

 
495,927

Rest of World
 
346,694

 
343,416

 
 
 
 
 
 
 
1,594,206

 
1,534,320


Long-lived assets at book value constitute the following:
 
 
 
2012
 
2011
December 31,
 
$’000
 
$’000
 
 
 
 
 
Property, plant and equipment
 
1,171,603

 
1,107,595

Property, plant and equipment of consolidated variable interest entities
 
183,793

 
185,788

Investments in unconsolidated companies
 
58,924

 
60,012

Goodwill
 
161,278

 
161,460

Other intangible assets
 
18,608

 
19,465

 
 
 
 
 
 
 
1,594,206

 
1,534,320


23.    Related party transactions
 
OEH manages under long-term contract the tourist train owned by Eastern and Oriental Express Ltd., in which OEH is an equity method investor.  The amount due to OEH from Eastern and Oriental Express Ltd. at December 31, 2012 was $5,005,000 ( 2011 - $2,581,000 ). In the year ended December 31, 2012 , OEH earned management fees of $389,000 ( 2011 - $279,000 ; 2010 - $278,000 ), which are recorded in revenue.
 
OEH manages under long-term contracts the Hotel Monasterio, Palacio Nazarenas, Machu Picchu Sanctuary Lodge and Hotel Rio Sagrado owned by its 50 /50 joint venture with local Peruvian interests, as well as the 50 /50 owned Peru Rail and Ferrocarril Transandino rail operations, and provides loans, guarantees and other credit accommodation to these joint ventures.  See Note 5.  In the year ended December 31, 2012 , OEH earned management and guarantee fees of $7,886,000 ( 2011 - $7,644,000 ; 2010 - $5,303,000 ) which are recorded in revenue.  The amount due to OEH from its joint venture Peruvian operations at December 31, 2012 was $6,398,000 ( 2011 - $5,765,000 ).
 
OEH manages under a long-term contract the Hotel Ritz in Madrid, Spain, in which OEH holds a 50% interest and which is accounted for under the equity method.  For the year ended December 31, 2012 , OEH earned $1,035,000 ( 2011 - $1,204,000 ; 2010 - $1,107,000 ) in management fees, which are recorded in revenue, and $631,000 ( 2011 - $560,000 ; 2010 - $372,000 ) in interest income.  The amount due to OEH from the Hotel Ritz at December 31, 2012 was $24,128,000 ( 2011 - $18,486,000 ).  See Note 5 regarding a partial guarantee of the hotel’s bank indebtedness.
 
24.    Subsequent events
 
On January 31, 2013, OEH completed the sale of condominium units, marina slips and commercial units at its Porto Cupecoy property development (excluding condominium units under sale contracts) for an agreed sales price of $19,000,000 , less costs to sell. See Note 2.

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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures
 
Disclosure Controls and Procedures
 
The Company's chief executive officer and chief financial officer have evaluated the effectiveness of OEH's disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) to ensure that the information included in periodic reports filed with the SEC is assembled and communicated to OEH management and is recorded, processed, summarized and reported within the appropriate time periods. Based on that evaluation, OEH management has concluded that these disclosure controls and procedures were effective as of December 31, 2012.

Management’s Annual Report on Internal Control over Financial Reporting
 
OEH management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in SEC Rule 13a-15(f)).  OEH's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Management assessed the effectiveness of OEH's internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment and those criteria, management has concluded that OEH's internal control over financial reporting was effective as of December 31, 2012.

Deloitte LLP, OEH's independent registered public accounting firm, issued the report below on the effectiveness of OEH's internal control over financial reporting.

Report of Independent Registered Public Accounting Firm
 
Board of Directors and Shareholders
Orient-Express Hotels Ltd.
Hamilton, Bermuda

We have audited the internal control over financial reporting of Orient-Express Hotels Ltd. and subsidiaries (the “Company”) as of December 31, 2012 , based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012 , based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2012 of the Company and our report dated February 26, 2013 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule and includes an explanatory paragraph related to the restatement of the accompanying 2011 and 2010 statements of consolidated cash flows.

/s/ Deloitte LLP

London, England
February 26, 2013

  Changes in Internal Control over Financial Reporting
 
There have been no changes in OEH's internal control over financial reporting during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, OEH's internal control over financial reporting, except that during the fourth quarter of 2012, OEH completed its planned actions to remediate the material weakness in internal control over financial reporting relating to accounting for income taxes, as reported in Item 9A—Controls and Procedures of the Company's annual report on Form 10-K for the year ended December 31, 2011. Specifically, OEH did not maintain effective controls over the preparation and review of the calculations and related supporting documentation for certain tax assets and liabilities and the current and deferred income tax expense recorded in accordance with U.S. generally accepted accounting principles.

During 2012, OEH has taken steps to remediate this material weakness, including the following:

designing a standardized form of internal tax report for each reporting entity within OEH,

hiring additional resources in the preparation and review of the provision of income taxes,

delivering technical tax training to accounting personnel at local business units,

improving policies, procedures and formal communications between the tax department and the financial reporting group relating to tax account reconciliation, analysis and review,

undertaking certain year-end tax analysis and reporting activities in periods earlier in the year in order to provide additional analysis and reconciliation time during the financial close period,

improving communications with subsidiary finance and accounting personnel regarding the requirements for tax jurisdiction-specific information, and

enhancing the training of tax accounting personnel, particularly with respect to the application of U.S. generally accepted accounting principles.
 
The actions described above have strengthened OEH's internal control over financial reporting relating to the accounting for income taxes. These actions were completed during the fourth quarter of 2012 and, as of December 31, 2012, have remediated the related material weakness identified.


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ITEM 9B. Other Information

None.

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PART III

ITEM 10.       Directors, Executive Officers and Corporate Governance
 
Directors
 
Following the 2012 annual general meeting of the Company, Jo Malone resigned as a director of the Company on October 8, 2012. The board of directors on November 8, 2012 appointed John M. Scott III as a director to fill the vacancy created by Ms. Malone's resignation. At the same time, the board appointed Mr. Scott as the Company's President and Chief Executive Officer.

The present directors of the Company are as follows:
 
Name, Age
 
Principal Occupation and Other Major Affiliations
 
Year First
  Became 
Director
 
 
 
 
 
Harsha V. Agadi, 50
 
Executive Chairman of Quizno’s Global LLC (restaurants)
 
2011
John D. Campbell, 70
 
Senior Counsel (retired) of Appleby (attorneys)
 
1994
Mitchell C. Hochberg, 60
 
Managing Principal of Madden Real Estate Ventures LLC, and President of Lightstone Group LLC (real estate investment, development and advisory firms)

 
2009
Ruth A. Kennedy, 48

 
Founder and Consultant of Kennedy Dundas Ltd. (brand and business consultancy)
 
2012
Prudence M. Leith, 73
 
Freelance food consultant, television presenter and novelist
 
2006
J. Robert Lovejoy, 68
 
Chairman of the Board of the Company, and Founder and Principal of J.R. Lovejoy & Co. LLC (financial advisory firm)

 
2000
Philip R. Mengel, 68
 
Operating Partner of Snow Phipps Group LLC (private equity investment firm)
 
2011
Georg R. Rafael, 75
 
Vice Chairman of the Board of the Company, and Managing Director of Rafael Group S.A.M. (hotel investment and consultancy firm)

 
2002
John M. Scott III, 47
 
President and Chief Executive Officer of the Company
 
2012
 
The principal occupation of each director during at least the last five years is that shown in the table above supplemented by the following information.

Mr. Agadi is Executive Chairman of Quizno's Global LLC, a privately-owned group of mainly franchised restaurants in 40 countries with a strong brand recognition. Previously in 2010 to early 2012, he was Chairman and Chief Executive of Friendly Ice Cream Corporation, a private company operating restaurants principally in the eastern United States. Friendly entered Chapter 11 reorganization proceedings in the United States in October 2011 and emerged in financially and operationally restructured form in January 2012. In 2004 to 2009, Mr. Agadi was President and Chief Executive of Church's Chicken Inc., another branded restaurant group in over 20 countries. In 2000 to 2004, he was an Industrial Partner of Ripplewood Holdings LLC, a private equity investment firm, and in the 1990s held executive positions with other branded restaurant groups. Mr. Agadi is also a non-executive director of Crawford & Company, an international insurance services firm listed on the New York Stock Exchange, and the non-executive Chairman of Krystal Company, a privately-owned U.S.-based convenience restaurant group. He is on the Board of Visitors of the Fuqua Business School at Duke University.

Mr. Campbell was a member of the Bermuda law firm of Appleby until March 1999 (where he served as Senior Partner from 1987 to 1999) and retired as Senior Counsel in July 2003. He is a non-executive director, Chairman of the Nominations and Governance Committee and Chairman of the Succession Planning Committee of Argus Group Holdings Ltd., a public company listed on the Bermuda Stock Exchange engaged principally in the insurance business. In May 2012, Mr. Campbell retired after seven years as non-executive Chairman of the Board of HSBC Bank Bermuda Ltd. (formerly named The Bank of Bermuda Ltd.), a subsidiary of HSBC Holdings plc. He had served as a director of the bank for 25 years and as Chairman of the bank's Audit Committee for 20 years until 2008.
Mr. Hochberg has been the Managing Principal of Madden Real Estate Ventures since March 2007.  In 2012, he was appointed President of Lightstone Group LLC, a privately-owned U.S.-based real estate company owning and managing a diversified portfolio of commercial, industrial, multi-family residential, and hospitality properties. He was President and Chief Operating

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Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States, in 2006 and early 2007.  Mr. Hochberg founded, and for 20 years to December 2005, was the President and Chief Executive Officer of Spectrum Communities and its successor, developers of luxury home communities in the northeastern United States.  Mr. Hochberg is also currently the non-executive Chairman of Orleans Homebuilders Inc., a developer of single-family residences in seven U.S. states. He is a lawyer and a certified public accountant.

Ms. Kennedy founded Kennedy Dundas in 2009, a brand and business consultancy advising clients in the luxury goods and services sectors to meet their business development objectives. In 2006-2009, she served as head of Quinlan Private UK, a Dublin-based real estate and private equity group managing commercial and residential properties in Europe including luxury hotels. Ms. Kennedy was responsible for opening offices in the United Kingdom and establishing the firm's private client business in Europe. Before that position, Ms. Kennedy was 16 years with David Linley and Co., the bespoke furniture and design business in the U.K. where she served as Managing Director responsible for business development as well as day-to-day operations. She began her career at S.G. Warburg as an investment banker.

Ms. Leith was the founder, owner and Managing Director of Leith's Group which, from 1960 until its sale in 1995 to Accor, grew to encompass restaurants, a prestigious London-based chef school, contract catering, and event and party catering.  Past consulting activities have included Compass Group PLC, a large food service business with operations principally in the United Kingdom, Continental Europe and North America.  Ms. Leith has served at various times as a non-executive director on the boards of British Railways, Whitbread PLC, Halifax PLC, Safeway PLC, Woolworths Group PLC, Nations Healthcare Ltd. and Omega International Group PLC. She has been honored with the award of a CBE by the British government for services to the catering industry.

Mr. Lovejoy was appointed Chairman of the Board in 2011 and served as Interim Chief Executive Officer of the Company from July 2011 to May 2012. In 2010, he was Senior Advisor, General Counsel and Partner of Coatue Management LLC, an equity management company.  During the four prior years, he was Managing Director of Groton Partners LLC, a private merchant banking firm.  In 2000-2005, he was Senior Managing Director of Ripplewood Holdings LLC, a private equity investment firm.  Prior to that position he was a Managing Director and Co-Head of General Banking of Lazard Frères & Co. LLC, an investment banking firm, and a General Partner of Lazard's predecessor partnership for over 15 years.  Mr. Lovejoy is a lawyer (formerly a partner in the Davis Polk & Wardwell LLP law firm), and also the lead non-executive director of One Liberty Properties Inc., a commercial and industrial real estate investment trust listed on the NYSE.

Mr. Mengel served as Interim Chief Executive Officer of the Company from May to November 2012. He joined Snow Phipps Group LLC in 2007, a private equity firm focused on small- and mid-market investments. Before that position, he served as Chief Executive Officer and director of United States Can Corporation in 2005 and 2006 when the company was sold following successful financial reorganization under his leadership. Mr. Mengel served as Chief Executive Officer of English, Welsh and Scottish Railway Ltd. in 1999 to 2003, the principal rail freight operator in Great Britain following privatization by the British government, and as Group Chief Executive of Ibstock PLC in 1995 to 1999, a British-based building products supplier, prior to the sale of that company. Mr. Mengel has been a director since 1999 of The Economist Group Ltd., a privately owned company that publishes ''The Economist'' magazine and other current affairs periodicals.

Mr. Rafael was Managing Director of Rafael Hotels Ltd., a deluxe hotel owning and operating company that he founded in 1986. Rafael Hotels was sold to Mandarin Oriental Hotels in 2000 and included among others such iconic hotels as The Mark in New York, Turnberry Isle Resort & Club in Miami and the Hôtel du Rhône in Geneva. He continues to serve as Vice Chairman of the Elbow Beach Hotel in Bermuda, a former Rafael Hotel. After the sale of the company, Mr. Rafael served as Vice Chairman of the Executive Committee of Mandarin Oriental Hotels until early 2002 when he joined the Company's board. Before Rafael Hotels, he was Joint Managing Director of Regent International Hotels, a deluxe hotel group that Mr. Rafael established with partners in 1972. While with Regent, Mr. Rafael was responsible for the acquisition, renovation and development of such famous hotels as The Mayfair Regent in New York and Chicago, The Beverly Wilshire in Los Angeles, The Regent Washington, The Dorchester in London, The Regent Hong Kong and, in the Pacific, the Halekulani in Honolulu, The Regent Fiji and The Regent Sydney and many more worldwide. Mr. Rafael was appointed Vice Chairman of the Board of the Company in March 2010.

Prior to joining the Company in November 2012, Mr. Scott served as President and Chief Executive Officer of Rosewood Hotels & Resorts from 2003 until the sale in 2011 of Rosewood and related owned hotel assets (including The Carlyle in New York, Mansion on Turtle Creek and Hotel Crescent Court in Dallas, Little Dix Bay in Virgin Gorda, and Inn of the Anasazi in Santa Fe). Prior to joining Rosewood, Mr. Scott served for seven years as Managing Director of Acquisitions and Asset Management at Maritz, Wolff & Co., where he was responsible for acquisitions and asset management for the private equity real estate investment group. Previously, Mr. Scott held management positions in business planning and development at The Walt Disney Company and senior hotel management positions at the Interpacific Group Hong Kong, a private hotel investment

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and management company operating in the Asia-Pacific region. He also serves as a non-executive director of Cedar Fair Entertainment Company, a leading theme park and entertainment company operating in the United States and Canada and listed on the New York Stock Exchange.
 
Director Qualifications
 
When considering whether the directors have the experience, qualifications, attributes and skills, taken as a whole, to enable the Company's board of directors to satisfy its oversight responsibilities effectively in light of OEH's business and structure, the board of directors considered each person's background and experience outlined above.

In particular, with regard to Mr. Agadi, the board of directors considered his experience as chief executive of various restaurant companies operating in many different countries. As chief executive, Mr. Agadi developed expertise in sales, marketing, operations, finance, strategy and development. Like OEH, these companies under Mr. Agadi's guidance relied on strong marketing and brand awareness.

With regard to Mr. Campbell, the board of directors considered his work on other company boards and his corporate governance experience, including his service as a director and Chairman of the Nominations and Governance and Succession Planning Committees of another publicly traded company and his tenure as Chairman of the Board, a director and Chairman of the Audit Committee of HSBC Bank Bermuda Ltd., as well as his leadership and operational and legal experience as a member of a global law firm.
With regard to Mr. Hochberg, the board of directors considered his real estate industry and operational experience, including his service as an executive officer of a developer and manager of innovative luxury hotels and residential projects in the United States and as an executive officer of a diversified real estate portfolio company. Also relevant was his background in accounting and law.

With regard to Ms. Kennedy, the board of directors considered her experience as a consultant in the luxury goods and services sectors for clients seeking to develop and strengthen their individual brands. The board of directors also considered her experience in managing a luxury goods business and her work in finance.

With regard to Ms. Leith, the board of directors considered her industry and operational experience in restaurants and catering, including in founding and managing restaurants, a chef school, a contract catering business, and event and party catering business and consulting for a large food service business, and the fact of her years of board and corporate governance experience as a director of other public companies.

With regard to Mr. Lovejoy, the board of directors considered his understanding of international business, finance and corporate strategy, including his knowledge in complex financial matters, numerous and varied global industries, and international corporate strategy. The board of directors also considered his leadership and board experience, including as an executive officer in the financial industry and as a director of a commercial and industrial real estate investment trust.

With regard to Mr. Mengel, the board of directors considered his experience as a director and chief executive of large industrial and transport companies in the United States and abroad where he focused on improving operational and financial performance. The board also appreciated his strong skills in financial analysis demonstrated throughout his career.

With regard to Mr. Rafael, the board of directors considered his hotel industry and operational experience, including his background founding deluxe hotel owning and operating companies, his experience in developing new hotels, his insight into many aspects of hotel design, and his understanding of international business, general management and corporate strategy, including his service as Vice Chairman of the Executive Committee of a luxury hotel group.

With regard to Mr. Scott, the board of directors considered his hotel industry experience in various countries, particularly during his time at Rosewood where he was responsible for increases in earnings, hotels under management and new hotel projects. The board of directors also appreciated his understanding of the deluxe lodging sector and his experience in strategy, operations, finance and brand building.
 

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Executive Officers
 
The present executive officers of the Company are as follows:
 
Name, Age
 
Position
 
 
 
John M. Scott III, 47

 
President and Chief Executive Officer since November 2012

Martin O’Grady, 49
 
Vice President—Finance and Chief Financial Officer since March 2008
Ralph Aruzza, 56

 
Vice President and Chief Sales and Marketing Officer since February 2013
Filip J.M. Boyen, 54
 
Vice President since September 2005 and Chief Operating Officer since September 2009
Richard M. Levine, 51
 
Vice President and Chief Legal Officer since February 2012
Maurizio Saccani, 62
 
Vice President—Italy since September 2007 and Chief of Product Development since December 2011
Raymond R.A. Blanc, 63
 
Vice President—Gastronomy since December 2010
Philip A. Calvert, 60
 
Vice President—Legal and Commercial Affairs since June 2010
Roger V. Collins, 66
 
Vice President—Design and Technical Services since June 2001
Edwin S. Hetherington, 63
 
Vice President, General Counsel and Secretary since December 2006
Shawn K. Jereb, 38
 
Vice President—Revenue Management and Distribution since June 2012
Peter Massey-Cook, 48
 
Vice President—Compliance since January 2012
 
During 2012, Sara L. Edwards resigned as Vice President-Human Resources, a position she held since September 2011. Leaving the Company after the end of 2012 were Roy A. Paul, Vice President and Chief Development Officer, and David C. Williams, Vice President and Chief Marketing Officer, positions they held since February 2011 and June 2004, respectively.

The principal occupation of the present officers of the Company during at least the last five years is shown in the table above supplemented by the following information, except Mr. Scott whose previous experience is described above regarding the Company's directors.

Prior to becoming an officer of the Company, Mr. O'Grady served as Chief Financial Officer of Orion Capital Managers LP, a European private equity real estate investment firm including hotels.  From 1999 until 2005, he worked for Security Capital European Realty, where he served as Chief Financial Officer of Access Self Storage, a retail self-storage operator in the United Kingdom, France and Australia.  From 1992 until 1998, Mr. O'Grady held a number of senior finance and accounting positions with Jardine Matheson Group, an Asian-based conglomerate, including Group Financial Controller of Mandarin Oriental Hotels from 1992 to 1995.  Mr. O'Grady began his career with PricewaterhouseCoopers in the U.K. and the U.S., and is an Associate Chartered Accountant in England and Wales.

Mr. Aruzza joined the Company from Rosewood Hotels & Resorts where he was Vice President of Sales and Marketing since early 2006. During his seven years at Rosewood, he oversaw all strategic brand initiatives and global sales networks, as well as directing the channel management and customer relationship management functions. Mr. Aruzza has over 35 years of experience in the luxury travel market, starting his career at Hyatt Hotels and Resorts and holding various senior marketing positions at Four Seasons Hotels and Resorts. He later became the Corporate Director of Marketing for the Ritz-Carlton Hotel Company, and went on to become Vice President of Sales and Marketing for Camberley Hotel Company and Coastal Hotel Group.
Mr. Boyen held positions with Marco Polo Hotels, Sun International Hotels and Ramada Renaissance before he joined OEH in 1997.  Initially, he served as General Manager of Bora Bora Lagoon Resort until 1999, when he became Managing Director of OEH's hotel and tourist train operations in Peru.  He was appointed Vice President-Hotels, Africa, Australia and South America of the Company in September 2005, and Vice President-Operations in September 2007.


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In November 2008, Mr. Boyen settled an investigation into alleged insider dealing in shares of a mining company publicly traded in the United Kingdom brought by the Financial Services Authority, an independent non-governmental body that regulates the financial services industry in the United Kingdom (“FSA”).   In settling the matter, the FSA imposed a civil penalty of $152,000 on Mr. Boyen for engaging in market abuse for trading on behalf of himself and a third party on the basis of inside information in contravention of the U.K. Financial Services and Markets Act 2000.  Mr. Boyen fully cooperated with the FSA's investigation.  None of the activities or information involved in the investigation related to OEH or the Company's securities.

Mr. Levine joined OEH after eight years with Kerzner International Holdings Ltd., a global resort development and management business operating primarily under the One&Only and Atlantis brands, where he served as Executive Vice President and General Counsel working in business development and restructuring while leading the legal, regulatory and compliance department. Previously he worked in the private equity investment business as General Counsel at Hellman & Friedman LLC (1998-2003) and Credit Suisse First Boston (1996-1998). Mr. Levine is a New York-licensed lawyer.

Mr. Saccani joined Orient-Express Hotels Inc., an NYSE-listed predecessor of the Company, in 1978 as Food and Beverage Manager of the Hotel Cipriani.  After serving as Manager, Italy, of the Venice Simplon-Orient-Express, he became Managing Director of the Villa San Michele in 1985. By 2007, he had assumed responsibility for all of the Company's hotels in Italy, most recently the two acquired in Sicily in 2010. While continuing to oversee the Italian properties, Mr. Saccani acts as the Company's Chief of Product Development.

Mr. Blanc is the chef-patron of Le Manoir aux Quat'Saisons which he founded in 1984 and whose restaurant has achieved two stars in the influential Michelin Guide for 28 years. He began his career in the restaurant business in 1969 and opened the first of a series of restaurants in the U.K. in 1977. Over the years, working with the chefs in his various restaurants, more than 25 of those chefs have subsequently achieved Michelin star status. A prolific food writer, Mr. Blanc often appears on food-related television programs. He has been honored by the British government with the award of an OBE for services promoting culinary excellence and food ethics, and by the French government as a Chevalier de la Légion d'Honneur. He began his association with the Company when it acquired Le Manoir in 2002.

Mr. Calvert joined OEH in October 2008 as Director of Legal Services. He held a similar position with Sea Containers Ltd., formerly an NYSE-listed leasing and transport company and the former parent of the Company, having joined in 1983 and worked on many OEH matters while Sea Containers was a shareholder in the Company. Mr. Calvert is an English barrister and a New York-licensed lawyer.

Mr. Collins, an engineer during his entire career, has worked in the hotel industry since 1979 with Grand Metropolitan Hotels, Courage Inns and Taverns, and Trusthouse Forte Hotels, having joined Orient-Express Hotels Inc. in 1991.

Mr. Hetherington started with Orient-Express Hotels Inc. as Counsel and Secretary in 1980, and was appointed the Company's Secretary in 1994.  He is a New York-licensed lawyer. Until the end of 2006, he was also Vice President, General Counsel and Secretary of Sea Containers while it was listed on the NYSE.

Mr. Jereb's entire career has been in the hotel industry, principally in revenue management and sales. He has worked at various locations for Morgans Hotel Group, Starwood Hotels and Resorts, and Marriott Hotels and Resorts. He joined OEH in 2008.

Mr. Massey-Cook joined OEH in 2012 from the UBS AG where he served at Executive Director, Employee Compliance for Europe, Middle East and Asia. Previously in 1996-2009, he worked in various capacities at BP plc where he established and headed BP's compliance program in Europe as Regional Director. His commercial background has included export selling, strategic marketing and business development in the steel, chemicals and energy industries based at various times in Germany, Japan, Belgium and the U.K.
 
Corporate Governance
 
The board of directors of the Company has established corporate governance measures substantially in compliance with requirements of the NYSE.  These include a set of Corporate Governance Guidelines, Charters for each of the standing Audit Committee, Compensation Committee and Nominating and Governance Committee of the full board, and a Code of Business Conduct and Ethics for Directors, Officers and Employees.  The Code of Business Conduct and Ethics is filed as an exhibit to this report.  These documents are published on the Company's website (www.orient-express.com).

Because the Company is a foreign private issuer as defined in SEC rules, it is not required to comply with all NYSE corporate governance requirements as they apply to U.S. domestic companies listed on the NYSE.  The Company's corporate governance

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practices, however, do not differ in any significant way from those requirements, except that if the board of directors determines that a particular director has no material relationship with OEH and is otherwise independent, the board may waive any of the NYSE independence requirements. The Company's corporate governance practices comply with applicable requirements of the SEC.

The present members of the Company's Audit Committee are Messrs. Campbell (chairman), Hochberg and Lovejoy.  The board has designated Mr. Hochberg, an independent director, as an audit committee financial expert as defined by SEC rules.  The present members of the Compensation Committee are Mss. Kennedy and Leith and Messrs. Agadi, Campbell (chairman) and Rafael.  The present members of the Nominating and Governance Committee are Mss. Kennedy and Leith (chairman) and Messrs. Hochberg and Lovejoy. See Item 13—Certain Relationships and Related Transactions, and Director Independence below.

In addition, the board has appointed Messrs. Agadi, Hochberg (chairman), Mengel and Rafael as an Investment Committee to consider important finance and development matters in preparation of presentation of those matters to the full board for discussion. During 2012, the board appointed Ms. Leith and Messrs. Hochberg (chairman), Mengel and Rafael as a Search Committee to search for a permanent Chief Executive Officer, which led to the appointment of Mr. Scott to that position.

The non-executive directors of the Company meet regularly without management present.  Mr. Lovejoy, Chairman, presides at these executive sessions of the board.

Interested persons may communicate directly with any of the Company's directors by writing to him or her at the Company's registered office address (Orient-Express Hotels Ltd., 22 Victoria Street, Hamilton HM 12, Bermuda).

Information responding to Item 405 of SEC Regulation S-K is omitted because the Company is a “foreign private issuer” as defined in SEC Rule 3b-4 under the 1934 Act.

ITEM 11. Executive Compensation
 
Because the Company is a foreign private issuer, it is responding to this Item 11 as permitted by Item 402(a)(1) of SEC Regulation S-K under the 1934 Act.

The following table shows the salary and bonus paid in cash during 2012 to Mr. Scott, and to all officers as a group, for services to OEH in all capacities during the year:
Name of Individual or Group
 
Principal Capacities in Which Served
 
Cash Compensation
 
 
 
 
 
John M. Scott III
 
President, Chief Executive Officer and Director
 
$
133,200

All executive officers as a group (13 persons)
 
 
 
$
7,497,700


The group total excludes Sara L. Edwards who resigned as an officer in September 2012, and excludes Ralph Aruzza who joined as an officer in February 2013.

Mr. Scott joined OEH on November 8, 2012. His employment agreement is with an OEH subsidiary in the U.K. and includes the following terms:
 
an annual base salary of $900,000, subject to annual increases as determined by the Company's board of directors or Compensation Committee;

eligibility for an annual bonus at a target level of 125% of his annual base salary and a maximum level of 150% of his annual base salary, with a guaranteed bonus of $160,300 in respect of 2012 and of the target level in respect of 2013;

a sign-on deferred share award of 440,000 class A common shares (the “Sign-On Award”) under the Company's 2009 Share Award and Incentive Plan, which vest annually in four equal tranches starting on January 1, 2013, the first tranche of which has vested and the shares issued to Mr. Scott;

participation at the executive level in future annual grants under the 2009 plan starting in 2013, at a target level of at least 150% of his annual base salary;


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reimbursement for relocation expenses and, commencing upon his entry into a lease for his permanent residence, an annual expatriate allowance of $500,000; and

a severance payment in the event of termination of his employment without cause or his resignation for good reason, equal to two times his annual base salary plus target bonus, 50% of which is payable in cash upon termination and the remainder of which is payable in monthly installments over a 12-month period following termination.

Mr. Scott and the Company have also entered into a severance agreement providing that, if the Company undergoes a change in control and if Mr. Scott's employment is terminated by OEH or if he resigns for good reason within one year following the change in control (or in anticipation of the change in control), then Mr. Scott will not receive any severance benefits under his employment agreement but will instead be entitled to certain severance payments, the amount of which depends on the timing of the change in control, ranging from one times his annual base salary, expatriate allowance and target bonus plus vesting of 110,000 of his shares under his Sign-On Award if his termination results from a change in control occurring on or before December 31, 2013, to two-and-a half times his annual base salary and two times his target bonus, one-half of his expatriate allowance and full vesting of his equity awards if his termination results from a change in control occurring after June 30, 2014. The agreement also entitles Mr. Scott to a tax neutralization payment for any excise tax incurred by Mr. Scott in connection with payments under the agreement (or any other agreements).
 
In addition to his employment and severance agreements, Mr. Scott and the Company have entered into an indemnification agreement in connection with his appointment. Mr. Scott's employment, severance and indemnification agreements are filed as exhibits to this report.

The Company has also entered into severance and indemnification agreements with eight of its other officers. The severance agreements entitle those officers to receive employment termination payments in certain circumstances constituting a change in control of the Company in an amount equal to two times each officer's annual compensation, and require the Company to pay the excise tax on the severance payments of the U.S. tax-paying officers. The forms of severance and indemnification agreements with the other officers are filed as exhibits to this report.

During 2012 and prior to the appointment of Mr. Scott as President, Chief Executive Officer and a director of the Company on November 8, 2012, J. Robert Lovejoy acted as Interim Chief Executive Officer of the Company until May 15, 2012 and thereafter Philip R. Mengel acted as Interim Chief Executive Officer. For this service, Messrs. Lovejoy and Mengel were paid total cash compensation in 2012 of $587,500 and $680,000, respectively.
 
Retirement Plans
 
Officers and employees based in the United Kingdom have participated in a contributory defined benefit pension plan established by a subsidiary of OEH.  The amount of contribution to the plan in respect of a specific person cannot readily be separated or individually calculated.  Participants in the plan have been eligible to receive at their normal retirement date an annual pension based on the number of years of pensionable service and their final pensionable compensation.

In 2006, the subsidiary froze its U.K. defined benefit pension plan, thus stopping future benefit accrual, so that the benefit payable to participants at normal retirement will be calculated using pensionable service and final pensionable salary at that date.  Thereafter, the OEH subsidiary established a defined contribution retirement plan for U.K. employees, including U.K.-based officers, under which the subsidiary contributes to individual accounts established by employees.  The subsidiary currently contributes for the officer participants in this plan at the rate of up to ten percent of annual salary.

Under the U.K. defined benefit plan, currently estimated accrued annual benefits payable to the one participating officer of the Company amounted to approximately $76,900 at December 31, 2012, and under the U.K. defined contribution plan, the OEH subsidiary contributed on behalf of participating officers a total of $190,300 during 2012.  See Note 13 to the Financial Statements regarding retirement plans.

Certain U.S. subsidiaries of OEH have adopted a 401(k) retirement plan that permits employees to contribute pre-tax amounts out of their compensation into individual tax-deferred accounts.  The maximum contribution most employees could make was $17,000 in 2012. For officers of the Company based in the U.S. participating in this plan in 2012, OEH paid a total of $34,600 into their accounts as partial matching payments under the plan in addition to their own contributions.
 

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Option Awards under 2000 and 2004 Stock Option Plans and 2009 Share Award and Incentive Plan
 
Options to purchase class A common shares of the Company at market value at the time of award have been granted to directors, officers and selected employees under the Company's 2000 and 2004 Stock Option Plans and 2009 Share Award and Incentive Plan.  The Compensation Committee of the board of directors administers these plans.  The options awarded have substantially the same terms and, in general, become exercisable three years after the date of grant and expire ten years from date of grant.  In certain circumstances constituting a change in control of the Company, outstanding options become immediately exercisable, and optionees may thereafter surrender their options instead of exercising them and receive directly from the Company in cash the difference between the option exercise price and the value of the underlying shares determined according to the plans.

During 2012, options to purchase an aggregate of 392,300 class A shares were granted under the 2009 plan to current officers of the Company at prices ranging from $8.42 to $11.32 per share, and no options were exercised by officers.  During 2012, no options were granted to or exercised by the directors of the Company.

At December 31, 2012, options under the three plans to purchase an aggregate of 1,903,450 class A shares (of which 868,650 were exercisable by June 30, 2013) were held by directors and current officers at per share exercise prices ranging from $5.89 to $59.23 and expiring between 2013 and 2022.  See Note 17 to the Financial Statements.

Following approval of the 2009 plan by shareholders at the 2009 annual general meeting of the Company, no further grants of stock options may be made under the 2000 and 2004 plans.
 
Share Awards under 2007 Performance Share Plan and 2009 Share Award and Incentive Plan
 
Like the 2009 Share Award and Incentive Plan, the Company's 2007 Performance Share Plan was administered by the Compensation Committee of the board of directors.  Directors, officers and selected employees have been awarded amounts of class A common shares of the Company under the 2007 and 2009 plans to be issued currently or on a deferred basis after the expiration of a vesting period.  The Compensation Committee may condition the vesting of deferred shares on achievement, in whole or in part, of specified performance criteria in the individual award such as earnings targets, total shareholder return goals or other criteria.  Shares may also be issued under the awards before the vesting period has expired if a change in control of the Company occurs or certain other early vesting events occur.

