Royal Caribbean Cruise Lines 2007 Annual Report Download - page 36

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
Options and restricted stock units outstanding as of December 31,
2007 vest in equal installments over four to five years 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
the period during which a participant must exercise non-qualified
options following a termination of service to one year. It also
limits the period for exercise of both qualified and non-qualified
options following termination of service due to a participant’s
death or disability to one year. This amendment is effective for
options granted on or after September 18, 2006. The amendment
did not have any impact on our 2007 and 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 in the aggregate. 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
NewYork Stock Exchange on the first business day of the pur-
chase period and the last business day of each month of the
purchase period. Shares of common stock of 20,759, 18,116 and
14,476 were issued under the ESPP at a weighted-average price of
$37.25, $36.00 and $40.83 during 2007, 2006 and 2005, respectively.
Under an executive compensation program approved in 1994, we
award to a trust 10,086 shares of common stock per quarter, up to
amaximum of 806,880 shares.
Total compensation expense recognized for employee stock
based compensation for the year ended December 31, 2007 was
$19.0 million, of which $16.3 million was included within market-
ing, selling and administrative expenses and $2.7 million within
payroll and related expenses. Total compensation expense recog-
nized for employee stock based compensation for the year ended
December 31, 2006 was $18.4 million, of which $13.8 million was
included within marketing, selling and administrative expenses
and $4.6 million within payroll and related expenses.
The following table illustrates the effect on income before cumu-
lativeeffectof a changein accounting principle, net income and
earningsper shareas if we had applied the fair value recognition
provisions of SFAS 123 to such compensation for the year ended
December 31, 2005 (in thousands, except per share data):
Income before cumulative effect of a change in
accounting principle $663,465
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards (9,732)
Pro forma income before cumulative effect of a
change in accounting principle 653,733
Add: Interest on dilutive convertible notes 48,128
Pro forma income before cumulative effect of a
change in accounting principle for
diluted earnings per share $701,861
Net income, as reported $715,956
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards (9,732)
Pro forma net income 706,224
Add: Interest on dilutive convertible notes 48,128
Pro forma net income for diluted earnings per share $754,352
Weighted-average common shares outstanding 206,217
Dilutive effect of stock options and restricted stock awards 2,498
Dilutive effect of convertible notes 25,772
Diluted weighted-average shares outstanding 234,487
Earnings per share before cumulative effect of a change
in accounting principle:
Basic – as reported $ 3.22
Basic – pro forma $ 3.17
Diluted – as reported $ 3.03
Diluted – pro forma $ 2.99
Earningsper share:
Basic – as reported $ 3.47
Basic – pro forma $ 3.42
Diluted – as reported $ 3.26
Diluted – pro forma $ 3.22
The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model. The
estimated fair value of stock options, less estimated forfeitures,
is amortized over the vesting period using the graded-vesting
method. The assumptions used in the Black-Scholes option-
pricing model areas follows:
2007 2006 2005
Dividend yield 1.3% 1.4% 1.0%
Expected stock price volatility 28.0% 33.0% 48.8%
Risk-free interest rate 4.8% 4.5% 3.5%
Expected option life 5years 5years 5 years
Upon the adoption of SFAS 123R, expected volatility was based on
acombination of historical and implied volatilities. The risk-free
interest rate is based on U.S. Treasury zero coupon issues with a
remaining term equal to the expected option life assumed at the
date of grant. The expected term was calculated based on historical
experienceand represents the time period options actually remain
outstanding. Weestimated forfeitures based on historical pre-
vesting forfeitures and shall revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. For
purposes of calculating pro forma information for the period prior
to fiscal 2006, we accounted for forfeitures as they occurred.