UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULES 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF APRIL, 2002
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ROYAL CARIBBEAN CRUISES LTD.
------------------------------------------------------------
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
1050 CARIBBEAN WAY, MIAMI, FLORIDA 33132
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT FILES OR WILL FILE ANNUAL
REPORTS UNDER COVER FORM 20-F OR FORM 40-F.
FORM 20-F [X] FORM 40-F [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT BY FURNISHING THE
INFORMATION CONTAINED IN THIS FORM IS ALSO THEREBY FURNISHING THE INFORMATION TO
THE COMMISSION PURSUANT TO RULE 12g3-2(b) UNDER THE SECURITIES EXCHANGE ACT OF
1934.
YES [ ] NO [X]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROYAL CARIBBEAN CRUISES LTD.
---------------------------
(Registrant)
Date: April 3, 2002 By /s/ RICHARD J. GLASIER
---------------------------
Richard J. Glasier
Executive Vice President and
Chief Financial Officer
Royal Caribbean Cruises Ltd.
2001 ANNUAL REPORT
The future holds exciting promise for Royal Caribbean Cruises Ltd. Rising
demand, powerful demographics and a modern fleet are lifting the ride. In 2001,
a record 2.4 million people sailed aboard the company's 23 ships while revenues
rose to $3.1 billion. Four new ships were launched in 2001, making 16 innovative
new vessels since 1995. Royal Caribbean International has become the world's
largest cruise brand with 33,050 double-occupancy berths, and when Celebrity
Cruises introduces its fourth Millennium-class ship in 2002, it will have
doubled its capacity in two years to 16,350 berths.
(Photo)
1
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
2001 2000 1999
---------- ---------- ----------
Revenues $3,145,250 $2,865,846 $2,546,152
Operating Income 455,605 569,540 480,174
Net Income 254,457 445,363 383,853
Earnings Per Share* $ 1.32 $ 2.31 $ 2.06
Shareholders' Equity $3,756,584 $3,615,915 $3,261,156
(* diluted)
2
YEAR REVENUES
---- --------------------
88 523
89 567
90 698
91 760
92 1,013
93 1,113
94 1,171
95 1,184
96 1,357
97 1,939
98 2,636
99 2,546
00 2,866
01 3,145
YEAR NET INCOME
---- --------------------
88 14
89 42
90 52
91 4
92 61
93 107
94 137
95 149
96 151
97 175
98 331
99 384
00 445
01 254
YEAR SHAREHOLDERS' EQUITY
---- --------------------
88 295
89 348
90 400
91 404
92 464
93 733
94 846
95 965
96 1,085
97 2,019
98 2,455
99 3,261
00 3,616
01 3,757
($ millions)
3
(Photo)
RICHARD D. FAIN / Chairman and CEO
DEAR SHAREHOLDERS:
We navigated across particularly choppy seas in 2001, and our disappointing
financial results reflected this. We had known from the outset that it would be
a challenging year as we launched four new ships in the midst of a softening
economy and as we suffered an unusual spate of ship disruptions due to technical
problems. But we were unprepared for the horrific tragedies of September 11.
These attacks affected all of us personally and also led to a drastic decline in
air travel and demand for cruises.
This barrage of unforeseen, negative impacts coincided with the peak period of
our expansion program - a period of unusually high operating and financial
leverage. While this leverage should soon work for us in a positive way, our
margins and profits are affected in the short term. In 2001, we registered a
43-percent decrease in net profit to $254.5 million, or $1.32 per share, a steep
falloff from record profits in 2000.
The impact of September 11 is still being felt as we enter 2002. We expect
yields, which were down 9 percent in 2001, to decline again. But we are now
clearly seeing a recovery in demand with a corresponding abatement of the
widespread price discounting of 2001. Looking forward, we are encouraged by the
current booking and pricing trends.
We also have taken aggressive steps to control costs and reduce capital
expenditures. This has enabled us to reduce our nonfuel operating and SG&A
expenses by 5 percent per berth in 2001 with similar savings expected in 2002.
In addition, we have reduced our planned capital expenditures over the next few
years by more than $300 million.
As difficult as this year has been, it also has provided a surprising silver
lining. The fact that we have responded so well to the bad news of 2001 and the
resilience that the cruise industry has demonstrated in the face of such market
forces are indeed reassuring.
PROMISING FUTURE
There are a number of reasons to be confident in the future performance of our
company. In 2001, we eclipsed records with $3.1 billion in revenues and 2.4
million cruise guests. A rapid expansion of Celebrity Cruises, while ill-timed
in a recession, proved to make strategic sense, given the enormous appeal of
Millennium and her sister ships. The debut of Royal Celebrity Tours,
complementing our Alaska cruises with escorted land tours, was also a winner.
And for the first time, Royal Caribbean International and Celebrity Cruises
topped one million first-time cruisers.
As we started taking bookings in 2002,we saw a significant recovery in
pricing. We experienced record booking levels in the "Wave Period" that began in
January, and pricing on new bookings has nearly returned to pre-September 11
levels. I believe these business trends are proof of the resiliency of the
cruise industry and a powerful testament to the fundamental strength of the
business model. The prospects for the future are bright.
4 Royal Caribbean Cruises Ltd.
We are now clearly seeing a recovery in demand
with a corresponding abatement of the widespread price
discounting of 2001. Looking forward, we are
encouraged by the current booking and pricing trends.
LOOKING RADIANT
By launching four beautiful new ships in 2001 - an unprecedented 9,250 new
berths in a single year - the company positioned itself to further capitalize on
rising demand for cruise vacations. We introduced the third distinctly new,
innovative class of ships in as many years with the glass-sheathed Radiance of
the Seas. Each of Royal Caribbean International's four Radiance-class ships
(Brilliance of the Seas will arrive in 2002) will offer guests more than twice
as many balconied staterooms as any of the six Vision-class ships built between
1995 and 1998. By 2004, some 35 percent of the staterooms for Royal Caribbean
International and Celebrity Cruises will have balconies. This trend exemplifies
our ongoing product improvement that is attracting and keeping customers.
Radiance of the Seas also brought the first smokeless gas-turbine engines to
Royal Caribbean International, one year after Celebrity Cruises began outfitting
its Millennium-class ships with this environmentally friendly technology. We
also are gratified that other cruise lines have followed this lead of using gas
turbines on at least a partial basis. (A summary of our 2001 environmental
programs and initiatives is presented elsewhere in this Annual Report.)
You might say the Millennium class made a double-curtsy in 2001 with debuts by
Infinity and Summit. A fourth sister, Constellation, will arrive in May for
European itineraries. In just two years, Celebrity Cruises will have doubled its
capacity to 16,350 berths - almost all of the berths created since 1995. The
Millennium class features the largest penthouse and spa facilities at sea, as
well as specialty restaurants with artifacts evoking a bygone era. These include
carved-walnut panels from Olympic, identical twin to Titanic, and a prominent
statue and gold-lacquered murals from Normandie, the most notable ship of the
1930s. Amenities such as these, combined with what is widely regarded as some of
the finest dining in the cruise industry, are reasons that guests of Celebrity
Cruises are extremely loyal. We are refining our marketing efforts in 2002 to
target these and other discerning cruisers.
COVERING THE CARIBBEAN
For the first time, we made it possible to visit every corner of the Caribbean,
from Cozumel to Curacao, on our hugely successful Voyager-class ships. Newcomer
Adventure of the Seas, the third of five 142,000-ton marvels, began southern
Caribbean itineraries from San Juan in November. Miami-based Voyager of the Seas
and Explorer of the Seas continued their western and eastern Caribbean routes.
These revolutionary ships are generating the highest per diems in the fleet.
We are continually expanding our cruise offerings to populous markets within
driving distance of several U.S. ports. First-time endeavors along the Gulf
Coast were well-received in 2001. Rhapsody of the Seas began a rotation from
three different ports in the Gulf of Mexico - Galveston,Tampa and New Orleans -
and will adopt Galveston as a year-round base this April. For the first time,
Celebrity's Zenith wintered in Tampa and Horizon in Miami. In November 2002, the
Gulf lineup also will include
Royal Caribbean Cruises Ltd. 5
While we are optimistic about the future
as we stand, we believe this merger would
accelerate our already excellent prospects for
improving margins and profits.
Nordic Empress in Tampa, Splendour of the Seas in Houston, and Grandeur of the
Seas in New Orleans. We believe there is much untapped potential in these ports
as well as mid-Atlantic ports such as Baltimore and Charleston, S.C., where this
year Celebrity's Galaxy starts operating 10- and 11-night cruises to the
Caribbean.
Royal Celebrity Tours began escorting guests on pre- and post-cruise tours to
Denali National Park and other scenic areas along the route of the Alaska
Railroad. Two glass-domed "Wilderness Express" traincars offer views of remote
landscapes, and 95 percent of our cruise-tour guests told us they would
recommend it to a friend. We are adding a third and fourth traincar, thus
doubling the number of guests we can accommodate on cruise-tour packages.
Five ships offered itineraries in Europe in summer 2001 as part of our efforts
to tap this fast-growing market. Unfortunately, 9/11 forced us to redeploy some
of these ships back to the U.S. But for 2002, we have assigned our two newest
ships, Constellation and Brilliance of the Seas, to Europe along with Splendour
of the Seas. Island Cruises, our joint venture with United Kingdom tour operator
First Choice Holidays, also will cater to the European market this summer with
Island Escape, formerly Viking Serenade.
In 2001, we introduced a sophisticated system for pre-selling shore excursions
through the Internet - still the only cruise lines with this capability. Besides
improving revenues, this new system has meant greater convenience for our guests
and cost savings to the company and to travel agents.
MERGER OPPORTUNITY
In addition to strengthening the brands of Royal Caribbean International and
Celebrity Cruises, in 2001 we pursued a significant merger opportunity - a
merger of equals with P&O Princess Cruises plc. On November 20, we announced an
agreement to create a merged "dual-listed company" that would retain separate
legal identities, tax residencies and listings on the stock exchanges in New
York, London and Oslo. Our efforts to combine forces with P&O Princess prompted
a competing, hostile takeover bid by Carnival Corporation, and there is still a
long way to go before the outcome is known.
Should we ultimately gain the necessary approvals for a combination, we would
create the world's largest cruise vacation company, deploying 41 ships and
75,000 double-occupancy berths, not including newbuilds in 2002. The 14 firm
orders for new ships between 2002 and 2004 - six by Royal Caribbean and eight by
P&O Princess - would bring the combined enterprise to more than 100,000
berths. While we are optimistic about the future as we stand, we believe this
merger would accelerate our already excellent prospects for improving margins
and profits.
6 Royal Caribbean Cruises Ltd.
REGAINING MOMENTUM
Obviously, 2001 was fraught with difficulties. The events of September 11
impacted our earnings negatively by more than $47 million, due to lost revenues
and direct costs associated with guests not being able to reach their departure
ports, as well as costs associated with business decisions taken in the
aftermath of the attacks. Legend of the Seas missed a month of service, sailing
around Africa (without guests) to Singapore as a post-September 11 consequence,
avoiding passage through the Suez Canal. We also absorbed a $31-million negative
impact from an unusual spate of additional canceled cruises. Galaxy, Millennium,
Infinity and Nordic Empress all had service outages in the second quarter.
This confluence of adverse events resulted in greater financial leverage than we
intended. Fortunately, we had previously taken steps to anticipate our financing
needs in advance of the requirements. As a result, we ended the year with $1.4
billion in liquidity and have minimized the need to raise new sources of funding
to complete our capital program. We expect our leverage to peak over the next 12
months and then decline progressively to a more normal level. We also believe
our credit ratings will improve as we go down this path.
Entering 2002, we continue to focus attention on our costs. A series of
difficult decisions enabled us to reduce our non-fuel unit costs by 5 percent,
including the elimination of almost 500 shoreside positions. We expect to
realize comparable savings during 2002. In addition, we hope to benefit from a
decline in global oil prices. We have achieved these cost efficiencies without
affecting our continually improving product quality, and we are determined to
continue to do so.
WITH THANKS
I have many people to thank for their incredible efforts in 2001. I am grateful
to our Board of Directors for their steadying hands. I thank our reliable
partners in the travel-agent community, who ultimately carry our message to
cruise vacationers. And I especially thank the more than 25,000 shoreside and
shipboard employees of Royal Caribbean International and Celebrity Cruises.
Their performance under adversity was remarkable. Yes, we have assembled a
fantastic fleet. More important, we have assembled a group of fantastic people.
Sincerely,
/s/ Richard D. Fain
-----------------------
Richard D. Fain
Chairman and CEO
Royal Caribbean Cruises Ltd. 7
(Photo)
Celebrity Cruises' new Summit takes a bow against the Miami skyline.
8
(Photo)
9
(Photo)
Main dining room, Voyager of the Seas
10
(Photo)
15.3 million
guest cruise days
RISING DEMAND
A flotilla of spectacular new cruise ships propelled the North American market
to 57-percent growth in five years - from 4.4 million guests in 1995 to 6.9
million in 2000. The numbers rose slightly to 6.91 million in 2001 despite an
economic recession and a decline in air travel. Royal Caribbean International
and Celebrity Cruises served a record 2.4 million guests in 2001, and in two
years, have increased the number of "guest cruise days" by 37 percent - from
11.2 million in 1999 to 15.3 million in 2001. Even with an unprecedented four
new ships and 9,250 new berths in a single year, occupancy in 2001 remained high
at 101.8 percent. The company attracted more than one million first-time
cruisers in 2001.
