** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

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**(Mark One)**

 

**ý****                                ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2005**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from                         to                         **

 

**CommissionFile Number 1-16017**

 

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**ORIENT-EXPRESS HOTELS LTD.**

(Exactname of registrant as specified in its charter)

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

 

**22Victoria Street,Hamilton HM 12, Bermuda**

(Addressof principal executive offices)

 

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

 

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SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: **None.**

 

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Indicate bycheck mark if the registrant is a well known seasoned issuer, as defined in Rule 405of the Securities Act.Yes ý  No o

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.Yes o  No ý

 

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

 

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

 

                Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

 
| Large Accelerated Filer ý | Accelerated  Filer o | Non-Accelerated  Filer o |
|--------------------------------|----------------------|--------------------------|

 

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

 

The aggregatemarket value of the Class A common shares held by non-affiliates of theregistrant computed according to the closing price on June 30, 2005 (thelast business day of the registrant’s second fiscal quarter in 2005) wasapproximately $910,000,000.

 

As of February 28,2006, 39,413,250 Class A common shares and 18,044,478 Class B commonshares of the registrant were outstanding. All of the Class B shares are owned by a subsidiary of the registrant(see Note 10(d) to the Financial Statements (Item 8)).

 

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DOCUMENTSINCORPORATED BY REFERENCE:  **None**

 

 

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**TABLEOF CONTENTS**

 
| PART I   | Item 1.  | Business                                                                                                            |   |
|---------------|----------|---------------------------------------------------------------------------------------------------------------------|--------|
|          | Item 1A. | Risk Factors                                                                                                        |   |
|          | Item 1B. | Unresolved Staff Comments                                                                                           |   |
|          | Item  2. | Properties                                                                                                          |   |
|          | Item 3.  | Legal Proceedings                                                                                                   |   |
|          | Item 4.  | Submission  of Matters to a Vote of Security Holders                                                                |   |
|          |     |                                                                                                                |   |
| PART II  | Item 5.  | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |
|          | Item 6.  | Selected Financial  Data                                                                                            |   |
|          | Item 7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |
|          | Item 7A. | Quantitative and Qualitative  Disclosures About Market Risk                                                         |   |
|          | Item 8.  | Financial  Statements and Supplementary Data                                                                        |   |
|          | Item 9.  | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |   |
|          | Item 9A. | Controls and  Procedures                                                                                            |   |
|          | Item 9B. | Other Information                                                                                                   |   |
|          |     |                                                                                                                |   |
| PART III | Item 10. | Directors and Executive Officers of  the Registrant                                                                 |   |
|          | Item 11. | Executive  Compensation                                                                                             |   |
|          | Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |   |
|          | Item 13. | Certain  Relationships and Related Transactions                                                                     |   |
|          | Item 14. | Principal  Accountant Fees and Services                                                                             |   |
|          |     |                                                                                                                |   |
| PART IV  | Item 15. | Exhibits and  Financial Statement Schedules                                                                         |   |
|          |     | Signatures                                                                                                          |   |
|          |     | Exhibit Index                                                                                                  |   |

 

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**Preliminary Note:** Forward-looking statements concerning the operations, performance,financial condition, plans and prospects of Orient-Express Hotels Ltd. andits subsidiaries are based on management’s current expectations and are subjectto various risks and uncertainties. Actual results could differ materially from those anticipated in thestatements due to a number of factors, including those described in Item 1–Business,Item 1A-Risk Factors, Item 7–Management’s Discussion and Analysis, Item 7A–Quantitativeand Qualitative Disclosures about Market Risk, and Item 12–Security Ownershipof Certain Beneficial Owners and Management below.  Orient-Express Hotels Ltd. undertakes noobligation to update or revise publicly any forward-looking statement, whetheras a result of new information, future events or otherwise.

 

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**PART I**

 

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

 

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

 

These reportsand amendments to them are available free of charge on the internet website ofthe Company as soon as reasonably practicable after they are filedelectronically with the SEC.  Theinternet website address is http://www.orient-express.com.  Unless specifically noted, information on thewebsite is not incorporated by reference into this Form 10-K annualreport.

 

Pursuant toSEC Rule 3a12-3 under the 1934 Act regarding foreign private issuers, theproxy solicitations of the Company are not subject to the disclosure andprocedural requirements of SEC Regulation 14A under the 1934 Act, andtransactions in the Company’s equity securities by its officers, directors andsignificant shareholders are exempt from the reporting and liability provisionsof Section 16 of the 1934 Act.

 

**Introduction**

 

OEH is a hoteland leisure group focused on the luxury end of the leisure market.  It currently owns and/or invests in 50properties (42 of which it manages) consisting of 39 highly individual deluxehotels, three restaurants, six tourist trains and two river cruise businesses.  These are located in 25 countries worldwide.  OEH acquires or manages only very distinctiveproperties in areas of outstanding cultural, historic or recreational interestin order to provide luxury lifestyle experiences for the elite traveller.

 

The locationsof OEH’s various properties are shown in the map on the preceding page, wherethey number 46 because the Hotel Cipriani and Palazzo Vendramin are contiguousin Venice, the Hotel Splendido and Splendido Mare are both in

 

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Portofino, andthree separate safari lodges operate as a unit in Botswana.  These seven properties bring the total to 50.

 

Hotels andrestaurants represent the largest segment of OEH’s business, contributing 85%of revenue in 2005, 84% in 2004 and 85% in 2003.  Tourist trains and cruises accounted for theremaining revenue in each year.  OEH’sworldwide portfolio of hotels currently consists of about 3,700 individualguest rooms and multiple-room suites, each known as a “key”.  This total includes Pansea Hotels describedbelow which are not owned or managed by OEH. Hotels owned by OEH in 2005 achieved an average daily room rate (“ADR”)of $375 ($366 in 2004) and a revenue per available room (“RevPAR”) of $228($214 in 2004).  Approximately two-thirdsof OEH’s customers are leisure travellers, with approximately 50% of guests in2005 originating from the United States, 35% from Europe and the remaining 15%from elsewhere in the world.

 

Revenue,earnings and identifiable assets of OEH in 2003, 2004 and 2005 for its businesssegments and geographic areas are presented in Note 15 to the FinancialStatements (Item 8 below).

 

Until November 17,2005, Sea Containers Ltd. (“SCL”), a Bermuda company with shares listed on theNew York Stock Exchange, owned approximately 25% of the outstanding Class Aand Class B shares of the Company. See “OEH’s Relationship with Sea Containers Ltd.” below.

 

**Owned Hotels–Europe**

 

*Italy*

 

The **Hotel Cipriani** and **Palazzo Vendramin–**104keys–in Venice were built for the most part in the 1950s and are located onthree acres on Giudecca Island across from the Piazza San Marco.  Most of the rooms have views over theVenetian lagoon.  Features include finecuisine in three indoor and outdoor restaurants, gardens and terraces encompassingan Olympic-sized swimming pool, a tennis court and a free private boat serviceto the Piazza San Marco.  The hotel ownsa nearby historic warehouse building where, after refurbishment, large banquetsand meetings are held.

 

The **Hotel Splendido** and **Splendido Mare**–81keys–overlook picturesque Portofino harbor on the Italian Riviera.  Set on four acres, the main hotel was builtin 1901 and is surrounded by gardens and terraces which include a swimming pooland tennis court.  There are two open-airand enclosed restaurants as well as banquet/meeting rooms, and a shuttle buslinking the main hotel with Splendido Mare on the harbor below.

 

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The **Villa San Michele**–45 keys–is located in Fiesole, a shortdistance from Florence.  Originally builtas a monastery in the 15th century with a façade attributed to Michelangelo, ithas stunning views over historic Florence and the Arno River Valley.  OEH has remodelled and expanded the guestaccommodation to luxury standards, including a swimming pool. A shuttle busservice is provided into Florence.  Theproperty occupies ten acres.  The VillaSan Michele also operates for hotel guests the five-bedroom main house of theCapannelle vineyard in the Chianti region owned by James and SimonSherwood.  See Item 13–CertainRelationships and Related Transactions below.

 

OEH rebuiltand in June 2005 reopened the **Hotel Caruso**–45keys–in Ravello.  The hotel is located onthree hill-top acres overlooking the Amalfi coast near Naples.  Once a nobleman’s palace, parts of thebuildings date back to the 11th century. An additional seven keys are currentlybeing built at this hotel.

 

All of theseItalian properties operate seasonally, closing for varying periods during thewinter.

 

*Portugal*

 

**Reid’sPalace**–164 keys–is the most famous hotel onthe island of Madeira, situated on ten acres of semitropical gardens on a clifftop above the sea and the bay of Funchal, the main port city.  Opened in 1891, the hotel has fourrestaurants and meeting facilities. Leisure and sports amenities include two fresh water swimming pools, athird tide-filled pool, tennis courts, ocean water sports and access to twochampionship golf courses.  It hasyear-round appeal to European leisure travellers, serving both winter escapesto the sun and regular summer holidays. A new spa and conference center are being added in 2006.

 

The **Lapa Palace**–109 keys–is in the embassy district of Lisbon,near the city center and overlooking the Tagus River. The historic part of thehotel was originally built in the 1870s as the palace of a Portuguese noblefamily.  It opened as a luxury hotel in1992 after extensive conversion and expansion, including the addition ofconference facilities and underground car parking.  The hotel is set amid gardens with ornamentalfountains and both indoor and outdoor swimming pools, occupying a total ofthree acres.  OEH owns an adjoiningparcel of land suitable for development of up to 46 additional keys.

 

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*Elsewherein Europe*

 

**Hôtelde la Cité**–61 keys–is located in the centralsquare of the beautiful walled medieval town of Carcassonne, France nearToulouse.  Opened in 1909, the hotelincorporates one of the 50 watch towers in Carcassonne’s ancient fortificationsand features two restaurants, gardens, a swimming pool and a nearby conferencecenter, altogether occupying two acres. One of the restaurants has been awarded one star for fine dining by theinfluential Michelin Guide.  The hotelalso operates a canal barge on the Canal du Midi providing day excursions forguests.

 

OEH owns **La Residencia**–59 keys–located in the charming village ofDeià on the rugged northwest coast of the island of Mallorca, Spain in theMediterranean.  Mallorca is a popularEuropean tourist destination throughout the year.  The core of La Residencia was originallycreated from two adjoining 16th and 17th century country houses set on ahillside site of 30 acres.  The hotelfeatures three restaurants including the gourmet El Olivio, one of the foremoston the island, as well as two large outdoor swimming pools, tennis courts and aspa with an indoor pool.  OEH iscurrently adding keys to the hotel and enlarging the spa.

 

**LeManoir aux Quat’ Saisons**–32 keys–is locatedin Oxfordshire, England about an hour’s drive west of London.  The main part of the hotel is a 16th centurymanor house set in 27 acres of gardens. The property was developed by Raymond Blanc, one of Britain’s mostfamous chefs, and the hotel’s restaurant has two stars in the Michelin Guide,placing it among the best in the British Isles. Mr. Blanc has given a long-term commitment to remain the chef atthe hotel.

 

In February 2005,OEH acquired a 93.5% interest in, and full management and operational controlof, the deluxe **Grand Hotel Europe**–301 keys–in St.Petersburg, Russia.  Originally built in1875, the hotel occupies one side of an entire city block on the fashionableNevsky Prospect in the heart of the city near the Russian Museum, ShostakovichPhilharmonia and other tourist and cultural attractions as well as the businesscenter.  There are six restaurants on thepremises, popular with locals and visitors alike, as well as a grand ballroom,meeting facilities, a health club and seven retail shops.  OEH has begun a significant refurbishment of thehotel and plans to acquire the minority interest owned by the City of St.Petersburg.

 

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**Owned Hotels–North America**

 

*UnitedStates*

 

The **Windsor Court**–324 keys–opened in 1984 and is located in thecentral business district of New Orleans near the French Quarter and theMississippi riverfront.  Harrah’soperates the only land-based casino in Louisiana across the street.  Each room has panoramic views over the riveror the city.  Facilities include threerestaurants and lounges, a roof-top ballroom, several other banquet and meetingrooms, an outdoor swimming pool and a health club.  The hotel’s interior décor features acollection of historic European art and antique furniture.  The hotel has planning permission to build aconference center on a nearby owned lot which would cater to small and mediumsized business meetings.  Damaged byhurricanes in August and September 2005, the hotel reopened inNovember.

 

**KeswickHall**–48 keys–is located in the rollingcountryside of central Virginia, near Charlottesville.  Originally a private home dating from 1912,it is popular for weekend breaks and business meetings because of the naturalbeauty of the area and the adjacent Keswick Club which features a spa andfitness center, tennis courts, swimming pool and an Arnold Palmer-designed golfcourse.  The total site occupies 600acres including vacant land around the golf course being sold by OEH in parcelsfor residential development.

 

The **Inn at Perry Cabin**–81 keys–was first built in 1812 as acountry inn and is located in St. Michaels, Maryland on the eastern shore ofChesapeake Bay.  Set on 25 waterfrontacres that include a fitness center, indoor and outdoor swimming pools, andboating and fishing on the Bay, it is an attractive conference and vacationdestination, particularly for guests from the Washington, D.C. area.  OEH has completed a major renovation andexpansion of the hotel, including a new conference facility, and is building aspa.

 

OEH owns **El Encanto Hotel and Garden Villas**–77 keys–in Santa Barbara,California.  The hotel is located in thehills above the restored Santa Barbara Mission, with views out to the PacificOcean.  Built in 1913 on a seven-acresite, the guestrooms are in cottages and low rise buildings spread throughoutmature gardens with a swimming pool and tennis court.  OEH plans to close this property in mid-2006for about ten months for significant renovation and the addition of nine keys.

 

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*Caribbean*

 

**LaSamanna**–81 keys–is located on the island ofSt. Martin in the French West Indies. Built in 1973, the hotel comprises several buildings on ten acres ofland along a 4,000-foot beach.  Amenitiesinclude two restaurants, a freshwater swimming pool, a spa, tennis courts,fitness and conference centers, boating and ocean water sports.  The hotel is open most of the year,seasonally closing during the autumn months.

 

OEH ownsadditional land adjoining La Samanna on both the French and Dutch sides of St.Martin.  On the French side, it is constructingten private villas on six acres which it intends to sell to third parties, andhas received planning permission to build and sell 27 more units on about 30additional acres.  On the Dutch side, OEHhas begun construction of a marina and residential village called Cupecoy YachtClub which OEH would sell and manage. The village will be comprised of shops, restaurants and about 150vacation condominiums on a parcel of 12 acres.

 

*Mexico*

 

OEH owns the **Maroma Resort and Spa**–65 keys–on Mexico’s Caribbean coast onthe Yucatan Peninsula 25 miles south of Cancun’s international airport.  OEH originally purchased a 75% interest inthe hotel and, in February 2006, purchased the minority interest.  The resort opened in 1995 and has 25 acres ofland, including some for future expansion or residential development, along a750-foot beach with the Cozumel barrier reef offshore where guests may fish,snorkel and scuba-dive. Important Mayan archaeological sites are alsonearby.  Rooms are arranged in low-risevillas and there are extensive spa facilities. The hotel suffered hurricane damage in October 2005 and reopened inFebruary 2006.

 

In addition,OEH has reached an agreement in principle to purchase a 28.5 acre tractadjacent to Maroma for a total purchase price of $6,400,000, of which$1,000,000 may be deferred until OEH develops the land.  OEH intends to construct and sell up to 20private villas on the land, although it may also construct additional keys forthe hotel.

 

Also in February 2006,OEH acquired for $8,400,000 a 75% interest **Casa de Sierra Nevada**–33keys–a luxury resort in the colonial town of San Miguel de Allende.  Opened in 1952, the hotel is comprised ofnine Spanish colonial buildings built in the 16th and 18thcenturies.  OEH manages the hotel andplans to renovate the existing buildings and two restaurants, as well as todevelop 20 new suites, a full service spa, and a new

 

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pool andgarden area.  In addition to the nineowned buildings, the hotel leases two buildings for administrative offices, atotal site of approximately two acres.

 

**Owned Hotels–Rest of theWorld**

 

*SouthAmerica*

 

Built in the1920s on a three-acre site facing Copacabana Beach near the central businessdistrict of Rio de Janeiro, Brazil, the **Copacabana Palace**–225keys–is one of the most famous in South America and features two gourmetrestaurants, spacious function and meeting rooms, a large swimming pool andfitness center, and a roof-top tennis court and pool.  The old casino rooms and 500-seat theater arecurrently being refurbished as additional function and meeting space.

 

The **Miraflores Park Hotel**–82 keys–is located in an exclusiveresidential district of Lima, Peru surrounded by parkland and looking out atthe Pacific Ocean, yet near the commercial and cultural center of thecity.  Opened in 1997, the hotel has alarge ballroom, rooftop outdoor pool, health and beauty facilities and abusiness center for guests, and occupies about one acre of land.

 

*SouthernAfrica*

 

The **Mount Nelson Hotel**–226 keys–in Cape Town, South Africa is anhistoric property opened in 1899 with beautiful gardens and pools and has longenjoyed a reputation as one of the foremost hotels on the Africancontinent.  It stands just below TableMountain and is within walking distance of the main business, civic andcultural center of the city.  The hotelhas a ballroom, two swimming pools, tennis courts, a spa and fitness center,all situated on ten acres of grounds and gardens.  Expansion is planned through incorporationinto the hotel of owned adjoining residential properties.

 

The **Westcliff Hotel**–117 keys–is the only garden hotel inJohannesburg, South Africa, situated on six hillside acres with views over thecity’s zoo and parkland.  Its resortamenities include two swimming pools, a tennis court and health club, and thehotel attracts business guests because of its proximity to the citycenter.  OEH opened this hotel in1998.  A banquet and conference centeroccupies part of the adjacent expansion land.

 

**Orient-ExpressSafaris**–39 keys total–consist of threeseparate game-viewing lodges in Botswana called **Khwai RiverLodge, Eagle Island Camp** and **Savute Elephant Camp**.  Established in 1971, OEH leases the lodgesites in the

 

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Okavango Riverdelta and nearby game reserves, where some of the best wildlife in Africa canbe observed from open safari vehicles or boats. Each camp has 12 or 15 twin-bedded deluxe tents, and guests travelbetween the camps by light aircraft. Boating, fishing, hiking and swimming areoffered at the various sites.

 

*Australia*

 

The **Observatory Hotel**–96 keys–is in Sydney within walkingdistance of the central business district of the city.  This hotel opened in 1993 and has tworestaurant and lounge areas, extensive meeting and banquet rooms, a spa andhealth club with indoor swimming pool, a tennis court and a large parkinggarage on a site of about one acre.

 

The **Lilianfels Hotel**–85 keys–is in the Blue Mountains NationalPark west of Sydney.  It is named afterthe original estate house, dating from 1890, where the hotel’s gourmetrestaurant is located.  The main hotel,built in 1992 and recently refurbished, has a second restaurant and conferencefacilities.  The resort’s four acres ofgrounds encompass an indoor swimming pool, health club and spa, tennis courtand extensive gardens with views over the Blue Mountains.  There is expansion land to add keys in thefuture.

 

*FrenchPolynesia*

 

**BoraBora Lagoon Resort**–77 keys–opened in 1993and has bungalows situated over the lagoon water plus additional beach andgarden bungalows, all built in traditional Tahitian style on a 12-acresite.  Guests dine in two restaurants andenjoy extensive water sports and tennis. A recent renovation program included a new swimming pool, spa andconference facility.  There is expansionland, possibly for residential development.

 

**Hotel Management Interests**

 

Through a50%/50% joint venture with a Spanish investment company, OEH owns and managesthe famous **Hotel Ritz**–167 keys–in centralMadrid near the financial district, Spanish parliament and many of the city’swell known tourist attractions.  Openedin 1910, the hotel has four spacious conference and banqueting suites, anindoor restaurant and the famous Ritz Terrace restaurant outdoors in thegardens.  OEH and its 50% partner haveembarked on an extensive capital improvement program, including refurbishmentof 60 keys in 2006.

 

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**CharlestonPlace**–442 keys–is located in the heart ofhistoric Charleston, South Carolina, a popular destination for tourists andbusiness meetings.  Opened in 1986, thehotel has two restaurants, extensive banqueting and conference space includinga grand ballroom, a health club with spa and swimming pool and roof-top tenniscourt, and a shopping arcade of 25 retail outlets leased to unaffiliatedparties.  The hotel also owns theadjacent historic Riviera Theater remodelled as additional conference space andretail shops.  OEH has a 19.9% ownershipinterest in this hotel, manages the property under an exclusive long-termcontract, and receives interest on partnership loans which it assumed at thetime of its original investment and on other loans made since then.

 

OEH has a50%/50% joint venture with local investors in Peru which, under exclusivemanagement of OEH, operates the following two hotels under 20-year renewableleases which commenced in 1995.

 

The **Hotel Monasterio**–126 keys–is located in the ancient Incacapital of Cusco, the most important tourist destination in Peru.  OEH is upgrading and expanding the propertywhich includes a long-term lease of an adjoining convent for futuredevelopment, a total site of about three acres. The hotel was originally built as a Spanish monastery in the 16thcentury and was converted to hotel use in 1995. The deluxe guest rooms and two restaurants are arranged around open-aircloisters.  Because of Cusco’s highaltitude, specially oxygenated ventilation has been added to some of therefurbished rooms.

 

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

 

**Restaurants**

 

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

 

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OEH has a 49%interest in **Harry’s Bar**, a private dining clubin the Mayfair area of London.  Themajority partner manages the restaurant with assistance from OEH’s Italianhotels. Its menu features gourmet Italian cuisine.  OEH has a right of first refusal to acquirethe remaining interest in this property under certain conditions.  OEH and the majority partner are currentlydiscussing the future ownership of this restaurant.

 

OEH hasre-established the famous **La Cabaña** steakhouse in Buenos Aires dating from the 1930s. OEH bought the contents and name of the restaurant some years ago and,after relocating to the Recoleta area of the city, reopened in September 2003.  The main dining room features a traditionalopen fire for searing meats, and three private dining rooms have regionalArgentine themes.

 

**Tourist Trains and Cruises**

 

OEH’sprincipal European tourist trains, called the **VeniceSimplon-Orient-Express**, operate in two parts in a regularlyscheduled overnight service between London and Venice and on short excursionsin southern England.  OEH owns 30 railwaycars originally used on historic “Orient-Express” and other famous Europeantrains.  All have been refurbished inoriginal 1920s/1930s décor and meet modern safety standards.  The services are marketed as a continuationof the Orient-Express trains of pre-World War II years.  One train is based in Great Britain composedentirely of Pullman cars with a capacity for up to 250 passengers.  The other on the Continent is made up ofCompagnie Internationale des Wagons-Lits et du Tourisme sleeping cars and daycoaches with capacity for up to 180 passengers. They operate once or twice weekly principally between London and Venicefrom March to November each year via Paris, Zurich and Innsbruck on ascenic route through the Alps. Passengers travel under the English Channel by bus on the Eurotunnelshuttle train.  Occasional trips are alsomade from time to time to Rome, Prague and Istanbul and other Europeandestinations.

 

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

 

The **Northern Belle** tourist train offers day trips and charterservice principally in the north of Britain. It builds on the success of OEH’s British Pullman business, whichfocuses on the south of England around London. This train

 

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consists ofsix dining cars elegantly decorated to be reminiscent of old British “Belle”trains of the 1930s, plus related service cars, and can carry up to 250passengers.  Full course gourmet mealsare served on board and passengers stay in local hotels on overnightitineraries.

 

In April 2005,OEH acquired a 50% interest in the **Royal Scotsman**luxury tourist train with rights to acquire the other 50% on an earn-out basisin three years.  Founded in 1985, theRoyal Scotsman is composed of nine Edwardian-style cars accommodating up to 36passengers.  Each compartment in the sixsleeping cars has a private bathroom. Operating from April to November each year, the train travelson itineraries of up to seven nights through the Scottish countryside affordingpassengers the opportunity to visit clan castles, historic battlegrounds, famousScotch whiskey distilleries and other points of interest.  The sellers retain management of the RoyalScotsman until the end of the earn-out period, but the train has been fullyintegrated into OEH’s sales and marketing network.

 

**PeruRail** is a 50%/50% joint venture between OEH and Peruvian partners formedto operate part of the state-owned railways in Peru under a 30-year franchiseacquired in 1999 and extendable every five years, upon the joint venture’sapplication, up to 30 additional years. The joint venture pays the government a fee related to traffic levelswhich can be offset until 2009 against investment in track improvements. The 70-mileCusco-Machu Picchu line carries mainly tourists visiting the famous Inca ruins,the principal means of access because there is no convenient road.  A second rail line runs from Cusco toMatarani on the Pacific Ocean via Puno on Lake Titicaca and Arequipa andprincipally serves freight traffic.  TheCusco-Machu Picchu line connects two of OEH’s Peruvian hotels allowing creationof inclusive tours served by OEH’s **Hiram Bingham**luxury tourist train.  OEH also operatesa deluxe daytime tourist train on the Cusco-Puno route through the High Andesmountains, and a 1920s steamer included in the franchise on day excursions fortourists on Lake Titicaca.

 

The **Eastern & Oriental Express** in Southeast Asiatravels up to one round trip each week between Singapore, Kuala Lumpur andBangkok.  The journey lasts about48 hours each way and includes two nights on board and side trips toPenang in Malaysia and the River Kwai in Thailand.  Some overnight trips are also made fromBangkok to Chiang Mai and elsewhere in Thailand.  Originally built in 1970, the 24 cars weresubstantially rebuilt to an elegant oriental style of décor and fitted withmodern facilities such as air-conditioning and private bathrooms.  The train is made up of sleeping cars, threerestaurant cars, a bar car and an open air observation

 

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car and cancarry up to 125 passengers.  The Eastern &Oriental Express is available for charter by private groups.  OEH manages the train exclusively and has a25% shareholding in the owning company.

 

OEH owns andoperates a deluxe river cruiseship on the Irrawaddy River in central Burma, orMyanmar, called the **Road to Mandalay**.  The ship was a Rhine River cruiser built in1964 which OEH bought and refurbished. It has 66 air-conditioned cabins with private bathrooms, spaciousrestaurant and lounge areas and a canopied sun deck with swimming pool.  The ship travels between Mandalay and Paganup to eight times each month and carries 126 passengers who enjoy sightseeingalong the river and guided shore excursions to places of historic interest.  Five to eight night itineraries are offered,including airfare to and from the ship and hotel accommodation in Rangoon.  OEH also operates occasional cruises todifferent destinations, such as to Bhamo in the north of the country close tothe China border.  The ship does notoperate in the hot summer season and occasionally when the water level of theIrrawaddy River falls too low due to lack of rainfall.

 

OEH owns a 50%interest in the business of **Afloat in France**operating luxury river and canal boats in Burgundy, Provence and other rural regionsof France.  OEH also owns the five boatsof Afloat in France, and has the right to purchase the balance of the operatingbusiness in three to five years on an earn-out basis.  The boats each accommodate between six and 12passengers each in double berth compartments with private bathrooms, and somehave small plunge pools on deck.  Theyoperate seasonally between April and October on three to six nightitineraries with guests dining on board or in nearby restaurants.  Side trips are organized each day.

 

**Pansea Hotels**

 

OEH has made$8,000,000 of convertible loans to the Pansea Hotel group of six deluxe hotelsin Southeast Asia.  The properties are **La Residence Phou Vao**in Luang Prabang, Laos; **Napasai**in Koh Samui, Thailand; **The Governor’sResidence**in Rangoon, Burma; **La Residence d’Angkor**inSiem Reap, Cambodia; and **Jimbaran Puri Bali**and**Ubud Hanging Gardens** in Bali,Indonesia.  They total 272 keys atpresent but all are capable of expansion. OEH does not manage these six hotels but markets them along with itsother properties, in particular the Eastern & Oriental Express touristtrain and the Road to Mandalay cruiseship, under the name “PanseaOrient-Express Hotels”.

 

The loans areconvertible in 2007 into about 25% of the Pansea Hotels holding company’sshares.  At that time OEH has

 

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an option toacquire all of the shares.  OEH has afurther option to acquire all of the shares in 2009, at which time the existingshareholders have the right to sell their shares to OEH at the same price.  The loan conversion price and option exerciseprices are based on multiples of the holding company’s net book value or itsearnings before interest, tax, depreciation and amortization, less the holdingcompany’s debt.  The loan proceeds havebeen used primarily to expand the Pansea properties.

 

**Management Strategies**

 

As theforegoing indicates, OEH has a mix of hotel and other deluxe travel productsthat are geographically diverse and appeal to the high-end leisure market,reflecting an important management strategy. As a result, about two-thirds of annual revenue derives from leisurecustomers while corporate/business travel accounts for the rest.

