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

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2001

or

For the transition period from                              to                             

Commission file number 1-16017

ORIENT-EXPRESS HOTELS LTD.
(Exact name of registrant as specified in its charter)

41 Cedar Avenue, P.O. Box HM 1179
Hamilton HM EX, Bermuda
(Address of principal executive offices)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable. See Preliminary Notes on page 1.)

        As of March 15, 2002, 28,340,601 Class A common shares and 20,503,877 Class B common shares of Orient-Express Hotels Ltd. were outstanding (including 18,044,478 Class B shares accounted for as owned by subsidiaries of Orient-Express Hotels Ltd. (see Note 9(e) to the Financial Statements (Item 8)) and 16,429,201 Class A shares and 2,459,399 Class B shares owned by Sea Containers Ltd.). The aggregate market value of the Class A common shares held by non-affiliates of the registrant was approximately $220,000,000.

DOCUMENTS INCORPORATED BY REFERENCE: None.

        Preliminary Notes:    Orient-Express Hotels Ltd. is incorporated in the Islands of Bermuda and is a "foreign private issuer" as defined in Rule 3b-4 under the Securities Exchange Act of 1934 (the "1934 Act") and in Rule 405 under the Securities Act of 1933. As a result, it is eligible to file this annual report pursuant to Section 13 of the 1934 Act on Form 20-F (in lieu of Form 10-K) and to file its interim reports on Form 6-K (in lieu of Forms 10-Q and 8-K). However, Orient-Express Hotels Ltd. elects to file its annual and interim reports on Forms 10-K, 10-Q and 8-K, and does so as those forms apply to foreign private issuers.

        Pursuant to Rule 3a12-3 under the 1934 Act regarding foreign private issuers, the proxy solicitations of Orient-Express Hotels Ltd. are not subject to the disclosure and procedural requirements of Regulation 14A under the 1934 Act, and transactions in its equity securities by its officers, directors and significant shareholders are exempt from Section 16 of the 1934 Act.

        Forward-looking statements concerning the operations, performance, financial condition, plans and prospects of Orient-Express Hotels Ltd. and its subsidiaries are based on management's current expectations and are subject to various risks and uncertainties. Actual results could differ materially from those anticipated in the statements due to a number of factors, including those described in Item 1—Business, Item 7—Management's Discussion and Analysis, Item 7A—Quantitative and Qualitative Disclosures about Market Risk, and Item 12—Security Ownership of Certain Beneficial Owners and Management below.

PART I

ITEM 1. Business

        Orient-Express Hotels Ltd. (the "Company" and, together with its subsidiaries, "OEH") is a hotel and leisure group focused on the luxury end of the leisure market. It currently owns and/or operates 30 highly individual deluxe hotels worldwide, four restaurants (one of which is a local group of four outlets), six tourist trains, and a river cruiseship. OEH acquires only very distinctive properties in areas of outstanding cultural, historic or recreational interest in order to provide luxury lifestyle experiences for the elite traveler. The locations of OEH's various properties are shown in the map above, numbering 37 because the Hotel Cipriani and Palazzo Vendramin are both in Venice and the Hotel Splendido and Splendido Mare are both in Portofino, while Gametrackers in Botswana operates three separate safari lodges. These seven units bring the total to 41 properties.

        Hotels and restaurants represent the largest segment of OEH's business, contributing 84% of revenue in 2001. Tourist trains and cruises accounted for the remaining 16%. OEH's worldwide portfolio of hotels currently consists of 2,900 individual guest rooms and multiple-room suites, each known as a key. Those in 2001 achieved an average daily room rate, or ADR, of $276. A majority of OEH's customers are leisure travelers, with approximately 55% of guests in 2001 originating from the United States, 32% from Europe and the remaining 13% from elsewhere in the world.

        Revenue, operating earnings and identifiable assets of OEH in 1999, 2000 and 2001 for its business segments and geographic areas are presented in Note 13 to the Financial Statements (Item 8 below).

        At the present time, OEH is a majority-owned subsidiary of Sea Containers Ltd. See "OEH's Relationship with Sea Containers Ltd." below.

Owned Hotels—Europe

Italy

        The Hotel Cipriani and Palazzo Vendramin—102 keys—in Venice were built for the most part in the 1950s and are located on three acres on Giudecca Island opposite the Piazza San Marco. Most of their rooms have views over the Venetian lagoon. Features include fine cuisine in three indoor and outdoor restaurants, gardens and terraces encompassing an Olympic-sized swimming pool, a tennis court and a private boat service to the Piazza San Marco. OEH has added rooms to these properties over the years often by combining smaller rooms into suites. OEH acquired in 2000 a building adjacent to the hotel, which provides banquet and meeting rooms and frees up space in the main hotel to add eight keys, one of which is currently under construction in 2002.

        The Hotel Splendido and Splendido Mare—84 keys—overlook picturesque Portofino harbor on the Italian Riviera. Set on four acres, the main hotel was built in 1901 and is surrounded by gardens and terraces which include a swimming pool and tennis court. There are two open-air and enclosed restaurants as well as banquet/meeting rooms, and a shuttle bus links the two parts of the resort. OEH acquired the Splendido Mare during 2001, having previously operated it under a long-term lease.

        The Villa San Michele—45 keys—is located in Fiesole, a few minutes drive from Florence. Originally built as a monastery in the 15th century with a façade attributed to Michelangelo, it has stunning views over the historic center of Florence and the Arno River Valley. OEH has remodelled and expanded the guest accommodation to luxury standards, including the addition of a swimming pool. A shuttle bus service is provided to the center of Florence. The property occupies ten acres and OEH is currently adding eight new keys in 2002.

        These Italian properties are seasonal and close for varying periods during the winter.

        OEH owns and is redeveloping the Hotel Caruso in Ravello on three hill-top acres overlooking the Amalfi coast near Naples. Parts of the property date back to the 11th century. OEH has received business grants from the European Union to help with this redevelopment and, assuming all government planning reviews are completed soon, is targeting to re-open the hotel in 2003.

Portugal

        Reid's Palace Hotel—164 keys—is the most famous hotel on the island of Madeira and has been substantially refurbished by OEH in recent years. This resort is situated on ten acres of semitropical gardens on a cliff top above the sea and the bay of Funchal, the main port city. Opened in 1891, the hotel has four restaurants and spacious conference facilities. Leisure and sports amenities include two swimming pools, a third tide-filled pool, tennis courts, ocean water sports and access to two championship golf courses. It is particularly well known in the United Kingdom and German leisure markets and has year round appeal, serving both winter escapes to the sun and regular summer holidays. Later in 2002, OEH plans to start development of a new spa and conference center at the hotel.

        The Hotel Quinta do Lago—141 keys—is located near Faro in the Algarve region, an area well known as a premier European golf destination and also popular for more traditional summer holidays because the Rio Formosa National Park and Atlantic Ocean beaches are within walking distance. Opened in 1988, the hotel occupies eight acres and features ocean views, two restaurants, a health club, indoor and outdoor swimming pools, tennis courts and extensive gardens as well as access to nearby championship golf courses. OEH is planning to add a 21-key extension to the property.

        OEH owns the Lapa Palace Hotel—109 keys—in the embassy district of Lisbon, near the city center and overlooking the Tagus River. The main part of the hotel was originally built in the 1870s as the palace of a Portuguese noble family. It opened as a luxury hotel in 1992 after extensive conversion and expansion, including the addition of conference facilities and underground car parking. The hotel is set amid gardens with ornamental fountains and both indoor and outdoor swimming pools, occupying a total of three acres. In 2001, 15 keys were added. OEH owns an adjoining parcel of land suitable for further development and has applied for planning permission to add 50 more keys.

France

        Hôtel de la Cité—61 keys—is located in Carcassonne, about an hour's drive from Toulouse. This beautiful walled medieval town attracts three million tourist visitors per year. The hotel is situated on the square of Basilica Saint-Nazaire, the town's main architectural attraction, and incorporates one of the 50 watch towers in Carcassonne's ancient fortifications. Opened in 1909, it features two restaurants, gardens with a swimming pool and a conference center, occupying two acres altogether. OEH completed extensive refurbishment work during 2001 to upgrade the property and reposition it in the higher end of the hotel market. The hotel also owns and operates for guests on day excursions a canal barge in the nearby Canal du Midi.

Spain

        In February 2002, OEH acquired La Residencia—63 keys—located in the charming village of Deià on the rugged northwest coast of the island of Mallorca in the Mediterranean. The price was approximately $40,000,000 and included purchase of Le Manoir aux Quat' Saisons described in the next paragraph and a 50% interest in four Le Petit Blanc restaurants in England described under "Restaurants" below. The core of La Residencia was created from two 16th and 17th century country houses set on a hilltop site of 30 acres. The hotel features three restaurants including the gourmet El Olivio, one of the foremost on the island, as well as a large outdoor swimming pool, two tennis courts and a spa with an indoor pool. Mallorca is a popular tourist destination with over seven million visitors each year.

England

        Also in February 2002, OEH acquired Le Manoir aux Quat' Saisons—32 keys—in Oxfordshire about a hour's drive west of London. The main part of the hotel is a 15th century manor house set in 27 acres of gardens. The property has been developed by Raymond Blanc, one of Britain's most famous chefs, and the hotel's restaurant has two stars in the current Michelin Guide, placing it among the best in the British Isles. Mr. Blanc has given a long-term commitment to remain the chef at the hotel.

Owned Hotels—North America

United States

        The Windsor Court—324 keys—opened in 1984 and is located in the central business district of New Orleans near the French Quarter and the Mississippi riverfront. Harrah's operates the only land-based casino in Louisiana across the street from the hotel. Each room has panoramic views over the river or the city. Facilities include three restaurants and lounges, a rooftop ballroom, several other banquet and meeting rooms, an outdoor swimming pool and a health club. The hotel's interior décor features a collection of historic European art and antique furniture. In late 2000, a new luxury hotel opened nearby which increased competition, but management believes the Windsor Court will maintain its prominence in the New Orleans market.