Royal Caribbean Cruises Ltd. 11
43.5 million
'definitely or probably' will cruise
(Photo)
ATTRACTIVE DEMOGRAPHICS
The Baby Boom is the engine driving the cruise industry's long-term demographics
- 53 percent of cruisers are Baby Boomers. The average age of cruisers in the
U.S. market is 50, according to Cruise Lines International Association's
biannual market study. The first of the 79.3 million Americans from the Baby
Boom (1946-1964) reached age 55 in 2001. By 2010, there will be 41 million
people aged 50 to 59 - twice as many as there were in 1990. And the Baby Boomers
command an average household income of almost $60,000. CLIA identified a
significant group of vacationers who would "definitely or probably" take a
cruise in the next five years - 43.5 million people. Nearly half of a target
population of 140 million people (68.3 million) are "interested" in cruising,
and those prospects have an average household income of $60,400.
12 Royal Caribbean Cruises Ltd.
(Photo)
Water slide and rock-climbing wall, Radiance of the Seas
13
(Photo)
Dine-in wine cellars on Millennium-class ships
14
(Photo)
14 of top 23 ships
'
in Conde Nast Traveler poll
HIGH SATISFACTION LEVELS
'
In the "2001 Reader's Choice Awards" poll by Conde Nast Traveler, the company
claimed 14 of the top 23 places in the Best Large Ships category while its
largest competitor had none. Celebrity Cruises' Millennium, Mercury and Century
were three of the four highest-rated ships in the poll. CLIA surveys show that
cruise vacationers are happy customers - nearly 9 out of 10 cruisers say they
plan to cruise again. Experienced cruisers are emphatic that cruises rate higher
than other vacations: 75 percent because of the pampering, 74 percent because of
the fine dining, and 71 percent because of hassle-free vacationing. Relaxing and
getting away (69 percent) and visiting several destinations (68 percent) are
other major reasons that cruisers are most pleased with vacations at sea.
Royal Caribbean Cruises Ltd. 15
(Photo)
5 years young
average age of ships
YOUNG FLEET PROFILE
In the company's multi-billion-dollar new building program, 16 new ships have
been launched since 1995, encompassing five distinct classes of vessel design -
Vision, Century, Voyager, Millennium and Radiance. These innovative ships offer
unique amenities, from splendid dining rooms and theaters to luxurious spas and
extensive recreation facilities, including ice-skating rinks and rock-climbing
walls. Plush surroundings and advanced technology are consistent from one ship
to the next. Celebrity Cruises, the fastest-growing premium cruise line, will
have doubled its capacity between 2000 and 2002 with four Millennium-class
ships. In 2001, Royal Caribbean International became the world's largest cruise
brand with 33,050 double occupancy berths. Altogether, 73 percent of the
company's 47,400 berths have been built since 1995, and the average age of the
23 ships at year end was about 5 years, compared to 8 years for the fleet of the
largest competitor.
16 Royal Caribbean Cruises Ltd.
(Photo)
Bronze sculpture by Fernando Botero, Summit
17
(Photo)
Ice-skating rinks on Voyager-class ships
18
[Photo]
CENTER OF EVERYTHING
CUSTOMER FOCUS
Customer service, frequently praised by guests, is the hallmark of cruise
vacations with Royal Caribbean International and Celebrity Cruises. Guests are
at the center of everything we do, and their comfort and safety are always
paramount concerns. The company's focus on customers was never more evident than
after U.S. air travel was grounded following the September 11 terrorist attacks.
Every ship simultaneously faced an abnormal operating environment. "Your
willingness and ability to manage this unforeseeable and tragic emergency went
far above and beyond what might be expected of any company under the
circumstances," wrote Victoria and Anthony Spellman of Scottsdale, Arizona.
Susan Mahoney and Victoria Willis of Gilbert, Arizona, wrote, "We were told that
if we stayed in your care, we would be taken care of, and we would get home
safe. You did exactly as you promised . . . Somehow, 'thank you' does not sound
like enough."
Royal Caribbean Cruises Ltd. 19
MOST ADVANCED TECHNOLOGY
[Photo]
ENVIRONMENTAL STEWARDSHIP
Royal Caribbean International and Celebrity Cruises uphold the strictest
environmental standards and utilize the most advanced technology. Six ships
launched between 2000 and 2002 are equipped with the cruise industry's first
smokeless, gas turbine engines. Environmental Officers, the stewards of our
ocean protection programs, work with crew members and dozens of companies to
recycle and reuse products and ensure proper disposal. In 2001, the fleet
conducted research in the management of solid and liquid waste and eliminated
hazardous waste from photo operations. The fleet has earned and maintained its
voluntary certification against the ISO 14001 standard, issued by the
International Standards Organization. Continuous improvement is achieved by
identifying Significant Environmental Aspects and setting objectives and targets
for the reduction in the use of natural resources and reduction of nitrous oxide
emissions.
20 Royal Caribbean Cruises Ltd.
[Photo]
Environmental Officer Tracy Guerin, Adventure of the Seas
21
2001 ENVIRONMENTAL REPORT
A culture of environmental stewardship permeates the fleet of Royal Caribbean
International and Celebrity Cruises. From the ship's Master to the crew, every
effort is made to ensure that we are good stewards of our ocean environment and
of all the ports we visit. This responsibility extends to every employee,
shipboard and shoreside.
The company is committed to protecting and preserving environmental resources,
preventing pollution, and continually improving environmental management. This
means not only meeting applicable environmental regulations but also exploring
and implementing programs that go Above and Beyond Compliance. The three basic
tenets of the Environmental Management System are 1) reduce the creation or
generation of waste; 2) recycle or reuse materials; and 3) properly dispose of
remaining wastes.
Significant advances have been made in recent years while earning and
maintaining ISO 14001 certification for the fleet's Environmental Management
System. Royal Caribbean International and Celebrity Cruises are the first cruise
lines in the world to obtain ISO 14001 certification from the International
Standards Organization.
Each ship has an Environmental Officer assigned to oversee environmental
operations. Every year, with the assistance of an external auditor evaluating
the fleet, the company honors one ship for superior environmental performance
and another for environmental innovation.
While United States and international law permit untreated gray water to be
discharged virtually anywhere at sea and treated black water to be discharged
four nautical miles from shore, the company's standard is to make all discharges
at least 12 nautical miles from shore.
The company aggressively pursues new technologies in order to reach the highest
environmental standards. One of the most noteworthy initiatives was the first
application of smokeless, gas-turbine technology onboard a cruise ship. This
began with Celebrity Cruises' Millennium in 2000 and was extended to three new
vessels in 2001 (Infinity, Summit, and Radiance of the Seas) and both new ships
arriving in 2002 (Constellation and Brilliance of the Seas). Altogether, eight
ships will have gas turbines by 2004.
Gas-turbine technology minimizes a ship's environmental impact by drastically
reducing exhaust emissions; emissions of nitrous oxides are lowered by 85
percent and sulfur oxides by more than 90 percent - no smoke, only steam.
High-efficiency gas turbines drive generators that, in turn, provide electricity
to the propulsion motors. At the same time, a steam turbine utilizes waste heat
from the gas turbine's exhaust to produce additional electricity for ship
services.
Other technological advances reflect this commitment to Above and Beyond
Compliance. Lloyd's Register, a leading international ship classification
society, awarded its first-ever Environmental Protection certificates to
Celebrity Cruises' Mercury and Galaxy for installing a system of reverse osmosis
treatment for gray water and treated black water. These Rochem FM systems,
manufactured in Germany, are the same sort used to make bottled water. In
addition to reverse osmosis, the systems use a flat-membrane (FM) filtration
process to produce a highly purified stream.
22 Royal Caribbean Cruises Ltd.
The company continues to explore prototype systems through research and
development, as was done with General Electric for the gas turbines and with a
Swedish manufacturer for Marinfloc, a bilge-water cleaning system installed
fleetwide in 1998-99. Marinfloc uses aluminum chloride to break up emulsions in
a process called flocking, so that processed bilge water is at least three times
cleaner than the international standard.
Some of the chief accomplishments in 2001 included:
o Increasing fuel efficiency through system upgrades, enhanced
maintenance routines, and energy conservation. This resulted in savings
of 17,500 tons of diesel fuel, equivalent to a train of 700 tank cars
spanning more than nine miles.
o Reducing exhaust emissions by optimizing engine performance, using fuel
additives, and implementing an advanced fuel polarization system. NOx
emissions were lowered by 23 percent, earning Celebrity Cruises the
Environmental Protection certificate from Lloyd's Register.
o Re-piping the photo labs to create a "closed loop" operation of silver
recovery units. By removing silver from photo waste, effluent becomes
non-hazardous.
o Installing a filter system in laundry rooms to remove perchloroethylene
(PERC) from any liquid waste in the dry cleaning and steam-press
process. The filtered effluent can be landed as non-hazardous.
o Eliminating 99 chemicals from a list of approved chemicals as part of
ongoing improvements in chemical management.
o Replacing Sterno, used for warming a chafing dish, with the odorless
Ecofuel, which contains no alcohol and no air pollutants, has a lower
flash point, and is self-extinguishing when inverted.
o Using water-based printing plates instead of plates that required a
chemical printing solution.
Having made my living from the sea for more than 30 years, it gives me great
pride in knowing that whether through technological advances or best practices,
Royal Caribbean International and Celebrity Cruises strive to set the standard
for environmental stewardship.
Capt. William S. Wright
Senior VP, Safety & Environment
Royal Caribbean Cruises Ltd. 23
WASTE STREAM OPERATIONAL CONTROLS
GRAY WATER BLACK WATER BILGE WATER
- Cabin Sinks & - Toilets All liquids collected
Showers in open spaces in the
- Medical Facility bottom of the ship
- Laundry Sinks
Holding Tank
- Galley
Treatment Unit
- A/C Condensate (Sludge)
Monitor > 5ppm
- Salon
Clean Holding Tank
Black Water Black Water
Holding Treatment Monitor > 5ppm
Tank
Documentation
Holding Tank (or)
(or) (or) Approved Discharge
Shoreside to Sea
Approved Discharge Approved Discharge Treatment Beyond
Shoreside to Sea Shoreside to Sea Facility 12 nm
Treatment Beyond Treatment Beyond
Facility 12 nm Facility 12 nm
Corporate Discharge beyond 12 nm with ship's Physical removal of plastics & other debris; Discharge if beyond 12 nm and
Policy speed > 6 knots or land for treatment land remainder for treatment by shore facility < 5 parts per million
by shore facility. or discharge beyond 12 nm with ship's (ppm) oil.
speed > 6 knots.
Regulatory Local Treated discharge beyond 4 nm. < 15 ppm, discharged while
Standards underway.
Above and Yes Yes Yes
beyond
compliance
nm: nautical miles
Royal Caribbean Cruises Ltd. 24
HOTEL AND
SLUDGE RESTAURANT WASTE SPECIAL WASTE
- Used Lube Oil Paper Food Cans Glass - Chemicals
& Plastic Waste
- Fuel Sludge - Spent
Fluorescents
Compactor
Grinder Crusher - Batteries
Documentation - Used Paints/
Thinners
Incinerator Discharge Cold Storage - Dry Cleaning
to Sea Waste
Beyond
12 nm - Photo Waste
Documentation Segregated Leakproof
(or) Containers
Land
Approved Land Ash for Ashore for Documentation
Shoreside Shoreside Disposal Recycling
Treatment Land Ashore to
Facility Authorized Waste
Management Professionals
Corporate Incinerate onboard or land for Collect and sort at source of Land only in designated ports
Policy treatment and recycling, by shore generation. Generally, food waste to authorized hazardous waste
facility. is incinerated onboard with the professionals. Corporate
incinerator ash landed ashore. requires shore facility visits
Food waste may also be landed or or audits.
discharged > 12 nm.
Regulatory If not incinerated, land for Except for plastics, discharge U.S. and International
Standards disposal. outside 3, 12, 25 or 200nm.
Above and Equal Yes Equal
beyond compliance
Royal Caribbean Cruises Ltd. 25
FULFILL THE WISHES
REACHING OUT
Two months after the September 11 terrorist attacks on the twin towers of the
World Trade Center, Royal Caribbean International's new Adventure of the Seas
was the first cruise ship to dock at the Passenger Ship Terminal in New York.
Mayor Rudy Giuliani (second from right) joined CEO Richard Fain (far right) at
the naming ceremony. Four godparents - Sgt. Richard Lucas, Tara Stackpole,
Maggie McDonnell and Kevin Hannafin - represented the fallen heroes of New York
City's fire and police departments and the Port Authority Police Department. The
many outreach efforts of Royal Caribbean International and Celebrity Cruises
include the donation of hundreds of cruises to the Make-A-Wish Foundation,
fulfilling wishes of children facing life-threatening illnesses. More than $4.5
million has been raised for South Florida charities in the 13 years of the Royal
Caribbean Classic, a Senior PGA Tour golf tournament.
