FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULES 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF APRIL, 2003
ROYAL CARIBBEAN CRUISES LTD.
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]
[If "Yes" is marked indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_____.]
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 24, 2003 By: /s/ BONNIE S. BIUMI
--------------------------------
Bonnie S. Biumi
Acting Chief Financial Officer
ROYAL CARIBBEAN CRUISES LTD.
2002 ANNUAL REPORT
[PHOTO]
[PHOTO]
A record 2.8 million guests sailed in 2002 on the 25 ships of Royal Caribbean
International and Celebrity Cruises, enabling Royal Caribbean Cruises Ltd. to
post a 38-percent increase in net income with record revenues of $3.4 billion.
Nearing the peak of expansion in 2002, the company surpassed 50,000
double-occupancy berths and will reach 60,000 berths at the end of its current
newbuilding program in 2004.
FINANCIAL HIGHLIGHTS
YEAR REVENUES
---- --------------------
88 523
89 567
90 698
91 760
92 1,013
93 1,113
94 1,171
95 1,184
96 1,357
97 1,939
98 2,636
99 2,546
00 2,866
01 3,145
02 3,434
YEAR NET INCOME
---- --------------------
88 14
89 42
90 52
91 4
92 61
93 107
94 137
95 149
96 151
97 175
98 331
99 384
00 445
01 254
02 351
YEAR SHAREHOLDERS' EQUITY
---- --------------------
88 295
89 348
90 400
91 404
92 464
93 733
94 846
95 965
96 1,085
97 2,019
98 2,455
99 3,261
00 3,616
01 3,757
02 4,035
($ millions)
(dollars in thousands, except per share data) 2002 2001 2000
Revenues $3,434,347 $3,145,250 $2,865,846
Operating Income 550,975 455,605 569,540
Net Income 351,284 254,457 445,363
Earnings Per Share* $ 1.79 $ 1.32 $ 2.31
Shareholders' Equity $4,034,694 $3,756,584 $3,615,915
(*diluted)
1
[PHOTO]
Richard D. Fain
Chairman and CEO
CHAIRMAN'S LETTER
March 24, 2003
DEAR SHAREHOLDERS:
That ominous cloud of world tension continues to loom over global travel,
heightened now by the war in Iraq. We do not now know the duration or full
repercussions of this conflict, nor can we predict the full impact on the
business of cruise vacations. However, our performance during 2002 in the face
of economic and geopolitical uncertainty provides some comfort regarding the
strength of our company and of our industry. Within months of the horrifying
9/11 terrorist attacks, we experienced a dramatic rebound. Rising demand and the
lure of our ultra-modern fleet enabled Royal Caribbean to achieve Net Income of
$351.3 million, or $1.79 per share - a vigorous 38-percent increase in profits.
These are truly remarkable results, given the negative influences that buffeted
all segments of the travel industry.
Unfortunately, the war-related uncertainties have upset our expectations for a
strong recovery in cruise pricing in 2003. Recent booking trends have been
disappointing and indicate another year of lackluster yields. Nevertheless, the
very strong booking trends we saw in most of the second half of 2002 provide
ample evidence that the current weakness is not a fundamental industry issue but
rather a shorter-term reaction to world events.
Revenues in 2002 climbed 9.2 percent to $3.4 billion. More importantly, our key
index of net yields showed surprising firmness, edging down a mere seven-tenths
of one percent. During 2002, we had a capacity increase of 15.0 percent (one of
the largest in our history), and our ability to absorb this increase during such
traumatic times with only nominal yield declines is very gratifying. But
revenues are only half of the equation. The impact of our aggressive cost
controls was apparent again in 2002 as we cut operating and SG&A expenses by 7.4
percent per available berth. We are resolute in managing our business as
efficiently as possible, constantly seeking - and finding - ways to control or
avoid costs.
By launching a combined seven new ships and 16,500 berths in 2001 and 2002 -
peak years in a decade of expansion - we raised our profile in the eyes of
vacationers
2
[PHOTO]
Wine bar Vintages
on Navigator of the Seas
but also raised our operating and financial leverage. That leverage will become
a positive force in the near future as the pace of our capital expenditures
subsides. Our remaining three ships under construction represent $1.3 billion of
the approximately $5.5 billion in combined contract commitments for 13 ships in
1999-2004. We have successfully absorbed double-digit capacity increases of 20.8
percent and 15.0 percent the past two years. Our capacity growth slows to 12.2
percent and 10.4 percent this year and next, respectively, and thereafter drops
quickly.
Royal Caribbean International and Celebrity Cruises served a record 2.8 million
guests last year - a million more than as recently as 1999 - and logged 18.1
million guest cruise days. The occupancy rate of 104.5 percent (double occupancy
equals 100 percent) was one of our highest ever. Each succeeding year that we
attract one million people cruising for the first time, as we did in both 2001
and 2002 and will do again in 2003, we broaden a highly satisfied customer base.
As always, the safety of our guests is our highest priority. We are continuing
to operate at the highest security level with measures such as comprehensive
screening of everyone and everything coming onboard our ships. Our SeaPass
computerized photo ID system, for example, verifies the identity of each guest
and crew member as they come on or off a ship.
A MILESTONE TO CELEBRATE
Despite the gravity of world events, we reached an exciting and significant
milestone in 2002 - the company surpassed 50,000 berths. Celebrity Cruises
completed its stylish Millennium class with Constellation, the fourth ship in
the series. Celebrity, the fastest-growing of the premium brands, has doubled
its capacity to 16,350 berths, compared to 1999. Brilliance of the Seas and
Navigator of the Seas joined the Royal Caribbean International fleet. These
newbuilds from three European shipyards expanded our fleet to 25 ships with a
capacity of 53,000 berths. By the fourth quarter of 2003, when both Serenade of
the Seas and Mariner of the Seas are afloat, our 58,200 berths will be triple
the capacity of a scant seven years ago. Jewel of the Seas
3
[PHOTO]
Rhapsody of the Seas made Galveston, Texas, a year-round homeport. New
dining options (opposite page) on Navigator of the Seas included Jade, with
Asian fusion foods.
4
[PHOTO]
will conclude our current expansion in June 2004 and lift us above 60,000
berths.
We completed a $20-million renovation of CocoCay, our private island in the
Bahamas, with new snorkeling and water-sports facilities, a new dining venue,
and additional bars and shops. Enhancements to our distribution system powered
our 2002 performance. Specifically, we reorganized and expanded our 158-person
sales force to become the largest and strongest in the industry. Our
travel-agent-only web-site www.cruisingpower.com was upgraded to consolidate all
online communication with travel agents. In a distinctive marketing effort that
doubled awareness of the Celebrity Cruises brand, we targeted savvy travelers in
"A True Departure" campaign. Meanwhile, Royal Caribbean International continued
its acclaimed "Get Out There" advertising campaign and also launched
communication of GOLD Anchor Service to emphasize the outstanding, friendly
service that has pleased millions of guests for more than 30 years.
DEPLOYMENT STRATEGIES
Flexibility in deployment - a unique strength of the cruise industry - enabled
us to open or expand promising markets in 2002. This was especially true in
Galveston, Texas, where Rhapsody of the Seas established our first year-round
homeport on the Gulf of Mexico, and in Baltimore, where Galaxy cultivated a
following on Chesapeake Bay. Galaxy also tapped an emerging market in
Charleston, South Carolina. By targeting large populations within driving
distance of U.S. ports, cruising has maintained high occupancy rates even when
some vacationers are reluctant to fly to embarkation ports.
Other winter deployments in the Gulf of Mexico in late 2002 included Nordic
Empress and Horizon in Tampa, Splendour of the Seas in Galveston, and Grandeur
of the Seas in New Orleans. In June 2003, we will re-establish our presence in
Los Angeles with short cruises to Mexico on Monarch of the Seas.
We will deploy five ships and almost 10,000 berths in Europe this summer - three
ships
5
[PHOTO]
from Royal Caribbean International and two from Celebrity. Sailings in Europe
account for 8 percent of our annual capacity. Island Cruises, our joint venture
with United Kingdom tour operator First Choice Holidays, experienced some
startup difficulties in 2002 with Island Escape, but by summer, the ship was
earning much higher customer-satisfaction ratings.