During 2012, deferred share awards were made under the 2009 plan with performance criteria based on OEH's total shareholder return and earnings before tax on up to 280,600 class A shares to current officers, all vesting in 2015, and additional awards were made without performance criteria on 527,400 class A shares to current officers vesting in 2012 to 2016. Also during 2012, 90,200 class A shares without performance criteria were awarded to the current non-executive directors of the Company vesting in 2015. Finally under prior awards under the 2007 and 2009 plans, a total of 91,466 class A shares were issued to current officers during 2012 plus an additional 110,000 class A shares in February 2013, and a total of 51,645 class A shares were issued to directors during 2012.

At December 31, 2012, deferred share awards on a total of up to 1,140,926 class A shares of the Company were outstanding to directors and current officers under the 2009 plan vesting in 2013 to 2016, including the 110,000 class A shares vested and issued in February 2013.  See Note 17 to the Financial Statements.

As noted above with respect to the 2000 and 2004 Stock Option Plans, following shareholder approval of the 2009 plan, no new share awards were permitted to be made under the 2007 plan. During 2012, the 2007 plan expired by its terms when the last awards under it vested and the shares were issued.
 
Non-Executive Director Fees
 
In 2012, each of Mss. Kennedy, Leith and Malone and Messrs. Agadi, Campbell, Hochberg, Mengel and Rafael was paid a cash retainer fee as a member of the Company's board of directors at the annual rate of $50,000, payable in quarterly installments while each served as a director, and a cash attendance fee of between $1,500 and $5,500 for each meeting of the board or a committee thereof which he or she attended, depending on the location of the meeting and whether it was held by conference telephone call.

In 2012, the members of the Audit Committee were each paid a cash retainer fee at the annual rate of $5,000, and the members of the Compensation Committee, Nominating and Governance Committee and Investment Committee were each paid a cash retainer fee at the annual rate of $2,500. In addition, the chairman of the Audit Committee was paid a cash fee at the annual

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rate of $20,000, and the chairman of each of the other three committees was paid a cash fee at the annual rate of $7,500. All of these fees were payable in quarterly installments while each director served on a committee or as chairman. No retainer or chairman fee was paid to the Search Committee members, although they were paid per meeting attendance fees.

As Chairman of the Board in 2012, Mr. Lovejoy was paid an all-inclusive cash amount at the annual rate of $500,000, payable in quarterly installments in lieu of annual retainer or per meeting attendance fees. As Vice Chairman of the Board, Mr. Rafael was paid a cash amount of $100,000 in 2012 in addition to payment to him of the foregoing retainer and attendance fees.

Aggregate cash retainer, attendance and other director fees to Mss. Kennedy, Leith and Malone and Messrs. Agadi, Campbell, Hochberg, Lovejoy, Mengel and Rafael described above amounted to $1,417,400 in 2012. Also, as noted above, Messrs. Lovejoy and Mengel were paid total cash compensation of $587,500 and $680,000, respectively, for serving as the Company's Interim Chief Executive Officer in 2012.

In addition, as noted above, the directors participate in the Company's 2000 and 2004 Stock Option Plans, 2007 Performance Share Plan and 2009 Share Award and Incentive Plan.  Included in the awards summarized above are awards in 2012 of deferred shares without performance criteria under the 2009 plan on a total of 90,200 class A shares to the directors.

Mr. Lovejoy and his family may stay at OEH's properties without charge, except for third-party provided services used during his visits.  The other non-executive directors and their families are entitled to 75% discounts off the usual room rates and food and beverage prices for their personal visits at OEH's properties.

The Company has entered into a director indemnification agreement with each of its non-executive directors, the form of which is filed as an exhibit to this report.

See Item 13—Certain Relationships and Related Transactions, and Director Independence regarding an agreement between OEH and James B. Sherwood, a former director of the Company, relating to the Hotel Cipriani in Venice, Italy.
 
Compensation Committee Interlocks and Insider Participation
 
The Compensation Committee of the Company's board of directors is composed of five non-executive directors, namely Mss. Kennedy and Leith and Messrs. Agadi, Campbell and Rafael.  No Compensation Committee member has served as an officer or employee of the Company in an executive capacity.  No executive officer of the Company serves on the board of directors or compensation committee of another company that has an executive officer serving on the Company's board of directors or its Compensation Committee.

Information responding to Item 407(e)(5) of SEC Regulation S-K is omitted because the Company is a “foreign private issuer” as defined in SEC Rule 3b-4 under the 1934 Act.
 
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Five Percent Shareholders
 
The following table contains information concerning the beneficial ownership of the Company's class A common shares and class B common shares by the only persons known to the Company to own beneficially more than 5% of the outstanding shares of either class of common shares.

Orient-Express Holdings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of the Company and owns only class B shares.  Under Bermuda law, the shares owned by Holdings are outstanding and may be voted.  In a strategic transaction involving OEH such as a takeover of the Company, this structure may assist in maximizing the value that the Company and its shareholders receive in the transaction.  See “Risks of Investing in Class A Common Shares” in Item 1A—Risk Factors regarding a judgment of the Bermuda Supreme Court in 2010 upholding this class B share ownership and voting structure.  Each class B share is convertible at any time into one class A share and, therefore, the shares listed as owned by Holdings represent class B shares and the class A shares into which those shares are convertible.

Voting and dispositive power with respect to the class B shares owned by Holdings is exercised by its board of directors, who are Ms. Leith, Mr. Campbell and two other persons who are not directors or officers of the Company.  Each of these persons may be deemed to share beneficial ownership of the class B shares owned by Holdings for which he or she serves as a director, as well as the class A shares into which those class B shares are convertible, but is not shown in the table below.


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Name and Address
 
No. of
Class A
and
Class B
Shares
 
 
 
Percent
of
Class A
Shares(1)
 
Percent
of
Class B
Shares
 
 
 
 
 
 
 
 
 
Orient-Express Holdings 1 Ltd.
22 Victoria Street
Hamilton HM 12, Bermuda
 
18,044,478

 
 
 
14.9
%
 
100.0
%
 
 
 
 
 
 
 
 
 
Cohen & Steers Inc., Cohen & Steers Capital Management Inc.
and Cohen & Steers Europe S.A. (2)
280 Park Avenue, 10th Floor
New York, New York 10017
 
12,146,552

 
(9)
 
11.8
%
 

 
 
 
 
 
 
 
 
 
The Indian Hotels Co. Ltd., Samsara Properties Ltd.     
and Paul White (3)
Mandlik House, Mandlik Road
Mumbai 400 001, India
 
7,213,254

 
(9)
 
7.0
%
 

 
 
 
 
 
 
 
 
 
Dimensional Fund Advisors LP (4)    
Palisades West, Building One
6300 Bee Cave Road
Austin, Texas 78746
 
6,522,656

 
(9)
 
6.3
%
 

 
 
 
 
 
 
 
 
 
Reuben Brothers Ltd. and Alexander Bushaev (5)    
3 Mangrove Bay Road
Sandy's Parish, Bermuda
 
6,379,465

 
(9)
 
6.2
%
 

 
 
 
 
 
 
 
 
 
AllianceBernstein LP (6)    
1345 Avenue of the Americas
New York, New York 10105
 
6,292,133

 
(9)
 
6.1
%
 

 
 
 
 
 
 
 
 
 
BlackRock Inc. (7)    
40 East 52 nd  Street
New York, New York
 
5,248,708

 
(9)
 
5.1
%
 

 
 
 
 
 
 
 
 
 
The Vanguard Group (8)    
100 Vanguard Boulevard
Malvern, Pennsylvania 19355
 
5,242,395

 
(9)
 
5.1
%
 

 
 
 
 
 
 
 
 
 
 
(1)
The percentage of class A shares shown is based on 103,010,639 class A shares outstanding on February 15, 2013, plus the class A shares issuable upon conversion of the class B shares beneficially owned by that person, if any.

(2)
The information with respect to Cohen & Steers Inc. (“Cohen & Steers”), Cohen & Steers Capital Management Inc. and Cohen & Steers Europe S.A. relates only to class A shares and is derived from their joint Schedule 13G report amended February 14, 2013 and filed with the SEC on that date. The report states that (a) Cohen & Steers is a holding company owning Cohen & Steers Capital Management Inc. (“C&S Capital”), a registered investment adviser, (b) Cohen & Steers and C&S Capital own Cohen & Steers Europe S.A. (“C&S Europe”), a registered investment adviser, (c) Cohen & Steers has sole voting power with respect to 9,545,061class A shares and sole dispositive power with respect to 12,146,552 class A shares, (d) C&S Capital has sole voting power with respect to 9,346,609 class A shares and sole dispositive power with respect to 11,808,201 class A shares and (e) C&S Europe has sole voting power with respect to 198,452 class A shares and sole dispositive power with respect to 338,351 class A shares.

(3)
The information with respect to The Indian Hotels Co. Ltd. (“Indian Hotels”), its subsidiary Samsara Properties Ltd. and Paul White relates only to class A shares and is derived from their joint Schedule 13D report amended October 26, 2012 and filed with the SEC on that date. The report states that (a) the two companies have shared voting and

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dispositive power with respect to 7,130,764 class A shares and (b) Mr. White has sole voting and dispositive power with respect to 82,490 class A shares.

(4)
The information with respect to Dimensional Fund Advisors LP (“Dimensional”) relates only to class A shares and is derived from its Schedule 13G report amended February 8, 2013 and filed with the SEC on February 11, 2013. The report states that (a) Dimensional is a registered investment adviser, (b) Dimensional furnishes investment advice to four registered investment companies and serves as an investment manager to certain other commingled group trusts and separate accounts, in certain cases with subsidiaries of Dimensional as advisers or sub-advisers, and (c) Dimensional has sole voting power with respect to 6,426,165 class A shares and sole dispositive power with respect to 6,522,656 class A shares.

(5)
The information with respect to Reuben Brothers Ltd. (“Reuben Brothers”) and Alexander Bushaev relates only to class A shares and is derived from their joint Schedule 13G report amended February 10, 2012 and filed with the SEC on February 14, 2012. The report states that (a) Reuben Brothers is a corporation and Mr. Bushaev is an individual, (b) Mr. Bushaev manages the investments of Reuben Brothers under contract, and (c) Reuben Brothers and Mr. Bushaev have shared voting and dispositive power with respect to 6,379,465 class A shares.

(6)
The information with respect to AllianceBernstein LP (“AllianceBernstein”) relates only to class A shares and is derived from its Schedule 13G report amended February 11, 2013 and filed with the SEC on February 12, 2013. The report states that (a) AllianceBernstein is a registered investment adviser, (b) class A shares are held on behalf of undisclosed client discretionary investment advisory accounts of AllianceBernstein, and (c) AllianceBernstein has sole voting power with respect to 5,386,549 class A shares, sole dispositive power with respect to 6,154,570 class A shares, and shared dispositive power with respect to 137,563 class A shares.

(7)
The information with respect to BlackRock Inc. (“BlackRock”) relates only to class A shares and is derived from its Schedule 13G report dated February 4, 2013 and filed with the SEC on January 30, 2013. The report states that (a) BlackRock is a parent holding company and a registered investment adviser, (b) certain subsidiaries of BlackRock (BlackRock Japan Co. Ltd., BlackRock Institutional Trust Company, N.A., BlackRock Fund Advisors, BlackRock Asset Management Australia Ltd., BlackRock Advisors LLC, BlackRock Investment Management LLC, BlackRock Asset Management Canada Ltd., BlackRock Advisors (UK) Ltd., BlackRock Investment Management (UK) Ltd., and BlackRock International Ltd.) may hold class A shares, and (c) BlackRock has sole voting and dispositive power with respect to 5,248,708 class A shares.

(8)
The information with respect to The Vanguard Group (“Vanguard”) relates only to class A shares and is derived from its Schedule 13G report dated February 7, 2013 and filed with the SEC on February 13, 2013. The report states that (a) Vanguard is a registered investment adviser and (b) Vanguard has sole voting power with respect to 144,446 class A shares, sole dispositive power with respect to 5,101,615 class A shares, and shared dispositive power with respect to 140,780 class A shares.

(9)
Class A shares only.
 
Directors and Executive Officers
 
The following table contains information concerning the beneficial ownership of class A common shares of the Company by each current director and officer of the Company and by all directors and officers of the Company as a group.  Each person has sole voting and dispositive power with respect to his or her shares, except Mr. Agadi shares voting and dispositive power with respect to all of his shares, Mr. Campbell shares voting and dispositive power with respect to 11,000 shares, and Mr. Lovejoy shares voting and dispositive power with respect to 4,100 shares.  Each individual's holding is less than 1% of the class A shares outstanding.

The group total in the following table includes class A shares beneficially owned by directors and officers as well as (a) 868,650 class A shares covered by stock options held by them exercisable before June 30, 2013 under the Company's 2000 and 2004 Stock Option Plans and 2009 Share Award and Incentive Plan and (b) deferred share awards covering 48,000 class A shares without performance criteria held by directors and up to 76,303 class A shares with performance criteria held by officers vesting before June 30, 2013 under the 2009 plan. The group total represents 1.6% of class A shares outstanding.

As noted above, certain of the directors of the Company may be deemed to share beneficial ownership of the class B shares held by Orient-Express Holdings 1 Ltd. because they are also directors of that subsidiary, but those shares are not included in the following table.

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Name
 
No. of
Class
  A Shares
 
 
 

Harsha V. Agadi
 
35,000

Ralph Aruzza
 

Raymond R.A. Blanc
 

Filip J.M. Boyen
 
46,530

Philip A. Calvert
 
13,709

John D. Campbell
 
22,345

Roger V. Collins
 
29,989

Edwin S. Hetherington
 
36,810

Mitchell C. Hochberg
 
26,265

Shawn K. Jereb
 

Ruth A. Kennedy
 

Prudence M. Leith
 
16,450

Richard M. Levine
 

J. Robert Lovejoy
 
20,445

Peter Massey-Cook
 

Philip R. Mengel
 
70,000

Martin O'Grady
 
30,000

Georg R. Rafael
 
226,345

Maurizio Saccani
 
26,371

John M. Scott III
 
110,100

All directors and officers as a group (20 persons) including 992,953 exercisable stock option shares and early vesting deferred shares
 
1,703,312

 
The foregoing table does not include stock options to purchase an aggregate of 1,034,800 class A shares becoming exercisable after June 30, 2013 held by officers under the Company's 2000 and 2004 Stock Option Plans and 2009 Share Award and Incentive Plan, and does not include currently unvested awards of deferred shares covering an aggregate of up to 1,016,623 class A shares vesting after June 30, 2013 held by directors and officers under the Company's 2009 Share Award and Incentive Plan.

The board of directors of the Company has adopted guidelines concerning class A share ownership by non-executive directors. The current guidelines are for each director to own beneficially class A shares in an amount equivalent to three times the annual cash retainer fee for board service (currently $50,000) within four years after initial election by shareholders and five times that amount within six years, with owned class A shares valued at the higher of cost or current market value.
 
Voting Control of the Company
 
The following table lists the voting power held by the known beneficial owners of more than 5% of the outstanding class A or class B common shares of the Company and all directors and executive officers as a group.  The directors of the Company who are deemed to be beneficial owners solely because they are directors of Holdings are not listed individually but are included in the group.


 

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Name
 
No. of
Class A
Shares
 
No. of
Class B
Shares
 
Combined
Voting
Power
 
 
 
 
 
 
 
Holdings
 

 
18,044,478

 
63.7
%
Cohen & Steers et al.
 
12,146,552

 

 
4.3
%
Indian Hotels et al.
 
7,213,254

 

 
2.5
%
Dimensional
 
6,522,656

 

 
2.3
%
Reuben Brothers et al.
 
6,379,465

 

 
2.3
%
AllianceBernstein
 
6,292,133

 

 
2.2
%
BlackRock
 
5,248,708

 

 
1.9
%
Vanguard
 
5,242,395

 

 
1.8
%
All directors and executive officers as a group (20 persons) including 992,953 exercisable stock option shares and early vesting deferred shares
 
1,353,328

 
18,044,478

 
64.0
%

In general the holders of class A and B common shares of the Company vote together as a single class on most matters submitted to general meetings of shareholders, with holders of class B shares having one vote per share and holders of class A shares having one-tenth of a vote per share.  Each class B share is convertible at any time into one class A share.  In all other material respects, the class A and B shares are identical and are treated as a single class of common shares.

Holdings and the Company's directors and executive officers hold in total approximately 16% in number of the outstanding class A and class B shares having approximately 64% of the combined voting power of the outstanding common shares of the Company for most matters submitted to a vote of the Company's shareholders.  Other shareholders, accordingly, hold approximately 84% in number of the outstanding common shares having about 36% of combined voting power in the Company.

Under Bermuda law, the class B shares owned by Holdings (representing approximately 64% of the combined voting power) are outstanding and may be voted by that subsidiary.  The investment by Holdings in class B shares and the manner in which Holdings votes those shares are determined by the board of directors of Holdings (two of whom are also directors of the Company) consistently with the exercise by those directors of their fiduciary duties to the subsidiary.  Holdings, therefore, has the ability to elect at least a majority of the members of the board of directors of the Company and to control the outcome of most matters submitted to a vote of the Company's shareholders.

With respect to a number of strategic matters which would tend to change control of the Company, its memorandum of association and bye-laws contain provisions that could make it more difficult for a third party to acquire OEH without the consent of the Company's board of directors.  These provisions include supermajority shareholder voting provisions for the removal of directors and for “business combination” transactions with beneficial owners of shares carrying 15% or more of the votes which may be cast at any general meeting of shareholders, and limitations on the voting rights of such 15% beneficial owners.  Also, the Company's board of directors has the right under Bermuda law to issue preferred shares without shareholder approval, which could be done to dilute the share ownership of a potential hostile acquirer.  Also, the rights to purchase series A junior participating preferred shares, one of which is attached to each class A and class B common share of the Company, may have anti-takeover effects.  See Note 16(c) to the Financial Statements (Item 8 above).  Although OEH management believes these provisions provide the Company and its shareholders with the opportunity to receive appropriate value in a strategic transaction by requiring potential acquirers to negotiate with the Company's board of directors, these provisions apply even if the potential transaction may be considered beneficial by many shareholders.

Information responding to Item 201(d) of SEC Regulation S-K is omitted because the Company is a “foreign private issuer” as defined in SEC Rule 3b-4 under the 1934 Act.


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ITEM 13.                           Certain Relationships and Related Transactions, and Director Independence
 
Related Party Transactions

See Note 23 to the Financial Statements (Item 8 above) regarding related party transactions.

In addition, James B. Sherwood, a former director of the Company, owns a private residential apartment in the Hotel Cipriani in Venice, Italy, a hotel owned by a subsidiary of the Company.  OEH has granted Mr. Sherwood a right of first refusal to purchase the hotel in the event OEH proposes to sell it.  The purchase price would be the offered sale price in the case of a cash sale or the fair market value of the hotel, as determined by an independent valuer, in the case of a non-cash sale.  Similarly, if Mr. Sherwood proposes to sell his apartment, he has granted OEH a right of first refusal to purchase it at fair market value or, at Mr. Sherwood's option in the case of a proposed cash sale, the offered sale price.  In addition, the Company has granted an option to Mr. Sherwood to purchase the hotel at fair market value if a change in control of the Company occurs.  Mr. Sherwood may elect to pay 80% of the purchase price if he exercises his right of first refusal, or 100% of the purchase price if he exercises his purchase option, by a non-recourse promissory note secured by the hotel payable in ten equal annual installments with interest at LIBOR.  The option is not assignable and expires one year after Mr. Sherwood's death. These agreements relating to the Hotel Cipriani between Mr. Sherwood and OEH and its predecessor companies have been in place since 1983 and were last amended and restated in 2005.
 
Director Independence
 
The nine members of the board of directors of the Company are identified in Item 10—Directors, Executive Officers and Corporate Governance.  Regarding the independence of directors from OEH and its management, the board has reviewed the materiality of any relationship that each of them has with OEH either directly or indirectly through another organization, including the fees and other compensation described under “Non-Executive Director Fees” in Item 11—Executive Compensation.  The criteria applied included the director independence requirements set forth in the Company's Corporate Governance Guidelines, any managerial, familial, professional, commercial or affiliated relationship between a director and the Company, a subsidiary or another director and, with respect to the Company's Audit Committee, the SEC's independence rules.

Based on this review, the board has determined that Mss. Kennedy and Leith and Messrs. Agadi, Campbell, Hochberg, Lovejoy, Mengel and Rafael are independent directors.  The Company's Corporate Governance Guidelines are filed as an exhibit to this report and are available at OEH's website www.orient-express.com.

ITEM 14. Principal Accounting Fees and Services
 
The following table presents the fees of Deloitte LLP, OEH’s independent registered public accounting firm, for audit and permitted non-audit services in 2012 and 2011:
 
 
 
2012
 
2011
Year ended December 31,
 
$
 
$
 
 
 
 
 
Audit fees
 
2,238,500

 
2,366,700

Audit-related fees
 
180,000

 
147,200

Tax fees
 
588,300

 
1,259,400

All other fees
 

 

Total
 
3,006,800

 
3,773,300

 
Audit services consist of work performed in connection with the audits of OEH's financial statements and its internal control over financial reporting for each fiscal year and in the review of financial statements included in quarterly reports during the year, as well as work normally done by the independent auditor in connection with statutory and regulatory filings, such as statutory audits of non-U.S. subsidiaries, and consents and comfort letters for SEC registration statements.

Audit-related services consist of assurance and related services that are normally performed by the independent auditor and that are reasonably related to the audit or review of financial statements but are not reported under audit services, including due diligence reviews in potential transactions, specific procedures for lenders agreed in loan documents, and audits of benefit plans.


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Tax services consist of all services performed by the independent auditor's tax personnel, except those services specifically related to the audit or review of financial statements, and include fees in the areas of tax return preparation and compliance and tax planning and advice.

Other services consist of those services permitted to be provided by the independent auditor but not included in the other three categories.  There were no other services provided in 2012 and 2011.

The Audit Committee of the board of directors of the Company has established a policy to pre-approve all audit and permitted non-audit services provided by the independent auditor.  Prior to engagement of the auditor for the next year's audit, management and the auditor submit to the Committee a description of the audit and permitted non-audit services expected to be provided during that year in each of four categories of services described above, together with a fee proposal for those services.  Prior to the engagement of the independent auditor, the Audit Committee considers with management and the auditor and approves (or revises) both the description of audit and permitted non-audit services proposed and the budget for those services.  If circumstances arise during the year when it becomes necessary to engage the independent auditor for additional services not contemplated in the original preapproval, the Audit Committee at its regularly scheduled meetings requires separate pre-approval before engaging the independent auditor.  To ensure prompt handling of unexpected matters, the Committee may delegate pre-approval authority to one or more of its members who report any pre-approval decisions to the Committee at its next scheduled meeting.  For 2012 and 2011, all of the audit and permitted non-audit services described above were pre-approved under the policy.


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PART IV

ITEM 15. Exhibits and Financial Statement Schedules
 
 
Page
Number
 
 
1. Financial Statements
 
 
 
Reports of independent registered public accounting firm
 
 
 
Consolidated financial statements - years ended December 31, 2012, 2011 and 2010:
 
Balance sheets (December 31, 2012 and 2011)
Statements of operations
Statements of comprehensive income
Statements of cash flows
Statements of total equity
Notes to financial statements
 
 
2. Financial Statement Schedule
 
 
 
Schedule II — Valuation and qualifying accounts (years ended December 31, 2012, 2011 and 2010)
 
 
3. Exhibits
 
 
 
The index to exhibits appears below, on the pages immediately following the signature pages to this report.
 


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ORIENT-EXPRESS HOTELS LTD. AND SUBSIDIARIES
 
Schedule II—Valuation and Qualifying Accounts
 
Column A
 
Column B
 
Column C
 
Column D
 
Column E
 
 
 
 
Additions
 
 
 
 
 
 
 
 
Balance at beginning of period
 
Charged to costs and expenses
 
Charged to
other accounts
 
Deductions
 
Balance at end of period
Description
 
$
 
$
 
$
 
$
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
602,000

 
208,000

 
7,000

 
(2)  
 
(345,000
)
 
(1)  
 
472,000

Valuation allowance on deferred tax assets
 
50,746,000

 
6,093,000

 
40,537,000

 
 
 

 
 
 
97,376,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
474,000

 
231,000

 
(3,000
)
 
(2)  
 
(100,000
)
 
(1)  
 
602,000

Valuation allowance on deferred tax assets
 
28,201,000

 
11,795,000

 
10,750,000

 
 
 

 
 
 
50,746,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2010:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
388,000

 
223,000

 
(6,000
)
 
(2)  
 
(131,000
)
 
(1)  
 
474,000

Valuation allowance on deferred tax assets
 
6,506,000

 
19,019,000

 
2,676,000

 
 
 

 
 
 
28,201,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Bad debts written off, net of recoveries.
 
 
 
 
 
 
 
 
 
 
 
 
(2)  Foreign currency translation adjustments.
 
 
 
 
 
 
 
 
 
 
 
 

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated:   February 26, 2013
 
 
ORIENT-EXPRESS HOTELS LTD.
 
 
 
 
 
By:
/s/ Martin O’Grady
 
 
Martin O’Grady
 
 
Vice President—Finance and Chief Financial Officer
 

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Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
 
Dated:  February 26, 2013
 
Name
 
Title
 
 
 
 
 
 
/s/ Harsha V. Agadi
 
Director
Harsha V. Agadi
 
 
 
 
 
 
 
 
/s/ John D. Campbell
 
Director
John D. Campbell
 
 
 
 
 
 
 
 
/s/ Mitchell C. Hochberg
 
Director
Mitchell C. Hochberg
 
 
 
 
 
 
 
 
/s/ Ruth A. Kennedy
 
Director
Ruth A. Kennedy
 
 
 
 
 
 
 
 
/s/ Prudence M. Leith
 
Director
Prudence M. Leith
 
 
 
 
 
 
 
 
/s/ J. Robert Lovejoy
 
Chairman and Director
J. Robert Lovejoy
 
 
 
 
 
 
 
 
/s/ Philip R. Mengel
 
Director
Philip R. Mengel
 
 
 
 
 
 
 
 
/s/ John M. Scott III
 
President, Chief Executive Officer and Director
John M. Scott III
 
 
 
 
 
 
 
 
/s/ Georg R. Rafael
 
Vice Chairman and Director
Georg R. Rafael
 
 
 
 
 
 
 
 
/s/ Martin O’Grady
 
Vice President—Finance and Chief Financial Officer (Chief Accounting Officer)
Martin O’Grady
 
 


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Table of Contents

EXHIBIT INDEX
 
Exhibit No.
 
Incorporated by Reference to
 
Description
 
 
 
 
 
3.1
 
Exhibit 3.2 to June 15, 2011 Form 8-K/A Current Report (File No. 001-16017)
 
Memorandum of Association and Certificate of Incorporation of Orient-Express Hotels Ltd.

3.2
 
Exhibit 3.2 to June 15, 2007 Form 8-K Current Report (File No. 001-16017)
 
Bye-Laws of Orient-Express Hotels Ltd.
3.3
 
Exhibit 1 to April 23, 2007 Amendment No. 1 to Form 8-A Registration Statement
(File No. 001-16017)
 
Rights Agreement dated June 1, 2000, and amended and restated April 12, 2007, between Orient-Express Hotels Ltd. and Computershare Trust Company N.A., as Rights Agent

3.4
 
Exhibit 4.2 to December 10, 2007 Form 8-K Current Report (File No. 001-16017)
 
Amendment No. 1 dated December 10, 2007 to Amended and Restated Rights Agreement (Exhibit 3.3)
3.5
 
Exhibit 4.3 to May 27, 2010 Form 8-K Current Report (File 001-16017)
 
Amendment No. 2 dated May 27, 2010 to Amended and Restated Rights Agreement (Exhibit 3.3)
4.1
 
Exhibit 1.1 to August 6. 2012 Form 8-K Current Report (File No. 001-16017)
 
Amended and Restated Secured Facility Agreement dated August 1, 2012 for Orient-Express Hotels Ltd. and certain subsidiaries arranged by Barclays Bank PLC and other banks


OEH has no instrument with respect to long-term debt not listed above under which the total amount of securities authorized exceeds 10% of the total assets of OEH on a consolidated basis.  The Company agrees to furnish to the SEC upon request a copy of each instrument with respect to long-term debt not filed as an exhibit to this report.

10.1
 
 
 
Orient-Express Hotels Ltd. 2000 Stock Option Plan, as amended

10.2
 
 
 
Orient-Express Hotels Ltd. 2004 Stock Option Plan, as amended
10.3
 
Exhibit 10.3 to 2008 Form 10-K Annual Report (File No. 001-16017)
 
Orient-Express Hotels Ltd. 2007 Performance Share Plan, as amended
10.4
 
Exhibit 10.4 to 2009 Form 10-K Annual Report (File 001-16017)
 
Orient-Express Hotels Ltd. 2007 Stock Appreciation Rights Plan, as amended
10.5
 
 
 
Orient-Express Hotels Ltd. 2009 Share Award and Incentive Plan, as amended

10.6
 
Exhibit 10.3 to 2004 Form 10-K Annual Report (File No. 001-16017)
 
Amended and Restated Agreement Regarding Hotel Cipriani Interests dated February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l. and Orient-Express Hotels Ltd.
10.7
 
Exhibit 10.4 to 2004 Form 10-K Annual Report (File No. 001-16017)
 
Amended and Restated Right of First Refusal and Option Agreement Regarding Indirectly Held Hotel Cipriani Interests dated February 8, 2005 between James B. Sherwood and Orient-Express Hotels Ltd.

10.8
 
 
 
Service Agreement between Orient-Express Services Ltd. and
John M. Scott III dated November 8, 2012

10.9
 
 
 
Severance Agreement between Orient-Express Hotels Ltd. and
John M. Scott III dated November 8, 2012

10.10
 
 
 
Indemnification Agreement between Orient-Express Hotels Ltd. and John M. Scott III dated November 8, 2012

10.11
 
 
 
Form of Severance Agreement between Orient-Express Hotels Ltd. and certain of its officers, as amended


10.12
 
 
 
Form of Indemnification Agreement between Orient-Express Hotels Ltd. and its non-executive directors and certain of its officers

11
 
 
 
Statement of computation of per share earnings
12
 
 
 
Statement of computation of ratios
14
 
Exhibit 14 to 2011 Form 10-K Annual Report (File No. 001-16017)

 
Code of Business Conduct and Ethics for Directors, Officers and Employees of Orient-Express Hotels Ltd.
18
 
 
 
Letter from Deloitte LLP regarding change in accounting principles



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Table of Contents


Exhibit
No.
 
Incorporated by Reference to
 
Description
 
 
 
 
 
21
 
 
 
Subsidiaries of Orient-Express Hotels Ltd.
23
 
 
 
Consent of Deloitte LLP relating to Form S-3 Registration Statement No. 333-165092 and Form S-8 Registration Statements No. 333-58298, No. 333-129152, No. 333-147448, No. 333-161459, No. 333-168588 and No. 333-183142
31
 
 
 
Rule 13a-14(a)/15d-14(a) Certifications
32
 
 
 
Section 1350 Certification
99.1
 
Exhibit 99.1 to 2011 Form 10-K Annual Report (File No. 001-16017)
 
Corporate Governance Guidelines of Orient-Express Hotels Ltd.
99.2
 
Exhibit 99.1 to June 1, 2010 Form 8-K Current Report (File No. 001-16017)
 
Judgment of Bermuda Supreme Court dated June 1, 2010 in D.E. Shaw Oculus Portfolios LLC et al. vs. Orient-Express Hotels Ltd. et al.
101
 
 
 
Interactive data file



145


Exhibit 10.1

[Orient-Express Hotels Ltd. 2000 Stock Option Plan, as amended]

ORIENT-EXPRESS HOTELS LTD.

2000 STOCK OPTION PLAN

[As adopted by the Board of Directors on June 5, 2000 and approved by the sole shareholder on June 5, 2000, and amended by the Board of Directors on February 2, 2009 and December 7, 2012.]

1.      The Plan

Orient-Express Hotels Ltd. (the "Company") may grant, in the manner and upon the terms and conditions set forth herein, options to purchase not in excess of an aggregate of 750,000 Class A or Class B common shares of the Company (adjusted, if necessary, in accordance with Section 12) to eligible directors, officers and employees of the Company and its subsidiaries (as determined in accordance with Section 3). Shares may be either authorized but unissued shares or acquired shares.

2.      Administration of the Plan

The Plan shall be administered, and the options hereunder shall be granted, by the Board of Directors of the Company or a committee thereof from time to time constituted pursuant to the Bye‑Laws of the Company. Any decision of the Board or the committee shall be final and conclusive in all matters relating to the Plan. The Board or the committee may make or vary regulations for the administration and operation of the Plan not inconsistent with the provisions hereof. The Board or the committee may act only by a majority of its members in office, except that the members may authorize any one or more of their number or the Secretary of the Company to execute and deliver documents on their behalf. No member of the Board or the committee shall be liable for anything done or omitted to be done by him or by any other member in connection with the Plan, except for his own willful misconduct or as expressly provided by statute.

The Board or the committee shall have authority to (a) adopt a subsidiary plan (the "U.K. Plan") under the Plan which provides for the grant of options on shares reserved under the Plan to eligible United Kingdom resident directors, officers and employees and complies with the requirements imposed by the United Kingdom Board of Inland Revenue, and (b) prescribe the form of options granted under the Plan, provided in each case that the terms and conditions of the U.K. Plan and the form of the option are not inconsistent with the terms and conditions of the Plan. Any option granted under the U.K. Plan shall be deemed to be outstanding also under the Plan.

The Board or the committee is authorized, in its discretion exercised at the time of grant, to designate options as "United States incentive stock options" within the meaning of Section 422 of the United States Internal Revenue Code.

3.      To Whom Options May Be Granted

Options may be granted to those directors, officers and employees of the Company or any subsidiary who, in the opinion of the Board or the committee, have contributed significantly to the growth and progress of the Company or any subsidiary or to persons who, in the opinion of the Board or the committee, hold promise of contributing to the growth and progress of the Company or any subsidiary and who can be attracted to directorship, officership or employment through the grant of options under the Plan. The Board or the committee is hereby given the authority to determine which of the eligible directors, officers and employees are to be granted options and the number of shares to be allocated to each.