26
Financial Table of Contents
29 Management's Discussion and Analysis of
Financial Condition and Results of Operations
39 Consolidated Statements of Operations
40 Consolidated Balance Sheets
41 Consolidated Statements of Cash Flows
42 Consolidated Statements of Shareholders' Equity
43 Notes to the Consolidated Financial Statements
52 Management's Responsibility for Financial Statements
52 Report of Independent Certified Public Accountants
53 Board of Directors and Executive Officers
54 Shareholder Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations
As used in this document, the terms "Royal Caribbean," "we," "our" and "us"
refer to Royal Caribbean Cruises Ltd., the term "Celebrity" refers to Celebrity
Cruise Lines Inc. and the terms "Royal Caribbean International" and "Celebrity
Cruises" refer to our two cruise brands. In accordance with industry practice,
the term "berths" is determined based on double occupancy per cabin even though
some cabins can accommodate three or four guests.
Certain statements under this caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in our letter to shareholders
and elsewhere in this document constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. Forward-looking statements do
not guarantee future performance and may involve risks, uncertainties and other
factors which could cause our actual results, performance or achievements to
differ materially from the future results, performance or achievements expressed
or implied in those forward-looking statements. Examples of these risks,
uncertainties and other factors include, but are not limited to:
o general economic and business conditions,
o cruise industry competition,
o changes in vacation industry capacity, including cruise capacity,
o the impact of tax laws and regulations affecting our business or our
principal shareholders,
o the impact of changes in other laws and regulations affecting our
business,
o the impact of pending or threatened litigation,
o the delivery of scheduled new vessels,
o emergency ship repairs,
o incidents involving cruise vessels at sea,
o reduced consumer demand for cruises as a result of any number of
reasons, including armed conflict, political instability, or the
unavailability of air service,
o changes in interest rates or oil prices, and
o weather.
The above examples may not be exhaustive and new risks emerge from time to time.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
General
SUMMARY
We reported net income and earnings per share for the year ended December 31,
2001 as shown in the table below. Net income decreased 42.9% to $254.5 million
or $1.32 per share on a diluted basis in 2001 compared to $445.4 million or
$2.31 per share in 2000. The decrease in net income is primarily the result of
lost revenues and additional costs associated with events related to September
11, 2001, and ships out of service. Additionally, net income was impacted by a
decline in net revenues per available passenger cruise day due to a general
softness in the U.S. economy and a significant growth of our fleet capacity. The
increase in capacity is associated with the addition of Millennium and Explorer
of the Seas in 2000 and Infinity, Radiance of the Seas, Summit, and Adventure of
the Seas in 2001.
Net income for 2001 was adversely impacted by approximately $47.7 million due to
lost revenues and extra costs directly associated with passengers not being able
to reach their departure ports during the weeks following the terrorist attacks
of September 11, 2001 and costs associated with business decisions taken in the
aftermath of the attacks. Also, net income was negatively impacted by
approximately $30.7 million from the cancellation of nine weeks of sailings due
to ship incidents, partially offset by $14.0 million related to insurance claims
from prior years. Net income for 1999 was adversely impacted by $17.3 million of
non-recurring settlement-related charges and by $12.8 million, net of insurance
recoveries, for ships out of service. Accordingly, on a comparable basis, before
the impact of September 11, 2001, ships out of service, insurance claims and the
settlement charges, earnings were $318.9 million or $1.65 per share in 2001
versus $445.4 million or $2.31 per share in 2000 and $414.0 million or $2.22 per
share in 1999. There were no significant events or circumstances in 2000 for
which an adjustment was appropriate to make 2000 net income comparable to
adjusted 2001 and 1999 earnings.
Year Ended December 31,
(in thousands, -------------------------------------
except per share data) 2001 2000 1999
---------------------- ---- ---- ----
Revenues $3,145,250 $2,865,846 $2,546,152
Operating Income 455,605 569,540 480,174
Net Income 254,457 445,363 383,853
Basic Earnings
Per Share $ 1.32 $ 2.34 $ 2.15
Diluted Earnings
Per Share $ 1.32 $ 2.31 $ 2.06
28 Royal Caribbean Cruises Ltd.
Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
SELECTED STATISTICAL INFORMATION (UNAUDITED):
2001 2000 1999
---- ---- ----
Guests Carried 2,438,849 2,049,902 1,704,034
Guest Cruise Days 15,341,570 13,019,811 11,227,196
Occupancy Percentage 101.8% 104.4% 104.7%
PROPOSED DUAL-LISTED COMPANY MERGER WITH P&O PRINCESS CRUISES PLC
On November 19, 2001, we entered into an agreement with P&O Princess Cruises plc
(P&O Princess), providing for the combination of Royal Caribbean and P&O
Princess as a merger of equals under a dual-listed company structure. If the
dual-listed company merger is completed, it would involve a combination of the
two companies through a number of contracts and certain amendments to our
Articles of Incorporation and By-Laws and to P&O Princess' Articles and
Memorandum of Association. The two companies would retain their separate legal
identities but would operate as if they were a single unified economic entity.
The contracts governing the dual-listed company merger would provide that the
boards of directors of the two companies would be identical and that, as far as
possible, the shareholders of Royal Caribbean and P&O Princess would be placed
in substantially the same economic position as if they held shares in a single
enterprise which owned all of the assets of both companies. The net effect of
the dual-listed company merger would be that the shareholders of Royal Caribbean
would own an economic interest equal to 49.3% of the combined company and the
shareholders of P&O Princess would own an economic interest equal to 50.7% of
the combined company.
The obligations of Royal Caribbean and P&O Princess to effect the dual-listed
company merger are subject to the satisfaction of various conditions, including
the receipt of certain regulatory approvals and consents and approval by the
shareholders of each of Royal Caribbean and P&O Princess. No assurance can be
given that all required approvals and consents will be obtained, and if such
approvals and consents are obtained, no assurance can be given as to the terms,
conditions and timing of the approvals and consents. If the dual-listed company
merger is not completed by November 16, 2002, either party can terminate the
agreement if it is not in material breach of its obligations thereunder. We have
incurred, and continue to incur, costs which have been or will be deferred in
connection with the dual-listed company merger. In the event the transaction is
not consummated, we would be required to write these costs off, resulting in an
estimated impact to earnings of approximately $15 million. If the dual-listed
company merger is completed, these deferred costs, together with additional
costs, would be capitalized as part of the transaction.
If the merger agreement is terminated under certain circumstances, we would be
obligated to pay P&O Princess a break fee of $62.5 million. These circumstances
include, among other things, our board of directors withdrawing or adversely
modifying its recommendation to shareholders to approve the dual-listed company
merger, our board of directors recommending an alternative acquisition
transaction to shareholders, and our shareholders failing to approve the
dual-listed company merger if another acquisition proposal with respect to Royal
Caribbean exists at that time. Similarly, P&O Princess would be obligated to pay
us a break fee of $62.5 million upon the occurrence of reciprocal circumstances.
In December 2001, Carnival Corporation (Carnival) announced a competing
pre-conditional offer to acquire all of the outstanding shares of P&O Princess.
In connection with its preconditional offer, Carnival solicited proxies from P&O
Princess' shareholders in favor of an adjournment of the P&O Princess' special
meeting prior to a shareholder vote to approve the dual-listed company merger.
On February 14, 2002, Royal Caribbean and P&O Princess convened special meetings
of their respective shareholders to approve the dual-listed company merger.
Prior to voting to approve the merger, the shareholders of each company voted to
adjourn their respective meetings until an unspecified future date. We do not
know at this time the date on which the meetings will be reconvened.
JOINT VENTURE WITH P&O PRINCESS
On November 19, 2001, we entered into a joint venture agreement with P&O
Princess to target customers in southern Europe. The joint venture company is
owned 50% by P&O Princess and 50% by us. Each party has committed up to $500.0
million in shareholder equity, with approximately $5.0 million contributed by
each party to date and the balance due and payable when called by the joint
venture company. Each party has agreed to assign two identified ship-build
contracts to the joint venture company, which will be held in trust for the
joint venture company pending such assignments. Any payments we have made under
these contracts prior to assignment will be credited against our shareholder
equity commitment. Subject to the terms of the agreement, the joint venture
agreement can be terminated by either party if certain commercial benchmarks
have not been achieved by January 1, 2003 or April 1, 2003. The joint venture
agreement does not require the approval of the shareholders of Royal Caribbean
or P&O Princess. (See Future Commitments.)
Royal Caribbean Cruises Ltd. 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
FLEET EXPANSION
Our current fleet expansion program encompasses three distinct vessel designs
known as the Voyager-class, Millennium-class and Radiance-class. Since 1999, we
have taken delivery of three Voyager, three Millennium and one Radiance class
vessels. We currently operate 22 ships with 45,854 berths.
We have six ships on order. The planned berths and expected delivery dates of
the ships on order are as follows:
Expected
Vessel Delivery Date Berths
------ ------------- ------
Royal Caribbean International
Voyager-class:
Navigator of the Seas 1st Quarter 2003 3,114
Mariner of the Seas 1st Quarter 2004 3,114
Radiance-class:(1)
Brilliance of the Seas 3rd Quarter 2002 2,100
Serenade of the Seas(2) 4th Quarter 2003 2,100
Jewel of the Seas(2) 2nd Quarter 2004 2,100
Celebrity Cruises
Millennium-class:
Constellation 2nd Quarter 2002 2,034
(1) We have two options on Radiance-class vessels with delivery dates in
the third quarters of 2005 and 2006.
(2) These two ships are committed to the new southern European joint
venture with P&O Princess.
We believe the Voyager-class vessels are the largest and the most innovative
passenger cruise ships ever built. The Radiance-class vessels are a progression
from Royal Caribbean International's Vision-class vessels, while the
Millennium-class ships are a progression from Celebrity Cruises' Century-class
vessels.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates. (See Notes 1 and 2 to the Consolidated Financial Statements.) Certain
of our accounting policies are deemed "critical," as they require management's
highest degree of judgment, estimates and assumptions. A discussion of what we
believe to be our most critical accounting policies follows:
SHIP ACCOUNTING
Our ships represent our most significant asset, and we state them at cost less
accumulated depreciation and amortization. Depreciation of vessels, which
includes amortization of vessels under capital leases, is computed net of a 15%
projected residual value using the straight-line method over estimated service
lives of primarily 30 years. Significant vessel improvement costs are
capitalized as additions to the vessel versus a repair and maintenance activity,
which is charged to expense. Our depreciation and amortization assumptions take
into consideration the impact of anticipated technological changes, long-term
cruise and vacation market conditions and historical useful lives of
similarly-built ships. Given the very large and complex nature of our ships, our
accounting estimates related to ships and determinations of vessel improvement
costs to be capitalized require considerable judgment and are inherently
uncertain. Should certain factors or circumstances cause us to revise our
estimate of ship service lives or projected residual values, depreciation
expense could be materially lower or higher. If circumstances cause us to change
our assumptions in making determinations as to whether vessel improvements
should be capitalized, the amounts we expense each year as repairs and
maintenance costs could increase, partially offset by a decrease in depreciation
expense.
VALUATION OF LONG-LIVED ASSETS AND GOODWILL
We review long-lived assets and goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be fully recoverable. The assessment of possible impairment is based on our
ability to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated future cash flows are less
than the carrying value of the asset, an impairment charge is recognized for the
difference between the asset's estimated fair value and its carrying value.
The determination of fair value is based on quoted market prices in active
markets, if available. Such markets are often not available for used cruise
ships. Accordingly, we also base fair value on independent appraisals, sales
price negotiations and projected future cash flows discounted at a rate
determined by
30 Royal Caribbean Cruises Ltd.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
management to be commensurate with our business risk. The estimation of fair
value utilizing discounted forecasted cash flows includes numerous uncertainties
which require our significant judgment when making assumptions of revenues,
operating costs, marketing, selling and administrative expenses, interest rates,
ship additions and retirements, cruise industry competition and general economic
and business conditions, among other factors.
Upon adoption of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002, we ceased to amortize goodwill; goodwill
amortization was $10.4 million in 2001. In addition, we are required to perform
an initial impairment review of our goodwill upon adoption and an annual
impairment review thereafter. We currently do not expect to record an impairment
charge upon completion of the initial impairment review.
If there is a material change in the assumptions used in our determination of
fair values or if there is a material change in the conditions or circumstances
influencing fair value, we could be required to recognize a material impairment
charge.
CONTINGENCIES - LITIGATION
On an ongoing basis, we assess the potential liabilities related to any lawsuits
or claims brought against us. While it is typically very difficult to determine
the timing and ultimate outcome of such actions, we use our best judgment to
determine if it is probable that we will incur an expense related to the
settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, we make estimates of the amount of insurance recoveries, if any. We
accrue a liability when we believe a loss is probable and the amount of loss can
be reasonably estimated. Due to the inherent uncertainties related to the
eventual outcome of litigation and potential insurance recovery, it is possible
that certain matters may be resolved for amounts materially different from any
provisions or disclosures that we have previously made.
PROPOSED STATEMENT OF POSITION
On June 29, 2001, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a proposed Statement of
Position, "Accounting for Certain Costs and Activities Related to Property,
Plant and Equipment." Under the proposed Statement of Position, we would be
required to adopt a component method of accounting for our ships. Using this
method, each component of a ship would be identified as an asset and depreciated
over its own separate expected useful life. In addition, we would have to
expense drydocking costs as incurred which differs from our current policy of
accruing future drydocking costs evenly over the period to the next scheduled
drydocking. Lastly, liquidated damages received from shipyards as mitigation of
consequential economic costs incurred as a result of the late delivery of a new
vessel would have to be recorded as a reduction of the ship's cost basis versus
our current treatment of recording liquidated damages as nonoperating income. If
adopted, the proposed Statement of Position would be effective for us beginning
on January 1, 2003. We have not yet analyzed the impact that this proposed
Statement of Position would have on our results of operation or financial
position, as we are uncertain whether, or in what form, it will be adopted.