        In May 1999, OEH acquired Keswick Hall—48 keys. Originally a private home dating from 1912, the hotel is located in the rolling countryside of central Virginia, near Charlottesville and Monticello. It is popular for weekend breaks and business meetings because of the surrounding area and the adjacent Keswick Club which features several tennis courts, an Olympic-sized swimming pool and an Arnold Palmer golf course which OEH operates under lease. OEH has an option to purchase the golf course which it plans to exercise in 2002. Zoning permits have also been issued to allow building up to 75 new keys. Including the golf course, the total site occupies 600 acres.

        In the Keswick Hall transaction, OEH also acquired in May 1999 the Inn at Perry Cabin—41 keys —which was built in 1812 as a country inn and is located in St. Michaels, Maryland on the eastern shore of Chesapeake Bay. Set on 25 shoreside acres that include a health club, an indoor swimming pool and boating and fishing on the Bay, it is an attractive vacation spot, particularly for the Washington, D.C. market. Like Keswick Hall, the Inn at Perry Cabin has extensive grounds for expansion. A major renovation of the hotel with the addition of 40 keys and a conference facility is currently underway for completion in 2002.

Caribbean

        OEH owns La Samanna—81 keys—located on the island of St. Martin in the French West Indies. Built in 1973, the hotel has two restaurants and comprises 16 buildings on ten acres of land along a 4,000-foot beach. Amenities include a freshwater swimming pool, tennis courts, fitness and conference centers, boating and ocean water sports. The hotel is currently expanding its spa facilities, and owns an adjacent 45 acres of land available for future development, starting with a planned 40 additional keys. The hotel is open most of the year, seasonally closing during the autumn months. The hotel has also been closed for short periods due to hurricane damage in the past, and is insured for damage and business interruption relating to this risk.

        During the first quarter of 1999, OEH sold at a $1,300,000 gain the Windermere Island Club in the Bahamas, which its predecessor company had acquired in 1983. The property had been closed for several years pending sale.

Mexico

        In March 2002, OEH acquired for about $7,500,000 a 75% equity interest in Maroma Resort and Spa—57 keys—on Mexico's Caribbean coast 40 miles south of Cancun. OEH will manage the hotel with continuing support from the seller, who will retain a 25% interest over which OEH has a right of first refusal to acquire in certain circumstances. Of the total keys, 21 are under construction for completion in 2002. The resort opened in 1995 and has 25 acres of land, including some for future expansion, along a 750-foot beach with the Cozumel barrier reef offshore where guests may fish, snorkel and scubadive. Important Myan archaeological sites are also nearby. Rooms are arranged in six low-rise villas and there are extensive spa facilities. Cancun airport provides excellent international flight connections to the hotel.

Owned Hotels—Rest of the World

South America

        Built in the 1920s on a three-acre site facing Copacabana Beach near the central business district of Rio de Janeiro, Brazil, the Copacabana Palace Hotel—226 keys—is one of the most famous in South America and features two gourmet restaurants, several spacious function and meeting rooms including a 500-seat theater, a large swimming pool, health club and a roof-top tennis court and pool. Future expansion is planned subject to obtaining government planning permission. In mid-2001, a new luxury hotel opened nearby which increased competition, but management believes the Copacabana Palace will maintain its prominence in the local Rio market.

        In January 2001, OEH acquired the Miraflores Park Plaza—81 keys—in an exclusive residential district of Lima, Peru surrounded by parkland and looking out at the Pacific Ocean, yet near the commercial and cultural center of the city. Opened in 1997, the hotel has a business center for guests, a large ballroom, outdoor pool, and health and beauty facilities, and occupies about one acre of land.

Southern Africa

        The Mount Nelson Hotel—226 keys—in Cape Town, South Africa is an historic property opened in 1899 with beautiful gardens and pools and has long enjoyed a reputation as one of the foremost hotels on the African continent. It stands just below Table Mountain and is within walking distance of the main business, civic and cultural center of the city. The hotel has a ballroom, two swimming pools, tennis courts and a fitness center, all situated on ten acres of grounds and gardens.

        OEH developed the Westcliff Hotel—118 keys—in Johannesburg, South Africa as the only garden hotel in the city, perched on six hillside acres with views over the zoo and park. Its resort amenities include two swimming pools, a tennis court and health club, and the hotel attracts business guests because of its proximity to the city center. It opened in 1998. Part of the site is available for future development including a banquet and conference center planned to be built during 2002.

        OEH owns Gametrackers—39 keys total—comprising three separate safari lodges in Botswana called Khwai River Lodge, Eagle Island Camp and Savute Elephant Camp. Established in 1971, OEH leases the lodge sites in the Okavango River delta and nearby game reserves, where some of the best wildlife in Africa can be observed from open safari vehicles or boats. Each camp has 12 to 15 twin-bedded deluxe tents, and guests travel between the camps by light aircraft. Boating, fishing, hiking and swimming are offered at the various sites.

Australia

        In March 2000, OEH acquired the Observatory Hotel—96 keys—in Sydney, and Lilianfels Hotel—86 keys—in the Blue Mountains National Park west of Sydney. OEH managed the Observatory Hotel for many years and the contract had provisions which helped it acquire the property at an attractive price. Within walking distance of the central business district of Sydney, this hotel opened in 1993 and has two restaurant and lounge areas, extensive meeting and banquet rooms, a health club with indoor swimming pool, a tennis court and a large parking garage on a site of about one acre.

        The Lilianfels Hotel is named after the original estate house, dating from 1890, which has been refurbished as the hotel's gourmet restaurant. The main hotel, built in 1992, has a second restaurant and conference facilities. The resort's four acres of grounds encompass an indoor swimming pool, health club and spa, tennis court and extensive gardens with views over the Blue Mountains. There is expansion land at this property including adjoining plots acquired in 2001.

French Polynesia

        In April 2001, OEH acquired the Bora Bora Lagoon Resort—80 keys—which opened in 1993 and has bungalows situated over the lagoon water plus additional beach and garden bungalows, all built in traditional Tahitian style on a 12-acre site. Guests dine in two restaurants and enjoy extensive water sports and tennis. A major renovation program at this property is currently underway in 2002. OEH previously managed the resort under contract. In 1999, when the owner was considering a sale, OEH agreed to sell back to the owner its contractual right to an early termination fee, which generated a $2,500,000 gain that year.

Hotel Management Interests

        The Charleston Place—442 keys—is located in the heart of historic Charleston, South Carolina, a popular destination for tourists, groups and business meetings. Opened in 1986, the hotel has two restaurants, extensive banqueting and conference space including a grand ballroom, a health club with swimming pool and tennis court, and 27 retail shops leased to third parties. The hotel also owns the adjacent historic Riviera Theater recently remodelled as an additional conference facility and five retail shops. OEH has a 19.9% ownership interest in the hotel, manages the property under a long-term contract, and receives interest on partnership loans which it assumed in the original transaction.

        In March 1999, OEH formed a 50/50 joint venture with local investors in Peru, one of the most interesting and promising tourist locations in South America. Under exclusive management of OEH, this joint venture operates the following two hotels under 20-year renewable leases which commenced in 1995.

        The Monasterio Hotel—123 keys—is located in the ancient Inca capital of Cusco, the most important tourist destination in Peru. OEH has embarked on a program to upgrade and expand the property substantially and in that connection has a long-term lease on the adjoining Nazarenas convent, a total site of about three acres. The hotel was originally built as a Spanish monastery in the 16th century and was converted to hotel use in 1995. The deluxe guest rooms and suites and two restaurants are arranged around open-air cloisters. Because of Cusco's high altitude, special oxygenation has been added to the ventilation system of some of the refurbished rooms.

        The Machu Picchu Sanctuary Lodge—31 keys—is the only hotel in the vicinity of the famous mountaintop Inca ruins. OEH has refurbished all of the rooms to a high standard. The joint venture also has a lease on a seven-acre site by the river at the foot of the ruins, close to the town where tourists arrive by train, which OEH plans to develop as a larger hotel, but this is unlikely to be open for several years given the time required for permits, design and construction.

Restaurants

        OEH owns '21' Club, the famous landmark restaurant in New York City. Originally a speakeasy in the 1920s, this restaurant is open to the public, occupies three brownstone buildings in midtown Manhattan and features gourmet American cuisine. It serves à la carte meals in the bar restaurant and also has a number of banqueting rooms used for functions. It was during Prohibition that '21's famous secret wine cellar was built, with its two-ton door operated by placing an 18-inch wire into a tiny key hole in a certain brick. During 2002, OEH plans to add a second à la carte restaurant in one of the banquet rooms.

        OEH also has a 49% interest in Harry's Bar, a private dining club in the Mayfair area of London. The majority partner manages the restaurant with assistance from OEH's Italian hotels. Its menu features gourmet Italian cuisine. OEH has a right of first refusal to acquire the remaining interest in this property under certain conditions.

        OEH has bought the contents and name of the renowned La Cabaña steak house in Buenos Aires and a suitable site in the city to re-establish the restaurant in 2003 after planned refurbishment.

        As noted under "Owned Hotels—Europe" above, OEH acquired two hotels in Spain and England in February 2002 that included purchase of a 50% interest in a group of four restaurants each called Le Petit Blanc in Oxford, Cheltenham, Birmingham and Manchester, England. Developed by Raymond Blanc, the chef at Le Manoir aux Quat' Saisons who is the other 50% owner, they offer his French cuisine reasonably priced in contemporary brasserie settings. The four sites are leased.

Tourist Trains and Cruises

        OEH's principal European tourist trains, called the Venice Simplon-Orient-Express, operate in two parts in a regularly scheduled overnight service between London and Venice and on short excursions in southern England. OEH owns 30 railway cars originally used on the historic "Orient-Express" and other famous European trains. All have been refurbished in original 1920s/1930s décor and meet modern safety standards. The services offered are a continuation of, and are marketed as, the Orient- Express trains of pre-World War II years. One train is based in Great Britain composed entirely of Pullman cars with a capacity for up to 250 passengers. The other on the Continent is made up of Compagnie Internationale des Wagons-Lits et du Tourisme sleeping cars and day coaches with capacity for up to 180 passengers. They operate once or twice weekly principally between London and Venice from March to November each year via Paris, Zurich and Innsbruck on a scenic route through the Alps. Passengers travel under the English Channel by bus on the Eurotunnel shuttle train. Occasional trips are also made from time to time to Rome, Prague and Istanbul and other European destinations.