No United States incentive stock option shall be granted to a person who is not an employee or (except as provided in Sections 4 and 7) to an employee who owns (or would be regarded as owning) shares possessing more than ten percent of the total combined voting power of all classes of shares of the Company or its subsidiaries at the time the option is granted. In addition, in the case of United States incentive stock options, the aggregate fair market value (determined at the time the option is granted) of the shares with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all United States incentive stock option plans of the Company and its subsidiaries) shall not exceed U.S.$100,000.







    
The term "subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company, each of which owns at the time such option is granted (except in the case of the last such corporation in the chain) shares possessing 50 percent or more of the total combined voting power of all classes of shares in one of the other corporations in such chain.

4.      Option Price

The option price per share shall be not less than the fair market value of the shares subject to the option at the time it is granted, as determined in good faith by the Board or the committee. If a United States incentive stock option is granted to an employee who at the time the option is granted owns (or would be regarded as owning) shares possessing more than ten percent of the total combined voting power of all classes of shares of the Company or its subsidiaries, the option price shall be at least 110 percent of the fair market value of the shares subject to the option at the time it is granted. The option price shall be subject to adjustment in accordance with Section 12.

5.      Circumstances Under Which Options May Be Granted

Options may be granted at any time and from time to time on or after the date on which the Plan is adopted by the Board of Directors of the Company and before the expiration of ten years therefrom. If prior to the expiration of ten years from the date on which the Plan is adopted, an option shall expire or otherwise terminate without having been exercised in full, the unexercised shares shall thereupon become available for the granting of options to other eligible directors, officers and employees. No option shall be granted unless, at the time such option is granted, the Company shall have available at least the number of shares covered by such option and by all other options then outstanding under the Plan.

6.      Options Not Assignable

Every option granted under the Plan shall provide that it is not transferable by the person to whom it is granted, otherwise than by will or the laws of descent and distribution, and that it is exercisable, during his lifetime, only by him.

7.     Manner of Exercise of Options

Any person to whom an option has been granted may exercise the same, subject to the provisions of Section 10, at any time and from time to time before the expiration of not more than ten years (or, in the case of any United States incentive stock option granted to an employee subject to the second sentence of Section 4, not more than five years) from the date the option was granted. Any such exercise shall be effected by giving written notice to the Company, in a form satisfactory to the Board or the committee, specifying the number of shares with respect to which the option is being exercised. Any person to whom an option has been granted under the U.K. Plan may exercise the same under the Plan, subject to all the provisions hereof and provided that in the written notice of exercise the person states that he is exercising under the Plan and not under the U.K. Plan.

8.      Manner of Payment on Exercise of Options

At the time of giving such notice, such person shall pay or cause to be paid to the Company the full option price of the shares as to which the option is exercised. As soon as practicable thereafter, the Company shall cause a certificate or certificates for such shares to be registered in the name of such person, in such denominations as such person may direct, and shall deliver said certificate or certificates to or upon the order of such person.

Notwithstanding the foregoing, on concurrence by the Board or the committee (which concurrence may be granted or withheld in its sole discretion) the person exercising an option may elect to defer, for a term not to exceed five years from the date of exercise, payment of all or a portion of the option price of the shares as to which the option is exercised, provided, however that:

2







(a) in the case of an optionee who is a "United States person" within the meaning of Regulation X of the Board of Governors of the Federal Reserve System of the United States of America, the portion of the option price so deferred for future payment shall not exceed the "good faith loan value" of the shares, within the meaning of the applicable provisions of Regulation G of such Board and as may be in effect on the date of exercise if such deferral is then subject to such regulation;

(b) the shares for which the option is exercised shall be issued to and registered in the name of the person exercising the option but shall be endorsed by the person in blank (either on the certificate or on a separate stock power) and held by the Company as collateral for the deferred portion of the option price;

(c) the person exercising the option shall execute a promissory note or other instrument of like effect in favor of the Company in a principal amount equal to the deferred portion of the option price, which instrument shall provide for the payment of interest at the rate, determined by the Board or the committee, of at least four percent per annum, payable quarterly;

(d) the person exercising the option shall have the right at any time and from time to time to withdraw part or all of the option shares from the collateral so held by the Company upon payment of a corresponding portion of the deferred option price, together with any accrued interest thereon, and that upon such payment the person exercising the option shall be discharged under the promissory note or other instrument, pro tanto, and shall then be free to dispose of the shares in any manner he may deem appropriate, subject to the relevant conditions and restrictions of the Plan; and

(e) the deferred payment arrangement shall be subject to such further terms and conditions as may be prescribed by the Board or the committee upon the exercise of options.

The person exercising an option shall be entitled, from the date of exercise, to all the rights of a shareholder as to the shares covered by the exercise, including the right to vote the shares and to receive and retain all dividends paid thereon.

8A.     Cashless Exercise

In lieu of exercising any option and making payment as specified in Section 8, any person exercising an option may elect to receive, and the Company will issue to such option holder, upon the surrender of the option (or specified portion thereof), that number of shares equal to the value of the option (or specified portion thereof), computed using the following formula (a “Cashless Exercise”):

X    =     [Y (A - B)] / A

where:    X    =    the number of shares to be issued in a Cashless Exercise.
Y     = the number of shares issuable upon exercise of the option (or specified
portion thereof).

A     =     the current share price of the shares, as defined below.

B     = the exercise price of the option (or specified portion thereof) as to which
Cashless Exercise has been elected by the person exercising the option.

In the case of any Cashless Exercise, the “current share price” of the shares shall mean the closing price of a share on the New York Stock Exchange (or any other national securities exchange in the United States of America on which the Company's class A common shares are listed) on the business day immediately preceding the date on which the Cashless Exercise takes place.


3







The Company shall not be required to issue any fractional shares in connection with any Cashless Exercise. If a fraction of a share would otherwise be issuable on the exercise of an option (or specified portion thereof), the Company shall pay to the person exercising the option an amount in cash equal to the current share price multiplied by such fraction.

Upon the Cashless Exercise of an option pursuant to the provisions of this Section 8A, the option holder will pay to the Company in cash an amount equal to the par value of each share to be issued in the Cashless Exercise ($0.01 per share).

9.      Exercise After Death of Person to Whom Granted

In the event the person to whom an option is granted shall die owning but without having fully exercised the option, his estate or any person who acquired the right to exercise the option by bequest or inheritance or by reason of the death of the optionee may, subject to the provisions of Section 10 (except subsection 10(b) and (d)), exercise the option at any time and from time to time before the expiration of the period of one year after the date of death, notwithstanding that the exercise may occur less than three years or more than ten years after the date of grant thereof, but only if the person so exercising the option shall have furnished the Company with evidence satisfactory to the Company of the person's right to exercise the option and of payment or provision for the payment of any estate, transfer, inheritance or death taxes payable with respect to the option or the shares to which it relates. Any such exercise shall be effected in the manner described in Sections 7 and 8. Any such exercise, however, shall not be permitted in the case of a United States incentive stock option after the expiration of ten years from the date the option was granted.

10.      Circumstances Under Which Options May Not Be Exercised

Every option under the Plan shall provide that it may not be exercised (except as may be otherwise provided in Sections 9 and 11):

(a) until the shares reserved for issuance upon the exercise thereof have been listed upon any national securities exchange in the United States of America or the United Kingdom on which the Company's Class A or B common shares are then listed;

(b) until the expiration of a period of three years from the date the option was granted, and in any event not after (i) the expiration of a period of three months from the date a person ceases to be a director, officer or employee of the Company or a subsidiary thereof under circumstances not involving misconduct, impropriety or inefficiency on his part or (ii) the termination of the directorship, officership or employment of a person by the Company or a subsidiary thereof or the shareholders for reasons involving misconduct, impropriety or inefficiency on his part, except that a person ceasing to be a director, officer or employee of the Company or a subsidiary thereof on account of (i) retirement at or after the normal retirement date, (ii) early retirement not earlier than five years before the normal retirement date, (iii) injury or disability, (iv) dismissal for redundancy or (v) on concurrence of the Board or the committee (which concurrence may be granted or withheld in its sole discretion), the sale or other disposition of the subsidiary for which the person acts as director or officer or which employs the employee or the operating division of the Company or a subsidiary for which the employee performs his employment shall be entitled to exercise an option at any time prior to the expiration of a period of three months from the date he ceases to be a director, officer or employee of the Company or a subsidiary thereof notwithstanding that such exercise is made prior to the expiration of a period of three years from the date such option was granted (and for purposes of this Section 10 hereof, the directorship, officership or employment of any person with the Company or a subsidiary thereof shall not be deemed to have ceased or terminated so long as such person shall continuously since the date of grant of the option be a director, officer or employee either of the Company or a subsidiary thereof or of Sea Containers Ltd. or a subsidiary thereof);

        

4







(c) unless the Board or the committee shall be satisfied that the issuance of shares upon exercise will be in compliance with all relevant rules and regulations of the United States Securities and Exchange Commission; or

(d) after the expiration of ten years from the date the option is granted.

11.      Change in Control

For purposes of this Section 11, "Change in Control" means any of the following events:

(a) any "person" (as that term is defined for the purposes of Section 13(d) or 14(d) of the U.S. Securities Exchange Act of 1934) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under that Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, “voting shares”); or

(b) individuals who, on December 7, 2012, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(c) the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than 50% of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or

(d) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than 50% of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.

In the event of a Change in Control, and notwithstanding anything to the contrary in Section 3, any outstanding option granted under the Plan which an optionee shall not then have been entitled to exercise shall become exercisable immediately prior to or concurrently with the occurrence of the Change in Control and the optionee shall have the right to exercise all such options.

Notwithstanding anything in the Plan to the contrary, in the event of exercise of an option following a Change in Control, the optionee may elect, in the written notice provided for in Sections 7 and 8, (i) to pay or cause to be paid to the Company the full option price of the shares as to which the option is exercised, or (ii) to surrender to the Company all or any part of an option and receive from the Company upon such surrender an amount in cash equal to the excess, if any, of the determined value of the shares subject to the option or portion thereof so surrendered over the aggregate exercise price of such shares as set forth in the applicable option grant letter. The term "determined value" as used herein means the higher of (A) the highest sale price per Class A or B common share of the Company on the New York Stock Exchange (or, if any of such shares are not listed on that exchange at that time, then the highest sale price of the shares on the principal stock exchange on which such shares are listed, or if such shares are not listed, then the over‑the‑counter market) during the 12 months immediately preceding the date of the Change in Control, or (B) the highest price per share actually paid in connection with any Change in Control (including, without limitation, prices paid in any subsequent amalgamation, merger or combination with any entity that acquires control of the Company), in either case multiplied by the number of shares subject to the option or portion thereof so surrendered. In the event of a surrender of all or a portion of an option pursuant to this Section, the number of shares as to which the option was surrendered shall not again become available for use under the Plan.

    

5







The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from any amalgamation, merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company, in any such case which would constitute a Change in Control. The Company agrees that it will make appropriate provisions for the preservation of all optionees' rights under the Plan in any agreement or plan that it may enter into or adopt to effect any such amalgamation, merger, consolidation, reorganization or transfer of assets constituting a Change in Control.

12.      Adjustment of Number or Kind of Shares

If the Company shall effect one or more share splits, share dividends, combinations of shares, exchanges of shares or similar capital adjustments, the Board or the committee shall appropriately adjust the aggregate number and kind of shares with respect to which options have been granted or may be granted under the Plan. Every option granted under the Plan shall provide that, in the event of any such capital adjustments, the number and kind of the shares with respect to which it may be exercised, and the option price, shall be appropriately adjusted.

13.      Amendment

The Plan may be amended from time to time by the Board of Directors of the Company. No amendment shall alter or impair any of the rights or obligations of any person, without his consent, under any option theretofore granted under the Plan.

14.      Termination

The Plan shall terminate upon the first of the following dates or events to occur:

(a) if the Company is a participant in any corporate amalgamation, merger, consolidation or other transaction and no provision is made at the time of the transaction to continue the Plan, except as provided in Section 11;

(b) resolution of the Board of Directors of the Company terminating the Plan; or

(c) on June 1, 2010.

In the event of termination of the Plan in any of the ways provided hereinabove, the provisions of the Plan shall continue in full force and effect as regards any options granted prior to such termination.

15.     Effect of Options Upon Employment

Nothing in the Plan shall be construed as giving any person acting as a director or officer of or employed by the Company or any subsidiary thereof the right to be retained in such directorship, officership or employment. The Company and any subsidiary thereof and the shareholders shall have the right to dismiss any director, officer or employee at any time with or without cause and without liability for the effect which such dismissal might have upon him as a participant under the Plan, and under no circumstances shall a person ceasing to be a director, officer or employee by reason of dismissal or otherwise be entitled to or claim against the Company or any subsidiary thereof any compensation for or in respect of any consequent reduction or loss of his rights or benefits (actual or prospective) under any option held by him in connection with the Plan.



6







16.      Construction

In all respects the Plan shall be governed by, and be construed in accordance with, the laws of the Islands of Bermuda.

* * * * *


7


Exhibit 10.2

[Orient-Express Hotels Ltd. 2004 Stock Option Plan, as amended]

ORIENT-EXPRESS HOTELS LTD.

2004 STOCK OPTION PLAN

(As adopted by the Board of Directors on February 10, 2004 and approved by shareholders on June 7, 2004, and amended by the Board of Directors on May 7, 2007 and approved (as amended) by shareholders on June 15, 2007, and amended by the Board of Directors on February 2, 2009 and December 7, 2012)

1.
The Plan

Orient-Express Hotels Ltd. (the “Company”) may grant, in the manner and upon the terms and conditions set forth herein, options to purchase not in excess of an aggregate of 1,000,000 Class A common shares of the Company (adjusted, if necessary, in accordance with Section 12) to eligible directors, officers and employees of the Company and its subsidiaries (as determined in accordance with Section 3). Shares may be either authorized but unissued shares or acquired shares.

2.
Administration of the Plan

The Plan shall be administered, and the options hereunder shall be granted, by the Board of Directors of the Company or a committee thereof from time to time constituted pursuant to the Bye‑Laws of the Company. Any decision of the Board or the committee shall be final and conclusive in all matters relating to the Plan. The Board or the committee may make or vary regulations for the administration and operation of the Plan not inconsistent with the provisions hereof. The Board or the committee may act only by a majority of its members in office, except that the members may authorize any one or more of their number or the Secretary of the Company to execute and deliver documents on their behalf. No member of the Board or the committee shall be liable for anything done or omitted to be done by him or by any other member in connection with the Plan, except for his own willful misconduct or as expressly provided by statute.

The Board or the committee shall have authority to (a) adopt a subsidiary plan (the “U.K. Plan”) under the Plan which provides for the grant of options on shares reserved under the Plan to eligible United Kingdom resident directors, officers and employees and complies with the requirements imposed by the United Kingdom Board of Inland Revenue, and (b) prescribe the form of options granted under the Plan; provided, however, in each case that the terms and conditions of the U.K. Plan and the form of the option are not more favorable to optionees than the terms and conditions of the Plan. Any option granted under the U.K. Plan shall be deemed to be outstanding also under the Plan.

The Board or the committee is authorized, in its discretion exercised at the time of grant, to designate options as “United States incentive stock options” within the meaning of Section 422 of the United States Internal Revenue Code.

3.
To Whom Options May Be Granted

Options may be granted to those directors, officers and employees of the Company or any subsidiary who, in the opinion of the Board or the committee, have contributed significantly to the growth and progress of the Company or any subsidiary or to persons who, in the opinion of the Board or the committee, hold promise of contributing to the growth and progress of the Company or any subsidiary and who can be attracted to directorship, officership or employment through the grant of options under the Plan. The Board or the committee is hereby given the authority to determine which of the eligible directors, officers and employees are to be granted options and the number of shares to be allocated to each.

No United States incentive stock option shall be granted to a person who is not an employee or (except as provided in Sections 4 and 7) to an employee who owns (or would be regarded as owning) shares possessing more than ten percent of the total combined voting power of all classes of shares of the Company or its subsidiaries at the




time the option is granted. In addition, in the case of United States incentive stock options, the aggregate fair market value (determined at the time the option is granted) of the shares with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all United States incentive stock option plans of the Company and its subsidiaries) shall not exceed U.S.$100,000.

The term “subsidiary” means any corporation in an unbroken chain of corporations beginning with the Company, each of which owns at the time such option is granted (except in the case of the last such corporation in the chain) shares possessing 50 percent or more of the total combined voting power of all classes of shares in one of the other corporations in such chain.

4.
Option Price

The option price per share shall be not less than the fair market value of the shares subject to the option at the time it is granted, as determined in good faith by the Board or the committee. If a United States incentive stock option is granted to an employee who at the time the option is granted owns (or would be regarded as owning) shares possessing more than ten percent of the total combined voting power of all classes of shares of the Company or its subsidiaries, the option price shall be at least 110 percent of the fair market value of the shares subject to the option at the time it is granted. The option price shall be subject to adjustment in accordance with Section 12.

5.
Circumstances Under Which Options May Be Granted

Options may be granted at any time and from time to time on or after the date on which the Plan is adopted by the Board of Directors of the Company and before the expiration of ten years therefrom. If prior to the expiration of ten years from the date on which the Plan is adopted, an option shall expire or otherwise terminate without having been exercised in full, the unexercised shares shall thereupon become available for the granting of options to other eligible directors, officers and employees. No option shall be granted unless, at the time such option is granted, the Company shall have available at least the number of shares covered by such option and by all other options then outstanding under the Plan.

6.
Options Not Assignable

Every option granted under the Plan shall provide that it is not transferable by the person to whom it is granted, otherwise than by will or the laws of descent and distribution, and that it is exercisable, during his lifetime, only by him.

7.
Manner of Exercise of Options

Any person to whom an option has been granted may exercise the same, subject to the provisions of Section 10, at any time and from time to time before the expiration of not more than ten years (or, in the case of any United States incentive stock option granted to an employee subject to the second sentence of Section 4, not more than five years) from the date the option was granted. Any such exercise shall be effected by giving written notice to the Company, in a form satisfactory to the Board or the committee, specifying the number of shares with respect to which the option is being exercised. Any person to whom an option has been granted under the U.K. Plan may exercise the same under the Plan, subject to all the provisions hereof and provided that in the written notice of exercise the person states that he is exercising under the Plan and not under the U.K. Plan.

8.
Manner of Payment on Exercise of Options

At the time of giving such notice, such person shall pay or cause to be paid to the Company the full option price of the shares as to which the option is exercised. As soon as practicable thereafter, the Company shall cause a certificate or certificates for such shares to be registered in the name of such person, in such denominations as such person may direct, and shall deliver said certificate or certificates to or upon the order of such person.


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Notwithstanding the foregoing, on concurrence by the Board or the committee (which concurrence may be granted or withheld in its sole discretion) the person exercising an option may elect to defer, for a term not to exceed five years from the date of exercise, payment of all or a portion of the option price of the shares as to which the option is exercised, provided, however that:

(a)    in the case of an optionee who is a “United States person” within the meaning of Regulation X of the Board of Governors of the Federal Reserve System of the United States of America, the portion of the option price so deferred for future payment shall not exceed the “good faith loan value” of the shares, within the meaning of the applicable provisions of Regulation G of such Board and as may be in effect on the date of exercise if such deferral is then subject to such regulation;

(b)    the shares for which the option is exercised shall be issued to and registered in the name of the person exercising the option but shall be endorsed by the person in blank (either on the certificate or on a separate stock power) and held by the Company as collateral for the deferred portion of the option price;

(c)    the person exercising the option shall execute a promissory note or other instrument of like effect in favor of the Company in a principal amount equal to the deferred portion of the option price, which instrument shall provide for the payment of interest at the rate, determined by the Board or the committee, of at least four percent per annum, payable quarterly;

(d)    the person exercising the option shall have the right at any time and from time to time to withdraw part or all of the option shares from the collateral so held by the Company upon payment of a corresponding portion of the deferred option price, together with any accrued interest thereon, and that upon such payment the person exercising the option shall be discharged under the promissory note or other instrument, pro tanto, and shall then be free to dispose of the shares in any manner he may deem appropriate, subject to the relevant conditions and restrictions of the Plan; and

(e)    the deferred payment arrangement shall be subject to such further terms and conditions as may be prescribed by the Board or the committee upon the exercise of options.

The person exercising an option shall be entitled, from the date of exercise, to all the rights of a shareholder as to the shares covered by the exercise, including the right to vote the shares and to receive and retain all dividends paid thereon.

8A.      Cashless Exercise

In lieu of exercising any option and making payment as specified in Section 8, any person exercising an option may elect to receive, and the Company will issue to such option holder, upon the surrender of the option (or specified portion thereof), that number of shares equal to the value of the option (or specified portion thereof), computed using the following formula (a “Cashless Exercise”):

X     =    [Y (A - B)] / A

where:    X    =    the number of shares to be issued in a Cashless Exercise.

Y    =    the number of shares issuable upon exercise of the option (or specified portion
thereof).

A    =    the current share price of the shares, as defined below.

B    =    the exercise price of the option (or specified portion thereof) as to which Cashless
Exercise has been elected by the person exercising the option.

In the case of any Cashless Exercise, the “current share price” of the shares shall mean the closing price of a share on the New York Stock Exchange (or any other national securities exchange in the United States of America on which the Company's class A common shares are listed) on the business day immediately preceding the date on which the Cashless Exercise takes place.

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The Company shall not be required to issue any fractional shares in connection with any Cashless Exercise. If a fraction of a share would otherwise be issuable on the exercise of an option (or specified portion thereof), the Company shall pay to the person exercising the option an amount in cash equal to the current share price multiplied by such fraction.

Upon the Cashless Exercise of an option pursuant to the provisions of this Section 8A, the option holder will pay to the Company in cash an amount equal to the par value of each share to be issued in the Cashless Exercise ($0.01 per share).

9.
Exercise After Death of Person to Whom Granted

In the event the person to whom an option is granted shall die owning but without having fully exercised the option, his estate or any person who acquired the right to exercise the option by bequest or inheritance or by reason of the death of the optionee may, subject to the provisions of Section 10 (except subsection 10(b) and (d)), exercise the option at any time and from time to time before the expiration of the period of one year after the date of death, notwithstanding that the exercise may occur less than three years or more than ten years after the date of grant thereof, but only if the person so exercising the option shall have furnished the Company with evidence satisfactory to the Company of the person's right to exercise the option and of payment or provision for the payment of any estate, transfer, inheritance or death taxes payable with respect to the option or the shares to which it relates. Any such exercise shall be effected in the manner described in Sections 7 and 8. Any such exercise, however, shall not be permitted in the case of a United States incentive stock option after the expiration of ten years from the date the option was granted.

10.
Circumstances Under Which Options May Not Be Exercised

Every option under the Plan shall provide that it may not be exercised (except as may be otherwise provided in Sections 9 and 11):

(a)    until the shares reserved for issuance upon the exercise thereof have been listed upon any national securities exchange in the United States of America on which the Company's Class A common shares are then listed;

(b)    until the expiration of a period of three years from the date the option was granted, and in any event not after (i) the expiration of a period of three months from the date a person ceases to be a director, officer or employee of the Company or a subsidiary thereof under circumstances not involving misconduct, impropriety or inefficiency on his part or (ii) the termination of the directorship, officership or employment of a person by the Company or a subsidiary thereof or the shareholders for reasons involving misconduct, impropriety or inefficiency on his part; provided, however, that a person ceasing to be a director, officer or employee of the Company or a subsidiary thereof on account of (i) retirement at or after the normal retirement date, (ii) early retirement not earlier than five years before the normal retirement date, (iii) injury or disability, (iv) dismissal for redundancy or (v) on concurrence of the Board or the committee (which concurrence may be granted or withheld in its sole discretion), the sale or other disposition of the subsidiary for which the person acts as director or officer or which employs the employee or the operating division of the Company or a subsidiary for which the employee performs his employment, shall be entitled to exercise an option at any time prior to the expiration of a period of three months from the date he ceases to be a director, officer or employee of the Company or a subsidiary thereof notwithstanding that such exercise is made prior to the expiration of a period of three years from the date such option was granted (and for purposes of this Section 10 hereof, the directorship, officership or employment of any person with the Company or a subsidiary thereof shall not be deemed to have ceased or terminated so long as such person shall continuously since the date of grant of the option be a director, officer or employee either of the Company or a subsidiary thereof or of Sea Containers Ltd. or a subsidiary thereof);

(c)    unless the Board or the committee shall be satisfied that the issuance of shares upon exercise will be in compliance with all relevant rules and regulations of the United States Securities and Exchange Commission; or


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(d)    after the expiration of ten years from the date the option is granted.

11.
Change in Control

For purposes of this Section 11, “Change in Control” means any of the following events:

(a)    any “person” (as that term is defined for the purposes of Section 13(d) or 14(d) of the U.S. Securities Exchange Act of 1934, as amended) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under that Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, “voting shares”); or

(b)    individuals who, on December 7, 2012, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(c)    the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than 50% of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or

(d)    the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than 50% of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.

In the event of a Change in Control, and notwithstanding anything to the contrary in Section 3, any outstanding option granted under the Plan which an optionee shall not then have been entitled to exercise shall become exercisable immediately prior to or concurrently with the occurrence of the Change in Control and the optionee shall have the right to exercise all such options.

Notwithstanding anything in the Plan to the contrary, in the event of exercise of an option following a Change in Control, the optionee may elect, in the written notice provided for in Sections 7 and 8, (i) to pay or cause to be paid to the Company the full option price of the shares as to which the option is exercised, or (ii) to surrender to the Company all or any part of an option and receive from the Company upon such surrender an amount in cash equal to the excess, if any, of the determined value of the shares subject to the option or portion thereof so surrendered over the aggregate exercise price of such shares as set forth in the applicable option grant letter. The term “determined value” as used herein means the higher of (A) the highest sale price per Class A common share of the Company on the New York Stock Exchange (or, if any of such shares are not listed on that exchange at that time, then the highest sale price of the shares on the principal stock exchange on which such shares are listed, or if such shares are not listed, then the over‑the‑counter market) during the 12 months immediately preceding the date of the Change in Control, or (B) the highest price per share actually paid in connection with any Change in Control (including, without limitation, prices paid in any subsequent amalgamation, merger or combination with any entity that acquires control of the Company), in either case multiplied by the number of shares subject to the option or portion thereof so surrendered. In the event of a surrender of all or a portion of an option pursuant to this Section, the number of shares as to which the option was surrendered shall not again become available for use under the Plan.


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The obligations of the Company under the Plan shall be binding upon any successor company, corporation or other organization resulting from any amalgamation, merger, consolidation or other reorganization of the Company, or upon any successor company, corporation or organization succeeding to all or substantially all of the assets and business of the Company, in any such case which would constitute a Change in Control. The Company agrees that it will make appropriate provisions for the preservation of all optionees' rights under the Plan in any agreement or plan that it may enter into or adopt to effect any such amalgamation, merger, consolidation, reorganization or transfer of assets constituting a Change in Control.

12.
Adjustment of Number or Kind of Shares

If the Company shall effect one or more share splits, share dividends, combinations of shares, exchanges of shares or similar capital adjustments, the Board or the committee shall appropriately adjust the aggregate number and kind of shares with respect to which options have been granted or may be granted under the Plan. Every option granted under the Plan shall provide that, in the event of any such capital adjustments, the number and kind of the shares with respect to which it may be exercised, and the option price, shall be appropriately adjusted.

13.
Amendment

The Plan may be amended from time to time by the Board of Directors of the Company. No amendment shall alter or impair any of the rights or obligations of any person, without his consent, under any option theretofore granted under the Plan.

14.
Termination

The Plan shall terminate upon the first of the following dates or events to occur:

(a)    if the Company is a participant in any corporate amalgamation, merger, consolidation or other transaction and no provision is made at the time of the transaction to continue the Plan, except as provided in Section 11;

(b)    resolution of the Board of Directors of the Company terminating the Plan; or

(c)    on February 9, 2014.

In the event of termination of the Plan in any of the ways provided hereinabove, the provisions of the Plan shall continue in full force and effect as regards any options granted prior to such termination.

15.
Effect of Options Upon Employment

Nothing in the Plan shall be construed as giving any person acting as a director or officer of or employed by the Company or any subsidiary thereof the right to be retained in such directorship, officership or employment. The Company and any subsidiary thereof and the shareholders shall have the right to dismiss any director, officer or employee at any time with or without cause and without liability for the effect which such dismissal might have upon him as a participant under the Plan, and under no circumstances shall a person ceasing to be a director, officer or employee by reason of dismissal or otherwise be entitled to or claim against the Company or any subsidiary thereof any compensation for or in respect of any consequent reduction or loss of his rights or benefits (actual or prospective) under any option held by him in connection with the Plan.

16.
Construction

In all respects the Plan shall be governed by, and be construed in accordance with, the laws of the Islands of Bermuda.



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Exhibit 10.5

[Orient-Express Hotels Ltd. 2009 Share Award and Incentive Plan, as amended]








ORIENT-EXPRESS HOTELS LTD.
 

2009 SHARE AWARD AND INCENTIVE PLAN

















1



ORIENT-EXPRESS HOTELS LTD.


2009 SHARE AWARD AND INCENTIVE PLAN *


 
 
Page

1.
Purpose
3

 
 
 
2.
Definitions
3

 
 
 
3.
Administration
5

 
 
 
4.
Shares Subject to Plan
5

 
 
 
5.
Eligibility; Per-Person Award Limitations
6

 
 
 
6.
Specific Terms of Awards
6

 
 
 
7.
Performance Awards
10

 
 
 
8.
Certain Provisions Applicable to Awards
10

 
 
 
9.
Additional Award Forfeiture Provisions
11

 
 
 
10.
Change in Control
11

 
 
 
11.
General Provisions
12



Appendix A Participants Subject to U.S. Law


________________________

* As adopted by the Board of Directors on March 13, 2009 and August 6, 2009 and approved by shareholders on June 5, 2009, amended by the Board of Directors on March 12, 2010 and May 26, 2010 and approved by shareholders on June 3, 2010, amended by the Board of Directors on March 9, 2012 and approved by shareholders on June 7, 2012, and amended by the Board of Directors on December 7, 2012.



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ORIENT-EXPRESS HOTELS LTD.
2009 SHARE AWARD AND INCENTIVE PLAN
1.      Purpose . The purpose of this 2009 Share Award and Incentive Plan (the "Plan") is to aid Orient-Express Hotels Ltd., a Bermuda company (together with its successors and assigns, the "Company"), in attracting, retaining, motivating and rewarding employees, non-employee directors serving on the Board of Directors of the Company or any of its subsidiaries or affiliates, and other service providers of the Company or its subsidiaries or affiliates, strengthening the Company's capability to develop, maintain and direct a competent management team, to provide for equitable and competitive compensation opportunities, to recognize individual contributions and reward achievement of Company goals, and to promote the creation of long-term value for shareholders by closely aligning the interests of Participants with those of shareholders. The Plan authorizes share-based and cash-based incentives for Participants.
2.      Definitions . In addition to the terms defined in Section 1 above and elsewhere in the Plan, the following capitalized terms used in the Plan have the respective meanings set forth in this Section:
(a)     "Annual Incentive Award" means a type of Performance Award granted to a Participant under Section 7 representing a conditional right to receive cash, Shares or other Awards or payments, as determined by the Committee, based on performance in a performance period of one fiscal year or a portion thereof.
(b)     "Annual Limit" shall have the meaning specified in Section 5(b).
(c)     "Award" means any Option, SAR, Restricted Shares, Deferred Shares, Shares granted as a bonus or in lieu of another award, Dividend Equivalent, Other Share-Based Award, or Performance Award or Annual Incentive Award, together with any related right or interest, granted to a Participant under the Plan.
(d)     "Beneficiary" means the legal representatives of the Participant's estate entitled by will or the laws of descent and distribution to receive the benefits under a Participant's Award upon a Participant's death, provided that, if and to the extent authorized by the Committee, a Participant may be permitted to designate a Beneficiary, in which case the "Beneficiary" instead will be the person, persons, trust or trusts (if any are then surviving) which have been designated by the Participant in his or her most recent written and duly filed beneficiary designation to receive the benefits specified under the Participant's Award upon such Participant's death.
(e)     "Board" means the Company's Board of Directors.
(f)    “Change in Control” shall have the meaning specified in Section 10.
(g)     "Code" means the United States Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation thereunder shall include any successor provisions and regulations, and reference to regulations includes any applicable guidance or pronouncement of the Department of the Treasury and Internal Revenue Service.
(h)     "Committee" means the Compensation Committee of the Board (or a designated successor to such committee), the composition and governance of which is established in the Committee's Charter as approved from time to time by the Board and subject to other corporate governance documents of the Company. No action of the Committee shall be void or deemed to be without authority due to the failure of any member, at the time the action was taken, to meet any qualification standard set forth in the Committee Charter or this Plan. The full Board may perform any function of the Committee hereunder (except to the extent limited under applicable New York Stock Exchange rules), in which case the term "Committee" shall refer to the Board.
(i)     "Covered Employee" has the meaning given to such term under Code Section 162(m)(3) and applicable regulations thereunder.
    