Results of Operations
The following table presents operating data as a percentage of revenues. As a
result of the events of September 11, 2001, ships out of service and certain
other items, not all operating margins are comparative year over year.
Year Ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Expenses:
Operating 61.5 57.7 58.8
Marketing, selling
and administrative 14.4 14.4 14.6
Depreciation and amortization 9.6 8.0 7.8
----- ----- -----
Operating Income 14.5 19.9 18.8
Other Income (Expense) (6.4) (4.4) (3.8)
----- ----- -----
Net Income 8.1% 15.5% 15.0%
===== ===== =====
Royal Caribbean Cruises Ltd. 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
REVENUES
Revenues increased 9.7% to $3.1 billion from $2.9 billion for the same period in
2000. The increase in revenues was due primarily to a 20.8% increase in
capacity, partially offset by a 9.1% decline in gross revenue per available
passenger cruise day. The increase in capacity was primarily due to the addition
of Millennium and Explorer of the Seas in 2000, and Infinity, Radiance of the
Seas, Summit and Adventure of the Seas in 2001. The increase in new capacity was
partially offset by the cancellation of 14 weeks of sailings due to ship
incidents and the events of September 11, 2001. The decline in gross revenue per
available passenger cruise day was primarily attributed to the events related to
September 11, 2001, a general softness in the U.S. economy and a significant
growth of our fleet capacity. Net revenue per available passenger cruise day for
2001 declined 9.1% from the prior year. Occupancy for 2001 was 101.8% compared
to 104.4% in 2000.
Starting in early 2001, we experienced a softness in bookings which we attribute
to the weakening U.S. economy. By mid-summer, we started to see a recovery in
this trend, with booking volume and pricing improving. Following the terrorist
attacks of September 11, 2001, there was a substantial drop in bookings and an
increase in cancellations. After the initial decline, bookings gradually
improved, prompted initially by substantial discounts. Pricing began to recover
by mid-November. Booking patterns, which shifted to closer-in sailing dates
following September 11, also began to return to pre-September 11 patterns.
EXPENSES
Operating expenses increased 17.1% to $1.9 billion in 2001 compared to $1.7
billion for the same period in 2000. The increase is primarily due to additional
costs associated with increased capacity.
Marketing, selling and administrative expenses increased 10.0% to $454.1 million
in 2001 from $412.8 million in 2000. On a per available passenger cruise day
basis, marketing, selling and administrative expenses decreased 8.9% due
primarily to economies of scale and cost containment efforts, partially offset
by business decisions taken subsequent to the events of September 11, 2001
involving itinerary changes, office closures, and severance costs related to a
reduction in force. Marketing, selling and administrative expenses as a
percentage of revenues were 14.4% for 2001 and 2000.
Cost savings initiatives from 2000 and 2001 contributed to a 4.5% reduction in
operating costs and marketing, selling and administrative expenses on a per
available passenger cruise day basis, excluding fuel costs, in 2001 compared to
2000. We expect a similar improvement in 2002.
Depreciation and amortization increased 30.4% to $301.2 million in 2001 from
$231.0 million in 2000. The increase is primarily due to incremental
depreciation associated with the addition of new ships.
OTHER INCOME (EXPENSE)
Gross interest expense (excluding capitalized interest) increased to $290.2
million in 2001 compared to $198.5 million in 2000. The increase is due
primarily to an increase in the average debt level associated with our fleet
expansion program, partially offset by a reduction in our weighted average
interest rate. Capitalized interest decreased from $44.2 million in 2000 to
$37.0 million in 2001 due to a lower average level of investment in ships under
construction and lower interest rates.
Included in Other income (expense) in 2001 and 2000 is $19.4 million and $9.2
million, respectively, of dividend income from our investment in convertible
preferred stock of First Choice Holidays PLC and $7.2 million and $10.2 million
in 2001 and 2000, respectively, of compensation from a shipyard related to the
delivery of ships. (See Liquidity and Capital Resources.)
32 Royal Caribbean Cruises Ltd.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
REVENUES
Revenues increased 12.6% to $2.9 billion in 2000 compared to $2.5 billion for
the same period in 1999. The increase in revenues is due to a 16.4% increase in
capacity partially offset by a 3.3% decline in gross revenue per available
passenger cruise day. The increase in capacity is primarily associated with the
addition to the fleet of Voyager of the Seas in 1999, and Millennium and
Explorer of the Seas in 2000. The decline in gross revenue per available
passenger cruise day was due to lower cruise ticket prices, a lower percentage
of guests electing to use our air program and lower shipboard revenue per diems
due to a higher use of concessionaires onboard the Royal Caribbean International
vessels in 2000. Concessionaires pay us a net commission, which is recorded as
revenue, in contrast to in-house operations, where shipboard revenues and
related cost of sales are recorded on a gross basis. Net revenue per available
passenger cruise day for 2000 was approximately the same as in 1999. Occupancy
for 2000 was 104.4% compared to 104.7% in 1999.
EXPENSES
Operating expenses increased 10.4% to $1.7 billion in 2000 as compared to $1.5
billion in 1999. The increase is primarily due to additional costs associated
with increased capacity and an increase in fuel costs, partially offset by a
decrease in air expenses due to a lower percentage of guests electing to use our
air program, as well as lower shipboard cost of sales due to the increased use
of concessionaires as discussed previously. Included in 1999 operating expenses
are charges of $17.3 million related to settlements with the U.S. Department of
Justice and the State of Alaska. Excluding the settlements, operating expenses
as a percentage of revenues decreased to 57.7% in 2000 from 58.1% in 1999.
Marketing, selling and administrative expenses increased 11.0% to $412.8 million
in 2000 from $371.8 million in 1999. The increase is primarily due to television
advertising costs associated with our new advertising campaigns to promote brand
awareness, as well as increased administrative staffing levels and investment in
information technology to support our growth. Marketing, selling and
administrative expenses as a percentage of revenues decreased from 14.6% in 1999
to 14.4% in 2000.
Depreciation and amortization increased 16.7% to $231.0 million in 2000 from
$197.9 million in 1999. The increase is due to incremental depreciation
associated with the addition of new ships, as well as shoreside capital
expenditures primarily related to information technology in support of our
growth plans.
OTHER INCOME (EXPENSE)
Gross interest expense (excluding capitalized interest) increased to $198.5
million in 2000 as compared to $165.2 million in 1999. The increase is due
primarily to higher debt levels associated with our fleet expansion program and
higher interest rates. Capitalized interest increased $9.6 million from $34.6
million in 1999 to $44.2 million in 2000, due to an increase in expenditures
related to ships under construction.
Included in Other income (expense) in 2000 is approximately $10.2 million of
compensation from a shipyard related to the delivery of Millennium and $9.2
million of dividend income from our July 2000 investment in convertible
preferred stock of First Choice Holidays PLC. (See Liquidity and Capital
Resources.) Included in Other income (expense) in 1999 is $26.5 million of
loss-of-hire insurance resulting from ships out of service.
Liquidity and Capital Resources
SOURCES AND USES OF CASH
Net cash provided by operating activities was $633.7 million in 2001 as compared
to $703.3 million in 2000 and $583.4 million in 1999. The change in each year
was primarily due to fluctuations in net income.
During the year ended December 31, 2001, our capital expenditures were
approximately $2.1 billion, consisting of approximately $1.8 billion in cash
payments and approximately $0.3 billion related to the acquisition of a vessel
through debt, as compared to $1.3 billion during 2000 and $1.0 billion during
1999. The largest portion of capital expenditures related to the deliveries of
Infinity, Radiance of the Seas, Summit, and Adventure of the Seas in 2001;
Millennium and Explorer of the Seas in 2000; and Voyager of the Seas in 1999, as
well as progress payments for ships under construction in all years.
Royal Caribbean Cruises Ltd. 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Capitalized interest decreased to $37.0 million in 2001 from $44.2 million in
2000 due to a lower average level of investment in ships under construction and
lower interest rates. Capitalized interest increased to $44.2 million in 2000
from $34.6 million in 1999 due to an increase in expenditures related to ships
under construction.
During 2001, we received net cash proceeds of $1.8 billion from the issuance of
Senior Notes, Liquid Yield Option(TM) Notes, Zero Coupon Convertible Notes, term
loans, and drawings on our revolving credit facility. We also incurred
additional debt of $0.3 billion related to the acquisition of a vessel. During
2000, we received net proceeds of $1.2 billion from the issuance of term loans,
and drawings on our revolving credit facility. These funds were used for ship
deliveries and general corporate purposes, including capital expenditures. (See
Note 6 - Long-Term Debt.)
The Liquid Yield Option(TM) Notes and the Zero Coupon Convertible Notes are zero
coupon bonds with yields to maturity of 4.875% and 4.75%, respectively, due
2021. Each Liquid Yield Option(TM) Note and Zero Coupon Convertible Note was
issued at a price of $381.63 and $391.06, respectively, and will have a
principal amount at maturity of $1,000. The Liquid Yield Option(TM) Notes and
Zero Coupon Convertible Notes are convertible at the option of the holder into
17.7 million and 13.8 million shares of common stock, respectively, if the
market price of our common stock reaches certain levels. These conditions were
not met at December 31, 2001 for the Liquid Yield Option(TM) Notes or the Zero
Coupon Convertible Notes and therefore, the shares issuable upon conversion are
not included in the earnings per share calculation.
We may redeem the Liquid Yield Option(TM) Notes beginning on February 2, 2005,
and the Zero Coupon Convertible Notes beginning on May 18, 2006, at their
accreted values for cash as a whole at any time, or from time to time in part.
Holders may require us to purchase any outstanding Liquid Yield Option(TM) Notes
at their accreted value on February 2, 2005 and February 2, 2011 and any
outstanding Zero Coupon Convertible Notes at their accreted value on May 18,
2004, May 18, 2009, and May 18, 2014. We may choose to pay the purchase price in
cash or common stock or a combination thereof. In addition, we have a
three-year, $345.8 million unsecured variable rate term loan facility available
to us should the holders of the Zero Coupon Convertible Notes require us to
purchase their notes on May 18, 2004.
In July 2000, we invested approximately $300 million in convertible preferred
stock issued by First Choice Holidays PLC. Independently, we entered into a
joint venture with First Choice Holidays PLC to launch a new cruise brand,
Island Cruises. As part of the transaction, ownership of Viking Serenade was
transferred to the new joint venture at a valuation of $95.4 million. The
contribution of Viking Serenade represents our 50% investment in the joint
venture, as well as $47.7 million in proceeds used towards the purchase price of
the convertible preferred stock.
We made principal payments totaling approximately $45.6 million, $128.1 million
and $127.9 million under various term loans and capital leases during 2001, 2000
and 1999, respectively.
During 2001, 2000 and 1999, we paid quarterly cash dividends on our common stock
totaling $100.0 million, $91.3 million and $69.1 million, respectively. In April
2000, we redeemed all outstanding shares of our convertible preferred stock and
dividends ceased to accrue. We paid quarterly cash dividends on our convertible
preferred stock totaling $3.1 million and $12.5 million in 2000 and 1999,
respectively.
In 1999, we issued 10,825,000 shares of common stock. The net proceeds were
approximately $487.4 million. (See Note 7 - Shareholders' Equity.)
FUTURE COMMITMENTS
We currently have six ships on order for an additional capacity of 14,562
berths. The aggregate contract price of the six ships, which excludes
capitalized interest and other ancillary costs, is approximately $2.6 billion,
of which we have deposited $316.5 million as of December 31, 2001. Additional
deposits are due prior to the dates of delivery of $127.0 million in 2002 and
$5.2 million in 2003. We anticipate that overall capital expenditures will be
approximately $1.1 billion, $1.1 billion and $1.0 billion for 2002, 2003 and
2004, respectively. Two of the ships on order, with an aggregate capacity of
4,200 berths, are committed to the joint venture with P&O Princess. The
aggregate contract price of these two ships, excluding capitalized interest and
other ancillary costs, is approximately $0.8 billion and is included in our
projected capital costs above.
34 Royal Caribbean Cruises Ltd.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
In June 2001, we deferred our options to purchase two additional Radiance-class
vessels with delivery dates in the third quarters of 2005 and 2006. The options
have an aggregate contract price of $804.6 million. Our right to cancel the
options was extended to on or before July 26, 2002.
Pursuant to the joint venture agreement entered into in November 2001 with P&O
Princess, we have committed up to $500.0 million in shareholder equity, with
approximately $5.0 million contributed to date and the balance due and payable
when called by the joint venture company. We have agreed to assign our
ship-build contracts for Serenade of the Seas and Jewel of the Seas to the joint
venture company. The aggregate contract price of these two ships, excluding
capitalized interest and other ancillary costs, is approximately $0.8 billion,
of which we have deposited $79.3 million as of December 31, 2001. Also, we have
obtained commitments for export financing for up to 80% of the contract price of
these two vessels. Any payments we have made under these contracts prior to
assignment will be credited against our shareholder equity commitment. The joint
venture shareholders intend that the joint venture company be financed through
third-party indebtedness and each joint venture shareholder has committed to
provide necessary credit support in the form of guarantees on a pro rata basis,
subject to legal or regulatory restrictions. To the extent that third-party
financing cannot be obtained, and if approved in accordance with the terms of
the joint venture agreement, the joint venture shareholders will provide
financing on a pro rata basis on identical terms. Subject to the terms of the
joint venture agreement, the agreement can be terminated by either party if
certain commercial benchmarks have not been achieved by January 1, 2003 or April
1, 2003.