        The British Pullman cars of Venice Simplon-Orient-Express operate all year, originating out of London on short excursions to places of historic or scenic interest in southern England, including some overnight trips when passengers stay at local hotels. Both the British and Continental trains are available for private charter.

        In June 2000, OEH launched a new tourist train, Northern Belle, offering day trips and charter service in the north of Britain. It builds on the success of OEH's British Pullman business, which focuses on the south of England around London. The train comprises six dining cars elegantly decorated to be reminiscent of old British "Belle" trains of the 1930s, plus related service cars, and can carry up to 250 passengers. Full course gourmet meals are served on board and passengers stay in local hotels on overnight itineraries.

        In September 1999, PeruRail was formed as a 50/50 joint venture with Peruvian partners to operate a large part of the state-owned Peruvian railways under a 30-year franchise agreement with a possible extension for a further 30 years. In return for the franchise, the joint venture pays the Peruvian government a fee related to traffic levels which can be offset for ten years either fully or partially against investment in track improvements. The 70-mile Cusco-Machu Picchu line serves mainly tourists visiting the Inca ruins. This is the principal access to the famous Inca ruins because there is no convenient road. A second rail line runs from Cusco to Matarani on the Pacific Ocean via Puno on Lake Titicaca and Arequipa and principally serves freight traffic at present. The Cusco-Machu Picchu line connects two of OEH's Peruvian hotels allowing creation of inclusive packages. During 2001, OEH began operating a deluxe daytime tourist train service on the Cusco-Puno route through the High Andes mountains using refurbished PeruRail passenger cars, and a 1930s steamer included in the franchise on day excursions for tourists on Lake Titicaca.

        OEH's other luxury trains are the Eastern & Oriental Express in Southeast Asia, and the Great South Pacific Express in eastern Australia. Both are operated under exclusive management contracts with OEH having a 25% shareholding in the Eastern & Oriental Express owning company and a 10% shareholding in the Great South Pacific Express operating company.

        The Eastern & Oriental Express makes one round trip each week between Singapore, Kuala Lumpur and Bangkok. The journey lasts about 48 hours each way and includes two nights on board and side trips to Penang in Malaysia and the River Kwai in Thailand. Some overnight trips are also made from Bangkok to Chiang Mai in northern Thailand. Originally built in 1970, the 24 cars were substantially rebuilt to an elegant oriental style of décor and fitted with modern facilities such as air-conditioning and private bathrooms. The train is made up of sleeping cars with three types of berths, three restaurant cars, a bar car and an open air observation car and can carry 125 passengers. Like the Venice Simplon-Orient-Express, the Eastern & Oriental Express is available for charter by private groups.

        The Great South Pacific Express which commenced operations in May 1999 comprises 21 sleeping, restaurant, bar and observation cars decorated in a late 19th century style with capacity for 100 passengers. These are owned by Queensland Rail and leased to the operating company. Like the Eastern & Oriental Express tourist train, the Great South Pacific Express train is fully air-conditioned and the three types of passenger compartments are well appointed with private bathrooms. Regularly scheduled one or two night itineraries originating out of Brisbane operate north to Cairns in Queensland and south to Sydney in New South Wales. The northern route includes stopovers for passengers to visit the Great Barrier Reef and the Kurunda rainforest. The southern route includes stopovers in the Hunter Valley wine region and the Blue Mountains in New South Wales and a visit to Canberra, Australia's capital city.

        OEH owns and operates a deluxe river cruiseship on the Irrawaddy River in central Burma, or Myanmar, called the Road to Mandalay. The ship was a Rhine River cruiser built in 1964 which OEH bought and refurbished. It features 66 air-conditioned cabins with private bathrooms, spacious restaurants and lounge areas and a canopied sun deck with swimming pool. The ship travels between Mandalay and Pagan up to eight times each month and carries 126 passengers who enjoy sightseeing along 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 to different destinations, such as to Bhamo in the north of the country close to the China border. The ship does not operate in midsummer due to the heat and occasionally when the water level of the Irrawaddy River falls below normal levels due to lack of rainfall.

Management Strategies

        OEH has benefited in recent years from trends and developments favorably impacting the world hotel, travel and leisure market, including strong demand growth trends in the luxury hotel market in many parts of the world, increased travel and leisure spending by consumers, favorable demographic trends in relevant age and income brackets of U.S. and European populations, and increased online travel bookings. These trends suffered a setback in 2001 due to a slowing world economy and the shock of terrorist attacks on September 11 followed by the war in Afghanistan. Management believes that the public's confidence in world travel will return and demand for luxury hotel and tourist products will resume. For the future, OEH plans to grow its business by increasing prices, occupancy and earnings at its established properties and newer acquisitions, by expanding existing hotel and restaurant properties where land or space is already available, by increasing the utilization of its tourist trains and cruiseship to add trips, and by acquiring additional distinctive luxury properties throughout the world. Factors in OEH's evaluation of potential acquisitions include the uniqueness of the property, attractions for 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 plans to continue both owning and operating most of its properties. Ownership encourages OEH to develop the distinctive character of its properties and allows it to benefit from all of the current cash flow and future capital gains should it sell a property. Self-management has enabled OEH to capture the economic benefits otherwise retained by a third-party operator, to control the operations, quality and expansion 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's individual properties, such as the Hotel Cipriani and '21' Club, have distinctive local brand identities. OEH links these together under its umbrella "Orient-Express Hotels" name which originated with the legendary luxury European train in the late 19th and early 20th centuries and which is recognizable worldwide and synonymous with sophisticated travel and refined elegance.

Marketing, Sales and Public Relations

        OEH's sales and marketing function is based upon global and local direct sales, cross-selling to existing customers and public relations. OEH has a global sales force of over 150 persons in 40 locations. Hotel marketing efforts are coordinated through OEH's regional sales offices mainly in New York and London while the tourist trains and cruiseship are marketed through sales and reservations offices in Providence (Rhode Island), London, Paris, Cologne, Tokyo, Singapore, Brisbane and Cusco. OEH also has local sales representatives at many of the hotels. The responsibilities of OEH's sales staff include promoting special events, working with group and corporate account representatives and planning direct mail efforts.

        Because repeat customers appreciate the consistent quality of OEH's hotels, trains and restaurants, a key aspect of its strategy is to promote other OEH properties through various cross-selling efforts. These include direct mail to existing customers, in-house brochures and promotions, discounts on travel by frequent guests, and OEH's in-house "Orient-Express Magazine". OEH also sells to guests luxury souvenir goods branded with the names of its travel products.

        Another key aspect of OEH's marketing strategy is a focus on public relations, which it believes is a highly cost-effective marketing tool for luxury properties. Because of the unique nature of the properties, guests are more likely to hear about OEH's hotels and tours through word-of-mouth or magazine or newspaper articles rather than direct advertising. OEH has two in-house public relations offices in London and New York and representatives in 11 countries worldwide, including contracts with third-party public relations firms, to promote its properties through travel magazines and various local, national and international newspaper travel sections. OEH also belongs to a number of international organizations to promote its properties in conjunction with other non-branded, luxury operators through such groups as "The Leading Hotels of the World" and "Preferred Hotels and Resorts Worldwide".

Internet Initiatives

        Management believes that there is significant potential for the internet to enhance distribution and reduce sales and marketing expenses. Through its website (www.orient-express.com), OEH offers enhanced direct booking services. The internet also helps lower transaction costs on reservations by saving travel agent commissions and tour operator discounts. OEH is also developing an Orient-Express Hotels Club site to offer discounted rates to frequent guests, and perhaps the frequent guests of other travel companies whose products are comparable to OEH but who do not compete directly. This will allow OEH to reward its frequent guests, sell excess room capacity and establish a growing on-line community.

Industry Awards

        OEH has gained a worldwide reputation for quality and service in the luxury segment of the leisure and business travel market. Over the years, OEH's properties have won numerous national and international awards given by trade or consumer publications such as Conde Nast Traveller, Gourmet, Travel & Leisure and Tatler and private subscription newsletters such as Andrew Harper's Hideaway Report, or industry bodies such as the American Automobile Association. They are based on opinion polls of their readers or the professional opinion of journalists or panels of experts. The awards are considered to influence consumer choice and are therefore highly prized.

Competition

        OEH competes for hotel and restaurant acquisition opportunities with others who have substantially greater financial resources. This competition may have the effect of increasing OEH's acquisition costs by reducing the number of suitable investment opportunities offered and increasing the bargaining power of property owners seeking to sell or to enter into management agreements.

        Competition for guests in the hospitality industry is based generally on the convenience of location, the quality of the property, pricing, range and quality of food services and amenities offered, types of cuisine, and name recognition. Demographic, geographic or other changes in one or more of OEH's markets could impact the convenience or desirability of the sites of OEH's hotels and restaurants, and so could adversely affect their profitability. Also, new or existing competitors could significantly lower prices or offer greater conveniences, services or amenities or significantly expand, improve or introduce new facilities in markets in which OEH's hotels and restaurants compete.

        OEH's strategy is to acquire only hotels which have special locations and distinctive character. Many are in areas with unique local history or high entry barriers because of zoning restrictions. OEH builds further its competitive advantage 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 luxury trains have no direct competitors. Other trains exist on similar routes, but management believes OEH's trains and onboard service are so unique that guests consider OEH's trains more as a luxury experience and an end in themselves rather than as a means of transport.

Employees

        OEH currently employs about 4,400 persons, about 1,850 of whom are represented by labor unions. Approximately 3,600 persons are employed in the hotels and restaurants, 700 are employed in the trains and cruises business, and the balance are engaged in central administration and sales.

        Management believes that OEH's ongoing labor relations are good but these could deteriorate due to disputes over wage or benefit levels, working conditions or OEH's response to changes in government regulation of workers and the workplace. OEH's operations rely heavily on employees providing high-quality personal service, and any labor shortage or stoppage caused by poor relations with employees could adversely affect OEH's ability to provide those services.

Government Regulation

        OEH and its properties are subject to numerous laws and government regulations such as those relating to food and beverage preparation and sale, liquor service, health and safety of premises, employee relations, the environment and handling of hazardous substances. Management believes that OEH is in compliance in all material respects with relevant laws and regulations with respect to its business. Changes in these and in government tax rates or regimes, however, may adversely affect the results of OEH's various properties.