 

OEH benefitsfrom trends and developments favorably impacting the global hotel, travel andleisure markets, including strong demand growth trends in the luxury hotelmarket in many parts of the world, increased travel and leisure spending byconsumers, favorable demographic trends in relevant age and income brackets ofU.S. and European populations, and increased online travel bookings.  These trends suffered a setback beginning in2001 due to slowing national economies, the shock of terrorist attacks, thebuild-up and aftermath of the wars in Afghanistan and Iraq and the SARS epidemic.  Management currently believes that the public’sconfidence in international travel and demand for luxury hotel and touristproducts are returning.

 

For thefuture, OEH management plans to grow the business by increasing RevPAR andearnings at its established properties and newer acquisitions, by expandingexisting hotel and restaurant properties where land or space is alreadyavailable, by increasing the utilization of its tourist trains and cruises toadd trips, and by acquiring additional distinctive luxury properties throughoutthe world.  Factors in OEH’s evaluationof a potential acquisition include the uniqueness of the property, attractionsfor guests in the vicinity, acceptability of initial investment returns,visible upside potential such as by pricing, expansion or improved marketing,limitations on nearby competition, and convenient access.

 

OEH managementplans to continue owning or part owning and managing most OEH properties.  Ownership encourages OEH to develop thedistinctive character of its properties and allows it to benefit from all ofthe current cash flow and future

 

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capital gainsshould it sell a property. Self-management has enabled OEH to capture the economic benefits otherwiseshared with a third-party manager, to control the operations, quality andexpansion of the hotels, and to use its experience with price changes,expansions and renovations to improve cash flow and enhance asset values.

 

Many of OEH’sindividual properties, such as the Hotel Cipriani and ‘21’ Club, havedistinctive local character and brand identity. Management believes that discerning travellers will choose a famousproperty in preference to a chain brand. OEH links its properties together under the umbrella “Orient-ExpressHotels, Trains and Cruises” name which originated with the legendary luxuryEuropean train in the late 19th and early 20th centuries and which isrecognizable worldwide and synonymous with sophisticated travel and refinedelegance.

 

OEH isexpanding its property development activities, beginning at Keswick Hall withthe sale of land around the golf course for residential development and at LaSamanna with high-end vacation villa and apartment developments includingCupecoy Yacht Club.  Other hotels ownedby OEH with available vacant land for development include Bora Bora LagoonResort, Maroma Resort and Spa, and Inn at Perry Cabin.  Management anticipates future profits bothfrom sales of land and completed units and from ongoing management of the unitsfor the purchasers as integral parts of the adjacent hotels.

 

**Marketing, Sales andPublic Relations**

 

OEH’s salesand marketing function is primarily based upon direct sales, cross-selling toexisting customers and public relations. OEH has a global sales force of about 250 persons in 50 locationsincluding regional sales offices in New York, Paris, Cologne, Milan and Londonand reservations offices, mainly for tourist trains, cruises and tour products,in London, Paris, Cologne, Tokyo, Singapore, Cusco, Charleston, and Providence(Rhode Island).  OEH also has salesrepresentatives with responsibility for the hotels where they are based.  The responsibilities of OEH’s sales staffinclude working with the travel industry, contacting group and corporateaccount representatives and planning marketing such as direct mailings.  OEH belongs to a number of internationalorganizations, such as “The Leading Hotels of the World”, to promote itsproperties.

 

Internet usageis an important direct sales tool. Through OEH’s website (www.orient-express.com), with its prize-winningdesign, OEH offers direct reservations services to customers.  On-line sales have lower transaction costs by

 

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saving travelagent commissions and tour operator discounts. The internet also enhances marketing exposure and increasesdistribution.

 

Because repeatcustomers appreciate the consistent quality of OEH’s hotels, trains, cruisesand restaurants, an important part of management’s strategy is to promote otherOEH properties through various cross-selling efforts.  These include direct mail to existingcustomers, in-house brochures and promotions, discounted special offers, andOEH’s “Orient-Express Travel Club” website and in-house “Orient-ExpressMagazine”.  OEH sells luxury souvenirgoods branded with the names of its travel products.

 

OEH’smarketing strategy also focuses on public relations, which management believesis a highly cost-effective marketing tool for luxury properties.  Because of the unique nature of the OEHproperties, guests are more likely to hear about OEH’s hotels and tours throughword-of-mouth or published articles rather than through directadvertising.  OEH has an in-house publicrelations offices in London and representatives in ten countries worldwide,including contracts with third-party public relations firms, to promote itsproperties through travel magazines, newspapers and other media.  During 2005, OEH hosted about 1,300journalists at its various properties. As a result, about 7,400 articles and stories were published orbroadcast about OEH’s properties, many in publications with large local,regional or international circulations.

 

**Industry Awards**

 

OEH has gaineda worldwide reputation for quality and service in the luxury segment of theleisure and business travel market.  Overthe years, OEH’s properties have won numerous national and international awardsgiven by trade or consumer publications such as Conde Nast Traveller, Gourmet,Travel & Leisure and Tatler, and private subscription newsletters suchas Andrew Harper’s Hideaway Report, or industry bodies such as the AmericanAutomobile Association. The awards are based on opinion polls of their readersor the professional opinion of journalists or panels of experts.  The awards are believed to influence consumerchoice and are therefore highly prized.

 

**Competition**

 

Some of OEH’sproperties are located in areas where there are numerous competitors.  Competition for guests in the hospitalityindustry is based generally on the convenience of location, the quality of theproperty, room rates and menu

 

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prices, therange and quality of food services and amenities offered, types of cuisine, andname recognition.

 

OEH’s strategyis to acquire only hotels which have special locations and distinctivecharacter.  Many are in areas with uniquelocal history or high entry barriers because of zoning restrictions. OEH buildsits competitive advantage further by offering high quality service and cuisine,often with a local flavor.  Typically,therefore, OEH competes by providing a special combination of location,character, cuisine and service rather than relying on price competition.

 

OEH’s luxurytourist trains have no direct competitors. Other trains exist on similarroutes, but management believes OEH’s trains and onboard service are so uniqueand of such superior quality that guests consider an OEH train journey more asa luxury experience and an end in itself rather than as a means of transport.

 

**Employees**

 

OEH currentlyemploys about 6,000 persons, about 2,300 of whom are represented by laborunions.  Approximately 5,300 persons areemployed in the hotels and restaurants, 600 are employed in the trains andcruises business, and the balance are engaged in central administration andsales.  Management believes that OEH’songoing labor relations are satisfactory.

 

**Government Regulation**

 

OEH and itsproperties are subject worldwide to numerous laws and government regulationssuch as those relating to the preparation and sale of food and beverages,liquor service, health and safety of premises, employee relationships,environmental matters, and planning and zoning rules. Management believes thatOEH is in compliance in all material respects with relevant laws andregulations with respect to its business.

 

**OEH’s Relationship withSea Containers Ltd.**

 

Until theinitial public offering of the Company’s Class A common shares in August 2000,OEH was a wholly-owned subsidiary of Sea Containers Ltd. (“SCL”), a Bermudacompany with shares listed on the New York Stock Exchange.  Since then, SCL has sold its shares in theCompany in public secondary offerings registered in the United States, sellingits last shares in November 2005. Of the Company’s directors and officers, only one is a director andofficer of SCL, one is a director of SCL, and one is an officer of SCL.  See Item 10–Directors and Executive Officersof the Registrant.

 

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At the time ofthe initial public offering in 2000, OEH and SCL entered into agreementsproviding for the separation of their business operations and variousrelationships between the companies including services, offices and taxmatters.  While the agreement regardingtax matters has an indefinite term, the agreement regarding services andoffices will terminate at the end of 2006. See Item 13–Certain Relationships and Related Transactions below.

 

**ITEM 1A.****               RiskFactors**

 

OEH investors should carefully consider the risks described below andthe other information contained in or incorporated by reference in thisreport.  These risks are separated intothree general groups:

 

•                                          risks of OEH’s business;

 

•                                          risks that relate to OEH’sfinancial condition and results of operations; and

 

•                                          risks of owning and selling Class Acommon shares.

 

Described below are only the risks OEH management considers to be themost significant.  There may beadditional risks that are deemed less material or not presently known tomanagement.

 

If any of these risks occurs, OEH’s business, prospects, financialcondition, results of operations or cash flows could be materially adverselyaffected.  A risk that might have amaterial adverse effect means that the risk may have one or more of theseeffects.  In that case, the market priceof the Class A common shares could decline.

 

**Risks of OEH’s Business**

 

***OEH’s operations are subject toadverse factors generally encountered in the hospitality industry.***

 

Besides the specific conditions discussed in the risk factors below,these adverse factors include

 

•                                          cyclical downturns arising fromchanges in general and local economic conditions,

 

•                                          political instability ofgovernments of some countries where properties are located,

 

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•                                          falling disposable income ofconsumers and the travelling public,

 

•                                          dependence on varying levels oftourism, business travel and corporate entertainment,

 

•                                          changes in popular travelpatterns,

 

•                                          competition from other hotels andleisure time activities,

 

•                                          periodic local oversupply of guestaccommodation, which may adversely affect occupancy rates and actual room ratesachieved,

 

•                                          increases in operating costs dueto inflation and other factors which may not be offset by increased revenues,

 

•                                          regional and local economic andpolitical conditions affecting market demand, including recessions, civildisorder and acts of terrorism,

 

•                                          foreign exchange rate movements,

 

•                                          adverse weather conditions ordestructive forces like fire or flooding, and

 

•                                          seasonality, in that many of OEH’shotels and tourist trains are located in the northern hemisphere where theyoperate at low revenue or close during the winter months.

 

The effect of these factors varies among the hotels and otherproperties because of their geographic diversity.  For example, the SARS epidemic in Asia in2003 caused a reduction in passenger bookings on the tourist train of OEHoperating between Bangkok and Singapore and had a negative impact on travel toAustralia and Tahiti.  Although the SARSoutbreak was contained, it is possible that the disease could re-emerge oranother potential epidemic could occur. The occurrence of this or a similar event may have a negative impact onOEH’s operations.

 

In particular, as a result of terrorist attacks in the United States onSeptember 11, 2001 and the subsequent military actions in Afghanistan andIraq, international, regional and even domestic travel was disrupted.  Demand for most of OEH’s properties declinedsubstantially in the latter part of 2001,

 

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and the effects of the disruption are continuing to be felt.  For example, American leisure travelers seemmore reluctant than in the past to go abroad, and the booking lead-times byguests, travel agents and tour operators at OEH’s properties have shortenedsince September 11th.  Further actsof terrorism or a military action could again reduce leisure and businesstravel.

 

***The hospitality industry is highly competitive,both for acquisitions of new hotels and restaurants and for customers at OEH’sproperties.***

 

OEH competes for hotel and restaurant acquisition opportunities withothers who may have substantially greater financial resources.  These competitors may be prepared to accept ahigher level of financial risk than OEH can prudently manage.  This competition may have the effect ofreducing the number of suitable investment opportunities offered to OEH andincreasing OEH’s acquisition costs by enhancing the bargaining power ofproperty owners seeking to sell or to enter into management agreements.

 

Some of OEH’s properties are located in areas where there are numerouscompetitors.  For example, in recentyears competing deluxe hotels opened near OEH’s properties in New Orleans,Sydney and Rio de Janeiro.  Competitivefactors in the hospitality industry include convenience of location, thequality of the property, room rates and menu prices, the range and quality offood services and amenities offered, types of cuisine, and namerecognition.  Demographic, geographic orother changes in one or more of OEH’s markets could impact the convenience ordesirability of its hotels and restaurants, and so could adversely affect theiroperations.  Also, new or existing competitorscould significantly lower rates or offer greater conveniences, services oramenities, or significantly expand, improve or introduce new facilities in themarkets in which OEH’s hotels and restaurants compete.

 

***The hospitality industry is heavilyregulated, including with respect to food and beverage sales, employeerelations, construction and environmental concerns, and compliance with theselaws could reduce revenues and profits of properties owned or managed by OEH.***

 

OEH and its various properties are subject worldwide to numerous lawsand government regulations, including those relating to the preparation andsale of food and beverages, liquor service, and health and safety ofpremises.  The properties are alsosubject to laws governing OEH’s relationship with employees in such areas asminimum wage and maximum working hours, overtime, working conditions, hiringand

 

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firing employees and work permits. Also, the success of expanding existing properties depends uponobtaining necessary building permits or zoning variances from localauthorities.  Failure to obtain or delayin obtaining these permits could adversely affect OEH’s strategy of increasingrevenues and net income through expansion of existing properties.

 

OEH also is subject to foreign and U.S. laws and regulations relatingto the environment and the handling of hazardous substances that may impose orcreate significant potential environmental liabilities, even in situationswhere the environmental problem or violation occurred on a property before OEHacquired it.

 

***OEH’s acquisition, expansion anddevelopment strategy may be less successful than expected and, therefore, itsgrowth may be limited.***

 

Management intends to increase the revenues and net income of OEHthrough acquisition of new properties and expansion of existingproperties.  The ability to pursue newgrowth opportunities successfully will depend on OEH management’s ability toidentify properties suitable for acquisition and expansion, to negotiatepurchases or construction on satisfactory terms, to obtain the necessaryfinancing and permits, to build on schedule and with minimum disruption toguests, and to integrate new properties into OEH’s operations.  Also, the acquisition of properties in newlocations may present operating and marketing challenges that are differentfrom those encountered in OEH’s existing locations.  There can be no assurance that managementwill succeed in OEH’s growth strategy.

 

OEH management plans to develop new properties in the future.  New project development is subject to suchadverse factors as market or site deterioration after acquisition, inclementweather, labor or material shortages, work stoppages and the continuedavailability of construction and permanent financing.  For example, the opening of the WestcliffHotel in Johannesburg occurred about six months later than originally planned,as construction took longer than expected. This delay had a significant adverse impact on the revenues andprofitability of OEH’s southern Africa operations.  Similarly, OEH has undertaken a residentialdevelopment project near La Samanna on St. Martin.  Timing of completion has not been confirmed,and construction delay would likely impact earnings from the project.

 

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***OEH may be unable to obtain the necessaryadditional capital to finance the growth of its business.***

 

The acquisition and expansion of leisureproperties, as well as the ongoing renovations, refurbishments and improvementsrequired to maintain or upgrade our existing properties, are capitalintensive.  Although actual amounts ofcapital expenditures could exceed estimates, current expansion plans call forthe expenditure of up to an aggregate of $80,000,000 over the next few years toadd new rooms or facilities at existing properties, and current acquisitionplans contemplate expenditure of about $50,000,000 per year for new propertieswhich would be financed mainly by a suitable level of mortgage debt.  The availability of future borrowings andaccess to the capital markets for equity financing to fund these acquisitionsand expansions depends on prevailing market conditions and the acceptability offinancing terms offered to OEH.  Therecan be no assurance that future borrowings or equity financing will be availableto OEH, or available on acceptable terms, in an amount sufficient to fund itsneeds.  Future equity financings may bedilutive to the existing holders of common shares.  Future debt financings could involverestrictive covenants that would limit OEH’s flexibility in operating itsbusiness.

 

***Currency fluctuations may have a materialadverse effect on OEH’s financial statements and/or its operating margins.***

 

Substantial portions of OEH’s revenues andexpenses are denominated in non-U.S. currencies such as European euros, Britishpounds sterling, Russian rubles, South African rand, Australian dollars,Peruvian nuevos soles, Botswana pula, Brazilian reais, Mexican pesos and FrenchPacific francs.  In addition, OEH buysassets and incurs liabilities in these foreign currencies.  Foreign exchange rate fluctuations may have amaterial adverse effect on OEH’s financial statements and/or operating margins.

 

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

 

•                                          translationrisk, which is the risk that the financial statements for a particular periodor as of a certain date depend on the prevailing exchange rates of the variouscurrencies against the U.S.  dollar, and

 

•                                          transactionrisk, which is the risk that the currency of costs and liabilities fluctuatesin relation to the currency of revenue and assets, which

 

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fluctuations mayadversely affect OEH’s operating margins.

 

***OEH’s operations may be adversely affectedby extreme weather conditions and the impact of natural disasters.***

 

OEH operates properties in a variety of locales,each of which is subject to local weather patterns affecting the properties andcustomer travel.  As OEH’s revenues aredependent on the revenues of individual properties, extreme weather conditionscan from time to time have a major adverse impact upon individual properties orparticular regions.  For example, LaSamanna hotel, which is located on St. Martin, suffered substantial wind andflood damage from a hurricane in November 1999.  Although the hotel was fully insured for therepair costs, it remained closed until February 2000, so that OEH missedmuch of the high season that year.   As afurther example, hurricanes in August and September 2005 caused damage to theWindsor Court Hotel in New Orleans, resulting in a temporary closure of thehotel until November 1, 2005.   Leisureand business travel to New Orleans is expected to be at a reduced level forseveral months following the hurricanes. OEH carries property and loss of earnings insurance in amountsmanagement deems reasonably adequate, but damages may exceed the insurancelimits or be outside the scope of coverage.

 

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

 

OEH’s relations with itsemployees in various countries, including the approximately 2,300 employeesrepresented by labor unions, could deteriorate due to disputes related to,among other things, wage or benefit levels, working conditions or management’sresponse to changes in government regulation of workers and the workplace.  Operations rely heavily on employees’providing high-quality personal service, and any labor shortage or stoppagecaused by poor relations with employees, including labor unions, couldadversely affect the ability to provide those services, which could reduceoccupancy and room revenue and even tarnish OEH’s reputation.

 

***OEH’s owned hotels and restaurants aresubject to risks generally incident to the ownership of commercial real estateand often beyond its control.***

 

These include

 

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

 

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•                                          changes ininterest rates and in the availability, cost and terms of financing,

 

•                                          the impact ofpresent or future governmental legislation and regulations (including environmentallaws),

 

•                                          the ongoingneed for capital improvements to maintain or upgrade properties,

 

•                                          changes inproperty taxes and operating expenses, and

 

•                                          the potentialfor uninsured or underinsured losses.

 

***Some of the Company’s directors andexecutive officers may have potential conflicts of interest because they ownSCL shares or have positions at SCL, or because of contractual rights relatingto one OEH property.***

 

Some of the Company’s directorsand executive officers, namely James B. Sherwood, John D. Campbell and Edwin S.Hetherington, hold common shares and options to purchase common shares inSCL.  Also, these persons are executiveofficers or directors of SCL.  Ownershipof common shares in SCL by Company directors and officers, or their positions asexecutive officers or directors of SCL, could create, or appear to create,potential conflicts of interest when directors and officers are faced withdecisions that could have different implications for SCL and the Company.

 

In addition, OEH has granted toJames B. Sherwood, the Chairman of both SCL and the Company, a right of firstrefusal to purchase the Hotel Cipriani in Venice and related assets if OEHproposes to sell or transfer them.  Also,a subsidiary of the Company has granted to Mr. Sherwood an option to purchasethe hotel at its fair market value if a change of control of the Companyoccurs.

 

The Company has in place a codeof business practices administered by the audit committee of the Board andapplicable to the Company’s principal executive, financial and accountingofficers to avoid conflicts of interest. However, there can be no assurance that this will prevent futureconflicts.

 

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## **Risks Relating to OEH’s Financial Condition andResults of Operations**

 

***Covenants inOEH’s financing agreements could limit its discretion in operating itsbusinesses, causing it to make less advantageous business decisions; OEH’sindebtedness is collateralized by substantially all of its properties.***

 

OEH’s financing agreements withabout 20 commercial bank lenders contain covenants that include limits onadditional debt collateralized by mortgaged properties, limits on liens onproperty and limits on mergers and asset sales, and financial covenantsrequiring maintenance of a minimum net worth amount or a minimum interestexpense coverage, or establishing a maximum debt to equity ratio.  Indebtedness is also collateralized bysubstantially all of OEH’s properties. Future financing agreements may contain similar, or even morerestrictive, provisions and covenants. If OEH fails to comply with the restrictions in its present or futurefinancing agreements, a default may occur. A default could allow the creditors to accelerate the related debt aswell as any other debt to which a cross-acceleration or cross-defaultprovision applies.  A default could alsoallow the creditors to foreclose on the properties collateralizing the debt.

 

***Increases in prevailing interest rates mayincrease OEH’s interest payment obligations.***

 

Substantially all of OEH’sconsolidated long-term debt at December 31, 2005 accrued interest at rates thatfluctuate with prevailing interest rates, so that any increases in prevailinginterest rates may increase OEH’s interest payment obligations.  From time to time, OEH enters into hedgingtransactions in order to manage its floating interest-rate exposure, but therecan be no assurance those transactions will be successful.  At December 31, 2005, OEH had no interestrate swaps in effect.

 

***The Company’s abilityto pay dividends on the Class A common shares is limited.***

 

Beginning in January 2004,the Company has been paying quarterly dividends on its Class A and Bcommon shares in the amount of $0.025 per share.  There can be no assurance the Company will beable to make dividend payments in the future because of debt repaymentrequirements, a downturn to OEH’s business or other reasons.

 

Under Bermuda law, the Companymay pay dividends on, or make other distributions with respect to theClass A and B common shares (1) unless there are reasonable groundsfor believing that OEH is, or after the payment or distribution

 

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would be, unable to pay its liabilities as theybecome due, or (2) unless the realizable value of OEH’s assets is lessthan the aggregate of its liabilities, issued share capital and “share premiumaccounts” (share premium is defined as the amount of shareholders’ equity overand above the aggregate par value of issued shares).  There can be no assurance the Company willnot be restricted by Bermuda law from paying dividends.

 

***OEH’s substantial indebtedness couldadversely affect its financial health.***

 

OEH has a significant amount ofdebt and may incur additional debt from time to time.  As of December 31, 2005, its consolidatedlong-term indebtedness was $­­­568,000,000 (including the currentportion).  This substantial indebtednesscould

 

•                                          require OEHto dedicate much of its cash flow from operations to payments on indebtedness,and so reduce the availability of cash flow to fund working capital, capitalexpenditures, product and service development and other general corporatepurposes; for example, in 2005 OEH generated $40,500,000 in cash from operatingactivities after paying interest of $29,500,000 and before loan principalrepayments of $39,600,000.

 

•                                          limit OEH’sability to obtain additional financing to fund future working capital, capitalexpenditures, product and service development and other general corporatepurposes,

 

•                                          increase OEH’svulnerability to adverse economic and industry conditions, including theseasonality of some of its businesses, or

 

•                                          limit itsflexibility in planning for, or reacting to, changes in its business andindustry as well as the economy generally.

 

OEH’s must also repay orrefinance a significant amount of indebtedness in future years.  Although OEH may seek to refinance itsindebtedness, it may be unable to obtain refinancing.  Any failure of OEH to repay any indebtednesswhen due may result in a default under such indebtedness and cause cross-defaultsunder other indebtedness.

 

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## **Risks of Owning and Selling Class A CommonShares**

 

***The Companywill not be restricted from issuing additional Class A common shares, andany sales could negatively affect the trading price of the Class A commonshares outstanding.***

 

The Company may in itsdiscretion sell newly issued Class A common shares.  There can be no assurance that the Companywill not make significant sales of Class A common shares.  Any sales could materially and adverselyaffect the trading price of the Class A common shares outstanding.

 

***The price ofthe Class A common shares may fluctuate significantly, which may make itdifficult for shareholders to sell the Class A common shares when theywant or at prices they find attractive.***

 

The price of the Class Acommon shares on the New York Stock Exchange constantly changes.  OEH expects that the market price of theClass A common shares will continue to fluctuate.  Holders of Class A common shares will besubject to the risk of volatility and depressed prices.

 

The Company’s share price canfluctuate as a result of a variety of factors, many of which are beyond OEH’scontrol.  These factors include

 

•                                          quarterlyvariations in operating results,

 

•                                          operatingresults that vary from the expectations of management, securities analysts andinvestors,

 

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

 

•                                          developmentsgenerally affecting OEH’s businesses,

 

•                                          announcementsby OEH or its competitors of significant contracts, acquisitions, jointventures or capital commitments,

 

•                                          announcementsby third parties of significant claims or proceedings against OEH,

 

•                                          the dividendpolicy for the Class A and B common shares,

 

•                                          future salesof equity or equity-linked equities, and

 

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•                                          generaldomestic and international economic conditions.

 

In addition, the stock marketin general has experienced volatility that has often been unrelated to theoperating performance of a particular company. These broad market fluctuations may adversely affect the market price ofthe Class A common shares.

 

***The Company’s directors and officers maycontrol the outcome of most matters submitted to a vote of shareholders.***

 

A wholly-owned subsidiaryof the Company, Orient-Express Holdings 1 Ltd. (“Holdings”),currently holds 18,044,478 Class B common shares in the Company representingabout 82% of the voting power for most matters submitted to a vote ofshareholders, and Holdings, together with the directors and officers of theCompany, holds common shares representing about 83% of the combined votingpower for most matters submitted to a vote of shareholders.  In general, holders of Class A commonshares and holders of Class B common shares vote together as a singleclass, with holders of Class A common shares having one-tenth of one voteper share and holders of Class B common shares having one vote pershare.  Therefore, as long as the numberof outstanding Class B shares exceeds one-tenth the number of outstandingClass A common shares, the holders of Class B common shares couldcontrol the outcome of most matters submitted to a vote of theshareholders.  Under Bermuda law, commonshares of the Company owned by Holdings are outstanding and may be voted byHoldings.  The manner in which Holdingsvotes its common shares will be determined by the four directors of Holdings,two of whom, John D. Campbell and James B. Sherwood, are also directors orofficers of the Company, consistently with the exercise by those directors oftheir fiduciary duties to Holdings. Those directors, should they choose to act together, will be able tocontrol substantially all matters affecting the Company, and to block a numberof matters relating to any potential change of control of the Company.  See Item 12—SecurityOwnership of Certain Beneficial Owners and Management and Related StockholdersMatters.

 

***Provisions in the Company’s charterdocuments, and the preferred share purchase rights currently attached to theClass A and B common shares, may discourage potential acquisitions of OEH,even those that the holders of a majority of its Class A common sharesmight favor.***

 

The Company’s memorandum ofassociation and bye-laws contain provisions that could make it harder for athird party

 

30

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to acquire it without the consent of its Board of Directors.  These provisions include

 

•                                          supermajorityshareholder voting provisions for the removal of directors from office with orwithout cause, and for “business combination” transactions with beneficialowners of shares carrying 15% or more of the votes which may be cast at anygeneral meeting of the Company, and

 

•                                          limitationson the voting rights of such 15% beneficial owners.

 

Also, the Company’s Board ofDirectors has the right under Bermuda law to issue preferred shares withoutshareholder approval, which could be done to dilute the stock ownership of apotential hostile acquirer.  Although OEHbelieves these provisions provide an opportunity to receive a higher price byrequiring potential acquirers to negotiate with the Company’s Board ofDirectors, these provisions apply even if the offer is favored by shareholdersholding a majority of the Company’s equity.

 

The Company has in place ashareholder rights agreement providing for rights to purchase series Ajunior participating preferred shares of the Company.  The rights are not currently exercisable andthey are attached to and trade together with the Class A and B commonshares on a one-to-one basis.  Theserights may have anti-takeover effects.

 

These anti-takeover provisionsare in addition to the ability of Holdings and directors and officers to voteshares representing a significant majority of the total voting power of theCompany’s common shares.  See the RiskFactor immediately above.

 

***A judgment of a United States court forliabilities under U.S.  securities lawsmight not be enforceable in Bermuda, or an original action might not be broughtin Bermuda against OEH for liabilities under U.S. securities laws.***

 

The Company is incorporated inBermuda, a majority of its directors and officers are residents of Bermuda, theUnited Kingdom and elsewhere outside the United States, and most of its assetsand the assets of its directors and officers are located outside the UnitedStates.  As a result, it may be difficultfor shareholders to

 

•                                          effectservice of process within the United States upon the Company or its directorsand officers, or

 

31

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•                                          enforcejudgments obtained in United States courts against the Company or its directorsand officers based upon the civil liability provisions of the United Statesfederal securities laws.

 

OEH has been advised by Bermudacounsel, Appleby Spurling Hunter, that there is doubt as to

 

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

 

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

 
| **ITEM 1B.** | **Unresolved  Staff Comments** |
|--------------|--------------------------------|

 

None.

 
| **ITEM 2.** | **Properties** |
|-------------|----------------|

 

OEHowns 29 hotels, three European tourist trains, a cruiseship and five smallFrench canalboats and two restaurants, and owns interests of 50% or less in tenhotels, its Scottish and Southeast Asian tourist trains and PeruRail, and athird restaurant, all as described in Item 1—Business above.  The small regional sales, marketing andoperating offices of the hotels, tourist trains and cruise business areoccupied under operating leases.

 
| **ITEM 3.** | **Legal  Proceedings** |
|-------------|------------------------|

 

There are nomaterial legal proceedings, other than ordinary routine litigation incidentalto OEH’s business, to which the Company or any of its subsidiaries is a party orto which any of their property is subject.