Under the joint venture agreement, if a change of control occurs with respect to
a joint venture shareholder, the other shareholder has a right to acquire the
interest of that shareholder at fair market value in exchange for preferred
stock or a 15-year subordinated note (or a combination thereof) of the
purchasing shareholder. Notwithstanding the foregoing, the joint venture
shareholder subject to a change of control has the right, subject to certain
conditions, to put its interest in the joint venture to the other joint venture
shareholder at a discount to fair market value in exchange for preferred stock
or a 20-year subordinated note (or a combination thereof) of the purchasing
shareholder.
We have $5.6 billion of long-term debt of which $238.6 million is due during the
12-month period ending December 31, 2002. The vast majority of our property and
equipment consists of vessels. We own all but two ships, which were financed
with capital leases. These capital lease obligations are included as a component
of long-term debt. (See Note 6 - Long-Term Debt.)
We are obligated under noncancelable operating leases primarily for office and
warehouse facilities, computer equipment and motor vehicles. As of December 31,
2001, future minimum lease payments under noncancelable operating leases
aggregated to $87.9 million, due primarily through 2016. We have future
commitments to pay for our usage of certain port facilities, maintenance
contracts and communication services aggregating $228.2 million, due through
2014. (See Note 12 - Commitments and Contingencies.)
As a normal part of our business, depending on market conditions, pricing and
our overall growth strategy, we continuously consider opportunities to enter
into contracts for the building of additional ships. We may also consider the
sale of ships. We continuously consider potential acquisitions and strategic
alliances. If any of these were to occur, they would be financed through the
incurrence of additional indebtedness, the issuance of additional shares of
equity securities or through cash flows from operations.
FUNDING SOURCES
As of December 31, 2001, our liquidity was $1.4 billion consisting of
approximately $0.7 billion in cash and cash equivalents and approximately $0.7
billion available under our $1.0 billion unsecured revolving credit facility.
Our $1.0 billion revolving credit facility expires June 2003. Any amounts
outstanding at that time will be payable immediately if the facility is not
renewed. We intend to renew or replace this facility prior to its expiration
date. The margin and facility fee under our $1.0 billion unsecured revolving
credit facility and the $625.0 million unsecured term loan vary with our credit
rating and were increased 0.20% and 0.25%, respectively, as a result of the
lowering of our credit rating by Standard & Poors to BB+ and Moody's to Ba2 in
the fourth quarter of 2001 and currently are at their highest contractual
levels. In addition, we have obtained commitments for export financing for up to
Royal Caribbean Cruises Ltd. 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
80% of the contract price of three of the six ships currently on order,
Constellation, Serenade of the Seas and Jewel of the Seas (or up to $1.0 billion
in aggregate for the three ships). Capital expenditures and scheduled debt
payments will be funded through a combination of cash flows provided by
operations, drawdowns under our available credit facility, the incurrence of
additional indebtedness and the sales of equity or debt securities in private or
public securities markets. The terrorist attacks of September 11, 2001 and the
lowering of our credit ratings by Standard & Poors and Moody's have adversely
impacted terms and availability of financing in the financial markets, and it is
indeterminable how long this situation will continue. Therefore, there can be no
assurances that cash flows from operations and additional financings from
external sources will be available in accordance with our expectations.
Our debt agreements contain covenants that require us, among other things, to
maintain minimum liquidity, net worth, and fixed charge coverage ratio and limit
our debt to capital ratio. We are in compliance with all covenants as of
December 31, 2001.
Financial Instruments and Other
GENERAL
We are exposed to market risk attributable to changes in interest rates, foreign
currency exchange rates and commodity prices. We minimize these risks through a
combination of our normal operating and financing activities and through the use
of derivative financial instruments pursuant to our hedging practices and
policies. The financial impacts of these hedging instruments are primarily
offset by corresponding changes in the underlying exposures being hedged. We
achieve this by closely matching the amount, term and conditions of the
derivative instrument with the underlying risk being hedged. We do not hold or
issue derivative financial instruments for trading or other speculative
purposes. Derivative positions are monitored using techniques including market
valuations and sensitivity analyses.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to our
long-term debt obligations. Market risk associated with our long-term fixed rate
debt is the potential increase in fair value resulting from a decrease in
interest rates. Market risk associated with our variable rate debt is the
potential increase in interest expense from an increase in interest rates. We
enter into interest rate swap agreements to modify our exposure to interest rate
movements and to manage our interest expense. At December 31, 2001, our interest
rate swap agreements effectively changed $525.0 million of fixed rate debt with
a weighted-average fixed rate of 7.3% to LIBOR-based floating rate debt. At
December 31, 2001, 58% of our debt was effectively fixed and 42% was floating.
The estimated fair value of our long-term debt at December 31, 2001, excluding
our Liquid Yield Option(TM) Notes and Zero Coupon Convertible Notes, was $4.3
billion using quoted market prices, where available, or using discounted cash
flow analyses based on market rates available to us for similar debt with the
same remaining maturities. The fair value of our interest rate swap agreements
was estimated to be $35.7 million as of December 31, 2001 based on quoted market
prices for similar or identical financial instruments to those we hold. A
hypothetical 10% decrease in assumed interest rates at December 31, 2001 would
increase the fair value of our long-term fixed rate debt by approximately $45.1
million, net of an increase in the fair value of our interest rate swap
agreements. A hypothetical 10% increase in assumed interest rates at December
31, 2001 would increase our 2002 interest expense by approximately $3.4 million.
CONVERTIBLE NOTES
The fair values of our Liquid Yield Option(TM) Notes and Zero Coupon Convertible
Notes fluctuate with the price of our common stock and at December 31, 2001 were
$470.2 million and $306.3 million, respectively. A hypothetical 10% decrease or
increase in our December 31, 2001 common stock price would decrease or increase
the value of our Liquid Yield Option(TM) Notes and Zero Coupon Convertible Notes
by $17.2 million and $22.4 million, respectively.
36 Royal Caribbean Cruises Ltd.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
FOREIGN CURRENCY EXCHANGE RATE RISK
Our primary exposure to foreign currency exchange rate risk relates to our firm
commitments under two vessel construction contracts denominated in euros. We
enter into foreign currency forward contracts to manage this risk and were
substantially hedged as of December 31, 2001. The fair value of our contracts at
December 31, 2001, was an unrealized loss of $99.3 million which is recorded,
along with an offsetting $99.3 million fair value asset related to our vessel
construction contracts, on our accompanying 2001 balance sheet. A hypothetical
10% strengthening of the U.S. dollar as of December 31, 2001, assuming no
changes in comparative interest rates, would result in an $89.5 million decrease
in the fair value of these contracts. This decrease in fair value would be fully
offset by a decrease in the U.S. dollar value of the related foreign currency
denominated vessel construction contracts.
We are also exposed to foreign currency exchange rate fluctuations on the U.S.
dollar value of our foreign currency denominated forecasted transactions. To
manage this exposure, we take advantage of any natural offsets of our foreign
currency revenues and expenses and enter into foreign currency forward contracts
and/or option contracts for a portion of the remaining exposure related to these
forecasted transactions. Our principal net foreign currency exposure relates to
the Norwegian kroner and the euro. At December 31, 2001, the estimated fair
value of such contracts was an unrealized gain of approximately $0.2 million
based on quoted market prices for equivalent instruments with the same remaining
maturities. A hypothetical 10% strengthening of the U.S. dollar as of December
31, 2001, assuming no changes in comparative interest rates, would decrease the
fair value of these contracts by approximately $6.2 million. This decrease in
fair value would be fully offset by a decrease in the U.S. dollar value of the
forecasted transactions being hedged.
BUNKER FUEL PRICE RISK
Our exposure to market risk for changes in bunker fuel prices relates to the
consumption of fuel on our vessels. Bunker fuel cost, as a percentage of our
revenues, was approximately 3.7% in 2001, 3.3% in 2000 and 2.1% in 1999. We use
fuel swap agreements to mitigate the financial impact of fluctuations in bunker
fuel prices. As of December 31, 2001, we had fuel swap agreements to pay fixed
prices for bunker fuel with an aggregate notional amount of $85.2 million,
maturing through 2003. The fair value of these contracts at December 31, 2001
was an unrealized loss of $7.8 million. We estimate that a hypothetical 10%
increase in our weighted-average bunker fuel price as of December 31, 2001 would
increase our 2002 projected bunker fuel cost by approximately $16.3 million.
This increase would be partially offset by a $7.5 million increase in the fair
value of our fuel swap agreements.
Royal Caribbean Cruises Ltd. 37
Consolidated Statements of Operations
Year Ended December 31,
(in thousands, except -------------------------------------------
per share data) 2001 2000 1999
----------- ----------- -----------
INCOME STATEMENT
Revenues $ 3,145,250 $ 2,865,846 $ 2,546,152
----------- ----------- -----------
Expenses
Operating 1,934,391 1,652,459 1,496,252
Marketing, selling and
administrative 454,080 412,799 371,817
Depreciation and amortization 301,174 231,048 197,909
----------- ----------- -----------
2,689,645 2,296,306 2,065,978
----------- ----------- -----------
Operating Income 455,605 569,540 480,174
----------- ----------- -----------
Other Income (Expense)
Interest income 24,544 7,922 8,182
Interest expense, net of
capitalized interest (253,207) (154,328) (130,625)
Other income (expense) 27,515 22,229 26,122
----------- ----------- -----------
(201,148) (124,177) (96,321)
----------- ----------- -----------
Net Income $ 254,457 $ 445,363 $ 383,853
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 1.32 $ 2.34 $ 2.15
=========== =========== ===========
Diluted $ 1.32 $ 2.31 $ 2.06
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
38 Royal Caribbean Cruises Ltd.
Consolidated Balance Sheets
As of December 31,
-----------------------------
(in thousands, except share data) 2001 2000
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 727,178 $ 177,810
Trade and other receivables, net 72,196 53,609
Inventories 33,493 30,115
Prepaid expenses and other assets 53,247 49,185
------------ ------------
Total current assets 886,114 310,719
Property and Equipment - at cost less
accumulated depreciation and amortization 8,605,448 6,831,809
Goodwill - less accumulated amortization
of $138,606 and $128,192, respectively 278,561 288,974
Other Assets 598,659 396,963
------------ ------------
$ 10,368,782 $ 7,828,465
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 238,581 $ 109,926
Accounts payable 144,070 158,143
Accrued expenses and other liabilities 283,913 200,900
Customer deposits 446,085 443,411
------------ ------------
Total current liabilities 1,112,649 912,380
Long-Term Debt 5,407,531 3,300,170
Other Long-Term Liabilities 92,018 --
Commitments and Contingencies (Note 12)
Shareholders' Equity
Common stock ($.01 par value; 500,000,000
shares authorized; 192,310,198 and
192,122,088 shares issued) 1,923 1,921
Paid-in capital 2,045,904 2,043,111
Retained earnings 1,731,423 1,576,921
Accumulated other comprehensive loss (16,068) --
Treasury stock (475,524 and 435,180
common shares at cost) (6,598) (6,038)
------------ ------------
Total shareholders' equity 3,756,584 3,615,915
------------ ------------
$ 10,368,782 $ 7,828,465
============ ============
The accompanying notes are an integral part of these financial statements.