Of course, the dominant segment of our cruise offerings remains the seven-night
Caribbean sailing (42 percent of capacity). In November, we will deploy the
fifth of our five magnificent Voyager-class ships when Mariner of the Seas
becomes our first newbuild to sail from Port Canaveral.
CREATING VALUE
When reciting shipbuilding statistics and enumerating the recent newbuilds, it
is worth noting that these are not assembly-line clones with a different name
painted on the hull. Every succeeding ship is the result of a decade of
continuous innovation and creative enhancements. We believe that by offering the
widest array of amenities in an affordable, nearly all-inclusive package, we are
creating value and winning customers for Royal Caribbean International and
Celebrity Cruises. For example, each of our 13 ships built from 1999 to 2004
features 575 to 760 balcony staterooms, whereas with rare exceptions, the cruise
industry's new ships in the 1990s were designed with no more than 280 balcony
staterooms.
Navigator of the Seas, our fourth Voyager-class ship, entered service in
December 2002 and exemplified this evolution (and innovation) in amenities.
There are still the trendsetting recreational features - the rock-climbing wall,
ice-skating rink, and inline skating track - and, of course, the spectacular
Royal Promenade. But the look, inside and out, is somewhat new. Viewed from
dockside, Navigator of the Seas casts a distinctively brighter glow with more of
a glass-sheathed appearance. That is because her balconies are no longer
recessed into the structure for load-bearing, which proved unnecessary. On the
inside, new concepts on Navigator of the Seas
6
[PHOTO]
A parade of waiters serves complimentary sorbet at poolside on Millenium. Royal
Celebrity Tours (opposite page) now has four glass-domed train-cars in Alaska.
include the wine bar Vintages, the cruise industry's first wine education and
entertainment venue; Boleros, the first Latin jazz bar at sea; Chops Grille, a
popular steakhouse borrowed from our Radiance-class ships; Ben & Jerry's Ice
Cream Parlor, another first; and Jade, a buffet-style specialty restaurant with
Asian fusion foods.
Each of the 13 ships in our 1999-2004 expansion has a personality all her own.
The cumulative effect is an extremely high level of customer satisfaction. In
the "2002 Reader's Choice Awards" poll by Conde Nast Traveler, our company
claimed 16 of the top 26 places in the Best Large Ships category. The previous
year, we garnered 14 of the top 23 places.
STRONGEST CASH FLOW
Even as our financial health grew more robust in 2002, we were disappointed when
our proposed combination with P&O Princess Cruises plc was scuttled in favor of
a nominally higher offer. We received a termination fee of $62.5 million,
resulting in net proceeds of $33 million that were included in our
fourth-quarter results.
We ended the year with $1.2 billion in liquidity and the strongest cash flow in
our history. As we near completion of our recent capital expansion program, we
believe we have also seen the peak of our leverage position. Now that we have
achieved the critical mass for our brands, we are working to reduce our leverage
with a smaller newbuild program and a continued strong cash flow. We ended 2002
with a net debt-to-capital ratio of 56.3 percent, and we expect it to fall
rapidly as our capital commitments decline.
In 2003, we will happily welcome three million guests onboard our ships. It was
only in 1997 that we topped one million guests for the first time.
Industry-wide, the North American market grew to 7.4 million guests in 2002, and
Cruise Lines International Association predicts demand will keep rising - an
estimated 8 million cruisers in 2003.
In addition to our cruise offerings, Royal Celebrity Tours continued to
establish itself as
7
[PHOTO]
a premier provider of land tours in Alaska during 2002. Royal Celebrity Tours
achieved a 38-percent increase in the number of guests in our second year of
operation, and we anticipate a similar gain this year. We set upon the rails our
third and fourth glass-domed "Wilderness Express" traincars in 2002 and doubled
our motorcoach fleet.
AND, THANKFULLY . . .
There are thousands of reasons for our success in 2002 and our ability to meet
future challenges. My deepest thanks go first to the more than 30,000 shipboard
and shoreside employees of Royal Caribbean International and Celebrity Cruises
whose talent, job dedication, and professionalism never waver. I am also very
grateful to the many experienced pros in the travel-agent community, the
lifeblood of our distribution system.
Finally, I thank our Board of Directors for their wisdom and vision in helping
build a strong and resilient company. A special debt of gratitude is owed to a
company founder, Arne Wilhelmsen, a stalwart member of our board who is retiring
after 35 years of distinguished service. Quite simply, Arne has been the very
bedrock upon which Royal Caribbean grew. Amazingly, he never missed a board
meeting in 35 years. He steered us from our start with Song of Norway, the ship
that featured a distinctive cocktail lounge encircling the funnel, to a
spectacular 25-ship fleet with rock-climbing walls ascending the funnel. Arne
helped us climb, and the company will always welcome his wise counsel. We are
fortunate that the Wilhelmsen tradition will be upheld as Arne's son, Alex,
takes his place on the board. Together, we will build an exciting future.
Sincerely,
/s/ Richard D. Fain
RICHARD D. FAIN
Chairman and
Chief Executive Officer
8
[PHOTO]
Royal Caribbean International urges vacationers with active lifestyles
to "Get Out There." Celebrity Cruises promotes "A True Departure" by targeting
the savvy travelers who are offered luxurious settings, such as The Olympic
dining room (opposite page) on Millennium.
9
[PHOTO]
Alongside a gas-turbine engine that powers all Millennium and
Radiance-class ships, Chief Engineer Iraklis Baltsavias
(pointing) explains a maintenance procedure to Capt. Gerasimos
Andrianatos. First Engineer George Spirellis makes the adjustment.
ENVIRONMENTAL LETTER
Royal Caribbean International and Celebrity Cruises sail to more than 200 ports
of call, equipping our fleet with the most advanced environmental technologies
while upholding the most stringent environmental policies. We understand that
because we make our living from the sea, we must adhere to the highest standards
of marine conservation.
Our Environmental Management System, for which both brands have met ISO 14001
environmental standards, stresses continual improvement. We have a dedicated
position for an Environmental Officer on every ship. This senior officer
provides oversight and verification of the ship's environmental operations,
making sure that all waste streams are managed properly. Additionally, the
Environmental Officer is responsible for maintaining crew training for our Save
The Waves((R)), ISO 14001, and health and safety programs.
RECOGNITION AND PROTECTION
In 2002, Celebrity Cruises was the only cruise line to be awarded the
prestigious William M. Benkert Award for Environmental Excellence, the top
national award for marine environmental protection given by the U.S. Coast
Guard. This award recognizes Celebrity's commitment to an environmental program
that far exceeds mere compliance with regulatory standards.
Our industry-leading use of gas turbines was recognized in 2002 by Lloyd's List,
a leading maritime publication, when Millennium received the "Innovation in
Shipbuilding" award. Porthole Cruise Magazine acknowledged Royal Caribbean
International's environmental stewardship by naming it "Best Eco-Friendly Cruise
Line" for 2002.
Conservation International just published an interim summary report on the
cruise industry, "A Shifting Tide - Environmental Challenges and Cruise Industry
Response," that applauds numerous aspects of the environmental practices and
policies of Royal Caribbean International and Celebrity Cruises.
10
[PHOTO]
In 2002, our fleet conducted reviews with onboard testing of several advanced
wastewater treatment systems. Research concluded that some systems purify
wastewater almost to drinking-water standards. By summer 2003, half of our
combined Alaska fleet will have the most advanced wastewater treatment systems
onboard. We participated last summer in separate studies of cruise-vessel
discharges by Alaska's Department of Environmental Conservation and the
Environmental Protection Agency, which determined that the effluent has no
discernable impact when purified to regulatory standards. The EPA study, for
example, found that dilution rates of discharges from ships at sea were far
better than anticipated - up to one part per 640,000.
Our pursuit of advanced technologies has made our fleet more and more
environmentally friendly. With Constellation and Brilliance of the Seas in 2002,
we launched our fifth and sixth ships equipped with smokeless gas-turbine
engines. This technology drastically reduces exhaust emissions of nitrous oxide
(by 85 percent) and sulfur oxides (by more than 90 percent). By June 2004, eight
of our ships will be so equipped.