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

 

TheCompany submitted no matter to a vote of its security holders during the fourthquarter of 2005.

 

32

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**PART II**

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

 

TheClass A common shares of the Company are traded on the New York StockExchange under the symbol OEH.  All ofthe Class B common shares of the Company are closely held and not listed.  See Item 12—Security Ownershipof Certain Beneficial Owners and Management and Related StockholderMatters.  The following table presentsthe quarterly high and low sales prices of a Class A common share in 2005 and2004 as reported for New York Stock Exchange composite transactions:

 
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |       |     |       |     |       |   |   |   |   |
| First quarter  |       | $        | 26.36      |     | $          | 19.60 |   | $ | 19.79 |   | $ | 16.35 |   |
| Second quarter |       | 32.50    |       | 25.16    |       | 18.23 |   | 14.50 |   |
| Third quarter  |       | 33.40    |       | 27.28    |       | 17.04 |   | 14.50 |   |
| Fourth quarter |       | 32.71    |       | 26.15    |       | 23.05 |   | 15.71 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

TheCompany paid quarterly cash dividends at the rate of $0.025 per Class A and Bcommon share in 2005 and 2004.

 

TheIslands of Bermuda where the Company is incorporated have no applicablegovernmental laws, decrees or regulations which restrict the export or importof capital or affect the payment of dividends or other distributions tonon-resident holders of the Class A and B common shares of the Company orwhich subject United States holders to taxes.

 

AtFebruary 28, 2006, the number of record holders of the Class A commonshares of the Company was approximately 30.

 

During2005, the Company issued and sold 5,050,000 Class A common shares in a publicoffering registered in the United States in March 2005.  Also, during the fourth quarter of 2005, nopurchases of the Company’s common shares were made by or on behalf of theCompany or any affiliated person.

 

33

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**ITEM 6.  Selected Financial Data**

 

**Orient-ExpressHotels Ltd. and Subsidiaries**

 
| ** **                                                | ** ** | **Year ended December 31,**                 | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                | ** ** | **(In thousands except per share amounts)** | ** ** |
| Revenue                                                   |       | $                                           | 433,147    |   | $ | 357,284 |   | $ | 315,863 |   | $ | 279,268 |   | $ | 252,236 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Gain  on sale of hotel asset                              |       | $                                           | —     |   | $ | — |   | $ | 4,250 | * | $ | — |   | $ | — |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Earnings  from unconsolidated companies – net of tax |       | $                                           | 11,175     |   | $ | 9,084 |   | $ | 7,320 |   | $ | 8,471 |   | $ | 7,415 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Net  earnings on class A and class B common shares        |       | $                                           | 40,733     |   | $ | 28,222 |   | $ | 23,609 |   | $ | 25,294 |   | $ | 29,850 |   |
| Net  earnings per class A and class B common share Basic  |       | $                                           | 1.07       |   | $ | 0.82 |   | $ | 0.76 |   | $ | 0.82 |   | $ | 0.97 |   |
| Diluted                                                   |       | $                                           | 1.06       |   | $ | 0.82 |   | $ | 0.76 |   | $ | 0.82 |   | $ | 0.97 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Total  assets                                             |       | $                                           | 1,415,562  |   | $ | 1,276,901 |   | $ | 1,169,226 |   | $ | 998,532 |   | $ | 836,251 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Long-term  obligations                                    |       | $                                           | 568,307    |   | $ | 583,706 |   | $ | 554,188 |   | $ | 459,016 |   | $ | 362,871 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                                |       | $                                           | 673,400    |   | $ | 544,990 |   | $ | 512,444 |   | $ | 426,482 |   | $ | 392,587 |   |
|                                                      |       |                                        |       |   |   |   |   |   |   |   |   |
| Dividends  per class A and class B common share           |       | $                                           | 0.10       |   | $ | 0.10 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                           |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*                                         The gain in 2003 related to the sale of the Hotel Quinta do Lago inPortugal.

 

See notes to consolidated financial statements (Item8).

 

34

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

 

**Overview**

 

OEH hastwo business segments: (1) hotels and restaurants and (2) touristtrains and cruises.  Hotels currently consistof 33 deluxe hotels, excluding six Pansea Hotels to which OEH has made aconvertible loan.  Twenty-nine of thesehotels are wholly or majority owned (including Casa de Sierra Nevada, acquiredin February 2006), and are referred to in this discussion as “owned hotels”.  The other four hotels, in which OEH has anequity interest and operates under management contracts, are referred to inthis discussion as “hotel management interests”.  Of the owned hotels, twelve are located inEurope, seven in North America and ten in the rest of the world.  One of the hotels in Europe, the Hotel Carusoin Ravello, Italy was operational from June to October 2005, when it closed tocomplete restoration and refurbishment for re-opening in April 2006.  In February 2005, OEH acquired the GrandHotel Europe, St. Petersburg, Russia.

 

Also, OEHcurrently owns and operates the restaurants ‘21’ Club in New York and La Cabañain Buenos Aires, which opened in September 2003, and has a 49% interest inHarry’s Bar in London (the “restaurants”).

 

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

 

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

 

Following theterrorist attacks in the United States on September 11, 2001, as well asweakening national economies in 2001, OEH experienced a significant adverseimpact on its business in common with other companies in the travel andhospitality sector.  During 2002, thebusiness showed some improving trends quarter on quarter.  In the first half of 2003, however, with theprospect and then commencement of the Iraq War and the outbreak of the SARSepidemic, travel was

 

35

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furtherreduced with a consequential reduction in occupancy and OEH’sprofitability.  In the second half of 2003,business was generally better than in the first half, but RevPAR remained belowpre-September 11 levels, primarily due to 15%-20% lower occupancy at the hotelscompared to 2000 and 2001 occupancy (on a “comparable” or “same store” basis —see below).  The improvement in businessin the second half of 2003 was not sufficient to reverse the impact of the IraqWar and SARS on the results of the first half, leading to net earnings for 2003at $23.6 million (including the $4.3 million gain on sale of the Hotel Quintado Lago) being down from $25.3 million in 2002. The results for 2004 were much improved over 2003 with net earningsincreasing from $19.4 million (excluding the gain on sale of the Hotel Quintado Lago) to $28.2 million, an increase of 45%. This was principally driven by a same store RevPAR increase of 16% atOEH’s owned hotels and a much improved performance in the tourist trains andcruises segment.  This improvementcontinued into 2005, with same store RevPAR increases of 16%, coupled with theacquisition of the Grand Hotel Europe, driving revenue increases of 21% and netearnings growth of 44% to $40.7 million.

 

OEH has astrategy to grow its business through:

 

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

 

•                  Expansion ofhotels:  the returns on investment byadding new rooms to a hotel are high as the incremental operating costs arelow; and

 

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

 

•                  Real estate:  OEH owns 325 acres of land, of which itintends to develop over time, as residential real estate developments.

 

In November2003, OEH sold the Hotel Quinta do Lago in the Algarve, Portugal, for $40million cash, equivalent to a multiple of 16 times historic EBITDA.  The hotel was not considered a long-term fitwith OEH’s portfolio and strategy so OEH took the opportunity to sell theproperty at an attractive price.

 

36

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Also, inNovember and December 2003, the Company issued and sold through underwriters3,450,000 newly-issued class A common shares at $16 each, raising $51.9 millionnet of underwriters’ fees and expenses.  Theproceeds from the sales of the hotel and new shares have been used to invest inother hotels and related assets and to fund expansion of some existing hotelsas part of OEH’s growth strategy outlined above.  In March 2005, by selling 5,050,000 newly-issuedclass A common shares at $26 each, OEH raised $121.9 million net of underwritersfees and expenses.  The proceeds of thissale were used primarily to fund the acquisition of the Grand Hotel Europe.

 

In2005, 85% of OEH’s revenue was derived from the hotels and restaurants segmentand the remainder from the tourist trains and cruises segment.  In the hotels and restaurants segment, 89% ofrevenue was from owned hotels, 6% from restaurants and 5% was from hotel managementinterests.

 

OEHderives revenue from owned hotel operations primarily from the sale of roomsand the provision of food and beverages. The main factors for analyzing rooms revenue are the number of roomnights sold and the ADR, and RevPAR referred to above which is a measure ofboth these factors.

 

Revenuefrom restaurants is derived from food and beverages sold to customers.  Revenue from hotel management interestsincludes fees received under management contracts, which are based upon acombination of a percentage of the revenue from operations and operatingearnings calculated before specified fixed charges.

 

Therevenue from the tourist trains and cruises segment primarily comprises ticketssold for travel and food and beverage sales.

 

Operatingcosts include labor, repairs and maintenance, energy and the costs of food andbeverages sold to customers in respect of owned hotel operations, restaurants,tourist trains and cruises.

 

Selling,general and administrative expenses include travel agents’ commissions, thesalaries and related costs of the sales teams, advertising and public relationscosts, and the salaries and related costs of management.  Some of the central general andadministrative expenses are provided under agreement with SCL.  See Note 16 to the Financial Statements.

 

Depreciationand amortization includes depreciation of owned hotels, restaurants, touristtrains and cruise boats.

 

37

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WhenOEH discusses results for a period on a “comparable” or “same store” basis, OEHis considering only the results of hotels owned and operating throughout theperiods mentioned and excluding the effect of any acquisitions, dispositions ormajor refurbishments.

 

**Results of Operations**

 

OEH’soperating results for years 2005, 2004 and 2003, expressed as a percentage ofrevenue, are as follows:

 
| ** **                              | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                |       |                       |       |   |   |   |   |
| Hotels  and restaurants                 |       | 85                         | %          | 84 | % | 85 | % |
| Tourist  trains and cruises             |       | 15                         |       | 16 |   | 15 |   |
|                                    |       | 100                        |       | 100 |   | 100 |   |
| Expenses:                               |       |                       |       |   |   |   |   |
| Depreciation  and amortization          |       | 8                          |       | 8 |   | 8 |   |
| Operating                               |       | 47                         |       | 49 |   | 50 |   |
| Selling,  general and administrative    |       | 31                         |       | 32 |   | 32 |   |
| Gain on sale of hotel asset             |       | —                     |       | — |   | (1 | ) |
| Net finance costs                       |       | 6                          |       | 5 |   | 5 |   |
| Earnings before income taxes            |       | 8                          |       | 6 |   | 6 |   |
| Provision for income taxes              |       | (1                         | )          | (1 | ) | — |   |
| Earnings from unconsolidated companies  |       | 3                          |       | 3 |   | 2 |   |
| Net earnings as a percentage of revenue |       | 10                         | %          | 8 | % | 8 | % |

 

Segmentnet earnings before interest expense (but after interest income fromunconsolidated companies), foreign currency, tax (including tax on earningsfrom unconsolidated companies), depreciation, amortization and gain on hotelasset sale (“segment EBITDA”) for the years ended 2005, 2004 and 2003 areanalyzed as follows (dollars in millions):

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| EBITDA:                                        |       |                        |       |   |   |   |   |
| Owned  Hotels:                                 |       |                        |       |   |   |   |   |
| Europe                                         |       | $                           | 46.6       |   | $ | 29.9 |   | $ | 32.8 |   |
| North  America                                 |       | 18.8                        |       | 15.0 |   | 11.1 |   |
| Rest  of the world                             |       | 23.4                        |       | 18.0 |   | 11.1 |   |
| Hotel  management and part-ownership interests |       | 17.5                        |       | 14.9 |   | 13.5 |   |
| Restaurants                                    |       | 5.6                         |       | 3.9 |   | 2.6 |   |
| Tourist  trains and cruises                    |       | 15.4                        |       | 13.0 |   | 6.0 |   |
| Central  overheads                             |       | (19.0                       | )          | (15.7 | ) | (12.2 | ) |
| Total                                          |       | $                           | 108.3      |   | $ | 79.0 |   | $ | 64.9 |   |

 

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

 

38

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| ** **                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings                                                     |       | $                           | 40.7       |   | $ | 28.2 |   | $ | 23.7 |   |
| Add:                                                             |       |                        |       |   |   |   |   |
| Depreciation and amortization                                    |       | 34.1                        |       | 28.4 |   | 25.3 |   |
| Interest expense, net                                            |       | 30.2                        |       | 19.9 |   | 19.9 |   |
| Foreign currency, net                                            |       | (5.1                        | )          | (2.7 | ) | (2.7 | ) |
| Provision for income taxes                                       |       | 5.0                         |       | 2.6 |   | 1.0 |   |
| Share of provision for income taxes of  unconsolidated companies |       | 3.4                         |       | 2.6 |   | 2.0 |   |
| Less:                                                            |       |                        |       |   |   |   |   |
| Gain on sale of hotel                                            |       | —                      |       | — |   | (4.3 | ) |
| Total                                                            |       | $                           | 108.3      |   | $ | 79.0 |   | $ | 64.9 |   |

 

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

 

Operatinginformation for OEH’s owned hotels for the years ended December 31, 2005 and2004 is as follows:

 

39

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| ** **                                  | ** ** | **Year ended  December 31,** | ** ** |       |
|---------------------------------------------|------------|-----------------------------------|------------|------------|
| ** **                                  | ** ** | **2005**                          | ** ** | **2004**   | ** ** |   |
| Average Daily Rate (in dollars)             |       |                              |       |       |   |   |
| Europe                                      |       | $                                 | 526        |       | $ | 626 |   |   |
| North  America                              |       | 323                               |       | 322        |   |   |
| Rest  of World                              |       | 277                               |       | 247        |   |   |
| Worldwide                                   |       | 375                               |       | 366        |   |   |
|                                        |       |                              |       |       |   |   |
| Room nights Sold (in thousands)             |       |                              |       |       |   |   |
| Europe                                      |       | 176                               |       | 108        |   |   |
| North  America                              |       | 140                               |       | 142        |   |   |
| Rest  of World                              |       | 196                               |       | 183        |   |   |
| Worldwide                                   |       | 512                               |       | 433        |   |   |
|                                        |       |                              |       |       |   |   |
| RevPAR (in dollars)                         |       |                              |       |       |   |   |
| Europe                                      |       | $                                 | 307        |       | $ | 342 |   |   |
| North  America                              |       | 219                               |       | 217        |   |   |
| Rest  of World                              |       | 162                               |       | 136        |   |   |
| Worldwide                                   |       | 228                               |       | 214        |   |   |
| ** **                                  | ** ** | ** **                        | ** ** | ** ** | ** ** | **Change %** | ** ** |
| ** **                                  | ** ** | ** **                        | ** ** | ** ** | ** ** | **Dollars** | ** ** | **Local  Currency** | ** ** |
| Comparable/Same  Store RevPAR  (in dollars) |       |                              |       |       |   |   |   |   |   |
| Europe                                      |       | $                                 | 369        |       | $ | 346 |   | 6 | % | 6 | % |
| North  America                              |       | 249                               |       | 230        |   | 9 | % | 9 | % |
| Rest  of World                              |       | 163                               |       | 138        |   | 18 | % | 18 | % |
| Worldwide                                   |       | 241                               |       | 217        |   | 11 | % | 10 | % |

 

Averagedaily rate is the average amount achieved for the rooms sold.  RevPAR is revenue per available room, that isthe rooms’ revenue divided by the number of available rooms for each night ofoperation.  Same store RevPAR is acomparison based on the operations of the same units in each period, byexcluding the effect of any acquisitions, dispositions or major refurbishments.  The same store data excludes the followingoperations: Hotel Caruso, El Encanto Hotel & Garden Villas and Grand HotelEurope, as well as La Residencia, Maroma Resort and Spa, Miraflores Park Hoteland the Windsor Court Hotel for the periods in which they were closed.

 

**Year Ended December 31, 2005**

**compared to Year Ended December 31, 2004**

 

*Revenue*

 

Totalrevenue increased by $75.8 million, or 21.2%, from $357.3 million in 2004to $433.1 million in 2005.  Hotels and

 

40

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restaurantsrevenue increased by $73.2 million, or 24.5%, from $298.7 million in2004 to $371.9 million in 2005, and the revenue from tourist trains andcruises increased by $2.6 million, or 4.5%, from $58.6 million in 2004 to $61.2million in 2005.

 

Theincrease in hotels and restaurants revenue consisted of the following:

 

•                  $70.1 million attributable to owned hotels, or 26%, from $271.0million in 2004 to $341.1 million in 2005,

 

•                  an increase in revenue from hotel management interests of $1.3 million,or 18%, from $7.3 million in 2004 to $8.6 million in 2005, mainly dueto improved results of Charleston Place and the Peruvian hotel investments,

 

•                  an increase in restaurants revenue of $1.8 million, or 9%, from$20.3 million in 2004 to $22.2 million in 2005, mainly due to improved revenueat the ‘21’ Club of $1.1 million and La Cabana of $0.4m.

 

Theincrease in owned hotels revenue of $70.1 million is analyzed by region asfollows:

 

*Europe.*  Revenue increased by$45.1 million from $116.1 million in 2004 to $161.2 million in2005.  $32 million of this growth wasattributable to the Grand Hotel Europe with all other properties showingrevenue growth.

 

On a samestore basis in euros, RevPAR increased by 6% in 2005 over 2004 and whentranslated to U.S. dollars also increased by 6%.  The European portfolio revenue increases in2005 were stronger within the Italian portfolio which showed significantincreases from $54.4 million to $59.5 million in 2005, an increase of 9%.

 

*North America.*  Revenue increased by $9.0million, or 13%, from $75.4 million in 2004 to $84.4 million in 2005.  Included in 2005 revenues are $4.7 millionrelating to real estate sales at Keswick Hall Hotel (2004-$4.2 million).  The increase was underpinned by $6 million ofrevenue at El Encanto Hotel & Garden Villas, but offset by drops in revenueat the Windsor Court Hotel and Maroma Resort and Spa ($4.4 million) due tohurricane related closures.

 

On a samestore basis, RevPAR in 2005 increased by 9% over 2004.

 

41

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*Rest of the World.*  Revenue increased by $15.9million, or 20%, from $79.6 million in 2004 to $95.5 million in 2005.  Revenues at all properties showed good growthin 2005.  Southern Africa revenuesincreased by 19% to $31.6 million, South American revenues increased by 20% to$33.1 million, and Australia and Asia increased by 21% to $30.8 million.

 

RevPARincreased by 10% in local currencies but increased by 11% in U.S. dollars.

 

*Depreciation and Amortization*

 

Depreciationand amortization increased by $5.8 million, or 20%, from$28.3 million in 2004 to $34.1 million in 2005.  The increase was due primarily to the impactof the Grand Hotel Europe, St. Petersburg.

 

*Operating Expenses*

 

Operatingexpenses increased by $29.7 million, or 17%, from $175.6 million in2004 to $205.3 million in 2005.  Thiswas primarily due to the improved revenues and volumes in OEH’s businesses inthe year and the impact of the Grand Hotel Europe acquisition and the HotelCaruso opening. As a percentage of revenue, operating expenses reduced from 49%in 2004 to 47% in 2005.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses increased by $19.6 million, or 17%,from $114.5 million in 2004 to $134.1 million in 2005.  This was primarily due to the acquisition ofthe Grand Hotel Europe.

 

*Earnings from Operations before Net FinanceCosts*

 

Earningsfrom operations increased by $20.8 million, or 53%, from$38.9 million in 2004 to $59.7 million in 2005.

 

*Net Finance Costs*

 

Netfinance costs increased by $7.9 million, or 46%, from $17.2 million in 2004 to$25.1 million in 2005.  This includes foreigncurrency transaction gains of $5.1 million in 2005 (2004-$2.7 million) onfinancing transactions.  The increase isattributable to the impact of the financing of the Grand Hotel Europe, theHotel Caruso and funding of capital expenditure in 2005.  There were also increases in both U.S. andU.K. interest rates in 2005.

 

42

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*Taxes on Income*

 

Theprovision for income taxes increased by $2.4 million, or 92%, from$2.6 million in 2004 to $5.0 million in 2005.  The Company is incorporated in Bermuda, whichdoes not impose an income tax. Accordingly, the entire income tax provision was attributable to incometax charges incurred by subsidiaries operating in jurisdictions that impose anincome tax.  The increase of $2.4 millionwas due to increased profitability of these subsidiaries and the impact of theGrand Hotel Europe.

 

*Earnings from Unconsolidated Companies*

 

Earnings fromunconsolidated companies, which include OEH’s share of the net earnings of itsequity investments as well as interest income related to loans and advances tothe equity investees, increased by $2.0 million, or 22%, from $9.1 million to $11.2million, mainly due to increased earnings from Peruvian joint ventures.

 

 

**Year Ended December 31, 2004**

**compared to Year Ended December 31, 2003**

 

*Revenue*

 

Totalrevenue increased by $41.4 million, or 13%, from $315.9 million in 2003 to$357.3 million in 2004.  Hotels andrestaurants revenue increased by $29.3 million, or 11%, from$269.4 million in 2003 to $298.7 million in 2004, and the revenuefrom tourist trains and cruises increased by $12.2 million, or 26%, from $46.4million in 2003 to $58.6 million in 2004.

 

Theincrease in hotels and restaurants revenue consisted of the following:

 

•                  $25.6 million attributable to owned hotels, or 10%, from $245.4million in 2003 to $271.0 million in 2004,

 

•                  an increase in revenue from hotel management interests of$0.8 million, or 12%, from $6.5 million in 2003 to $7.3 millionin 2004, mainly due to improved results of the Peruvian hotels,

 

•                  an increase in restaurants revenue of $2.8 million, or 16%,from $17.5 million in 2003 to $20.3 million in 2004, mainly due to an increasein revenue at the ‘21’ Club of $2.1 million including additional corporatefunctions held at the restaurant.

 

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Theincrease in owned hotels revenue of $25.6 million is analyzed by region asfollows:

 

*Europe.*  Revenue increased by$0.2 million from $115.9 million in 2003 to $116.1 million in2004.  In the fourth quarter of 2003 OEHsold the Hotel Quinta do Lago.  Revenuefrom the Hotel Quinta do Lago was $11.2 million in 2003 prior to its sale.

 

On a samestore basis in euros, RevPAR increased by 2% in 2004 over 2003 but whentranslated to U.S. dollars increased by 13%, as the euro was stronger againstthe dollar in 2004 compared to 2003.  Inlocal currency terms the Italian and French hotels performed much better in2004 but the Portuguese hotels performed worse than in 2003.

 

*North America.*  Revenue increased by $8.8million, or 13%, from $66.6 million in 2003 to $75.4 million in 2004.

 

On a samestore basis, RevPAR in 2004 increased by 8% over 2003.  This was largely due to an increase at theMaroma Resort and Spa following improvements made to the property including theopening of a new spa.

 

*Rest of the World.*  Revenue increased by $16.6million, or 26%, from $63.0 million in 2003 to $79.6 million in 2004.

 

RevPARincreased by 18% in local currencies but increased by 29% in U.S. dollars.  This strong performance was mainly due to theCopacabana Palace Hotel in Brazil and the Westcliff in Johannesburg as well asBora Bora Lagoon Resort following its refurbishment.

 

*Depreciation and Amortization*

 

Depreciationand amortization increased by $3.0 million, or 12%, from$25.3 million in 2003 to $28.3 million in 2004 primarily due to theeffect of the relative weakness of the dollar in 2004 which led to thetranslation of depreciation on assets denominated in other currencies intohigher dollar amounts and due to capital expenditure in 2003 and 2004.

 

*Operating Expenses*

 

Operatingexpenses increased by $17.0 million, or 11%, from $158.6 million in2003 to $175.6 million in 2004. This was primarily due to the improved occupancy in OEH’s businesses inthe year and translation of operating costs incurred in hotel currencies whichwere stronger against the U.S. dollar in 2004 compared to 2003.

 

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*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses increased by $12.7 million, or 12%,from $101.8 million in 2003 to $114.5 million in 2004.  The primary reason for this was thetranslation of selling, general and administrative costs incurred in localcurrencies.

 

*Earnings from Operations before Net FinanceCosts*

 

Earningsfrom operations increased by $4.4 million, or 13%, from $34.5 millionin 2003 to $38.9 million in 2004. The earnings from operations in 2003 include a gain of $4.3 million onthe sale of the Hotel Quinta do Lago during the year.

 

*Net Finance Costs*

 

Netfinance costs remained the same in 2004 as in 2003 at $17.2 million.  As in 2003, OEH benefited from foreignexchange gains on euro cash balances.

 

*Taxes on Income*

 

Theprovision for income taxes increased by $1.6 million, or 16%, from$1.0 million in 2003 to $2.6 million in 2004.  The Company is incorporated in Bermuda, whichdoes not impose an income tax. Accordingly, the entire income tax provision was attributable to incometax charges incurred by subsidiaries operating in jurisdictions that impose anincome tax.  The increase of$1.6 million was due to increased profitability of these subsidiaries.

 

*Earnings from Unconsolidated Companies*

 

Earnings fromunconsolidated companies, which include OEH’s share of the net earnings of itsequity investments as well as interest income related to loans and advances tothe equity investees, increased by $1.8 million, or 25%, from $7.3 million to$9.1 million, mainly due to increased earnings from Peruvian joint ventures.

 

 

**Liquidity and Capital Resources**

 

*Working Capital*

 

OEH hadcash and cash equivalents of $38.4 million at December 31, 2005, $47.2 millionless than the $85.6 million at December 31, 2004.  At December 31, 2005, there were undrawnamounts available to OEH under committed short-term lines of credit of $7.1million ($12 million at December 31, 2004), bringing total cashavailability at December 31, 2005 to $45.5 million.

 

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Current assetsless current liabilities, including the current portion of long-term debt,resulted in a working capital deficit balance of $54.5 million, a workingcapital decrease of $54.5 million from a zero balance at December 31,2004.

 

OEH’sbusiness does not require the maintenance of significant inventories orreceivables and, therefore, management believes working capital is not the mostappropriate measure of liquidity.

 

*Cash Flow*

 

*OperatingActivities.* Net cash provided by operating activities decreased by $12.1 millionto $40.5 million for the year ended December 31, 2005, from cashprovided by operating activities of $52.6 million for the year endedDecember 31, 2004.  The decrease waspartly attributable to an increase in accounts receivable during 2005 that washigher than the increase in accounts receivable during 2004 by $19.8million.  The effect of the increase inaccounts receivable was partly offset by the increase in net earnings of $12.5million and dividends received from unconsolidated companies.

 

*InvestingActivities.* Cash used in investing activities was $222.0 million for the yearended December 31, 2005, compared to $100.6 million for the yearended December 31, 2004, an increase of $121.4 million of which $44.9million was due to increased capital expenditure, $13.2 million was due to expenditureon real estate activities, and $65.0 million was due to increased acquisitionsand investments offset against $1.7 million higher proceeds from the sale ofassets.

 

*FinancingActivities.* Cash provided from financing activities for the year endedDecember 31, 2005 was $135.6 million as compared to cash provided fromfinancing activities of $51.1 million for the year ended December 31,2004, an increase of $84.5 million.

 

*Capital Commitments*

 

There were $24.3 millionof capital commitments outstanding as of December 31, 2005 mainly oninvestments in owned hotels.

 

*Indebtedness*

 

AtDecember 31, 2005, OEH had $568.3 million of consolidated long-termdebt, including the current portion, collateralized by OEH assets with a numberof commercial bank lenders which is payable over periods of one to11 years with

 

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a weightedaverage interest rate of 5.51%.  Thesefinancing agreements contain covenants that include limits on the propertyowning company’s ability to raise additional debt collateralized by theseproperties, limits on liens on the properties and limits on mergers and assetsales and, in some cases, financial covenants such as a minimum interestcoverage ratio and debt service coverage ratio and a maximum debt to equityratio.  Some of the Company guarantees ofthese facilities contain financial covenants on OEH covering a minimumconsolidated tangible net worth and a minimum consolidated interest coverageratio.  OEH is in full compliance withthese covenants, and management believes they will not substantially limit OEH’sability to finance future acquisitions or capital expenditure plans.  See Note 6 to the Financial Statementsregarding the maturity of long-term debt.

 

Approximately 36%of the outstanding principal was drawn in euros at December 31, 2005, andthe balance primarily drawn in U.S. dollars. At December 31, 2005, 98% of borrowings of OEH were in floatinginterest rates.

 

*Liquidity*

 

Managementplans to invest over the next few years in the expansion of existing hotelproperties consistent with its growth strategy, subject to marketconditions.  In addition, OEH aims toacquire more properties which it expects to finance with an appropriate levelof debt collateralized on the properties, and the balance through availablecash resources.

 

Managementexpects to have available cash from operations and appropriate debt and othersources of financing sufficient to fund its working capital requirements,capital expenditures, acquisitions and debt service for 2006 and later years.