        The expansion of existing properties may be dependent upon obtaining necessary building permits or zoning variances from local authorities. The failure to obtain these could adversely affect OEH's strategy of increasing revenues and net income through expansion of existing properties.

Certain Trading Factors

        OEH's business prospects, financial condition, results of operations or cash flow could be adversely affected by the following trading factors as well as others described in this report.

        OEH's operations are subject to factors generally encountered in the hospitality industry, such as cyclical downturns arising from changes in general and local economic conditions, changes in popular travel patterns, dependence by certain properties on vulnerable geographic market segments, inability to sustain price increases or to reduce costs, periodic local oversupply of guest accommodation which may adversely affect occupancy rates and actual room rates achieved, and regional and local political and other conditions affecting market demand, including recessions, energy and water shortages, epidemics, civil disorder, crime and terrorism. Another factor is seasonality in that many of OEH's hotels and tourist trains are located in the northern hemisphere where they operate at low revenue or close during the winter months. The effect of these factors varies among the hotels and other properties because of their geographic diversity.

        In particular, as a result of terrorist attacks on September 11, 2001 and the subsequent military action in Afghanistan, international, regional and even domestic travel has been disrupted. Demand for most of OEH's properties declined substantially in the latter part of the year, and the effects of the disruption may continue to be felt, for example, because of reluctance of leisure travellers to go abroad or through a shortening of booking lead-times by guests, travel agents and tour operators.

        Local extreme weather conditions such as storms and hurricanes, destructive forces like fire or flooding and, in the case of OEH's tourist trains, disruption of the railway networks on which they operate may adversely affect operations and revenue at individual OEH properties. OEH carries property and loss of earnings insurance in amounts management deems adequate, but damages may exceed the insurance limits or be outside the scope of coverage.

        Management intends to increase revenues and net income through acquisitions of new properties and expansion of existing ones. Pursuit of these opportunities depends on OEH's ability to identify suitable properties, to negotiate purchases or construction on satisfactory terms, to obtain the necessary financing and governmental permits, to build on schedule, and to integrate new properties into OEH's operations. Also, the acquisition of properties in new locations may present operating and marketing challenges that are different from those currently encountered in existing locations. OEH may develop new properties in the future which are subject to such adverse factors as market or site deterioration after acquisition, inclement weather, construction delays, labor or materials shortages, work stoppages and the continued availability of construction and permanent financing.

        The acquisition and expansion of leisure properties, as well as the ongoing renovations, refurbishments and improvements required to maintain or upgrade existing properties, are capital intensive. The availability of future borrowings and access to the capital markets for equity financing to fund these acquisitions and expansions depends on prevailing market conditions and the acceptability of financing terms offered to OEH. There can be no assurance that future borrowings or equity financing will be available to OEH, or available on acceptable terms, in an amount sufficient to fund OEH's needs. Future equity financings may be dilutive to existing holders of OEH shares, and future debt financings may involve restrictive covenants limiting OEH's flexibility to operate its business.

        Currency fluctuations may materially affect OEH's financial statements and operating margins because of the geographic diversity of its operations linked to foreign currencies. OEH financial statements are presented in U.S. dollars and can be impacted by foreign exchange fluctuations through both (i) translation risk, which is the risk that the financial statements for a particular period or as of a certain date depend on the prevailing exchange rates of the various currencies against the U.S. dollar, and (ii) transaction risk, which is the risk that the currency of OEH's costs and liabilities fluctuates in relation to the currency of its revenue and assets, which fluctuation may adversely affect operating margins. With respect to translation risk, even though the fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods, the translation impact is a reporting consideration and does not affect the underlying results of operations, as transaction risk does. OEH tries to match foreign currency revenues and costs and assets and liabilities to provide a natural hedge against translation risks although this is not a perfect hedge. With respect to transaction risk, OEH may try to mitigate its exposure by entering into forward foreign exchange contracts from time to time. See Item 7A—Quantitative and Qualitative Disclosures about Market Risk below.

        OEH may incur a significant amount of debt from time to time which could require OEH to dedicate much of its cash flow from operations to payments on indebtedness, thus reducing the availability of cash flow to fund working capital, capital expenditures, product and service development and other general corporate purposes, limiting OEH's ability to obtain additional financing, increasing OEH's vulnerability to adverse economic and industry conditions and the seasonality of some OEH properties, or limiting OEH's flexibility in planning for, or reacting to, changes in its business. Also, since most of OEH's long-term debt accrues interest at rates that fluctuate with prevailing interest rates, any increases in prevailing interest rates may increase interest payment obligations. From time to time OEH enters into hedging transactions in order to manage its floating interest rate exposure. See Item 7A—Quantitative and Qualitative Disclosures about Market Risk below.

OEH's Relationship with Sea Containers Ltd.

        Sea Containers Ltd. ("SCL"), a Bermuda company with shares listed on the New York Stock Exchange, engages in three main businesses, namely (i) service-oriented ferry and rail transport operations primarily in and around Britain and Scandinavia, (ii) worldwide marine cargo container leasing primarily through its GE SeaCo joint venture with General Electric Capital Corporation and (iii) hotel and leisure operations through OEH. Until the initial public offering of the Company's Class A shares in August 2000, it was a wholly-owned subsidiary of SCL. SCL currently owns about 58% of the Company's Class A shares and all of the Company's Class B shares including those Class B shares accounted for as owned by OEH subsidiaries. These shares in total represent about 95% of the combined voting power of the two classes for most matters submitted to a vote of Company shareholders.

        OEH has entered into agreements with SCL providing for the separation of their business operations, for various ongoing relationships between the companies such as shared services and offices, tax matters, noncompetition and indemnity, and relating to the shares of the Company and SCL to be owned by their respective subsidiaries. See Item 13—Certain Relationships and Related Transactions below. The last agreement, an Amended and Restated Share Owning Subsidiaries Restructuring Agreement dated as of June 6, 2001 (the "SOS Restructuring Agreement"), enables four OEH subsidiaries to acquire from SCL a substantial number of the Class B common shares in the Company (representing an approximate 77% voting interest in the Company) either when a spinoff distribution described in the next paragraph occurs or, by one of those OEH subsidiaries, at any time after July 21, 2002 upon exercise of a call option under the SOS Restructuring Agreement.

        SCL intends to distribute to its shareholders a substantial number of the Class A and B common shares of the Company that SCL owns if it completes planned public sales of some of those shares of the Company (subject to stock market conditions) and receives all necessary consents and approvals from its board of directors, lenders and others. SCL is not obligated to make a spinoff distribution which may not occur soon or at all. Claims by alleged holders of public debt of SCL that a distribution is a default under the indentures governing that debt were dismissed by the court during 2001 but, if reasserted, could delay or even prevent a distribution from occurring. See Item 3—Legal Proceedings below. Also, SCL may elect to sell all or substantially all of the shares of the Company it owns, but subject to the call option rights of an OEH subsidiary under the SOS Restructuring Agreement. See Item 13—Certain Relationships and Related Transactions below.

        In August 2001, the Company registered with the Securities and Exchange Commission (Registration Statement No. 333-67268) a public secondary offering by SCL of up to 5,000,000 existing Class A common shares of the Company. SCL has advised OEH that, during the three months ended September 30, 2001, SCL sold 75,200 of the shares realizing net proceeds of about $1,500,000 and, during the period January 1-March 15, 2002, SCL sold 439,200 of the shares realizing net proceeds of about $8,000,000. SCL has further advised OEH that all of the shares were sold at market prices prevailing at the time of sale, and that the sales were made in ordinary broker transactions at normal brokerage commissions through Salomon Smith Barney Inc. SCL is bearing all costs and expenses of this offering, and OEH will receive none of the sale proceeds.

        Before OEH's separation from SCL and subject to the SOS Restructuring Agreement, SCL will have the power to control OEH as long as it continues to own a substantial number of the Company's Class B common shares. As a result, until SCL distributes or otherwise disposes of these shares including to OEH subsidiaries under the SOS Restructuring Agreement, SCL will be able to elect the Company's entire board of directors and, through it, to control any determination with respect to OEH's business direction and policies. Since the initial public offering of the Company's Class A shares in August 2000, the Company's board of directors and management have conducted OEH's business with the full support of SCL, and OEH believes SCL has no intention of withdrawing that support. Of the six directors on the Company's board, three are also directors or officers of SCL.

        SCL is the borrower under financing agreements which contain covenants limiting the actions which SCL may take, or permit a material subsidiary such as the Company to take. The Company will continue to be a material subsidiary for purposes of these covenants so long as it remains majority-owned or controlled by SCL. SCL's financing agreements also impose financial covenants measured on a consolidated basis with SCL's subsidiaries, including OEH. SCL's decisions with respect to OEH, while it remains an SCL subsidiary, may be affected by its having to remain in compliance with these covenants and other requirements. OEH may cease to be a material subsidiary of SCL under these agreements if an OEH subsidiary exercises on or after July 21, 2002 a call option on OEH shares under the SOS Restructuring Agreement as described above. See Item 13—Certain Relationships and Related Transactions below.

        A default under SCL's loan agreements or public debt indentures could result in a default under some OEH loan agreements which contain cross-default provisions to debt of SCL. See Note 5 to the Financial Statements below. Any default under loan agreements of OEH triggered by a default under SCL's debt instruments could also result in cross-defaults to other loan agreements of OEH. OEH is amending these loan agreements or refinancing them in order to remove these cross-default provisions. OEH has guaranteed no debt of SCL.

ITEM 2. Properties

        OEH owns 27 hotels, three European tourist trains, a cruiseship and two restaurants as described in Item 1—Business above. OEH owns interests of 50% or less in three hotels, its Southeast Asian and Australian tourist trains and PeruRail, and two restaurant businesses also as described in Item 1—Business above. The small regional sales and marketing offices of the hotels, tourist trains and cruiseship are occupied under lease.