Royal Caribbean Cruises Ltd. 39
Consolidated Statements of Cash Flows
Year Ended December 31,
-------------------------------------------
(in thousands) 2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 254,457 $ 445,363 $ 383,853
Adjustments:
Depreciation and amortization 301,174 231,048 197,909
Accretion of original issue discount 36,061 -- --
Changes in operating assets and liabilities:
(Increase) in trade and other receivables, net (18,587) (150) (16,927)
(Increase) decrease in inventories (3,378) (3,717) 5,436
Decrease (increase) in prepaid expenses and other assets 3,305 1,865 (6,006)
(Decrease) increase in accounts payable (14,073) 55,102 (12,792)
Increase (decrease) in accrued expenses and other liabilities 75,645 (8,204) (34,373)
Increase (decrease) in customer deposits 2,674 (21,622) 62,107
Other, net (3,589) 3,631 4,151
----------- ----------- -----------
Net cash provided by operating activities 633,689 703,316 583,358
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (1,737,471) (1,285,649) (972,481)
Investment in convertible preferred stock -- (305,044) --
Net proceeds from vessel transfer to joint venture -- 47,680 --
Other, net (46,501) (21,417) (14,963)
----------- ----------- -----------
Net cash used in investing activities (1,783,972) (1,564,430) (987,444)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net 1,834,341 1,195,000 --
Repayments of long-term debt (45,553) (128,086) (127,919)
Dividends (99,955) (94,418) (81,568)
Proceeds from issuance of common stock -- -- 487,399
Other, net 10,818 2,958 16,723
----------- ----------- -----------
Net cash provided by financing activities 1,699,651 975,454 294,635
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 549,368 114,340 (109,451)
Cash and Cash Equivalents at Beginning of Year 177,810 63,470 172,921
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 727,178 $ 177,810 $ 63,470
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amount capitalized $ 203,038 $ 146,434 $ 133,925
=========== =========== ===========
Noncash investing and financing activities:
Acquisition of vessel through debt $ 326,738 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
40 Royal Caribbean Cruises Ltd.
Consolidated Statements of Shareholders' Equity
Accumulated
Other Total
Preferred Common Paid-in Retained Comprehensive Treasury Shareholders'
(in thousands) Stock Stock Capital Earnings Income (Loss) Stock Equity
-------------- --------- ----------- ----------- ----------- ----------- ----------- ------------
Balances at
January 1, 1999 $ 172,500 $ 1,690 $ 1,361,796 $ 923,691 $ -- $ (4,919) $ 2,454,758
Issuance of common
stock -- 108 487,291 -- -- -- 487,399
Issuance under
preferred stock
conversion (300) -- 300 -- -- -- --
Issuance under employee
related plans -- 14 17,260 -- -- (560) 16,714
Preferred stock dividends -- -- -- (12,506) -- -- (12,506)
Common stock dividends -- -- -- (69,062) -- -- (69,062)
Net income -- -- -- 383,853 -- -- 383,853
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1999 172,200 1,812 1,866,647 1,225,976 -- (5,479) 3,261,156
Issuance under preferred
stock conversion (172,200) 106 172,094 -- -- -- --
Issuance under employee
related plans -- 3 4,370 -- -- (559) 3,814
Preferred stock dividends -- -- -- (3,121) -- -- (3,121)
Common stock dividends -- -- -- (91,297) -- -- (91,297)
Net income -- -- -- 445,363 -- -- 445,363
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 2000 -- 1,921 2,043,111 1,576,921 -- (6,038) 3,615,915
Issuance under employee
related plans -- 2 2,793 -- -- (560) 2,235
Common stock dividends -- -- -- (99,955) -- -- (99,955)
Transition adjustment
SFAS No. 133 -- -- -- -- 7,775 -- 7,775
Changes related to
cash flow
derivative hedges -- -- -- -- (23,843) -- (23,843)
Net income -- -- -- 254,457 -- -- 254,457
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 2001 $ -- $ 1,923 $ 2,045,904 $ 1,731,423 $ (16,068) $ (6,598) $ 3,756,584
=========== =========== =========== =========== =========== =========== ===========
Comprehensive income is as follows:
Year Ended December 31,
----------------------------------------
(in thousands) 2001 2000 1999
-------------- -------- -------- --------
Net income $254,457 $445,363 $383,853
Transition adjustment SFAS No. 133 7,775 -- --
Changes related to cash flow
derivative hedges (23,843) -- --
-------- -------- --------
Total comprehensive income $238,389 $445,363 $383,853
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Royal Caribbean Cruises Ltd. 41
Notes to the Consolidated Financial Statements
Note 1. General
DESCRIPTION OF BUSINESS
We are a global cruise company. We operate two cruise brands, Royal Caribbean
International and Celebrity Cruises, with 15 cruise ships and 8 cruise ships,
respectively, at December 31, 2001. Our ships operate on a selection of
worldwide itineraries that call on approximately 200 destinations.
BASIS FOR PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles and are presented in U.S. dollars.
Estimates are required for the preparation of financial statements in accordance
with generally accepted accounting principles. Actual results could differ from
these estimates. All significant intercompany accounts and transactions are
eliminated in consolidation.
Note 2. Summary of Significant Accounting Policies
CRUISE REVENUES AND EXPENSES
Deposits received on sales of guest cruises represent unearned revenue and are
initially recorded as customer deposit liabilities on our balance sheet.
Customer deposits are subsequently recognized as cruise revenues, together with
revenues from shipboard activities and all associated direct costs of a voyage,
upon completion of voyages with durations of ten days or less and on a pro rata
basis for voyages in excess of ten days. Minor amounts of revenues and expenses
from pro rata voyages are estimated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and marketable securities with original
maturities of less than 90 days.
INVENTORIES
Inventories consist of provisions, supplies and fuel carried at the lower of
cost (weighted-average) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. We capitalize interest as part of the cost of construction.
Significant vessel improvement costs are capitalized as additions to the vessel,
while costs of repairs and maintenance are charged to expense as incurred. We
review long-lived assets for impairment whenever events or changes in
circumstances indicate, based on estimated future cash flows, that the carrying
amount of these assets may not be fully recoverable.
Depreciation of property and equipment, which includes amortization of vessels
under capital leases, is computed using the straight-line method over useful
lives of primarily 30 years for vessels and three to ten years for other
property and equipment. (See Note 4 - Property and Equipment.)
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized over 40 years using the straight-line method. We
review goodwill and other intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be fully recoverable.
ADVERTISING COSTS
Advertising costs are expensed as incurred except those costs which result in
tangible assets, such as brochures, are treated as prepaid expenses and charged
to expense as consumed. Advertising expenses consist of media advertising as
well as brochure, production and direct mail costs. Media advertising was $103.4
million, $98.9 million and $93.1 million, and brochure, production and direct
mail costs were $77.5 million, $79.2 million and $57.4 million for the years
2001, 2000 and 1999, respectively.
DRYDOCKING
Drydocking costs are accrued evenly over the period to the next scheduled
drydocking and are included in accrued expenses and other liabilities.
FINANCIAL INSTRUMENTS
We enter into various forward, swap and option contracts to manage our interest
rate exposure and to limit our exposure to fluctuations in foreign currency
exchange rates and bunker fuel prices.
On January 1, 2001, we adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. On an ongoing basis, we assess whether derivatives used in
hedging transactions are "highly effective" in offsetting changes in fair value
or cash flow of hedged items and therefore qualify as either a fair value or
cash flow hedge. A derivative instrument that hedges the exposure to changes in
the fair value of a recognized asset or a liability, or a firm commitment is
designated as a fair value hedge. A derivative instrument that hedges a
forecasted transaction or the variability of cash flows related to a recognized
liability is designated as a cash flow hedge.
42 Royal Caribbean Cruises Ltd.
Notes to the Consolidated Financial Statements (continued)
Unrealized gains and losses on fair value hedges are recorded on the balance
sheet as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments. Realized gains and losses on foreign currency
forward contracts that hedge foreign currency denominated firm commitments
related to vessels under construction are included in the cost basis of the
vessels. Realized gains and losses on all other fair value hedges are recognized
in earnings as offsets to the related hedged items. For derivative instruments
that qualify as cash flow hedges, the effective portions of changes in fair
value of the derivatives are deferred and recorded as a component of other
comprehensive income until the hedged transactions occur and are recognized in
earnings. All other portions of changes in the fair value of cash flow hedges
are recognized in earnings immediately.
Our risk-management policies and objectives for holding hedging instruments have
not changed with the adoption of Statement of Financial Accounting Standards No.
133. The implementation of Statement of Financial Accounting Standards No. 133
did not have a material impact on our results of operations or financial
position at adoption or during the twelve months ended December 31, 2001.
FOREIGN CURRENCY TRANSACTIONS
The majority of our transactions are settled in U.S. dollars. Gains or losses
resulting from transactions denominated in other currencies and remeasurements
of other currencies are recognized in income currently.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income, after deducting
preferred stock dividends accumulated during the period, by the weighted-average
number of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted-average
number of shares of common stock, common stock equivalents and other potentially
dilutive securities outstanding during each period.
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method and
disclose certain fair market value information with respect to our stock-based
compensation activity. (See Note 7 - Shareholders' Equity.)
SEGMENT REPORTING
We operate two cruise brands, Royal Caribbean International and Celebrity
Cruises. The brands have been aggregated as a single operating segment based on
the similarity of their economic characteristics as well as product and services
provided.
Information by geographic area is shown in the table below. Revenues are
attributed to geographic areas based on the source of the guest.
2001 2000 1999
---- ---- ----
Revenues:
United States 81% 82% 83%
All Other Countries 19% 18% 17%
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which addresses how goodwill should be accounted for after having been initially
recognized in the financial statements. Statement of Financial Accounting
Standards No. 142 is effective for fiscal years beginning after December 15,
2001. Upon adoption of Financial Accounting Standards No. 142, we will cease to
amortize goodwill; goodwill amortization was $10.4 million in 2001. In addition,
we are required to perform an initial impairment review of our goodwill upon
adoption and an annual impairment review thereafter. We currently do not expect
to record an impairment charge upon completion of the impairment review.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement of Financial Accounting Standards No.
144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and requires (i) the recognition and measurement of the impairment of
long-lived assets to be held and used and (ii) the measurement of long-lived
assets to be held for sale. Statement of Financial Accounting Standards No. 144
is effective for fiscal years beginning after December 15, 2001. We do not
expect the adoption of Statement of Financial Accounting Standards No. 144 to
have a material effect on our results of operations or financial position.
Note 3. Proposed Dual-Listed Company Merger with P&O Princess
On November 19, 2001, we entered into an agreement with P&O Princess Cruises plc
(P&O Princess), providing for the combination of Royal Caribbean and P&O
Princess as a merger of equals under a dual-listed company structure. If the
dual-listed company merger is completed, it would involve a combination of the
two companies through a number of contracts and certain amendments to our
Articles of Incorporation and By-Laws and to P&O Princess' Articles and
Memorandum of Association. The two companies would retain
Royal Caribbean Cruises Ltd. 43
Notes to the Consolidated Financial Statements (continued)
their separate legal identities but would operate as if they were a single
unified economic entity. The contracts governing the dual-listed company merger
would provide that the boards of directors of the two companies would be
identical and that, as far as possible, the shareholders of Royal Caribbean and
P&O Princess would be placed in substantially the same economic position as if
they held shares in a single enterprise which owned all of the assets of both
companies. The net effect of the dual-listed company merger would be that the
shareholders of Royal Caribbean would own an economic interest equal to 49.3% of
the combined company and the shareholders of P&O Princess would own an economic
interest equal to 50.7% of the combined company.
The obligations of Royal Caribbean and P&O Princess to effect the dual-listed
company merger are subject to the satisfaction of various conditions, including
the receipt of certain regulatory approvals and consents and approval by the
shareholders of each of Royal Caribbean and P&O Princess. No assurance can be
given that all required approvals and consents will be obtained, and if such
approvals and consents are obtained, no assurance can be given as to the terms,
conditions and timing of the approvals and consents. If the dual-listed company
merger is not completed by November 16, 2002, either party can terminate the
agreement if it is not in material breach of its obligations thereunder. We have
incurred, and continue to incur, costs which have been or will be deferred in
connection with the dual-listed company merger. In the event the transaction is
not consummated, we would be required to write these costs off, resulting in an
estimated impact to earnings of approximately $15 million. If the dual-listed
company merger is completed, these deferred costs, together with additional
costs, would be capitalized as part of the transaction.
If the merger agreement is terminated under certain circumstances, we would be
obligated to pay P&O Princess a break fee of $62.5 million. These circumstances
include, among other things, our board of directors withdrawing or adversely
modifying its recommendation to shareholders to approve the dual-listed company
merger, our board of directors recommending an alternative acquisition
transaction to shareholders, and our shareholders failing to approve the
dual-listed company merger if another acquisition proposal with respect to Royal
Caribbean exists at that time. Similarly, P&O Princess would be obligated to pay
us a break fee of $62.5 million upon the occurrence of reciprocal circumstances.
In December 2001, Carnival Corporation (Carnival) announced a competing
pre-conditional offer to acquire all of the outstanding shares of P&O Princess.
In connection with its pre-conditional offer, Carnival solicited proxies from
P&O Princess' shareholders in favor of an adjournment of the P&O Princess'
special meeting prior to a shareholder vote to approve the dual-listed company
merger. On February 14, 2002, Royal Caribbean and P&O Princess convened special
meetings of their respective shareholders to approve the dual-listed company
merger. Prior to voting to approve the merger, the shareholders of each company
voted to adjourn their respective meetings until an unspecified future date. We
do not know at this time the date on which the meetings will be reconvened.
Note 4. Property and Equipment
Property and equipment consists of the following (in thousands):
2001 2000
----------- ----------
Land $ 7,056 $ 7,056
Vessels 8,289,028 6,168,383
Vessels under capital lease 771,131 768,474
Vessels under construction 396,286 508,954
Other 366,914 313,689
----------- ----------
9,830,415 7,766,556
Less - accumulated depreciation
and amortization (1,224,967) (934,747)
----------- ----------
$ 8,605,448 $6,831,809
=========== ==========
Vessels under construction include progress payments for the construction of new
vessels as well as planning, design, interest, commitment fees and other
associated costs. We capitalized interest costs of $37.0 million, $44.2 million
and $34.6 million for the years 2001, 2000 and 1999, respectively. Accumulated
amortization related to vessels under capital lease was $136.2 million and
$112.9 million at December 31, 2001 and 2000, respectively.
Note 5. Other Assets
In July 2000, we purchased a new issue of convertible preferred stock,
denominated in British pound sterling, for approximately $300 million from First
Choice Holidays PLC. The convertible preferred stock carries a 6.75% coupon.
Dividends of $19.4 million and $9.2 million were earned in 2001 and 2000,
respectively and recorded in Other income (expense). If fully converted, our
holding would represent approximately a 17% interest in First Choice Holidays
PLC.
