Royal Caribbean Cruise Lines 2006 Annual Report Download - page 30

Advertising Costs
Advertising costs are expensed as incurred except those costs,
which result in tangible assets, such as brochures, which are treat-
ed as prepaid expenses and charged to expense as consumed.
Advertising costs consist of media advertising as well as brochure,
production and direct mail costs. Media advertising was $141.3 mil-
lion, $139.1 million and $133.2 million, and brochure, production
and direct mail costs were $89.5 million, $86.9 million and $82.2
million for the years 2006, 2005 and 2004, respectively.
Derivative 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. Generally these
instruments are designated as hedges and are recorded on the bal-
ance sheet at their fair value. Our derivative instruments are not held
for trading or speculative purposes.
At inception of the hedge relationship, 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 asset or liabil-
ity is designated as a cash flow hedge.
Changes in the fair value of derivatives that are designated as fair
value hedges are offset against changes in the fair value of the under-
lying hedged assets, liabilities or firm commitments. Changes in fair
value of derivatives that are designated as cash flow hedges are
recorded as a component of accumulated other comprehensive
(loss) income until the underlying hedged transactions are recog-
nized in earnings. The foreign-currency transaction gain or loss of our
nonderivative financial instrument designated as a hedge of our net
investment in our foreign operations are recognized as a component
of accumulated other comprehensive income along with the associ-
ated cumulative translation adjustment of the foreign operation.
On an ongoing basis, we assess whether derivatives used in hedg-
ing transactions are “highly effective” in offsetting changes in fair
value or cash flow of hedged items. If it is determined that a deriva-
tive is not highly effective as a hedge, changes in fair value of the
derivatives are recognized in earnings immediately. The ineffective
portion of hedges is recognized in earnings immediately.
Foreign Currency Translations and Transactions
We translate assets and liabilities of our foreign subsidiaries whose
functional currency is the local currency, at exchange rates in effect
at the balance sheet date. We translate revenues and expenses at
weighted-average exchange rates for the period. Equity is translated
at historical rates and the resulting cumulative foreign currency
translation adjustments are included as a component of accumulat-
ed other comprehensive (loss) income, which is reflected as a sep-
arate component of shareholders’ equity. Exchange gains or losses
arising from the remeasurement of monetary assets and liabilities
denominated in a currency other than the functional currency of the
entity involved are immediately included in our earnings, unless cer-
tain liabilities have been designated to act as a hedge of a net invest-
ment in a foreign operation. The majority of our transactions are set-
tled in United States dollars. Gains or losses resulting from
transactions denominated in other currencies are recognized in
income at each balance sheet date.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding
during each period. Diluted earnings per share incorporates the
incremental shares issuable upon the assumed exercise of stock
options and conversion of potentially dilutive securities, including
shares contingently issuable under our previously outstanding con-
vertible debt instruments. In addition, net income is adjusted to add
back the amount of interest recognized in the period associated with
the dilutive securities. (See Note 8.
Earnings Per Share .)
Stock-Based Employee Compensation
We have three stock-based compensation plans, which provide for
awards to our officers, directors and key employees. The plans con-
sist of a 1990 Employee Stock Option Plan, a 1995 Incentive Stock
Option Plan and a 2000 Stock Award Plan. The 1990 Stock Option
Plan and the 1995 Incentive Stock Option Plan terminated by their
terms in March 2000 and February 2005, respectively. The 2000
Stock Award Plan, as amended, provides for the issuance of (i)
incentive and non-qualified stock options, (ii) stock appreciation
rights, (iii) restricted stock, (iv) restricted stock units and (v) per-
formance shares of up to 13,000,000 shares of our common stock.
During any calendar year, no one individual shall be granted awards
of more than 500,000 shares. We awarded 204,154, 160,574, and
331,756 restricted stock units in 2006, 2005 and 2004 respective-
ly. Options and restricted stock units outstanding as of December
31, 2006, vest in equal installments over three to five years and four
to five years, respectively, from the date of grant. Generally, options
and restricted stock units are forfeited if the recipient ceases to be a
director or employee before the shares vest. Options are granted at
a price not less than the fair value of the shares on the date of grant
and expire not later than ten years after the date of grant.
In September 2006, the Compensation Committee amended the
Company’s 2000 Stock Award Plan. The amendment extends to one
year the period during which a participant must exercise non-quali-
fied options following a termination of service. It also limits to one
year the period for exercise of both qualified and non-qualified
options following termination of service due to a participant’s death
or disability. This amendment is effective for options granted on or
after September 18, 2006. The amendment did not have any impact
on our December 31, 2006 consolidated financial statements.
We also provide an Employee Stock Purchase Plan to facilitate 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 com-
mon stock as reported on the New York Stock Exchange on the first
28 ROYAL CARIBBEAN CRUISES LTD.
Notes to the Consolidated Financial Statements (Continued)