Royal Caribbean Cruise Lines 2008 Annual Report Download - page 72

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-17 Royal Caribbean Cruises Ltd.
In July 2008, we settled our pending case against Pentair Water Treat-
ment (OH) Company (formerly known as Essef Corporation) for claims
stemming from a 1994 outbreak of Legionnaires’ disease on one of
Celebrity Cruises’ ships. Pursuant to the terms of the settlement agree-
ment, we were paid, net of costs and payment to insurers, approxi-
mately $17.6 million. This award was recognized in our consolidated
financial statements in 2008 within other income.
We are routinely involved in other claims typical within the cruise vaca-
tion industry. The majority of these claims are covered by insurance. We
believe the outcome of such claims, net of expected insurance recover-
ies, will not have a material adverse impact on our financial condition
or results of operations.
Operating Leases
In 2002, we entered into an operating lease denominated in British
pound sterling for the Brilliance of the Seas. The lease payments vary
based on sterling LIBOR. The lease has a contractual life of 25 years;
however, the lessor 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 termi-
nation payment of approximately £126.0 million, or approximately
$183.9 million based on the exchange rate at December 31, 2008,
if the lease is canceled in 2012, and relinquish our right to cause the
sale of the vessel. This is analogous to a guaranteed residual value.
This termination amount, which is our maximum exposure, has been
included in the table below for noncancelable operating leases. Under
current circumstances we do not believe early termination of this lease
is probable.
Under the Brilliance of the Seas 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, capital allow-
ance deductions and certain unfavorable determinations which may be
made by United Kingdom tax authorities. These indemnifications could
result in an increase in our lease payments. We are unable to estimate
the maximum potential increase in our lease payments due to the various
circumstances, timing or a combination of events that could trigger such
indemnifications. We have been advised by the lessor that the United
Kingdom tax authorities are disputing the lessor’s accounting treatment
of the lease and that the parties are in discussions on the matter. If the
characterization of the lease is ultimately determined to be incorrect, we
could be required to indemnify the lessor under certain circumstances.
The lessor has advised us that they believe their characterization of the
lease is correct. Based on the foregoing and our review of available infor-
mation, we do not believe an indemnification is probable. However, if
the lessor loses its dispute and we are required to indemnify the lessor,
we cannot at this time predict the impact that such an occurrence
would have on our financial condition and results of operations.
In addition, we are obligated under other noncancelable operating
leases primarily for offices, warehouses and motor vehicles. As
of December 31, 2008, future minimum lease payments under
noncancelable operating leases were as follows (in thousands):
Year
2009 $ 48,459
2010 45,809
2011 42,378
2012 210,436
2013 9,201
Thereafter 34,356
$390,639
Total expense for all operating leases amounted to $67.6 million,
$65.6 million and $57.0 million for the years 2008, 2007 and 2006,
respectively.
Other
Some of the contracts that we enter into include indemnification provi-
sions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes,
increased lender capital costs and other similar costs. The indemnifi-
cation clauses are often standard 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 indemnifica-
tion in any material amount is probable.
If any person other than A. Wilhelmsen AS. and Cruise Associates,
our two principal shareholders, acquires ownership of more than 30%
of our common stock and our two principal shareholders, in the
aggregate, own less of our common stock than such person and do
not collectively have the right to elect, or to designate for election, at
least a majority of the board of directors, we may be obligated to pre-
pay indebtedness outstanding 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 liquidity and operations.
At December 31, 2008, we have future commitments to pay for our
usage of certain port facilities, marine consumables, services and main-
tenance contracts as follows (in thousands):
Year
2009 $132,841
2010 90,711
2011 83,927
2012 84,363
2013 70,599
Thereafter 185,429
$647,870