44 Royal Caribbean Cruises Ltd.
Notes to the Consolidated Financial Statements (continued)
Separately, we entered into a joint venture with First Choice Holidays PLC to
launch a new cruise brand, Island Cruises. As part of the transaction, ownership
of Viking Serenade was transferred to the new joint venture at a valuation of
approximately $95.4 million. The contribution of Viking Serenade represents our
50% investment in the joint venture as well as approximately $47.7 million in
proceeds towards the purchase price of the convertible preferred stock. The
contribution of Viking Serenade resulted in a deferred gain of approximately
$3.8 million, which is being recognized over the estimated remaining useful life
of the vessel. Royal Caribbean International operated Viking Serenade under a
charter agreement until early 2002, at which time the vessel moved to the new
joint venture.
Note 6. Long-Term Debt
Long-term debt consists of the following (in thousands):
2001 2000
---------- ----------
$360 million unsecured term loan
bearing interest at LIBOR
plus 1.0%, due 2006 $ 360,000 $ --
Zero Coupon Convertible Notes
with yield to maturity of 4.75%,
due 2021 355,628 --
Liquid Yield Option(TM) Notes
with yield to maturity of 4.875%,
due 2021 600,878 --
$625 million unsecured term loan
bearing interest at LIBOR
plus 1.25%, due 2005 625,000 625,000
$300 million unsecured term loan
bearing interest at LIBOR
plus 0.8%, due 2009 through 2010 300,000 300,000
$1 billion unsecured revolving
credit facility bearing interest
at LIBOR plus 0.45% on balances
outstanding, 0.2% facility fee,
due 2003 350,000 270,000
Senior Notes and Senior Debentures
bearing interest at rates ranging
from 6.75% to 8.75%, due 2002
through 2011, 2018 and 2027 1,950,341 1,392,017
Unsecured term loan bearing
interest at 8.0%, due 2006 109,250 134,332
Term loans bearing interest at
rates ranging from 6.7% to 8.0%,
due through 2010, secured by
certain Celebrity vessels 506,675 241,452
Term loans bearing interest at
LIBOR plus 0.45%, due through
2008, secured by certain
Celebrity vessels 78,491 19,697
Capital lease obligations with
implicit interest rates ranging
from 7.0% to 7.2%,
due through 2011 409,849 427,598
---------- ----------
5,646,112 3,410,096
Less - current portion (238,581) (109,926)
---------- ----------
Long-term portion $5,407,531 $3,300,170
========== ==========
During 2001, we drew $360.0 million under our unsecured term loan that bears
interest at LIBOR plus 1.0%, due 2006.
In August 2001, we entered into a $326.7 million term loan bearing interest at a
fixed rate of 8.0%, due in 2010 and secured by a Celebrity vessel.
In May 2001, we received net proceeds of $339.4 million from the issuance of
Zero Coupon Convertible Notes, due 2021. In February 2001, we received net
proceeds of $494.6 million and $560.8 million from the issuance of 8.75% Senior
Notes due 2011 and Liquid Yield Option(TM) Notes due 2021, respectively.
The Liquid Yield Option(TM) Notes and the Zero Coupon Convertible Notes are zero
coupon bonds with yields to maturity of 4.875% and 4.75%, respectively, due
2021. Each Liquid Yield Option(TM) Note and Zero Coupon Convertible Note was
issued at a price of $381.63 and $391.06, respectively, and will have a
principal amount at maturity of $1,000. The Liquid Yield Option(TM) Notes and
Zero Coupon Convertible Notes are convertible at the option of the holder into
17.7 million and 13.8 million shares of common stock, respectively, if the
market price of our common stock reaches certain levels. These conditions were
not met at December 31, 2001 for the Liquid Yield Option(TM) Notes or the Zero
Coupon Convertible Notes and therefore, the shares issuable upon conversion are
not included in the earnings per share calculation.
We may redeem the Liquid Yield Option(TM) Notes beginning on February 2, 2005,
and the Zero Coupon Convertible Notes beginning on May 18, 2006, at their
accreted values for cash as a whole at any time, or from time to time in part.
Holders may require us to purchase any outstanding Liquid Yield Option(TM) Notes
at their accreted value on February 2, 2005 and February 2, 2011 and any
outstanding Zero Coupon Convertible Notes at their accreted value on May 18,
2004, May 18, 2009, and May 18, 2014. We may choose to pay the purchase price in
cash or common stock or a combination thereof. In addition, we have a
three-year, $345.8 million unsecured variable rate term loan facility available
to us should the holders of the Zero Coupon Convertible Notes require us to
purchase their notes on May 18, 2004.
During 2001, under the terms of two of our secured term loans, we elected to
defer principal payments totaling $64.4 million to 2004 through 2006.
Royal Caribbean Cruises Ltd. 45
Notes to the Consolidated Financial Statements (continued)
In June 2000, we entered into a $625.0 million unsecured term loan bearing
interest at LIBOR plus 1.25%, due 2005.
The contractual interest rates on balances outstanding under our $1.0 billion
unsecured revolving credit facility and the $625.0 million unsecured term loan
vary with our debt rating.
The Senior Notes, Senior Debentures, Liquid Yield Option(TM) Notes and Zero
Coupon Convertible Notes are unsecured. The Senior Notes and Senior Debentures
are not redeemable prior to maturity.
We entered into a $264.0 million capital lease to finance Splendour of the Seas
and a $260.0 million capital lease to finance Legend of the Seas in 1996 and
1995, respectively. The capital leases each have semi-annual payments of $12.0
million over 15 years with final payments of $99.0 million and $97.5 million,
respectively.
Our debt agreements contain covenants that require us, among other things, to
maintain minimum liquidity, net worth, and fixed charge coverage ratio and limit
our debt to capital ratio. We are in compliance with all covenants as of
December 31, 2001. Following is a schedule of annual maturities on long-term
debt as of December 31, 2001 (in thousands):
Year
----
2002 $ 238,581
2003 434,959
2004(1) 339,133
2005(2) 1,627,473
2006 688,397
(1) Includes $51.8 million related to our Zero Coupon Convertible Notes.
This amount represents the $397.6 million accreted value of the notes
as of May 18, 2004, the first date holders may require us to purchase
any outstanding notes net of a $345.8 million loan facility available
to us to satisfy this obligation. We may choose to pay any amounts in
cash or common stock or a combination thereof.
(2) Includes the $697.2 million accreted value of our Liquid Yield
Option(TM) Notes as of February 2, 2005, the first date holders may
require us to purchase any outstanding notes. We may choose to pay any
amounts in cash or common stock or a combination thereof.
Note 7. Shareholders' Equity
In April 2000, we redeemed all outstanding shares of our convertible preferred
stock and dividends ceased to accrue.
In 1999, we completed a public offering of 11,625,000 shares of common stock at
a price of $46.69 per share. Of the total shares sold, 10,825,000 shares were
sold by us, and the balance of 800,000 shares were sold by a selling
shareholder. After deduction of the underwriting discount and other estimated
expenses of the offering, our net proceeds were approximately $487.4 million.
Our Employee Stock Purchase Plan, which has been in effect since January 1,
1994, facilitates the purchase by employees of up to 800,000 shares of common
stock. The purchase price is derived from a formula based on 90% of the fair
market value of the common stock during the quarterly purchase period, subject
to certain restrictions. Shares of common stock of 33,395, 40,838 and 35,263
were issued under the Employee Stock Purchase Plan at a weighted average price
of $17.69, $23.09 and $37.81 during 2001, 2000 and 1999, respectively.
Under an executive compensation program approved in 1994, we will award to a
trust 10,086 shares of common stock per quarter, up to a maximum of 806,880
shares. We issued 40,344 shares each year under the program during 2001, 2000
and 1999.
Compensation expense related to our "Taking Stock in Employees" program, which
was discontinued effective December 31, 2001, was $1.6 million, $2.1 million and
$3.3 million in 2001, 2000 and 1999, respectively. Under the plan, employees are
awarded five shares of our stock, or the cash equivalent, at the end of each
year of employment.
We have Employee Stock Option Plans, which provide for awards to our officers,
directors and key employees of options to purchase shares of our common stock.
One of the plans is a tax-qualified Incentive Stock Option Plan. During 2001,
one of the Employee Stock Option Plans and the Incentive Stock Option Plan were
amended to increase the number of shares reserved for issuance by 5,000,000 and
3,000,000 shares of common stock, respectively. Options are granted at a price
not less than the fair value of the shares on the date of grant. Options expire
not later than ten years after the date of grant and generally become
exercisable in full over three or five years after the grant date.
Stock option activity and information about stock options outstanding are
summarized in the following tables:
46 Royal Caribbean Cruises Ltd.
Notes to the Consolidated Financial Statements (continued)
STOCK OPTION ACTIVITY
2001 2000 1999
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- ---------
Outstanding options at January 1 11,291,784 $27.17 6,894,172 $24.82 6,492,390 $16.78
Granted 6,525,775 $12.41 5,036,100 $30.21 2,285,500 $39.23
Exercised (104,526) $13.22 (186,436) $12.68 (1,318,714) $11.01
Canceled (690,792) $29.84 (452,052) $30.65 (565,004) $23.03
---------- ---------- ----------
Outstanding options at December 31 17,022,241 $21.49 11,291,784 $27.17 6,894,172 $24.82
========== ========== ==========
Options exercisable at December 31 4,679,421 $20.79 2,707,234 $16.02 1,649,180 $12.53
========== ========== ==========
Available for future grants at December 31 5,871,763 3,839,246 8,553,864
========== ========== ==========
STOCK OPTIONS OUTSTANDING
As of December 31, 2001
Options Outstanding Options Exercisable
-------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
-------------------- ----------- --------- --------- ----------- --------
$ 7.24 - $ 9.90 5,846,545 9.2 years $ 9.79 432,870 $ 8.83
$11.19 - $20.30 3,912,196 6.7 years $17.35 2,354,826 $15.55
$21.92 - $28.78 3,961,250 7.5 years $25.72 1,153,550 $24.09
$28.88 - $48.00 3,302,250 7.7 years $42.05 738,175 $39.34
---------- ---------
17,022,241 7.9 years $21.49 4,679,421 $20.79
========== =========
We use the intrinsic value method of accounting for stockbased compensation. Had
the fair value based method been used to account for such compensation,
compensation costs would have reduced net income by $37.0 million, $28.8 million
and $15.0 million or $0.19, $0.15 and $0.08 per share in 2001, 2000 and 1999,
respectively. The weighted-average fair value of options granted during 2001,
2000 and 1999 was $4.35, $12.43 and $15.52, respectively. Fair value information
for our stock options was estimated using the Black-Scholes option-pricing model
based on the following weighted average assumptions:
2001 2000 1999
------- ------- -------
Dividend yield 2.5% 2.0% 1.0%
Expected stock price volatility 43.3% 38.4% 35.6%
Risk-free interest rate 4% 6% 5%
Expected option life 5 years 6 years 6 years
Note 8. Earnings Per Share
Below is a reconciliation between basic and diluted earnings per share for the
years ended December 31, 2001, 2000 and 1999 (in thousands, except per share
data):
Year Ended December 31,
----------------------------------------------------------------------------
2001 2000 1999
----------------------- ---------------------- -----------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
------ ------ ----- ------ ------ ----- ------ ------ -----
Net income $254,457 $445,363 $383,853
Less: preferred stock dividends -- (1,933) (12,506)
-------- -------- --------
Basic earnings per share 254,457 192,231 $1.32 443,430 189,397 $2.34 371,347 172,319 $2.15
===== ===== =====
Effect of dilutive securities:
Stock options 1,250 1,428 3,508
Convertible preferred stock -- -- 1,933 2,110 12,506 10,629
-------- ------- -------- ------- -------- -------
Diluted earnings per share $254,457 193,481 $1.32 $445,363 192,935 $2.31 $383,853 186,456 $2.06
======== ======= ===== ======== ======= ===== ======== ======= =====
Royal Caribbean Cruises Ltd. 47
Notes to the Consolidated Financial Statements (continued)
Note 9. Retirement Plans
We maintain a defined contribution pension plan covering all of our full-time
shoreside employees who have completed the minimum period of continuous service.
Annual contributions to the plan are based on fixed percentages of participants'
salaries and years of service, not to exceed certain maximums. Pension cost was
$8.3 million, $7.3 million and $7.2 million for the years 2001, 2000 and 1999,
respectively.
Effective January 1, 2000, we instituted a defined benefit pension plan to cover
all of our shipboard employees not covered under another pension plan through
their collective bargaining agreement. Benefits to eligible employees are
accrued based on the employee's years of service. Pension expense was
approximately $3.2 million and $1.9 million in 2001 and 2000, respectively.
Note 10. Income Taxes
We and the majority of our subsidiaries are not subject to U.S. corporate income
tax on income generated from the international operation of ships pursuant to
Section 883 of the Internal Revenue Code, provided that we meet certain tests
related to country of incorporation and composition of shareholders. We believe
that we and a majority of our subsidiaries meet these tests. Income tax expense
related to our remaining subsidiaries is not significant.
Note 11. Financial Instruments
The estimated fair values of our financial instruments are as follows (in
thousands):
2001 2000
----------- -----------
Cash and Cash Equivalents $ 727,178 $ 177,810
Long-Term Debt
(including current portion
of long-term debt) (5,031,858) (3,332,475)
Foreign Currency Forward
Contracts (losses) (99,110) (5,624)
Interest Rate Swap Agreements
in a net receivable position 35,668 24,583
Fuel Swap Agreements
in a net (payable) receivable
position (7,799) 10,666
The reported fair values are based on a variety of factors and assumptions.