ITEM 3. Legal Proceedings

        As previously reported, the Company had been named defendant in two lawsuits in New York state court by investors alleging to be holders of publicly traded notes and debentures of SCL and claiming, inter alia, certain defaults under the indentures governing those notes and debentures have occurred or would occur because of a proposed spinoff distribution of the Company's shares by SCL. The first lawsuit was dismissed by the court on June 15, 2001 primarily because the plaintiffs failed to comply with the pre-suit requirements in the indentures and lacked standing to sue. Those plaintiffs filed notices of intention to appeal the dismissal with the New York Appellate Division on August 2, 2001, but no appeal has been filed to date. The second lawsuit was dismissed by the same New York state court on November 28, 2001 on similar grounds, and the plaintiffs in that case have not appealed. See note 11(b) to the Financial Statements (Item 8 below).

        Other than this public debt litigation, OEH is involved in no material legal proceedings, other than ordinary routine litigation incidental to its business.

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

        The Company submitted no matter to a vote of its security holders during the fourth quarter of 2001.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

        The Class A common shares of the Company are traded on the New York Stock Exchange. The Class B common shares of the Company are all owned by Sea Containers Ltd., and are not listed. The following table presents the quarterly high and low sales prices of the Class A common shares since the Company's initial public offering on August 10, 2000 as reported for New York Stock Exchange composite transactions:

        The Company has paid no cash dividends on its Class A and B common shares since its initial public offering, the Board of Directors having determined to retain profits to fund future growth and development of OEH.

        The Islands of Bermuda where the Company is incorporated have no applicable governmental laws, decrees or regulations which restrict the export or import of capital or affect the payment of dividends or other distributions to nonresident holders of the Class A and B common shares of the Company or which subject United States holders to taxes.

        At March 15, 2002, the number of record holders of the Class A common shares of the Company was approximately 20.

ITEM 6. Selected Financial Data

Orient-Express Hotels Ltd. and Subsidiaries

        See notes to consolidated financial statements (Item 8).

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

Overview

        OEH has two business segments: (1) hotels and restaurants and (2) tourist trains and cruises. Hotels currently consist of 30 deluxe hotels, including La Residencia, Le Manoir aux Quat' Saisons and Maroma Resort and Spa, all acquired in early 2002. Twenty-seven of these are wholly or majority owned and are referred to in this report as "owned hotels", although the Miraflores Park Plaza was accounted for among "hotel management interests" during 2001 until the end of the year when it became an "owned hotel". See Note 2(a) to the Financial Statements (Item 8 below). The other three hotels in which OEH has an equity interest and operates under management contracts are referred to in this report as "hotel management interests". In 2001, revenue from hotel management interests was $10.9 million, or 4% of total revenue, which consisted of $6.4 million from investments accounted for using the equity method, and $4.5 million from management fees. Of the owned hotels, 12 are located in Europe, five in North America and ten in the rest of the world. One of the hotels in Europe—the Hotel Caruso in Ravello—is not currently operational as it is undergoing restoration and refurbishment.

        Also, OEH currently owns and operates the restaurant '21' Club in New York, has a 49% interest in Harry's Bar in London, a 50% interest in four restaurants in Britain, trading as Le Petit Blanc (operating as one unit), and owns La Cabaña restaurant in Buenos Aires, which is currently closed for restoration and refurbishment (the "restaurants").

        OEH's tourist trains and cruises segment operates six tourist trains—three of which are owned and operated and three in which OEH has an equity interest and management contracts—and a river cruiseship.

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

        OEH has been pursuing a growth strategy based on internal growth driven principally by increases in REVPAR, growth from expansion of existing properties and growth from acquisitions. As a result of this strategy, in recent years prior to the September 11th events referred to below, the revenues of OEH, its earnings before interest, tax, depreciation and amortization, or EBITDA, its EBITDA margin (EBITDA over revenue) and its net earnings have all increased substantially.

        Following the terrorist attacks in the United States on September 11, 2001, OEH experienced a significant adverse impact on its business in common with other companies in the travel and hospitality sector. Significant levels of cancellations were received by OEH's hotels from American customers in the immediate aftermath of September 11th including hotels outside the United States, whose guests are, approximately, one-third American. The subsequent impact upon the economy of the United States and concerns for the world economy generally has meant that whilst occupancy at the hotels has recovered from the immediate impact, they have not recovered to the pre-September 11th levels. This has led directly to the decrease in revenue and net earnings of OEH in 2001 compared to 2000, which is discussed in more detail in the following sections.

        In 2001, 84% of OEH's revenues were derived from the hotels and restaurants segment and the remainder from the tourist trains and cruises segment. In the hotels and restaurants segment, 87% of revenues was from owned hotels, 8% was from restaurants and 5% was from hotel management interests.

        OEH derives revenue from owned hotel operations primarily from the sale of rooms and the provision of food and beverages. The main factors for analyzing rooms revenue are the number of room nights sold and the average daily room rate, or ADR, and REVPAR referred to above which is a measure of both these factors.

        Revenue from restaurants is derived from food and beverages sold to customers. Revenue from hotel management interests includes fees received under management contracts, which are based upon a combination of a percentage of the revenue from operations and operating earnings calculated before specified fixed charges. It also includes OEH's share of the earnings of unconsolidated companies.

        The revenue from the tourist trains and cruises segment primarily comprises tickets sold for travel and food and beverage sales.

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

        Selling, general and administrative expenses include travel agents' commissions, the salaries and related costs of the sales teams, advertising and public relations costs, and the salaries and related costs of management. Some of the central general and administrative expenses are provided under agreement with SCL. See Note 14 to the Financial Statements below.

        Depreciation and amortization includes depreciation of owned hotels, restaurants, tourist trains and the cruiseship.

        When OEH looks at results for a period on a "comparable" basis, OEH is considering only the results of hotels owned throughout the period mentioned.

Results of Operations

        OEH's operating results for years 2001, 2000, and 1999, expressed as a percentage of total revenue, were as follows:

        The revenues and earnings before interest, tax, depreciation and amortization (EBITDA) of OEH's operations for the years 2001, 2000, and 1999 are analyzed as follows:

        Management believes that EBITDA is a useful measure of operating performance. However, EBITDA does not represent cash flow from operations as defined by U.S. generally accepted accounting principles, is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net earnings under U.S. generally accepted accounting principles for purposes of evaluating results of operations.

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

Revenue

        Total revenue, including earnings from unconsolidated companies, decreased by $15.1 million, or 5%, from $276.4 million in 2000 to $261.3 million in 2001 (on a comparable basis, excluding acquisitions in 2000 and 2001 revenue decreased by $19.8 million). Hotels and restaurants revenue decreased by $13.2 million, from $233.6 million in 2000 to $220.4 million in 2001, and the revenue from tourist trains and cruises decreased by $1.9 million, from $42.8 million to $40.9 million.

        The decrease in hotels and restaurants revenue comprised the following:

•

a decrease in owned hotels revenue of $9.6 million, or 5%, from $201.3 million in 2000 to $191.7 million in 2001. The overall REVPAR was $173 in 2001 compared to $185 in 2000; comparable REVPAR decreased by 9% in U.S. dollars, or 6% in local currency,



•

a decrease in revenue from hotel management interests of $0.5 million, or 4%, from $11.4 million in 2000 to $10.9 million in 2001, and



•

a decrease in restaurants revenue of $3.1 million, or 15%, from $20.9 million in 2000 to $17.8 million in 2001.

        The decrease in owned hotels revenue of $9.6 million is primarily due to events following September 11, 2001 as discussed above, and is analyzed by region as follows:

        Europe:    Revenue increased by $0.8 million, or 1%, from $79.0 million in 2000 to $79.8 million in 2001. The revenue is on a comparable basis with all hotels owned in 2001 being owned for all of 2000.

        REVPAR on a comparable basis increased by 3% in U.S. dollars in 2001 over 2000 and 6% in local currencies reflecting the weakening euro.

        North America:    Revenue decreased by $8.0 million, or 12%, from $67.2 million in 2000 to $59.2 million in 2001.

        On a comparable basis REVPAR declined by 12% in 2001 compared to 2000 from $223 to $195 largely reflecting the impact of the September 11th events.

        Rest of the World:    Revenue decreased by $2.4 million, or 4%, from $55.1 million in 2000 to $52.7 million in 2001. Revenue on a comparable basis decreased by $8.0 million, or 18%.

        This was primarily driven through a decline in comparable REVPAR of 16% in local currencies over 2000 and 22% in U.S. dollars. This decrease in revenue on a comparable basis was partly offset by revenue from the Observatory and Lilianfels Hotels in Australia and the Bora Bora Lagoon Resort, which were acquired during 2000 and 2001 respectively.

Depreciation and Amortization

        Depreciation and amortization increased by $1.3 million, or 9%, from $15.1 million in 2000 to $16.4 million in 2001. This increase was primarily attributable to an increase at OEH's owned hotels and restaurants due to the effect of acquisitions made in 2000 and 2001.

Operating Expenses

        Operating expenses reduced by $2.6 million, or 2%, from $122.6 million in 2000 to $120.0 million in 2001. Following the impact of September 11th referred to above, OEH conducted a review of operating expenses at all of its properties and businesses and a number of cost reduction initiatives were implemented to offset partly the reduction in revenue.

Selling, General and Administration Expenses

        Selling, general and administrative expenses increased by $2.5 million, or 4%, from $69.7 million in 2000 to $72.2 million in 2001. This increase was primarily due to acquisitions made in 2000 and 2001.

Earnings from Operations

        Earnings from operations decreased by $16.3 million, or 24%, from $69.0 million in 2000 to $52.7 million in 2001. Earnings from operations represent total revenue less depreciation and amortization, operating expenses and selling, general and administrative expenses.

Net Finance Costs

        Net finance costs decreased by $4.3 million, or 19%, from $23.0 million in 2000 to $18.7 million in 2001. The decrease is mainly attributable to lower interest rates on floating rate debt during 2001.

Taxes on Income

        The provision for income taxes decreased by $1.8 million, or 30%, from $6.0 million in 2000 to $4.2 million in 2001. The Company is incorporated in Bermuda, which does not impose an income tax. Accordingly, the entire income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax. The decrease of $1.8 million was due to reduced profitability of these subsidiaries.

Net Earnings

        In 2001, OEH's net earnings decreased by $10.1 million, or 25%, from $40.0 million in 2000 to $29.9 million in 2001. Net earnings represent earnings from operations less net finance costs, provision for income taxes and the cumulative effect of change in accounting principle.