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(j)     "Deferred Shares" means a right, granted under this Plan, to receive Shares or other Awards or a combination thereof at the end of a specified deferral period.
(k)     "Dividend Equivalent" means a right, granted under this Plan, to receive cash, Shares, other Awards or other property equal in value to all or a specified portion of the dividends paid with respect to a specified number of Shares.
(l)     "Effective Date" means the effective date specified in Section 11(o).
(m)     "Eligible Person" has the meaning specified in Section 5.
(n)     "Exchange Act" means the United States Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule (including a proposed rule) thereunder shall include any successor provisions and rules.
(o)     "Fair Market Value" means the fair market value of Shares, Awards or other property as determined in good faith by the Committee or under procedures established by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Shares on a given day shall be, as specified by the Committee, the closing price of the Shares on the date on which it is to be valued hereunder as reported for New York Stock Exchange -- Composite Transactions. Fair Market Value relating to the exercise price or base price of any Non-409A Option or SAR and relating to the market value of Shares measured at the time of exercise shall conform to requirements under Code Section 409A.
(p)    "409A Awards" means Awards that constitute a deferral of compensation under Code Section 409A and regulations thereunder. "Non-409A Awards" means Awards other than 409A Awards. Although the Committee retains authority under the Plan to grant Options, SARs and Restricted Shares on terms that will qualify those Awards as 409A Awards, Options, SARs, and Restricted Shares are intended to be Non-409A Awards unless otherwise expressly specified by the Committee.
(q)     "Incentive Stock Option" or "ISO" means any Option designated as an incentive stock option within the meaning of Code Section 422 and qualifying thereunder.
(r)     "Option" means a right to purchase Shares granted under Section 6(b).
(s)     "Other Share-Based Awards" means Awards granted to a Participant under Section 6(h).
(t)     "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person.
(u)     "Performance Award" means a conditional right, granted to a Participant under Sections 6(i) or 7, to receive cash, Shares or other Awards or payments.
(v)    “Preexisting Plans” means the 2000 Stock Option Plan, 2004 Stock Option Plan and the 2007 Performance Share Plan, as the same may be amended to the Effective Date.
(w)     "Restricted Shares" means Shares granted under this Plan which is subject to certain restrictions and to a risk of forfeiture.
(x)     "Shares” means the Company's class A common shares, $0.01 par value each, and any other equity securities of the Company that may be substituted or resubstituted for Shares pursuant to Section 11(c).
(y)     "Stock Appreciation Rights" or "SAR" means a right granted to a Participant under Section 6(c).
3.      Administration .
(a)      Authority of the Committee . The Plan shall be administered by the Committee, which shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants; to grant Awards; to determine the type and number of Awards, the dates on which

4



Awards may be exercised and on which the risk of forfeiture or deferral period relating to Awards shall lapse or terminate, the acceleration of any such dates (including upon a Change in Control), the expiration date of any Award, whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, and other terms and conditions of, and all other matters relating to, Awards; to prescribe documents evidencing or setting terms of Awards (such Award documents need not be identical for each Participant or each Award), amendments thereto, and rules and regulations for the administration of the Plan and amendments thereto; to construe and interpret the Plan and Award documents and correct defects, supply omissions or reconcile inconsistencies therein; and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. Decisions of the Committee with respect to the administration and interpretation of the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, including Participants, Beneficiaries, transferees under Section 11(b) and other persons claiming rights from or through a Participant, and shareholders.
(b)      Manner of Exercise of Committee Authority . The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may act through subcommittees, including for purposes of qualifying Awards under Code Section 162(m) as performance-based compensation, in which case the subcommittee shall be subject to and have authority under the charter applicable to the Committee, and the acts of the subcommittee shall be deemed to be acts of the Committee hereunder. The Committee may delegate to officers or managers of the Company or any subsidiary or affiliate, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent that such delegation (i) will not cause Awards intended to qualify as "performance-based compensation" under Code Section 162(m) to fail to so qualify and (ii) is permitted under applicable provisions of the laws of the Islands of Bermuda.
(c)      Limitation of Liability . The Committee and each member thereof, and any person acting pursuant to authority delegated by the Committee, shall be entitled, in good faith, to rely or act upon any report or other information furnished by any executive officer, other officer or employee of the Company or a subsidiary or affiliate, the Company's independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee, any person acting pursuant to authority delegated by the Committee, and any officer or employee of the Company or a subsidiary or affiliate acting at the direction or on behalf of the Committee or a delegee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination.
4.      Shares Subject To Plan .
(a)      Overall Number of Shares Available for Delivery . The total number of Shares reserved and available for delivery in connection with Awards under the Plan shall be (i) 10,000,000 Shares, plus (ii) the number of shares that, immediately prior to the Effective Date, remain available for new awards under the Preexisting Plans plus (iii) the number of shares subject to awards under the Preexisting Plans which become available in accordance with Section 4(b) after the Effective Date; provided, however, that the total number of Shares with respect to which ISOs may be granted shall not exceed the number specified under clause (i) above. Any Shares delivered under the Plan shall consist of authorized and unissued shares or treasury shares.     
(b)      Share Counting Rules . The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute Awards) and make adjustments in accordance with this Section 4(b). Shares shall be counted against those reserved to the extent such Shares have been delivered and are no longer subject to a risk of forfeiture. Accordingly, (i) to the extent that an Award under the Plan or an award under the Preexisting Plans, in whole or in part, is canceled, expired, forfeited, settled in cash, settled by delivery of fewer Shares than the number underlying the Award or award, or otherwise terminated without delivery of Shares to the participant, the Shares retained by or returned to the Company will not be deemed to have been delivered under the Plan; and (ii) Shares that are withheld from such an Award or award or separately surrendered by the participant in payment of the exercise price or taxes relating to such an Award or award shall be deemed to constitute Shares not delivered and will be available under the Plan. The Committee may

5



determine that Awards may be outstanding that relate to more Shares than the aggregate remaining available under the Plan so long as Awards will not in fact result in delivery and vesting of Shares in excess of the number then available under the Plan. In addition, in the case of any Award granted in assumption of or in substitution for an award of a company or business acquired by the Company or a subsidiary or affiliate or with which the Company or a subsidiary or affiliate combines, Shares delivered or deliverable in connection with such assumed or substitute Award shall not be counted against the number of Shares reserved under the Plan.
5.     Eligibility; Per-Person Award Limitations .
(a)     Eligibility . Awards may be granted under the Plan only to Eligible Persons. For purposes of the Plan, an "Eligible Person" means (i) an employee of the Company or any sub-sid-iary or affiliate, including any executive officer or employee director of the Company or a sub-sidiar-y or affiliate, (ii) any person who has been offered employment by the Company or a subsidiary or affiliate, provided that such prospective employee may not receive any payment or exercise any right relating to an Award until such person has commenced employment with the Company or a subsidiary or affiliate, (iii) any non-employee director of the Company or any subsidiary or affiliate, and (iv) any person who provides substantial services to the Company or a subsidiary or affiliate. An employee on leave of absence may be considered as still in the employ of the Company or a subsidiary or affiliate for purposes of eligibility for participation in the Plan. For purposes of the Plan, a joint venture in which the Company or a subsidiary has a substantial direct or indirect equity investment shall be deemed an affiliate, if so determined by the Committee. Holders of awards granted by a company or business acquired by the Company or a subsidiary or affiliate, or with which the Company or a subsidiary or affiliate combines, are eligible for grants of substitute Awards granted in connection with such acquisition or combination transaction in assumption of or in substitution for such outstanding awards previously granted.
(b)      Per-Person Award Limitations . Except as otherwise provided in an Appendix hereto, the Committee may establish a maximum Annual Limit of shares that any Eligible Person may be awarded in any calendar year.
6.      Specific Terms Of Awards.
(a)      General . Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Sections 11(e) and Appendix A), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion with respect to any term or condition of an Award that is not mandatory under the Plan, subject to Appendix A and the terms of the Award agreement. The Committee may require payment of consideration for an Award except as limited by the Plan.
(b)      Options . The Committee is authorized to grant Options to Participants on the following terms and conditions:
(i)
Exercise Price. The exercise price per Share purchasable under an Option (including both ISOs and non-qualified Options) shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a Share on the date of grant of such Option, subject to Section 8(a). Notwithstanding the foregoing, any substitute Award granted in assumption of or in substitution for an outstanding award granted by a company or business acquired by the Company or a subsidiary or affiliate, or with which the Company or a subsidiary or affiliate combines may be granted with an exercise price per Share other than as required above. No adjustment will be made for a dividend or other right for which the record date is prior to the date on which the Shares are issued, except as provided in Section 11(c) of the Plan.

6



(ii)
Option Term; Time and Method of Exercise. The Committee shall determine the term of each Option, provided that in no event shall the term of any Option exceed a period of ten years from the date of grant. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid and the form of such payment (subject to Appendix A), including, without limitation, cash, Shares (including by withholding Shares deliverable upon exercise), other Awards or awards granted under other plans of the Company or any subsidiary or affiliate, or other property (including through broker-assisted "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by or forms in which Shares will be delivered or deemed to be delivered in satisfaction of exercised Options to Participants (including, in the case of 409A Awards, deferred delivery of Shares subject to the Option, as mandated by the Committee, with such deferred Shares subject to any vesting, forfeiture or other terms as the Committee may specify).
(iii)
ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422.
(c)      Stock Appreciation Rights . The Committee is authorized to grant SARs to Participants on the following terms and conditions:
(i)
Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one Share on the date of exercise over (B) the grant price of the SAR as determined by the Committee but which in any event shall be not less than the Fair Market Value of a Share on the date of grant of the SAR, subject to Section 8(a).
(ii)
Other Terms. The Committee shall determine the term of each SAR, provided that in no event shall the term of an SAR exceed a period of ten years from the date of grant. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Shares will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be free-standing or in tandem or combination with any other Award, and whether or not the SAR will be a 409A Award or Non-409A Award. Limited SARs that may only be exercised in connection with a Change in Control or termination of service following a Change in Control as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. The Committee may require that an outstanding Option be exchanged for an SAR exercisable for Shares having vesting, expiration, and other terms substantially the same as the Option, so long as such exchange will not result in additional accounting expense to the Company.
(iii)
Purchase Price. The Participants must pay to the Company a purchase price of $.01 per SAR received at the time of exercise of an SAR, representing the par value of each Share.
(d)      Restricted Shares . The Committee is authorized to grant Restricted Shares to Participants on the following terms and conditions:
(i)
Grant and Restrictions. Restricted Shares shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise and under such other circumstances as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award document relating to the Restricted Shares, a Participant granted Restricted Shares shall have all of

7



the rights of a shareholder, including the right to vote the Restricted Shares and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee).
(ii)
Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Shares that are at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will lapse in whole or in part, including in the event of terminations resulting from specified causes.
(iii)
Certificates for Shares. Restricted Shares granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Shares, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Shares.
(iv)
Dividends and Splits. As a condition to the grant of an Award of Restricted Shares, the Committee may require that any dividends paid on a Restricted Shares shall be either (A) paid with respect to such Restricted Shares at the dividend payment date in cash, in kind, or in a number of unrestricted Shares having a Fair Market Value equal to the amount of such dividends, or (B) automatically reinvested in additional Restricted Shares or held in kind, which shall be subject to the same terms as applied to the original Restricted Shares to which it relates, or (C) deferred as to payment, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in Deferred Shares, other Awards or other investment vehicles, subject to such terms as the Committee shall determine or permit a Participant to elect. Unless otherwise determined by the Committee, Shares distributed in connection with a Share split or Share dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed.
(v)
Purchase Price. The Participants must pay to the Company a purchase price of $.01 per Restricted Share at the time of the granting of the Award, representing the par value of each Restricted Share.
(e)      Deferred Shares . The Committee is authorized to grant Deferred Shares to Participants, subject to the following terms and conditions:
(i)
Award and Restrictions. Issuance of Shares will occur upon expiration of the deferral period specified for an Award of Deferred Shares by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Shares shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, and under such other circumstances as the Committee may determine at the date of grant or thereafter. Deferred Shares may be satisfied by delivery of Shares, other Awards, or a combination thereof (subject to Appendix A), as determined by the Committee at the date of grant or thereafter.

8



(ii)
Forfeiture. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award document evidencing the Deferred Shares), all Deferred Shares that are at that time subject to such forfeiture conditions shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award document, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Shares will lapse in whole or in part, including in the event of terminations resulting from specified causes. Deferred Shares subject to a risk of forfeiture may be called "restricted share units" or otherwise designated by the Committee.
(iii)
Dividend Equivalents. Unless otherwise determined by the Committee, Dividend Equivalents on the specified number of Shares covered by an Award of Deferred Shares shall be either (A) paid with respect to such Deferred Shares at the dividend payment date in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Shares, either as a cash deferral or with the amount or value thereof automatically deemed reinvested in additional Deferred Shares, other Awards or other investment vehicles having a Fair Market Value equal to the amount of such dividends, as the Committee shall determine or permit a Participant to elect.
(iv)
Purchase Price. The Participants must pay to the Company a purchase price of $.01 per Deferred Share at the time of the granting of the Award, representing the par value of each Deferred Share.
(f)      Bonus Shares and Awards in Lieu of Obligations . The Committee is authorized to grant to Participants Shares as a bonus, or to grant Shares or other Awards in lieu of obligations of the Company or a subsidiary or affiliate to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, subject to such terms as shall be determined by the Committee. The Participants must pay to the Company a purchase price of $.01 per Share at the time of the granting of the Award, representing the par value of each Share.
(g)      Dividend Equivalents . The Committee is authorized to grant Dividend Equivalents to a Participant, which may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, Awards, or other investment vehicles, and subject to restrictions on transferability, risks of forfeiture and such other terms as the Committee may specify.
(h)      Other Share-Based Awards . The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares or factors that may influence the value of Shares, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee, and Awards valued by reference to the book value of Shares or the value of securities of or the performance of specified subsidiaries or affiliates or other business units. The Committee shall determine the terms and conditions of such Awards. Shares delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Shares, other Awards, notes, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h).
(i)      Performance Awards . Performance Awards, denominated in cash or in Shares or other Awards, may be granted by the Committee in accordance with Section 7. A Performance Award denominated in Shares shall constitute an Award authorized under Sections 6(b) - 6(h) to which performance conditions have been attached under Section 7.
    

9



7.      Performance Awards . Performance Awards may be denominated as a cash amount, number of Shares, or specified number of other Awards (or a combination) which may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Appendix A in the case of a Performance Award intended to qualify as "performance-based compensation" under Code Section 162(m).
8.      Certain Provisions Applicable To Awards .
(a)      Stand-Alone, Additional, Tandem, and Substitute Awards . Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary or affiliate, or any business entity to be acquired by the Company or a subsidiary or affiliate, or any other right of a Participant to receive payment from the Company or any subsidiary or affiliate; provided, however, that a 409A Award may not be granted in tandem with a Non-409A Award. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards. The Committee may determine that, in granting a new Award, the in-the-money value or fair value of any surrendered Award or award or the value of any other right to payment surrendered by the Participant may be applied to the purchase of any other Award. This Section 8(a) shall be subject to Section 11(e) (including the limitation on repricing) and subject to Appendix A.
(b)      Term of Awards . The term of each Award shall be for such period as may be determined by the Committee, subject to the express limitations set forth in Sections 6(b)(ii), 6(c)(ii) and 8 or elsewhere in the Plan.
(c)      Form and Timing of Payment under Awards; Deferrals . Subject to the terms of the Plan (including Appendix A) and any applicable Award document, payments to be made by the Company or a subsidiary or affiliate upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Shares, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Shares in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events, subject to Appendix A. Subject to Appendix A, installment or deferred payments may be required by the Committee (subject to Section 11(e)) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Shares.
9.      Additional Award Forfeiture Provisions . The Committee may condition a Participant's right to receive a grant of an Award, to exercise the Award, to retain cash, Shares, other Awards or other property acquired in connection with an Award, or to retain the profit or gain realized by a Participant in connection with an Award, including cash or other proceeds received upon sale of Shares acquired in connection with an Award, upon compliance by the Participant with specified conditions relating to non-competition, confidentiality of information relating to or possessed by the Company, non-solicitation of customers, suppliers, and employees of the Company, cooperation in litigation, non-disparagement of the Company and its subsidiaries and affiliates and the officers, directors and affiliates of the Company and its subsidiaries and affiliates, and other restrictions upon or covenants of the Participant, including during specified periods following termination of employment or service to the Company. Pursuant to this authorization, unless otherwise determined by the Committee, the following policy will apply to each Award:


10



In the event that the Company is required to restate its financial statements due to material noncompliance of the Company with any applicable financial reporting requirement, if such restatement results directly or indirectly from willful misconduct or gross negligence of the Participant the Participant shall reimburse the Company for the difference between (i) the amount of any bonus, incentive or equity compensation paid as a result of the erroneous financial statement and (ii) the amount that would have been paid, if any, under the restated financial statements. The Committee may specify additional forfeitures applicable in the event such a restatement or similar circumstances, subject to Section 11(e).
10.         Change in Control.
For purposes of this Section 10, “Change in Control” means any of the following events:
(a)     any “person” (as that term is defined for the purposes of Section 13(d) or 14(d) of the U.S. Securities Exchange Act of 1934, as amended) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under that Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, “voting shares”); or
(b)    individuals who, on December 7, 2012, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or
(c)    the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than 50% of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or
(d)    the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than 50% of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.
In the event of a Change in Control, any outstanding Option or SAR granted under the Plan which a Participant shall not then have been entitled to exercise shall become exercisable and vested immediately prior to or concurrently with the occurrence of the Change in Control and the Participant will have the right to exercise all such Options or SARs, except to the extent this right is limited as an explicit term of the Award established by the Committee at the time of grant. With respect to other types of Awards, the effect of a Change in Control on vesting and other Award terms will be specified by the Committee.
Notwithstanding anything in the Plan to the contrary, in the event of exercise of an Option or SAR following a Change in Control, the Participant may elect, by written notice to the Committee, (i) with respect to Options only, to pay or cause to be paid to the Company the full exercise price of the Shares as to which the Option is exercised and thereupon receive delivery of such Shares, or (ii) to surrender to the Company all or any part of an Option or SAR and receive from the Company upon such surrender an amount in cash equal to the excess, if any, of the Fair Market Value at the surrender date of the Shares subject to the Option or SAR or portion thereof so surrendered over the aggregate exercise price of such Shares as set forth in the applicable Option or SAR grant letter, multiplied by the number of Shares subject to the Option or SAR or portion thereof so surrendered.
The obligations of the Company under the Plan with respect to any Awards shall be binding upon any successor company, corporation or other organization resulting from any amalgamation, merger, consolidation or other reorganization of the Company, or upon any successor company, corporation or organization succeeding to all or substantially all of the assets and business of the Company, in any such case which would constitute a Change in Control. The Company agrees that it will make appropriate provisions for the preservation of all Participants' rights

11



under the Plan in any agreement or plan that it may enter into or adopt to effect any such amalgamation, merger, consolidation, reorganization or transfer of assets constituting a Change in Control.
11.      General Provisions .
(a)      Compliance with Legal and Other Requirements . The Company may, to the extent deemed necessary or advisable by the Committee and subject to Appendix A, postpone the issuance or delivery of Shares or payment of other benefits under any Award until completion of such registration or qualification of such Shares or other required action under any federal, state or foreign law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Shares or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Shares or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Shares or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control.
(b)      Limits on Transferability; Beneficiaries . No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or a subsidiary or affiliate thereof), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more transferees during the lifetime of the Participant but not otherwise to a third party for value, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee and the Committee has determined that there will be no transfer of the Award to a third party for value, and subject to any terms and conditions which the Committee may impose thereon (which may include limitations the Committee may deem appropriate in order that offers and sales under the Plan will meet applicable requirements of registration forms under the U.S. Securities Act of 1933, as amended, specified by the Securities and Exchange Commission). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award document applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee.
(c)      Adjustments . In the event that any large, non-recurring dividend or other distribution (whether in the form of cash or property other than Shares), recapitalization, forward or reverse split, Share dividend, reorganization, merger, consolidation, spinoff, combination, repurchase, share exchange, liquidation, dissolution, equity restructuring as defined under generally accepted accounting principles, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate or, in the case of any outstanding Award, which is necessary in order to prevent dilution or enlargement of the rights of the Participant, then the Committee shall, in an equitable manner as determined by the Committee, adjust any or all of (i) the number and kind of Shares which may be delivered in connection with Awards granted thereafter, including the number of Shares available under Section 4, (ii) the number and kind of Shares by which annual per-person Award limitations are measured under Section 5, (iii) the number and kind of Shares subject to or deliverable in respect of outstanding Awards, (iv) the exercise price, grant price or purchase price relating to any Award or, if deemed appropriate, the Committee may make provision for a payment of cash or property to the holder of an outstanding Option (subject to Appendix A), and (v) the performance goals or conditions of outstanding Awards that are based on share prices. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and perfor-mance goals and any hypothetical funding pool relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, events

12



described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any sub-sid-iary or affiliate or other business unit, or the financial statements of the Company or any subsidiary or affiliate, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or affiliate or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that the existence of such authority (i) would cause Options, SARs, or Performance Awards granted under the Plan to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder, or (ii) would cause the Committee to be deemed to have authority to change the targets, within the meaning of Treasury Regulation 1.162-27(e)(4)(vi), under the performance goals relating to Options or SARs granted to Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder.
(d)      Tax Withholding. The Company and any subsidiary or affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's withholding obligations, either on a mandatory or elective basis in the discretion of the Committee, or in satisfaction of other tax obligations. Other provisions of the Plan notwithstanding, only the minimum amount of Shares deliverable in connection with an Award necessary to satisfy statutory withholding requirements will be withheld, unless withholding of any additional amount of Shares will not result in additional accounting expense to the Company.
(e)      Changes to the Plan . The Board may amend, suspend or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of shareholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Company's shareholders for approval not later than the earliest annual general meeting for which the record date is at or after the date of such Board action if such shareholder approval is required by any federal or state law or regulation or the rules of the New York Stock Exchange, or if such amendment would materially increase the number of Shares reserved for issuance and delivery under the Plan, and the Board may otherwise, in its discretion, determine to submit other amendments to the Plan to shareholders for approval. The Committee is authorized to amend outstanding Awards, except as limited by the Plan. The Board and Committee may not amend outstanding Awards (including by means of an amendment to the Plan) without the consent of an affected Participant if such an amendment would materially and adversely affect the rights of such Participant with respect to the outstanding Award (for this purpose, actions that alter the timing of federal income taxation of a Participant will not be deemed material unless such action results in an income tax penalty on the Participant, and any discretion that is reserved by the Board or Committee with respect to an Award is unaffected by this provision). Without the approval of shareholders (unless shareholder approval is not required by any applicable law or regulation or the rules of the New York Stock Exchange), the Committee will not amend or replace previously granted Options or SARs in a transaction that constitutes a "repricing," which for this purpose means any of the following or any other action that has the same effect:
(i)    Lowering the exercise price of an Option or SAR after it is granted;
(ii)
Any other action that is treated as a repricing under generally accepted accounting principles;
(iii)
Canceling an Option or SAR at a time when its exercise price exceeds the fair market value of the underlying Shares, in exchange for another Option or SAR, Restricted Shares, other equity or cash;

13



provided, however, that the foregoing transactions shall not be deemed a repricing if pursuant to an adjustment authorized under Section 11(c). With regard to other terms of Awards, the Committee shall have no authority to waive or modify any such Award term after the Award has been granted to the extent the waived or modified term would be mandatory under the Plan for any Award newly granted at the date of the waiver or modification. A cancellation and exchange described in clause (iii) above will be considered a repricing regardless of whether the Option, Restricted Shares or other equity is delivered simultaneously with the cancellation, regardless of whether it is treated as a repricing under generally accepted accounting principles, and regardless of whether it is voluntary on the part of the Participant.    
(f)      Right of Setoff . The Company or any subsidiary or affiliate may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or a subsidiary or affiliate may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, including but not limited to amounts owed under Section 9, although the Participant shall remain liable for any part of the Participant's payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 11(f). With respect to any amount that constitutes a deferral of compensation, the Company may implement a setoff under this provision only at such time as the deferred compensation otherwise would be distributable to the Participant (i.e., the settlement date for such deferred compensation).
(g)      Unfunded Status of Awards; Creation of Trusts . The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Shares pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Shares, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant.
(h)      Nonexclusivity of the Plan . Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements, apart from the Plan, as it may deem desirable, including incentive arrangements and awards which do not qualify under Code Section 162(m), and such other arrangements may be either applicable generally or only in specific cases.
(i)      Payments in the Event of Forfeitures; Fractional Shares . Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(j)      Certain Limitations on Awards to Ensure Compliance with Local Laws . The Appendices to this Plan are incorporated by reference herein and shall apply to Awards and deferrals by Participants who are subject to the national laws that are addressed under each such Appendix.
(k)      Governing Law . The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Award document shall be determined in accordance with the laws of the Islands of Bermuda and, in the case of Appendices, laws specified therein.
(l)      Awards to Participants of Various Jurisdictions . The Committee may modify the terms of any Award under the Plan made to or held by a Participant who is then resident or primarily employed outside of the United States, or establish one or more Appendices or sub-plans, in any manner deemed by the Committee to be necessary or appropriate in order that the Award shall conform to laws, regulations, and customs of the country in which the recipient thereof is then resident or primarily employed. An Award may be modified under this Section

14



11(l) in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability for the Participant whose Award is modified.
(m)      Limitation on Rights Conferred under Plan . Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary or affiliate, (ii) interfering in any way with the right of the Company or a subsidiary or affiliate to terminate any Eligible Person's or Participant's employment or service at any time (subject to the terms and provisions of any separate written agreements), (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a shareholder of the Company unless and until the Participant is duly issued or transferred Shares in accordance with the terms of an Award or an Option is duly exercised. Except as expressly provided in the Plan and an Award document, neither the Plan nor any Award document shall confer on any person other than the Company and the Participant any rights or remedies thereunder. Any Award shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any subsidiary or affiliate and shall not affect any benefits under any other benefit plan at any time in effect under which the availability or amount of benefits is related to the level of compensation (unless required by any such other plan or arrangement with specific reference to Awards under this Plan).
(n)      Severability . If any of the provisions of this Plan or any Award document is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and the remaining provisions shall not be affected thereby; provided, that, if any of such provisions is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder. The Plan and any Award documents contain the entire agreement of the parties with respect to the subject matter thereof and supersede all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter thereof. No rule of strict construction shall be applied against the Company, the Committee, or any other person in the interpretation of any terms of the Plan, Award, or agreement or other document relating thereto.
(o)      Plan Effective Date and Termination . The Plan shall become effective if, and at such time as, the shareholders of the Company have approved it at a general meeting of the Company. The date of such shareholder approval shall be the Effective Date. Upon such approval of the Plan by the shareholders of the Company, no further awards shall be granted under the Preexisting Plans, but any outstanding awards under the Preexisting Plans shall continue in accordance with their terms. Unless earlier terminated by action of the Board of Directors, the authority to make new grants under the Plan shall terminate on the date that is ten years after the Effective Date, and the Plan will remain in effect until such time as no Shares remain available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan.

15



APPENDIX A
Participants Subject to U.S. Law
Capitalized terms used in this Appendix have the same meaning given to them in the Plan.
1.     Code Section 162(m) Considerations .
It is the intent of the Company that Options and SARs granted to Covered Employees and other Awards designated as Awards to Covered Employees subject to Appendix A shall constitute qualified "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of allocation of an Award. Accordingly, the terms of this Section 1, including the definitions of Covered Employee and other terms used herein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee as likely to be a Covered Employee with respect to a specified Award. If any provision of the Plan or any Award document relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives.
(a)     Per-Person Award Limitations . In each calendar year during any part of which the Plan is in effect, an Eligible Person may be granted Awards intended to qualify as "performance-based compensation" under Code Section 162(m) under the Plan relating to up to his or her Annual Limit. A Participant's Annual Limit, in any year during any part of which the Participant is then eligible under the Plan, shall equal 250,000 Shares plus the amount of the Participant's unused Annual Limit relating to the same type of Award as of the close of the previous year, subject to adjustment as provided in Section 11(c) of the Plan. In the case of an Award which is not valued in a way in which the limitation set forth in the preceding sentence would operate as an effective limitation satisfying applicable law (including Treasury Regulation 1.162-27(e)(3)), an Eligible Person may not be granted Awards authorizing the earning during any calendar year of an amount that exceeds the Eligible Person's Annual Limit, which for this purpose shall equal $2,500,000 plus the amount of the Eligible Person's unused cash Annual Limit as of the close of the previous year (this limitation is separate and not affected by the number of Awards granted during such calendar year subject to the limitation in the preceding sentence). For this purpose, (i) "earning" means satisfying performance conditions so that an amount becomes payable, without regard to whether it is to be paid currently or on a deferred basis or continues to be subject to any service requirement or other non-performance condition, (ii) a Participant's Annual Limit is used to the extent an amount or number of Shares may be potentially earned or paid under an Award (at the maximum designated amount for such Awards), regardless of whether such amount or Shares are in fact earned or paid, and (iii) the Annual Limit applies to Dividend Equivalents under Section 6(g) of the Plan only if such Dividend Equivalents are granted separately from and not as a feature of another Award.
(b)     Performance-Awards Granted to Covered Employees. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of a preestablished performance goal and other terms set forth in this Section 1(b).
(i)      Performance Goals Generally . The performance goal for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Appendix A. The performance goal shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder, including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain" at the time such goals are established.

16



The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.
(ii)      Business Criteria . One or more of the following business criteria for the Company, on a consolidated basis, and/or for any specified subsidiary or affiliate or other business unit of the Company (alone or in combination), shall be used by the Committee in establishing performance goals for such Performance Awards:
(A)
net income;
(B)
earnings, before or after income taxes;
(C)
earnings per share;
(D)
pre-tax operating income;
(E)
expense management;
(F)
profitability, including profitability of an identifiable business unit or product;
(G)
revenue;
(H)
shareholder value creation measures, including but not limited to share price or total shareholder return;
(I)
return measures, including return on assets (gross or net), return on investment, return on capital, or return on equity;
(J)
cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital;
(K)
net economic profit (operating earnings minus a charge for capital) or economic value created;
(L)
strategic innovation;
(M)
dividend levels;
(N)
significant business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion goals, cost targets, completion of capital and debt transactions, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures; or
(O)
any combination of the foregoing. 
The targeted level or levels of performance with respect to such business criteria may be established at such levels and in such terms as the Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. Performance goals based upon these business criteria may be based upon generally accepted accounting principles (“GAAP”) or may be non-GAAP measures, and in either case may be adjusted for purchase accounting impacts related to acquisitions and other extraordinary, non-recurring or unusual events or accounting treatments (subject to applicable requirements of Code Section 162(m)). Performance Goals may be particular to a Participant,

17



the Company or a division, subsidiary or other business segment of the Company, or may be based on the performance of the Company as a whole.
(iii)      Performance Period; Timing for Establishing Performance Goals . Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to one year or more than one year, as specified by the Committee. A performance goal shall be established not later than the earlier of (A) 90 days after the beginning of any performance period applicable to such Performance Award or (B) the time 25% of such performance period has elapsed.
(iv)      Performance Award Pool . The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 1(b)(ii) hereof during the given performance period, as specified by the Committee in accordance with Section 1(b)(iii) hereof. The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. The Committee may specify Performance Awards for any one Participant as a percentage of the Performance Award pool, subject to such terms and conditions as the Committee may specify, provided that the aggregate percentage of the Performance Award pool allocated to Participants may not exceed 100% of the Performance Award pool.
(v)      Settlement of Performance Awards; Other Terms . Settlement of Performance Awards shall be in cash, Shares, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Appendix A beyond the level of payment authorized for achievement of the performance goal specified under this Appendix A based on the actual level of achievement of such goal in excess of the amount earned through performance with respect to the performance goal established under this Appendix A. Any settlement which changes the form of payment from that originally specified shall be implemented in a manner such that the Performance Award and other related Awards do not, solely for that reason, fail to qualify as "performance-based compensation" for purposes of Code Section 162(m). The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant or other event (including a Change in Control) prior to the end of a performance period or settlement of such Performance Awards.
(c)      Annual Incentive Awards Granted to Covered Employees . The Committee may grant an Annual Incentive Award to an Eligible Person who is designated by the Committee as likely to be a Covered Employee. Such Annual Incentive Award will be intended to qualify as "performance-based compensation" for purposes of Code Section 162(m), and its grant, exercise and/or settlement shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 1(c).
(i)      Grant of Annual Incentive Awards . Not later than the earlier of 90 days after the beginning of any performance period applicable to such Annual Incentive Award or the time 25% of such performance period has elapsed, the Committee shall determine the Covered Employees who will potentially receive Annual Incentive Awards, and the amount(s) potentially payable thereunder, for that performance period. The amount(s) potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 1(b)(ii) hereof in the given performance period, as specified by the Committee. The Committee may designate an annual incentive award pool as the means by which Annual Incentive Awards will be measured, which pool shall conform to the provisions of Section 1(b)(iv) hereof. In such case, the portion of the Annual Incentive Award pool potentially payable to each Covered Employee shall be preestablished by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 1(a) hereof.

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(ii)      Payout of Annual Incentive Awards . After the end of each performance period, the Committee shall determine the amount, if any, of the Annual Incentive Award for that performance period payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount. The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant or other event prior to the end of a performance period or settlement of such Annual Incentive Award.     
(d)      Written Determinations . Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the level of actual achievement of the specified performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Awards shall be recorded in writing in the case of Awards intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance objective relating to the Performance Award or Annual Incentive Award and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied.
2.     Code Section 409A Considerations .
(a)     409A Awards and Deferrals. Other provisions of the Plan notwithstanding, the terms of any 409A Award, including any authority of the Company and rights of the Participant with respect to the 409A Award, shall be limited to those terms permitted under Code Section 409A, and any terms not permitted under Code Section 409A shall be modified and limited to the extent necessary to conform with Code Section 409A but only to the extent that such modification or limitation is permitted under Code Section 409A and the regulations and guidance issued thereunder. The following rules will apply to 409A Awards:
(i)     Elections . If a Participant is permitted to elect to defer an Award or any payment under an Award, such election will be permitted in accordance with the provisions specified in Exhibit A hereto;
(ii)     Exercise and Distribution . Except as provided in Section 2(a)(iii) hereof, no 409A Award shall be exercisable (if the exercise would result in a distribution) or otherwise distributable to a Participant (or his or her beneficiary) except upon the occurrence of one of the following (or a date related to the occurrence of one of the following), which must be specified in a written document governing such 409A Award and otherwise meet the requirements of Treasury Regulation § 1.409A-3:
(A)
Specified Time. A specified time or a fixed schedule.
(B)
Separation from Service. The Participant's separation from service (within the meaning of Treasury Regulation § 1.409A-1(h) and other applicable rules under Code Section 409A); provided, however, that if the Participant is a “key employee” (as defined in Code Section 416(i) without regard to paragraph (5) thereof) and any of the Company's equity is publicly traded on an established securities market or otherwise, settlement under this Section 2(a)(ii)(B) may not be made before the date that is six months after the date of separation from service.