 

*Contractual Obligations Summary*

 

The followingtable summarizes OEH’s material known contractual obligations, excludingaccounts payable and accrued liabilities, in 2006 and later years as ofDecember 31, 2005 (dollars in millions).

 

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| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2006**                    | ** ** | **2007-  2008** | ** ** | **2009-  2010** | ** ** | **There-  After** | ** ** | **Total** | ** ** |
| Working capital facilities |       | $                           | 47,108     |   | $ | — |   | $ | — |   | $ | — |   | $ | 47,108 |   |
| Debt                       |       | 70,333                      |       | 291,590 |   | 119,216 |   | 69,954 |   | 551,093 |   |
| Capital leases             |       | 1,818                       |       | 3,318 |   | 3,205 |   | 8,873 |   | 17,214 |   |
| Operating leases           |       | 590                         |       | 716 |   | 453 |   | 144 |   | 1,903 |   |
| Capital commitments        |       | 24,341                      |       | — |   | — |   | — |   | 24,341 |   |
|                       |       | $                           | 144,190    |   | $ | 295,624 |   | $ | 122,874 |   | $ | 78,971 |   | $ | 641,659 |   |

 

*Off-Balance Sheet Arrangements*

 

OEH hadno material off-balance sheet arrangements at December 31, 2005 other thanthose involving its equity investees reported in Notes 1(g), 2(b), 6(a) and 16to the Financial Statements, and commitments and contingencies and derivativefinancial instruments reported in Notes 12 and 13.

 

Alldeposits received for residential purchases at La Samanna are held in escrow,and as at December 31, 2005, this amounted to $2.6 million.

 

**Critical Accounting Policies and Estimates**

 

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

 

Criticalaccounting policies are those that reflect significant judgments or uncertainties,and potentially result in materially different results under differentassumptions and conditions.  OEHmanagement believes the following are OEH’s most critical accounting policiesand estimates.

 

*Carrying values of long-lived assets and goodwill*

 

OEH management periodically evaluates therecoverability of long-lived assets whenever events or changes in

 

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circumstancesindicate that the carrying amount may not be recoverable.  These evaluations include analyses based onthe cash flows generated by the underlying assets, profitability informationincluding estimated future operating results, trends or other determinants offair value.  If the value of the assetdetermined by these evaluations is less than its carrying amount, a loss, ifany, is recognized for the difference between the fair value and the carryingvalue of the asset.  Future adversechanges in market conditions or poor operating results of the related businessmay indicate an inability to recover the carrying value of the asset, therebypossibly requiring an impairment charge in the future.

 

Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”, goodwill must be evaluated annually forimpairment.  The impairment testing under SFAS No. 142 isperformed in two steps, first, the determination of impairment based upon thefair value of a reporting unit as compared with its carrying value and, second,if there is an impairment, the measurement of the amount of impairment loss bycomparing the implied fair value of goodwill with the carrying amount of thatgoodwill.  As of December 31, 2005and 2004, OEH determined the carrying values of all its reporting units wereless than their estimated fair values, indicating that there was no impairmentof the recorded goodwill.  To determinefair value, OEH relied on common industry valuation models, including multiplesof earnings.

 

Otherintangible assets with indefinite useful lives are also reviewed for impairmentin accordance with SFAS No. 142.

 

*Depreciation*

 

Real estate and other fixed assets are recorded at cost and are depreciated over their estimated useful lives by the straight-line method.  The depreciation rates on freehold buildings are 60 years with a 10% residual value, 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 pension plan is accounted forusing actuarial valuations required by SFAS No. 87, “Employers’ Accountingfor Pensions”.  Management considersaccounting for pensions critical to all of OEH’s operating segments becausemanagement is required to make significant subjective judgments about a numberof actuarial assumptions, which 

 

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include discount rates, salarygrowth, long-term return on plan assets and mortality rates.

 

Management believes that a 7.0% long-termreturn on plan assets in 2005 is reasonable despite the recent marketvolatility.  In determining the expectedlong-term rate of return on assets, management has evaluated input from OEH’sactuaries and financial advisors, including their review of anticipated futurelong-term performance of individual asset classes and the consideration of theappropriate asset allocation strategy given the anticipated requirements of theplan to determine the average rate of earnings expected on the fundsinvested.  The projected returns arebased on broad equity and bond indices, including fixed interest rate gilts(U.K. Government issued long-term securities) of long-term duration since theplan is in the U.K.  OEH’s expectedlong-term rate of return is based on a planned transition towards 100% equityinvestment which is due to be completed at the end of March, 2006.

 

Management regularly reviews OEH’s actualasset allocation and periodically rebalances investments to targetedallocations when considered appropriate. While the analysis considers recent fund performance and historicalreturns, the assumption is primarily a long-term, prospective rate.  Management will continue to evaluate theexpected rate of return at least annually, and will adjust as necessary.

 

Depending on the assumptions and estimatesused, pension expense could vary within a range of outcomes and have a materialeffect on OEH’s consolidated financial statements.  Management is currently monitoring andevaluating the level of pension contributions based on various factors thatinclude investment performance, actuarial valuation and tax deductibility.  Management will evaluate the need foradditional contributions in 2006 based on these factors.  Management believes that the cash flows fromOEH’s operations will be sufficient to fund additional contributions, if any,to the plan.

 

##### *Tax assets*

##### * *

OEH maintains a valuation allowance to reduceits gross deferred tax assets to reflect the amount, based upon OEH’s estimatesof income that would likely be realized. If OEH’s future operations differed from those in the estimates, OEH mayneed to increase or decrease the valuation allowance, which could affect itsreported operations.

 

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**Recent Accounting Pronouncements**

 

****The Companyadopted SFAS No. 123R with effect from January 1, 2005 (see Note1(e)).****

 

****In October 2005,the Financial Accounting Standards Board (“FASB”) issued Staff Position FAS 13-1,“Accounting for Rental Costs Incurred during a Construction Period”, whichrequires rental costs associated with ground or building operating leases thatare incurred during a construction period to be recognized as rentalexpense.  This Staff Position iseffective for reporting periods beginning after December 15, 2005, andretrospective application is permitted but not required.  OEH has historically expensed rent costsincurred during the construction period. Accordingly, Staff Position FAS 13-1 is not expected to have any impacton OEH’s consolidated financial statements.****

 

****In March 2005,the FASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations”.  FIN 47clarifies the term “conditional” as used in SFAS No.143, “Accounting for AssetRetirement Obligations”.  Thisinterpretation refers to a legal obligation to perform an asset retirementactivity even if the timing and/or settlement is conditional on a future eventthat may or may not be within the control of an entity.  Accordingly, the entity must record aliability for the conditional asset retirement obligation if the fair value ofthe obligation can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15,2005.  The adoption of FIN 47 did nothave a material impact on OEH’s consolidated financial statements.****

 

****In May 2005,the FASB issued SFAS No. 154,”Accounting Changes and Error Corrections”.  SFAS No. 154 replaces AccountingPrinciple Board Opinion No 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”.  SFAS No. 154 changes the requirementsfor the accounting for and reporting of a change in accounting principles.  It requires retrospective application toprior periods’ financial statements of changes in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change.  Thestatement is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 did nothave a material effect on OEH’s financial position or results of operations.****

 

****In July 2005,the FASB issued an exposure draft, “Accounting for Uncertain Tax Positions, anInterpretation of FASB Statement No. 109”. As drafted, the interpretation would****

**** ****

****51****

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**** ****

****require companies to recognize the best estimate of the impact of a taxposition only if that position is probable of being sustained during a taxaudit.  However, in November 2005,the FASB voted to replace the probable threshold with a more-likely-than-notcriterion when determining if the impact of a tax position should berecorded.  The FASB expects to issue afinal interpretation in the first quarter of 2006.  When it is available, OEH will review thefinal interpretation to determine the impact it may have on OEH’s consolidatedfinancial statements.****

 

****In December 2005,the FASB deliberated issues relating to the limited-scope, first phase of itsproject to reconsider the accounting for post-retirement benefits, includingpensions.  The FASB decided that theobjectives and scope of this phase include, among other items, recognizing theover-funded or under-funded status of defined benefit post-retirement plans asan asset or a liability in the statement of financial position.  The FASB expects to issue an exposure draftfor the initial phase in the first quarter of 2006.  In the second multi-year phase of theproject, the FASB expects to consider comprehensively a variety of issuesrelated to the accounting for post-retirement benefits, including expenserecognition, obligation measurement, and whether post-retirement benefit trustsshould be consolidated by the plan sponsor. OEH will review the proposed standards when they are available todetermine the impact they may have on OEH’s consolidated financial statements.****

 
| **ITEM 7A.** | **Quantitative and Qualitative Disclosures About Market Risk** |
|--------------|----------------------------------------------------------------|

 

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

 

The market risk relating to interest ratesarises mainly from the financing activities of OEH.  Earnings are affected by changes in interestrates on floating rate borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. OEH management assesses market risk based on changes in interest ratesusing a sensitivity analysis.  Ifinterest rates increased by 10% with all other variables held constant, annualnet finance costs of OEH would have increased by approximately $3,000,000 basedon borrowings 

 

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outstanding at December 31,2005.  The interest rates onsubstantially all of OEH’s long-term debt are adjusted regularly to reflectcurrent market rates.  Accordingly, thecarrying amounts approximate fair value.

 

The market risk relating to foreigncurrencies arises from holding assets, buying, selling and financing incurrencies other than the U.S. dollar, principally the European euro, Britishpound, South African rand, Brazilian real and Australian dollar.  Some non-U.S. subsidiaries of the Companyborrow in local currencies, and OEH may in the future enter into forwardexchange contracts relating to purchases denominated in foreign currencies.  There are no foreign currency derivativefinancial instruments currently in effect relating to OEH.

 

Nine of OEH’s owned hotels in 2005 operatedwith currencies linked to the euro, two operated in South African rand, two inAustralian dollars, one in British pounds sterling, one in Botswanan pula, andone in Peruvian nuevo soles.  The VeniceSimplon-Orient-Express, British Pullman and Northern Belle tourist trainsoperate primarily in British pounds sterling and currencies linked to theeuro.  OEH faces exposure arising fromthe impact of translating its global foreign currency earnings into U.S.dollars, and anticipates this foreign exchange rate risk will remain a marketexposure for the foreseeable future.

 

OEH’s properties match foreign currencyearnings and costs to provide a natural economic hedge against currencymovements.  In addition, a significantproportion of the guests at OEH hotels located outside of the United Statesoriginate from the United States. When a foreign currency in which OEH operatesdevalues against the U.S. dollar, OEH has considerable flexibility to increaseprices in local currency, or vice versa. Management believes that when these factors are combined, OEH does notface a material economic exposure to its net earnings from currency movements,although the reporting of OEH’s revenues and costs translated into U.S. dollarscan, from period to period, be materially affected.

 

OEH managementuses a sensitivity analysis to assess the potential impact on net earnings ofchanges in foreign currency financial instruments from hypothetical changes inthe foreign currency exchange rates.  Theprimary assumption used in this model is a hypothetical 10% weakening orstrengthening of the foreign currencies against the U.S. dollar.  At December 31, 2005, as a result ofthis analysis, OEH management determined that the impact on foreign currencyfinancial instruments of a 10% change in foreign currency exchange rates inrelation to the U.S. dollar would be approximately $3,000,000 on OEH's netearnings.

 

 

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

 

*Report of Independent Registered PublicAccounting Firm*

 

Board of Directors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

 

We have audited the accompanying consolidatedbalance sheets of Orient-Express Hotels Ltd. and subsidiaries (the “Company”)as of December 31, 2005 and 2004, and the related consolidated statementsof operations, shareholders’ equity, and cash flows for each of the three yearsin the period ended December 31, 2005. Our audits also included the financial statement schedule listed inItem 15.  These consolidated financialstatements and the financial statement schedule are the responsibility ofthe Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and the financial statement schedule basedon our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofOrient-Express Hotels Ltd. and subsidiaries as of December 31, 2005 and2004, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in the United States of America.  Also in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005, based on the 

 

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criteria established inInternal Control – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 3,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|

 

London, England.

March 3, 2006

 

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*Report of Independent Registered PublicAccounting Firm*

 

Board of Directors and Shareholders

Orient-Express Hotels Ltd.

Hamilton, Bermuda

 

We have audited management’s assessment, inthe accompanying Report on Internal Control over Financial Reporting includedin Item 9A–Controls and Procedures of this Form 10-K Annual Report, thatOrient-Express Hotels Ltd. and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control–Integrated Frameworkissued by the Committee of Sponsoring Organizations of the TreadwayCommission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial 

 

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statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

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

 

In our opinion, management’s assessment thatthe Company maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based onthe criteria established in Internal Control–Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Also inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, basedon the criteria established in Internal Control–Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated financial statements and financial statement schedule as ofand for the year ended December 31, 2005 of the Company and our reportdated March 3, 2006 expressed an unqualified opinion on those consolidatedfinancial statements and financial statement schedule.

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|

 

London, England

March 3, 2006

 

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** **

**Orient-ExpressHotels Ltd. and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                               | ** ** | **December 31,**      | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                               | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                     |       |                       |       |   |   |
| **Assets**                                                                               |       |                       |       |   |   |
| Cash and  cash equivalents                                                               |       | $                          | 38,397     |   | $ | 85,610 |   |
| Accounts  receivable, net of allowances of $980 and $1,027                               |       | 59,061                     |       | 34,984 |   |
| Due from  related parties                                                                |       | 17,549                     |       | 14,718 |   |
| Prepaid expenses  and other                                                              |       | 13,061                     |       | 11,914 |   |
| Inventories                                                                              |       | 29,636                     |       | 28,965 |   |
| Total  current assets                                                                    |       | 157,704                    |       | 176,191 |   |
|                                                                                     |       |                       |       |   |   |
| Property, plant and equipment, net of  accumulated depreciation of $164,814 and $155,582 |       | 1,010,926                  |       | 911,992 |   |
| Real estate  assets                                                                      |       | 18,398                     |       | 4,819 |   |
| Investments                                                                              |       | 129,681                    |       | 123,599 |   |
| Goodwill and  other intangible assets                                                    |       | 62,867                     |       | 29,529 |   |
| Other assets                                                                             |       | 35,986                     |       | 30,771 |   |
|                                                                                     |       | $                          | 1,415,562  |   | $ | 1,276,901 |   |
| **Liabilities  and Shareholders’ Equity**                                           |       |                       |       |   |   |
| Working  capital facilities                                                              |       | $                          | 47,108     |   | $ | 42,920 |   |
| Accounts  payable                                                                        |       | 22,680                     |       | 23,839 |   |
| Due to  related parties                                                                  |       | 7,374                      |       | 5,453 |   |
| Accrued  liabilities                                                                     |       | 43,545                     |       | 37,288 |   |
| Deferred  revenue                                                                        |       | 19,339                     |       | 20,493 |   |
| Current  portion of long-term debt and capital leases                                    |       | 72,151                     |       | 46,245 |   |
| Total  current liabilities                                                               |       | 212,197                    |       | 176,238 |   |
|                                                                                     |       |                       |       |   |   |
| Long-term  debt and obligations under capital leases                                     |       | 496,156                    |       | 537,461 |   |
| Deferred  income taxes                                                                   |       | 29,656                     |       | 14,020 |   |
|                                                                                     |       | 738,009                    |       | 727,719 |   |
| Minority  interest                                                                       |       | 4,153                      |       | 4,192 |   |
|                                                                                     |       |                       |       |   |   |
| Shareholders’  equity:                                                              |       |                       |       |   |   |
| Preferred shares $0.01 par value  (30,000,000 shares authorized, issued nil)             |       | —                     |       | — |   |
| Class A common shares $0.01 par value  (120,000,000 shares authorized):             |       |                       |       |   |   |
| Issued – 39,399,750 (2004 – 31,790,601)                                        |       | 393                        |       | 318 |   |
| Class B common shares $0.01 par value  (120,000,000 shares authorized):             |       |                       |       |   |   |
| Issued – 18,044,478 (2004 – 20,503,877)                                        |       | 181                        |       | 205 |   |
| Additional  paid-in capital                                                              |       | 404,923                    |       | 280,212 |   |
| Retained  earnings                                                                       |       | 314,207                    |       | 277,281 |   |
| Accumulated  other comprehensive loss                                                    |       | (46,123                    | )          | (12,845 | ) |
| Less:  reduction due to class B common shares owned by a subsidiary – 18,044,478    |       | (181                       | )          | (181 | ) |
| Total  shareholders’ equity                                                         |       | 673,400                    |       | 544,990 |   |
| Commitments  and contingencies                                                           |       |                       |       |   |   |
|                                                                                     |       | $                          | 1,415,562  |   | $ | 1,276,901 |   |

 

See notes to consolidatedfinancial statements.

 

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statements of Consolidated Operations**

 
| **Year ended December 31,**                        | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
|                                                    |       |                                                 |       |     |       |     |       |
| Revenue                                                 |       | $                                                    | 433,147    |     | $          | 357,284  |       | $ | 315,863 |   |
|                                                    |       |                                                 |       |     |       |     |       |
| Expenses:                                               |       |                                                 |       |     |       |     |       |
| Depreciation and amortization                           |       | 34,087                                               |       | 28,349   |       | 25,265   |       |
| Operating                                               |       | 205,291                                              |       | 175,547  |       | 158,577  |       |
| Selling, general and administrative                     |       | 134,108                                              |       | 114,474  |       | 101,761  |       |
| Total  expenses                                         |       | 373,486                                              |       | 318,370  |       | 285,603  |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Gain on sale  of hotel asset                            |       | —                                               |       | —   |       | 4,250    |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Earnings from operations before net finance  costs      |       | 59,661                                               |       | 38,914   |       | 34,510   |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Interest  expense, net                                  |       | (30,153                                              | )          | (19,948  | )          | (19,892  | )          |
| Foreign  currency, net                                  |       | 5,065                                                |       | 2,723    |       | 2,673    |       |
| Net finance  costs                                      |       | (25,088                                              | )          | (17,225  | )          | (17,219  | )          |
|                                                    |       |                                                 |       |     |       |     |       |
| Earnings  before income taxes                           |       | 34,573                                               |       | 21,689   |       | 17,291   |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Provision  for income taxes                             |       | 5,015                                                |       | 2,551    |       | 1,002    |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Earnings before earnings from unconsolidated  companies |       | 29,558                                               |       | 19,138   |       | 16,289   |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Earnings  from unconsolidated companies net of tax      |       | 11,175                                               |       | 9,084    |       | 7,320    |       |
|                                                    |       |                                                 |       |     |       |     |       |
| Net earnings  on class A and B common shares            |       | $                                                    | 40,733     |     | $          | 28,222   |       | $ | 23,609 |   |
|                                                    |       |                                                 |       |     |       |     |       |
| Earnings per  class A and B                             |       |                                                 |       |     |       |     |       |
| common share:                                           |       |                                                 |       |     |       |     |       |
| Basic                                                   |       | $                                                    | 1.07       |     | $          | 0.82     |       | $ | 0.76 |   |
| Diluted                                                 |       | $                                                    | 1.06       |     | $          | 0.82     |       | $ | 0.76 |   |
|                                                    |       |                                                 |       |     |       |     |       |
| Dividends per class A and class B common  share         |       | $                                                    | 0.10       |     | $          | 0.10     |       | $ | — |   |

 

See notes to consolidated financialstatements

 

59

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statements of Consolidated Cash Flows**

 
| ** **                                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                             | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash flows from operating activities:                                                                  |       |                             |       |   |   |   |   |
| Net earnings                                                                                           |       | $                                | 40,733     |   | $ | 28,222 |   | $ | 23,609 |   |
|                                                                                                   |       |                             |       |   |   |   |   |
| Adjustment to reconcile net earnings to net  cash provided by operating activities:                    |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                          |       | 34,087                           |       | 28,349 |   | 25,265 |   |
| Undistributed earnings of unconsolidated  companies                                                    |       | (2,830                           | )          | (3,588 | ) | (2,275 | ) |
| Profit from sale of real estate and fixed  assets                                                      |       | (3,822                           | )          | (1,286 | ) | (1,143 | ) |
| Stock options issued                                                                                   |       | 1,249                            |       | 1,391 |   | — |   |
| Other non-cash items                                                                                   |       | (716                             | )          | 1,277 |   | 1,409 |   |
| Change in deferred tax                                                                                 |       | (4,778                           | )          | (1,045 | ) | (500 | ) |
| Gain from sale of hotel asset                                                                          |       | —                           |       | — |   | (4,250 | ) |
| Change in assets and liabilities, net of  effects from acquisition of subsidiaries:                    |       |                             |       |   |   |   |   |
| (Increase)/decrease in accounts receivable,  prepaid expenses and other                                |       | (29,039                          | )          | (9,220 | ) | 1,445 |   |
| Increase in inventories                                                                                |       | (2,605                           | )          | (1,208 | ) | (1,172 | ) |
| Increase/(decrease) in accounts payable,  accrued liabilities , deferred revenue and other liabilities |       | 7,562                            |       | 9,673 |   | (9,144 | ) |
| Dividends received from unconsolidated companies                                                       |       | 624                              |       | — |   | — |   |
| Total adjustments                                                                                      |       | (268                             | )          | 24,343 |   | 9,635 |   |
| Net cash provided by operating activities                                                              |       | 40,465                           |       | 52,565 |   | 33,244 |   |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash flows from investing activities:                                                                  |       |                             |       |   |   |   |   |
| Capital expenditures on operating  properties                                                          |       | (110,088                         | )          | (65,104 | ) | (54,450 | ) |
| Capital expenditure on real estate  developments                                                       |       | (13,185                          | )          | — |   | — |   |
| Acquisitions and investments, net of cash  acquired                                                    |       | (103,453                         | )          | (38,479 | ) | (27,225 | ) |
| Proceeds from sale of real estate and fixed  assets                                                    |       | 4,705                            |       | 3,003 |   | 1,504 |   |
| Proceeds from sale of hotel asset                                                                      |       | —                           |       | — |   | 39,604 |   |
| Net cash used in investing activities                                                                  |       | (222,021                         | )          | (100,580 | ) | (40,567 | ) |
|                                                                                                   |       |                             |       |   |   |   |   |
| Cash flows from financing activities:                                                                  |       |                             |       |   |   |   |   |
| Net proceeds from/(repayments of) working  capital facilities and redrawable loans                     |       | (87,596                          | )          | 21,336 |   | (7,715 | ) |
| Issuance of common shares (net)                                                                        |       | 121,889                          |       | — |   | 51,893 |   |
| Stock options exercised                                                                                |       | 1,623                            |       | — |   | — |   |
| Proceeds from long-term debt                                                                           |       | 143,040                          |       | 88,226 |   | 68,236 |   |
| Principal payments under long-term debt                                                                |       | (39,552                          | )          | (55,053 | ) | (64,080 | ) |
| Payment of common share dividends                                                                      |       | (3,807                           | )          | (3,425 | ) | — |   |
| Net cash provided by financing activities                                                              |       | 135,597                          |       | 51,084 |   | 48,334 |   |
|                                                                                                   |       |                             |       |   |   |   |   |
| Effect of exchange rate changes on cash                                                                |       | (1,254                           | )          | 1,194 |   | 2,476 |   |
| Net increase/(decrease) in cash and cash  equivalents                                                  |       | (47,213                          | )          | 4,263 |   | 43,487 |   |
| Cash and cash equivalents at beginning of  year                                                        |       | 85,610                           |       | 81,347 |   | 37,860 |   |
| Cash and cash equivalents at end of year                                                               |       | $                                | 38,397     |   | $ | 85,610 |   | $ | 81,347 |   |
|                                                                                                        |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

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** **

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

**Statements of Consolidated Shareholders’ Equity**

 
| **(Dollars in thousands)**                                         | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A  Common  Shares  At Par**

**Value** | ** ** | **Class B  Common  Shares  At Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained   Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Common  Shares  Held By A   Subsidiary** | ** ** | **Total  Comprehensive  Income** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Balance, January 1, 2003                                                |       | $                                         | —     |                                                     | $          | 283                                                  |       | $                                | 205        |                         | $          | 226,963                                     |       | $                                                         | 228,875    |                             | $          | (29,663 | ) | $ | (181 | ) |   |   |
| Issuance of class A common shares in public offering, net of issuance  costs |       |                                      |       | 35                                                       |       |                                                 |       | 51,858                           |       |                         |       |                                        |       |                                                      |       |                             |       |
| Comprehensive income:                                                        |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Net earnings on common shares for the year                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       | 23,609                       |       |                                        |       |                                                      |       | $                                | 23,609     |   |
| Other comprehensive income                                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       | 10,460                                      |       |                                                      |       | 10,460                           |       |
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       | $                                | 34,069     |   |
| Balance, December 31, 2003                                              |       | —                                    |       | 318                                                      |       | 205                                                  |       | 278,821                          |       | 252,484                      |       | (19,203                                     | )          | (181                                                      | )          |                             |       |
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Stock based compensation                                                     |       |                                      |       |                                                     |       |                                                 |       | 1,391                            |       |                         |       |                                        |       |                                                      |       |                             |       |
| Dividends on common shares                                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       | (3,425                       | )          |                                        |       |                                                      |       |                             |       |
| Comprehensive income:                                                        |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Net earnings on common shares for the year                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       | 28,222                       |       |                                        |       |                                                      |       | $                                | 28,222     |   |
| Other comprehensive income                                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       | 6,358                                       |       |                                                      |       | 6,358                            |       |
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       | $                                | 34,580     |   |
| Balance, December 31, 2004                                              |       | —                                    |       | 318                                                      |       | 205                                                  |       | 280,212                          |       | 277,281                      |       | (12,845                                     | )          | (181                                                      | )          |                             |       |
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Issuance of class A common shares in public offering, net of issuance  costs |       |                                      |       | 50                                                       |       |                                                 |       | 121,839                          |       |                         |       |                                        |       |                                                      |       |                             |       |
| Stock based compensation                                                     |       |                                      |       |                                                     |       |                                                 |       | 1,249                            |       |                         |       |                                        |       |                                                      |       |                             |       |
| Stock options exercised                                                      |       |                                      |       | 1                                                        |       |                                                 |       | 1,623                            |       |                         |       |                                        |       |                                                      |       |                             |       |
| Conversion of class B to class A shares                                      |       |                                      |       | 24                                                       |       | (24                                                  | )          |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Dividends on common shares                                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       | (3,807                       | )          |                                        |       |                                                      |       |                             |       |
| Comprehensive income:                                                        |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       |                             |       |
| Net earnings on common shares for the year                                   |       |                                      |       |                                                     |       |                                                 |       |                             |       | 40,733                       |       |                                        |       |                                                      |       | $                                | 40,733     |   |
| Other comprehensive loss                                                     |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       | (33,278                                     | )          |                                                      |       | (33,278                          | )          |
|                                                                         |       |                                      |       |                                                     |       |                                                 |       |                             |       |                         |       |                                        |       |                                                      |       | $                                | 7,455      |   |
| Balance, December 31, 2005                                              |       | $                                         | —     |                                                     | $          | 393                                                  |       | $                                | 181        |                         | $          | 404,923                                     |       | $                                                         | 314,207    |                             | $          | (46,123 | ) | $ | (181 | ) |   |   |
|                                                                              |            |                                           |            |                                                          |            |                                                      |            |                                  |            |                              |            |                                             |            |                                                           |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

See notes to consolidated financialstatements.

 

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Notes to Consolidated Financial Statements**

 

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

 

*(a)          Business*

 

In this report Orient-ExpressHotels Ltd. is referred to as the “Company”, and the Company and itssubsidiaries are referred to collectively as “OEH”.

 

At December 31, 2005, OEH owned orinvested in 38 deluxe hotels and resorts located in the United States,Caribbean, Europe, southern Africa, South America, Southeast Asia, Australiaand South Pacific, three restaurants in London, New York and Buenos Aires, sixtourist trains in Europe, Southeast Asia and Peru, and a river cruiseship inBurma and five canalboats in France.  SeeNote 17 regarding the purchase of an additional hotel in February 2006.

 

*(b)          Basisof presentation*

 

The accompanying consolidated financialstatements reflect the results of operations, financial position and cash flowsof the Company and all its majority-owned subsidiaries.  The consolidated financial statements havebeen prepared using the historical basis in the assets and liabilities and thehistorical results of operations directly attributable to OEH, and allintercompany accounts and transactions between the Company and its subsidiarieshave been eliminated.  Unconsolidatedcompanies that are 20% to 50% owned are accounted for on an equity basis.

 

Cash and cash equivalents include all cashbalances and highly-liquid investments having original maturities of threemonths or less.