COMMITMENT TO THE FUTURE
Royal Caribbean Cruises Ltd. has remained steadfast in its support of ocean
research with the oceanic and atmospheric laboratories operating the past 2 1/2
years onboard Explorer of the Seas. Our joint venture with the University of
Miami's Rosenstiel School of Marine and Atmospheric Science provides valuable
tools for researchers to study ocean phenomena in the eastern Caribbean
(www.rsmas.miami.edu).
We also support marine conservation through our Ocean Fund. In 6 1/2 years, we
have donated $6 million to 37 different organizations for projects ranging from
marine science education to the protection of coral reefs, marine mammals, sea
turtles, and endangered fish populations.
Separately, the crew of Sovereign of the Seas, the company's 2001 Environmental
Ship of the Year, donated its $25,000 prize to establish an artificial reef in
the Bahamas. Through the Reef Ball Foundation, concrete reef balls seeded with
coral polyps are strategically placed where new reefs are desired. Monarch of
the Seas, the 2001 Innovative Ship of the Year, used its prize to educate
children in Key West on protecting reefs through proper waste disposal and
recreational boating practices.
I am proud of the commitments and progress we have made to ensure that our ships
are equipped with the latest technologies to protect our fragile ocean
environment. I am also proud of the men and women who serve on our ships and
their dedication to our commitment to our ABC (Above and Beyond Compliance)
program.
Sincerely,
/s/ William S. Wright
CAPT. WILLIAM S. WRIGHT
Senior VP, Safety & Environment
11
[PHOTO]
BOARD OF DIRECTORS
(from left to right)
EDWIN W. STEPHAN
Royal Caribbean Cruises Ltd.
WILLIAM K. REILLY
Aqua International Partners
LAURA LAVIADA
Pro Mujer
RICHARD D. FAIN
Royal Caribbean Cruises Ltd.
THOMAS J. PRITZKER
The Pritzker Organization, LLC
ARNE WILHELMSEN
A. Wilhelmsen AS
EYAL OFER
Carlyle M.G. Limited
ARVID GRUNDEKJOEN
Awilco ASA
GERT W. MUNTHE
Ferd Private Equity
BERNARD W. ARONSON
ACON Investments, LLC
TOR B. ARNEBERG
Nightingale & Associates, Inc.
JOHN D. CHANDRIS
Chandris (UK) Limited
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
and Celebrity Cruises
BONNIE S. BIUMI
Acting Chief Financial Officer,
Vice President and Treasurer,
Royal Caribbean Cruises Ltd.
ADAM GOLDSTEIN
Executive Vice President,
Brand Operations
Royal Caribbean International
12
FINANCIAL TABLE OF CONTENTS
14 Management's Discussion and Analysis of
Financial Condition and Results of Operations
24 Consolidated Statements of Operations
25 Consolidated Balance Sheets
26 Consolidated Statements of Cash Flows
27 Consolidated Statements of Shareholders' Equity
28 Notes to the Consolidated Financial Statements
40 Report of Independent Certified Public Accountants
41 Shareholder Information
13
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" represents double occupancy capacity per cabin even though
many cabins can accommodate three or more 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:
- general economic and business conditions,
- vacation industry competition, including cruise industry competition,
- changes in vacation industry capacity, including cruise capacity,
- the impact of tax laws and regulations affecting our business or our
principal shareholders,
- the impact of changes in other laws and regulations affecting our
business,
- the impact of pending or threatened litigation,
- the delivery of scheduled new ships,
- emergency ship repairs,
- incidents involving cruise ships at sea,
- reduced consumer demand for cruises as a result of any number of
reasons, including armed conflict, terrorist attacks, geo-political and
economic uncertainties or the unavailability of air service,
- changes in interest rates or oil prices, and
- weather.
The above examples are not 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 revenues, operating income, net income and earnings per share as
shown in the following table:
Year Ended December 31,
--------------------------------------------------
(in thousands, except per share data) 2002 2001 2000
---------- ---------- ----------
Revenues $3,434,347 $3,145,250 $2,865,846
Operating Income 550,975 455,605 569,540
Net Income 351,284 254,457 445,363
Basic Earnings Per Share $ 1.82 $ 1.32 $ 2.34
Diluted Earnings Per Share $ 1.79 $ 1.32 $ 2.31
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Unaudited selected statistical information is shown in the following table:
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
---------- ---------- ----------
Guests Carried 2,768,475 2,438,849 2,049,902
Guest Cruise Days 18,112,782 15,341,570 13,019,811
Occupancy Percentage 104.5% 101.8% 104.4%
Net income increased 38.1% to $351.3 million or $1.79 per share on a diluted
basis in 2002 compared to $254.5 million or $1.32 per share in 2001. The
increase in net income was primarily the result of an increase in capacity
associated with the addition of Infinity, Radiance of the Seas, Summit and
Adventure of the Seas in 2001 and Constellation, Brilliance of the Seas and
Navigator of the Seas in 2002.
Net income for 2002 included net proceeds of $33.0 million received in
connection with the termination of our merger agreement with P&O Princess
Cruises plc ("P&O Princess") and a charge of approximately $20.0 million
recorded in connection with a litigation settlement. (See Note 12 - Commitments
and Contingencies.) 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.
We have canceled a total of five weeks of sailings in the first quarter of 2003
due to the unanticipated drydock of one ship, which we estimate will negatively
impact net income by approximately $0.06 per share.
TERMINATION OF PROPOSED COMBINATION WITH P&O PRINCESS
In October 2002, our proposed combination with P&O Princess was terminated prior
to its consummation and P&O Princess paid us a break fee of $62.5 million. We
incurred approximately $29.5 million of merger-related costs. We also agreed to
terminate, effective as of January 1, 2003, our joint venture with P&O Princess.
The venture was terminated before it commenced business operations.
FLEET EXPANSION
Our current fleet expansion program encompasses three distinct ship designs
known as the Voyager class, Millennium class and Radiance class. Since 1999, we
have taken delivery of four Voyager, four Millennium and two Radiance-class
ships. We currently operate 25 ships with 53,042 berths.
We have three ships on order for the Royal Caribbean International brand. The
planned berths and expected delivery dates of the ships on order are as follows:
SHIP EXPECTED DELIVERY DATE BERTHS
---------------------- ------
Voyager class:
Mariner of the Seas 4th Quarter 2003 3,114
Radiance class:(1)
Serenade of the Seas 3rd Quarter 2003 2,076
Jewel of the Seas 2nd Quarter 2004 2,076
(1) We have options on two Radiance-class ships with delivery dates in the
fourth quarters of 2005 and 2006.
We believe the Voyager-class ships are the largest and the most innovative
passenger cruise ships ever built. The Radiance-class ships are a progression
from Royal Caribbean International's Vision-class ships.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 Note 1 - General and Note 2 - Summary of Significant Accounting
Policies.) Certain of our accounting policies are deemed "critical," as they
require management's highest degree of judgment, estimates and assumptions. We
have discussed these accounting estimates and disclosures with the audit
committee of our board of directors. A discussion of what we believe to be our
most critical accounting policies follows:
SHIP ACCOUNTING
Our ships represent our most significant assets and we state them at cost less
accumulated depreciation and amortization. Depreciation of ships, which includes
amortization of ships 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. Improvement costs that we believe add value to our ships are
capitalized as additions to the ship and depreciated over the improvements'
estimated useful lives. Repairs and maintenance activities are charged to
expense as incurred.
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 ship 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 ship 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 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. In
addition, goodwill is reviewed annually, or earlier, if there is an indication
of impairment.
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 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.
We believe we made reasonable estimates and judgments in determining whether our
long-lived assets and goodwill have been impaired; however, 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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 take into consideration 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 recoveries, 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 ("SOP"), "Accounting for Certain Costs and Activities Related to
Property, Plant and Equipment." Under the proposed SOP, 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
ship 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. We
have not yet analyzed the impact that this proposed SOP 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:
Year Ended December 31,
----------------------------------------
2002 2001 2000
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Expenses:
Operating 61.5 61.5 57.7
Marketing, selling and administrative 12.6 14.4 14.4
Depreciation and amortization 9.9 9.6 8.0
----- ----- -----
Operating Income 16.0 14.5 19.9
Other Income (Expense) (5.8) (6.4) (4.4)
----- ----- -----
Net Income 10.2% 8.1% 15.5%
===== ===== =====
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES
Revenues increased 9.2% to $3.4 billion from $3.1 billion in 2001. The increase
in revenues was primarily due to a 15.0% increase in capacity, partially offset
by a 5.1% decline in gross revenue per available passenger cruise day. The
increase in capacity was associated with the additions of Infinity, Radiance of
the Seas, Summit and Adventure of the Seas during 2001, and Constellation,
Brilliance of the Seas and Navigator of the Seas in 2002, partially offset by
the transfer of Viking Serenade to Island Cruises, our joint venture with First
Choice Holidays PLC. The decline in gross revenue per available passenger cruise
day was primarily associated with a lower percentage of guests who chose to book
their air passage through us, lower cruise ticket prices following the events of
September 11, 2001, a general softness in the United States economy and an
increase in industry capacity. Net revenue per available passenger cruise day
("net yields") for 2002 declined 0.7% from 2001. Net revenue represents gross
revenues less costs of air transportation, travel agent commissions and other
direct costs of sales. Occupancy for 2002 was 104.5% compared to 101.8% in 2001.
Each year the cruise industry generally experiences a period of increased
bookings, referred to as the "wave period," that begins in early January and
typically extends through February. In recent years, there has been a trend
towards bookings closer-in to the sail dates. On January 30, 2003, we noted that
this trend has reduced the importance of the wave period as an indicator of full
year booking patterns while making it even more relevant for first quarter
bookings. We also noted that bookings for the 2003 wave period were slower than
we had anticipated, especially for sailings earlier in the year. We believe this
can be attributed to uncertainty about the conflict in Iraq coupled with a
weaker economy and the impact of last December's publicity concerning stomach
flu. While wave period bookings were lower than 2002, we had very strong
bookings for 2003 sailings in late 2002 and we did not have to replace bookings
as we did in late 2001 and early 2002 to make up for the bookings lost in the
aftermath of September 11, 2001. As a result, we expected to achieve an increase
in net yields for the first quarter of 2003 in the range of 2% to 4%.
Since then, bookings have become even softer and the war in Iraq makes it even
more difficult to make predictions. Nevertheless, we still expect net yields for
the first quarter to increase in the range of 2% to 4%. We also expect that net
yields in the second quarter will be below last year's level.
EXPENSES
Operating expenses increased 9.2% to $2.1 billion in 2002 compared to $1.9
billion in 2001. Included in operating expenses in 2002 is a charge of $20.0
million recorded in connection with a litigation settlement. (See Note 12 -
Commitments and Contingencies.) Operating costs per available passenger cruise
day in 2002 declined 5.0% from 2001. The decline on a per available passenger
cruise day basis was associated with fewer guests purchasing air passage through
us and lower commissions resulting from reduced cruise ticket prices.
Marketing, selling and administrative expenses decreased 5.1% to $431.1 million
in 2002 compared to $454.1 million in 2001. Marketing, selling and
administrative expenses as a percentage of revenues were 12.6% and 14.4% in 2002
and 2001, respectively. Included in 2001 were charges associated with 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. On a per available passenger cruise day basis, marketing, selling and
administrative expenses in 2002 decreased 17.5% from 2001 primarily due to
economies of scale and cost reduction initiatives.
Operating and marketing, selling and administrative expenses, on a per available
passenger cruise day basis, are expected to increase 6% to 8% in 2003
attributable in part to increases in fuel costs, changes in our concession
arrangement for the Celebrity brand food service, the full year impact of the
operating lease for Brilliance of the Seas, and higher insurance and security
costs.
Depreciation and amortization increased 12.6% to $339.1 million in 2002 from
$301.2 million in 2001. The increase was primarily due to incremental
depreciation associated with the addition of new ships, partially offset by the
elimination of $10.4 million of goodwill amortization in 2002. (See Note 2 -
Summary of Significant Accounting Policies.)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER INCOME (EXPENSE)
Gross interest expense, excluding capitalized interest, was $290.3 million in
2002, essentially unchanged from 2001. The increase in the average debt level
associated with our fleet expansion program was offset by a decrease in interest
rates. Capitalized interest decreased to $23.4 million in 2002 from $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 2002 was $33.0 million of net proceeds
received in connection with the termination of the P&O Princess merger
agreement. Also included in Other income (expense) in 2002 and 2001 were $20.3
million and $19.4 million, respectively, of dividend income from our investment
in convertible preferred stock of First Choice Holidays PLC as well as $12.3
million and $7.2 million, respectively, of compensation from shipyards related
to the late delivery of ships, partially offset by $6.6 million and $1.6
million, respectively, of losses from affiliated operations as well as other
miscellaneous items.
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 in 2000. The increase
in revenues was primarily due 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 United States economy and a significant growth of our
fleet capacity. Net yields for 2001 declined 9.1% from the prior year. Occupancy
for 2001 was 101.8% compared to 104.4% in 2000.
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 in- creased 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% primarily
due 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.
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 primarily
due 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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
late delivery of ships.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Net cash provided by operating activities was $870.5 million in 2002 compared to
$633.7 million in 2001 and $703.3 million in 2000. The change in each year was
primarily due to the timing of cash receipts related to customer deposits and
fluctuations in net income.
During the year ended December 31, 2002, our capital expenditures were
approximately $1.0 billion compared to approximately $2.1 billion in 2001 and
$1.3 billion in 2000. The largest portion of capital expenditures related to the
deliveries of Constellation and Navigator of the Seas in 2002; Infinity,
Radiance of the Seas, Summit and Adventure of the Seas in 2001; and Millennium
and Explorer of the Seas in 2000, as well as progress payments for ships under
construction in all years.
Capitalized interest decreased to $23.4 million in 2002 from $37.0 million in
2001 and $44.2 million in 2000 due to a lower average level of investment in
ships under construction and lower interest rates.
In July 2002, we financed the addition of Brilliance of the Seas to our fleet by
novating our original ship building contract and entering into a long-term
operating lease denominated in British pound sterling. The total lease term is
25 years cancelable by either party at years 10 and 18. In connection with the
novation of the contract, we received $77.7 million for reimbursement of
shipyard deposits previously made.
During 2002, we obtained financing of $0.3 billion related to the acquisition of
Constellation. In 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 as well as
obtained financing of $0.3 billion related to the acquisition of Summit. 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, 2002 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
In July 2000, we invested approximately $300 million in convertible preferred
stock issued by First Choice Holidays PLC. (See Note 5 - Other Assets.)
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 joint venture at a valuation of $95.4
million. The contribution of Viking Serenade represented 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 $603.3 million, $45.6 million
and $128.1 million under various term loans, senior notes, revolving credit
facility and capital leases during 2002, 2001 and 2000, respectively.
During 2002, 2001 and 2000, we paid quarterly cash dividends on our common stock
totaling $100.1 million, $100.0 million and $91.3 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 in 2000.
FUTURE COMMITMENTS
We currently have three ships on order for an additional capacity of 7,266
berths. The aggregate contract price of the three ships, which excludes
capitalized interest and other ancillary costs, is approximately $1.3 billion,
of which we have deposited $0.2 billion as of December 31, 2002. We anticipate
that overall capital expenditures will be approximately $1.1 billion, $0.5
billion and $0.1 billion for 2003, 2004 and 2005, respectively.
We have options to purchase two additional Radiance-class ships with delivery
dates in the fourth quarters of 2005 and 2006. The options have an aggregate
contract price of $0.8 billion and expire on September 19, 2003. Under the terms
of the options, the shipyard has the ability to terminate them upon providing us
advance notice.
We have $5.4 billion of long-term debt of which $0.1 billion is due during the
12-month period ending December 31, 2003. Included in Long-term debt are two
ships financed with capital leases. (See Note 6 - Long-Term Debt.)
We are obligated under noncancelable operating leases primarily for a ship,
office and warehouse facilities, computer equipment and motor vehicles. As of
December 31, 2002, future minimum lease payments under noncancelable operating
leases aggregated to $413.9 million, due through 2028. We have future
commitments to pay for our usage of certain port facilities, maintenance
contracts and communication services aggregating to $261.6 million, due through
2027. (See Note 12 - Commitments and Contingencies.)
Under the Brilliance of the Seas long-term operating lease, we have agreed to
indemnify the lessor to the extent its after-tax return is negatively impacted
by unfavorable changes in corporate tax rates and capital allowance deductions.
These indemnifications could result in an increase in our annual lease payments.
We are unable to estimate the maximum potential increase in such lease payments
due to the various circumstances, timing or combination of events that could
trigger such indemnifications. Current facts indicate that an indemnification is
not probable; however, if one occurs, we may have remedies available to us under
the terms of the lease agreement.
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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FUNDING SOURCES
As of December 31, 2002, our liquidity was $1.2 billion consisting of
approximately $0.2 billion in cash and cash equivalents and $1.0 billion
available under our $1.0 billion unsecured revolving credit facility. Our $1.0
billion revolving credit facility expires in June 2003. Any amounts outstanding
at that time will be payable immediately if the facility is not replaced. We
intend to replace this facility prior to its expiration date, although such
replacement may be at an amount less than $1.0 billion. In addition, we have
commitments for export financing for up to 80% of the contract price of two
ships on order, Serenade of the Seas and Jewel of the Seas, not to exceed $624.0
million in aggregate. Capital expenditures and scheduled debt payments will be
funded through a combination of cash flows from operations, drawdowns under our
available credit facilities, the incurrence of additional indebtedness and the
sales of equity or debt securities in private or public securities markets.
Geo-political and economic uncertainties coupled with market volatility 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 financing
from external sources will be available in accordance with our expectations.
Our financing 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, 2002.
We believe our availability under current existing credit facilities, cash flows
from operations and our ability to obtain new borrowings and/or raise new
capital will be sufficient to fund operations, debt payment requirements and
capital expenditures over the next year.
FINANCIAL INSTRUMENTS AND OTHER
GENERAL
We are exposed to market risk attributable to changes in interest rates, foreign
currency exchange rates and fuel 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. (See Note 11 - Financial Instruments.)
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to our
long-term debt obligations and our operating lease for Brilliance of the Seas.
We enter into interest rate swap agreements to modify our exposure to interest
rate movements and to manage our interest expense and rent expense.
Market risk associated with our long-term fixed rate debt is the potential
increase in fair value resulting from a decrease in interest rates. At December
31, 2002, our interest rate swap agreements effectively changed $375.0 million
of fixed rate debt with a weighted-average fixed rate of 7.58% to LIBOR-based
floating rate debt. The estimated fair value of our long- term fixed rate debt
at December 31, 2002, excluding our Liquid Yield Option(TM) Notes and Zero
Coupon Convertible Notes, was $2.2 billion using quoted market prices, where
avail- able, 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 associated interest rate swap agreements was estimated to be $64.0
million as of December 31, 2002 based on quoted market prices for similar or
identical financial instruments to those we hold. A hypothetical one percentage
point decrease in interest rates at December 31, 2002 would increase the fair
value of our long-term fixed rate debt, excluding our Liquid Yield Option(TM)
Notes and Zero Coupon Convertible Notes, by approximately $80.3 million, net of
an increase in the fair value of the associated interest rate swap agreements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Market risk associated with our floating rate debt is the potential increase in
interest expense from an increase in interest rates. At December 31, 2002, 58%
of our debt was effectively fixed and 42% was floating. A hypothetical one
percentage point increase in interest rates would increase our 2003 interest
expense by approximately $15.7 million. At December 31, 2002, we have interest
rate swap agreements that effectively change $25.0 million of LIBOR-based
floating rate debt to fixed rate debt of 4.395% beginning January 2005.
Market risk associated with our operating lease for Brilliance of the Seas is
the potential increase in rent expense from an increase in interest rates. A
hypothetical one percentage point increase in interest rates would increase our
2003 rent expense by approximately $4.5 million. At December 31, 2002, we have
interest rate swap agreements that effectively change British pound sterling
50.0 million of sterling LIBOR-based operating lease payments to fixed rate
lease payments with a weighted-average rate of 5.05% beginning January 2004.
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, 2002 were
$575.4 million and $365.0 million, respectively. A hypothetical 10% decrease or
increase in our December 31, 2002 common stock price would decrease or increase
the value of our Liquid Yield Option(TM) Notes and Zero Coupon Convertible Notes
by $10.2 million and $9.3 million, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISK
Our primary exposure to foreign currency exchange rate risk relates to our firm
commitments under one ship construction contract denominated in euros. We
entered into foreign currency forward contracts to manage this risk and were
substantially hedged as of December 31, 2002. The fair value of these forward
contracts at December 31, 2002, was an unrealized gain of $31.0 million which is
recorded, along with an offsetting $31.0 million fair value asset related to our
ship construction contracts, on our accompanying 2002 balance sheet. A
hypothetical 10% strengthening of the United States dollar as of December 31,
2002, assuming no changes in comparative interest rates, would result in a $75.8
million decrease in the fair value of these contracts. This decrease in fair
value would be fully offset by a decrease in the United States dollar value of
the related foreign currency denominated ship construction contract.
We are also exposed to foreign currency exchange rate fluctuations on the United
States 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, 2002, the estimated fair
value of such contracts was an unrealized gain of approximately $6.4 million
based on quoted market prices for equivalent instruments with the same remaining
maturities. The estimated unrealized gain has been deferred and, if realized,
will be recorded in earnings when the transactions being hedged are recognized
in 2003. A hypothetical 10% strengthening of the United States dollar as of
December 31, 2002, assuming no changes in comparative interest rates, would
decrease the fair value of these contracts by approximately $3.6 million. This
decrease in fair value would be fully offset by a decrease in the United States
dollar value of the forecasted transactions being hedged.
FUEL PRICE RISK
Our exposure to market risk for changes in fuel prices relates to the
consumption of fuel on our ships. Fuel cost, as a percentage of our revenues,
was approximately 4.5% in 2002, 3.7% in 2001, and 3.3% in 2000. We use fuel swap
agreements and zero cost collars to mitigate the financial impact of
fluctuations in fuel prices. As of December 31, 2002, we had fuel swap
agreements and zero cost collars to pay fixed prices for fuel with an aggregate
notional amount of approximately $39.4 million, maturing through 2003. The fair
value of these contracts at December 31, 2002 was an unrealized gain of $7.5
million. The effective portion of the estimated unrealized gain has been
deferred and, if realized, will be recorded in earnings when the transactions
being hedged are recognized in 2003. We estimate that a hypothetical 10%
increase in our weighted-average fuel price for the year ended December 31, 2002
would increase our 2003 fuel cost by approximately $18.1 million. This increase
would be partially offset by a $1.5 million increase in the fair value of our
fuel swap agreements.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------------------
(in thousands, except per share data) 2002 2001 2000
----------- ----------- -----------
INCOME STATEMENT
REVENUES $ 3,434,347 $ 3,145,250 $ 2,865,846
----------- ----------- -----------
EXPENSES
Operating 2,113,217 1,934,391 1,652,459
Marketing, selling and administrative 431,055 454,080 412,799
Depreciation and amortization 339,100 301,174 231,048
----------- ----------- -----------
2,883,372 2,689,645 2,296,306
----------- ----------- -----------
OPERATING INCOME 550,975 455,605 569,540
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 12,413 24,544 7,922
Interest expense, net of capitalized interest (266,842) (253,207) (154,328)
Other income (expense) 54,738 27,515 22,229
----------- ----------- -----------
(199,691) (201,148) (124,177)
----------- ----------- -----------
NET INCOME $ 351,284 $ 254,457 $ 445,363
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 1.82 $ 1.32 $ 2.34
=========== =========== ===========
Diluted $ 1.79 $ 1.32 $ 2.31
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
24
CONSOLIDATED BALANCE SHEETS
As of December 31,
-------------------------------------
(in thousands, except share data) 2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 242,584 $ 727,178
Trade and other receivables, net 79,535 72,196
Inventories 37,299 33,493
Prepaid expenses and other assets 88,325 53,247
------------ ------------
Total current assets 447,743 886,114
PROPERTY AND EQUIPMENT - at cost less accumulated
depreciation and amortization 9,276,484 8,605,448
GOODWILL - less accumulated amortization of $138,606 278,561 278,561
OTHER ASSETS 535,743 598,659
------------ ------------
$ 10,538,531 $ 10,368,782
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 122,544 $ 238,581
Accounts payable 171,153 144,070
Accrued expenses and other liabilities 308,281 283,913
Customer deposits 567,955 446,085
------------ ------------
Total current liabilities 1,169,933 1,112,649
LONG-TERM DEBT 5,322,294 5,407,531
OTHER LONG-TERM LIABILITIES 11,610 92,018
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY
Common stock ($.01 par value; 500,000,000 shares authorized;
192,982,513 and 192,310,198 shares issued) 1,930 1,923
Paid-in capital 2,053,649 2,045,904
Retained earnings 1,982,580 1,731,423
Accumulated other comprehensive income (loss) 3,693 (16,068)
Treasury stock (515,868 and 475,524 common shares at cost) (7,158) (6,598)
------------ ------------
Total shareholders' equity 4,034,694 3,756,584
------------ ------------
$ 10,538,531 $ 10,368,782
============ ============
The accompanying notes are an integral part of these financial statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
(in thousands) 2002 2001 2000
--------- ----------- -----------
OPERATING ACTIVITIES
NET INCOME $ 351,284 $ 254,457 $ 445,363
ADJUSTMENTS:
Depreciation and amortization 339,100 301,174 231,048
Accretion of original issue discount 46,796 36,061 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in trade and other receivables, net (7,339) (18,587) (150)
Increase in inventories (3,806) (3,378) (3,717)
(Increase) decrease in prepaid expenses and other assets (8,469) 3,305 1,865
Increase (decrease) in accounts payable 27,083 (14,073) 55,102
(Decrease) increase in accrued expenses and other liabilities (2,240) 75,645 (8,204)
Increase (decrease) in customer deposits 121,870 2,674 (21,622)
Other, net 6,191 (3,589) 3,631
--------- ----------- -----------
Net cash provided by operating activities 870,470 633,689 703,316
--------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (689,991) (1,737,471) (1,285,649)
Investment in convertible preferred stock -- -- (305,044)
Net proceeds from ship transfer to joint venture -- -- 47,680
Other, net (6,275) (46,501) (21,417)
--------- ----------- -----------
Net cash used in investing activities (696,266) (1,783,972) (1,564,430)
--------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt, net -- 1,834,341 1,195,000
Repayments of long-term debt (603,270) (45,553) (128,086)
Dividends (100,127) (99,955) (94,418)
Other, net 44,599 10,818 2,958
--------- ----------- -----------
Net cash (used in) provided by financing activities (658,798) 1,699,651 975,454
--------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (484,594) 549,368 114,340
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 727,178 177,810 63,470
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 242,584 $ 727,178 $ 177,810
========= =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest, net of amount capitalized $ 236,523 $ 203,038 $ 146,434
========= =========== ===========
Noncash investing and financing activities:
Acquisition of ship through debt $ 319,951 $ 326,738 $ --
========= =========== ===========
The accompanying notes are an integral part of these financial statements.
26
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, 2000 $ 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
Issuance under employee
related plans -- 7 7,745 -- -- (560) 7,192
Common stock dividends -- -- -- (100,127) -- -- (100,127)
Changes related to cash flow
derivative hedges -- -- -- -- 19,761 -- 19,761
Net income -- -- -- 351,284 -- -- 351,284
--------- ------ ---------- ----------- -------- ------- -----------
BALANCES AT DECEMBER 31, 2002 $ -- $1,930 $2,053,649 $ 1,982,580 $ 3,693 $(7,158) $ 4,034,694
========= ====== ========== =========== ======== ======= ===========
Comprehensive income is as follows:
Year Ended December 31,
--------------------------------------------------
(in thousands) 2002 2001 2000
-------- --------- --------
Net income $351,284 $ 254,457 $445,363
Transition adjustment SFAS No. 133 -- 7,775 --
Changes related to cash flow derivative hedges 19,761 (23,843) --
-------- --------- --------
Total comprehensive income $371,045 $ 238,389 $445,363
======== ========= ========
The accompanying notes are an integral part of these financial statements.
27
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 16 cruise ships and 9 cruise ships,
respectively, at December 31, 2002. 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
accounting principles generally accepted in the United States and are presented
in United States 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.
Improvement costs that we believe add value to our ships are capitalized as
additions to the ship and depreciated over the improvements' estimated useful
lives, 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 ships
under capi- tal leases, is computed using the straight-line method over
estimated useful lives of primarily 30 years for ships, three to twelve years
for other property and equipment and the shorter of the lease term or related
asset life for leasehold improvements. (See Note 4 - Property and Equipment.)
28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
ADVERTISING COSTS
Advertising costs are expensed as incurred except those costs which result in
tangible assets, such as brochures, which 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 $97.9 million, $103.4 million and $98.9 million, and brochure,
production and direct mail costs were $69.5 million, $77.5 million and $79.2
million for the years 2002, 2001 and 2000, 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 fuel prices.
Derivative instruments are 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 off-setting 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 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.
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 ships under construction are included in the cost basis of the
ships. 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
accumulated 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 currently.
Our risk-management policies and objectives for holding hedging instruments
have not changed with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 133 on January 1, 2001. The implementation of SFAS 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 United States 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.
29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
STOCK-BASED COMPENSATION
We account for stock-based compensation using the intrinsic value method. Had
the fair value method been used to account for such compensation, compensation
costs would have reduced net income and earnings per share as follows:
Year Ended December 31,
---------------------------------------------------------
(in thousands, except per share data) 2002 2001 2000
--------- --------- ---------
Net income, as reported $ 351,284 $ 254,457 $ 445,363
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards (20,544) (37,017) (28,797)
--------- --------- ---------
Pro forma net income $ 330,740 $ 217,440 $ 416,566
========= ========= =========
EARNINGS PER SHARE:
Basic - as reported $ 1.82 $ 1.32 $ 2.34
Basic - pro forma $ 1.72 $ 1.13 $ 2.19
Diluted - as reported $ 1.79 $ 1.32 $ 2.31
Diluted - pro forma $ 1.69 $ 1.13 $ 2.18
========= ========= =========
The weighted-average fair value of options granted during 2002, 2001 and 2000
was $6.84, $4.35 and $12.43 per share, respectively. Fair value information for
our stock options was estimated using the Black-Scholes option-pricing model
based on the following weighted-average assumptions:
2002 2001 2000
------- ------- -------
Dividend yield 2.7% 2.5% 2.0%
Expected stock price volatility 42.9% 43.3% 38.4%
Risk-free interest rate 3% 4% 6%
Expected option life 5 years 5 years 6 years
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.
2002 2001 2000
---- ---- ----
REVENUES:
United States 82% 81% 82%
All Other Countries 18% 19% 18%
ACCOUNTING PRONOUNCEMENTS
Goodwill represents the excess of cost over the fair value of net assets
acquired, and prior to January 1, 2002, it was amortized over 40 years using
the straight-line method. Upon adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002, we ceased to amortize goodwill.
Goodwill amortization was $10.4 million in 2001 and 2000. In addition, we were
required to perform an initial impairment review of our goodwill upon adoption,
annually thereafter and whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be fully recoverable. We
completed our initial and annual impairment tests and determined that goodwill
was not impaired. For the years ended December 31, 2001 and 2000, net income,
excluding the amortization of goodwill, would have been $264.9 million and
$455.8 million, respectively. Basic and diluted earnings per share would have
been $1.38 and $1.37, respectively, for 2001 and $2.40 and $2.36, respectively,
for 2000.
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires the measurement and recognition
of the impairment of (i) long-lived assets to be held and used and (ii)
long-lived assets to be held for sale. The implementation of SFAS No. 144 did
not have a material impact on our results of operations or financial position
at adoption or during the year ended December 31, 2002.
In June 2002, the Financial Accounting Standards Board issued SFAS No.146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.
146 requires that liabilities for costs associated with an exit activity or
disposal of long-lived assets be recognized when the liabilities are incurred
and when the fair value can be determined. SFAS No. 146 is effective for any
exit or disposal activities that are initiated after December 31, 2002.
In November 2002, Financial Accounting Standards Board Interpretation ("FIN")
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No.45
requires recognition of an initial liability for the fair value of the
guarantor's obligation upon issuance of a guarantee. Disclosure requirements
have been expanded to include information about each guarantee, even if the
likelihood of any required payment is remote. We adopted the disclosure
requirements of FIN No.45as of December 31, 2002. The initial recognition and
measurement provisions are effective on a prospective basis for guarantees
issued or modified after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued SFAS No.148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of SFAS No. 123," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFASNo.148 amends the requirements of SFAS No.123
requiring prominent disclosures in annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We continue to use the intrinsic
value method and, as a result, the adoption of SFAS No. 148 had no impact on
our results of operations or financial position.
In January 2003, the Financial Accounting Standards Board issued FIN No.46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN No.46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if specific criteria are met. FIN No.46
is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No.46 must be applied for the first
interim or annual period beginning after June 15, 2003. We are currently
evaluating the effect that the adoption of FIN No.46 will have on our results
of operations and financial position.
NOTE 3. TERMINATION OF PROPOSED COMBINATION WITH P&O PRINCESS
In October 2002, our proposed combination with P&O Princess was terminated
prior to its consummation and P&O Princess paid us a break fee of $62.5
million. We incurred approximately $29.5 million of merger-related costs. The
net proceeds of $33.0 million were included in Other income (expense). We also
agreed to terminate, effective as of January 1, 2003, our joint venture with
P&O Princess. The venture was terminated before it commenced business
operations.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(in thousands) 2002 2001
------------ -----------
Land $ 7,056 $ 7,056
Ships 9,404,959 8,289,028
Ships under capital lease 772,096 771,131
Ships under construction 265,782 396,286
Other 378,345 366,914
------------ -----------
10,828,238 9,830,415
Less - accumulated depreciation and amortization (1,551,754) (1,224,967)
------------ -----------
$ 9,276,484 $ 8,605,448
============ ===========
31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Ships under construction include progress payments for the construction of new
ships as well as planning, design, interest, commitment fees and other
associated costs. We capitalized interest costs of $23.4 million, $37.0 million
and $44.2 million for the years 2002, 2001 and 2000, respectively. Accumulated
amortization related to ships under capital lease was $159.9 million and $136.2
million at December 31, 2002 and 2001, respectively.
NOTE 5. OTHER ASSETS
We hold convertible preferred stock in First Choice Holidays PLC denominated in
British pound sterling valued at approximately $300 million. The convertible
preferred stock carries a 6.75% coupon. Dividends of $20.3 million, $19.4
million and $9.2 million were earned in 2002, 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.
NOTE 6. LONG-TERM DEBT Long-term debt consists of the following:
(in thousands) 2002 2001
----------- -----------
$1 billion unsecured revolving credit facility bearing
interest at LIBOR plus 0.45% on balances
outstanding, 0.2% facility fee, due 2003 $ -- $ 350,000
Senior Notes and Senior Debentures bearing
interest at rates ranging from 6.75% to 8.75%,
due 2004 through 2011, 2018 and 2027 1,835,591 1,950,341
Liquid Yield Option(TM) Notes with yield
to maturity of 4.875%, due 2021 630,528 600,878
Zero Coupon Convertible Notes with yield
to maturity of 4.75%, due 2021 372,774 355,628
$625 million unsecured term loan bearing interest
at LIBOR plus 1.25%, due 2005 625,000 625,000
$360 million unsecured term loan bearing interest
at LIBOR plus 1.0%, due 2006 360,000 360,000
$300 million unsecured term loan bearing interest
at LIBOR plus 0.8%, due 2009 through 2010 300,000 300,000
Unsecured term loan bearing interest at 8.0%, due 2006 84,440 109,250
Term loans bearing interest at rates ranging from 6.7% to
8.0%, due through 2010, secured by certain Celebrity ships 466,209 506,675
Term loans bearing interest at LIBOR plus 0.45% to 1.535%,
due through 2010, secured by certain Celebrity ships 379,609 78,491
Capital lease obligations with implicit interest rates
ranging from 7.0% to 7.2%, due through 2011 390,687 409,849
----------- -----------
5,444,838 5,646,112
Less - current portion (122,544) (238,581)
----------- -----------
Long-term portion $ 5,322,294 $ 5,407,531
=========== ===========
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
In May 2002, we entered into a $320.0 million term loan bearing interest at a
variable rate of six-month LIBOR plus 1.535%, due through 2010 and secured by
Constellation. In September 2002, our $150.0 million 7.125% senior notes
matured and were paid in full.
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 Summit.
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, 2002 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 2002 and 2001, under the terms of two of our secured term loans, we
elected to defer principal payments totaling $64.4 million each year to 2004
through 2007.
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.
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2002. Following is a schedule of annual maturities on long-term
debt as of December 31, 2002 for each of the next five years (in thousands):
Year
2003 $ 122,544
2004 (1) 364,385
2005 (2) 1,660,941
2006 713,361
2007 350,878
(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.
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. Offerings to employees are made on a quarterly basis. Subject to certain
limitations, the purchase price for each share of common stock is equal to 90%
of the average of the market prices of the common stock as reported on the New
York Stock Exchange on the first business day of the purchase period and the
last business day of each month of the purchase period. Shares of common stock
of 25,649, 33,395 and 40,838 were issued under the Employee Stock Purchase Plan
at a weighted- average price of $17.34, $17.69 and $23.09 during 2002, 2001 and
2000, 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 2002, 2001
and 2000.
Compensation expense related to our "Taking Stock in Employees" program, which
was discontinued effective December 31, 2001, was $1.6 million and $2.1
million in 2001 and 2000, respectively. Under the plan, employees were awarded
five shares of our stock, or the cash equivalent, at the end of each year of
employment.
We have three Employee Stock Option Plans which provide for awards to our
officers, directors and key employees of options to purchase shares of our
common stock. During 2001, two of the Employee Stock Option Plans were amended
to increase the number of shares reserved for issuance by a total of 8,000,000
shares of common stock between the two plans. 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.
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option activity and information about stock options outstanding are
summarized in the following tables:
STOCK OPTION ACTIVITY
2002 2001 2000
------------------------ ------------------------ ----------------------
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 17,022,241 $21.49 11,291,784 $27.17 6,894,172 $24.82
Granted 617,600 $20.89 6,525,775 $12.41 5,036,100 $30.21
Exercised (599,122) $11.10 (104,526) $13.22 (186,436) $12.68
Canceled (1,806,142) $23.61 (690,792) $29.84 (452,052) $30.65
---------- ---------- ----------
Outstanding options at December 31 15,234,577 $21.63 17,022,241 $21.49 11,291,784 $27.17
========== ========== ==========
Options exercisable at December 31 7,890,128 $21.82 4,679,421 $20.79 2,707,234 $16.02
========== ========== ==========
Available for future grants at December 31 6,744,505 5,871,763 3,839,246
========== ========== ==========
STOCK OPTIONS OUTSTANDING
As of December 31, 2002 Options Outstanding Options Exercisable
----------------------- ----------------------------------------------- -----------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Exercise Price Range Outstanding Remaining Life Exercise Price Exercisable Exercise Price
-------------------- ----------- -------------- -------------- ----------- --------------
$ 9.00-$ 9.90 4,843,071 8.16 years $ 9.80 1,658,285 $ 9.68
$11.19-$20.30 3,590,838 5.88 years $17.30 2,774,390 $16.52
$21.71-$28.78 3,958,018 6.93 years $25.39 2,018,603 $25.22
$28.88-$48.00 2,842,650 6.67 years $41.99 1,438,850 $41.25
---------- ---------
15,234,577 7.03 years $21.63 7,890,128 $21.82
========== =========
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. EARNINGS PER SHARE
Below is a reconciliation between basic and diluted earnings per share:
Year Ended December 31,
-------------------------------------------------
(in thousands, except per share data) 2002 2001 2000
-------- -------- ---------
Basic:
Net income $351,284 $254,457 $ 445,363
Less preferred stock dividends -- -- (1,933)
-------- -------- ---------
Net income less preferred stock dividends $351,284 $254,457 $ 443,430
======== ======== =========
Weighted-average common shares outstanding 192,485 192,231 189,397
======== ======== =========
Basic earnings per share $ 1.82 $ 1.32 $ 2.34
======== ======== =========
DILUTED:
Net income $351,284 $254,457 $ 445,363
======== ======== =========
Weighted-average common shares outstanding 192,485 192,231 189,397
Dilutive effect of stock options 3,246 1,250 1,428
Convertible preferred stock -- -- 2,110
-------- -------- ---------
Diluted weighted-average shares outstanding 195,731 193,481 192,935
======== ======== =========
Diluted earnings per share $ 1.79 $ 1.32 $ 2.31
======== ======== =========
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 $8.5 million, $8.3 million and $7.3 million for the years
2002, 2001 and 2000, 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 $3.5 million, $3.2 million and $1.9 million in 2002, 2001 and
2000, respectively.
NOTE 10. INCOME TAXES
We and the majority of our subsidiaries are not subject to United States
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.
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11. FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments are as follows:
(in thousands) 2002 2001
----------- -----------
Cash and Cash Equivalents $ 242,584 $ 727,178
Long-Term Debt (including current portion of long-term debt) (5,039,646) (5,031,858)
Foreign Currency Forward Contracts gains (losses) 37,376 (99,110)
Interest Rate Swap Agreements in a net receivable position 62,835 35,668
Fuel Swap and Zero Cost Collar Agreements in a net
receivable (payable) position 7,491 (7,799)
=========== ===========
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, 2002 or 2001 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 ship 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, 2002, we had foreign currency
forward contracts in a notional amount of $488.0 million maturing through 2003.
Our foreign currency forward contracts related to firm commitments on ships
under construction had aggregate unrealized gains of approximately $31.0
million and unrealized losses of approximately $99.3 million at December 31,
2002 and 2001, respectively. Approximately $6.4 million of unrealized gains on
our foreign currency forward contracts related to forecasted transactions were
deferred at December 31, 2002 and, if realized, will be recorded in earnings
when the transactions being hedged are recognized in 2003. Deferred gains from
hedging forecasted transactions were not material 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 and our operating lease for Brilliance of the Seas.
We enter into interest rate swap agreements to modify our exposure to interest
rate movements and to manage our interest expense and rent expense.
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Market risk associated with our long-term fixed rate debt is the potential
increase in fair value resulting from a decrease in interest rates. As of
December 31, 2002, we had interest rate swap agreements which exchanged fixed
interest rates for floating interest rates in a notional amount of $375.0
million, maturing in 2006 through 2011.
Market risk associated with our floating rate debt is the potential increase in
interest expense from an increase in interest rates. As of December 31, 2002,
we had interest rate swap agreements which, beginning January 2005, exchange
floating rate term debt for a fixed interest rate of 4.395% in a notional
amount of $25.0 million, maturing in 2008.
Market risk associated with our operating lease for Brilliance of the Seas is
the potential increase in rent expense from an increase in interest rates. As
of December 31, 2002, we had interest rate swap agreements that effectively
change British pound sterling 50.0 million of sterling LIBOR-based operating
lease payments to fixed rate lease payments with a weighted-average fixed rate
of 5.05% beginning January 2004.
FUEL SWAP AGREEMENTS
The fair values of our fuel swap and zero cost collar 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 fuel prices
relates to the forecasted consumption of fuel on our ships. We use fuel swap
and zero cost collar agreements to mitigate the impact of fluctuations in fuel
prices. As of December 31, 2002, we had fuel swap agreements to pay fixed
prices for fuel with an aggregate notional amount of $39.4 million, maturing
through 2003. Approximately $6.7 million of unrealized gains and $7.0 million
of unrealized losses on these contracts were deferred at December 31, 2002 and
2001, respectively. Deferred unrealized gains, if realized, will be recorded in
earnings when the transactions being hedged are recognized in 2003.
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, 2002, we had three ships on order for an additional capacity
of 7,266 berths. The aggregate contract price of the three ships, which
excludes capitalized interest and other ancillary costs, is approximately $1.3
billion, of which we have deposited $0.2 billion as of December 31, 2002. We
anticipate that overall capital expenditures will be approximately $1.1
billion, $0.5 billion and $0.1 billion for 2003, 2004 and 2005, respectively.
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
sought payment of (i) the wages alleged to be owed, (ii) penalty wages under 46
United States Code Section 10313 and (iii) punitive damages. In November 1999,
a purported class action suit was filed in the same court alleging a similar
cause of action.
In October 2002, we entered into settlement agreements in connection with both
lawsuits. Under the terms of the settlement agreements, we could be required to
make aggregate payments of $20.0 million, for which we recorded a reserve as
of September 30, 2002.
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.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
OPERATING LEASES
On July 5, 2002, we added Brilliance of the Seas to Royal Caribbean
International's fleet. In connection with this addition, we novated our
original ship building contract and entered into a long-term operating lease
denominated in British pound sterling. The total lease term is 25 years
cancelable by either party at years 10 and 18. In connection with the novation
of the contract, we received $77.7 million for reimbursement of shipyard
deposits previously made. The lease payments vary based on sterling LIBOR. In
addition, we are obligated under other noncancelable operating leases
primarily for office and warehouse facilities, computer equipment and motor
vehicles.
As of December 31, 2002, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):
Year
----
2003 $ 47,020
2004 46,858
2005 43,538
2006 40,582
2007 39,870
Thereafter 196,065
--------
$413,933
========
Total expense for all operating leases amounted to $24.3 million, $9.8 million
and $6.7 million for the years 2002, 2001 and 2000, respectively.
Under the Brilliance of the Seas long-term operating lease, we have agreed to
indemnify the lessor to the extent its after-tax return is negatively
impacted by unfavorable changes in corporate tax rates and capital allowance
deductions. These indemnifications could result in an increase in our annual
lease payments. We are unable to estimate the maximum potential increase in
such lease payments due to the various circumstances, timing or combination of
events that could trigger such indemnifications. Current facts indicate that
an indemnification is not probable; however, if one occurs, we may have
remedies available to us under the terms of the lease agreement.
OTHER
At December 31, 2002, we have future commitments to pay for our usage of
certain port facilities, maintenance contracts and communication services as
follows (in thousands):
Year
----
2003 $ 39,259
2004 40,617
2005 28,479
2006 24,973
2007 21,443
Thereafter 106,821
--------
$261,592
========
NOTE 13. SUBSEQUENT EVENTS
We currently have canceled a total of five weeks of sailings in the first
quarter of 2003 due to the unanticipated drydock of one ship.
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14. QUARTERLY DATA (UNAUDITED)
(in thousands, First Second Third Fourth
except per share data) Quarter Quarter Quarter Quarter
--------------------- ---------------------- ------------------------ ----------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- ---------- -------- -------- --------
Revenues $799,953 $726,878 $821,804 $821,674 $1,031,660 $940,721 $780,930 $655,977
Operating Income $112,412 $ 90,084 $130,520 $135,275 $ 241,597 $211,257 $ 66,446 $ 18,989
Net Income (Loss) $ 52,813 $ 52,497 $ 66,700 $ 81,713 $ 193,494 $159,212 $ 38,277 $(38,965)
Earnings (Loss)
Per Share:
Basic $ 0.27 $ 0.27 $ 0.35 $ 0.43 $ 1.01 $ 0.83 $ 0.20 $ (0.20)
Diluted $ 0.27 $ 0.27 $ 0.34 $ 0.42 $ 0.99 $ 0.82 $ 0.20 $ (0.20)
Dividends Declared
Per Share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13
======== ======== ======== ======== ========== ======== ======== ========
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
[PRICEWATERHOUSECOOPERS LOGO]
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, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Miami, Florida
February 28, 2003
40
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.celebrity.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
1900 Wachovia Financial Center
200 S. Biscayne Boulevard
Miami, Florida 33131-2330
COMMON STOCK
Transfer Agent & Registrar
Wachovia National Bank
1525 West W.T. Harris Boulevard
Building 3C3
Charlotte, NC 28262-1153
Internet http://www.wachovia.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:
2002 HIGH LOW 2001 High Low
---- ------ ------ ---- ------ ------
First Quarter $23.95 $16.03 First Quarter $30.25 $19.87
Second Quarter 24.38 19.35 Second Quarter 23.09 18.65
Third Quarter 20.59 14.00 Third Quarter 24.88 7.75
Fourth Quarter 22.44 15.00 Fourth Quarter 17.60 8.32
ANNUAL MEETING
The annual meeting will be held on Tuesday, May 20, 2003 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 is available through the
Company's investor relations website on the Internet at www.rclinvestor.com. In
addition to this Internet site, a copy will be provided without charge upon
written request to the Company.
[ROYAL CARIBBEAN INTERNATIONAL LOGO] [CELEBRITY CRUISES LOGO]
ROYAL CARIBBEAN CRUISES LTD., 1050 CARIBBEAN WAY, MIAMI, FLORIDA 33132