19



(C)
Death. The death of the Participant.
(D)
Disability. The date the Participant has experienced a 409A Disability (as defined below).
(E)
409A Ownership/Control Change. The occurrence of a 409A Ownership/Control Change (as defined below).
(iii)     No Acceleration . The exercise or distribution of a 409A Award may not be accelerated prior to the time specified in Section 2(a)(ii) hereof, except in the case of one of the following events:
(A)
Domestic Relations Order. The 409A Award may permit the acceleration of the exercise or distribution time or schedule to an individual other than the Participant as may be necessary to comply with the terms of a domestic relations order (as defined in Section 414(p)(1)(B) of the Code).
(B)
Conflicts of Interest. Such 409A Award may permit the accelera-tion of the settlement time or schedule as may be necessary to comply with an ethics agreement with the Federal government or if reasonably necessary to comply with a Federal, state, local or foreign ethics law or conflict of interest law in compliance with Treasury Regulation § 1.409A-3(j)(4)(iii).
(C)
Change. The Committee may exercise the discretionary right to accelerate the vesting of any unvested compensation deemed to be a 409A Award upon a 409A Ownership/Control Change or to terminate the Plan upon or within 12 months after a 409A Ownership/Control Change, or otherwise to the extent permitted under Treasury Regulation § 1.409A-3(j)(4)(ix), or accelerate settlement of such 409A Award in any other circum-stance permitted under Treasury Regulation § 1.409A-3(j)(4).
(iv)     Definitions. For purposes of this Appendix A, the following terms shall be defined as set forth below:
(A)
“409A Ownership/Control Change” shall be deemed to have occurred if a Change in Control occurs in connection with which there occurs a change in the ownership of the Company, a change in effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, within the meaning of Treasury Regulation § 1.409A-3(i)(5).
(B)
“409A Disability” means an event which results in the Participant (i) being unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii), by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company or its subsidiaries.
(v)     Determination of “Key Employee.” For purposes of a settlement under Section 2(a)(ii), status of a Participant as a “key employee” shall be determined annually under the Company's administrative procedure for such determination for purposes of all plans subject to Code Section 409A.
(vi)     Non-Transferability . The provisions of Section 11(b) of the Plan notwithstanding, no 409A Award or right relating thereto shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or the Participant's Beneficiary.

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(vii)     Limitation on Setoffs . If the Company has a right of setoff that could apply to a 409A Award, such right may only be exercised at the time the 409A Award would have been distributed to the Participant or his or her Beneficiary, and may be exercised only as a setoff against an obligation that arose not more than 30 days before and within the same year as the distribution date if application of such setoff right against an earlier obligation would not be permitted under Code Section 409A.
(viii)    4 09A Rules Do Not Constitute Waiver of Other Restrictions . The rules applicable to 409A Awards under this Appendix A constitute further restrictions on terms of Awards set forth elsewhere in this Plan. Thus, for example, an Option or SAR that is a 409A Award shall be subject to restrictions, including restrictions on rights otherwise specified in Section 6(b) or 6(c) of the Plan, in order that such Award shall not result in constructive receipt of income before exercise or tax penalties under Code Section 409A.
(b)     Rules Applicable to Certain Participants Transferred to Affiliates. For purposes of determining a separation from service (where the use of the following modified definition is based upon legitimate business criteria), in applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the language “at least 20 percent” shall be used instead of “at least 80 percent” at each place it appears in Sections 1563(a)(1), (2) and (3), and in applying Treasury Regulation § 1.414(c)-2 (or any successor provision) for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code Section 414(c), the language “at least 20 percent” shall be used instead of “at least 80 percent” at each place it appears in Treasury Regulation § 1.414(c)-2.
(c)     Distributions Upon Vesting. In the case of any Award providing for a distribution upon the lapse of a substantial risk of forfeiture, if the timing of such distribution is not otherwise specified in the Plan or an Award agreement or other governing document, the distribution shall be made not later than March 15 of the year following the year in which the substantial risk of forfeiture lapsed, provided that the Participant shall have no influence on any determination as to the tax year in which the distribution will be made.
(d)     Release or Other Termination Agreement . If the Company requires a Participant to execute a release, non-competition, or other agreement as a condition to receipt of a payment or retention of an Award upon or following a termination of employment, the Company will supply to the Participant a form of such release or other document not later than the date of the Participant's termination of employment, which must be returned within the minimum time period required by law (but not more than 45 days) and must not be revoked by the Participant within the applicable time period for revocation in order for the Participant to satisfy any such condition. If any amount payable during a fixed period following termination of employment is subject to such a requirement and the fixed period would begin in one tax year and end in the next tax year, the Company, in determining the time of payment of any such amount, will not be influenced by the timing of any action of the Participant including execution of such a release or other document and expiration of any revocation period. In particular, the Company will be entitled in its discretion to deposit any such payment in escrow during either year comprising such fixed period, so that such deposited amount is constructively received and taxable income to the Participant upon deposit but with distribution from such escrow remaining subject to the Participant's execution and non-revocation of such release or other document.
(e)     Scope and Application of this Provision. For purposes of this Appendix A, references to a term or event (including any authority or right of the Company or a Participant) being “permitted” under Code Section 409A mean that the term or event will not cause the Participant to be deemed to be in constructive receipt of compensation relating to the 409A Award prior to the distribution of cash, shares or other property or to be liable for payment of interest or a tax penalty under Code Section 409A.

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3.     Required Consent to and Notification of Code Section 83(b) Election . No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made unless expressly permitted by the terms of the Award document or by action of the Committee in writing prior to the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision.
4.     Additional ISO Considerations.
(a)     Ten Percent Shareholders. A person who owns (or is deemed to own pursuant to Code Section 424(d)) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or any subsidiary of the Company shall not be granted an ISO unless the exercise price of such ISO is at least 110% of the Fair Market Value of the underlying Share on the date of grant and the ISO is not exercisable after the expiration of five (5) years from the date of grant.
(b)     ISO Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Shares with respect to which ISOs are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its subsidiaries) exceeds $100,000, the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as non-qualified Options, notwithstanding any contrary provisions of the applicable Option Award.
(c)     Requirement of Notification Upon Disqualifying Disposition Under Code Section 421(b). If any Participant shall make any disposition of Shares delivered pursuant to the exercise of an ISO under the circumstances described in Code Section 421(b) (i.e., a disqualifying disposition), such Participant shall notify the Company of such disposition within ten days thereof.
5.    [Reserved].
6.     Governing Law . The construction and effect of this Appendix A, any rules and regulations relating to any 409A Award document shall be determined in accordance with applicable provisions of the Code.


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Exhibit A to Appendix A

Deferral Election Rules
If a participant in a plan, program or other compensatory arrangement (a "plan") of Orient-Express Hotels Ltd. (the "Company") is permitted to elect to defer awards or other compensation, any such election relating to compensation deferred under the applicable plan must be received by the Company prior to the date specified by or at the direction of the administrator of such plan (the "Administrator," which in most instances will be the Human Resources Department). For purposes of compliance with Section 409A of the Internal Revenue Code (the "Code"), any such election to defer shall be subject to the rules set forth below, subject to any additional restrictions as may be specified by the Administrator. Under no circumstances may a participant elect to defer compensation to which he or she has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation.
(1)
Initial Deferral Elections . Any initial election to defer compensation (including the election as to the type and amount of compensation to be deferred and the time and manner of settlement of the deferral) must be made (and shall be irrevocable) no later than December 31 of the year before the participant's services are performed which will result in the earning of the compensation, except as follows:
Initial deferral elections with respect to compensation that, absent the election, constitutes a short-term deferral may be made in accordance with Treasury Regulation § 1.409A-2(a)(4) and (b);
Initial deferral elections with respect to compensation that remains subject to a requirement that the participant provide services for at least 12 months (a “forfeitable right” under Treasury Regulation § 1.409A-2(a)(5)) may be made on or before the 30 th day after the participant obtains the legally binding right to the compensation, provided that the election is made at least 12 months before the earliest date at which the forfeiture condition could lapse and otherwise in compliance with Treasury Regulation § 1.409A-2(a)(5);
Initial deferral elections by a participant in his or her first year of eligibility may be made within 30 days after the date the participant becomes eligible to participate in the applicable plan, with respect to compensation paid for services to be performed after the election and in compliance with Treasury Regulation § 1.409A-2(a)(7);
Initial deferral elections by a participant with respect to performance-based compensation (as defined under Treasury Regulation § 1.409A-1(e)) may be made on or before the date that is six months before the end of the performance period, provided that (i) the participant was employed continuously from either the beginning of the performance period or the later date on which the performance goal was established, (ii) the election to defer is made before such compensation has become readily ascertainable (i.e., substantially certain to be paid), (iii) the performance period is at least 12 months in length and the performance goal was established no later than 90 days after the commencement of the service period to which the performance goal relates, (iv) the performance-based compensation is not payable in the absence of performance except due to death, disability, a 409A Ownership/Control Change (as defined in Section 2(a)(iv)(A) of Appendix A of the 2009 Share Award and Incentive Plan) or as otherwise permitted under Treasury Regulation § 1.409A-1(e), and (v) this initial deferral election must in any event comply with Treasury Regulation § 1.409A-2(a)(8);
Initial deferral elections resulting in Company matching contributions may be made in compliance with Treasury Regulation § 1.409A-2(a)(9);
Initial deferral elections may be made to the fullest permitted under other applicable provisions of Treasury Regulation § 1.409A-2(a); and


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(2)
Further Deferral Elections. The foregoing notwithstanding, for any election to further defer an amount that is deemed to be a deferral of compensation subject to Code Section 409A (to the extent permitted under Company plans, programs and arrangements), any further deferral election made under the plan shall be subject to the following:
The further deferral election will not take effect until at least 12 months after the date on which the election is made;
If the election relates to a distribution event other than a Disability (as defined in Treasury Regulation § 1.409A-3(i)(4)), or death, the payment with respect to which such election is made must be deferred for a period of not less than five years from the date such payment would otherwise have been paid (or in the case of a life annuity or installment payments treated as a single payment, five years from the date the first amount was scheduled to be paid), to the extent required under Treasury Regulation § 1.409A-2(b);
The requirement that the further deferral election be made at least 12 months before the original deferral amount would be first payable may not be waived by the Administrator, and shall apply to a payment at a specified time or pursuant to a fixed schedule (and in the case of a life annuity or installment payments treated as a single payment, 12 months before the date that the first amount was scheduled to be paid);
The further deferral election shall be irrevocable when filed with the Company; and
The further deferral election otherwise shall comply with the applicable requirements of Treasury Regulation § 1.409A-2(b).

(3)
Transition Rules. Initial deferral elections and elections to change any existing deferred date for distribution of compensation in any transition period designated under Department of the Treasury and IRS regulations may be permitted by the Company to the fullest extent authorized under transition rules and other applicable guidance under Code Section 409A.






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Exhibit 10.8
[Employment Agreement between Orient-Express Services Ltd. and John M. Scott III dated November 8, 2012]
THIS AGREEMENT is made on 8 November 2012.
BETWEEN
(1)
ORIENT-EXPRESS SERVICES LIMITED , (Company number 00946687) which has its registered office at 1 st Floor, Shackleton House, 4 Battle Bridge Lane, London, SE1 2HP (the Company ); and
(2)
JOHN MARCY SCOTT III of 4212 Belclaire Avenue, Dallas, Texas USA 75205 (the Executive )
IT IS AGREED as follows:-
1.    DEFINITON
In this Agreement the following expressions have the following meanings:
Board means the board of directors of Orient-Express Hotels (as defined below);
Change of Control Agreement means the severance agreement entered into between the Executive and Orient-Express Hotels on the date of this Agreement;
Confidential Information means any confidential information relating to the Company's, or any Group Company's business including, but not limited to, its financial position, business strategies, market position or technical information such as know how or trade secrets, received or acquired (by any means) by the Executive from the Company or any Group Company during the Employment which is designated by the Company, or marked, as confidential or which by reason of its character and/or the manner of its coming to his knowledge, is evidently confidential;
Effective Date means 8 November 2012;
Employment means the Executive's employment in accordance with the terms and conditions of this Agreement;
Good Reason means:
(a)
the failure of the Executive to be nominated for and elected as a director of Orient-Express Hotels at the first annual general meeting of the Orient-Express Hotels stockholders following the Effective Date; provided that the Executive understands and acknowledges that Orient-Express Hotels cannot in any way cause or guarantee his appointment as a director, but the Company and Orient-Express Hotels understand and acknowledge that the Executive's service as a director of Orient-Express Hotels is a condition to the Executive's entering into this Agreement;
(b)
the failure of the Executive to be nominated for or elected as a director of Orient-Express Hotels at each subsequent annual general meeting of the Orient-Express Hotels stockholders during the Employment; provided that the Executive understands and acknowledges that Orient-Express Hotels cannot in any way cause or guarantee his appointment as a director, but the Company and Orient-Express Hotels understand and acknowledge that the Executive's service as a director of Orient-Express Hotels is a condition to the Executive's entering into this Agreement;

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(c)
the removal of the Executive as a director of either the Company or Orient-Express Hotels other than for just cause under the applicable Bye-Laws or Articles of Association;
(d)
Orient-Express Hotels giving notice to not extend the term of, or to terminate, the Change of Control Agreement under section 2 of the Change of Control Agreement;
(e)
the assignment to the Executive of any duties materially inconsistent with the Executive's status as President and Chief Executive Officer of Orient-Express Hotels;
(f)
a reduction by the Company in the Salary, Expatriate Allowance or any guaranteed Target Bonus, as each is in effect at the Effective Date or as the same may be increased from time to time;
(g)
the relocation of the Executive's principal place of employment to a location more than 50 miles from London;
(h)
the failure by the Company to pay to the Executive any portion of the Executive's current compensation within 30 days of the date such compensation is due;
(i)
a material reduction in the Executive's aggregate benefit entitlements under this Agreement in breach of the terms of this Agreement;
(j)
the failure of the Company to provide the Executive the annual bonus opportunity described in clause 5 below; or
(k)
a material failure by the Company or Orient-Express Hotels to perform any of its other obligations under this Agreement.
Group Company means Orient-Express Hotels, the Company, any holding company and any subsidiary of the Company or any holding company (as defined in the Companies Act 2006);
Indemnification Agreement means the indemnification agreement entered into between the Executive and Orient-Express Hotels on the date of this Agreement;
Orient-Express Hotels means Orient-Express Hotels Ltd., a company registered in Bermuda with its registered office at Canon's Court, 22 Victoria Street, Hamilton, HM12, Bermuda, whose shares are listed on the New York Stock Exchange;
Recognised Investment Exchange has the meaning given to it by section 285 of the Financial Services and Markets Act 2000.
2.    TERM AND JOB DESCRIPTION
2.1    The Executive shall be employed by the Company as President and Chief Executive Officer of the Company and of its parent company, Orient-Express Hotels. The Executive shall:
(a)    be appointed a director of the Company on the Effective Date; and
(b)
be nominated by Orient-Express Hotels for election to the Board at the first annual general meeting of the Orient-Express Hotels stockholders following the Effective Date or such other time when such nominations are made together with any other directors who are being nominated at that time; and
(c)
be appointed to the Board as soon as practicable following the Effective Date to fill any casual vacancy on the Board; and

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(d)
be nominated by Orient-Express Hotels for election to the Board at each subsequent annual general meeting during the Employment or at such other time as directors are nominated together for election to the Board.
During the Employment the Executive shall be invited to attend all Board meetings in his role as Chief Executive Officer of Orient-Express Hotels until such time as he is elected or appointed to the Board.
2.2    The Employment shall begin on the Effective Date. For statutory purposes, there is no previous period of continuous employment.
2.3    Subject to clause 19, the Employment will continue until terminated by either party giving to the other six months' written notice at any time.
2.4    The Executive acknowledges that the Company will, as a result of the Executive signing this Agreement and agreeing to become its President and Chief Executive Officer, share with the Executive Confidential Information in anticipation of his assumption of his new role and will undertake significant internal measures to install the Executive to its management with effect from the Effective Date. In consideration of this, the Executive undertakes that he will not, from the date of this Agreement until the Effective Date, enter into discussions with any other party with a view to his employment or engagement by that other party or any other third party or accept an offer of employment or engagement from such other party or any other third party such that he would not be able to meet his obligations under this Agreement.
2.5    Prior to the Effective Date Orient-Express Hotels and the Executive shall agree an announcement about the Executive's appointment as President and Chief Executive Officer of Orient-Express Hotels. No announcement shall be made by Orient-Express Hotels, the Company or any Group Company about the Executive's appointment without his express approval.
2.6    The Company and Orient-Express Hotels will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business or assets to expressly assume and agree, in writing before effecting such succession, to perform the Company's obligations under this Agreement.
3.    DUTIES
3.1    During the Employment, the Executive will:
(a)
diligently perform all such duties and exercise all such powers as are lawfully and properly assigned to him from time to time by the Board consistent with his employment as President and Chief Executive Officer, whether such duties or powers relate to the Company or any other Group Company;
(b)    comply with all express directions lawfully and properly given to him by the Board;
(c)
subject to clause 15.2, unless prevented by sickness, injury or other incapacity, devote the whole of his time, attention and abilities during his working hours to the business of the Company or any other Group Company for which he is required to perform duties;
(d)
promptly provide the Board with all such information in his possession and that he can reasonably obtain as it may require in connection with the business or affairs of the Company and of any other Group Company for which he is required to perform duties.
3.2    As a senior executive the Executive's working time is not measured or pre-determined. The Executive is responsible for determining his own hours of work, sufficient for the proper performance of his duties.

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3.3    The Executive's normal place of work is the Company's London office from time to time or such other office location within Greater London at which the Company may from time to time require the Executive to base himself. Upon the Executive's relocation to the London area, his residence shall be within a reasonable daily travelling distance of the Company's offices in London.
3.4    The Executive acknowledges that the Company's business is global and agrees to travel globally and work (both within and outside the United Kingdom) as may be required for the proper performance of his duties under the Employment.
4.    SALARY
4.1    The Company shall pay to the Executive a basic salary of US$900,000 (less any deductions required by law) per calendar year (as such amount may be adjusted from time to time, the Salary ) which shall accrue from day to day and be payable in arrears by equal monthly instalments on the same date as the Company's other London based senior executives are paid. The Salary will be reviewed annually during the Employment, with the first review being undertaken by the Compensation Committee of the Board for 2014. No Salary review will be undertaken after notice has been given by either party to terminate the Employment. The Company is under no obligation to increase the Salary following a review of the Salary, but will not decrease it.
4.2    The Salary will be inclusive of all fees and other remuneration to which the Executive may be or become entitled as an officer of the Company or of any other Group Company.
4.3    The Executive agrees that, pursuant to Part II of the Employment Rights Act 1996, the Company has the right to deduct from his Salary and/or bonus and/or any other amounts due or owed to the Executive by the Company (or any other Group Company) any amount owed to the Company or any Group Company by the Executive.
5.    BONUS
5.1    Subject to this clause 5, the Executive shall participate in the Company's annual bonus plan, in accordance with the rules of the plan in force from time to time. For the avoidance of doubt, if there is any conflict between this Agreement and the rules of the Company's annual bonus plan in force from time to time the terms of this Agreement shall prevail.
5.2    The Executive's on-target bonus will be 125 per cent. of Salary (the Target Bonus ) and his maximum bonus will be 150 per cent. of Salary (the Maximum Bonus ). In respect of 2012 and 2013 only, the Executive will be guaranteed to be paid the Target Bonus (without prejudice to his ability to earn a higher bonus payment subject to the Maximum Bonus). Any bonus payable (including any guaranteed Target Bonus) in respect of 2012 shall be pro-rated to reflect the period for which the Executive is employed by the Company in 2012 save that the amount of the bonus payable in respect of 2012 shall be no less than US$160,273. Any bonus payable shall be paid less any deductions required by law and shall be fully paid between January 1 and April 15 of the calendar year immediately following the calendar year in respect of which the bonus was earned.
5.3     Save in relation to any right of the Executive to receive payment of a sum in respect of Target Bonus under clause 19.3, the Executive will only be eligible to receive a bonus if he is in the Company's employment at the date of payment and has not given or received notice to terminate his employment in accordance with clause 2.3 of this Agreement.
5.4    The terms of the Executive's annual bonus opportunity may be changed at any time from January 2014 onwards but for the avoidance of doubt it is agreed that the Executive will always be entitled to participate in an annual bonus plan which generates an opportunity to earn a target amount equal to the Target Bonus and an opportunity to earn a maximum amount of no less than the Maximum Bonus. Any bonus payment made to the Executive is non-pensionable.

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6.    INITIAL INCENTIVE AWARD
6.1     The Executive will be entitled to receive an initial incentive award of 440,000 deferred Class A common shares in Orient-Express Hotels, which award will be made on the Effective Date.
6.2    Subject to this clause 6.2, the initial incentive award will be made subject to the rules of Orient Express Hotels' 2009 Share Award and Incentive Plan ( LTIP ) applicable to deferred shares. Vesting of the initial incentive award will not be subject to any performance criteria: one quarter of the award will vest on 1 January 2013, with the remaining three quarters of the award vesting in three equal tranches on the first, second and third anniversary of 1 January 2013. Except as provided in clause 19.3 below or the Change of Control Agreement, vesting of each tranche of the award will be conditional on the Executive continuing to be employed by the Company and not being under notice on the applicable vesting date. Any vesting of the initial incentive award will be settled in Class A common shares in Orient-Express Hotels or in cash, unless otherwise agreed in writing with the Executive. Any such shares or cash to which the Executive becomes entitled as a result of the vesting of the initial incentive award will, subject to Section 11 of the LTIP rules, be delivered or paid to the Executive promptly after vesting and no later than 2½ months after the end of the calendar year in which the deferred shares become vested.
7.    LONG TERM INCENTIVE PLAN
7.1    The Executive shall be granted an award under a long term incentive plan in each financial year of the Company, beginning in 2013, in accordance with the rules of the long term incentive plan in force from time to time.
7.2    The Executive's annual long term incentive plan award will be no less than 150 per cent. of the Salary.
7.3    Any long term incentive plan award granted to the Executive will be granted subject to the rules of the long term incentive plan in force from time to time and in accordance with Orient-Express Hotels' policy on allocation of equity instruments for long term incentive plan awards in force at the time of the relevant grant. As at the date of this Agreement, long term incentive plan awards are granted under the LTIP and Orient-Express Hotels' policy on allocation is by value 40 per cent. share options, 35 per cent. performance shares and 25 per cent. deferred shares.
8.    RELOCATION EXPENSES
8.1    Subject to production of receipts or other appropriate evidence of payment, the Company shall reimburse the Executive in respect of any reasonable and customary costs incurred by him in relocating himself and his family to accommodation within a reasonable daily travelling distance of the Company's offices in London (including any reasonable costs incurred in respect of the Executive, his wife and children visiting London in order to view and secure temporary and permanent accommodation for himself and his family, in order to attend any school interviews, rental payments and rental fees in respect of temporary accommodation whilst doing so, moving costs, storage costs, house-hunting expenses (including estate agents fees and travel costs) and shipping costs) (together Relocation Expenses ).
8.2    The Executive undertakes that:
(a)
he will relocate himself to London as soon as reasonably practicable after the date of this Agreement; and
(b)
his family will relocate as soon as reasonably practicable after the date on which the Executive first secures permanent accommodation for himself and his family (the Relocation Date ) and in any event in advance of the 2013/14 school year.

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8.3    The reimbursement of any Relocation Expenses pursuant to this clause 8 will be done in a manner which complies with the rules applicable under US Treasury Regulation Section 1.409A-3(i)(1)(iv) applicable to reimbursements and in-kind benefits. The Company shall gross up any amount paid by way of reimbursement of Relocation Expenses pursuant to this clause 8 to reflect any PAYE income tax and primary class 1 National Insurance contributions (or any similar liability to withhold amounts in respect of income tax or social security contribution in any jurisdiction) that the Company is liable to account for as a result of paying the Executive such reimbursement amount.
8.4    On termination of the Executive's employment by the Executive pursuant to clause 19.4, by the Company other than pursuant to clause 19.5, or upon the Executive's death and subject to production of receipts or other appropriate evidence of payment, the Company shall reimburse the Executive in respect of any reasonable and customary costs (other than any property-related taxes) incurred in relocating himself and his family to the United States of America (including any reasonable costs in respect of moving costs, storage costs, travel costs, the costs of the Executive's and his family's return journey to the United States of America and shipping all personal possessions back to the United States of America).
9.    EXPATRIATE ALLOWANCE
9.1    From the Relocation Date the Executive will be paid, in addition to the Salary, an annual expatriate allowance of US$500,000 (less any deductions required by law) (the Expatriate Allowance ). The Expatriate Allowance will accrue on a daily basis, and will be payable in arrears in equal monthly instalments on the same date as instalments of the Salary are paid.
9.2    Subject to production of receipts or other appropriate evidence of payment, the Executive will be entitled to be reimbursed in respect of all reasonable travel and accommodation expenses incurred by the Executive until the Relocation Date. The reimbursement of such expenses will be done in a manner which complies with the rules applicable under US Treasury Regulation Section 1.409A-3(i)(1)(iv) applicable to reimbursements and in-kind benefits.
9.3    The Executive will be reimbursed the cost of two return business class tickets to and from the United States each calendar year for each of himself, his wife and his three children. The Executive is not entitled to carry over this entitlement from one year to the next. The Company shall gross up any amount paid by way of reimbursement pursuant to this clause 9.3 to reflect any PAYE income tax and primary class 1 National Insurance contributions (or any similar liability to withhold amounts in respect of income tax or social security contribution in any jurisdiction) that the Company is liable to account for as a result of paying the Executive such reimbursement amount.
10.    EXPENSES
10.1    The Company will reimburse (or procure the reimbursement of) all out-of-pocket expenses properly and reasonably incurred by the Executive in the course of his Employment subject to production of receipts or other appropriate evidence of payment. The Company will further reimburse the reasonable expenses incurred by the Executive in seeking tax advice in relation to the preparation of his and his wife's annual tax returns in respect of any tax years falling during the course of the Employment. The reimbursement of expenses as referred to in this clause 10.1 will be done in a manner which complies with the rules applicable under US Treasury Regulation Section 1.409A-3(i)(1)(iv) applicable to reimbursements and in-kind benefits.
11.    PENSION
From the Effective Date, the Executive will be entitled to join the Company's Group Personal Pension Plan (or such other plan as the Company may make available to its London based senior executives from time to time).

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12.    INSURANCE
12.1    From the Effective Date, and during the Employment, the Executive shall participate in such personal accident insurance, private medical expenses insurance, life assurance and permanent health insurance arrangements as the Company has in place for its London based senior executives from time to time, at the rate and/or level of cover then applicable to other existing senior London based executives or higher. The Company will procure that any such private medical expenses insurance arrangement provides cover in respect of the Executive, his wife and unmarried dependent children below the age of 21 (or such other age limit provided generally under the Company's group medical insurance plan from time to time).
12.2    Subject to production of receipts or other appropriate evidence of payment, the Executive will be entitled to be reimbursed by the Company in respect of the reasonable costs incurred by the Executive in obtaining private medical expenses insurance arrangements for his wife and children in the United States of America in respect of the period from the Effective Date to the date on which they relocate to London provided that where possible the Executive will seek to elect for the continuation of such benefits under any existing policy the Executive might have the benefit of until his wife and children relocate to London and are covered by the private medical expenses insurance referred to in clause 12.1. The reimbursement of such expenses will be done in a manner which complies with the rules applicable under US Treasury Regulation Section 1.409A-3(i)(1)(iv) applicable to reimbursements and in-kind benefits. The Company shall gross up any amount paid by way of reimbursement pursuant to this clause 12.2 to reflect any PAYE income tax and primary class 1 National Insurance contributions (or any similar liability to withhold amounts in respect of income tax or social security contribution in any jurisdiction) that the Company is liable to account for as a result of paying the Executive such reimbursement amount.
13.    HOLIDAY
13.1    The Executive's paid annual holiday entitlement is 25 days (plus bank and public holidays in England), to be taken at a time or times convenient to the Company. The right to paid holiday will accrue pro‑rata during each calendar year of the Employment.
13.2    Up to a maximum of 5 days' accrued but untaken holiday may be carried forward to the next calendar year but any carried forward holiday must be taken within the first quarter of the next calendar year otherwise the right to take such holiday will be lost. Subject to clause 13.3 the Executive has no entitlement to be paid in lieu of accrued but untaken holiday.
13.3    On termination of the Employment, the Executive's entitlement to accrued holiday pay shall be calculated on a pro‑rata basis (which calculation shall be made on the basis that each day of paid holiday is equivalent to 1/260 of the Executive's salary). If the Executive has taken more working days' paid holiday than his accrued entitlement, the Company is authorised to deduct the appropriate amount from his final salary instalment (which deduction shall be made on the basis that each day of paid holiday is equivalent to 1/260 of the Executive's salary.)
14.    SICKNESS AND OTHER INCAPACITY
14.1    Subject to the Executive's compliance with the Company's policy on notification and certification of periods of absence from work as disclosed to the Executive, the Executive may, at the Board's sole discretion, continue to be paid the Salary, the Expatriate Allowance and any bonus payable during any period of absence from work due to sickness, injury or other incapacity. Any such payment will be inclusive of any statutory sick pay payable in accordance with applicable legislation in force at the time of absence.
14.2    The Executive will not be paid during any period of absence from work (other than due to holiday, sickness, injury or other incapacity) without the prior permission of the Board.

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15.    OTHER INTERESTS
15.1    Subject to clause 15.2, during the Employment the Executive will not (without the Board's prior written consent) be directly or indirectly engaged, concerned or interested in (whether by serving as a director or otherwise) any other business activity, trade or occupation.
15.2    Notwithstanding clause 15.1, the Executive may:
(a)
continue to hold, and perform the duties associated with, his directorship of Cedar Fair Entertainment Company provided that, in the Board's reasonable opinion, there is no material conflict at any time between the Executive holding such position or performing such duties and the duties which he owes under this Agreement or as a result of his directorship(s) of Orient-Express Hotels or any Group Company. The Company confirms that, as at the date of this Agreement, the Board has not determined that there is any such material conflict; and
(b)
continue to hold, and perform the duties associated with, his directorship of Kimpton Hotels and Restaurants until such time as the Executive's resignation from such company becomes effective. The Executive undertakes that he will submit his resignation from the position he holds with Kimpton Hotels and Restaurants to that company as soon as reasonably practicable after the date of this Agreement and will secure that such resignation becomes effective as soon as practicable thereafter; and
(c)
perform duties for not for profit organisations, provided that, in the Board's opinion, there is no conflict between the Executive performing such duties and the duties which he owes under this Agreement; and
(d)
hold for investment purposes an interest of up to 3 per cent. in nominal value or (in the case of securities not having a nominal value) in number or class of securities in any class of securities listed on or dealt in a Recognised Investment Exchange, provided that the company which issued the securities does not carry on a business which is similar to or competitive with any business for the time being carried on by any Group Company; and
(e)
continue to hold his shareholding in Kimpton Hotels and Restaurants which was purchased for US$500,000.
16.    SHARE DEALING AND OTHER CODES OF CONDUCT
The Executive will comply with all codes of conduct, including its Code of Business Conduct and Ethics, Corporate Governance Guidelines and Anti-Bribery Policy, adopted from time to time by the Board of which the Executive is aware and has been provided copies and with all applicable rules and regulations of the New York Stock Exchange and any other relevant regulatory bodies, including the US Securities and Exchange Commission.
17.    INTELLECTUAL PROPERTY
During the Employment, to the extent that the Executive conceives of new methods or devices by which the products, services, processes, equipment or systems of the Company or any Group Company with which he is concerned or for which he is responsible might be improved and, accordingly, originates designs (whether registrable or not) or patentable work or other work in which copyright, database rights or trade mark rights (together Employee Works , but specifically excluding those Employee Works written, originated, conceived or made by the Executive wholly outside normal working hours and unconnected with the Employment or the business of the Company or any Group Company) may subsist, then:
(a)
the Executive shall forthwith disclose full details of any Employee Works in confidence to the Company and shall regard himself in relation to any Employee Works as a trustee for the Company;

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(b)
all intellectual property rights in any Employee Works shall vest absolutely in the Company which shall be entitled, so far as the law permits, to the exclusive use thereof;
(c)
notwithstanding (b) above, the Executive assigns to the Company all right, title and interest, present and future, anywhere in the world, in copyright and in any other intellectual property rights in respect of all such Employee Works;
(d)
the Executive hereby waives all moral rights as author under the Copyright Designs and Patents Act 1988 or any equivalent laws in respect of any Employee Works; and
(e)
the Executive agrees and undertakes that at any time during or after the termination of the Employment he will execute such deeds or documents and do all such acts and things as the Company may deem necessary or desirable to substantiate its rights in respect of the matters referred to above including for the purpose of obtaining letters patent or other privileges in all such countries as the Company may require. In the event that the Executive is required to take any action under this clause 17(e) after the termination of the Employment, the Company will reimburse all out-of-pocket expenses properly and reasonably incurred by the Executive in the course of taking such action, subject to production of receipts or other appropriate evidence of payment.
18.    DISCIPLINARY AND GRIEVANCE PROCEDURES
18.1    If the Executive is dissatisfied with any disciplinary decision taken in relation to him he may appeal in writing to the Chairman of the Board within 7 days of that decision. The Chairman's decision shall be final.
18.2    If the Executive has any grievance in relation to the Employment he may raise it in writing with the Chairman of the Board whose decision shall be final.
19.    TERMINATION
19.1    Either party may terminate the Employment in accordance with clause 2.3.
19.2    The Company may, in its sole discretion, terminate the Employment at any time with immediate effect and, subject to clause 19.7, pay a sum in lieu of notice (the Payment in Lieu ) equal to:
(a)
the Salary and the Expatriate Allowance which the Executive would have been entitled to receive under this Agreement during the notice period referred to at clause 2.3 if notice had been given (or, if notice has already been given, during the remainder of the notice period); and
(b)
if the Company is not permitted under the terms of the applicable insurance policy to continue to provide the benefits provided pursuant to clause 12 (or any of them) during that period, the cost to the Employee of obtaining in the market for himself and his family benefits equivalent to those provided pursuant to clause 12 which the Executive would have been entitled to receive during that period. Alternatively, the Company may in its absolute discretion continue to provide such benefits during that period.
For the avoidance of doubt, the Executive will not be entitled to receive any payment in addition to the Payment in Lieu in respect of any holiday entitlement that would have accrued during the period for which the Payment in Lieu is made.
The Payment in Lieu shall be paid, subject to such deductions as may be required by law, in a lump sum within 15 days after the termination of the Executive's employment and, subject to clause 19.3 below, shall be made in full and final settlement of any claims (other than statutory claims) the Executive may have against the Company or any Group Company arising from the termination of the Employment.