 

The consolidated financial statements includean allocation of certain general corporate administrative expenses from SeaContainers Ltd (“SCL”) which are provided under a services agreement withSCL.  In the opinion of management,general corporate administrative expenses have been allocated to OEH on areasonable and consistent basis using management’s estimate of servicesprovided by SCL.  However, suchallocations are not necessarily indicative of the level of expenses which mighthave been incurred had OEH not been operating under a services agreement duringthe periods presented.  Therefore, thefinancial information included herein may not necessarily reflect theconsolidated

 

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results of operations,financial position and cash flows of OEH had OEH been a separate stand-aloneentity for the years presented.

 

Certain items in 2004 and 2003 have beenreclassified to conform to the current year’s presentation.

 

“FASB” means Financial Accounting StandardsBoard and “APB” means Accounting Principles Board, the FASB’s predecessor.  “SFAS” means Statement of FinancialAccounting Standards of the FASB, and “FIN” means an accounting interpretationof the FASB.

 

*(c)           Foreigncurrency*

 

The functional currency for each of theCompany’s foreign subsidiaries is the applicable local currency, except forRussia, French West Indies, Mexico, Brazil and Peru, where functional currencyis U.S. dollars.

 

For foreign subsidiaries with a functionalcurrency other than the U.S. dollar, income and expenses are translated intoU.S. dollars, the reporting currency of the Company, at the average rates ofexchange prevailing during the year.  Theassets and liabilities are translated into U.S. dollars at the rates ofexchange on the balance sheet date and the related translation adjustments areincluded in accumulated other comprehensive income/(loss).  Translation adjustments arising fromintercompany financing that is long-term investment in nature is accounted forsimilarly.  No income taxes are providedon the translation adjustments as management does not expect that such gains orlosses will be realized.  Foreigncurrency transaction gains and losses are recognized as they occur.

 

*(d)          Estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Estimates include, among others, theallowance for doubtful accounts, depreciation and amortization, carrying valueof assets including intangible assets, employee benefits, taxes andcontingencies.  Actual results may differfrom those estimates.

 

63

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*(e)           Stock-basedcompensation*

 

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

 

With effect from January 1, 2005, theCompany adopted SFAS No. 123R, “Stock-Based Payment”, and chose themodified prospective application as its transition method.  Prior to January 1, 2005, the Companyhas historically reflected the pro-forma impact to net income had allpreviously issued stock-based compensation been expensed under the provisionsof SFAS No. 123.  Upon adoption ofSFAS No. 123R, all previously issued stock-based compensation vestingduring the 12 months ended December 31, 2005 and those issued during thecurrent year have been reflected in OEH’s net earnings.  This resulted in an expense in the 12 monthsended December 31, 2005 of $1,249,000. See Note 11.

 

OEH had previously accounted for itsstock-based compensation plans under APB Opinion No. 25.  Had compensation cost for the Company’s stockoption plans been determined based on fair values as of the dates of grant, OEH’snet earnings and earnings per share would have been reported as follows(dollars in thousands, except per share amounts):

 
| ** **                            | ** **                                                                                                     | **Year ended December 31,** | ** ** |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------|--------------------------------------------|------------|
| ** **                            | ** **                                                                                                     | **2004**                                   | ** ** | **2003** | ** ** |
|                                  |                                                                                                           |                                       |       |   |   |
| Net earnings:                         |                                                                                                           |                                       |       |   |   |
| As reported on common shares          |                                                                                                           | $                                          | 28,222     |   | $ | 23,609 |   |
| Add:                                  | Stock-based compensation expense included

in reported net income, net of related

tax effects                 |                                       | 1,514      |   | — |   |
| Deduct:                               | Total stock-based employee compensation

expense determined under fair value

based method, net of related tax |                                       | (897       | ) | (1,040 | ) |
| Pro forma                             |                                                                                                           | $                                          | 28,839     |   | $ | 22,569 |   |
| Basic and diluted earnings per share: |                                                                                                           |                                       |       |   |   |
| As reported                           |                                                                                                           | $                                          | 0.82       |   | $ | 0.76 |   |
| Pro forma                             |                                                                                                           | $                                          | 0.80       |   | $ | 0.72 |   |
|                                       |                                                                                                                |                                            |            |  |  |  |  |  |  |

 

*(f)            Revenuerecognition*

 

Hotel and restaurant revenues are recognizedwhen the rooms are occupied and the services are performed.  Tourist train and cruise revenues arerecognized upon commencement of the journey. Deferred revenue consisting of deposits paid in advance is recognized asrevenue when the services are performed for hotels and restaurants and uponcommencement of

 

64

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tourist train and cruisejourneys.  Revenues under managementcontracts are recognized based upon the attainment of certain financialresults, primarily revenue and operating earnings, in each contract as defined.

 

Revenue from real estate activities representthe proceeds from sales of undeveloped lands that OEH is holding for sale.  Profit from sales of land is recognized uponclosing using the full accrual method of accounting, provided that all therequirements prescribed by SFAS No. 66, “Accounting for Sales of RealEstate”, have been met.  No revenue hasbeen recognized for other real estate properties under development because thecriteria for revenue recognition set by SFAS No. 66 have not been met.

 

Revenue from real estate sales was $4,700,000in 2005 (2004-$4,200,000).

 

*(g)          Earningsfrom unconsolidated companies*

 

Earnings from unconsolidated companies includeOEH’s share of the net earnings of its equity investments as well as interestincome related to loans and advances to the equity investees amounting to$9,752,000 in 2005 (2004–$8,165,000, 2003–$7,080,000).

 

*(h)          Marketingcosts*

 

Marketing costs are expensed as incurred (exceptin the case of real estate projects as disclosed in Note 1(o) below) and arereported in selling, general and administrative expenses.  Marketing costs include costs of advertisingand other marketing activities.  Thesecosts were $32,405,000 in 2005 (2004-$26,780,000; 2003–$24,783,000).

 

*(i)           Interestexpense, net*

 

OEH capitalizes interest during theconstruction of assets. Interest expense, net excludes interest which has beencapitalized in the amount of $448,000 in 2005 (2004-$1,708,000; 2003–$1,795,000).

 

*(j)            Foreigncurrency, net*

 

Foreign currency, net consists entirely offoreign currency exchange transaction gains of $5,065,000 in 2005 (2004-$2,723,000;2003–$2,673,000).

 

65

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*(k)          Incometaxes*

 

Deferred income taxes result from temporarydifferences between the financial reporting and tax bases of assets andliabilities.  Deferred taxes are recordedat enacted statutory rates and are adjusted as enacted rates change.  Classification of deferred tax assets andliabilities corresponds with the classification of the underlying assets andliabilities giving rise to the temporary differences or the period of expectedreversal, as applicable.  A valuationallowance is established, when necessary, to reduce deferred tax assets to theamount that is more likely than not to be realized based on available evidence.

 

*(l)           Earningsper share*

 

Basic earnings per share exclude dilution andare computed by dividing net earnings available to common shareholders by theweighted average number of class A and B common shares outstanding for theperiod.  The number of shares used incomputing basic earnings per share was 38,214,000 for the year ended December 31,2005 (2004-34,250,000; 2003–31,139,000). The number of shares used in computing diluted earnings per share was38,534,000 for the year ended December 31, 2005 (2004-34,367,000; 2003–31,152,000).

 

The following table is a reconciliation ofthe net earnings and per share amounts used in the calculation of basicearnings per share and diluted earnings per share (in thousands, except pershare amounts):

 

 
| ** **                         | ** ** | **Net  Earnings** | ** ** | **Number of  Shares** | ** ** | **Per Share  Amount** | ** ** |
|------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------|------------|
| Year ended December 31, 2005: |       |              |       |                       |       |                       |       |
| Basic earnings per share           |       | $                 | 40,733     |                       | 38,214     |                       | $          | 1.07 |   |
| Effect of dilutive stock options   |       | —            |       | 320                        |       | $                          | 0.01       |   |
| Diluted earnings per share         |       | $                 | 40,733     |                       | 38,534     |                       | $          | 1.06 |   |
|                               |       |              |       |                       |       |                       |       |
| Year ended December 31, 2004: |       |              |       |                       |       |                       |       |
| Basic earnings per share           |       | $                 | 28,222     |                       | 34,250     |                       | $          | 0.82 |   |
| Effect of dilutive stock options   |       | —            |       | 117                        |       | —                     |       |
| Diluted earnings per share         |       | $                 | 28,222     |                       | 34,367     |                       | $          | 0.82 |   |
|                               |       |              |       |                       |       |                       |       |
| Year ended December 31, 2003: |       |              |       |                       |       |                       |       |
| Basic earnings per share           |       | $                 | 23,609     |                       | 31,139     |                       | $          | 0.76 |   |
| Effect of dilutive stock options   |       | —            |       | 13                         |       | —                     |       |
| Diluted earnings per share         |       | $                 | 23,609     |                       | 31,152     |                       | $          | 0.76 |   |

 

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*(m)          Inventories*

 

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

 

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

 

Property, plant and equipment, net are statedat cost less accumulated depreciation. The cost of significant renewals and betterments is capitalized anddepreciated, while expenditures for normal maintenance and repairs are expensedas incurred.

 

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

 
| **Description**                                           | ** ** | **Useful lives**                          | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|
|                                                      |       |                                           |       |
| Buildings                                                 |       | Up to 60  years and 10% residual value         |       |
| Tourist trains                                            |       | Up to 50  years                                |       |
| River cruiseship and canalboats                           |       | 25 years                                       |       |
| Furniture, fixtures and equipment                         |       | 5-25 years                                     |       |
| Equipment under capital lease and leasehold  improvements |       | Lesser of  initial lease term or economic life |       |

 

*(o)          Realestate assets*

 

Real estate assets consists primarily ofinventory costs of real estate property developments.  Expenditures directly related to non-hotelreal estate developments, such as real estate taxes and capital improvements,are capitalized.  Inventory costs of realestate development include construction costs and ancillary costs, which willbe expensed as real estate will be sold. OEH also capitalizes direct costs attributable to the sales andmarketing of the properties until revenue recognition commences.  If a sales contract is cancelled,unrecoverable direct selling costs are expensed upon cancellation.  Land property development costs areaccumulated by project and are allocated to individual residential units,principally using the relative sales value method.

 

*(p)          Impairmentof long-lived assets*

 

In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, OEH management reviewslong-lived assets whenever events or changes in

 

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circumstances indicate that thecarrying amount of the assets may not be recoverable.  In the event that an impairment occurs, OEHrecords a charge to income calculated as the excess of the asset’s carryingvalue over the estimated fair value.

 

*(q)          Investments*

 

Investments include equity interests in andadvances to unconsolidated companies.

 

*(r)           Goodwilland other tangible assets*

 

In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets”, goodwill must be evaluated annually to determineimpairment.  Goodwill is not amortized.

 

Thegoodwill impairment testing under SFAS No. 142 is performed in two steps,first, the determination of impairment based upon the fair value of a reportingunit as compared with its carrying value and, second, if there is animpairment, the measurement of the amount of impairment loss by comparing theimplied fair value of goodwill with the carrying amount of that goodwill.  Impairment testing is performed annually atyear end.  At December 31, 2005, therewas no impairment.  Other intangibleassets with indefinite useful lives are also reviewed for impairment inaccordance with SFAS No. 142.

 

*(s)           Concentrationof credit risk*

 

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

 

*(t)           Derivativefinancial instruments*

 

If the derivative is designated as a fairvalue hedge, the changes in the fair value of the derivative and of the hedgeditem attributable to the hedged risk are recognized in earnings.  If the derivative is designated as a cashflow hedge, the effective portions of changes in the fair value of the derivativeare recorded as a component of accumulated other comprehensive income/(loss) inshareholders’ equity and are recognized in the statement of consolidatedoperations when the hedged item affects earnings.  The ineffective portion of a hedgingderivative’s change in the fair value will be immediately recognized inearnings.  If the derivative is notdesignated as a hedge for accounting purposes, the change in its fair value isrecorded in earnings**.**

 

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OEH management formally documents all relationshipsbetween hedging instruments and hedged items, as well as its risk managementobjectives and strategies for undertaking various hedge transactions.  OEH links all hedges that are designated asfair value hedges to specific assets or liabilities on the balance sheet or tospecific firm commitments.  OEH links allhedges that are designated as cash flow hedges to forecasted transactions or tofloating rate liabilities on the balance sheet. OEH management also assesses, both at the inception of the hedge and onan ongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in fair values or cash flows ofhedged items.  Should it be determinedthat a derivative is not highly effective as a hedge, OEH will discontinuehedge accounting prospectively.

 

OEH is exposed to interest rate risk on itsfloating rate debt and management tries to manage the impact of interest ratechanges on earnings and cash flows.  OEH’spolicy is to enter into interest rate swap and interest rate cap agreementsfrom time to time to hedge the variability in interest rate cash flows due tointerest rate risk on floating rate debt. These swaps convert the floating rate interest payments on a portion ofthe outstanding debt into fixed payments.

 

*(u)          Variableinterest entities*

 

                Management’sevaluation of OEH’s joint venture agreements and management contracts hasidentified the Afloat in France joint venture in which OEH has variableinterests, due to the terms of the investment in the entity’s activities andthe structure of the financial support provided to the entity (see Note 2(b)).  The terms of the joint venture agreement donot expose OEH to the majority of expected cash flow variability and,therefore, this entity is not consolidated. OEH’s maximum exposure to loss was an investment balance in Afloat inFrance of $1,200,000 at December 31, 2005.

 

*(v)           Recentaccounting pronouncements*

 

****The Companyadopted SFAS No. 123R with effect from January 1, 2005 (see Note1(e)).****

 

****In October 2005,the FASB issued Staff Position FAS 13-1, “Accounting for Rental Costs Incurredduring a Construction Period”, which requires rental costs associated withground or building operating leases that are incurred during a constructionperiod to be recognized as rental expense. This Staff Position is effective for reporting periods beginning after December 15,2005, and retrospective application is permitted but not****

**** ****

****69****

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**** ****

****required.  OEH has historicallyexpensed rent costs incurred during the construction period.  Accordingly, Staff Position FAS 13-1 is notexpected to have any impact on OEH’s consolidated financial statements.****

 

****In March 2005,the FASB issued FIN 47, “Accounting for Conditional Asset RetirementObligations”.  FIN 47 clarifies the term “conditional”as used in SFAS No.143, “Accounting for Asset Retirement Obligations”.  This interpretation refers to a legalobligation to perform an asset retirement activity even if the timing and/orsettlement is conditional on a future event that may or may not be within thecontrol of an entity.  Accordingly, theentity must record a liability for the conditional asset retirement obligationif the fair value of the obligation can be reasonably estimated.  FIN 47 is effective for fiscal years endingafter December 15, 2005.  Theadoption of FIN 47 did not have a material impact on OEH’s consolidatedfinancial statements.****

 

****In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”.  SFAS No. 154 replaces APB Opinion No 20,“Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements”.  SFAS No. 154changes the requirements for the accounting for and reporting of a change inaccounting principles.  It requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change.  The statement is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005.  The adoption of SFAS No. 154did not have a material effect on OEH’s financial position or results ofoperations.****

 

****In July 2005,the FASB issued an exposure draft, “Accounting for Uncertain Tax Positions, anInterpretation of FASB Statement No. 109”. As drafted, the interpretation would require companies to recognize thebest estimate of the impact of a tax position only if that position is probableof being sustained during a tax audit. However, in November 2005, the FASB voted to replace the probablethreshold with a more-likely-than-not criterion when determining if the impactof a tax position should be recorded. The FASB expects to issue a final interpretation in the first quarter of2006.  When it is available, OEH willreview the final interpretation to determine the impact it may have on OEH’sconsolidated financial statements.****

 

****In December 2005,the FASB deliberated issues relating to the limited-scope, first phase of itsproject to reconsider****

**** ****

****70****

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**** ****

****the accounting for post-retirement benefits, including pensions.  The FASB decided that the objectives andscope of this phase include, among other items, recognizing the over-funded orunder-funded status of defined benefit post-retirement plans as an asset or aliability in the statement of financial position.  The FASB expects to issue an exposure draftfor the initial phase in the first quarter of 2006.  In the second multi-year phase of theproject, the FASB expects to comprehensively consider a variety of issuesrelated to the accounting for post-retirement benefits, including expenserecognition, obligation measurement, and whether post-retirement benefit trustsshould be consolidated by the plan sponsor. OEH will review the proposed standards when they are available todetermine the impact they may have on OEH’s consolidated financial statements.****

 

*****(w)          Other significantevents*****

 

****Due to hurricanes Katrina and Rita, theWindsor Court Hotel in New Orleans suffered damage and remained closedthroughout the period from August 29 to October 31, 2005. The MaromaResort and Spa in Mexico also suffered damage as a result of hurricanes Emilyand Wilma and remained closed throughout the period from July 18 (when thehotel closed for refurbishment) through December 31, 2005.  OEH’s insurance covers property damage andloss of earnings under business interruption for up to 12 months after theevent.  Earnings from operations includewithin revenue an insurance recovery of $4,900,000 for business interruptionfor the Windsor Court Hotel during the closure period.  Earnings from operations include withinrevenue an insurance recovery of $2,500,000 for business interruption for theMaroma Resort and Spa during the closure period.  A total of $1,000,000 has been expensed foreach property due to the deductible applicable to each insurance claim.  The property damage claims submitted as at December 31,2005 amounted to approximately $5,000,000 for the Windsor Court Hotel and approximately$2,000,000 for the Maroma Resort and Spa. The excess of the****property damageclaims submitted over the losses recorded represents a contingent gain and hasonly been recognized in the financial statements to the extent realized.

 

**2.             Significant acquisitions,dispositions and investments**

 

*(a)          Acquisitions*

 

*2005Acquisitions:*

 

On February 8, 2005, OEH purchased 100%of the issued equity of LLC Europe Hotel which owns a 93.5% interest in theproperty operating as the Grand Hotel Europe, St Petersburg,

 

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Russia.  The remaining interest in the property isowned by the City of St. Petersburg.  Inaddition, OEH acquired full management and operational control of the hotel andacquired 100% of a Cyprus company which has agreements with the hotel toprovide various management services.

 

This strategic acquisition enables OEH tostart expansion of its position in the Russian market, which contributed to thepurchase price and resulted in goodwill. The total purchase price, including acquisition costs, was $95,150,000paid in cash of which $57,500,000 was financed by a syndicate of banks led bythe International Finance Corporation.

 

The acquisition of the Grand Hotel Europe hasbeen accounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations”.  The Company allocated thepurchase price for the acquisition based on fair value of assets acquired andliabilities assumed, which is defined as the amount at which an asset orliability could be exchanged in a current transaction between knowledgeable,unrelated willing parties when neither party is acting under compulsion.

 

The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date ofacquisition (dollars in thousands):

 

 
| ** **                                | ** ** | **February 8,  2005** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| Current assets                            |       | $                          | 2,740      |   |
| Property, plant and fixtures and fittings |       | 80,500                     |       |
| Trade name                                |       | 7,100                      |       |
| Goodwill                                  |       | 28,812                     |       |
| Total assets acquired                     |       | 119,152                    |       |
|                                      |       |                       |       |
| Current liabilities and lease obligations |       | 8,192                      |       |
| Deferred income taxes                     |       | 15,810                     |       |
| Total liabilities assumed                 |       | 24,002                     |       |
| Net assets acquired                       |       | $                          | 95,150     |   |

 

Goodwill of $28,812,000 has been recorded ofwhich $ nil will be deductible for tax purposes.

 

The acquired intangible assets included thetrade name which was fair valued at $7,100,000, and has been assigned anindefinite useful life.

 

The results of the operation have beenincluded in the  consolidated financialstatements of OEH from February 8, 2005.

 

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The proforma results of operations datapresented below assume that the Grand Hotel Europe acquisition had been made atthe beginning of 2004.  The proforma datais presented for informational purposes only and is not necessarily indicativeof the results of future operations nor of the actual results that would havebeen achieved had the acquisition taken place at the beginning of 2004 (dollarsin thousands):

 
| **Year ended December 31,** | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(Proforma unaudited)** | ** ** |
| Revenue                                    |       | $                             | 435,014    |     | $          | 391,603 |   |
| Net Income                                 |       | $                             | 41,027     |     | $          | 30,939 |   |
| Earnings per share:                        |       |                          |       |     |       |
| Basic                                      |       | $                             | 1.08       |     | $          | 0.90 |   |
| Diluted                                    |       | $                             | 1.07       |     | $          | 0.90 |   |

 

*2004Acquisitions:*

 

Effective November 1, 2004, OEH acquiredEl Encanto Hotel  and Garden Villas inSanta Barbara, California for $26,000,000 paid in cash.  Part of the purchase price was financedwith a bank loan.  The entire purchaseprice was allocated to tangible fixed assets, primarily land, based on theirfair value.

* *

*(b)  Investments*

 

On April 29,2005, OEH acquired 50% of the equity in the Great Scottish and Western RailwayCo. Ltd., which currently operates the Royal Scotsman luxury tourist train on aseasonal service largely within Scotland. The initial investment was

 

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$2,700,000 of which $1,300,000 was paid in cashand the balance represents 50% of the long-term debt within the company inwhich OEH has invested.  OEH has anoption to acquire the remaining 50% of the equity in two years time at anenterprise valuation based upon a multiple of the average EBITDA for theprevious 36 months, as defined in the purchase agreement.  This investment has been accounted for underthe equity method of accounting.

 

                On May 25,2004, OEH acquired a 50% interest in a luxury French canal and river cruisebusiness called Afloat in France. This investment is accounted for under theequity accounting method. Also as part of this transaction OEH acquired thefive canalboats operated in the business. The total investment was $3,000,000 paid in cash.

 

On February 2, 2004, OEH entered into anagreement with the Pansea Hotel group, the owner of six deluxe hotels inSoutheast Asia.  Under this agreement,OEH is to provide a maximum of $8,000,000 in loans to the hotel holding companywhich are convertible after three years into approximately 25% of the holdingcompany’s shares.  As of December 31,2005, OEH had provided $8,000,000 (2004-$4,625,000) in loans to Pansea whichare recorded in other assets.  Theconversion price of the loans is determined at a multiple of EBITDA lessexisting debt on the exercise date (as defined in the investment agreement).  OEH is not managing the hotels but ismarketing them along with its other properties.

 

In April 2003,OEH acquired a 50% interest in the Hotel Ritz in Madrid, Spain, through a50%/50% joint venture with a Spanish real estate investment company.  The purchase price of the hotel was$135,000,000, and each joint venture partner contributed $22,000,000 with thebalance financed by bank loans.  Inaddition to its interest in the hotel, OEH acquired the exclusive long-termmanagement contract of the hotel.  Thisinvestment is accounted for under the equity method of accounting.

 

Investments represent equity interests of 50%or less and in which OEH exerts significant influence.  OEH does not have effective control of theseunconsolidated companies and, therefore, accounts for these investments usingthe equity method.

 

OEH’s investments in and loans and advancesto unconsolidated companies amounted to $129,681,000 at December 31, 2005(2004-$123,599,000; 2003–$146,495,000). OEH’s earnings from unconsolidated companies were $11,175,000 in 2005(2004-$9,084,000; 2003–$7,320,000).  SeeNote 16.

 

Summarized financial data for unconsolidatedcompanies are as follows (dollars in thousands):

 

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| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Current  assets                     |       | $                     | 45,390     |   | $ | 39,993 |   |
| Property,  plant and equipment, net |       | 344,475               |       | 357,949 |   |
| Other assets                        |       | 5,726                 |       | 5,469 |   |
| Total assets                        |       | $                     | 395,591    |   | $ | 403,411 |   |

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Current  liabilities                             |       | $                     | 50,150     |   | $ | 41,290 |   |
| Long-term  debt                                  |       | 203,520               |       | 216,251 |   |
| Other  liabilities                               |       | 90,161                |       | 79,403 |   |
| Total  shareholders’ equity                 |       | 51,760                |       | 66,467 |   |
| Total  liabilities and shareholders’ equity |       | $                     | 395,591    |   | $ | 403,411 |   |

 
| ** **                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                            |       | $                                | 159,705    |   | $ | 135,250 |   | $ | 110,952 |   |
| Earnings  from operations before net finance costs |       | $                                | 23,550     |   | $ | 16,467 |   | $ | 13,953 |   |
| Net loss                                           |       | $                                | (4,463     | ) | $ | (4,767 | ) | $ | (1,282 | ) |

 

Included inunconsolidated companies is the Charleston Place Hotel to which OEH has madeloans in addition to its equity investment. Some of these loans have aconversion feature exercisable by OEH no sooner than 2020 and in limitedcircumstances before then, under which OEH may convert its loans intoadditional capital, thereby giving OEH a majority equity interest in the hotel.

 

Also includedin unconsolidated companies are the Peru hotel and PeruRail joint ventures,under which OEH and the other 50% participant must contribute equallyadditional equity capital needed for the businesses. If the other participantdoes not meet this obligation, OEH has the right to dilute the otherparticipant and obtain a majority equity interest in the affected joint venturecompany. OEH also has rights to purchase the other participant’s interests,exercisable in limited circumstances such as its bankruptcy.

 

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

 

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

 

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| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land and buildings                       |       | $                     | 852,101    |   | $ | 765,132 |   |
| Machinery  and equipment                 |       | 156,780               |       | 149,191 |   |
| Fixtures,  fittings and office equipment |       | 148,346               |       | 134,935 |   |
| River  cruiseship and canalboats         |       | 18,513                |       | 18,316 |   |
|                                     |       | 1,175,740             |       | 1,067,574 |   |
| Less:  accumulated depreciation          |       | (164,814              | )          | (155,582 | ) |
|                                     |       | $                     | 1,010,926  |   | $ | 911,992 |   |

 

Themajor classes of assets under capital leases included above are as follows(dollars in thousands):

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Freehold and  leased land and buildings  |       | $                     | 14,803     |   | $ | 14,612 |   |
| Machinery  and equipment                 |       | 2,067                 |       | 2,410 |   |
| Fixtures,  fittings and office equipment |       | 1,817                 |       | 4,886 |   |
|                                     |       | 18,687                |       | 21,908 |   |
| Less:  accumulated depreciation          |       | (1,892                | )          | (2,591 | ) |
|                                     |       | $                     | 16,795     |   | $ | 19,317 |   |

 

**4.****                                      Goodwill and other intangible assets**

 

OEH’s goodwill consists of $725,000 related to the trains and cruisesbusiness segment and $55,042,000 related to the hotels and restaurants businesssegment of which $28,812,000 relates to the initial purchase price allocationsfor the acquisition of the Grand Hotel Europe, effective February 8, 2005.Other intangible assets consist of the value of the Grand Hotel Europe tradenameof $7,100,000 determined by the fair value exercise referred to in Note 2.

 

**5.****                                      Working capital facilities**

 

Workingcapital facilities are comprised of the following, all repayable within oneyear (dollars in thousands):

 
| ** **                                                                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Unsecured working capital facilities, with a weighted average  interest rate of 5.92% and 4.59%, respectively |       | $                     | 47,108     |   | $ | 42,920 |   |
|                                                                                                               |            |                       |            |  |  |  |  |

 

OEH hadapproximately $54,000,000 of working capital lines of credit at December 31,2005 (2004-$55,000,000) issued by various financial institutions and havingvarious expiration dates, of which $7,100,000 was undrawn (2004-$12,000,000).

 

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**6.****                                      Long-term debt and obligations under capital leases**

 

*(a)**                               Long-term debt*

 

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

 
| ** **                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Loans from banks collateralized by property, plant and equipment  payable over periods of 1 to 11 years, with a weighted average interest rate  of 5.51% and 4.18%, respectively, primarily based on LIBOR |       | $                     | 546,593    |   | $ | 567,012 |   |
| Loan secured by river cruiseship payable over 3 years, with a  weighted interest rate of 5.65% based on LIBOR                                                                                              |       | 4,500                 |       | — |   |
| Obligations under capital lease (see Note 6(b))                                                                                                                                                            |       | 17,214                |       | 16,694 |   |
|                                                                                                                                                                                                       |       | 568,307               |       | 583,706 |   |
| Less: current portion                                                                                                                                                                                      |       | 72,151                |       | 46,245 |   |
|                                                                                                                                                                                                       |       | $                     | 496,156    |   | $ | 537,461 |   |

 

Certain creditagreements of OEH have restrictive covenants, including a minimum consolidatednet worth test and a minimum consolidated interest coverage test as definedunder a bank-syndicated $179,000,000 loan facility borrowed during 2004 andsecured by three of OEH’s Italian hotels. At December 31, 2005, OEH was incompliance with all of its restrictive covenants. OEH does not currently haveany covenants in any of its loan agreements which limit the payment ofdividends.