Accordingly, the fair values may not represent actual values of the financial
instruments that could have been realized as of December 31, 2001 or 2000 or
that will be realized in the future and do not include expenses that could be
incurred in an actual sale or settlement. The following methods were used to
estimate the fair values of our financial instruments, none of which are held
for trading or speculative purposes:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents approximate their fair values
due to the short maturity of these instruments.
LONG-TERM DEBT
The fair values of our Senior Notes, Senior Debentures, Liquid Yield Option(TM)
Notes and Zero Coupon Convertible Notes were estimated by obtaining quoted
market prices. The fair values of all other debt were estimated using discounted
cash flow analyses based on market rates available to us for similar debt with
the same remaining maturities.
FOREIGN CURRENCY CONTRACTS
The fair values of our foreign currency forward contracts were estimated using
current market prices for similar instruments. Our exposure to market risk for
fluctuations in foreign currency exchange rates relates to our firm commitments
on vessel construction contracts and forecasted transactions. We use foreign
currency forward contracts to mitigate the impact of fluctuations in foreign
currency exchange rates. As of December 31, 2001, we had foreign currency
forward contracts in a notional amount of $1.1 billion maturing through 2003.
Our foreign currency forward contracts related to firm commitments on vessels
under construction had aggregate unrealized losses of approximately $99.3
million at December 31, 2001.
INTEREST RATE SWAP AGREEMENTS
The fair values of our interest rate swap agreements were estimated based on
quoted market prices for similar or identical financial instruments to those we
hold. Our exposure to market risk for changes in interest rates relates to our
long-term debt obligations. Market risk associated with our long-term fixed rate
debt is the potential increase in fair value resulting from a decrease in
interest rates. Market risk associated with our variable rate debt is the
potential increase in interest expense from an increase in interest rates. We
enter into interest rate swap agreements to modify our exposure to interest rate
movements and to manage our interest expense. As of December 31, 2001, we had
interest rate swap agreements in effect, which exchanged fixed interest rates
for floating interest rates in a notional amount of $525.0 million, maturing in
2006 through 2011.
FUEL SWAP AGREEMENTS
The fair values of our fuel swap agreements were estimated based on quoted
market prices for similar or identical financial instruments to those we hold.
Our exposure to market risk for changes in bunker fuel prices relates to the
forecasted consumption of fuel on our vessels. We use fuel swap agreements to
mitigate the impact of fluctuations in bunker fuel prices. As of December 31,
2001, we had fuel swap agreements to pay fixed prices for bunker fuel with an
aggregate notional amount of $85.2 million, maturing through 2003.
48 Royal Caribbean Cruises Ltd.
Notes to the Consolidated Financial Statements (continued)
Our exposure under foreign currency contracts, interest rate and fuel swap
agreements is limited to the cost of replacing the contracts in the event of
non-performance by the counterparties to the contracts, all of which are
currently our lending banks. To minimize this risk, we select counterparties
with credit risks acceptable to us and we limit our exposure to any individual
counterparty. Furthermore, all foreign currency forward contracts are
denominated in primary currencies.
Note 12. Commitments and Contingencies
CAPITAL EXPENDITURES
As of December 31, 2001, we have six ships on order. Three are Radiance-class
vessels scheduled for delivery in the third quarter of 2002, fourth quarter of
2003 and second quarter of 2004. Two are Voyager-class vessels with delivery
scheduled in the first quarters of 2003 and 2004. One is a Millennium-class
vessel scheduled for delivery in the second quarter of 2002. The aggregate
contract price of the six ships, which excludes capitalized interest and other
ancillary costs, is approximately $2.6 billion, of which we have deposited
$316.5 million as of December 31, 2001. Additional deposits are due prior to the
dates of delivery of $127.0 million in 2002 and $5.2 million in 2003. We
anticipate that overall capital expenditures will be approximately $1.1 billion,
$1.1 billion and $1.0 billion for 2002, 2003 and 2004, respectively. Two of the
ships on order, with an aggregate capacity of 4,200 berths, are committed to the
joint venture with P&O Princess. The aggregate contract price of these two
ships, excluding capitalized interest and other ancillary costs, is
approximately $0.8 billion and is included in our projected capital costs above.
Pursuant to the joint venture agreement entered into in November 2001 with P&O
Princess, we have committed up to $500.0 million in shareholder equity, with
approximately $5.0 million contributed to date and the balance due and payable
when called by the joint venture company. We have agreed to assign our
ship-build contracts for Serenade of the Seas and Jewel of the Seas to the joint
venture company. The aggregate contract price of these two ships, excluding
capitalized interest and other ancillary costs, is approximately $0.8 billion,
of which we have deposited $79.3 million as of December 31, 2001. Also, we have
obtained commitments for export financing for up to 80% of the contract price of
these two vessels. Any payments we have made under these contracts prior to
assignment will be credited against our shareholder equity commitment. The joint
venture shareholders intend that the joint venture company be financed through
third-party indebtedness and each joint venture shareholder has committed to
provide necessary credit support in the form of guarantees on a pro rata basis,
subject to legal or regulatory restrictions. To the extent that third-party
financing cannot be obtained, and if approved in accordance with the terms of
the joint venture agreement, the joint venture shareholders will provide
financing on a pro rata basis on identical terms. Subject to the terms of the
joint venture agreement, the agreement can be terminated by either party if
certain commercial benchmarks have not been achieved by January 1, 2003 or April
1, 2003.
Under the joint venture agreement, if a change of control occurs with respect to
a joint venture shareholder, the other shareholder has a right to acquire the
interest of that shareholder at fair market value in exchange for preferred
stock or a 15-year subordinated note (or a combination thereof) of the
purchasing shareholder. Notwithstanding the foregoing, the joint venture
shareholder subject to a change of control has the right, subject to certain
conditions, to put its interest in the joint venture to the other joint venture
shareholder at a discount to fair market value in exchange for preferred stock
or a 20-year subordinated note (or a combination thereof) of the purchasing
shareholder.
LITIGATION
In April 1999, a lawsuit was filed in the United States District Court for the
Southern District of New York on behalf of current and former crew members
alleging that we failed to pay the plaintiffs their full wages. The suit seeks
payment of (i) the wages alleged to be owed, (ii) penalty wages under 46 U.S.C.
Section 10313 of U.S. law and (iii) punitive damages. In November 1999, a
purported class action suit was filed in the same court alleging a similar cause
of action. We are not able at this time to estimate the impact of these
proceedings on us; there can be no assurance that such proceedings, if decided
adversely, would not have a material adverse effect on our results of
operations.
We are routinely involved in other claims typical within the cruise industry.
The majority of these claims is covered by insurance. We believe the outcome of
such other claims, net of expected insurance recoveries, is not expected to have
a material adverse effect upon our financial condition or results of operations.
Royal Caribbean Cruises Ltd. 49
Notes to the Consolidated Financial Statements (continued)
OPERATING LEASES
We are obligated under noncancelable operating leases primarily for office and
warehouse facilities, computer equipment and motor vehicles. As of December 31,
2001, future minimum lease payments under noncancelable operating leases were as
follows (in thousands):
Year
----
2002 $11,430
2003 11,251
2004 10,597
2005 7,606
2006 5,238
Thereafter 41,735
-------
$87,857
=======
Total rent expense for all operating leases amounted to $9.8 million, $6.7
million and $5.1 million for the years 2001, 2000 and 1999, respectively.
OTHER
At December 31, 2001, we have future commitments to pay for our usage of certain
port facilities, maintenance contracts and communication services as follows (in
thousands):
Year
----
2002 $ 25,684
2003 26,200
2004 25,129
2005 20,130
2006 17,666
Thereafter 113,428
--------
$228,237
========
Note 13. Quarterly Data (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------- ------------------ ------------------ ------------------
(in thousands, except per share data) 2001 2000 2001 2000 2001 2000 2001 2000
------------------------------------ ----- ------- ------ ------- ----- ------- ------ -------
Revenues $726,878 $707,786 $821,674 $680,731 $940,721 $835,210 $655,977 $642,118
Operating Income $ 90,084 $139,636 $135,275 $131,196 $211,257 $236,166 $ 18,989 $ 62,542
Net Income (Loss) $ 52,497 $105,528 $ 81,713 $108,258 $159,212 $201,497 $(38,965) $ 30,080
Earnings (Loss) Per Share:
Basic $ 0.27 $ 0.57 $ 0.43 $ 0.57 $ 0.83 $ 1.05 $ (0.20) $ 0.16
Diluted $ 0.27 $ 0.55 $ 0.42 $ 0.56 $ 0.82 $ 1.04 $ (0.20) $ 0.16
Dividends Declared Per Share $ 0.13 $ 0.11 $ 0.13 $ 0.11 $ 0.13 $ 0.13 $ 0.13 $ 0.13
50 Royal Caribbean Cruises Ltd.
Management's Responsibility
for Financial Statements
The accompanying financial statements of Royal Caribbean Cruises Ltd. were
prepared by management, which is responsible for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
judgments and estimates. The other financial information included in this annual
report is consistent with that in the financial statements.
The Company maintains a system of internal control to assure the proper
authorization of transactions, the safeguarding of assets and the reliability of
the financial records. Royal Caribbean Cruises Ltd. maintains an internal
auditing program that independently assesses the effectiveness of our internal
controls and recommends possible improvements. Management believes that Royal
Caribbean Cruises Ltd. maintains an effective system of internal control.
The financial statements of the Company have been audited by
PricewaterhouseCoopers LLP, independent auditors. Their accompanying report is
based upon an audit conducted in accordance with auditing standards generally
accepted in the United States of America, including the related review of
internal accounting controls and financial reporting matters.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with the independent auditors, the internal
auditors and representatives of management to discuss auditing and financial
reporting matters. Both the Company's independent auditors and the internal
auditors have free access to the Audit Committee.
Tor B. Arneberg
Chairman, Audit Committee
Richard D. Fain
Chairman and Chief Executive Officer
Richard J. Glasier
Executive Vice President and
Chief Financial Officer
Report of Independent
Certified Public Accountants
PricewaterhouseCoopers
To the Shareholders and Directors
of Royal Caribbean Cruises Ltd.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Royal
Caribbean Cruises Ltd. and its subsidiaries at 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. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Miami, Florida
January 25, 2002, except for Note 3 which is
as of February 14, 2002
Royal Caribbean Cruises Ltd. 51
(Photo)
Board of Directors
(from left to right)
TOR B. ARNEBERG
Nightingale & Associates, Inc.
BERNARD W. ARONSON
ACON Investments, LLC
EDWIN W. STEPHAN
Royal Caribbean Cruises Ltd.
EYAL OFER
Carlyle M.G. Limited
JOHN D. CHANDRIS
Chandris (UK) Ltd.
ARNE WILHELMSEN
Anders Wilhelmsen & Co. A/S
JANNIK LINDBAEK
International Finance Corp./Worldbank Group
THOMAS J. PRITZKER
The Pritzker Organization, LLC
ARVID GRUNDEKJOEN
Anders Wilhelmsen & Co. A/S
LAURA LAVIADA
Pro Mujer
WILLIAM K. REILLY
Aqua International Partners
RICHARD D. FAIN
Royal Caribbean Cruises Ltd.
Executive Officers
RICHARD D. FAIN
Chairman and Chief Executive Officer,
Royal Caribbean Cruises Ltd.
JACK L. WILLIAMS
President and Chief Operating Officer,
Royal Caribbean International &
Celebrity Cruises
RICHARD J. GLASIER
Executive Vice President
and Chief Financial Officer,
Royal Caribbean Cruises Ltd.
52 Royal Caribbean Cruises Ltd.
Shareholder Information
Corporate Office
Royal Caribbean Cruises Ltd.
1050 Caribbean Way
Miami, Florida 33132
Telephone (305) 539-6000
Telecommunications Display Device
(305) 539-4440
Internet http://www.royalcaribbean.com
http://www.celebritycruises.com
Independent Auditors
PricewaterhouseCoopers LLP
700 First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131-2330
Common Stock Transfer
Agent & Registrar
First Union National Bank
1525 West W.T. Harris
Boulevard, Building 3C3
Charlotte,NC 28262-1153
Internet http://www.firstunion.com
Common Stock
Common stock of Royal Caribbean
Cruises Ltd. trades on the New York
Stock Exchange (NYSE) and the
Oslo Stock Exchange (OSE) under
the symbol "RCL."
The table below sets forth the quarterly high and low prices of the common stock
on the New York Stock Exchange:
2001 High Low
---- ---- ---
First Quarter $30.25 $19.87
Second Quarter 23.09 18.65
Third Quarter 24.88 7.75
Fourth Quarter 17.60 8.32
2000 High Low
---- ---- ---
First Quarter $40.25 $31.38
Second Quarter 44.50 31.88
Third Quarter 51.63 41.06
Fourth Quarter 58.88 42.63
Annual Meeting
The annual meeting will be held on Friday, May 24, 2002 at 11 a.m. at the Hyatt
Regency, Miami, Florida.
Availability of Form 20-F
A copy of the Company's annual report on Form 20-F will be provided without
charge upon written request to the Company.
Design: Critt Graham + Associates www.crittgraham.com / Principal photography:
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