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19.3    Subject to the following provisions of this clause 19.3 and clauses 19.6 and 19.7 below, if the Company terminates the Employment other than pursuant to clause 19.5 below or if the Executive terminates the Employment at any time for Good Reason pursuant to clause 19.4 below, (a) the Company shall make a severance payment to the Executive of two years' Salary plus two years' Target Bonus (less any deductions required by law) (the Severance Payment ) and (b) any unvested deferred shares granted to the Executive as part of the initial incentive award referred to in clause 6 which would otherwise have vested on 1 January 2013 shall vest immediately on the date of termination of the Employment. The Executive will receive 50 per cent. of the Severance Payment as a lump sum payment in the Company's payroll immediately following the date of termination of the Employment and the remaining 50 per cent. in twelve equal monthly instalments on the Company's usual payroll date during the one year period commencing immediately following the termination of the Employment. Subject to clause 2.3 and 19.2 above, the Severance Payment shall be made in full and final settlement of any claims (other than statutory claims) the Executive may have against the Company or any Group Company arising from the termination of the Employment.
19.4    Subject to the following provisions of this clause 19.4, the Executive may at any time, by notice to the Company, terminate the Employment for Good Reason. A termination of employment by the Executive shall be deemed to be for Good Reason only if the Executive has delivered to the Company a written notice within 90 days after the occurrence of the circumstances giving rise to Good Reason reasonably identifying the actions or inactions alleged to constitute Good Reason and the Company has not cured such actions or inactions alleged to constitute Good Reason within 30 days after receipt of such notice.
19.5    The Company may also terminate the Employment immediately and with no liability to make any further payment to the Executive (other than in respect of amounts accrued due at the date of termination) if the Executive:
(a)
commits any material or persistent breach of any of the provisions of this Agreement provided that if any such breach or non-observance is capable of remedy then this sub-clause shall have effect only if written notice of that breach is served by the Company on the Executive and the Executive shall have failed to remedy such a breach within 14 days of the service of such notice;
(b)
commits any serious or repeated breach of any applicable policies and procedures of the Company or any Group Company that have been provided to the Executive and of which he is aware (as amended or superseded from time to time) including, but not limited to, those referred to in clause 16 above provided that if any such breach or non-observance is capable of remedy then this sub-clause shall have effect only if written notice of that breach is served by the Company on the Executive and the Executive shall have failed to remedy such a breach within 14 days of the service of such notice;
(c)
is guilty of serious misconduct which, in the Board's reasonable opinion, has damaged or may damage the business or affairs of the Company or any other Group Company;
(d)
is guilty of conduct which, in the Board's reasonable opinion, brings or is likely to bring himself, the Company or any other Group Company into disrepute;
(e)
is convicted of a criminal offence (other than a road traffic offence not subject to a custodial sentence or any offence for which a custodial sentence may not be imposed);
(f)
is disqualified from acting as a director of a company by order of a competent court;
(g)
is declared bankrupt or makes any arrangement with or for the benefit of his creditors or has an administration order made against him under the County Courts Act 1984 or any other similar procedure under other applicable law; or
(h)
voluntarily resigns his directorship of the Company or Orient-Express Hotels (other than at the explicit request of or by agreement or arrangement with the Board).

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The Board shall, where reasonably practicable, afford the Executive a reasonable opportunity to meet with the Board before the Board authorises or takes any action described in any of clauses 19.5(a) to (d) above. Any delay by the Company in exercising its rights under this clause shall not constitute a waiver of those rights.
19.6    The Company may also terminate the Employment in accordance with clause 2.3 or 19.2 above with no liability to make any further payment to the Executive (other than in respect of amounts accrued due at the date of termination) if the Executive is unable (whether due to illness, injury or any medically recognised condition) properly and effectively to perform his duties under this Agreement for a period or periods totalling 130 working days in any consecutive period of 12 months.
19.7    Notwithstanding the provisions above in this clause 19, the Executive shall not have any entitlement to, and will not be paid, any Payment in Lieu, Severance Payment or other amounts under this clause 19 if any amount becomes payable and is paid to the Executive under the Change of Control Agreement.
19.8    On termination of the Employment for whatever reason (and whether in breach of contract or otherwise) the Executive will:
(a)
immediately deliver to the Company all books, documents, papers, computer records, computer data, credit cards, and any other property relating to the business of or belonging to the Company or any other Group Company which is in his possession or under his control. The Executive is not entitled to retain copies or reproductions of any documents, papers or computer records relating to the business of or belonging to the Company or any other Group Company save that the Executive shall be entitled to retain any personal papers, documents and records relating to the terms of the Executive's Employment, including the Salary and other benefits and any rights of the Executive to participate in, and terms and conditions of, any annual bonus or other incentive scheme, including any long term incentive plan or share option scheme, and any similar such papers, documents and records that relate to the Employment;
(b)
immediately resign from any office he holds with the Company or any other Group Company (and from any related trusteeships) without any compensation for loss of office. Should the Executive fail to do so he hereby irrevocably authorises the Company to appoint some person in his name and on his behalf to sign any documents and do any thing to give effect to his resignation from office; and
(c)
immediately pay to the Company or, as the case may be, any other Group Company all outstanding loans or other amounts due or owed to the Company or any Group Company. The Executive confirms that, should he fail to do so, the Company is to be treated as authorised to deduct from any amounts due or owed to the Executive by the Company (or any other Group Company) a sum equal to such amounts; provided, however, that nothing contained herein shall relieve the Executive of his obligation to repay any such outstanding amounts when due to the Company or any Group Company and, provided, further, that with respect to amounts payable under this Agreement that are considered “nonqualified deferred compensation” under Section 409A of the Code the Company's right to make deductions from such amounts shall not change the date that such amounts are deemed to be paid to the Executive or included in the Executive's taxable income, but rather that the Company shall only be entitled to make the foregoing deductions at the time such amounts are payable to the Executive and included in the Executive's taxable income to the extent that the Executive has refused prior timely and reasonable attempts by the Company to collect such amounts from the Executive.
19.9    It is acknowledged that the Executive may, during the Employment, be granted rights upon the terms and subject to the conditions of the rules from time to time of the LTIP or any other profit sharing, share incentive, share option, bonus or phantom option scheme operated by the Company or any Group Company with respect to shares in the Company or any Group Company. If, on termination of the Employment, whether lawfully or in breach of contract the Executive loses any of the rights or benefits under any such scheme (including rights or benefits which the Executive would not have lost had the Employment not been terminated) the Executive shall not be entitled, by way of compensation for loss of office or otherwise howsoever, to any compensation for the loss of any rights under any such scheme.

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19.10    The Executive will not at any time after termination of the Employment represent himself as being in any way concerned with or interested in the business of, or employed by, the Company or any other Group Company.
20.    SUSPENSION AND GARDENING LEAVE
20.1    Where notice of termination has been served by either party whether in accordance with clause 2.3 or otherwise, the Company shall be under no obligation to provide work for or assign any duties to the Executive for the whole or any part of the relevant notice period and may require him:
(a)
not to attend any premises of the Company or any other Group Company, provided that where notice of termination is given by the Company, the Company shall allow the Executive to attend such premises by appointment at a time agreed with the Company to collect his personal possessions; and/or
(b)
to resign with immediate effect from any offices he holds with the Company or any other Group Company (and any related trusteeships); and/or
(c)
to refrain from business contact with any customers, clients or employees of the Company or any Group Company; and/or
(d)
to take any holiday which has accrued under clause 13 during any period of suspension under this clause 20.1.
Notwithstanding anything to the contrary in this Agreement, any action by the Company to place the Executive on gardening leave pursuant to this clause 20.1, including any requirement imposed by the Company on the Executive to take or refrain from any of the actions referred to in clauses 20.1(a) to (d) above shall not constitute Good Reason or affect or impair any right of the Executive arising out of or in connection with the termination in respect of which notice was served, including any right which the Executive may have under clause 19.3. The provisions of clause 15.1 shall remain in full force and effect during any period of suspension under this clause 20.1. The Executive will also continue to be bound by duties of good faith and fidelity to the Company during any period of suspension under this clause 20.1 to the same extent the Executive would be bound absent such suspension.
Any suspension under this clause 20.1 shall be on full Salary and benefits (including Expatriate Allowance and any bonus payable during any period of suspension).
20.2    The Company may suspend the Executive from the Employment during any period in which the Company is carrying out a disciplinary investigation into any alleged acts or defaults of the Executive. Such suspension shall be on full Salary and benefits (including Expatriate Allowance and any bonus payable during any period of suspension), save that the Executive shall not be entitled to earn any additional bonus during any period of suspension.
21.    RESTRAINT ON ACTIVITIES OF EXECUTIVE AND CONFIDENTIALITY
The Executive will keep secret and will not at any time (whether during the Employment or thereafter) use for his own or another's advantage, or reveal to any person, firm, company or organisation and shall use his best endeavours to prevent the publication or disclosure of any Confidential Information concerning the business or affairs of the Company or any Group Company or any of its or their customers.
The restrictions in this clause shall not apply:
(a)
to any disclosure or use of information which is already in the public domain otherwise than by breach of this Agreement;

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(b)
to any disclosure or use of information which was known to, or in the possession of, the Executive prior to his receipt of such information from the Company or any Group Company whenever so received;
(c)
to any disclosure or use of information which has been conceived or generated by the Executive independently of any information or materials received or acquired by the Executive from the Company or any Group Company;
(d)
to any disclosure or use authorised in writing by the Board or required by the Employment, by applicable US securities laws or regulations, by any stock exchange rules, by any other applicable laws or regulations, including, without limitation, to any disclosure required for patent purposes, or by order or subpoena of any government or regulatory authority or court; provided that (with respect to the last type of permitted disclosure) the Executive promptly notifies the Company when any such disclosure requirement arises to enable the Company (at its expense) to take such action as it deems necessary, including, without limitation, to seek an appropriate protective order and/or make known to the appropriate government or regulatory authority or court the proprietary nature of the Confidential Information and make any applicable claim of confidentiality with respect hereto;
(e)
so as to prevent the Executive from using his own personal skill, experience and knowledge in any business in which he may be lawfully engaged after the Employment is ended; or
(f)
to prevent the Executive making a protected disclosure within the meaning of s43A of the Employment Rights Act 1996.
22.    POST-TERMINATION COVENANTS
22.1    For the purposes of clause 22 the term “Termination Date” shall mean the date of the termination of the Employment howsoever caused.
22.2    The Executive covenants with the Company (for itself and as trustee and agent for each other Group Company) that he shall not, whether directly or indirectly, on his own behalf or on behalf of or in conjunction with any other person, firm, company or other entity: -
(a)
for the period of (subject to clause 22.3 below) 12 months following the Termination Date, solicit or entice away or endeavour to solicit or entice away from the Company or any Group Company any person, firm, company or other entity who is, or was, in the 12 months immediately prior to the Termination Date, a client of the Company or any Group Company with whom the Executive had personal business dealings during the course of the Employment in that 12 month period. Nothing in this clause 22.2(a) shall prohibit the seeking or doing of business which is not in direct or indirect competition with the business of the Company or any Group Company as at the Termination Date;
(b)
for the period of (subject to clause 22.3 below) 12 months following the Termination Date, have any business dealings with any person, firm, company or other entity who is, or was, in the 12 months immediately prior to the Termination Date, a client or customer of the Company or any Group Company with whom the Executive had personal business dealings during the course of the Employment in that 12 month period. Nothing in this clause 22.2(b) shall prohibit the seeking or doing of business not in direct or indirect competition with the business of the Company or any Group Company as at the Termination Date;
(c)
for the period of (subject to clause 22.3 below) 12 months following the Termination Date, solicit or entice away or endeavour to solicit or entice away any individual who is employed or engaged by the Company or any Group Company as a director or in a managerial, consultative or technical capacity; and with whom the Executive had personal business dealings during the course of the Employment in the 12 month period immediately prior to the Termination Date;

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(d)
for the period of (subject to clause 22.3 below) 12 months following the Termination Date, carry on, set up, be employed, engaged or interested in a business which is or is about to be in competition with the business of the Company or any Group Company as at the Termination Date with which the Executive was actively involved during the 12 month period immediately prior to the Termination Date. It is agreed that in the event that any such company ceases to be in competition with the Company and/or any Group Company this clause 22.2(d) shall, with effect from that date, cease to apply in respect of such company. The provisions of this clause 22.2(d) shall not, at any time following the Termination Date, prevent the Executive from holding shares or other capital not amounting to more than 3 per cent. of the total issued share capital of any company whether listed on a Recognised Investment Exchange or not and, in addition, shall not prohibit the seeking or doing of business not in direct or indirect competition with the business of the Company or any Group Company as at the Termination Date.
22.3    The period during which the restrictions referred to in clauses 22.2(a) (b), (c) and (d) inclusive shall apply following the Termination Date shall be reduced by the amount of time during which, if at all, the Company suspends the Executive under the provisions of clause 20.1.
22.4    The Executive agrees that if, during the Employment, he receives an offer of employment or engagement, he will provide a copy of clause 22 to the offeror as soon as is reasonably practicable after receiving the offer and will inform the Company as soon as possible after the offer is accepted.
22.5    The Executive will, at the request and expense of the Company, enter into a separate agreement with any Group Company that the Company may require under the terms of which he will agree to be bound by restrictions corresponding to those contained in clauses 22.2(a) (b), (c) and (d) inclusive (or such as may be appropriate in the circumstances).
23.    EXECUTIVE'S POSITION AS DIRECTOR
23.1    The Executive's duties as a director of the Company or any other Group Company are subject to the Bye-laws or other constitutional documents for either the Company or any Group Company (as applicable) which have been disclosed to the Executive and of which he is aware.
23.2    If during the Employment the Executive ceases (other than by resigning) to be a director of the Company or Orient-Express Hotels, this Agreement and the Employment will continue for the time being as if the Employment was as senior employee instead of that of President and Chief Executive Officer and with the same duties and responsibilities as were applicable in the latter capacity.
24.    WAIVER OF RIGHTS
24.1    If the Employment is terminated by either party and the Executive is offered re‑employment by the Company (or employment with another Group Company) on terms no less favourable in all material respects than the terms of the Employment under this Agreement, the Executive shall have no claim against the Company in respect of such termination.
25.    DATA PROTECTION
25.1    The Executive consents to the Company and any Group Company processing data relating to him at any time (whether before, during or after the Employment) for the following purposes:
(a)
performing its obligations under this Agreement (including remuneration, payroll, pension, insurance and other benefits, tax and national insurance obligations);
(b)
the legitimate interests of the Company and any Group Company including any sickness policy, working time policy, investigating acts or defaults (or alleged or suspected acts or defaults) of the Executive, security, management forecasting or planning and negotiations with the Executive;

14



(c)
processing in connection with any merger, sale or acquisition of a company or business in which the Company or any Group Company is involved or any transfer of any business in which the Executive performs his duties; and
(d)
transferring data to countries outside the European Economic Area, including without limitation the United States, for the purposes of managing the business of the Company or any Group Company or administering any applicable policies, pay or benefits.
25.2    The Executive explicitly consents to the Company and any Group Company processing sensitive personal data (within the meaning of the Data Protection Act 1998) at any time (whether before, during or after the Employment) for the following purposes:
(a)
where the sensitive personal data relates to the Executive's health, any processing in connection with the operation of the Company's (or any Group Company's) sickness policy or any relevant pension scheme or monitoring absence;
(b)
where the sensitive personal data relates to an offence committed, or allegedly committed, by the Executive or any related proceedings, processing for the purpose of disciplinary investigation and/or action by the Company or any Group Company;
(c)
for all sensitive personal data, any processing in connection with any merger, sale or acquisition of a company or business in which the Company or any Group Company is involved or any transfer of any business in which the Executive performs his duties; and
(d)
for all sensitive personal data, any processing in the legitimate interests of the Company or any Group Company.
26.    EMAIL AND INTERNET USE
The Executive agrees to be bound by and to comply with the terms of the Company's email and internet policy as disclosed to the Executive.
27.    CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Section 1(1) of the Contracts (Rights of Third Parties) Act 1999 shall apply to this Agreement but only to the extent that the Executive's heirs may enforce its terms in their own right despite the fact that the Executive's heirs are not a party to this Agreement.
28.    MISCELLANEOUS
28.1    This Agreement, the Change of Control Agreement and the Indemnification Agreement, together with any other documents referred to in this Agreement, constitute the entire agreement and understanding between the parties, and supersede all other agreements both oral and in writing between the Company (or any Group Company) and the Executive (other than those expressly referred to herein). The Executive acknowledges that he has not entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set out in this Agreement or expressly referred to in it as forming part of the Executive's contract of employment.
28.2    The Executive represents and warrants to the Company that he will not by reason of entering into the Employment, or by performing any duties under this Agreement, be in breach of any terms of employment with a third party whether express or implied or of any other obligation binding on him.
28.3    The Executive and the Company agree that it is the intent of the parties that this Agreement be interpreted and construed in accordance with, and not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the US Internal Revenue Code (the Code ), and that to the

15



extent any provisions of this Agreement do not comply with Section 409A of the Code, the parties will make such changes as are mutually agreed upon in order to comply with Section 409A of the Code. Notwithstanding any other provision with respect to the timing of payments under this Agreement, to the extent necessary to comply with the requirements of Section 409A of the Code, any payments to which the Executive may become entitled under this Agreement which are subject to Section 409A of the Code (and not otherwise exempt from its application) that are payable (i) in a lump sum within six months following the date of termination will be withheld until the first business day after the six-month anniversary of the date of termination or until the Executive's earlier death, at which time the Executive (or the Executive's estate) shall be paid the amount of such lump sum payments in a lump sum and (ii) in instalments within six months following the date of termination will be withheld until the first business day after the six-month anniversary of the date of termination or until the Executive's earlier death, at which time the Executive (or the Executive's estate) shall be paid the aggregate amount of such instalment payments in a lump sum, and after the first business day of the seventh month following the date of termination or until the Executive's earlier death and continuing each month thereafter, the Executive (or the Executive's estate) shall be paid the regular payments otherwise due to the Executive in accordance with the payment terms set forth herein. Notwithstanding any provision of this Agreement to the contrary, references to a “termination of employment” (and corollary terms) with the Company shall be construed to refer to the Executive's “separation from service” (within the meaning of US Treasury Regulation Section 1.409A-1(h)). For the purposes of Section 409A of the Code (including, without limitation, for the purposes of US Treasury Regulation 1.409A-2(b)(2)(iii), each payment that the Executive may be eligible to receive under this Agreement shall be treated as a separate and distinct payment and shall not collectively be treated as a single payment. Notwithstanding anything in this Agreement or in any Company policy, with respect to any reimbursement or in-kind benefit arrangements that constitute deferred compensation for purposes of Section 409A of the Code, except as otherwise permitted by Section 409A of the Code, the following conditions shall be applicable: (i) the amount eligible for reimbursement, or in-kind benefits provided in one calendar year may not affect the amount eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year (except that the health and dental plans may impose a limit on the amount that may be reimbursed or paid), (ii) any reimbursement shall be made to the Executive as soon as administratively practicable following submission to the Company for reimbursement, but in no event later than the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit. Any payments that qualify for the “short-term deferral” exception under US Treasury Regulation Section 1.409A-1(b)(4), the “separation pay” exception under US Treasury Regulation 1.409A-1(b)(9)(iii), or another exception under Section 409A of the Code will be paid under the applicable exception to the greatest extent possible.
28.4    Any notice to be given under this Agreement to the Executive must be in writing and may be served by being handed to him personally or by being sent by recorded delivery first class post to him at his usual or last known address; and any notice to be given to the Company must be in writing and may be served by being left at or by being sent by recorded delivery first class post to its registered office for the time being. Any notice served by post shall be deemed to have been served on the fourth day (excluding Sundays and public and bank holidays) after posting and in proving such service it shall be sufficient proof that the envelope containing the notice was properly addressed and posted as a prepaid letter by recorded delivery first class post.
28.5    Any reference in this Agreement to an Act of Parliament shall be deemed to include any statutory modification or re‑enactment thereof.
28.6    This Agreement is governed by, and shall be construed in accordance with, the laws of England. The parties submit to the non-exclusive jurisdiction of the English courts with regard to any dispute of claim arising under this Agreement.
SIGNED as a DEED and        )
DELIVERED by         ) /s/ John M. Scott III
JOHN MARCY SCOTT III     )


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SIGNED for and on behalf of    )
ORIENT-EXPRESS SERVICES     ) /s/ Martin O'Grady
LIMITED             ) Director


17


Exhibit 10.9

[Severance Agreement between Orient-Express Hotels Ltd. and John M. Scott III dated November 8, 2012]

SEVERANCE AGREEMENT
THIS AGREEMENT, dated November 8, 2012 is made by and between ORIENT-EXPRESS HOTELS LTD. , a Bermuda company (the " Company "), and JOHN MARCY SCOTT III (the " Executive ").
RECITALS
A. The Executive is employed by the Company or a subsidiary of the Company and is appointed President and Chief Executive Officer of the Company; and
B. The Company considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel; and
C. The Company's Board of Directors recognizes that, as is the case with many publicly held corporations, the possibility of a change in control with respect to the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and
D. The Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the loyalty and continued attention and dedication of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control with respect to the Company; and
E. The Company's Board of Directors has determined that if during the term of this Agreement a Change in Control occurs and the Executive's employment is terminated upon or within the period of one year immediately following such Change in Control, resulting in a triggering of the severance payments contained in this Agreement, (i) such payments shall supersede and be paid in lieu of all payments, rights and benefits provided under clause 19 of the Executive's service agreement with the Company or a subsidiary of the Company as in effect as of the Effective Date (the “ Service Agreement ”) and (ii) in the event that any payments are made or benefits provided under clause 19 of the Service Agreement, the gross amount of any severance payments payable under this Agreement shall be reduced by the gross amount, or value, of any such payments made or benefits provided.
NOW, THEREFORE , the Company and the Executive hereby agree as follows:
Section 1. Defined Terms . Capitalized terms are defined in Section 12.

Section 2. Term of Agreement . This Agreement shall commence at 8 November 2012 (the " Effective Date ") and shall continue in effect through the third anniversary of the Effective Date; provided, however, that thereafter, the term shall automatically be extended for additional one-year periods, unless, not later than 90 days prior to the third anniversary or any anniversary thereafter, as applicable, the Company or the Executive shall have given notice to the other party of its or his election not to extend the term hereof. This Agreement shall, in any event, continue to be in effect after the expiration of the term hereof to the extent necessary to apply to any Change in Control that occurs before that expiration.

Section 3. Company's Covenants . In order to induce the Executive to remain in the employ of the Company or a subsidiary of the Company, the Company agrees, under the conditions described herein and subject to the terms of this Agreement, to pay the Executive a severance payment and accelerate unvested equity-based grants as set forth in Section 4. No severance payment shall be payable under this Agreement, unless during the term of this Agreement there shall have been a termination of the Executive's employment with the Company or a subsidiary of the Company either upon or following a Change in Control under

1



Section 4 hereof. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business or assets to expressly assume and agree, in writing before effecting such succession, to perform the Company's obligations under this Agreement to the same extent as if no such succession had occurred. This Agreement shall not be construed as creating an express or implied contract of employment with the Company.

Section 4. Severance Payment and Acceleration of Unvested Equity Grants .
    
(a)     Severance Payment and Acceleration of Unvested Equity Grants following Change in Control which occurs on or before December 31, 2013 and which follows from a Bid made at any time up to and including June 30, 2013 . If during the term of this Agreement (i) a Change in Control occurs on or before December 31, 2013 which follows from a Bid made at any time up to and including June 30, 2013 (a “ Section 4(a) Change in Control ”) and (ii) the Executive's employment is terminated upon or within the period of one year immediately following such Section 4(a) Change in Control either (A) by the Company or a subsidiary of the Company without Cause, or (B) by the Executive with Good Reason, then, in any such case, (x) the Company shall pay, or shall procure that the relevant employing subsidiary pays, the Executive a lump sum severance payment, in cash within 15 days after the Date of Termination, equal to the sum of (i) one times the total of the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (ii) one times the Executive's annual target bonus and (iii) in the event that the termination of employment occurs on or after the Relocation Date one times the Expatriate Allowance provided that the Executive has provided to the Board within 10 days after the Date of Termination a copy of the lease of his permanent residence in the UK and (y) the unvested deferred shares granted to the Executive as part of the initial incentive award granted to him on commencement of his employment which would have vested on 1 January 2014 shall immediately accelerate and vest.

(b)     Severance Payment and Acceleration of Unvested Equity Grants following Change in Control which occurs on or before June 30, 2014 and which both follows from a Bid made at any time up to and including December 31, 2013 and is not a Section 4(a) Change in Control . If during the term of this Agreement (i) a Change in Control occurs on or before June 30, 2014 which both follows from a Bid made at any time up to and including December 31, 2013 and is not a Section 4(a) Change in Control (a “ Section 4(b) Change in Control ”) and (ii) the Executive's employment is terminated upon or within the period of one year immediately following such Section 4(b) Change in Control either (A) by the Company or a subsidiary of the Company without Cause, or (B) by the Executive with Good Reason, then, in any such case, (x) the Company shall pay, or shall procure that the relevant employing subsidiary pays, the Executive a lump sum severance payment, in cash within 15 days after the Date of Termination, equal to the sum of (i) 1.5 times the total of the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (ii) 1.5 times the Executive's annual target bonus and (iii) in the event that the termination of employment occurs on or after the Relocation Date one times the Expatriate Allowance provided that the Executive has provided to the Board within 10 days after the Date of Termination a copy of the lease of his permanent residence in the UK and (y) the unvested deferred shares granted to the Executive as part of the initial incentive award granted to him on commencement of his employment which would have vested on 1 January 2014 and 1 January 2015 shall immediately accelerate and vest.
(c)     Severance Payment and Acceleration of Unvested Equity Grants following Change in Control which is not a Section 4(a) Change in Control or a Section 4(b) Change in Control . If during the term of this Agreement (i) a Change in Control occurs which is neither a Section 4(a) Change in Control nor a Section 4(b) Change in Control and (ii) the Executive's employment is terminated upon or within the period of one year immediately following such Change in Control either (A) by the Company or a subsidiary of the Company without Cause, or (B) by the Executive with Good Reason, then, in any such case, (x) the Company shall pay, or shall procure that the relevant employing subsidiary pays, the Executive a lump sum severance payment, in cash within 15 days after the Date of Termination, equal to the sum of (i) 2.5 times the total of the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good

2



Reason, (ii) two times the Executive's annual target bonus and (iii) 0.5 times the Expatriate Allowance and (y) any unvested equity-based awards (as such term is defined under the Company's 2009 Share Award and Incentive Plan or any successor plan thereto) granted to the Executive during his employment, including (without limitation) any unvested deferred shares granted to the Executive as part of the initial incentive award granted to him on commencement of his employment shall immediately accelerate and vest.
(d)     Termination of Employment Prior to Change in Control . For purposes of this Agreement and Sections 4(a) to (c) above, the Executive's employment shall be deemed to have been terminated upon or following a Change in Control by the Company or a subsidiary of the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company or a subsidiary of the Company without Cause prior to a Change in Control and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which constitutes a Change in Control (an " Acquiring Person "), or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control and the circumstance or event which constitutes Good Reason occurs at the request or direction of an Acquiring Person. The amount payable to the Executive under this Section 4(d) shall be paid in a lump sum in cash within 15 days after the date of the Change in Control.

Section 5. Termination of Service Agreement .

Notwithstanding any provisions in the Service Agreement regarding the right to terminate the Executive's employment, or regarding the required notice for termination, if the termination of the Executive's employment occurs upon or within the period of one year immediately following a Change in Control, Section 6(b) hereof shall apply.

Section 6. Termination Procedures .

(a) Notice of Termination . Any purported termination of the Executive's employment (other than by reason of death) upon or within the period of one year immediately following a Change in Control during the term of this Agreement, shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 8 hereof. For purposes of this Agreement, a " Notice of Termination " shall mean a notice which shall state (i) in the event of a termination by the Company or a subsidiary of the Company, whether the termination is occurring for Cause, and (ii) in the event of termination by the Executive, whether the termination is occurring for Good Reason, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Company's Board of Directors at a meeting of the Company's Board of Directors (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Company's Board of Directors) finding that, in the good faith opinion of the Company's Board of Directors, one or more of the matters set forth in the definition of Cause herein apply to the Executive, and specifying the particulars thereof in reasonable detail.

(b) Date of Termination . With respect to any purported termination of the Executive's employment upon or within the period of one year immediately following a Change in Control during the term of this Agreement, the phrase " Date of Termination " shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or a subsidiary of the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall be the fifteenth (15 th ) day from the date such Notice of Termination is given or, in the case of a termination by the Executive because of Section 12(m)(i), (iv), (v), (vi), or (vii) the thirtieth (30 th ) day from the date such Notice of Termination is given.


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Section 7. Binding Agreement .

This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. The Company's obligation to make any severance payment or to provide any benefits under Section 4 shall be absolute and, to the fullest extent permitted by law, shall not be subject to any right of set-off.
Section 8. Notices . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when (i) sent by telefax, (ii) hand delivered, (iii) sent by courier, or (iv) mailed by registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:
Orient-Express Hotels Ltd.
c/o Orient-Express Hotels Inc.
555 Madison Avenue, 24th Floor
New York, New York 10022
U.S.A.
Attention: Company Secretary
Fax: +1 646 514 2947

Section 9. Miscellaneous .

(a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Company's Board of Directors.

(b) No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

(c) This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by or between the parties hereto; provided, however, that, except as set forth in Section 5 hereof, this Agreement shall not supersede, but instead govern in addition to, the Service Agreement, and in the event of a conflict between the Service Agreement and this Agreement, this Agreement shall govern. For the avoidance of doubt, if during the term of this Agreement a Change in Control occurs and the Executive's employment is terminated upon or within the period of one year immediately following such Change in Control, resulting in a triggering of the severance payments contained in this Agreement, (i) such payments shall supersede and be paid in lieu of all payments, rights and benefits provided under clause 19 of the Service Agreement and (ii) in the event that any payments are made or benefits provided under clause 19 of the Service Agreement, the gross amount of any severance payments payable under this Agreement shall be reduced by the gross amount, or value, of any such payments made or benefits provided.

(d) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of Bermuda.

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(e) Any payments provided for hereunder shall be paid net of any applicable withholding required under applicable laws.

(f) The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the term of this Agreement shall survive such expiration.

(g) The Executive and the Company agree that it is the intent of the parties that this Agreement be interpreted and construed in accordance with, and not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “ Code ”), and that to the extent any provisions of this Agreement do not comply with Section 409A of the Code, the parties will make such changes as are mutually agreed upon in order to comply with Section 409A of the Code. Notwithstanding any other provision with respect to the timing of payments under this Agreement, to the extent necessary to comply with the requirements of Section 409A of the Code, any payments to which the Executive may become entitled under this Agreement will be withheld until the first business day after the six-month anniversary of the date of termination or until the Executive's earlier death, at which time the Executive (or the Executive's estate) shall be paid such amount in a lump sum. Notwithstanding any provision of this Agreement to the contrary, references to a “termination of employment” (and corollary terms) with the Company shall be construed to refer to the Executive's “separation from service” (within the meaning of US Treasury Regulation Section 1.409A-1(h)). Notwithstanding anything to the contrary in this Agreement or any Company policy, with respect to any reimbursement that constitutes deferred compensation for purposes of Section 409A of the Code, except as otherwise permitted by Section 409A of the Code, the following conditions shall be applicable: (i) the amount eligible for reimbursement provided in one calendar year may not affect the amount eligible for reimbursement to be provided, in any other calendar year, (ii) any reimbursement shall be made to the Executive as soon as administratively practicable following submission to the Company for reimbursement, but in no event later than the last day of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement is not subject to liquidation or exchange for another benefit. Any payments that qualify for the “short-term deferral” exception under US Treasury Regulation Section 1.409A-1(b)(4), the “separation pay” exception under US Treasury Regulation 1.409A-1(b)(9)(iii), or another exception under Section 409A of the Code will be paid under the applicable exception to the greatest extent possible.

(h) In the event that it shall be determined that any payment or distribution by the Company or a subsidiary of the Company to or for the benefit of the Executive in connection with a Change in Control, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (including, without limitation, the acceleration of any payment, award, distribution or benefit) (the “ Payment ”), constitutes an “excess parachute payment” within the meaning of Section 280G of the Code, the Executive shall be paid an additional amount (the “ Gross-Up Payment ”) such that the net amount retained by the Executive after deduction of (i)  any excise tax imposed under Section 4999 of the Code and (ii)  any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay (a) federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and (b) state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. The Gross-Up Payment will be paid by the Company in a lump sum in cash promptly after the date the Executive remits the related taxes to the taxing authority, but in no event later than the end of the Executive's taxable year next following the Executive's taxable year in which the Executive remits the related taxes.

Section 10. Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.


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Section 11. Resolution of Disputes; Arbitration .

(a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Company's Board of Directors and shall be in writing. Any denial by the Company's Board of Directors of a claim for payments under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. Unless the Board of Directors gives notice of denial to the Executive within thirty (30) days of the Executive's claim submitted to the Board of Directors, the Executive's claim shall be deemed agreed to and approved by the Board of Directors for the Company. The Company's Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Company's Board of Directors a decision of the Company's Board of Directors within sixty (60) days after notification by the Company's Board of Directors that the Executive's claim has been denied.