Year Ended December 31, 2000 compared to Year Ended December 31, 1999

Revenue

        Total revenue, including earnings from unconsolidated companies but excluding gains, increased by $27.3 million, or 11%, from $249.1 million in 1999 to $276.4 million in 2000. Hotels and restaurants revenue increased by $24.7 million, from $208.9 million in 1999 to $233.6 million in 2000, and the revenue from tourist trains and cruises increased by $2.6 million, from $40.2 million to $42.8 million.

        The revenue increase for hotels and restaurants was comprised of:

•

an increase in owned hotels revenue of $23.6 million, or 13%, from $177.7 million in 1999 to $201.3 million in 2000. The overall REPVAR was $185 in 2000 compared to $186 in 1999, but comparable REVPAR grew by 5% in U.S. dollars, or 13% in local currency,



•

an increase in revenue from hotel management interests of $0.3 million, or 3%, from $11.1 million in 1999 to $11.4 million in 2000, and



•

an increase in restaurants revenue of $0.8 million, or 4%, from $20.1 million in 1999 to $20.9 million in 2000.

        The increase in owned hotels revenue of $23.6 million is analyzed by region as follows:

        Europe:    Revenue decreased by $1.0 million, or 1%, from $80.0 million in 1999 to $79.0 million in 2000. The revenue is on a comparable basis with all hotels owned in 2000 being owned for all of 1999.

        The reported revenues were significantly impacted by the weakening of the euro against the U.S. dollar in 2000 as the European hotels revenues are earned in currencies linked with the euro. In local currency, REVPAR increased by 15% in 2000 over 1999 driven largely by increased room rates, while in U.S. dollars this REVPAR was flat.

        North America:    Revenue increased by $8.1 million, or 14%, from $59.1 million in 1999 to $67.2 million in 2000.

        On a comparable basis, revenue increased by $2.7 million primarily due to an increase in the number of rooms sold at the Windsor Court, where the REVPAR grew at 11% over 1999. The remaining increase in revenue was due to the acquisitions of Keswick Hall and the Inn at Perry Cabin in 1999 and the revenue from La Samanna which was closed in late 1999 and early 2000 following hurricane damage.

        Rest of the World:    Revenue increased by $16.5 million, or 42%, from $38.6 million in 1999 to $55.1 million in 2000.

        Revenue on a comparable basis increased by $4.9 million, or 13%. This was primarily driven through a growth in comparable REVPAR of 15% in local currencies over 1999 and 10% in U.S. dollars. The remaining increase was due to the Observatory and Lilianfels Hotels in Australia, which were acquired during 2000.

Gains

        OEH realized gains of $3.8 million in 1999, including a $2.5 million payment in the fourth quarter to OEH relating to the buy-out of its right to an early termination fee under the management contract for the Bora Bora Lagoon Resort, and a $1.3 million gain on the sale of the Windermere Island Club in the Bahamas in the first quarter. The buy-out transaction occurred as a result of the owner considering a sale of the property and, in order to facilitate a sale, OEH agreed to sell back to the owner OEH's contractual right to an early termination fee. OEH continued to manage the property, and acquired it in April 2001.

Depreciation and Amortization

        Depreciation and amortization increased by $2.0 million, or 15%, from $13.1 million in 1999 to $15.1 million in 2000. This increase was primarily attributable to an increase at OEH's owned hotels and restaurants due to the effect of acquisitions made in 1999 and 2000.

Operating Expenses

        Operating expenses increased by $7.4 million, or 6%, from $115.2 million in 1999 to $122.6 million in 2000. This increase included a $9.0 million increase at OEH's owned hotels and restaurants primarily due to the effect of acquisitions made in 1999 and 2000, partly offset by reduced U.S. dollar reported operating costs in the European hotels following the weakening of the euro against the U.S. dollar in 2000. The majority of operating costs incurred at the European hotels are in currencies linked to the euro.

Selling, General and Administration Expenses

        Selling, general and administrative expenses increased by $7.4 million, or 12%, from $62.3 million in 1999 to $69.7 million in 2000, of which $7.3 million was due to owned hotels and restaurants. Of the increase of $7.3 million at OEH's owned hotels and restaurants, $3.0 million was attributable to the acquisition of hotels during 2000 and 1999.

Earnings from Operations

        Earnings from operations increased by $6.8 million, or 11%, from $62.2 million in 1999 to $69.0 million in 2000. Excluding gains, earnings from operations before net finance costs increased by $10.6 million, or 18%, from $58.4 million in 1999 to $69.0 million in 2000. Earnings from operations represent total revenue less depreciation and amortization, operating expenses and selling, general and administrative expenses.

Net Finance Costs

        Net finance costs increased by $4.0 million, or 21%, from $19.0 million in 1999 to $23.0 million in 2000. The increase includes $2.1 million attributable to the effect of increases in debt relating to acquisitions and investments financed in 2000 and 1999.

Taxes on Income

        The provision for income taxes increased by $0.8 million, or 15%, from $5.2 million in 1999 to $6.0 million in 2000. The Company is incorporated in Bermuda, which does not impose an income tax. Accordingly, the entire income tax provision was attributable to income tax charges incurred by subsidiaries operating in jurisdictions that impose an income tax. The increase of $0.8 million was due to increased profitability of these subsidiaries.

Net Earnings

        In 2000, OEH's net earnings before the cumulative effect of the change in accounting principle increased by $2.0 million, or 5%, from $38.0 million in 1999 to $40.0 million in 2000. Excluding gains, net earnings before the cumulative effect of the change in accounting principle increased by $5.8 million, or 17%, from $34.2 million in 1999 to $40.0 million in 2000. Net earnings represent earnings from operations less net finance costs, provision for income taxes and the cumulative effect of change in accounting principle.

Change in Accounting Principle

        In 1999, OEH adopted Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," of the American Institute of Certified Public Accountants. This required OEH to write-off $3.0 million, net of tax, in the first quarter of 1999 representing mainly deferred start-up costs of cruiseship operations which could no longer be carried forward under this statement. Other than the cumulative effect of this change, the impact of the adoption was not material in 1999 results.

Liquidity and Capital Resources

Working Capital

        OEH had cash of $57.9 million at December 31, 2001, $42.0 million more than the $15.9 million at December 31, 2000. At December 31, 2001 and 2000, the undrawn amounts available to OEH under its short-term lines of credit were $30.9 million and $12.3 million, respectively. In addition, OEH had available to draw under long-term facilities a further $24.0 million bringing its total cash and availability to $112.8 million.

        Current assets less current liabilities, including the current portion of long-term debt, resulted in a working capital deficit of $10.6 million at December 31, 2001, a working capital increase of $25.6 million from a deficit of $36.2 million at December 31, 2000. The overall increase in working capital was comprised of the following:

•

an increase in current assets of $43.3 million, of which $42.0 million was due to increased cash and $1.5 million increased inventories partly offset by a reduction of $0.2 million in accounts receivable;



•

an increase in current liabilities of $17.7 million, of which $13.6 million was due to accounts payable and accrued liabilities; and



•

an increase in the current portion of long-term debt of $2.0 million.

        OEH's business does not require the maintenance of significant inventories or receivables and, therefore, working capital is not the most appropriate measure of liquidity.

Cash Flow

        Operating Activities:    Net cash provided by operating activities decreased by $10.5 million to $40.5 million for the twelve months ended December 31, 2001, from cash provided by operating activities of $51.0 million for the twelve months ended December 31, 2000. The decrease was primarily attributable to a decrease in net earnings of $11.0 million after adjustment for certain non-cash items, including depreciation and amortization.

        Investing Activities:    Cash used in investing activities was $76.8 million for the twelve months ended December 31, 2001, compared to $81.2 million for the twelve months ended December 31, 2000.

        Financing Activities:    Cash provided from financing activities for the twelve months ended December 31, 2001 was $79.1 million as compared to cash provided from financing activities of $35.4 million for the twelve-month period ended December 31, 2000, an increase of $43.7 million.

        In 2000, OEH raised $85.5 million from the initial public offering of the Company's Class A shares, which it used to repay debt. Excluding the effect of a movement in the SCL investment prior to the initial public offering, the net cash provided by financing activities in 2001 increased by $15.4 million from $63.7 million to $79.1 million. This increase was mainly due to an increase in the proceeds from long-term debt of $44.7 million, partly offset by an increase in principal payments under long-term debt of $28.6 million (excluding debt repaid in 2000 from the proceeds of the initial public offering of $85.5 million).

        Capital Commitments:    There were $6.1 million of capital commitments outstanding as of December 31, 2001.

Indebtedness

        At December 31, 2001, OEH had $362.9 million of consolidated long-term debt, including the current portion, secured by OEH assets with a number of commercial bank lenders which is payable over periods of one to 12 years with a weighted average interest rate of 4.6%. These financing agreements contain covenants that include limits on the ability to raise additional debt secured by these properties, limits on liens on the properties and limits on mergers and asset sales and, in some cases, financial covenants on the relevant properties such as a minimum interest coverage ratio and debt service coverage ratio. Some of the Company guarantees of these facilities contain financial covenants on OEH covering a minimum consolidated tangible net worth and a minimum consolidated interest coverage ratio. OEH is in full compliance with these covenants, and management believes they will not substantially limit OEH's ability to finance future acquisitions or capital expenditure plans. See Note 5 to the Financial Statements regarding the maturity of long-term debt.

        Approximately 42% of the outstanding principal was drawn in euros at December 31, 2001, and the balance primarily drawn in U.S. dollars. At December 31, 2001, OEH had the equivalent of $103.2 million of floating rate euro debt, which had been swapped into fixed rate euro debt, which will convert back to floating rates in September 2002. At December 31, 2001, all other borrowings of OEH were in floating interest rates.

        Certain of this indebtedness is guaranteed by SCL and/or contains cross-default clauses to SCL bank borrowing agreements and its public debt including $9.5 million of debt of unconsolidated OEH companies. An additional $46.4 million of non-recourse debt secured by the Charleston Place contains cross-default clauses to SCL indebtedness. See Notes 5 and 14 to the Financial Statements. A default by SCL under its indebtedness could result in a default by OEH on certain of its long-term debt facilities. See Note 11(b) to the Financial Statements regarding litigation involving SCL's public senior notes. SCL has advised the Company that it is in full compliance with all of its credit and financing agreements. OEH is amending or refinancing its debt agreements that cross-default to SCL indebtedness to eliminate those provisions.