 

The followingis a summary of the aggregate maturities of consolidated long-term debtexcluding obligations under capital leases at December 31, 2005 (dollarsin thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** |
| 2006                              |       | $          | 70,333     |   |
| 2007                              |       | 129,041    |       |
| 2008                              |       | 162,549    |       |
| 2009                              |       | 67,866     |       |
| 2010                              |       | 51,350     |       |
| 2011 and  thereafter              |       | 69,954     |       |
|                              |       | $          | 551,093    |   |

 

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The interestrates on substantially all of OEH’s long-term debt are adjusted regularly toreflect current market rates. Accordingly, the carrying amounts of OEH’slong-term debt also approximate fair value.

 

The Companyhas guaranteed $347,000,000 of long-term debt of its subsidiary companies atDecember 31, 2005.

 

The Companyhas guaranteed, through 2011, $11,939,000 of the debt obligations of thePeruRail operations, an unconsolidated joint venture in which OEH has a 50%investment and, through 2006, $4,413,000 of PeruRail contingent obligationsrelating to the performance of its governmental rail concessions. The Companyhas guaranteed, through 2006, $3,000,000 of the debt obligations of CharlestonCenter LLC, owner of the Charleston Place Hotel in which OEH has a 19.9% equityinvestment. The Company has guaranteed, through 2006, a $3,000,000 bank loan toEastern and Oriental Express Ltd. in which OEH has a 25% equity investment. Allof these guarantees were in place before December 31, 2002.

 

*(b)**                               Obligations under capital leases*

 

The followingis a summary of future minimum lease payments under capital leases togetherwith the present value of the minimum lease payments at December 31, 2005(dollars in thousands): 

 
| **Year ending December 31,**                     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|------------|
|                                                  |       |       |       |
| 2006                                                  |       | $          | 2,637      |   |
| 2007                                                  |       | 2,487      |       |
| 2008                                                  |       | 2,343      |       |
| 2009                                                  |       | 2,127      |       |
| 2010                                                  |       | 2,128      |       |
| 2011 and  thereafter                                  |       | 18,779     |       |
| Minimum  lease payments                               |       | 30,501     |       |
| Less: amount  of interest contained in above payments |       | 13,287     |       |
| Present  value of minimum lease payments              |       | 17,214     |       |
| Less:  current portion                                |       | 1,818      |       |
|                                                  |       | $          | 15,396     |   |

 

Theamount of interest deducted from minimum lease payments to arrive at thepresent value is the interest contained in each of the leases.

 

**7.****                                      Pension plan**

 

From January 1,2003, a number of non-U.S. OEH employees participated in a defined benefitpension plan called Orient- Express Services 2003 Pension Scheme.

 

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Thesignificant weighted-average assumptions used to determine net periodic costsduring the year are as follows:

 
| ** **                                        | ** ** | **Year ended   December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                              |       |                               |       |   |   |   |   |
| Discount  rate                                    |       | 5.30                               | %          | 5.40 | % | 5.40 | % |
| Assumed  rates of compensation increases          |       | 3.25                               | %          | 3.00 | % | 3.00 | % |
| Expected  long-term rate of return on plan assets |       | 7.00                               | %          | 7.00 | % | 7.00 | % |

 

Thesignificant weighted-average assumptions used to determine benefit obligationsat year end are as follows:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Discount  rate                          |       | 4.75                  | %          | 5.30 | % |
| Assumed rate  of compensation increases |       | 3.25                  | %          | 3.25 | % |

 

The discountrate essentially represents the rate of return on high quality corporate bondsat the end of the year in the country in which the assets are held.

 

In determiningthe expected long-term rate of return on assets, management has evaluatedinformation from OEH’s actuaries and financial advisors, including their reviewof anticipated future long-term performance of individual asset classes and theasset allocation strategy given the anticipated requirements of the plan todetermine the average rate of earnings expected on the funds invested. Thereturn on assets assumption reflects the transition towards 100% equityinvestment which is due to be completed by March 31, 2006.

 

The weighted-averageasset allocation of OEH’s pension plan as of December 31, 2005 and 2004 byasset category as a percentage of plan assets is as follows:

 
| ** **                | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| **Asset Category**        | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                      |       |                              |       |   |   |
| Equity  securities        |       | 80                                | %          | 61 | % |
| Fixed income  investments |       | 20                                | %          | 39 | % |
| Total                     |       | 100                               | %          | 100 | % |

 

 

79

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The changes inthe benefit obligation, the plan assets and the funded status for the plan wereas follows (dollars in thousands):

 
| ** **                                      | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Change in  benefit obligation:                  |       |                              |       |   |   |
| Benefit  obligation at beginning of year        |       | $                                 | 13,953     |   | $ | 6,977 |   |
| Service cost                                    |       | 885                               |       | 780 |   |
| Interest  cost                                  |       | 699                               |       | 448 |   |
| Plan  participants’ contributions          |       | 297                               |       | 280 |   |
| Net transfer  in                                |       | 1,001                             |       | — |   |
| Actuarial  loss/(gain)                          |       | 2,817                             |       | 4,986 |   |
| Benefits  paid                                  |       | (258                              | )          | (329 | ) |
| Foreign  currency translation                   |       | (1,797                            | )          | 811 |   |
| Benefit  obligation at end of year              |       | 17,597                            |       | 13,953 |   |
|                                            |       |                              |       |   |   |
| Change in  plan assets:                         |       |                              |       |   |   |
| Fair value  of plan assets at beginning of year |       | 7,540                             |       | 5,823 |   |
| Actual return  on plan assets                   |       | 1,673                             |       | 463 |   |
| Employer  contributions                         |       | 1,063                             |       | 772 |   |
| Plan  participants’ contributions          |       | 297                               |       | 280 |   |
| Net transfer  in                                |       | 480                               |       | — |   |
| Benefits  paid                                  |       | (258                              | )          | (329 | ) |
| Foreign  currency translation                   |       | (989                              | )          | 531 |   |
| Fair value  of plan assets at end of year       |       | 9,806                             |       | 7,540 |   |
|                                            |       |                              |       |   |   |
| Funded  status                                  |       | (7,791                            | )          | (6,413 | ) |
| Unrecognized  net actuarial loss                |       | 10,832                            |       | 10,220 |   |
| Net amount  recognized                          |       | $                                 | 3,041      |   | $ | 3,807 |   |

 

Amountsrecognized in the consolidated balance sheets consist of the following (dollarsin thousands):

 
| ** **             | ** ** | **Year ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Prepaid  benefit cost  |       | $                                 | 3,041      |   | $ | 3,807 |   |
| Net amount  recognized |       | $                                 | 3,041      |   | $ | 3,807 |   |

 

The followingtable details certain information with respect to OEH’s pension plan as follows(dollars in thousands):

 
| ** **                      | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Projected  benefit obligation   |       | $                                 | 17,597     |   | $ | 13,953 |   |
| Accumulated  benefit obligation |       | $                                 | 9,589      |   | $ | 7,359 |   |
| Fair value  of plan assets      |       | $                                 | 9,806      |   | $ | 7,540 |   |

 

80

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The componentsof net periodic benefit cost for the OEH employees covered under the planconsisted of the following (dollars in thousands):

 
| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                   |       | $                                | 885        |   | $ | 780 |   | $ | 520 |   |
| Interest  cost on projected benefit obligation |       | 699                              |       | 448 |   | 353 |   |
| Expected  return on assets                     |       | (546                             | )          | (362 | ) | (274 | ) |
| Net  amortization and deferrals                |       | 417                              |       | 5 |   | 92 |   |
| Net periodic  benefit cost                     |       | $                                | 1,455      |   | $ | 871 |   | $ | 691 |   |

 

Additionalinformation about OEH’s pension plan is as follows (dollars in thousands):

 
| ** **                                                                                   | ** ** | **Year ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Decrease/(increase)  in minimum pension liability (net of tax) in other comprehensive income |       | $                                 | —     |   | $ | 1,613 |   |
|                                                                                              |            |                                   |            |  |  |  |  |

 

OEH expects tocontribute $894,000 to its pension plan in 2006. The following benefitpayments, which reflect assumed future service, are expected to be paid(dollars in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2006                              |       | $          | 3          |   |
| 2007                              |       | 47         |       |
| 2008                              |       | 47         |       |
| 2009                              |       | 56         |       |
| 2010                              |       | 68         |       |
| Next 5 years                      |       | 1,111      |       |
|                                   |            |            |            |  |

 

OEH hasanother defined benefit pension scheme in South Africa for certain employees ofthe Mount Nelson Hotel. Total number of active members is five, and theremaining members are retired pensioners. The latest actuarial valuation performedas at January 1, 2003 showed a net pension plan surplus of approximately$459,000 based on fair value of plan assets of $1,457,000 and projected benefitobligation of $998,000. Management does not expect significant movements in thebalances since the last valuation due to the small size of the scheme. Nofurther SFAS No. 132R disclosures have been made on the grounds of materiality.

 

81

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Certain employeesof OEH are members of the British Rail pension scheme, which is a governmentalmulti-employer defined benefit pension scheme. Total OEH contributions into thescheme for 2005 and 2004 were $184,000 and $197,000, respectively.

 

Certainemployees of OEH were members of defined contribution pension schemes. Totalcontributions into the scheme were as follows (dollars in thousands):

 
| ** **                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Employer’s  contributions |       | $                               | 5,100      |   | $ | 4,011 |   |
|                                |            |                                 |            |  |  |  |  |

 

**8.****                                      Income taxes**

 

The provisionfor income taxes consists of the following (dollars in thousands):

 
| ** **     | ** ** | **Year ended December 31, 2005** | ** ** |
|----------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **Current**                           | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|           |       |                                  |       |   |   |   |   |
| Bermuda        |       | $                                     | —     |   | $ | — |   | $ | — |   |
| United  States |       | 824                                   |       | (1,455 | ) | (631 | ) |
| Other          |       | 8,969                                 |       | (3,323 | ) | 5,646 |   |
|           |       | $                                     | 9,793      |   | $ | (4,778 | ) | $ | 5,015 |   |

 
| ** **     | ** ** | **Year ended December 31, 2004** | ** ** |
|----------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **Current**                           | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|           |       |                                  |       |   |   |   |   |
| Bermuda        |       | $                                     | —     |   | $ | — |   | $ | — |   |
| United  States |       | 310                                   |       | 538 |   | 848 |   |
| Other          |       | 4,278                                 |       | (2,575 | ) | 1,703 |   |
|           |       | $                                     | 4,588      |   | $ | (2,037 | ) | $ | 2,551 |   |

 
| ** **     | ** ** | **Year ended December 31, 2003** | ** ** |
|----------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **Current**                           | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|           |       |                                  |       |   |   |   |   |
| Bermuda        |       | $                                     | —     |   | $ | — |   | $ | — |   |
| United  States |       | (294                                  | )          | (146 | ) | (440 | ) |
| Other          |       | 3,445                                 |       | (2,003 | ) | 1,442 |   |
|           |       | $                                     | 3,151      |   | $ | (2,149 | ) | $ | 1,002 |   |

 

The Company isincorporated in Bermuda, which does not impose an income tax. OEH’s effectivetax rate is entirely due to income taxes imposed by jurisdictions in which OEHconducts business other than Bermuda.

 

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The following represents OEH’s netdeferred tax liabilities (dollars in thousands):

 
| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                       |       |                  |       |   |   |
| Gross  deferred tax assets (operating loss carry forwards) |       | $                     | 60,177     |   | $ | 64,493 |   |
| Less:  valuation allowance                                 |       | (22,487               | )          | (31,996 | ) |
| Net deferred  tax assets                                   |       | 37,690                |       | 32,497 |   |
| Deferred tax  liabilities                                  |       | (53,007               | )          | (35,207 | ) |
| Net deferred  tax liabilities                              |       | $                     | (15,317    | ) | $ | (2,710 | ) |

 

The deferredtax liabilities at December 31, 2005 include a liability of $15,810,000 inrespect of the Grand Hotel Europe. The liability is caused by the differencebetween the tax basis and the fair value of the depreciable and amortizableassets at the acquisition date.

 

The deferredtax assets consist primarily of tax loss carry forwards. The gross amount oftax loss carry forwards is $185,035,000. Of this amount, $59,402,000 willexpire in the five years ending December 31, 2010, and a further $5,146,000will expire in the five years ending December 31, 2015. The remaininglosses of $120,487,000 will expire after December 31, 2015 or have noexpiry date.

 

A valuationallowance has been provided against gross deferred tax assets where it isthought more likely than not that the benefits associated with these assetswill not be realized. The decrease in the valuation allowance reflects primarilythe fact that management now believes that certain deferred tax assets inrespect of the U.S. and South African operations are more likely than not to berealized.

 

The deferredtax liabilities consist primarily of differences between the tax basis ofdepreciable assets and the adjusted basis as reflected in the financialstatements.

 

OEH hasprepared these financial statements pursuant to a tax sharing agreement withSCL and its subsidiaries. In accordance with that agreement, prior to August 10,2000, the date of the Company’s initial public offering, OEHutilized/relinquished losses with certain SCL subsidiaries. After that date,OEH may no longer utilize/relinquish losses with SCL and its subsidiaries.The following represents the

 

83

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net liabilitythat exists from OEH to SCL and its subsidiaries (dollars in thousands):

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax sharing  agreement |       | —                           |       | $ | (92 | ) | $ | (1,973 | ) |
|                        |            |                                  |            |  |  |  |  |  |  |

 

**9.****                                      Supplemental cash flow information**

 
| ** **      | ** ** | **Year ended December 31,** | ** ** |
|-----------------|------------|----------------------------------|------------|
| ** **      | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **      | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash paid  for: |       |                             |       |   |   |   |   |
| Interest        |       | $                                | 29,461     |   | $ | 21,436 |   | $ | 19,714 |   |
| Income taxes    |       | $                                | 10,124     |   | $ | 4,071 |   | $ | 3,411 |   |

 

Non-cashinvesting and financing activities:

 

In conjunctionwith certain acquisitions in 2005, 2004 and 2003 (see Note 2(a)),liabilities were assumed as follows (dollars in thousands):

 
| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                           |       |                             |       |   |   |   |   |
| Fair value  of assets acquired |       | $                                | 119,152    |   | $ | 30,146 |   | $ | 50,611 |   |
| Cash paid                      |       | (95,150                          | )          | (29,670 | ) | (22,000 | ) |
| Liabilities  assumed           |       | $                                | 24,002     |   | $ | 476 |   | $ | 28,611 |   |

 

**10.****                               Shareholders’ equity**

 

*(a)**                               Public offering*

 

In November andDecember 2003, the Company completed a public offering registered in theUnited States through underwriters of 3,450,000 newly-issued class Acommon shares. Net proceeds amounted to $51,893,000.

 

In March 2005,the Company issued and sold through underwriters 5,050,000 class A commonshares in a public offering registered in the United States. Net proceedsamounted to $121,889,000.

 

*(b)**                               Dual common share capitalization*

 

The Companyhas been capitalized with class A common shares, of which there are120,000,000 authorized, and class B common shares, of which there are120,000,000 authorized, each convertible at any time into one class Acommon share. In general, holders of class A and class B commonshares vote

 

84

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together as asingle class, with holders of class B shares having one vote per share andholders of class A shares having one-tenth of one vote per share. In allother substantial respects, the class A and class B common shares arethe same.

 

*(c)**                                Shareholder rights agreement*

 

The Company hasin place a shareholder rights agreement which will be implemented not earlierthan the tenth day following the first to occur of (i) the publicannouncement of the acquisition by a person (other than a subsidiary of theCompany, SCL or a subsidiary of SCL) of shares carrying 20% or more of thetotal voting rights which may be cast at any general meeting of theCompany and (ii) the commencement or announcement of a tender offer orexchange offer by a person for shares carrying 30% or more of the total votingrights that may be cast at any general meeting of the Company. At thattime, the rights will detach from the class A and class B commonshares, and the holders of the rights will be entitled to purchase, for eachright held, one one-hundredth of a series A junior participating preferredshare of the Company at an exercise price of $142 (the “Purchase Price”) foreach one one-hundredth of such junior preferred share, subject to adjustment incertain events. From and after the date on which any person acquires beneficialownership of shares carrying 20% or more of the total voting rights which may becast at any general meeting of the Company, each holder of a right (other thanthe acquiring person) will be entitled upon exercise to receive, at the thencurrent Purchase Price and in lieu of the junior preferred shares, that numberof class A or class B common shares (depending on whether the rightwas previously attached to a class A or B share) having a market value oftwice the Purchase Price. If the Company is acquired or 50% or more of itsconsolidated assets or earning power is sold, each holder of a right will beentitled to receive, upon exercise at the then current Purchase Price, thatamount of common equity of the acquiring company which at the time of suchtransaction 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 rightsfor class A and class B common shares (depending on whether the rightwas previously attached to a class A or B share) if any person acquires20% beneficial ownership as described above, but less than 50% beneficialownership. The rights will expire on June 1, 2010 but may be redeemedat a price of $0.05 per right at any time prior to the tenth day following thedate on which a person acquires beneficial ownership of shares carrying 20% ormore of the total voting rights which may be cast at any general meetingof the Company.

 

85

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*(d)**                               Acquired shares*

 

Included inshareholders’ equity is a reduction for 18,044,478 class B common sharesof the Company that a subsidiary of the Company acquired from SCL in July 2002under an agreement with SCL dating from July 2000. Consistent with theoverall presentation of the capital structure in the financial statements, theCompany has given effect to the terms and conditions of that agreement as ifthe agreement had been consummated from the beginning of the earliest yearpresented. As a result, a total of 18,044,478 class B common shares aredeemed to be owned by the Company subsidiary at December 31, 2005 and 2004.Under applicable Bermuda law, these shares are outstanding and may bevoted although in computing earnings per share these shares are treated as areduction to outstanding shares.

 

*(e)**                                Preferred shares*

 

The Companyhas 30,000,000 authorized preferred shares, par value $0.01 each, 500,000 ofwhich have been reserved for issuance as series A junior participatingpreferred shares upon exercise of preferred share purchase rights held by class Aand B common shareholders in connection with the shareholder rights agreement. SeeNote 10(c).

 

**11.****                               Employee stock option plans**

 

Under theCompany’s 2000 and 2004 stock option plans, options to purchase up to 750,000and 500,000, respectively, class A and B common shares may be awardedto employees of OEH at fair market value at the date of grant. Options areexercisable three years after award and must be exercised ten years from thedate of grant. At December 31, 2005, 626,250 class A common shareswere reserved under the 2000 plan for issuance pursuant to options awarded to48 persons, and 161,500 class A common shares were reserved under the 2004plan for issuance pursuant to options awarded to 40 persons.

 

Transactionsunder the plans have been as follows:

 
| ** **                          | ** ** | **Year ended  December 31, 2005** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **Shares**                             | ** ** | **Option Price** | ** ** |
| Outstanding  at beginning of period |       | 824,000                                |       | $13.00-$19.00 |   |
| Granted                             |       | 82,000                                 |       | $21.40-$28.50 |   |
| Terminated                          |       | (18,500                                | )          | $13.06-$28.50 |   |
| Exercised                           |       | (99,750                                | )          | $13.06-$19.00 |   |
| Outstanding  at end of period       |       | 787,750                                |       | $13.00-$28.50 |   |
| Exercisable  at end of period       |       | 472,250                                |       | $13.00-$19.00 |   |

 

86

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| ** **                          | ** ** | **Year ended  December 31, 2004** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **Shares**                             | ** ** | **Option Price** | ** ** |
| Outstanding  at beginning of period |       | 676,000                                |       | $13.00-$19.00 |   |
| Granted                             |       | 150,000                                |       | $14.70 |   |
| Terminated                          |       | (2,000                                 | )          | $13.40 |   |
| Exercised                           |       | —                                 |       |   |   |
| Outstanding  at end of period       |       | 824,000                                |       | $13.00-$19.00 |   |
| Exercisable  at end of period       |       | 271,500                                |       | $19.00 |   |

 
| ** **                          | ** ** | **Year ended  December 31, 2003** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **Shares**                             | ** ** | **Option Price** | ** ** |
| Outstanding  at beginning of period |       | 573,000                                |       | $13.00-$19.00 |   |
| Granted                             |       | 103,000                                |       | $13.40-$17.09 |   |
| Terminated                          |       | —                                 |       |   |   |
| Exercised                           |       | —                                 |       |   |   |
| Outstanding  at end of period       |       | 676,000                                |       | $13.00-$19.00 |   |
| Exercisable  at end of period       |       | 260,000                                |       | $19.00 |   |

 

The optionsoutstanding at December 31, 2005, were as follows:

 
| ** **           | ** ** | **Number of Shares**            | ** ** | **Weighted Average of**         | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Exercise  Prices** | ** ** | **Outstanding  at  12/31/2005** | ** ** | **Exercisable  at  12/31/2005** | ** ** | **Remaining Contractual  Lives** | ** ** | **Exercise  Prices for Outstanding  Options** | ** ** | **Exercise  Prices for  Exercisable  Options** | ** ** |
| $                    | 13.00      |                            | 15,000     |                            | 15,000     |   | 6.8 |   | $ | 13.00 |   | $ | 13.00 |   |
| $                    | 13.06      |                            | 240,500    |                            | 240,500    |   | 6.8 |   | $ | 13.06 |   | $ | 13.06 |   |
| $                    | 13.40      |                            | 91,000     |                            | —     |   | 7.4 |   | $ | 13.40 |   | — |   |
| $                    | 14.70      |                            | 143,000    |                            | —     |   | 8.6 |   | $ | 14.70 |   | — |   |
| $                    | 17.09      |                            | 3,000      |                            | —     |   | 7.8 |   | $ | 17.09 |   | — |   |
| $                    | 19.00      |                            | 205,250    |                            | 205,250    |   | 5.2 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 19.00      |                            | 11,500     |                            | 11,500     |   | 4.6 |   | $ | 19.00 |   | $ | 19.00 |   |
| $                    | 21.40      |                            | 2,000      |                            | —     |   | 9.1 |   | $ | 21.40 |   |   |   |
| $                    | 28.40      |                            | 33,000     |                            | —     |   | 9.7 |   | $ | 28.40 |   |   |   |
| $                    | 28.50      |                            | 43,500     |                            | —     |   | 9.5 |   | $ | 28.50 |   |   |   |
|                 |       | 787,750                         |       | 472,250                         |       |   |   |   |   |   |   |

 

Estimates offair values of stock options on the grant dates using the Black-Scholes optionpricing model are based on the following assumptions:

 

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| ** **                           | ** ** | **As of and for  year ended December 31,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                            |       |   |   |   |   |
| Expected  share price volatility     |       | 41.71                                           | %          | 46.33 | % | 51.68 | % |
| Risk-free  interest rate             |       | 4.24                                            | %          | 4.01 | % | 2.25 | % |
| Expected  annual dividends per share |       | $                                               | 0.10       |   | $ | 0.10 |   | None |   |
| Expected  life of stock options      |       | 5  years                                        |       | 5  years |   | 5  years |   |
| Weighted  average fair value         |       | $                                               | 11.98      |   | $ | 6.70 |   | $ | 6.27 |   |
|                                      |            |                                                 |            |  |  |  |  |  |  |  |

 

**12.****                               Commitments and contingencies**

 

Outstandingcontracts to purchase fixed assets were approximately $24,341,000 at December 31,2005 (2004-$27,200,000).

 

Future rentalpayments under operating leases in respect of equipment rentals and leasedpremises are payable as follows (dollars in thousands):

 
| ** **           | ** ** | **Year ended  December 31,** | ** ** |
|----------------------|------------|-----------------------------------|------------|
|                 |       |                              |       |
| 2006                 |       | $                                 | 590        |   |
| 2007                 |       | 383                               |       |
| 2008                 |       | 333                               |       |
| 2009                 |       | 304                               |       |
| 2010                 |       | 149                               |       |
| 2011 and  thereafter |       | 144                               |       |
|                 |       | $                                 | 1,903      |   |

 

Rental expensefor the year ended December 31, 2005 amounted to $1,911,000 (2004-$1,716,000;2003-$1,366,000).

 

Under theagreement to acquire the Royal Scotsman (see Note 2(b)), OEH has an optionexercisable in December 2007 to acquire the remaining 50% of theoutstanding shares at a multiple of EBITDA less existing debt (as defined inthe agreement). In the event that OEH does not exercise these options, theexisting shareholders have the option to sell the related shares to OEH for£1,400,000 ($2,400,000) and £2,100,000 ($3,600,000), respectively. At December 31,2005, the fair value of this contract was approximately zero.

 

Pursuant tothe terms of its investment in the Afloat in France business (see Note 2(b)),OEH purchased an option to acquire the remaining shares in the business, whichis exercisable effective on May 9, 2009. Prior to that date, the othershareholders have the right to sell their shares in the business to OEH. Bothoptions have the same exercise prices, which are determined at a multiple ofEBITDA less existing debt (as defined in the agreement) during the exercise

 

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periods. Theexercise price of each option approximates the fair value of the shares at December 31,2005.

 

Pursuant tothe terms of its investment in the Pansea Hotel group (see Note 2(b)), OEH paid$1,400,000, which is recorded in other assets, for options exercisable afterthree to five years to acquire all of the holding company’s shares. Theexisting shareholders also have the right to sell their shares to OEH afterfive years. These options have the same exercise prices, which are determinedat a multiple of EBITDA less existing debt (as defined in the agreement) duringthe exercise periods. The exercise price of the options approximates the fairvalue of the shares at December 31, 2005.

 

**13.****                               Derivative financial instruments**

 

OEH is exposedto interest rate risk on its floating rate debt and has entered into interestrate cap agreements that limit such exposure to a certain level. Theseagreements have been designated and have qualified as cash flow hedges of thebenchmark interest rate risk related to the floating rate debt. Consideringthat the cap agreements have the same profile as the respective hedged debtinstruments, they are expected to be and have been highly effective and,therefore, no ineffectiveness has been recognized in earnings and no componentof the derivative instruments was excluded from the assessment of hedge effectiveness.

 

At December 31,2005 and 2004, the fair values of the outstanding interest rate caps wereaccounted for as other assets at $nil and $124,000, respectively.

 

The amounts inaccumulated other comprehensive income, a $68,000 loss at December 31, 2005,will be recognized in earnings in the periods during which the hedgedforecasted transactions affect earnings (i.e., when the hedged interest expenseon the debt is recorded). Of the existing losses at December 31, 2005,approximately $68,000 will be reclassified into earnings during the next 12months, assuming no further changes in fair value of the contracts. OEH doesnot hold derivatives other than for hedging purposes.

 

In December 2003,OEH entered into an interest rate swap to hedge its exposure to interest rate movementsin a loan for a notional amount of €9,466,700 ($12,900,000). The fair value ofthe swap was $630,000 negative and $142,800 negative at December 31, 2005and 2004, respectively, and recorded in accrued liabilities. Changes in thefair value of this swap were recorded to interest expense as OEH elected not toapply hedge accounting for this transaction. The interest rate swap

 

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wasdiscontinued during 2005.

 

**14.****                               Other comprehensive income/(loss)**

 

Theaccumulated balances for each component of other comprehensive loss are asfollows (dollars in thousands):

 
| ** **                                | ** ** | **Year ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| ** **                                | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Foreign  currency translation adjustments |       | $                                 | (46,055    | ) | $ | (12,636 | ) |
| Derivative  financial instruments         |       | (68                               | )          | (209 | ) |
|                                      |       | $                                 | (46,123    | ) | (12,845 | ) |
|                                           |            |                                   |            |  |  |  |  |

 

The componentsof comprehensive income/(loss) are as follows (dollars in thousands):

 
| ** **                                        | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  on common shares                    |       | $                               | 40,733     |   | $ | 28,222 |   | $ | 23,609 |   |
| Foreign  currency translation adjustments         |       | (33,419                         | )          | 5,046 |   | 10,465 |   |
| Change in  fair value of derivatives              |       | 141                             |       | (301 | ) | 102 |   |
| Additional  minimum pension liability, net of tax |       | —                          |       | 1,613 |   | (107 | ) |
| Comprehensive  income                             |       | $                               | 7,455      |   | $ | 34,580 |   | $ | 34,069 |   |

 

**15.****                               Information concerning financial reporting for segments andoperations in different geographical areas**

 

OEH’s segmentinformation has been prepared in accordance with SFAS No. 131, ****“****Disclosuresabout Segments of an Enterprise and Related Information****”****. OEH’soperations are organized along service lines as two segments, (i) hotelsand restaurants and (ii) tourist trains and cruises, and are grouped intovarious geographical regions. Hotels at December 31, 2005 are located inthe United States, Caribbean, Mexico, Europe, southern Africa, South America,Southeast Asia, Australia and South Pacific, restaurants are located in London,New York and Buenos Aires, tourist trains operate in Europe, Southeast Asia andPeru, and a river cruiseship operates in Burma and five canalboats in France. Segmentperformance is evaluated based upon segment net earnings before interest expense,foreign currency, tax (including tax on earnings from unconsolidatedcompanies), depreciation, amortization and gain on hotel asset sale (“segmentEBITDA”). Segment information is presented in accordance with the accountingpolicies described in Note 1.

 

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Financialinformation regarding these business segments is as follows (dollars inthousands):

 
| ** **                                     | ** **            | **Year ended December 31,** | ** ** |
|------------------------------------------------|-----------------------|----------------------------------|------------|
| ** **                                     | ** **            | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                       |                  |                             |       |   |   |   |   |
| Hotels and restaurants                         |                  |                             |       |   |   |   |   |
| Owned hotels                                   | – Europe         |                             | $          | 161,188 |   | $ | 116,074 |   | $ | 115,884 |   |
|                                           | – North  America |                             | 84,411     |   | 75,376 |   | 66,564 |   |
|                                           | – Rest of  World |                             | 95,516     |   | 79,576 |   | 62,989 |   |
| Hotel management/part ownership interests |                  | 8,663                            |       | 7,344 |   | 6,495 |   |
| Restaurants                                    |                  | 22,162                           |       | 20,339 |   | 17,510 |   |
|                                           |                  | 371,940                          |       | 298,709 |   | 269,442 |   |
| Tourist trains and cruises                     |                  | 61,207                           |       | 58,575 |   | 46,421 |   |
|                                           |                  | $                                | 433,147    |   | $ | 357,284 |   | $ | 315,863 |   |
|                                           |                  |                             |       |   |   |   |   |
| Depreciation  and amortization:                |                  |                             |       |   |   |   |   |
| Hotels and restaurants                         |                  |                             |       |   |   |   |   |
| Owned hotels                                   | – Europe         |                             | $          | 13,471 |   | $ | 9,954 |   | $ | 8,420 |   |
|                                           | – North  America |                             | 7,248      |   | 6,536 |   | 6,249 |   |
|                                           | – Rest of  World |                             | 8,675      |   | 7,755 |   | 6,888 |   |
| Restaurants                                    |                  | 851                              |       | 757 |   | 595 |   |
|                                           |                  | 30,245                           |       | 25,002 |   | 22,152 |   |
| Tourist trains and cruises                     |                  | 3,842                            |       | 3,347 |   | 3,113 |   |
|                                           |                  | $                                | 34,087     |   | $ | 28,349 |   | $ | 25,265 |   |

 
| ** **                                     | ** **            | **Year ended December 31,** | ** ** |
|------------------------------------------------|-----------------------|----------------------------------|------------|
| ** **                                     | ** **            | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment  EBITDA:                               |                  |                             |       |   |   |   |   |
| Owned hotels                                   | – Europe         |                             | $          | 46,560 |   | $ | 29,868 |   | $ | 32,789 |   |
|                                           | – North  America |                             | 18,764     |   | 14,951 |   | 11,097 |   |
|                                           | – Rest of  World |                             | 23,381     |   | 18,051 |   | 11,077 |   |
| Hotel management/part ownership interests |                  | 17,485                           |       | 14,885 |   | 13,474 |   |
| Restaurants                                    |                  | 5,625                            |       | 3,911 |   | 2,616 |   |
| Tourist trains and cruises                     |                  | 15,396                           |       | 13,057 |   | 5,984 |   |
| Central overheads                              |                  | (18,955                          | )          | (15,707 | ) | (12,157 | ) |
|                                           |                  | $                                | 108,256    |   | $ | 79,016 |   | $ | 64,880 |   |

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment  EBITDA/net earnings reconciliation:                    |       |                             |       |   |   |   |   |
| Segment EBITDA                                                  |       | $                                | 108,256    |   | $ | 79,016 |   | $ | 64,880 |   |
| Add:                                                            |       |                             |       |   |   |   |   |
| Gain on sale of hotel asset                                     |       | —                           |       | — |   | 4,250 |   |
| Less                                                            |       |                             |       |   |   |   |   |
| Depreciation and amortization                                   |       | 34,087                           |       | 28,349 |   | 25,265 |   |
| Interest expense, net                                           |       | 30,153                           |       | 19,948 |   | 19,892 |   |
| Foreign currency, net                                           |       | (5,065                           | )          | (2,723 | ) | (2,673 | ) |
| Provision for income taxes                                      |       | 5,015                            |       | 2,551 |   | 1,002 |   |
| Share of provision for income taxes of unconsolidated companies |       | 3,333                            |       | 2,669 |   | 2,035 |   |
| Net earnings                                                    |       | $                                | 40,733     |   | $ | 28,222 |   | $ | 23,609 |   |
|                                                            |       |                             |       |   |   |   |   |
| Earnings  from unconsolidated companies:                        |       |                             |       |   |   |   |   |
| Hotels and restaurants                                          |       |                             |       |   |   |   |   |
| Hotel management/part ownership interests                  |       | $                                | 7,169      |   | $ | 6,437 |   | $ | 6,979 |   |
| Restaurants                                                     |       | 360                              |       | 223 |   | 85 |   |
|                                                            |       | 7,529                            |       | 6,660 |   | 7,064 |   |
| Tourist trains and cruises                                      |       | 3,646                            |       | 2,424 |   | 256 |   |
|                                                            |       | $                                | 11,175     |   | $ | 9,084 |   | $ | 7,320 |   |

 

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| ** **                 | ** **            | **Year ended December 31,** | ** ** |
|----------------------------|-----------------------|----------------------------------|------------|
| ** **                 | ** **            | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Capital  expenditure:      |                  |                             |       |   |   |   |   |
| Hotels and restaurants     |                  |                             |       |   |   |   |   |
| Owned hotels               | – Europe         |                             | $          | 60,359 |   | $ | 32,643 |   | $ | 16,827 |   |
|                       | – North  America |                             | 19,100     |   | 14,177 |   | 19,928 |   |
|                       | – Rest of  World |                             | 23,368     |   | 15,214 |   | 13,213 |   |
| Restaurants                |                  | 1,091                            |       | 694 |   | 801 |   |
|                       |                  | 103,918                          |       | 62,728 |   | 50,769 |   |
| Tourist trains and cruises |                  | 6,170                            |       | 2,376 |   | 3,681 |   |
|                       |                  | $                                | 110,088    |   | $ | 65,104 |   | $ | 54,450 |   |

 
| ** **                                     | ** **            | **December 31,** | ** ** |
|------------------------------------------------|-----------------------|-----------------------|------------|
| ** **                                     | ** **            | **2005**              | ** ** | **2004** | ** ** |
| Identifiable  assets:                          |                  |                  |       |   |   |
| Hotels and restaurants                         |                  |                  |       |   |   |
| Owned hotels                                   | – Europe         |                  | $          | 560,982 |   | $ | 425,658 |   |
|                                           | – North  America |                  | 251,646    |   | 296,704 |   |
|                                           | – Rest of  World |                  | 343,773    |   | 308,598 |   |
| Hotel management/part ownership interests |                  | 103,549               |       | 103,184 |   |
| Restaurants                                    |                  | 42,794                |       | 43,024 |   |
|                                           |                  | 1,302,744             |       | 1,177,168 |   |
| Tourist trains and cruises                     |                  | 112,818               |       | 99,733 |   |
|                                           |                  | $                     | 1,415,562  |   | $ | 1,276,901 |   |

 

Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):

 
| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:      |       |                             |       |   |   |   |   |
| Europe        |       | $                                | 217,275    |   | $ | 169,788 |   | $ | 157,632 |   |
| North America |       | 109,019                          |       | 98,244 |   | 87,341 |   |
| Rest of World |       | 106,853                          |       | 89,252 |   | 70,890 |   |
|          |       | $                                | 433,147    |   | $ | 357,284 |   | $ | 315,863 |   |

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Long-lived  assets at book value: |       |                  |       |   |   |
| Europe                            |       | $                     | 553,287    |   | $ | 431,663 |   |
| North America                     |       | 308,622               |       | 331,544 |   |
| Rest of World                     |       | 359,963               |       | 306,732 |   |
|                              |       | $                     | 1,221,872  |   | $ | 1,069,939 |   |

 

 

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Long-lived assets at book value constitute the following (dollars inthousands):

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Property,  plant and equipment |       | $                     | 1,010,926  |   | $ | 911,992 |   |
| Real estate  assets            |       | 18,398                |       | 4,819 |   |
| Investments                    |       | 129,681               |       | 123,599 |   |
| Goodwill                       |       | 62,867                |       | 29,529 |   |
|                           |       | $                     | 1,221,872  |   | $ | 1,069,939 |   |

 

**16.****                               Related party transactions**

 

For the yearended December 31, 2005, OEH paid subsidiaries of SCL $5,757,000 (2004-$5,330,000;2003-$4,631,000) for the provision of various services provided under aservices agreement between OEH and SCL. These amounts have been settled inaccordance with the services agreement and are included in selling, general andadministrative expenses.

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method) and has made loans to the hotel-owningcompany. For the year ended December 31, 2005, OEH earned $4,587,000(2004-$3,943,000; 2003-$3,917,000) in management fees which are recorded inrevenue, and $9,752,000 (2004-$8,165,000; 2003–$7,080,000) in interest incomeon partnership and other loans, which is recorded in earnings fromunconsolidated companies. These loans have an indefinite maturity period. SeeNote 2(b).

 

OEH manages under long-termcontracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned byits 50%/50% joint venture with local Peruvian interests, as well as the50%-owned PeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the year ended December 31,2005, OEH earned management and guarantee fees of $4,785,000 (2004-$4,337,000;2003–$1,940,000) which are recorded in revenue, and loan interest of $116,000(2004-$104,000; 2003–$297,000) which is recorded in earnings fromunconsolidated companies. At December 31, 2005 and 2004, loans to thehotels aggregated $2,000,000, bear interest at a spread over LIBOR and come duein 2006. At the same date, OEH had a $750,000 subordinated loan to the PeruRailoperation with an indefinite maturity date and interest also at a spread overLIBOR. All of the guarantees relating to the Company’s investments in Peru werein place prior to December 31, 2003.

 

OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH acquired a 50%interest in April 2003 (see Note 2) and is accounted for under the equitymethod. For the year ended December 31, 2005, OEH earned $1,139,000 (2004-$969,000;2003–$1,069,000) in management fees, which are

 

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included in revenue. Seenote 2(b).

 

OEH has granted to JamesSherwood, Chairman and a director of the Company, a right of first refusal topurchase the Hotel Cipriani in Venice, Italy in the event OEH proposes to sellit. The purchase price would be the offered sale price in the case of a cashsale or the fair market value of the hotel, as determined by an independentvaluer, in the case of a non-cash sale. Mr. Sherwood has also been grantedan option to purchase the hotel at fair market value if a change in control ofthe Company occurs.

 

**17.****                               Subsequent events (unaudited)**

 

On February 8, 2006, OEH acquired a 75% interest in Casa de SierraNevada, a 33 room deluxe hotel in San Miguel de Allende, Mexico, for $8,400,000.OEH will manage the hotel exclusively.

 

Effective January 1, 2006, OEH acquired the 25% minority interestin Maroma Resort and Spa for $5,400,000.

 

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**Summary of quarterlyearnings (unaudited)**

 
| ** **                                                                   | ** ** | **Quarter ended**                                    | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **December  31**                                     | ** ** | **September  30** | ** ** | **June  30** | ** ** | **March  31** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| **2005**                                                                     |       |                                                 |       |   |   |   |   |   |   |
| Revenue                                                                      |       | $                                                    | 98,753     |   | $ | 127,733 |   | $ | 126,252 |   | $ | 80,409 |   |
| Earnings/(losses) before net finance costs                                   |       | $                                                    | 9,220      |   | $ | 26,228 |   | $ | 24,294 |   | $ | (81 | ) |
| Net finance costs                                                            |       | (7,539                                               | )          | (7,819 | ) | (6,231 | ) | (3,499 | ) |
| Earnings/(losses) before income taxes                                        |       | 1,681                                                |       | 18,409 |   | 18,063 |   | (3,580 | ) |
| (Provision for)/benefit from income taxes                                    |       | 1,132                                                |       | (3,025 | ) | (3,420 | ) | 298 |   |
| Earnings from unconsolidated companies net of tax                            |       | 1,537                                                |       | 4,099 |   | 3,814 |   | 1,725 |   |
| Net earnings/(losses) on class A and B common shares                    |       | $                                                    | 4,350      |   | $ | 19,483 |   | $ | 18,457 |   | $ | (1,557 | ) |
|                                                                         |       |                                                 |       |   |   |   |   |   |   |
| Net earnings/(losses) per class A and B common share:                   |       |                                                 |       |   |   |   |   |   |   |
| Basic                                                                        |       | $                                                    | 0.11       |   | $ | 0.50 |   | $ | 0.47 |   | $ | (0.04 | ) |
| Diluted                                                                      |       | $                                                    | 0.11       |   | $ | 0.49 |   | $ | 0.47 |   | $ | (0.04 | ) |
| Dividends per class A and B common share                                |       | $                                                    | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |
|                                                                         |       |                                                 |       |   |   |   |   |   |   |
| **2004**                                                                     |       |                                                 |       |   |   |   |   |   |   |
| Revenue                                                                      |       | $                                                    | 92,889     |   | $ | 100,025 |   | $ | 100,536 |   | $ | 63,834 |   |
| Earnings before net finance costs                                            |       | $                                                    | 9,511      |   | $ | 15,807 |   | $ | 16,529 |   | $ | (2,933 | ) |
| Net finance costs                                                            |       | (2,618                                               | )          | (4,751 | ) | (4,876 | ) | (4,980 | ) |
| Earnings/(losses) before income taxes                                        |       | 6,893                                                |       | 11,056 |   | 11,653 |   | (7,913 | ) |
| (Provision for)/benefit from income taxes                                    |       | 1,316                                                |       | (2,504 | ) | (2,375 | ) | 1,012 |   |
| Earnings from unconsolidated companies net of tax                            |       | 213                                                  |       | 2,943 |   | 3,633 |   | 2,295 |   |
| Net earnings/(losses) on class A and B common shares                    |       | $                                                    | 8,422      |   | $ | 11,495 |   | $ | 12,911 |   | $ | (4,606 | ) |
|                                                                         |       |                                                 |       |   |   |   |   |   |   |
| Net earnings/(losses) per class A and B common share  Basic and diluted |       | $                                                    | 0.25       |   | $ | 0.34 |   | $ | 0.38 |   | $ | (0.33 | ) |
| Dividends per class A and B common share                                |       | $                                                    | 0.025      |   | $ | 0.025 |   | $ | 0.025 |   | $ | 0.025 |   |

 

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

 

None.

 

**ITEM 9A.****                                            Controls and Procedures**

 

*Disclosure Controls and Procedures*

 

The Company’s chief executive and financial officers have evaluated theeffectiveness of OEH’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e))as of December 31, 2005 and, based on that evaluation, believe thosedisclosure controls and procedures are effective as of that date.

 

*Report on**Internal Control overFinancial Reporting*

 

OEH management is responsible for establishingand maintaining adequate internal control over financial reporting (as definedin SEC Rule 13a-15(f)). OEH’s internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with U.S. generally accepted accounting principles. Managementassessed the effectiveness of OEH’s internal control over financial reportingas of December 31, 2005. In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control–Integrated Framework. Based on thisassessment and those criteria, management believes that OEH’s internal controlover financial reporting is effective as of December 31, 2005. Deloitte &Touche LLP, OEH’s independent auditor (a registered public accounting firm),issued an attestation report on management’s assessment of OEH’s internalcontrol over financial reporting, which appears in Item 8–Financial Statementsabove.

 

*Changes in Internal Control over FinancialReporting*

 

There have been no changes in OEH’s internal control over financialreporting during the fourth quarter of 2005 that have materially affected, orare reasonably likely to materially affect, OEH’s internal control overfinancial reporting.

 

It should be noted that any system of controls, however well designedand operated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met, such as prevention and detection ofmisstatements. In addition, the design of any control system is based in part

 

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upon certain assumptions about the likelihood of future events. Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with the policies or procedures may deteriorate, for example. Becauseof these and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

 

**ITEM 9B.****                                            Other Information**

 

None.

 

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**PART III**

 

**ITEM10.****                                              Directors and Executive Officers of the Registrant**

 

**Directors**

 

The directorsof the Company are as follows:

 
| **Name, Age**             | ** ** | **Principal Occupation and Other Major Affiliations** | ** ** | **Year  First  Became  Director** |
|--------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------|
| John  D. Campbell, 63          |       | Senior  Counsel (retired) of Appleby Spurling Hunter (attorneys)               |       | 1994                              |
| James  B. Hurlock, 72          |       | Partner  (retired) of White & Case LLP (attorneys)                    |       | 2000                              |
| J.  Robert Lovejoy, 61         |       | Managing  Director of Groton Partners LLC (a private merchant banking firm)    |       | 2000                              |
| Daniel  J. O’Sullivan, 67 |       | Senior  Vice President-Finance (retired) of SCL                                |       | 1997                              |
| Georg  R. Rafael, 68           |       | Managing  Director of Rafael Group S.A.M. (hoteliers)                          |       | 2002                              |
| James  B. Sherwood, 72         |       | Chairman  of the Company                                                       |       | 1994                              |
| Simon  M.C. Sherwood, 45       |       | President  of the Company                                                      |       | 1994                              |

 

The principaloccupation of each director during the last five years is that shown in thetable supplemented by the following information.

 

Mr. Campbell,who is also a director of SCL, was a member of Appleby Spurling Hunteruntil March 1999 and retired as Senior Counsel in July 2003. Mr. Campbellis the non-executive Chairman of the Board of The Bank of Bermuda Ltd., asubsidiary of HSBC Holdings plc, as well as Chairman of the bank’s AuditCommittee, and a non-executive director and Chairman of the Nominations andGovernance Committee of Argus Insurance Company Ltd., a public company listedon the Bermuda Stock Exchange.

 

Mr. Hurlockacted as Chairman of the Management Committee of White & Case LLPoverseeing worldwide operations from 1980 until his retirement in 2000. He alsoserved as Interim CEO of Stolt-Nielsen Transportation Group Ltd., a chemicaltransport services company, from July 2003 until June 2004.

 

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Mr. Lovejoyjoined Groton Partners in January 2006. In 2000-2005, he was SeniorManaging Director of Ripplewood Holdings LLC, a private equity investment firm. Prior to that position he was aManaging Director of Lazard Freres & Co. LLC and a General Partner ofLazard’s predecessor partnership for over 15 years.

 

Mr. O’Sullivanheld senior financial and accounting positions with SCL and its predecessorcompany for over 30 years including Chief Financial Officer for seven yearsuntil his retirement in December 2004.

 

Mr. Rafaelwas until early 2002 the Vice Chairman–Executive Committee of Mandarin OrientalHotels, having sold to them in 2000 Rafael Hotels Ltd., a deluxe hotel owningand operating company that Mr. Rafael established in 1986. Before RafaelHotels, he was joint Managing Director of Regent International Hotels, a hotelgroup Mr. Rafael helped start in 1972.

 

Mr. JamesSherwood has also been a director of SCL since 1974, having founded itspredecessor company in 1965. He served as President of SCL during that timeuntil January 2006 when he became non-executive Chairman of SCL.

 

Mr. SimonSherwood was Senior Vice President–Leisure of SCL (1997-2000) and wasoriginally appointed Vice President of SCL in 1991, prior to which he wasManager, Strategic Consulting of Boston Consulting Group (1986-1990). He is thestepson of Mr. James Sherwood.

 

*CorporateGovernance*

 

The Board ofDirectors of the Company has established corporate governance measuressubstantially in compliance with requirements of the New Your Stock Exchange (“NYSE”).These include a set of Corporate Governance Guidelines, Charters for each ofthe Audit Committee, Compensation Committee, and Nominating and GovernanceCommittee of the full Board, and a Code of Business Conduct for Directors,Officers and Employees. The Board of Directors has also adopted a Code ofBusiness Practices for the Company’s Principal Executive, Financial andAccounting Officers, which is filed as an exhibit to this report. Thesedocuments are published on the Company’s website (www.orient-express.com) or may beobtained by writing to the Company’s Secretary at its registered office address(Orient-Express Hotels Ltd., 22 Victoria Street, Hamilton HM 12, Bermuda).

 

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Because theCompany is a foreign private issuer as defined in SEC rules, it is not requiredto comply with all NYSE corporate governance requirements as they apply to U.S.domestic companies listed on the NYSE. The Company’s corporate governance measuresdiffer in two significant ways. First, the Charter of the Company’s Nominatingand Governance Committee generally mandates the same responsibilities as NYSE rules requirebut authorizes the Committee to act only upon the Board’s request and in anadvisory capacity. Second, the Charter of the Company’s Compensation Committeeauthorizes the Committee to recommend to the Board the compensation of theCompany’s chief executive officers but does not empower the Committee itself todetermine, approve or modify that compensation.

 

Regarding theindependence of directors from OEH’s management, the Board has reviewed themateriality of any relationship that each of the seven directors of the Companyhas with OEH either directly or indirectly through another organization. Thecriteria applied included the director independence requirements set forth inthe Company’s Corporate Governance Guidelines, any other managerial, familial,professional, commercial or affiliated relationship between a director and theCompany, a subsidiary or another director and, with respect to the Company’sAudit Committee, the SEC’s independence rules. Based on this review, the Boardhas determined that Messrs. Campbell, Hurlock, Lovejoy and Rafael areindependent directors. The Company’s Corporate Governance Guidelines are filedas a exhibit to this report.

 

Interestedpersons may communicate directly with any of the independent directors bywriting to him at the Company’s registered office address (Orient-ExpressHotels Ltd., 22 Victoria Street, Hamilton HM 12, Bermuda).

 

The presentmembers of the Company’s Audit Committee are Messrs. Campbell, Hurlock andLovejoy. The Board has designated Mr. Lovejoy as the audit committeefinancial expert as defined by SEC rules. The present members of theCompensation Committee and the Nominating and Governance Committee are Messrs. Campbell,Hurlock, Lovejoy and Rafael.

 

**Executive Officers**

 

The executiveofficers of the Company are as follows:

 
| **Name, Age**       | ** ** | **Position**          | ** ** |
|--------------------------|------------|-----------------------|------------|
|                     |       |                  |       |
| James B.  Sherwood, 72   |       | Chairman  since 1994  |       |
| Simon M.C.  Sherwood, 45 |       | President  since 1994 |       |

 

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| **Name, Age**         | ** ** | **Position**                                                                | ** ** |
|----------------------------|------------|-----------------------------------------------------------------------------|------------|
|                       |       |                                                                        |       |
| Dean P.  Andrews, 53       |       | Vice  President–Hotels, North America since 1997                       |       |
| Filip Boyen,  47           |       | Vice  President–Hotels, Africa, Australia and South America since 2005 |       |
| Roger V.  Collins, 59      |       | Vice  President–Technical Services since 2001                          |       |
| Adrian D.  Constant, 45    |       | Vice  President–Hotels, Europe and Asia since 2001                     |       |
| Pippa  Isbell, 52          |       | Vice  President–Public Relations since 2000                            |       |
| Natale  Rusconi, 79        |       | Vice  President since 2004                                                  |       |
| Nicholas R.  Varian, 51    |       | Vice  President–Tourist Trains and Cruises since 1994                  |       |
| Paul M.  White, 41         |       | Vice  President–Finance and Chief Financial Officer since 2005         |       |
| David C.  Williams, 51     |       | Vice  President–Sales and Marketing since 2004                         |       |
| Edwin S.  Hetherington, 56 |       | Secretary  since 1994                                                       |       |

 

The principaloccupation of each person during the last five years is shown in the tablesupplemented by the following information.

 

The previousexperience of Messrs. James Sherwood and Simon Sherwood is reported underthe heading “Directors” above.

 

Mr. Andrewswas with Omni Hotels (1981-1997) working in new hotel development and financialand asset management.

 

Mr. Boyenheld positions with Marco Polo Hotels, Sun International Hotels and RamadaRenaissance until he joined OEH in 1997. Initially, he served as GeneralManager of its Bora Bora Lagoon Resort until 1999, when he became ManagingDirector of OEH’s hotel and tourist train operation in Peru. He was appointed aVice President in September 2005.

 

Mr. Collins,an engineer, has worked in the hotel industry since 1979 with GrandMetropolitan Hotels, Courage Inns and Taverns, and Trusthouse Forte Hotels,joining the Company’s predecessor, Orient-Express Hotels Inc., in 1991.

 

Mr. Constantbegan his career in the hotel industry in 1983, including positions atIntercontinental and Forte Hotels, and worked for Le Meridien Hotels(1993-2001) ending as Regional Manager for Brazil.

 

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Ms. Isbellwas appointed a Manager of the Company in 1998 after selling the publicrelations consultancy she founded in 1987. Her work in the hospitality industryincluded representation of Intercontinental Hotels, Forte, HiltonInternational, Jarvis Hotels, and Millennium and Copthorne.

 

Mr. Rusconiis also Managing Director of the Hotel Cipriani in Venice, Italy having beenappointed to that position in 1977. Previously he worked with the Savoy HotelGroup and CIGA Hotels.

 

Mr. Varianjoined Orient-Express Hotels Inc. in 1985 from P&O Steam NavigationCompany and has worked extensively on various cruise and tourist trainprojects, becoming a Vice President in 1989.

 

Mr. Whitewas previously Vice President–Hotels, Africa, Australia and South America from2000 until September 2005, when he became Vice President–Finance and ChiefFinancial Officer. Mr. White was Director of Hotel Operations for the samegeographical region from 1998 to 2000, and Financial Controller from 1991 to1998. He joined OEH in 1991 from Forte Hotels where he qualified as anaccountant. He is currently a member of the Chartered Institute of ManagementAccountants.

 

Mr. Williamsjoined Orient-Express Hotels Inc. in 1981 as Sales and Marketing Manager. Hebecame responsible for strategic marketing developments and businessinitiatives in the Americas, Europe and Asia. He previously worked for CarlsonMarketing Group.

 

Mr. Hetheringtonis also Vice President, General Counsel and Secretary of SCL having joinedOrient-Express Hotels Inc. in 1980.

 

**ITEM 11.****                                              Executive Compensation**

 

Because theCompany is a foreign private issuer, it is replying to this Item 11 pursuant toItem 402(a)(1)(ii) of SEC Regulation S-K.

 

The followingtable shows the salary and bonus of Messrs. James and Simon Sherwood paidin cash during 2005, and of all executive officers as a group, for services toOEH in all capacities:

 

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| **Name of Individual or Group**                 | ** ** | **Principal  Capacities in  Which Served** | ** ** | **Cash  Compensation** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|------------------------|------------|
|                                            |       |                                       |       |                   |       |
| James B.  Sherwood                              |       | Chairman  and Director                     |       | $                      | 443,500    |   |
| Simon M.C.  Sherwood                            |       | President  and Director                    |       | $                      | 819,000    |   |
| All  executive officers as a group (12 persons) |       |                                       |       | $                      | 4,014,800  |   |

 

Under theservices agreement between OEH and SCL described under Item 13–CertainRelationships and Related Transactions below, part of the salary and bonusof Mr. Hetherington is included in the corporate and administrativecharges of SCL to OEH and is excluded from the table. See also Note 16 to theFinancial Statements (Item 8 above).

 

In 2005, eachof Messrs. Campbell, Hurlock, Lovejoy, O’Sullivan and Rafael received afee of $2,750 for each meeting of the Board of Directors or a committee thereofwhich he attended, and was also paid a Board retainer fee at the annual rate of$17,500. Members of the Audit Committee (Messrs. Campbell, Hurlock andLovejoy) were paid an additional retainer fee of $5,000 per year, and membersof the Compensation Committee and Nominating and Governance Committee (Messrs. Campbell,Hurlock, Lovejoy and Rafael) were paid an additional retainer fee of $5,000 peryear. Aggregate attendance and retainer fees amounted to $260,000 in 2005. Thenon-executive directors are also entitled to 50% discounts off the usual room ratesand food and beverage prices for personal visits at OEH’s properties.

 

**Pensions**

 

Executiveofficers who are United Kingdom citizens participate in a contributory definedbenefit pension plan established by OEH in 2003 for British employees. Theamount of contribution to the plan in respect of a specific person cannotreadily be separated or individually calculated. Participants in the plan areeligible to receive at their normal retirement date an annual pension based onthe number of years of permanent employment and their final pensionablecompensation, up to a maximum pension of two-thirds of the final pensionablecompensation for service of up to 33 years, reduced by pension benefitspaid by the British government. A participant’s pensionable compensation uponwhich benefits are based is the greater of (i) the average of theparticipant’s highest three consecutive pensionable salaries during the tenyears preceding retirement or (ii) the participant’s pensionable salaryfor the year immediately preceding

 

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retirement. In2002 and prior years, most British executive officers participated in an SCLpension plan at SCL’s cost charged to OEH under the services agreement referredto above. Based on actuarial advice, plan assets were divided when the OEH planwas established as of January 1, 2003.