(b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration before the American Arbitration Association in New York, New York in accordance with its commercial arbitration rules as in effect at the time when the dispute or controversy arises. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. Except to the extent that any claims asserted by the Executive are in bad faith or are manifestly unreasonable and subject to this Section 11, the Company will from time to time reimburse the Executive, promptly upon the Executive's request, for all legal costs and expenses he incurs in bringing such proceedings. The Executive undertakes that in the event that the Executive is wholly unsuccessful in any dispute or controversy settled by arbitration pursuant to this Section 11(b) he will repay to the Company on demand an amount equal to the aggregate of any amounts paid to the Executive by the Company as reimbursement of legal fees under this Section 11.

Section 12. Definitions . For purposes of this Agreement, the following terms shall have the meanings indicated below:

(a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(b) "Acquiring Person" shall have the meaning set forth in Section 4 hereof.

(c) "Bid" shall mean written acquisition offer, bid, tender offer, proxy contest solicitation or any similar action.

(d) "Board" or "Board of Directors" means the Board of Directors of the Company.

(e) "Cause" for termination by the Company or a subsidiary of the Company of the Executive's employment shall mean termination on grounds that the Executive:

(i) commits any material or persistent breach of any of the provisions of this Agreement or the Service Agreement provided that if any such breach or non-observance is capable of remedy then this sub-clause shall have effect only if written notice of that breach is served by the Company or a subsidiary of the Company on the Executive and the Executive shall have failed to remedy such a breach within 14 days of the service of such notice;

(ii) commits any serious or repeated breach of any applicable policies and procedures of the Company or any Group Company (as defined in the Service Agreement) that have been provided to the Executive and of which he is aware (as amended or superseded from time to time) provided that if any such breach or non-observance is capable of remedy then this sub-clause shall have effect only if written notice of that breach is served by the Company or a subsidiary of the

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Company on the Executive and the Executive shall have failed to remedy such a breach within 14 days of the service of such notice;

(iii) is guilty of serious misconduct which, in the Board's reasonable opinion, has damaged or may damage the business or affairs of the Company or any other Group Company;

(iv) is guilty of conduct which, in the Board's reasonable opinion, brings or is likely to bring himself, the Company or any other Group Company into disrepute;

(v) is convicted of a criminal offence (other than a road traffic offence not subject to a custodial sentence or any offence for which a custodial sentence may not be imposed);

(vi) is disqualified from acting as a director of a company by order of a competent court;

(vii) is declared bankrupt or makes any arrangement with or for the benefit of his creditors or has an administration order made against him under the County Courts Act 1984 or any other similar procedure under other applicable law; or

(viii) voluntarily resigns his directorship of the Company or Orient-Express Hotels (other than at the explicit request of or by agreement or arrangement with the Board).

(f) For purposes of this Agreement, "Change in Control" means any of the following events:

(i)     any "person" (as that term is defined for the purposes of Section 13(d) or 14(d) of the Exchange Act) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, "voting shares"); or

(ii)    individuals who, on the date of entering into this Agreement, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(iii)    the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than fifty percent (50%) of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or

(iv)    the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than fifty percent (50%) of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions,

and, for the avoidance of doubt, includes a Section 4(a) Change in Control and a Section 4(b) Change in Control; provided, however, that none of the foregoing events shall constitute a Change in Control for purposes of this Agreement unless the event also constitutes either a “change in the ownership of a corporation” (within the meaning of US Treasury Regulation Section 1.409A-3(i)(v)), a “change in the effective control of a corporation” (within the meaning of US Treasury Regulation Section 1.409A-3(i)(vi)), or a “change in the ownership of a substantial portion of the assets of a corporation” (within the meaning of US Treasury Regulation Section 1.409A-3(i)(vii)).

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(g) "Company" shall mean Orient-Express Hotels Ltd., and, except in determining under Section 12(d) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(h) "Date of Termination" shall have the meaning set forth in Section 6 hereof.

(i) "Effective Date" shall have the meaning set forth in Section 2 hereof.

(j) "Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as amended from time to time.

(k) "Executive" shall mean the individual named in the first paragraph of this Agreement.
(l) "Expatriate Allowance" has the meaning given to it in the Service Agreement.

(m) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in any of clauses (i), (iv), (v), (vi) or (vii) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

(i)    the assignment to the Executive of any duties inconsistent with the Executive's status as President and Chief Executive Officer of the Company or a subsidiary of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control;
(ii)    a reduction by the Company or a subsidiary of the Company in the Executive's annual base salary and expatriate allowance as in effect on the date hereof or as the same may be increased from time to time;
(iii)    the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;
(iv)    the failure by the Company or a subsidiary of the Company to pay to the Executive any portion of the Executive's current compensation within thirty (30) days of the date such compensation is due;
(v)    the failure by the Company or a subsidiary of the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's 2009 Share Award and Incentive Plan, bonus and other plans or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company or a subsidiary of the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control;

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(vi)    the failure by the Company or a subsidiary of the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company or a subsidiary of the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company or a subsidiary of the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company or a subsidiary of the Company in accordance with the Company's normal vacation policy or any employment agreement in effect at the time of the Change in Control;
(vii)    any purported termination of the Executive's employment by the Company or a subsidiary of the Company following a Change in Control which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6(a) hereof; or
(viii)    any failure by the Company to require its successor to expressly assume and agree to perform this Agreement as provided in Section 3 hereof.
The Executive's continued employment for ninety (90) days following any act or failure to act constituting Good Reason shall constitute a waiver of rights with respect to such (but only such) act or failure to act.
(n) "Notice of Termination" shall have the meaning set forth in Section 6 hereof.

(o) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(p) "Relocation Date" has the meaning given to it in the Service Agreement.

(q) "Service Agreement" shall have the meaning set forth in Recital E hereof.

ORIENT-EXPRESS HOTELS LTD.

By: /s/ R.M. Levine                 
Name:    Richard M. Levine
Title:    Chief Legal Officer

/s/ J.M. Scott III         
Name: JOHN MARCY SCOTT III
Address:

    




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Exhibit 10.10

[Indemnification Agreement between Orient-Express Hotels Ltd. and John M. Scott III dated November 8, 2012]

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (the “ Agreement ”) is made as of the 8th day of November, 2012 by and between ORIENT-EXPRESS HOTELS LTD., a Bermuda company (the “ Company ”), and John Marcy Scott (the “ Indemnitee ”).
WHEREAS, in order to induce the Indemnitee to continue serving as an officer or director of the Company, the board of directors of the Company (the “ Board ”) has determined that it is in the best interests of the Company to enter into this Agreement;
WHEREAS, the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as an officer or director of the Company;
NOW, THEREFORE, in consideration of Indemnitee's agreement to serve as a director and an officer of the Company after the date hereof, the parties hereto agree as follows:
1. Definitions . For purposes of this Agreement:

(a) References to the “ Company ” shall include, in addition to the resulting company, any constituent company (including any constituent of a constituent) absorbed or otherwise acquired in an amalgamation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if the Indemnitee is or was or may be deemed a director, officer, employee, agent, control person, or fiduciary of such constituent company, or is or was or may be deemed to be serving at the request of such constituent company as a director, officer, employee, control person, agent or fiduciary of another company, partnership, joint venture, employee benefit plan, trust or other enterprise, each such Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving company as each Indemnitee would have with respect to such constituent company if its separate existence had continued.

(b) Change in Control ” means any of the following events:

(i)     any "person" (as that term is defined for the purposes of Section 13(d) or 14(d) of the Exchange Act) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, "voting shares"); or

(ii)    individuals who, on the date of entering into this Agreement, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(iii)    the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than fifty percent (50%) of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or

(iv)    the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than fifty percent (50%) of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.




(c) Corporate Status ” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving at the request or consent of the Company.

(d) Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

(e) Enterprise ” shall mean the Company and any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that the Indemnitee is or was serving at the request or consent of the Company as a director, officer, employee, agent or fiduciary.

(f) Exchange Act ” shall mean the United States Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

(g) Expenses ” shall include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. Expenses also shall include the foregoing incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(h) Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporate law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or the Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements); or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “ Independent Counsel ” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine Indemnitee's rights under this Agreement.

(i) Person ” shall mean “person” as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

(j) Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which the Indemnitee was, is or will be involved as a party or otherwise: (i) by reason of the fact that the Indemnitee is or was an officer or director of the Company or a subsidiary of the Company; (ii) by reason of any action taken by the Indemnitee or of any inaction on the Indemnitee's part while acting as an officer or director of the Company or a subsidiary of the Company; or (iii) by reason of the fact that the Indemnitee is or was serving at the request of the Company or a subsidiary of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding (i) one initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce Indemnitee's rights under this Agreement and (ii) any brought by the Company, a subsidiary of the Company or the Indemnitee under or in connection with any contract of employment or severance agreement between any of the Indemnitee, the Company and any subsidiary of the Company or its or their termination at any time.

(k) References to “ fines ” shall include any taxes assessed on any Indemnitee with respect to an employee benefit plan (other than any such taxes assessed as a result of Indemnitee being a beneficiary of such plan).

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(l) References to “ serving at the request of the Company ” shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries.

(m) If the Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, such Indemnitee shall be deemed to have acted in a manner “ not opposed to the best interests of the Company ” as referred to in this Agreement.

(n) Securities Act ” shall mean the United States Securities Act of 1933, as amended, and the rules and regulations thereunder.

2. Indemnity of Indemnitee . The Company hereby agrees to hold harmless and indemnify the Indemnitee to the fullest extent permitted by applicable law, as such may be amended from time to time, as set forth in this Agreement.

(a) Proceedings . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(a) if, by reason of Indemnitee's Corporate Status or otherwise, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding. Pursuant to this Section 2(a) , the Indemnitee shall be indemnified against all Expenses, judgments, penalties, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually incurred by the Indemnitee, or on the Indemnitee's behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee acted in good faith.

(b) Overriding Right to Indemnification if Successful on the Merits . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of Indemnitee's Corporate Status or otherwise, a party to and is successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall be indemnified to the maximum extent permitted by applicable law, as such may be amended from time to time, against all Expenses actually incurred by the Indemnitee or on the Indemnitee's behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually incurred by Indemnitee or on Indemnitee's behalf in connection with each successfully resolved claim, issue or matter; provided , however , no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which it shall be finally determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof), that the Indemnitee is liable to the Company as a result of any fraud or dishonesty on the part of Indemnitee. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

3. Additional Indemnity . In addition to, and without regard to any limitations on, the indemnification provided for in Section 2 of this Agreement, and subject to the other provisions of this Agreement, the Company shall, and hereby does indemnify and hold harmless the Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually incurred by the Indemnitee or on the Indemnitee's behalf if, by reason of Indemnitee's Corporate Status or otherwise, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee, to the fullest extent permitted by applicable law (as finally determined under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof); provided , however , the Company shall have no obligation to indemnify the Indemnitee's Expenses in respect of any claim, issue or matter in any Proceeding as to which it shall be finally determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof), that the Indemnitee is liable to the Company as a result of any fraud or dishonesty on the part of Indemnitee. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which the Indemnitee is not a party, he or she shall be indemnified against all Expenses actually incurred by him or her or on his or her behalf in connection therewith.

4. Contribution .

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(a) To the extent the indemnification provided in Section 2 and Section 3 hereof is unavailable, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the portion of the amount of any judgment or settlement of such action, suit or proceeding for which the Company would have been responsible had the indemnification provided in Section 2 and Section 3 been available, without requiring the Indemnitee to contribute to such payment, and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee for such amount. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against the Indemnitee.

(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, the Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount incurred by the Indemnittee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) and/or for Expenses actually incurred and paid or payable by the Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and the Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided , however , that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than the Indemnitee who are jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and the Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than the Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c) The Company hereby agrees to fully indemnify and hold the Indemnitee harmless from any claim of contribution brought by officers, directors or employees of the Company, other than the Indemnitee, based upon a claim of liability which, if made against the Indemnitee directly, would be indemnifiable under this Agreement.

(d) The Company and the Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4 .

(e) In connection with the registration of the Company's securities, the relative benefits received by the Company and the Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In connection with the registration of the Company's securities, in no event shall the Indemnitee be required to contribute any amount under this Section 4 in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Indemnitee or (ii) the proceeds received by such Indemnitee from its sale of securities under such registration statement.


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5. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of the Indemnitee's Corporate Status or otherwise, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified against all Expenses actually incurred by the Indemnitee or on the Indemnitee's behalf in connection therewith.

6. Advancement of Expenses . Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding by reason of the Indemnitee's Corporate Status or otherwise within thirty (30) days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by the Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of the Indemnitee to repay promptly any Expenses advanced if it shall finally be determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof) that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest-free.

7. Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for the Indemnitee rights of indemnity that are as favorable as may be permitted under the laws of Bermuda. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether the Indemnitee is entitled to indemnification under this Agreement:

(a) The Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Such notice shall include the Indemnitee's request for indemnification and such documentation and information as is reasonably available to the Indemnitee and as is reasonably necessary for the Company to determine whether and to what extent the Indemnitee is entitled to indemnification. The secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. Failure to provide the notice required hereby shall not impair the Indemnitee's rights of indemnification and contribution under this Agreement except to the extent that such failure to provide notice actually prejudices the rights of the Company to defend any action or proceeding which is the basis of the claimed indemnification.

(b) Upon written request by the Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination, if required by applicable law, with respect to the Indemnitee's entitlement thereto shall be made in the specific case by one of the following methods: (i) by a majority vote of the Disinterested Directors, even though less than a quorum, (ii) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (iii) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel, in a written opinion of such counsel to the Board and the Indemnitee, (iv) if so directed by the Board, by the shareholders of the Company, or (v) if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board who were directors immediately prior to such Change in Control) after the date hereof, by Independent Counsel.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) hereof, the Independent Counsel shall be selected as provided in this Section 7(c) .

(i) If the determination of entitlement to indemnification is to be made pursuant to Section 7(b)(iii) the Independent Counsel shall be selected by the Board. The Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the counsel so selected does not satisfy the definition of “ Independent Counsel ” set forth at Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. In the event of a proper and timely objection, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit;
            

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(ii) If there has been a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board who were directors immediately prior to such Change in Control) after the date hereof, then Independent Counsel shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and the Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company and the Indemnitee each agree to abide by such opinion;
(iii) If, within thirty (30) days after submission by the Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or the Indemnitee may petition the President for the time being of the Bermuda Bar Council (the “ President ”) for resolution of any objection which shall have been made by the Indemnitee to the Company's selection of Independent Counsel and/or for the appointment as the Independent Counsel of a person selected by the President or by such other person as the President shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 7(b) hereof; and
(iv) The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c) , regardless of the manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that the Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(e) In making a determination with respect to whether the Indemnitee acted in good faith and in a manner that Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, the person or persons or entity making such determination shall presume that Indemnitee acted in good faith and in a manner that Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Any action, or failure to act, by the Indemnitee based on the Indemnitee's good faith reliance on the records or books of account of the Enterprise, including financial statements, or on information supplied to the Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise shall not, in and of itself, constitute grounds for an adverse determination with respect to whether the Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to the Indemnitee for the purposes of determining the right to indemnification under this Agreement.

(f) If the person, persons or entity empowered or selected under Section 7 to determine whether the Indemnitee is entitled to indemnification shall not have made a determination within ninety (90) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be entitled to such indemnification absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such ninety 90-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto.

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(g) The Indemnitee shall cooperate with the person, persons or entity making such determination with respect to the Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or a shareholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee's entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys' fees and disbursements) incurred by the Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom.

(h) In the event the Company shall be obligated under Section 2 or Section 3 hereof to pay the expenses of any Proceeding against the Indemnitee or under Section 4 hereof to contribute to any judgment or settlement of any Proceeding, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice and the retention of counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same Proceeding; provided that (i) the Indemnitee shall have the right to employ the Indemnitee's counsel in any such Proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company.

(i) In no event shall the Company be obligated to pay the fees and expenses of more than one counsel for Indemnitee and any other directors, officers or employees of the Company who are indemnified pursuant to similar indemnity agreements with respect to any claim, unless a conflict of interest shall exist between the Indemnitee and any other of such indemnified parties with respect to such claim, in which event the Company will be obligated to pay the fees and expenses of an additional counsel for each indemnified party or group of indemnified parties with whom a conflict of interest exists.

(j) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which the Indemnitee is a party is resolved in any manner other than by adverse judgment against the Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that the Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(k) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of the Indemnitee to indemnification under this Agreement or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful.

(l) If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Proceeding, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses to which such Indemnitee is entitled.
  
8. Remedies of Indemnitee .


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(a) In the event that (i) a determination is made pursuant to Section 7 of this Agreement that the Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section 7(b) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification (subject to the extension contemplated by Section 7(f) ), (iv) payment of indemnification is not made pursuant to this Agreement within the later of (A) ten (10) days after receipt by the Company of a written request therefor and (B) any such longer period as explicitly provided under Section 7 of this Agreement or (v) payment of indemnification is not made within ten (10) days after a determination has been made that the Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 7 of this Agreement, the Indemnitee shall be entitled to seek an adjudication in of the Supreme Court of Bermuda, or in any other court of competent jurisdiction, of the Indemnitee's entitlement to such indemnification. The Company shall not oppose the Indemnitee's right to seek any such adjudication.

(b) If a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 8 , absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee's misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(c) In the event that the Indemnitee, pursuant to this Section 8 , seeks a judicial adjudication of Indemnitee's rights under, or to recover damages for breach of, this Agreement, or to recover under any insurance policies maintained by the Company, the Company shall pay on the Indemnitee's behalf, in advance, and will indemnify and hold the Indemnitee harmless against, any and all expenses (of the types described in the definition of Expenses in Section 1 of this Agreement) actually incurred by the Indemnitee in such judicial adjudication, regardless of whether the Indemnitee is ultimately determined to be entitled to such indemnification, advancement of expenses or insurance recovery, absent a prohibition of such advancement or indemnification under applicable law.

(d) In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid Expenses incurred by such Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, except to the extent that such the Indemnitee is ultimately unsuccessful in such action.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify the Indemnitee against any and all Expenses and, if requested by the Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, absent a prohibition of such advancement or indemnification under applicable law, such Expenses to the Indemnitee, which are incurred by the Indemnitee in connection with any action brought by the Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors' and officers' liability insurance policies maintained by the Company; provided that the Company receives, along with such written request, an undertaking by or on behalf of the Indemnitee to repay promptly any Expenses advanced if it shall finally be determined that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 8(e) shall be unsecured and interest-free.

(f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.


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9. Non-Exclusivity; Survival of Rights; Insurance; Subrogation; Primacy of Indemnification .

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the memorandum of association and bye-laws of the Company or any agreement, vote of shareholders, resolution of directors or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of the Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in the Indemnitee's Corporate Status or otherwise prior to such amendment, alteration or repeal. To the extent that a change in the applicable law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the memorandum of association and bye-laws of the Company and this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Bermuda company to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. Notwithstanding anything in this Agreement to the contrary, the indemnification and contribution provided for in this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitee or any of the Indemnitee's agents.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. The Company will use reasonable commercial efforts to procure and maintain such insurance in the minimum amount of $40 million. If at any time the Company, despite using reasonable commercial efforts, is unable to maintain such insurance in the minimum amount of $40 million, or if such insurance is cancelled or cover is withdrawn or reduced below such minimum, then the Company will forthwith inform the Indemnitee.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers reasonably required and take all action reasonably necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. In no event, however, shall the Company or any other person have any right of recovery, through subrogation or otherwise, against the Indemnitee, any entity affiliated with the Indemnitee to which the Indemnitee provides services or any entity related to the Indemnitee which is or was an investor in the Company or its affiliates, or any insurance policy purchased by the Indemnitee or any such entity.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that the Indemnitee has otherwise actually received such payment under any Company insurance policy, Company contract, Company agreement or otherwise (except to the extent that the Indemnitee is required (by court order or otherwise) to return such payment or to surrender it to the Company).

(e) The Company hereby acknowledges that the Indemnitee has or may have certain other sources of rights to indemnification, advancement of expenses and/or insurance whether currently in force or established in the future (collectively, the “Outside Indemnitors”). The Company hereby agrees: (i) that the Company is the indemnitor of first resort (i.e., its obligations to the Indemnitee are primary and any obligation of the Outside Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by the Indemnitee are secondary and any claims or rights to advancement of expenses pursuant to insurance policies maintained

9



by the Outside Indemnitors are also secondary) and (ii) that the Company shall be required to advance the full amount of expenses, judgments, penalties, fines and amounts paid in settlement to the maximum extent legally permitted and to the maximum extent required or permitted by the terms of this Agreement, the memorandum of association and bye-laws of the Company or any other agreement between the Company and the Indemnitee, without regard to any rights the Indemnitee may have against the Outside Indemnitors nor any rights the Indemnitee may have to coverage under insurance policies maintained by the Outside Indemnitors. The Company and the Indemnitee further agree that no advancement or payment by the Outside Indemnitors or any insurance carrier on behalf of the Indemnitee with respect to any claim for which the Indemnitee has sought indemnification from the Company or coverage from any such insurance carrier shall affect the foregoing. The Company and the Indemnitee agree that the Outside Indemnitors and the carriers of any insurance maintained by the Outside Indemnitors are express third party beneficiaries of the terms hereof.

10. Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against the Indemnitee:

(a) in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by the Indemnitee against the Company or its directors, officers, employees or other indemnitees, if a court of competent jurisdiction finally determines in a non-appealable decision that each of the material assertions made by the Indemnitee in such Proceeding (or any part of any Proceeding) was not made in good faith or was frivolous; or

(b) for which payment has actually been made to or on behalf of the Indemnitee under any Company insurance policy or other Company indemnity provision, except with respect to any excess beyond the amount paid under any Company insurance policy or other Company indemnity provision and except to the extent that the Indemnitee is required (by court order or otherwise) to return such payment or to surrender it to the Company); or

(c) for an accounting of profits made from the purchase and sale (or sale and purchase) by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act, or similar provisions of applicable statute or common law; or

(d) in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by the Indemnitee against the Company or its directors, officers, employees or other indemnitees (other than any Proceeding initiated by the Indemnitee pursuant to Section 8(c) , which shall be governed by the terms of such section), unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law; or

(e) to which the Indemnitee is not entitled to indemnification as a matter of law or public policy; or

(f) in respect of the Indemnitee's fraud or dishonesty, or violation of applicable laws concerning insider trading.

11. Duration of Agreement, Limitations . All agreements and obligations of the Company contained herein shall survive after the end of any period the Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall inure to the benefit of Indemnitee's estate, spouse, heirs, executors and personal and legal representatives; provided , however , that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.


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12. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

13. Security . To the extent requested by the Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

14. Enforcement .

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce the Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

(c) The Company represents that this Agreement has been approved by the Board.

15. Attorneys' Fees . In the event that any action is instituted by the Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, the Indemnitee shall be entitled to be paid all Expenses incurred by the Indemnitee with respect to such action if the Indemnitee is ultimately successful in such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid Expenses incurred by the Indemnitee in defense of such action (including costs and expenses incurred with respect to the Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, in each case only to the extent that the Indemnitee is ultimately successful in such action.

16. Severability . The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon the Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

17. Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

18. Notice By Indemnitee . The Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Such notice shall include the Indemnitee's request for indemnification and such documentation and information as is reasonably available to the Indemnitee and as is reasonably necessary for the Company to determine whether and to what extent the Indemnitee is entitled to indemnification. The secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. Failure to provide the notice required hereby shall not impair the Indemnitee's rights of indemnification and contribution under this Agreement except to the extent that such failure to provide notice actually prejudices the rights of the Company to defend any action or proceeding which is the basis of the claimed indemnification.


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19. Notices . Unless otherwise provided herein, any notice required or permitted under this Agreement shall be deemed effective upon the earliest of (a) actual receipt, or (b) (i) one (1) business day after delivery by confirmed facsimile transmission, (ii) one (1) business day (for domestic delivery) or two business days (for international delivery) after the business day of deposit with an internationally recognized overnight courier service for next business day domestic or two-business day international delivery, freight prepaid. References in this Agreement to “business day” shall mean any day, other than a Saturday or Sunday, on which banks are open for business in Bermuda. Any such notice shall be in writing and shall be addressed to the party to be notified at the address indicated for such party indicated on the signature pages or exhibits hereto, as otherwise set forth in this Section 19 , or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. All communications shall be sent:

(a) To the Indemnitee at the address set forth below the Indemnitee's signature hereto;

(b) To the Company at the address set forth below the Company's signature hereto;
or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
20. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

21. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

22. Governing Law and Consent to Jurisdiction . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of Bermuda, without regard to its conflict of laws rules. The Company and the Indemnitee hereby consent to submit to the non-exclusive jurisdiction of the courts of Bermuda for the purposes of any action or proceeding arising out of or in connection with this Agreement and they hereby waive any objection to the laying of venue of any such action or proceeding in the courts of Bermuda, and waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the courts of Bermuda has been brought in an improper or inconvenient forum.

23. Construction . The parties acknowledge that both parties have contributed to the drafting of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

INDEMNITEE:


Signature:     /s/ J.M. Scott III     
Name:        John Marcy Scott III
Address:    

COMPANY:
ORIENT-EXPRESS HOTELS LTD.


By:         /s/ R.M. Levine     
Name:        Richard M. Levine
Title:        Chief Legal Officer


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Address:    c/o Orient-Express Hotels Inc.
555 Madison Avenue, 24th Floor
New York, New York 10022
U.S.A.
Attention: Company Secretary
Fax: +1 646 514 2947
    




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Exhibit 10.11

[Form of severance agreement between Orient-Express Hotels Ltd. and certain of its officers, as amended]

SEVERANCE AGREEMENT
THIS AGREEMENT, dated [ ], [ ], is made by and between ORIENT-EXPRESS HOTELS LTD., a Bermuda company (the “Company”), and [ ] (the “Executive”).
RECITALS
A. The Executive is employed by the Company or a subsidiary of the Company and is appointed by the Company as its Vice President; and
B. The Company considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel; and
C. The Company's Board of Directors recognizes that, as is the case with many publicly held corporations, the possibility of a change in control with respect to the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of senior management personnel to the detriment of the Company and its shareholders; and
D. The Company's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the loyalty and continued attention and dedication of the Company's senior management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control with respect to the Company.
NOW, THEREFORE , the Company and the Executive hereby agree as follows:
Section 1. Defined Terms . Capitalized terms are defined in Section 13.

Section 2. Term of Agreement . This Agreement shall commence as of the date first written above (the “ Effective Date ”) and shall continue in effect through the third anniversary of the Effective Date; provided, however, that thereafter, the term shall automatically be extended for additional one-year periods, unless, not later than 90 days prior to the third anniversary or any anniversary thereafter, as applicable, the Company or the Executive shall have given notice to the other party of its or his election not to extend the term hereof.

Section 3. Company's Covenants . In order to induce the Executive to remain in the employ of the Company or a subsidiary of the Company, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payment set forth in Section 4. No Severance Payment shall be payable under this Agreement, unless during the term of this Agreement there shall have been a termination of the Executive's employment with the Company or a subsidiary of the Company following a Change in Control under Section 4 hereof. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company or a subsidiary of the Company, the Executive shall not have any right to be retained in the employ of the Company or a subsidiary of the Company.

Section 4. Severance Payment

(a) Severance Payment Following Change in Control . If during the term of this Agreement (i)  a Change in Control occurs and (ii)  the Executive's employment is terminated within one year following such Change in Control either (A)  by the Company or a subsidiary of the Company without Cause, or (B)  by the Executive with Good Reason, then, in any such case, the Company shall pay the Executive a lump sum severance payment (the “ Severance Payment ”), in cash, equal to two times the sum of (x) the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, and (y) the most recent annual bonus payment made to the Executive.




(b) Termination of Employment Prior to Change in Control . For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company or a subsidiary of the Company without Cause or by the Executive with Good Reason, if (i)  the Executive's employment is terminated by the Company or a subsidiary of the Company without Cause prior to a Change in Control and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which constitutes a Change in Control (an “ Acquiring Person ”), or (ii)  the Executive terminates his employment for Good Reason prior to a Change in Control and the circumstance or event which constitutes Good Reason occurs at the request or direction of an Acquiring Person.

Section 5. Termination of Employment Agreement . Notwithstanding any provisions in the employment agreement of the Executive with the Company or a subsidiary of the Company, as in effect on the Effective Date (the “ Employment Agreement ”), regarding the right to terminate the Executive's employment without cause or any other reason, or regarding the required notice for termination, the Executive's employment may only be terminated by him or by the Company or a subsidiary of the Company without cause or any other reason, if the party terminating shall give the other party not less than six months' prior written notice of the date of termination, unless the termination occurs following a Change in Control, in which event Section 6(b) hereof shall apply. This Section 5 shall not affect (i)  any provisions in the Employment Agreement related to termination for cause or any other reason or (ii)  any provisions in this Agreement related to termination for Cause or Good Reason.

Section 6. Termination Procedures .

(a) Notice of Termination . After a Change in Control and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 9 hereof. For purposes of this Agreement, a “ Notice of Termination ” shall mean a notice which shall state (i)  in the event of a termination by the Company or a subsidiary of the Company, whether the termination is occurring for Cause, and (ii)  in the event of termination by the Executive, whether the termination is occurring for Good Reason, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Company's Board of Directors at a meeting of the Company's Board of Directors (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Company's Board of Directors) finding that, in the good faith opinion of the Company's Board of Directors, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in reasonable detail.

(b) Date of Termination . With respect to any purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, the phrase “ Date of Termination ” shall mean the date specified in the Notice of Termination (which, in the case of a termination by the Company or a subsidiary of the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).

Section 7. Excise Tax . In the event that it shall be determined that any payment or distribution by the Company or a subsidiary of the Company to or for the benefit of the Executive in connection with a Change in Control, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (including, without limitation, the acceleration of any payment, award, distribution or benefit) (the “ Payment ”), constitutes an “excess parachute payment” within the meaning of Section 280G of the Code, the Executive shall be paid an additional amount (the “ Gross-Up Payment ”) such that the net amount retained by the Executive after deduction of (i)  any excise tax imposed under Section 4999 of the Code and (ii)  any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment shall be equal to the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay (a) federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and (b) state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes.

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Section 8. Binding Agreement . This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.

Section 9. Notices . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when (i) sent by telefax, (ii)  hand delivered, (iii)  sent by courier, or (iv)  mailed by registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:
To the Company:

Orient-Express Hotels Ltd.
c/o Orient-Express Services Ltd.
1 st  Floor, Shackleton House
4 Battle Bridge Lane
London SE1 2HP, England
Attention: Company Secretary
Fax: +44-(0)20-7921-4777
To the Executive:

At the address then appearing on the payroll records of the Company
Section 10. Miscellaneous .

(a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Company's Board of Directors.

(b) No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

(c) This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that, except as set forth in Section 5 hereof, this Agreement shall not supersede, but instead govern in addition to, the Employment Agreement, and in the event of a conflict between the Employment Agreement and this Agreement, this Agreement shall govern.

(d) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of Bermuda.

(e) Any payments provided for hereunder shall be paid net of any applicable withholding required under applicable laws.

(f) The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the term of this Agreement shall survive such expiration.

Section 11. Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.


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Section 12. Resolution of Disputes; Arbitration .

(a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Company's Board of Directors and shall be in writing. Any denial by the Company's Board of Directors of a claim for payments under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Company's Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Company's Board of Directors a decision of the Company's Board of Directors within sixty (60) days after notification by the Company's Board of Directors that the Executive's claim has been denied.
(b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration before the American Arbitration Association in New York, New York in accordance with its commercial arbitration rules as in effect at the time when the dispute or controversy arises. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

Section 13. Definitions . For purposes of this Agreement, the following terms shall have the meanings indicated below:
(a) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(b) “Acquiring Person” shall have the meaning set forth in Section 4 hereof.

(c) “Cause” for termination by the Company or a subsidiary of the Company of the Executive's employment shall mean (i)  the continued failure by the Executive to substantially perform the Executive's duties with the Company after a written demand for substantial performance is delivered to the Executive by the Company's Board of Directors, which demand specifically identifies the manner in which the Company's Board of Directors believes that the Executive has not substantially performed the Executive's duties, and Executive has not cured any such failure that is capable of being cured in all material respects within ten (10) days of receiving such written demand, or (ii)  the Executive's incapacity due to physical or mental illness to perform the Executive's duties with the Company for a period of three (3) consecutive months, or (iii) the conviction of the Executive for any indictable criminal offense.

(d) For purposes of this Agreement, “Change in Control” means any of the following events:

(i) any “person” (as that term is defined for the purposes of Section 13(d) or 14(d) of the Exchange Act) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, “voting shares”); or

(ii) individuals who, on December 7, 2012, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(iii) the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than 50% of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or


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(iv) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than 50% of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.

(e) “Code” shall mean the U.S. Internal Revenue Code of 1986, as amended.

(f) “Company” shall mean Orient-Express Hotels Ltd., and, except in determining under Section 12(d) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(g) “Date of Termination” shall have the meaning set forth in Section 6 hereof.

(h) “Effective Date” shall have the meaning set forth in Section 2 hereof.

(i) “Employment Agreement” shall have the meaning set forth in Section 5 hereof.

(j) “Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended from time to time.

(k) “Executive” shall mean the individual named in the first paragraph of this Agreement.

(l) “Good Reason” for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in any of clauses (i), (iv), (v), (vi) or (vii) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

(i) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control;

(ii) a reduction by the Company or a subsidiary of the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time;

(iii) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;

(iv) the failure by the Company or a subsidiary of the Company to pay to the Executive any portion of the Executive's current compensation within thirty (30) days of the date such compensation is due;

(v) the failure by the Company or a subsidiary of the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's stock option, bonus and other plans or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company or a subsidiary of the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control;


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(vi) the failure by the Company or a subsidiary of the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company or a subsidiary of the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company or a subsidiary of the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company or a subsidiary of the Company in accordance with the Company's normal vacation policy or any employment agreement in effect at the time of the Change in Control; or

(vii) any purported termination of the Executive's employment by the Company or a subsidiary of the Company following a Change in Control which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 6(a) hereof.

The Executive's continued employment for thirty (30) days following any act or failure to act constituting Good Reason shall constitute a waiver of rights with respect to such (but only such) act or failure to act.
(m) “Gross-Up Payment” shall have the meaning set forth in Section 7 hereof.

(n) “Notice of Termination” shall have the meaning set forth in Section 6 hereof.

(o) “Payment” shall have the meaning set forth in Section 7 hereof.