Liquidity

        Management plans to increase OEH's capital expenditures over the next few years with the expansion of existing hotel properties consistent with its growth strategy. Planned expenditure on these expansion projects is up to an aggregate of $150 million over the next three years. In addition, OEH aims to acquire more properties which it expects to finance with an appropriate level of debt secured on the properties, and the balance through available cash resources. At December 31, 2001, OEH had capital commitments of $6.1 million overall.

        Management expects to have available cash from operations and appropriate debt finance sufficient to fund its working capital requirements, capital expenditures, acquisitions and debt service for the foreseeable future.

Accounting Policies

        The preceding discussion and analysis of OEH's financial condition and results of operations is based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires OEH to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, OEH evaluates these estimates, including those related to the recoverability of long-lived assets including intangible assets, purchase price allocations and tax valuation allowances. OEH bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the result of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        Management believes the following represent the most significant and subjective estimates used in the preparation of OEH's consolidated financial statements.

        OEH periodically evaluates the recoverability of long-lived assets, including property, plant and equipment, and intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. These evaluations include analyses based on the cash flows generated by the underlying assets, profitability information, including estimated future operating results, trends or other determinants of fair value. If the value of the asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future.

        OEH records a preliminary purchase price allocation for acquisitions based on preliminary information received at the date of acquisition and based on OEH's historical acquisitions. These allocations are subject to adjustments and are finalized once additional information concerning asset and liability valuations is obtained. The final asset and liability fair values may differ from those currently set forth in the consolidated financial statements. If the final allocations for the acquisitions differ from the preliminary allocations, OEH may need to increase or decrease depreciation and/or amortization expenses, which could affect OEH's reported operations.

        OEH maintains a valuation allowance to reduce its gross deferred tax assets to reflect the amount, based upon OEH's estimates of income, that would likely be realized. If OEH's future operations differed from those in the estimates, OEH may need to increase or decrease the valuation allowance which would affect its reported operations.

        See Note 1 to the Financial Statements for a discussion of accounting policies with respect to these and other items.

Recent Accounting Pronouncements

        For a discussion of OEH's adoption of recent accounting pronouncements, see Note 1(u) to the Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

        OEH is exposed to market risk from changes in interest rates and foreign currency exchange rates. These exposures are monitored and managed as part of its overall risk management program, which recognizes the unpredictability of financial markets and seeks to mitigate material adverse effects on consolidated earnings and cash flow. OEH does not hold market rate sensitive financial instruments for trading purposes.

        The market risk relating to interest rates arises mainly from the financing activities of OEH. Earnings are affected by changes in interest rates on floating rate borrowings, principally based on U.S. dollar LIBOR and EURIBOR, and on short-term cash investments. OEH assesses market risk based on changes in interest rates using a sensitivity analysis. In September 2000, OEH entered into an interest rate swap, which exchanged floating rate euro debt for fixed rate euro debt in respect of the equivalent of euro 117 million ($103.2 million at December 31, 2001). If interest rates increased by ten percent with respect to remaining floating rate debt, with all other variables held constant, annual net finance costs of OEH would have increased by approximately $1.3 million based on borrowings and the interest rate swap outstanding at December 31, 2001. The interest rates on substantially all of OEH's long-term debt are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value. The fair value of the interest rate swap at December 31, 2001 was $1,756,000.

        The market risk relating to foreign currencies arises from buying, selling and financing in currencies other than the U.S. dollar, principally the euro, South African rand, Brazilian real and Australian dollar. Some non-U.S. subsidiaries of OEH borrow in local currencies, and OEH may in the future enter into forward exchange contracts relating to purchases denominated in foreign currencies. There are no foreign currency derivative financial instruments currently in effect relating to OEH.

        Nine of OEH's owned hotels in 2001 operated in currencies linked to the European euro, two operated in South African rand, two operated in Australian dollars, one operated in Botswanan pula, and one operated in Brazilian reais. The Venice- Simplon-Orient-Express, British Pullman and Northern Belle tourist trains operate primarily in British pounds sterling and currencies linked to the euro. OEH faces exposure arising from the impact of translating its global foreign currency earnings into U.S. dollars, and anticipates this foreign exchange rate risk will remain a market exposure for the foreseeable future.

        OEH uses a sensitivity analysis to assess the changes in the values of the U.S. dollar on foreign currency denominated monetary assets and liabilities. The primary assumption used in this model is a hypothetical ten percent weakening or strengthening of the U.S. dollar against OEH's currency exposure. At December 31, 2001, as a result of this analysis, OEH determined that the impact of a ten percent change in foreign currency exchange rates in relation to the U.S. dollar would not be material.

        As far as it can, OEH matches foreign currency earnings and costs and so provides a natural hedge against currency movements. In addition, a significant proportion of the guests at OEH hotels located outside of the United States originate from the United States. When a foreign currency in which OEH operates devalues against the U.S. dollar, OEH has considerable flexibility to increase prices in local currency. Management believes that when these factors are combined, OEH does not face a material exposure to its earnings from currency movements. The gains or losses OEH has incurred from transactions denominated in foreign currencies have not been material.

ITEM 8. Financial Statements and Supplementary Data

Report of Independent Auditors

Board of Directors and Shareholders
Orient-Express Hotels Ltd.
Hamilton, Bermuda

        We have audited the accompanying consolidated balance sheets of Orient-Express Hotels Ltd. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in Item 14. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Orient-Express Hotels Ltd. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As disclosed in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, and effective January 1, 1999, the Company adopted Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities.

Orient-Express Hotels Ltd. and Subsidiaries
Consolidated Balance Sheets

See notes to consolidated financial statements.

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

See notes to consolidated financial statements.

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

See notes to consolidated financial statements.

Orient-Express Hotels Ltd. and Subsidiaries
Statements of Consolidated Shareholders' Equity

See notes to consolidated financial statements.

Orient-Express Hotels Ltd. and Subsidiaries
Notes to Consolidated Financial Statements

1.    Summary of significant accounting policies and basis of presentation

(a)  Business

        Orient-Express Hotels Ltd. (the "Company") is a majority-owned subsidiary of Sea Containers Ltd. ("SCL"). The Company and its subsidiaries are referred to collectively as "OEH".

        At December 31, 2001, OEH owned or part-owned and managed 27 deluxe hotels and resorts located in the United States, the Caribbean, Europe, southern Africa, South America, Australia and the South Pacific, six tourist trains in Europe, Southeast Asia, Australia and Peru, a river cruiseship in Burma, and three restaurants in London, New York and Buenos Aires.

(b)  Basis of presentation

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

        The financial statements have been prepared as if the recapitalization and legal entity reorganization prior to the Company's initial public offering on August 10, 2000 had occurred in the earliest period presented. It is accounted for in a manner similar to a pooling of interests as all of these entities were under common control. The earnings per share have been retroactively restated using the number of shares outstanding after giving effect to the recapitalization.

        The consolidated financial statements include an allocation of certain general corporate administrative expenses from SCL and its subsidiaries which are provided under a shared services agreement with SCL. In the opinion of management, general corporate administrative expenses have been allocated to OEH on a reasonable and consistent basis using management's estimate of services provided by SCL and its subsidiaries. However, such allocations are not necessarily indicative of the level of expenses which might have been incurred had OEH been operating as a separate, stand-alone entity during the periods presented. Therefore, the financial information included herein may not necessarily reflect the consolidated results of operations, financial position and cash flows of OEH had OEH been a separate stand-alone entity for the years presented.

        Certain items in 2000 and 1999 have been reclassified to conform with the current year's presentation. The reclassifications have no effect on net earnings as previously reported.

(c)  Foreign currency translation

        Foreign subsidiary income and expenses are translated into U.S. dollars, the reporting currency of the Company, at the average rates of exchange prevailing during the year. The assets and liabilities are translated into U.S. dollars at the rates of exchange on the balance sheet date and the related translation adjustments are included in accumulated other comprehensive income/(loss). No income taxes are provided on the translation adjustments as management does not expect that such gains or losses will be realized. Foreign currency transaction gains and losses are recognized in operations as they occur.

(d)  Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

(e)  Stock-based compensation

        Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", of the Financial Accounting Standards Board ("FASB") encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. OEH has chosen to account for stock-based compensation using the intrinsic value method prescribed in Opinion No. 25, "Accounting for Stock Issued to Employees", as amended, of the Accounting Principles Board ("APB") and related interpretations. Accordingly, compensation cost for share options is measured as the excess, if any, of the quoted market price of the Company's shares at the date of the grant over the amount an employee must pay to acquire the shares. The amount of compensation cost, if any, is charged to income over the vesting period. See Note 10.

(f)    Revenue recognition

        Hotel and restaurant revenues are recognized when the services are performed. Tourist train and cruise revenues are recognized upon completion of the journey. Deferred revenue consisting of deposits paid in advance are recognized as revenue when the services are performed for hotels and restaurants and upon completion of tourist train and cruise journeys. Revenues under management contracts are recognized based upon the attainment of certain financial results, primarily revenue and operating earnings, in each contract as defined.

(g)  Earnings from unconsolidated companies

        Earnings from unconsolidated companies include OEH's share of the net earnings of its equity investments as well as interest income related to loans and advances to the equity investees amounting to $6,702,000 in 2001 (2000—$5,941,000, 1999—$5,790,000).

(h)  Gains on sales of assets and other

        In 1999, gains on sales of assets included $2,500,000 from the buy-out of OEH's right to the payment of an early termination fee in respect of a hotel management contract as well as $1,300,000 relating to the sale of the Windermere Island Club.

(i)    Marketing costs

        Marketing costs, including website research and planning costs, are expensed as incurred and are reported in selling, general and administrative expenses. Marketing costs include costs of advertising and other marketing activities. These costs were $18,300,000 in 2001 (2000—$15,873,000, 1999—$13,993,000).

(j)    Interest expense, net

        OEH capitalizes interest during the construction of assets. Interest expense, net excludes interest which has been capitalized in the amount of $882,000 in 2001 (2000—$332,000, 1999—$nil).