 

Under thisU.K. defined benefit plan, currently estimated accrued annual benefits payableto participating executive officers of the Company amounted to approximately$289,000 in the aggregate at December 31, 2005. See Note 7 to theFinancial Statements regarding the U.K. plan.

 

CertainU.S. subsidiaries of OEH have adopted a 401(k) pension plan that permitsemployees to contribute amounts out of their compensation into individual tax-deferredpension accounts. The maximum contribution an employee could make was $14,000in 2005. One executive officer of the Company based in the U.S. participates inthis plan, and OEH paid $2,000 into his account as a partial matching paymentunder the plan in addition to his own contribution.

 

Messrs. JamesSherwood, Andrews, Boyen, Rusconi and Hetherington participate in no OEHpension plan.

 

**2000 and 2004 Stock OptionPlans**

 

Options topurchase Class A common shares of the Company have been granted to directors,executive officers and selected employees under the Company’s 2000 and 2004Stock Option Plans, which are administered by the Compensation Committee of theBoard of Directors and have substantially the same terms. The plans provide forthe award of options to purchase up to 1,250,000 Class A and B commonshares at market value at the time of the award. In general, options becomeexercisable three years after the date of grant and expire ten years from dateof grant. In certain circumstances constituting a change in control of theCompany, outstanding options become immediately exercisable, and optionees may thereaftersurrender their options instead of exercising them and receive directly fromthe Company in cash the difference between the option exercise price and thevalue of the underlying shares determined according to the plans.

 

During 2005,options to purchase an aggregate of 62,500 Class A shares were granted todirectors and executive officers of the Company at prices of $28.20 to $28.50 pershare, including options on 5,000 shares to Mr. Simon Sherwood, 5,000shares to Mr. James Sherwood and 3,500 shares to each of the otherdirectors. Options were exercised by directors or officers during 2005 on anaggregate of 38,750 Class A shares at an aggregate gain of $550,000. At

 

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December 31,2005, options to purchase an aggregate of 560,750 Class A shares (of which362,250 were exercisable) were held by directors and executive officers at pershare exercise prices ranging from $13.00 to $28.50 and expiring between 2010and 2015. See Note 11 to the Financial Statements.

 

**ITEM 12.****                                              Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

 

**Five Percent Shareholders**

 

The followingtable contains information concerning the beneficial ownership of the Company’sClass A common shares and Class B common shares by the only personsknown to OEH to own beneficially more than 5% of the outstanding shares ofeither class.

 

Orient-ExpressHoldings 1 Ltd. (“Holdings”) listed in the table below is a subsidiary of theCompany which owns only Class B shares. Under Bermuda law, the sharesowned by Holdings are outstanding and may be voted. In a takeover of OEH,this structure may assist in maximizing the value that shareholders of theCompany receive in the takeover transaction. Each Class B share isconvertible at any time into one Class A share and, therefore, the shareslisted as owned by Holdings represent Class B shares and the Class Ashares into which those shares are convertible.

 

Voting anddispositive power with respect to the Class B shares owned by Holdings isexercised by its Board of Directors, who are Messrs. James Sherwood,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 Bshares owned by Holdings for which he serves as a director, as well as the Class Ashares into which those Class B shares are convertible, but is not shownin the table below.

 
| **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                                                                     |       | 31.4                                                       | %          | 100.0%                                                  |       |
|                                                                                                                                    |       |                                                                           |       |                                                       |       |                                                    |       |
| Capital Research and Management Co.  and SMALLCAP World Fund Inc.(2)   333 South Hope  Street  Los Angeles,  California 90071 |       | 2,860,000                                                                      | (5)        | 7.3                                                        | %          | —                                                  |       |

 

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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** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                                                        |       |                                                                           |       |                                                        |       |                                                    |       |
| Franklin Resources Inc. et al. (3) One Franklin  Parkway  San Mateo,  California 94403 |       | 2,287,680                                                                      | (5)        | 5.8                                                         | %          | —                                                  |       |
|                                                                                        |       |                                                                           |       |                                                        |       |                                                    |       |
| Westport Asset Management Inc. (4) 253  Riverside Avenue  Westport,  Connecticut 06880 |       | 2,234,900                                                                      | (5)        | 5.7                                                         | %          | —                                                  |       |

 

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(1)           Thepercentage of Class A shares shown is based on the 39,413,250 Class Ashares outstanding on February 28, 2006, plus the Class A sharesissuable upon conversion of the Class B shares beneficially owned by thatperson, if any.

 

(2)           Theinformation with respect to Capital Research and Management Co. (“Capital”) andSMALLCAP World Fund Inc. (“SMALLCAP”) relates only to Class A shares andis derived from their joint Schedule 13G report as amended as of December 31,2005 and filed with the SEC on February 10, 2006. The report states thatCapital is a registered investment advisor and has sole voting and dispositivepower with respect to 2,860,000 Class A shares, and that SMALLCAP is aregistered investment company, is advised by Capital and beneficially owns2,326,000 Class A shares.

 

(3)           Theinformation with respect to Franklin Resources Inc. (“Franklin Resources”)relates only to Class A shares and is derived from the joint Schedule 13Greport as of December 31, 2005 and filed with the SEC on February 8,2006 by Franklin Resources, Charles B. Johnson, Rupert H Johnson, Jr., andFranklin Advisers Inc. (“Franklin Advisers”). The report states that (a) FranklinResources is a parent holding company of three registered investment advisors,Franklin Advisers, Franklin Templeton Investments Corp (“Franklin Templeton”)and Templeton Asset Management Ltd. (“Templeton Asset”), (b) FranklinAdvisers has sole voting power with respect to 2,085,980 Class A sharesand sole dispositive power with respect to 2,100,580 Class A shares,Franklin Templeton has sole voting and dispositive power with respect of159,800 Class A shares, and Templeton Asset has sole voting anddispositive power with respect to 27,300 Class A shares, and (c) CharlesB. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of theoutstanding common stock of Franklin Resources and are the principalstockholders of Franklin Resources, and they and Franklin Resources may bedeemed to be, for purposes of SEC Rule 13d-3, the beneficial owners ofsecurities held by persons and entities advised by subsidiaries of FranklinResources.

 

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(4)           The information withrespect to Westport Asset Management Inc. (“Westport”) relates only to Class Ashares and is derived from its Schedule 13G report as amended as of December 31,2005 and filed with the SEC on February 13, 2006. The report states that (a) Westportis a registered investment advisor and a parent holding company and owns 50% ofWestport Advisers LLC, also a registered investment advisor, and (b) Westporthas sole voting and dispositive power with respect to 979,100 Class Ashares, shares voting power with Westport Advisers LLC with respect to 1,127,600Class A shares, and shares dispositive power with respect to 1,255,800 Class Ashares including the 1,127,600 Class A shares referred to above withWestport Advisors LLC.

 

(5)           Class Ashares only.

 

**Directorsand Executive Officers**

 

The followingtable contains information concerning the beneficial ownership of Class Acommon shares of the Company by each director and executive officer of theCompany and by all directors and executive officers of the Company as a group. Eachperson has sole voting and dispositive power with respect to his or her shares,except Mr. Campbell who shares voting and dispositive power with respectto his shares, Mr. Lovejoy who shares voting and dispositive power withrespect to 200 shares, and Mr. James Sherwood who shares voting anddispositive power with respect to 10,300 shares. Each individual’s holding isless than 1% of the Class A shares outstanding, other than Mr. JamesSherwood with 1.1%. The group total includes 362,250 Class A sharescovered by exercisable stock options held by directors and executive officersunder the Company’s 2000 Stock Option Plan which, together with the othershares beneficially owned by directors and executive officers, represents 2.1%of Class A shares outstanding.

 

As notedabove, Messrs. James Sherwood and Campbell may be deemed to sharebeneficial ownership of the 18,044,478 Class B shares held by Holdingsbecause they are also directors of that subsidiary, but those shares are notincluded in the following table.

 
| **Name**       | ** ** | **No. of Class  A Shares** | ** ** |
|----------------|------------|---------------------------------|------------|
|           |       |                            |       |
| D.P. Andrews   |       | 1,000                           |       |
| F. Boyen       |       | —                          |       |
| J.D.  Campbell |       | 1,000                           |       |
| R.V. Collins   |       | —                          |       |

 

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| **Name**                                                                                                 | ** ** | **No. of Class  A Shares** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
|                                                                                                     |       |                            |       |
| A.D.  Constant                                                                                           |       | —                          |       |
| E.S.  Hetherington                                                                                       |       | 1,000                           |       |
| J.B. Hurlock                                                                                             |       | 1,000                           |       |
| P. Isbell                                                                                                |       | 650                             |       |
| J.R. Lovejoy                                                                                             |       | 5,200                           |       |
| D.J. O’Sullivan                                                                                     |       | —                          |       |
| G.R. Rafael                                                                                              |       | —                          |       |
| N. Rusconi                                                                                               |       | —                          |       |
| J.B.  Sherwood                                                                                           |       | 453,195                         |       |
| S.M.C.  Sherwood                                                                                         |       | 14,400                          |       |
| N.R. Varian                                                                                              |       | 600                             |       |
| P. White                                                                                                 |       | 1,000                           |       |
| D.C.  Williams                                                                                           |       | —                          |       |
| All  directors and executive officers as a group (17 persons) including  exercisable stock option shares |       | 841,295                         |       |

 

**Voting Control of theCompany**

 

The followingtable lists the voting power held by the known beneficial owners of more than5% of the outstanding Class A or Class B common shares of the Companyand all directors and executive officers as a group. Those directors andexecutive officers of the Company who are deemed to be beneficial owners solelybecause they are directors of Holdings are not listed individually but are includedin the group.

 
| **Name**                                                                                                | ** ** | **No. of  Class A  Shares** | ** ** | **No. of  Class B   Shares** | ** ** | **Combined  Voting  Power** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
|                                                                                                    |       |                                  |       |                                        |       |                        |       |
| Holdings                                                                                                |       | —                                |       | 18,044,478                                  |       | 82.1                        | %          |
| Capital and SMALLCAP                                                                                    |       | 2,860,000                             |       | —                                      |       | 1.3                         | %          |
| Franklin Resources et al.                                                                               |       | 2,287,680                             |       | —                                      |       | 1.0                         | %          |
| Westport                                                                                                |       | 2,234,900                             |       | —                                      |       | 1.0                         | %          |
| All directors and executive officers as a group (17 persons)  including exercisable stock option shares |       | 841,295                               |       | 18,044,478                                  |       | 82.3                        | %          |

 

In general theholders of Class A and B common shares of the Company vote together as asingle class on most matters submitted to general meetings ofshareholders, with holders of Class B shares having one vote per share andholders of Class A shares having one-tenth of a vote per share. Each Class Bshare is convertible at any time into one Class A share. In all othermaterial respects, the Class A and B

 

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shares areidentical and are treated as a single class of common shares.

 

Holdings andthe Company’s directors and executive officers hold in total approximately 32%in number of the outstanding Class A and Class B shares havingapproximately 82% of the combined voting power of the outstanding common sharesof the Company for most matters submitted to a vote of the Company’sshareholders. Other shareholders, accordingly, hold approximately 68% in numberof the common shares having about 18% of combined voting power in the Company.

 

Under Bermudalaw, the Class B shares owned by Holdings (representing approximately 82%of the combined voting power) are outstanding and may be voted by thatsubsidiary. The investment by Holdings in Class B shares and the manner inwhich Holdings votes those shares are determined by the Board of Directors ofHoldings (two of whom are also directors and an officer of the Company)consistently with the exercise by those directors of their fiduciary duties tothe subsidiary. Holdings, therefore, has the ability to elect at least amajority of the members of the Board of Directors of the Company and to controlthe outcome of most matters submitted to a vote of the Company’s shareholders.

 

With respectto a number of matters which would tend to change control of the Company, itsmemorandum of association and bye-laws contain provisions that could make itharder for a third party to acquire OEH without the consent of the Company’sBoard of Directors. These provisions include supermajority shareholder votingprovisions for the removal of directors and for “business combination”transactions with beneficial owners of shares carrying 15% or more of the voteswhich may be cast at any general meeting of shareholders, and limitationson the voting rights of such 15% beneficial owners. Also, the Company’s Boardof Directors has the right under Bermuda law to issue preferred shares withoutshareholder approval, which could be done to dilute the share ownership of apotential hostile acquirer. Also, the rights to purchase series A juniorpreferred shares, one of which is attached to each Class A and Class Bcommon share of the Company, may have anti-takeover effects. SeeNote 10(c) to the Financial Statements. Although OEH managementbelieves these provisions provide for an opportunity to receive a higher bid byrequiring potential acquirers to negotiate with the Company’s Board ofDirectors, these provisions apply even if the offer may be consideredbeneficial by many shareholders.

 

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Informationresponding to Item 201(d) of SEC Regulation S-K is omitted because theCompany is a foreign private issuer.

 

**ITEM 13.****                                              Certain Relationships and Related Transactions**

 

Mr. JamesSherwood 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. Sherwooda right of first refusal to purchase the hotel in the event OEH proposes tosell it. The purchase price would be the offered sale price in the case of acash sale or the fair market value of the hotel, as determined by anindependent valuer, in the case of a non-cash sale. Similarly, if Mr. Sherwoodproposes to sell his apartment, he has granted OEH a right of first refusal topurchase it at fair market value or, at Mr. Sherwood’s option in the caseof a proposed cash sale, the offered sale price. In addition, the Company hasgranted an option to Mr. Sherwood to purchase the hotel at fair marketvalue if a change in control of the Company occurs.

 

Mr. JamesSherwood and the subsidiary of the Company which owns the Hotel Cipriani haveentered into an agreement under which he may rent his apartment to thehotel in return for 50% of the amounts paid by hotel guests for use of theapartment. In 2005, the hotel paid Mr. Sherwood $168,000 for the use ofhis apartment. Also, in any calendar year when the apartment is made availableto the hotel for 90 days or more when the hotel is open to guests, thehotel is obligated to clean, repair and insure the apartment at its expense andprovide Mr. Sherwood and his guests with all hotel services other thanfood and drink free of charge, including electricity, air conditioning,telephone rental, water and room services for the apartment. To the extentthat the apartment is made available to the hotel for less than 90 daysper year, Mr. Sherwood must pay a proportionate share of those expenses.

 

Mr. JamesSherwood and his two stepsons including Mr. Simon Sherwood own CapannelleS.r.l., a vineyard in the Chianti region of Italy that produces wine, olive oiland other products principally for public sale. In 2005, the vineyard sold$89,000 of products to OEH hotels at prices the same as its public prices.

 

Capannelle andthe Company’s subsidiary that owns the Villa San Michele near Florence, Italyhave entered into an agreement under which Capannelle makes the main house andother parts of the vineyard available to short-stay guests provided by thehotel. The incremental costs of Capannelle and Villa San Michele in servicingthe guests each year are

 

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netted againstthe amounts charged by the hotel for guest accommodation, food, beverage andother hotel services, and the net amount is shared equally between Capannelleand Villa San Michele. In 2005, Capannelle earned $21,000 from this arrangementwhich continues on a year-to-year basis unless terminated by either party.

 

See also Note16 to the Financial Statements (Item 8 above) regarding related partytransactions.

 

**Agreements with SeaContainers Ltd.**

 

In connectionwith the initial public offering of the Company’s Class A common shares inAugust 2000 and in anticipation of the separation of the two companies,OEH and SCL entered into the following agreements which remain in force:

 

*ServicesAgreement*

 

SCL and OEHentered into a services agreement covering the provision to OEH of variousservices, including financial, legal, accounting, corporate executive, publiccompany, human resources administration, insurance, pension benefits andinformation technology. OEH also occupies space in offices leased by variousSCL subsidiaries in London and overseas. For these services, OEH pays a feeplus reimbursements approximating the costs of SCL in providing the services.

 

OEH may terminatethese arrangements on one year’s notice. OEH has begun providing itself many ofthe services previously provided by SCL under the services agreement, andexpects to complete this process during 2006. Accordingly, at the end of 2005,OEH gave SCL the one year’s termination notice.

 

*TaxSharing Agreement*

 

OEH enteredinto a tax sharing agreement with SCL that allocates responsibilities for taxmatters between the two companies for periods prior to the separation of OEHand SCL. In general, OEH will continue to be responsible for taxes of itselfand its subsidiaries after the separation from SCL, and SCL has agreed toindemnify OEH for all taxes attributable to the separation itself.

 

**ITEM 14.****                                              Principal Accountant Fees and Services**

 

The followingtable presents the fees of Deloitte & Touche LLP, OEH’s independentauditor, for audit and permitted non-audit services in 2005 and 2004:

 

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| ** **          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit fees          |       | $        | 1,736,000  |     | $          | 1,614,000 |   |
| Audit-related  fees |       | 217,000  |       | 155,000  |       |
| Tax fees            |       | 445,000  |       | 525,000  |       |
| All other  fees     |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Total               |       | $        | 2,398,000  |     | $          | 2,294,000 |   |

 

Audit servicesconsist of work performed in connection with the audit of financial statements andmanagement’s assessment of the effectiveness of internal control over financialreporting for each fiscal year and in the review of financial statementsincluded in quarterly reports during the year, as well as work normally done bythe independent auditor in connection with statutory and regulatory filings,such as statutory audits of non-U.S. subsidiaries, and consents and comfortletters for SEC registration statements.

 

Audit-relatedservices consist of assurance and related services that are normally performedby the independent auditor and that are reasonably related to the audit orreview of financial statements but are not reported under audit services,including due diligence reviews in potential transactions and audits of benefitplans.

 

Tax servicesconsist of all services performed by the independent auditor’s tax personnel,except those services specifically related to the audit or review of financialstatements, and include fees in the areas of tax return preparation andcompliance and tax planning and advice.

 

Other servicesconsist of those services permitted to be provided by the independent auditorbut not included in the other three categories. There were none provided in2005 and 2004.

 

The AuditCommittee of the Board of Directors of the Company has established a policy topre-approve all audit and permitted non-audit services provided by theindependent auditor. Prior to engagement of the auditor for the next year’saudit, management and the auditor submit to the Committee a description of theaudit and permitted non-audit services expected to be provided during that yearin each of four categories of services described above, together with a feeproposal for those services. Prior to the engagement of the independentauditor, the Audit Committee considers with management and the auditor andapproves (or revises) both the description of audit and permitted non-auditservices proposed and the budget for those services. If circumstances ariseduring the year when it becomes necessary to engage the independent auditor foradditional services not contemplated

 

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in theoriginal pre-approval, the Audit Committee at its regularly scheduled meetingsrequires separate pre-approval before engaging the independent auditor. Toensure prompt handling of unexpected matters, the Committee may delegatepre-approval authority to one or more of its members who report anypre-approval decisions to the Committee at its next scheduled meeting. For 2005and 2004, all of the audit and permitted non-audit services described abovewere pre-approved under the policy.

 

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**PART IV**

 

**ITEM15.****                                              Exhibits and Financial Statement Schedules**

 
| ** **                                                                                                                                 | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                                       |       |       |
| 1.  Financial  Statements                                                                                                             |       |       |
|                                                                                                                                       |       |       |
| Reports of  independent registered public accounting firm                                                                                  |       |       |
| Consolidated  financial statements - years ended December 31, 2005, 2004 and 2003:                                                    |       |       |
| Balance sheets (December 31,  2005 and 2004)                                                                                          |       |       |
| Statements  of operations                                                                                                                  |       |       |
| Statements  of cash flows                                                                                                                  |       |       |
| Statements  of shareholders’ equity                                                                                                   |       |       |
| Notes to  financial statements                                                                                                             |       |       |
|                                                                                                                                       |       |       |
| 2.  Financial  Statement Schedule                                                                                                     |       |       |
|                                                                                                                                       |       |       |
| Schedule II - Valuation  and qualifying accounts (years ended December 31, 2005, 2004 and 2003)                                  |       |       |
|                                                                                                                                       |       |       |
| 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–Valuationand Qualifying Accounts

 
| **Column A**                        | ** ** | **Column B**                          | ** ** | **Column C**                         | ** ** | **Column D**                    | ** ** | **Column E**   | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                          | ** ** | ** **                            | ** ** | **Additions**                        | ** ** | ** **                      | ** ** | ** **     | ** ** |
| **Description**                     | ** ** | **Balance  at  beginning  of period** | ** ** | **Charged  to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions** | ** ** | **Balance  at  end  of period** | ** ** |
|                                |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Year ended December 31,  2005: |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Allowance  for doubtful accounts    |       | $                                     | 1,027,000  |                                 | $          | 164,000                         |       | $              | (111,000   | )(2) | $ | 88,000 | (1) | $ | 980,000 |   |
|                                |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Year ended December 31,  2004: |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Allowance  for doubtful accounts    |       | $                                     | 976,000    |                                 | $          | 112,000                         |       | $              | 60,000     | (2) | $ | 121,000 | (1) | $ | 1,027,000 |   |
|                                |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Year ended December 31,  2003: |       |                                  |       |                                 |       |                            |       |           |       |   |   |
| Allowance  for doubtful accounts    |       | $                                     | 592,000    |                                 | $          | 282,000                         |       | $              | 132,000    | (2) | $ | 16,000 | (1) | $ | 976,000 |   |
|                                |       |                                  |       |                                 |       |                            |       | $              | (14,000    | )(3) |   |   |   |   |   |   |
|                                     |            |                                       |            |                                      |            |                                 |            |                |            |  |  |  |  |  |  |  |  |

 

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(1)                                  Bad debts written off, net of recoveries.

 

(2)                                  Foreign currency translation adjustments.

 

(3)                                  Sale of subsidiary company.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| Dated: March 3,  2006 | ORIENT-EXPRESS  HOTELS LTD. |
|----------------------------|-----------------------------|
|                       |                        |
|                       |                        |
| ** **                 | ** By:**               | **/s/ Simon M.C.  Sherwood** | ** ** |
|                       |                        | Simon M.C. Sherwood |   |
|                       |                        | President |   |
|                       |                        | (Co-Principal Executive Officer) |   |

 

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Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.

 

Dated: March 3, 2006

 
| **Name**                                   | ** ** | **Title**                                                | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                               | ** ** |
| ** **                                 | ** ** | ** **                                               | ** ** |
|   /s/  John D. Campbell          |       | Director                                                 |       |
|  John D. Campbell                     |       |                                                     |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
|   /s/  James B. Hurlock          |       | Director                                                 |       |
|  James B. Hurlock                     |       |                                                     |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
| /s/ J. Robert Lovejoy                      |       | Director                                                 |       |
| J. Robert Lovejoy                          |       |                                                     |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
|   /s/  Daniel J. O’Sullivan |       | Director                                                 |       |
|  Daniel J. O’Sullivan            |       |                                                     |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
| /s/ Georg R. Rafael                        |       | Director                                                 |       |
| Georg R. Rafael                            |       |                                                     |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
| /s/ James B. Sherwood                      |       | Chairman and  Director                                   |       |
| James B. Sherwood                          |       | (Co-Principal  Executive Officer)                        |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
| /s/ Simon M.C. Sherwood                    |       | President  and Director                                  |       |
| Simon M.C. Sherwood                        |       | (Co-Principal  Executive Officer)                        |       |
|                                       |       |                                                     |       |
|                                       |       |                                                     |       |
| /s/ Paul M. White                          |       | Vice President-Finance  and                              |       |
| Paul M. White                              |       | Chief  Financial Officer  (Principal Accounting Officer) |       |

 

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**EXHIBIT INDEX**

 

 
| **Exhibit  No.**                                                                                                                                                                                                                                                                                                                                             | ** ** | **Incorporated by  Reference to**                                                     | ** ** | **Description**                                                                                                                                                                                            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                         |       |                                                                                            |       |                                                                                                                                                                                                       |       |
| 3.1                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 3.1 to Form S-1 Registration Statement No.  333-12030.                        |       | Memorandum of Association and Certificate of Incorporation of Orient-  Express Hotels Ltd.                                                                                                                 |       |
| 3.2                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 3.2 to Form S-1 Registration Statement No.  333-12030.                        |       | Bye-Laws of Orient-Express Hotels Ltd.                                                                                                                                                                     |       |
| 4.1                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 4.2 to Form S-1 Registration Statement No.  333-12030.                        |       | Rights Agreement between Orient-Express Hotels Ltd. and Fleet  National Bank, as Rights Agent, dated June 1, 2000.                                                                                    |       |
| 4.2                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 10 to June 30, 2003 Form 10-Q Quarterly Report  (File No. 1-16017). |       | Agreement for €135 Million Term and Multi-Currency Revolving Credit  Facility dated July 1, 2003 between the Company and Barclays Bank PLC.                                                      |       |
|                                                                                                                                                                                                                                                                                                                                                         |       |                                                                                            |       |                                                                                                                                                                                                       |       |
| 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                                                                                                                                                                                                                                                                                                                                                         |       | Exhibit 10.1 to Form S-1 Registration Statement No.  333-12030.                       |       | Orient-Express Hotels Ltd. 2000 Stock Option Plan.                                                                                                                                                         |       |
| 10.2                                                                                                                                                                                                                                                                                                                                                         |       | Exhibit 10.2 to 2004 Form 10-K Annual Report (File No. 1-16017)                       |       | Orient-Express Hotels Ltd. 2004 Stock Option Plan.                                                                                                                                                         |       |
| 10.3                                                                                                                                                                                                                                                                                                                                                         |       | Exhibit 10.3 to 2004 Form 10-K Annual Report (File No. 1-16017)                       |       | Amended and Restated Agreement Regarding Hotel Cipriani Interests  dated February 8, 2005 between James B. Sherwood, Hotel Cipriani S.r.l.  and Orient- Express Hotels Ltd.                           |       |
| 10.4                                                                                                                                                                                                                                                                                                                                                         |       | Exhibit 10.4 to 2004 Form 10-K Annual Report (File No. 1-16017)                       |       | Amended and Restated Right of First Refusal and Option Agreement  Regarding Indirectly Held Hotel Cipriani Interests dated February 8,  2005 between James B. Sherwood and Orient-Express Hotels Ltd. |       |

 

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| **Exhibit  No.** | ** ** | **Incorporated by  Reference to**                                      | ** ** | **Description**                                                                                                                           | ** ** |
|------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                                                       | ** ** | ** **                                                                                                                                | ** ** |
| 10.5             |       | Exhibit 10.4 to Form S-1 Registration Statement No.  333-12030.        |       | Agreement dated February 18, 1982 between James B. Sherwood and  Hotel Cipriani S.p.A.                                               |       |
| 10.6             |       | Exhibit 2.1 to Form S-1 Registration Statement No.  333-12030.         |       | Services Agreement dated August 1, 2000 among Sea Containers  Ltd., Sea Containers Services Ltd. and Orient-Express Hotels Ltd.      |       |
| 10.7             |       | Exhibit 10.6 to 2001 Form 10-K Annual Report (File No. 1-16017).  |       | Amendment to Services Agreement dated January 1, 2001 (Exhibit 10.6  above).                                                    |       |
| 10.8             |       | Exhibit 2.3 to Form S-1 Registration Statement No.  333-12030.         |       | Tax Sharing Agreement dated August 1, 2000 between Sea  Containers Ltd. and Orient-Express Hotels Ltd.                               |       |
| 10.9             |       | Exhibit 10.10 to 2003 Form 10-K Annual Report (File No. 1-16017). |       | Contract of Special Partnership or Joint Venture dated August 1,  2002 between Alberghiera Fiesolana S.p.A. and Capannelle S.r.l.    |       |
| 11               |       |                                                                             |       | Statement of computation of per share earnings.                                                                                           |       |
| 12               |       |                                                                             |       | Statement of computation of ratios.                                                                                                       |       |
| 14               |       | Exhibit 14 to 2003 Form 10-K Annual Report (File No.  1-16017).        |       | Code of Business Practices for Principal Executive, Financial and  Accounting Officers.                                                   |       |
| 21               |       |                                                                             |       | Subsidiaries of Orient- Express Hotels Ltd.                                                                                               |       |
| 23               |       |                                                                             |       | Consent of Deloitte & Touche LLP relating to Form S-8  Registration Statements No. 333-58298 and No. 333- 129152. |       |
| 31               |       |                                                                             |       | Rule 13a-14(a)/15d-14(a) Certifications.                                                                                             |       |
| 32               |       |                                                                             |       | Section 1350 Certification.                                                                                                          |       |
| 99               |       | Exhibit 99 to 2004 Form 10-K Annual Report (File No.  1-16017).        |       | Corporate Governance Guidelines of Orient- Express Hotels Ltd.                                                                            |       |

 

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