(p) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i)  the Company or any of its subsidiaries, (ii)  a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii)  an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv)  a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(q) “Severance Payment” shall have the meaning set forth in Section 4 hereof.
                
ORIENT-EXPRESS HOTELS LTD.
                        
By:
 
Name:
 
Title:
 
 
 
Name:
Address:




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Exhibit 10.12

[Form of indemnification agreement between Orient-Express Hotels Ltd. and its non-executive directors and certain of its officers]

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (the “ Agreement ”) is made as of the [ ] day of [ ], [ ] by and between ORIENT-EXPRESS HOTELS LTD., a Bermuda company (the “ Company ”), and [ ] (the “ Indemnitee ”).
WHEREAS, in order to induce the Indemnitee to continue serving as an officer or director of the Company, the board of directors of the Company (the “ Board ”) has determined that it is in the best interests of the Company to enter into this Agreement;
WHEREAS, the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as an officer or director of the Company;
NOW, THEREFORE, in consideration of Indemnitee's agreement to serve as an officer or director of the Company after the date hereof, the parties hereto agree as follows:
1. Definitions . For purposes of this Agreement:

(a) References to the “ Company ” shall include, in addition to the resulting company, any constituent company (including any constituent of a constituent) absorbed or otherwise acquired in an amalgamation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if the Indemnitee is or was or may be deemed a director, officer, employee, agent, control person, or fiduciary of such constituent company, or is or was or may be deemed to be serving at the request of such constituent company as a director, officer, employee, control person, agent or fiduciary of another company, partnership, joint venture, employee benefit plan, trust or other enterprise, each such Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving company as each Indemnitee would have with respect to such constituent company if its separate existence had continued.

(b) Change in Control ” means any of the following events:

(i)     any "person" (as that term is defined for the purposes of Section 13(d) or 14(d) of the Exchange Act) shall directly or indirectly become the beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of more than 40% of the voting shares of the Company then outstanding and then entitled to vote generally in the election of directors of the Company (in this definition, "voting shares"); or

(ii)    individuals who, on the date of entering into this Agreement, constitute the Company's Board of Directors (or the successors of such individuals nominated by such Board of Directors or a committee thereof on which such individuals or their successors constitute a majority) shall cease to constitute a majority of the Company's Board of Directors; or

(iii)    the Company amalgamates, merges or consolidates with or into any other entity or entities, or the Company or its holders of voting shares effects any reorganization, cash tender or exchange offer or other securities sale or business combination, except (in any case) if more than fifty percent (50%) of the outstanding voting shares of the surviving or resulting entity are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions; or

(iv)    the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets and business, except (in any case) to an entity of which more than fifty percent (50%) of the outstanding voting shares are beneficially owned (directly or indirectly) by the holders of the Company's voting shares immediately before the transaction or series of transactions.




(c) Corporate Status ” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving at the request or consent of the Company.

(d) Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

(e) Enterprise ” shall mean the Company and any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that the Indemnitee is or was serving at the request or consent of the Company as a director, officer, employee, agent or fiduciary.

(f) Exchange Act ” shall mean the United States Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

(g) Expenses ” shall include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. Expenses also shall include the foregoing incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(h) Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporate law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or the Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements); or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “ Independent Counsel ” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine Indemnitee's rights under this Agreement.

(i) Person ” shall mean “person” as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

(j) Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which the Indemnitee was, is or will be involved as a party or otherwise: (i) by reason of the fact that the Indemnitee is or was an officer or director of the Company or a subsidiary of the Company; (ii) by reason of any action taken by the Indemnitee or of any inaction on the Indemnitee's part while acting as an officer or director of the Company or a subsidiary of the Company; or (iii) by reason of the fact that the Indemnitee is or was serving at the request of the Company or a subsidiary of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding (i) one initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce Indemnitee's rights under this Agreement and (ii) any brought by the Company, a subsidiary of the Company or the Indemnitee under or in connection with any contract of employment or severance agreement between any of the Indemnitee, the Company and any subsidiary of the Company or its or their termination at any time.

(k) References to “ fines ” shall include any taxes assessed on any Indemnitee with respect to an employee benefit plan (other than any such taxes assessed as a result of Indemnitee being a beneficiary of such plan).


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(l) References to “ serving at the request of the Company ” shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries.

(m) If the Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, such Indemnitee shall be deemed to have acted in a manner “ not opposed to the best interests of the Company ” as referred to in this Agreement.

(n) Securities Act ” shall mean the United States Securities Act of 1933, as amended, and the rules and regulations thereunder.

2. Indemnity of Indemnitee . The Company hereby agrees to hold harmless and indemnify the Indemnitee to the fullest extent permitted by applicable law, as such may be amended from time to time, as set forth in this Agreement.

(a) Proceedings . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(a) if, by reason of Indemnitee's Corporate Status or otherwise, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding. Pursuant to this Section 2(a) , the Indemnitee shall be indemnified against all Expenses, judgments, penalties, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually incurred by the Indemnitee, or on the Indemnitee's behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee acted in good faith.

(b) Overriding Right to Indemnification if Successful on the Merits . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of Indemnitee's Corporate Status or otherwise, a party to and is successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall be indemnified to the maximum extent permitted by applicable law, as such may be amended from time to time, against all Expenses actually incurred by the Indemnitee or on the Indemnitee's behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually incurred by Indemnitee or on Indemnitee's behalf in connection with each successfully resolved claim, issue or matter; provided , however , no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which it shall be finally determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof), that the Indemnitee is liable to the Company as a result of any fraud or dishonesty on the part of Indemnitee. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

3. Additional Indemnity . In addition to, and without regard to any limitations on, the indemnification provided for in Section 2 of this Agreement, and subject to the other provisions of this Agreement, the Company shall, and hereby does indemnify and hold harmless the Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually incurred by the Indemnitee or on the Indemnitee's behalf if, by reason of Indemnitee's Corporate Status or otherwise, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee, to the fullest extent permitted by applicable law (as finally determined under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof); provided , however , the Company shall have no obligation to indemnify the Indemnitee's Expenses in respect of any claim, issue or matter in any Proceeding as to which it shall be finally determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof), that the Indemnitee is liable to the Company as a result of any fraud or dishonesty on the part of Indemnitee. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which the Indemnitee is not a party, he or she shall be indemnified against all Expenses actually incurred by him or her or on his or her behalf in connection therewith.


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4.
Contribution .

(a) To the extent the indemnification provided in Section 2 and Section 3 hereof is unavailable, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the portion of the amount of any judgment or settlement of such action, suit or proceeding for which the Company would have been responsible had the indemnification provided in Section 2 and Section 3 been available, without requiring the Indemnitee to contribute to such payment, and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee for such amount. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against the Indemnitee.

(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, the Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount incurred by the Indemnittee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) and/or for Expenses actually incurred and paid or payable by the Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and the Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided , however , that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than the Indemnitee who are jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and the Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than the Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c) The Company hereby agrees to fully indemnify and hold the Indemnitee harmless from any claim of contribution brought by officers, directors or employees of the Company, other than the Indemnitee, based upon a claim of liability which, if made against the Indemnitee directly, would be indemnifiable under this Agreement.

(d) The Company and the Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 4 .

(e) In connection with the registration of the Company's securities, the relative benefits received by the Company and the Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In connection with the registration of the Company's securities, in no event shall the Indemnitee be required to contribute any amount under this Section 4 in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Indemnitee or (ii) the proceeds received by such Indemnitee from its sale of securities under such registration statement.


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5. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of the Indemnitee's Corporate Status or otherwise, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified against all Expenses actually incurred by the Indemnitee or on the Indemnitee's behalf in connection therewith.

6. Advancement of Expenses . Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding by reason of the Indemnitee's Corporate Status or otherwise within thirty (30) days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by the Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of the Indemnitee to repay promptly any Expenses advanced if it shall finally be determined (under the procedures, and subject to the presumptions, set forth in Section 7 and Section 8 hereof) that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest-free.

7. Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for the Indemnitee rights of indemnity that are as favorable as may be permitted under the laws of Bermuda. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether the Indemnitee is entitled to indemnification under this Agreement:

(a) The Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Such notice shall include the Indemnitee's request for indemnification and such documentation and information as is reasonably available to the Indemnitee and as is reasonably necessary for the Company to determine whether and to what extent the Indemnitee is entitled to indemnification. The secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. Failure to provide the notice required hereby shall not impair the Indemnitee's rights of indemnification and contribution under this Agreement except to the extent that such failure to provide notice actually prejudices the rights of the Company to defend any action or proceeding which is the basis of the claimed indemnification.

(b) Upon written request by the Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination, if required by applicable law, with respect to the Indemnitee's entitlement thereto shall be made in the specific case by one of the following methods: (i) by a majority vote of the Disinterested Directors, even though less than a quorum, (ii) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (iii) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel, in a written opinion of such counsel to the Board and the Indemnitee, (iv) if so directed by the Board, by the shareholders of the Company, or (v) if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board who were directors immediately prior to such Change in Control) after the date hereof, by Independent Counsel.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) hereof, the Independent Counsel shall be selected as provided in this Section 7(c) .

(i) If the determination of entitlement to indemnification is to be made pursuant to Section 7(b)(iii) the Independent Counsel shall be selected by the Board. The Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the counsel so selected does not satisfy the definition of “ Independent Counsel ” set forth at Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. In the event of a proper and timely objection, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit;
            

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(ii) If there has been a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board who were directors immediately prior to such Change in Control) after the date hereof, then Independent Counsel shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and the Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company and the Indemnitee each agree to abide by such opinion;
(iii) If, within thirty (30) days after submission by the Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or the Indemnitee may petition the President for the time being of the Bermuda Bar Council (the “ President ”) for resolution of any objection which shall have been made by the Indemnitee to the Company's selection of Independent Counsel and/or for the appointment as the Independent Counsel of a person selected by the President or by such other person as the President shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 7(b) hereof; and
(iv) The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 7(c) , regardless of the manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that the Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(e) In making a determination with respect to whether the Indemnitee acted in good faith and in a manner that Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, the person or persons or entity making such determination shall presume that Indemnitee acted in good faith and in a manner that Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Any action, or failure to act, by the Indemnitee based on the Indemnitee's good faith reliance on the records or books of account of the Enterprise, including financial statements, or on information supplied to the Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise shall not, in and of itself, constitute grounds for an adverse determination with respect to whether the Indemnitee acted in good faith and in a manner that the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to the Indemnitee for the purposes of determining the right to indemnification under this Agreement.

(f) If the person, persons or entity empowered or selected under Section 7 to determine whether the Indemnitee is entitled to indemnification shall not have made a determination within ninety (90) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be entitled to such indemnification absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such ninety 90-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto.

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(g) The Indemnitee shall cooperate with the person, persons or entity making such determination with respect to the Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or a shareholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee's entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys' fees and disbursements) incurred by the Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom.

(h) In the event the Company shall be obligated under Section 2 or Section 3 hereof to pay the expenses of any Proceeding against the Indemnitee or under Section 4 hereof to contribute to any judgment or settlement of any Proceeding, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice and the retention of counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same Proceeding; provided that (i) the Indemnitee shall have the right to employ the Indemnitee's counsel in any such Proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company.

(i) In no event shall the Company be obligated to pay the fees and expenses of more than one counsel for Indemnitee and any other directors, officers or employees of the Company who are indemnified pursuant to similar indemnity agreements with respect to any claim, unless a conflict of interest shall exist between the Indemnitee and any other of such indemnified parties with respect to such claim, in which event the Company will be obligated to pay the fees and expenses of an additional counsel for each indemnified party or group of indemnified parties with whom a conflict of interest exists.

(j) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which the Indemnitee is a party is resolved in any manner other than by adverse judgment against the Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that the Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(k) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of the Indemnitee to indemnification under this Agreement or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful.

(l) If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Proceeding, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses to which such Indemnitee is entitled.


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8. Remedies of Indemnitee .

(a) In the event that (i) a determination is made pursuant to Section 7 of this Agreement that the Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 6 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section 7(b) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification (subject to the extension contemplated by Section 7(f) ), (iv) payment of indemnification is not made pursuant to this Agreement within the later of (A) ten (10) days after receipt by the Company of a written request therefor and (B) any such longer period as explicitly provided under Section 7 of this Agreement or (v) payment of indemnification is not made within ten (10) days after a determination has been made that the Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 7 of this Agreement, the Indemnitee shall be entitled to seek an adjudication in of the Supreme Court of Bermuda, or in any other court of competent jurisdiction, of the Indemnitee's entitlement to such indemnification. The Company shall not oppose the Indemnitee's right to seek any such adjudication.

(b) If a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 8 , absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee's misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(c) In the event that the Indemnitee, pursuant to this Section 8 , seeks a judicial adjudication of Indemnitee's rights under, or to recover damages for breach of, this Agreement, or to recover under any insurance policies maintained by the Company, the Company shall pay on the Indemnitee's behalf, in advance, and will indemnify and hold the Indemnitee harmless against, any and all expenses (of the types described in the definition of Expenses in Section 1 of this Agreement) actually incurred by the Indemnitee in such judicial adjudication, regardless of whether the Indemnitee is ultimately determined to be entitled to such indemnification, advancement of expenses or insurance recovery, absent a prohibition of such advancement or indemnification under applicable law.

(d) In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid Expenses incurred by such Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, except to the extent that such the Indemnitee is ultimately unsuccessful in such action.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify the Indemnitee against any and all Expenses and, if requested by the Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, absent a prohibition of such advancement or indemnification under applicable law, such Expenses to the Indemnitee, which are incurred by the Indemnitee in connection with any action brought by the Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors' and officers' liability insurance policies maintained by the Company; provided that the Company receives, along with such written request, an undertaking by or on behalf of the Indemnitee to repay promptly any Expenses advanced if it shall finally be determined that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 8(e) shall be unsecured and interest-free.

(f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.


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9. Non-Exclusivity; Survival of Rights; Insurance; Subrogation; Primacy of Indemnification .

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the memorandum of association and bye-laws of the Company or any agreement, vote of shareholders, resolution of directors or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of the Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in the Indemnitee's Corporate Status or otherwise prior to such amendment, alteration or repeal. To the extent that a change in the applicable law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the memorandum of association and bye-laws of the Company and this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Bermuda company to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. Notwithstanding anything in this Agreement to the contrary, the indemnification and contribution provided for in this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitee or any of the Indemnitee's agents.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other company, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. The Company will use reasonable commercial efforts to procure and maintain such insurance in the minimum amount of $40 million. If at any time the Company, despite using reasonable commercial efforts, is unable to maintain such insurance in the minimum amount of $40 million, or if such insurance is cancelled or cover is withdrawn or reduced below such minimum, then the Company will forthwith inform the Indemnitee.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers reasonably required and take all action reasonably necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. In no event, however, shall the Company or any other person have any right of recovery, through subrogation or otherwise, against the Indemnitee, any entity affiliated with the Indemnitee to which the Indemnitee provides services or any entity related to the Indemnitee which is or was an investor in the Company or its affiliates, or any insurance policy purchased by the Indemnitee or any such entity.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that the Indemnitee has otherwise actually received such payment under any Company insurance policy, Company contract, Company agreement or otherwise (except to the extent that the Indemnitee is required (by court order or otherwise) to return such payment or to surrender it to the Company).

(e) The Company hereby acknowledges that the Indemnitee has or may have certain other sources of rights to indemnification, advancement of expenses and/or insurance whether currently in force or established in the future (collectively, the “Outside Indemnitors”). The Company hereby agrees: (i) that the Company is the indemnitor of first resort (i.e., its obligations to the Indemnitee are primary and any obligation of the Outside Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by the Indemnitee are secondary and any claims or rights to advancement of expenses pursuant to insurance policies maintained

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by the Outside Indemnitors are also secondary) and (ii) that the Company shall be required to advance the full amount of expenses, judgments, penalties, fines and amounts paid in settlement to the maximum extent legally permitted and to the maximum extent required or permitted by the terms of this Agreement, the memorandum of association and bye-laws of the Company or any other agreement between the Company and the Indemnitee, without regard to any rights the Indemnitee may have against the Outside Indemnitors nor any rights the Indemnitee may have to coverage under insurance policies maintained by the Outside Indemnitors. The Company and the Indemnitee further agree that no advancement or payment by the Outside Indemnitors or any insurance carrier on behalf of the Indemnitee with respect to any claim for which the Indemnitee has sought indemnification from the Company or coverage from any such insurance carrier shall affect the foregoing. The Company and the Indemnitee agree that the Outside Indemnitors and the carriers of any insurance maintained by the Outside Indemnitors are express third party beneficiaries of the terms hereof.

10. Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against the Indemnitee:

(a) in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by the Indemnitee against the Company or its directors, officers, employees or other indemnitees, if a court of competent jurisdiction finally determines in a non-appealable decision that each of the material assertions made by the Indemnitee in such Proceeding (or any part of any Proceeding) was not made in good faith or was frivolous; or

(b) for which payment has actually been made to or on behalf of the Indemnitee under any Company insurance policy or other Company indemnity provision, except with respect to any excess beyond the amount paid under any Company insurance policy or other Company indemnity provision and except to the extent that the Indemnitee is required (by court order or otherwise) to return such payment or to surrender it to the Company); or

(c) for an accounting of profits made from the purchase and sale (or sale and purchase) by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act, or similar provisions of applicable statute or common law; or

(d) in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by the Indemnitee against the Company or its directors, officers, employees or other indemnitees (other than any Proceeding initiated by the Indemnitee pursuant to Section 8(c) , which shall be governed by the terms of such section), unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law; or

(e) to which the Indemnitee is not entitled to indemnification as a matter of law or public policy; or

(f) in respect of the Indemnitee's fraud or dishonesty, or violation of applicable laws concerning insider trading.

11. Duration of Agreement, Limitations . All agreements and obligations of the Company contained herein shall survive after the end of any period the Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall inure to the benefit of Indemnitee's estate, spouse, heirs, executors and personal and legal representatives; provided , however , that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.


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12. Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

13. Security . To the extent requested by the Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

14. Enforcement .

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce the Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

(c) The Company represents that this Agreement has been approved by the Board.

15. Attorneys' Fees . In the event that any action is instituted by the Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, the Indemnitee shall be entitled to be paid all Expenses incurred by the Indemnitee with respect to such action if the Indemnitee is ultimately successful in such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid Expenses incurred by the Indemnitee in defense of such action (including costs and expenses incurred with respect to the Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, in each case only to the extent that the Indemnitee is ultimately successful in such action.

16. Severability . The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon the Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

17. Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

18. Notice By Indemnitee . The Indemnitee shall give the Company notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Such notice shall include the Indemnitee's request for indemnification and such documentation and information as is reasonably available to the Indemnitee and as is reasonably necessary for the Company to determine whether and to what extent the Indemnitee is entitled to indemnification. The secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. Failure to provide the notice required hereby shall not impair the Indemnitee's rights of indemnification and contribution under this Agreement except to the extent that such failure to provide notice actually prejudices the rights of the Company to defend any action or proceeding which is the basis of the claimed indemnification.


11



19. Notices . Unless otherwise provided herein, any notice required or permitted under this Agreement shall be deemed effective upon the earliest of (a) actual receipt, or (b) (i) one (1) business day after delivery by confirmed facsimile transmission, (ii) one (1) business day (for domestic delivery) or two business days (for international delivery) after the business day of deposit with an internationally recognized overnight courier service for next business day domestic or two-business day international delivery, freight prepaid. References in this Agreement to “business day” shall mean any day, other than a Saturday or Sunday, on which banks are open for business in Bermuda. Any such notice shall be in writing and shall be addressed to the party to be notified at the address indicated for such party indicated on the signature pages or exhibits hereto, as otherwise set forth in this Section 19 , or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. All communications shall be sent:

(a) To the Indemnitee at the address set forth below the Indemnitee's signature hereto;

(b) To the Company at the address set forth below the Company's signature hereto;
or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
20. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

21. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

22. Governing Law and Consent to Jurisdiction . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of Bermuda, without regard to its conflict of laws rules. The Company and the Indemnitee hereby consent to submit to the non-exclusive jurisdiction of the courts of Bermuda for the purposes of any action or proceeding arising out of or in connection with this Agreement and they hereby waive any objection to the laying of venue of any such action or proceeding in the courts of Bermuda, and waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the courts of Bermuda has been brought in an improper or inconvenient forum.

23. Construction . The parties acknowledge that both parties have contributed to the drafting of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

[Remainder of this page intentionally left blank.]



12



IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.


INDEMNITEE:


Signature:
 
 
 
Name:    
Address:
 
    
    
    

                    
COMPANY:
ORIENT-EXPRESS HOTELS LTD.


By:
 
 
 
Name:
 
 
 
Title:
 

Address:    c/o Orient-Express Hotels Inc.
555 Madison Avenue, 24th Floor
New York, New York 10022
U.S.A.
Attention: Company Secretary
Fax: +1 646 514 2947
    





13


EXHIBIT 10.13

Indemnification Agreement between John M. Scott III and Orient-Express Hotels Ltd. dated November 8, 2012





EXHIBIT 11

ORIENT-EXPRESS HOTELS LTD. AND SUBSIDIARIES

Statement re Computation of Per Share Earnings

(Common shares means both Class A and Class B)


 
2012
 
2011
 
2010
Year ended December 31,
 
$
 
$
 
$
 
 
 
 
 
 
 
Losses from continuing operations
 
(10,617,000
)
 
(18,833,000
)
 
(28,281,000
)
Earnings/(losses) from discontinued operations, net of tax
 
3,729,000

 
(68,763,000
)
 
(34,299,000
)
 
 
 
 
 
 
 
Net losses
 
(6,888,000
)
 
(87,596,000
)
 
(62,580,000
)
Net earnings attributable to non-controlling interests
 
(173,000
)
 
(184,000
)
 
(179,000
)
Net losses attributable to Orient-Express Hotels Ltd.
 
(7,061,000
)
 
(87,780,000
)
 
(62,759,000
)
 
 
 
 
 
 
 
 
 
Shares
 
Shares
 
Shares
Shares used to compute basic earnings per common share (weighted average number of shares outstanding)
 
102,849,000

 
102,531,000

 
91,545,000

Shares used to compute diluted earnings per common share (weighted average number of shares outstanding assuming the effect of share options and share awards)
 
102,849,000

 
102,531,000

 
91,545,000

 
 
 
 
 
 
 
 
 
$
 
$
 
$
Basic earnings per share:
 
 
 
 
 
 
Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
Basic net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
Net earnings/(losses) from continuing operations
 
(0.10
)
 
(0.18
)
 
(0.31
)
Net earnings/(losses) from discontinued operations
 
0.04

 
(0.67
)
 
(0.37
)
Diluted net earnings/(losses) per share attributable to Orient-Express Hotels Ltd.
 
(0.07
)
 
(0.86
)
 
(0.69
)
 




EXHIBIT 12

ORIENT-EXPRESS HOTELS LTD. AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

Year ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(Dollars in thousands, except ratios)
 
 
 
 
 
 
 
 
 
 
 
Earnings/(losses) before income taxes and earnings from unconsolidated companies, net of tax
 
9,246

 
(3,110
)
 
(12,355
)
 
(1,236
)
 
(8,119
)
Distributed interest from unconsolidated companies
 

 

 

 

 
6,240

Add back dividends received
 
2,524

 
2,428

 
1,759

 
3,790

 
3,840

Impairments on equity method investment
 

 

 

 

 
22,992

Total earnings/(losses) before income taxes
 
11,770

 
(682
)
 
(10,596
)
 
2,554

 
24,953

 
 
 
 
 
 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
 
 
 
 
 
Interest
 
29,737

 
36,571

 
32,611

 
33,478

 
52,008

Amortization of finance costs
 
5,318

 
7,167

 
4,884

 
3,596

 
2,883

Interest on uncertain tax positions
 
26

 
(479
)
 
408

 
79

 
(895
)
Interest on guaranteed indebtedness
 

 

 

 

 

Total interest
 
35,081

 
43,259

 
37,903

 
37,153

 
53,996

Interest factor of rent expense
 
3,513

 
3,296

 
3,153

 
2,942

 
2,935

Total fixed charges
 
38,594

 
46,555

 
41,056

 
40,095

 
56,931

Capitalized interest
 
(4,193
)
 
(863
)
 
(2,201
)
 
(949
)
 
(4,599
)
Fixed charges (excluding capitalized interest)
 
34,401

 
45,692

 
38,855

 
39,146

 
52,332

Earnings before fixed charges (excluding capitalized interest) and income taxes
 
46,171

 
45,010

 
28,259

 
41,700

 
77,285

Ratio of earnings to fixed charges
 
1.2

 
1.0

 
0.7

 
1.0

 
1.4

Deficiency in earnings to cover fixed charges
 

 
682

 
10,596

 

 







Exhibit 18

February 26, 2013
 

Orient-Express Hotels Ltd.
22 Victoria Street
Hamilton HM12, Bermuda
 

Dear Sirs/Mesdames:
 
We have audited the consolidated financial statements of Orient-Express Hotels Ltd. as of December 31, 2012 and 2011, and for each of the three years in the period ended December 31, 2012, included in your Annual Report on Form 10-K to the Securities and Exchange Commission and have issued our report thereon dated February 26, 2013 , which expresses an unqualified opinion and includes an explanatory paragraph related to the restatement of the accompanying 2011 and 2010 statements of consolidated cash flows. Note 1 to such consolidated f inancial statements contains a description of your adoption during the year ended December 31, 2012 of the change in date for your annual goodwill impairment test from December 31 to October 1. In our judgment, such change is to an alternative accounting principle that is preferable under the circumstances.
 
Yours truly,
 
/s/ Deloitte LLP
London, England






EXHIBIT 21

SUBSIDIARIES OF ORIENT-EXPRESS HOTELS LTD.

 
 
Jurisdiction 
of Organization
CSN San Miguel Holdings Ltd.
 
B.V.I
OEH Inmobiliaria S.A. de C.V. (subsidiary of CSN San Miguel Holdings Ltd)
 
Mexico
Cupecoy Village Real Estate NV
 
St. Maarten
Cupecoy Village Development NV
 
St. Maarten
Game Viewers (Pty) Ltd.
 
Botswana
Game Trackers (Pty) Ltd. (subsidiary of Game Viewers (Pty) Ltd.)
 
Botswana
Global Marketing Ltd.
 
Bermuda
Grupo Conceptos S.A.
 
B.V.I.
Spa Residential S.A. de C.V. (subsidiary of Grupo Conceptos S.A.)
 
Mexico
Haggerton Holdings Ltd.
 
Cyprus
Hosia Company Ltd.
 
Hong Kong
Subsidiaries of Hosia Company Ltd.
 
 
Khmer Angkor Hotel Company Ltd.
 
Cambodia
PRA-FMI Pansea Hotel Development Company Ltd.
 
Myanmar
PT. Bali Resort and Leisure Company Ltd.
 
Indonesia
Samui Island Resort Company Ltd.
 
Thailand
Societe Hoteliere de Phou Vao Ltd.
 
Laos
La Residencia Ltd.
 
U.K.
Son Moragues S.A. (subsidiary of La Residencia Ltd.)
 
Spain
La Samanna S.A.S.
 
France
Leisure Holdings Asia Ltd.
 
Bermuda
Subsidiaries of Leisure Holdings Asia Ltd.
 
 
Myanmar Hotels and Cruises Ltd.
 
Myanmar
Vessel Holdings 2 Ltd.
 
Bermuda
      Myanmar Cruises Ltd.
 
Myanmar
      Myanmar Shwe Kyet Yet Tours Ltd.
 
Myanmar
Luxurytravel.com UK Ltd.
 
U.K.
Luxury Waterway Cruises Ltd.
 
Bermuda
Miraflores Ventures Ltd.
 
B.V.I.
Plan Costa Maya S.A. de C.V. (subsidiary of Miraflores Ventures Ltd.)
 
Mexico
Mount Nelson Hotel Ltd.
 
U.K.
MPP S.A.
 
Peru
Inversiones Malecon de la Reserva S.A. (subsidiary of MPP S.A.)
 
Peru
O.E. Interactive Ltd.
 
Bermuda
OEH Oxford Ltd.
 
Bermuda
OEH Peru Ltd.
 
Bermuda
OEH Spain Ltd.
 
Bermuda
Nomis Mallorcan Investments S.A. (subsidiary of OEH Spain Ltd.)
 
Spain
Orient-Express Holdings 1 Ltd.
 
Bermuda
Orient-Express Hotels Inc.
 
Delaware
Subsidiaries of Orient-Express Hotels Inc.
 
 
‘21’ Club Properties Inc.
 
Delaware
‘21’ Club Inc. (subsidiary of ‘21’ Club Properties Inc.)
 
New York
‘21’ Hotel Inc.
 
Delaware
Charleston Place Holdings Inc.
 
Delaware
El Encanto Inc.
 
Delaware
Mountbay Holdings Inc.
 
Delaware
Inn at Perry Cabin Corporation (subsidiary of Mountbay Holdings Inc.)
 
Maryland
Orient-Express Services Inc.
 
Delaware
Luxury Reservation Services Inc. (subsidiary of Orient-Express Services Inc.)
 
Delaware
Venice Simplon-Orient-Express Inc.
 
Delaware
Orient-Express Management Services S.a.r.l.
 
Luxembourg
Orient-Express Luxembourg Investments S.a.r.l.
 
Luxembourg
Orient-Express Luxembourg Holdings S.a.r.l.
 
Luxembourg
Subsidiaries of Orient-Express Luxembourg Holdings S.a.r.l.
 
 
Blanc Restaurants Ltd.
 
U.K.
Collection Venice Simplon-Orient-Express Ltd.
 
U.K.
Elysees Spa S.A.S
 
France
Reids Hoteis Lda.
 
Portugal
Subsidiaries of Reids Hoteis Lda.
 
 
Luxury Trains S.r.l.
 
Italy
Island Hotel (Madeira) Ltd.
 
U.K.





 
 
Jurisdiction 
of Organization
Venice Simplon-Orient-Express Ltd.
 
U.K.
Subsidiaries of Venice Simplon-Orient-Express Ltd.
 
 
Great Scottish & Western Railway Holdings Ltd.
 
U.K.
The Great Scottish & Western Railway Company Ltd. (subsidiary of Great Scottish & Western Railway Holdings Ltd.)
 
U.K.
Northern Belle Ltd.
 
U.K.
Venice Simplon-Orient-Express Deutschland G.m.b.H.
 
Germany
Venice Simplon-Orient-Express Voyages S.A.
 
France
Orient-Express Hotels Italia S.r.l.
 
Italy
Subsidiaries of Orient-Express Hotels Italia S.r.l.
 
 
Hotel Caruso S.r.l.
 
Italy
Hotel Cipriani S.r.l.
 
Italy
Hotel Splendido S.r.l.
 
Italy
Villa San Michele S.r.l.
 
Italy
     Orient-Express Investmenti S.p.a.
 
Italy
     Orient-Express Esercizi S.r.l. (subsidiary of Orient-Express Investimenti S.p.a)
 
Italy
Orient-Express Hungary Kft
 
Hungary
Phoenix Argente SAS
 
France
Orient-Express Hotels U.K. Ltd.
 
U.K.
Subsidiaries of Orient-Express Hotels U.K. Ltd.
 
 
European Cruises Ltd.
 
U.K.
Crosieres Orex S.A. (subsidiary of European Cruises Ltd.)
 
France
Horatio Properties Ltd.
 
U.K.
Orient-Express Services Ltd.
 
U.K.
Orient-Express Hotels Properties Ltd.
 
Bermuda
Subsidiaries of Orient-Express Hotels Properties Ltd.
 
 
Compania Hoteis Palace
 
Brazil
Orient-Express Hotels Brasil S.A.
 
Brazil
Orient-Express Spanish Holdings S.L.
 
Spain
Peru Rail Ltd.
 
Bermuda
Viewgrove Holdings Ltd.
 
Cyprus
LLC Europe Hotel (subsidiary of Viewgrove Holdings Ltd.)
 
Russia





Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-165092 on Form S-3 and Registration Statement Nos. 333-58298, 333-129152, 333-147448, 333-161459, 333-168588 and 333-183142 on Form S-8 of our reports dated February 26, 2013 relating to the consolidated financial statements and financial statement schedule of Orient-Express Hotels Ltd. and subsidiaries (which report expresses an unqualified opinion and includes an explanatory paragraph related to the restatement of the accompanying 2011 and 2010 statements of consolidated cash flows) and the effectiveness of Orient-Express Hotels Ltd. and subsidiaries' internal control over financial reporting, appearing in this Annual Report on Form 10-K of Orient-Express Hotels Ltd. and subsidiaries for the year ended December 31, 2012 .

 
 
/s/ Deloitte LLP
 
 
 
London, England
 
February 26, 2013
 





Exhibit 31
 
ORIENT-EXPRESS HOTELS LTD.
 
Rule 13a-14(a)/15d-14(a) Certification
 
I, John M. Scott III, certify that:
 
1.
I have reviewed this annual report on Form 10-K of Orient-Express Hotels Ltd. for the year ended December 31, 2012;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Dated: February 26, 2013
/s/ John M. Scott III
 
John M. Scott III
 
President and Chief Executive Officer





ORIENT-EXPRESS HOTELS LTD.
 
Rule 13a-14(a)/15d-14(a) Certification
 
I, Martin O’Grady, certify that:
 
1.
I have reviewed this annual report on Form 10-K of Orient-Express Hotels Ltd. for the year ended December 31, 2012;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Dated: February 26, 2013
/s/ Martin O’Grady
 
Martin O’Grady
 
Vice President – Finance and Chief Financial Officer




Exhibit 32
 
ORIENT-EXPRESS HOTELS LTD.
 
Section 1350 Certification
 
The undersigned hereby certify that this report of Orient-Express Hotels Ltd. for the periods presented fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the report.
 
/s/ John M. Scott III
 
/s/ Martin O’Grady
John M. Scott III
 
Martin O’Grady
President and Chief Executive Officer
 
Vice President – Finance and Chief Financial Officer
 
Dated: February 26, 2013
 
[A signed original of this written certification has been provided to Orient-Express Hotels Ltd. and will be retained by Orient-Express Hotels Ltd. and furnished to the U.S. Securities and Exchange Commission or its staff upon request.]