(k)  Interest and related income (expense)

        Interest and related income (expense) includes foreign exchange gains/(losses) of $367,000 in 2001 (2000—$(39,000), 1999—$nil).

(l)    Income taxes

        Deferred income taxes result from temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred taxes are recorded at enacted statutory rates and are adjusted as enacted rates change. Classification of deferred tax assets and liabilities corresponds with the classification of the underlying assets and liabilities giving rise to the temporary differences or the period of expected reversal, as applicable. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on available evidence.

(m)  Earnings per share

        Basic earnings per share exclude dilution and are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. The number of shares used in computing basic earnings per share was 30,874,000 for the year ended December 31, 2001 (2000—27,813,000, 1999—25,900,000). The number of shares used in computing diluted earnings per share was 30,874,000 for the year ended December 31, 2001 (2000—27,854,000, 1999—25,900,000). There was no material dilutive effect in each of the three years ended December 31, 2001.

(n)  Inventories

        Inventories include wine, food, beverages, certain retail goods and train-related items. Inventories are valued at the lower of cost or market value under the first-in, first-out method.

(o)  Property, plant and equipment, net

        Property, plant and equipment, net are stated at cost less accumulated depreciation and amortization. The cost of significant renewals and betterments is capitalized and depreciated, while expenditures for normal maintenance and repairs are expensed as incurred.

        Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:

        The Company determined that the lives of certain of its hotel machinery and equipment and tourist train components had been extended as a result of a rigorous maintenance program. In 1999, the lives of the hotel machinery and equipment were extended from 20 to 25 years. The Company has adopted a composite type depreciation methodology under which the parts of the tourist trains that are subject to government-mandated refurbishment programs are depreciated over a shorter life than those other parts of the trains not subject to these programs, which are depreciated over longer periods based upon their useful lives. As a result, in 1998, the lives of certain components of the tourist trains were extended from 8 years to 15 years. The impact of the change in estimate resulted in an increase to net income of $1,300,000 in 1999.

(p)  Impairment of long-lived assets

        In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets," of the FASB, management reviews long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In the event that an impairment occurs, the fair value of the related asset is estimated, and OEH records a charge to income calculated by comparing the asset's carrying value to the estimated fair value.

(q)  Investments

        Investments include equity interests in and advances to unconsolidated companies.

(r)  Intangible assets

        Intangible assets are recorded at cost and are amortized using the straight-line method over appropriate periods not exceeding 40 years. The Company continually reviews intangible assets to evaluate whether events or changes have occurred that would suggest an impairment of carrying value. An impairment would be recognized when expected future undiscounted operating cash flows are lower than carrying value. In the event that an impairment occurs, the fair value of the intangible asset is estimated, and OEH records a charge to income calculated by comparing the asset's carrying value to the estimated fair value. Components of intangible assets are as follows:

(s)  Concentration of credit risk

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

(t)    Derivative financial instruments

        Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and 138. SFAS 133 requires OEH to record all derivatives on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive income/(loss) in shareholders' equity and are recognized in the statement of consolidated operations when the hedged item affects earnings. The ineffective portion of a hedging derivative's change in the fair value will be immediately recognized in earnings. If the derivative is not designated as a hedge for accounting purposes, the change in its fair value is recorded in earnings.

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

        The initial adoption of SFAS No. 133 resulted in an unrealized loss of $1,333,000 in accumulated other comprehensive income/(loss) as of January 1, 2001. For the year ended December 31, 2001, the change in the fair market value of derivative instruments resulted in a charge to other comprehensive income/(loss) of $423,000.

(u)  Recent accounting pronouncements

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which defines an impairment as the condition that exists when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The statement also identifies the circumstances that apply when testing for recoverability, as well as other potential adjustments or revisions relating to recoverability. Specific guidance is provided for recognition and measurement, as well as reporting and disclosure, for long-lived assets held and used and those disposed of. The statement will be effective for financial statements issued for fiscal years beginning after December 15, 2001, and is not expected to have a material effect on OEH's consolidated results of operations, financial position or cash flows.

        In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001, and prohibits the use of the pooling of interests method. SFAS No. 142 changes the method by which companies may recognize intangible assets in business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. Amortization of all existing and newly acquired goodwill on a prospective basis will cease as of January 1, 2002, and thereafter all goodwill and intangibles with indefinite lives must be tested for impairment at least annually, based on the fair value of the reporting unit associated with the respective intangible asset. The effect of non-amortization provisions on 2002 operations cannot be forecasted at this time because acquisitions may occur in 2002. If these statements had been applied to goodwill in prior years, management believes full year net earnings would have increased by $894,000 in 2001 (2000—$873,000, 1999—$893,000) or $0.03 per share in each year.

        In 1999, the Company adopted Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities", of the American Institute of Certified Public Accountants. This required OEH to write-off $2,987,000, net of tax, in the first quarter of 1999 representing mainly deferred start-up costs of cruiseship operations which may no longer be carried forward under this statement. Other than the cumulative effect of this change, the impact of the adoption was not material to 1999 results.

2.    Acquisitions and investments

(a)  Acquisitions

        On April 27, 2001, OEH acquired the Bora Bora Lagoon Resort in French Polynesia, a hotel previously managed by OEH, for a cash price of approximately $19,600,000. OEH funded most of the purchase price with bank mortgage finance.

        On January 17, 2001, OEH acquired the Miraflores Park Plaza in Lima, Peru. Because OEH's 50/50 hotel joint venture in Peru had an option to purchase the hotel at cost which, if exercised, would have resulted in OEH becoming the exclusive long-term manager of the hotel, it was accounted for in 2001 as an investment by OEH. Because the option lapsed, the hotel has been accounted for as an acquisition with effect from December 31, 2001. The purchase price of approximately $17,000,000 was paid largely by the assumption of existing debt, with the balance paid in cash and the issuance of notes to the seller.

        On March 24, 2000, OEH acquired the Observatory and Lilianfels Hotels in Australia for an aggregate purchase price of approximately $40,000,000. The purchase has been substantially financed by a bank loan.

        On May 6, 1999, OEH acquired Ashley House Inc., owner of Keswick Hall near Charlottesville, Virginia, and Inn at Perry Cabin in St. Michaels, Maryland. The $25,500,000 purchase price was paid in cash and funded in part by a bank loan.

        The purchase prices paid for these acquisitions approximated the fair value of the net tangible and identifiable intangible assets acquired, and any resulting goodwill was not material.

        All the above acquisitions have been accounted for as purchases and, accordingly, the assets and liabilities of the acquired companies have been recorded at their fair value at the date of acquisition. The operating results of the acquired companies have been included in OEH's consolidated statements of operations from the effective dates of acquisition. Pro forma data have not been presented as the revenues and net income resulting from these acquisitions would not have had a material impact in the year of acquisition.

(b)  Investments

        Investments represent equity interests of 20% to 50% in any unconsolidated companies. OEH does not have effective control of these unconsolidated companies and, therefore, accounts for these investments using the equity method.

        On September 21, 1999, OEH acquired a 50% interest in a joint venture to which the Peruvian government awarded long-term concessions to operate the Southern and Machu Picchu lines of the state-owned railway system in Peru. On behalf of the joint venture partners, OEH manages the concessions and rail services which operate under the name PeruRail. No payment was required to acquire these concessions other than the purchase of spare parts and office equipment of which OEH's share amounted to $1,750,000.

        At March 31, 1999, OEH acquired for $10,000,000 a 50% interest in a joint venture company that bought two hotels in Peru, the Hotel Monasterio and the Machu Picchu Sanctuary Lodge. OEH is managing these properties on behalf of the joint venture.

        OEH's investments in and advances to unconsolidated companies amounted to $79,430,000 at December 31, 2001 (2000—$66,973,000). OEH's earnings from unconsolidated companies were $9,112,000 in 2001 (2000—$8,936,000, 1999—$7,008,000) and it received dividends of $nil in 2001 (2000—$222,000, 1999—$470,000).

        Summarized financial data for unconsolidated companies are as follows:

        Included in unconsolidated companies is the Charleston Place Hotel to which OEH has made loans in addition to its equity investment. One of these loans has a conversion feature exercisable by OEH no sooner than 2020 and in limited circumstances before then, under which OEH may convert its loans into additional capital, thereby giving OEH a majority equity interest in the hotel.

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

3.    Property, plant and equipment

        The major classes of real estate and other fixed assets are as follows:

        At December 31, 2001, the balance under capital lease for land and buildings was $8,574,000 (2000—$nil), for machinery and equipment $1,675,000 (2000—$1,877,000), and for fixtures and fittings $716,000 (2000—$247,000). Accumulated depreciation related to assets under capital lease at December 31, 2001 was $520,000 (2000—$441,000).

4.    Working capital facilities

        Working capital facilities are comprised of the following, all repayable within one year:

        OEH had approximately $38,000,000 of working capital lines of credit at December 31, 2001 (2000—$18,600,000) issued by various financial institutions and having various expiration dates, of which $30,900,000 was undrawn (2000—$12,300,000).

5.    Long-term debt and obligations under capital leases

(a)  Long-term debt

        Long-term debt consists of the following:

        Certain credit agreements of OEH have restrictive covenants. At December 31, 2001, OEH was in compliance with these covenants. OEH does not currently have any covenants in any of its loan agreements which limit the payment of dividends.

        Certain OEH credit agreements aggregating $103,141,000 of its consolidated long-term debt and $54,000,000 of unconsolidated long-term debt of unconsolidated companies (of which $46,400,000 was non-recourse to OEH and SCL) at December 31, 2001 have cross-default provisions to debt of SCL. OEH is amending these agreements or refinancing them in order to eliminate these provisions.

        The following is a summary of the aggregate maturities of consolidated long-term debt excluding obligations under capital leases at December 31, 2001:

        The interest rates on substantially all of OEH's long-term debt are adjusted regularly to reflect current market rates. Accordingly, the carrying amounts of OEH's long-term debt also approximate fair value.

        OEH has also guaranteed $6,622,000 of the debt obligations of PeruRail, an unconsolidated company in which OEH has a 50% investment, and $5,140,000 of PeruRail contingent obligations relating to the performance of its governmental rail concessions.

(b)  Obligations under capital leases

        The following is a schedule of future minimum lease payments under capital leases together with the present value of the minimum lease payments at December 31, 2001: