Royal Caribbean Cruise Lines 2003 Annual Report Download - page 33

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 on our financial condition, results of
operations or liquidity.
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
an operating lease denominated in British pound sterling. In
connection with the novation of the contract, we received
$77.7 million for reimbursement of shipyard deposits previous-
ly made. The lease payments vary based on sterling LIBOR.
The lease has a contractual life of 25 years; however, the les-
sor has the right to cancel the lease at years 10 and 18.
Accordingly, the lease term for accounting purposes is 10
years. In the event of early termination at year 10, we have the
option to cause the sale of the vessel at its fair value and use
the proceeds toward the applicable termination obligation plus
any unpaid amounts due under the contractual term of the
lease. Alternatively, we can make a termination payment of
approximately £126 million, or approximately $224 million
based on the exchange rate at December 31, 2003, and relin-
quish our right to cause the sale of the vessel. This termination
amount, which is our maximum exposure, has been included in
the table below for noncancelable operating leases.
In addition, we are obligated under other noncancelable oper-
ating leases primarily for office and warehouse facilities, com-
puter equipment and motor vehicles. As of December 31,
2003, future minimum lease payments under noncancelable
operating leases were as follows (in thousands):
Year
2004 $ 47,040
2005 45,620
2006 43,152
2007 42,126
2008 41,904
Thereafter (1) 387,777
$ 607,619
(1) Under the Brilliance of the Seas lease agreement, we may be required to
make a termination payment of approximately £126 million, or approximately
$224 million based on the exchange rate at December 31, 2003, if the lease is
canceled at year 10.
Total expense for all operating leases amounted to $44.1 mil-
lion, $24.3 million and $9.8 million for the years 2003, 2002
and 2001, respectively.
Under the
Brilliance of the Seas operating lease, we have agreed
to indemnify the lessor to the extent its after-tax return is nega-
tively impacted by unfavorable changes in corporate tax rates
and capital allowance deductions. These indemnifications could
result in an increase in our lease payments. We are unable to
estimate the maximum potential increase in such lease pay-
ments due to the various circumstances, timing or combination
of events that could trigger such indemnifications. Under current
circumstances we do not believe an indemnification is probable.
OTHER
Some of the contracts that we enter into include indemnifica-
tion provisions that obligate us to make payments to the coun-
terparty if certain events occur. These contingencies generally
relate to changes in taxes, increased lender capital costs and
other similar costs. The indemnification clauses are often stan-
dard contractual terms and are entered into in the normal
course of business. There are no stated or notional amounts
included in the indemnification clauses and we are not able to
estimate the maximum potential amount of future payments, if
any, under these indemnification clauses. We have not been
required to make any payments under such indemnification
clauses in the past and, under current circumstances, we do
not believe an indemnification is probable.
If A. Wilhelmsen AS. and Cruise Associates, our two principal
shareholders, cease to own a specified percentage of our com-
mon stock, we may be obligated to prepay indebtedness out-
standing under the majority of our credit facilities, which we
may be unable to replace on similar terms. If this were to occur,
it could have an adverse impact on our operations and liquidity.
At December 31, 2003, we have future commitments to pay for
our usage of certain port facilities, marine consumables, infor-
mation technology hardware and software, maintenance con-
tracts and communication services as follows (in thousands):
Year
2004 $ 65,281
2005 48,016
2006 29,693
2007 24,016
2008 23,862
Thereafter 115,844
$ 306,712
ROYAL CARIBBEAN CRUISES LTD. 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)