Note 1. General
DESCRIPTION OF BUSINESS
Royal Caribbean Cruises Ltd., a Liberian corporation, and its subsidiaries (the "Company"), is a global cruise company. The Company operates two cruise brands, Royal Caribbean International, which operates 12 cruise ships, and Celebrity Cruises, which operates five cruise ships. The Company's ships operate worldwide and call on destinations in Alaska, Australia, the Bahamas, Bermuda, Canada, the Caribbean, Europe, the Far East, Hawaii, Mexico, New England, the Panama Canal and Scandinavia.

BASIS FOR PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars. Management 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 are recorded as customer deposits and are recognized, together with revenues from shipboard activities and all associated direct costs of a voyage, upon completion of voyages with durations of 10 days or less and on a pro rata basis for voyages in excess of 10 days. Certain revenues and expenses for 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, fuel and gift shop merchandise carried at the lower of cost (weighted-average) or market.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Significant vessel improvement costs are capitalized as additions to the vessel, while costs of repairs and maintenance are charged to expense as incurred. The Company capitalizes interest as part of the cost of construction. The Company reviews long-lived assets, identifiable intangibles and goodwill and reserves for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of the assets will not be fully recoverable.

Depreciation of property and equipment, which includes amortization of vessels under capital lease, is computed using the straight-line method over useful lives of primarily 30 years for vessels and three to 10 years for other property and equipment. (See Note 5 - Property and Equipment.)

GOODWILL
Goodwill represents the excess of cost over the fair value of net assets acquired and is being amortized over 40 years using the straight-line method.

ADVERTISING COSTS
Advertising costs are expensed as incurred except those costs which result in tangible assets, such as brochures, are treated as prepaid supplies and charged to operations as consumed. Advertising expense consists of media advertising as well as brochure, production and direct mail costs. Media advertising was $93.1, $76.7 and $62.5 million, and brochure, production and direct mail costs were $57.4, $63.2 and $33.7 million for the years 1999, 1998 and 1997, respectively.

DRYDOCKING
Drydocking costs are accrued evenly over the period to the next scheduled drydocking and are included in accrued liabilities.

FINANCIAL INSTRUMENTS
The Company enters into various forward, option and swap contracts to limit its exposure to fluctuations in foreign currency exchange rates and oil prices, to modify its exposure to interest rate movements and to manage its interest costs. The differential in interest rates and oil prices to be paid or received under these agreements is recognized in income over the life of the contracts as part of interest expense and fuel expense, respectively. Foreign exchange forward and/or option contracts are revalued as of the balance sheet date based on forward and/or option contracts with comparable characteristics, and resulting gains and losses are recognized in income currently.

FOREIGN CURRENCY TRANSACTIONS
The majority of the Company's transactions are settled in U.S. 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.

STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value method and discloses certain fair market value information with respect to its stock option activity in the notes to the financial statements.

SEGMENT REPORTING
The Company operates two 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 about geographic areas is shown in the table below. Revenues are attributed to geographic areas based on the source of the customer.

Note 3. Stock Split
On June 23, 1998, the Company authorized a two-for-one split of its common stock effected in the form of a stock dividend. The additional shares were distributed on July 31, 1998 to shareholders of record on July 10, 1998. All share and per share information has been retroactively restated to reflect this stock split.

Note 4. Acquisition
In July 1997, the Company acquired all of the outstanding stock of Celebrity Cruise Lines Inc. ("Celebrity"), a provider of cruises to the North American market. The purchase price was $515.0 million, payable in cash of $245.0 million and 14,896,552 shares of the Company's common stock. This acquisition has been accounted for under the purchase method and the results of the operations of Celebrity have been included in the consolidated financial statements since July 1, 1997. The total cost of the acquisition was allocated to the tangible assets acquired and liabilities assumed based on their respective fair values.

The following unaudited pro forma information presents a summary of consolidated results of operations of the Company, including Celebrity, as if the acquisition had occurred January 1, 1997.

The unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional depreciation expense as a result of a step-up in the basis of fixed assets and increased interest expense on acquisition debt. They do not purport to be indicative of the results which would actually have been achieved if this acquisition had been effected on the date indicated or of those results which may be obtained in the future.

Note 5. Property and Equipment
Property and equipment consists of the following (in thousands):

Vessels under construction includes progress payments for the construction of new vessels as well as planning, design, interest, commitment fees and other associated costs. The Company capitalized interest costs of $34.6, $15.0 and $15.8 million for the years 1999, 1998 and 1997, respectively. Accumulated amortization related to vessels under capital lease was $90.2 and $67.9 million at December 31, 1999 and 1998, respectively.

In May 1998, the Company sold Song of America for $94.5 million and recognized a gain on the sale of $31.0 million which is included in Other income (expense). In the second quarter of 1998, the Company incurred a $32.0 million charge related to the write-down to fair market value of Viking Serenade. Based on the Company's strategic objectives, the unique circumstances of this vessel and indications of the current value of Viking Serenade, the Company recorded a write-down of the carrying value to its estimated fair market value which is included in Other income (expense). The Company continues to operate and depreciate the vessel which is classified as part of Property and Equipment on the balance sheet.

In October 1997, the Company sold Sun Viking for $30.0 million and recognized a gain on the sale of $4.0 million. In September 1997, the Company sold Meridian. The sale price was $62.1 million and there was no gain or loss recognized in the transaction. The Company has recorded the gains in Other income (expense).

Note 6. Long-Term Debt
Long-term debt consists of the following (in thousands):

Under the Company's $1.0 billion unsecured revolving credit facility (the "$1 Billion Revolving Credit Facility"), the contractual interest rate on balances outstanding varies with the Company's debt rating.

In March 1998, the Company issued $150.0 million of 6.75% Senior Notes due 2008 and $150.0 million of 7.25% Senior Debentures due 2018. Net proceeds to the Company were approximately $296.1 million.

In May 1997, the Company redeemed the remaining $104.5 million of 11 3/8% Senior Subordinated Notes and incurred an extraordinary charge of approximately $7.6 million, or $0.05 per share on the early extinguishment of debt.

The Senior Notes and Senior Debentures are unsecured and are not redeemable prior to maturity.

The Company 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 and $97.5 million, respectively.

The Company's debt agreements contain covenants that require the Company, among other things, to maintain minimum liquidity amounts, net worth and fixed charge coverage ratios and limit debt to capital ratios. The Company is in compliance with all covenants as of December 31, 1999. Following is a schedule of principle repayments on long-term debt (in thousands):

Note 7. Shareholders' Equity
The following represents an analysis of the changes in shareholders' equity for the years 1999, 1998 and 1997 (in thousands):

In 1999, the Company completed a public offering of 11,625,000 shares of common stock at a price of $46.69 per share. Of the total shares sold, 10,825,000 shares were sold by the Company and the balance of 800,000 shares were sold by a selling shareholder. After deduction of the underwriting discount and other estimated expenses of the offering, net proceeds to the Company were approximately $487.4 million.

In March 1998, the Company completed a public offering of 13,800,000 shares of common stock at a price of $28.25 per share. Of the total shares sold, 6,100,690 shares were sold by the Company, and the balance of 7,669,310 shares were sold by selling shareholders. After deduction of the underwriting discount and other estimated expenses of the offering, net proceeds to the Company were approximately $165.5 million.

In February 1997, the Company issued 3,450,000 shares of $3.625 Series A Convertible Preferred Stock (the "Convertible Preferred Stock"). The Convertible Preferred Stock has a liquidation preference of $50 per share and is convertible by the holder at any time into shares of common stock at a conversion price of $16.20 per share of common stock (equivalent to a conversion rate of 3.0864 shares of common stock for each share of Convertible Preferred Stock). The shares of Convertible Preferred Stock are redeemable, at the option of the Company, subsequent to February 16, 2000 at pre-established redemption prices.

The Company's Employee Stock Purchase Plan facilitates the purchase by employees of up to 800,000 shares of common stock commencing January 1, 1994. The purchase price is derived from a formula based on 90% of the fair market value of the common stock during the quarterly purchase period, subject to certain restrictions. Shares of common stock of 35,263, 35,546 and 33,276 were issued under the Employee Stock Purchase Plan at an average price of $37.81, $28.33 and $16.48 during 1999, 1998 and 1997, respectively.

Under an executive compensation program approved in 1994, the Company will award to a trust 10,086 shares of common stock per quarter, up to a maximum of 806,880 shares. The Company issued 40,344 shares each year under the program during 1999, 1998 and 1997.

The Company has an Employee Stock Option Plan and an Incentive Stock Option Plan which provide for awards to officers, directors and key employees of the Company up to an aggregate 14,703,000 shares and 3,700,000 shares of common stock, respectively. 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 10 years after the date of grant. Options under the Employee Stock Option Plan generally become exercisable as to 40% of the amount granted two years after the grant date and 20% of the amount granted at the end of each of the three succeeding years. Options under the Incentive Stock Option Plan generally become exercisable as to 25% of the amount granted two years after the grant date and 25% of the amount granted at the end of each of the three succeeding years.

Stock option activity and information about stock options are summarized in the following tables.

The Company uses the intrinsic value method of accounting for stock-based compensation. Had the fair value based method been used to account for such compensation, compensation costs would have reduced net income by $15.0, $8.2 and $4.0 million or $0.08, $0.05 and $0.03 per share in 1999, 1998 and 1997, respectively. The weighted-average fair value of options granted during 1999, 1998 and 1997 was $15.52, $10.49 and $7.80, respectively. Fair market value information for the Company's stock options for 1999, 1998 and 1997 was estimated using the Black-Scholes Model assuming an expected dividend rate of 1.0% in 1999 and 1.5% in 1998 and 1997, an estimated term of six years, a risk-free rate of return of approximately 5% in 1999 and 1998 and 6% in 1997, and an expected volatility of 35.6%, 35.0% and 28.0% in 1999, 1998 and 1997, respectively.

Effective January 1, 1998, the Company instituted a program, "Taking Stock in Employees," to award stock to employees up to a maximum of 1,400,000 shares of common stock. Employees are awarded 50 shares of the Company's stock which vest over a 10-year period. Employees can elect to receive cash equal to the fair market value of the stock upon vesting. Compensation expense was $3.3 and $3.6 million in 1999 and 1998, respectively, related to this program.

Note 8. Earnings Per Share
Below is a reconciliation between basic and diluted earnings per share before extraordinary item for the years ended December 31, 1999, 1998 and 1997 (in thousands, except per share amounts).

Extraordinary loss per share for the year ended 1997 for basic and diluted earnings per share was ($0.05).

Note 9. Retirement Plans
The Company maintains a defined contribution pension plan covering all of its 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 $7.2, $6.9 and $4.9 million for the years 1999, 1998 and 1997, respectively.

Effective January 1, 2000, the Company instituted a defined benefit pension plan to cover all of its shipboard employees not covered under another pension plan. Benefits to eligible employees are accrued based on the employee's years of service. The Company made an initial funding pursuant to this plan as of December 31, 1999.

Note 10. Income Taxes
The Company and the majority of its subsidiaries are not subject to U.S. corporate income tax on income generated from the international operation of ships pursuant to Section 883 of the Internal Revenue Code, provided that they meet certain tests related to country of incorporation and composition of shareholders. The Company believes that it and a majority of its subsidiaries meet these tests. Income tax expense related to the Company's remaining subsidiaries is not significant.

Note 11. Financial Instruments
The estimated fair values of the Company's financial instruments are as follows (in thousands):

The carrying amounts shown are the amounts reported in the consolidated balance sheets. 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, 1999 or 1998 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 the Company's financial instruments, none of which are held for trading or speculative purposes:

CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of those instruments.

LONG-TERM DEBT
The fair values of the $1 Billion Revolving Credit Facility, the capital leases, the secured fixed and variable rate loans and the unsecured fixed rate loan were estimated based on the market rates available to the Company for similar debt with the same remaining maturities. The fair values of the Senior Notes and Senior Debentures were estimated by obtaining quoted market prices.

INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements was estimated based on quoted market prices for similar or identical financial instruments to those held by the Company. The Company's exposure to market risk for changes in interest rates relates to its long-term debt obligations. Market risk associated with the Company's long-term debt is the potential increase in fair value resulting from a decrease in interest rates. The Company uses interest rate swaps to modify its exposure to interest rate movements and manage its interest expense. As of December 31, 1999, the Company had agreements in effect which exchanged fixed interest rates for floating interest rates in a notional amount of $850.0 million maturing in 2002 through 2008.

The Company has exposure under these interest rate swap agreements for the cost of replacing the contracts in the event of nonperformance by the counterparties, all of which are currently the Company's lending banks. To minimize that risk, the Company limits its exposure to any individual counterparty and selects counterparties with credit risks acceptable to the Company.

During June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement 133. The Statement defers the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, until January 1, 2000 for the Company. The Company has not yet determined the impact that the adoption of SFAS No. 133 will have on its earnings or statement of financial position.

Note 12. Commitments and Contingencies
CAPITAL EXPENDITURES
The Company has 10 ships on order. Two are Eagle-class vessels designated for the Royal Caribbean International fleet, which are scheduled for delivery in the third quarter of 2000 and first quarter of 2002. The Company also has four Vantage-class vessels designated for the Royal Caribbean International fleet scheduled for delivery in the first quarter of 2001 and second quarters of 2002, 2003 and 2004 and four Millennium-class vessels designated for the Celebrity Cruises fleet, scheduled for delivery in the second quarter of 2000, first quarter of 2001, third quarter of 2001 and second quarter of 2002. The aggregate contract price of the 10 ships, which excludes capitalized interest and other ancillary costs, is approximately $3.9 billion, of which the Company deposited $247.0 million during 1999, $119.3 million during 1998 and $23.7 million during 1997. Additional deposits are due prior to the dates of delivery of $88.1 million in 2000, $64.6 million in 2001 and $39.6 million in 2002.

LITIGATION
In July 1999, the Company entered into a plea agreement with the U.S. Department of Justice resolving a series of federal grand jury investigations of the Company's waste disposal practices. The Company was assessed fines of $18.0 million of which $4.0 million had previously been accrued in connection with the plea agreement. In January 2000, the Company entered into a settlement with the State of Alaska resolving a civil lawsuit relating to the same incidents. The settlement calls for the Company to make payments totaling $3.3 million, which were accrued in 1999.

Beginning in August 1996, several purported class action suits were filed alleging that Royal Caribbean International and Celebrity should have paid commissions to travel agents on a portion of the port charges that were included in the price of cruise fares. The suits seek damages in an unspecified amount. Similar suits are pending against other companies in the cruise industry. In December 1998, a Florida state court dismissed one of the suits for failure to state a claim under Florida law. The plaintiff in that case has filed an appeal of that decision. The Company is not able at this time to estimate the timing or impact of these proceedings on the Company.

In April 1999, a lawsuit was filed in the United State District Court for the Southern District of New York on behalf of current and former crew members alleging that the Company failed to pay the plaintiffs their full wages. The suit seeks payment of (i) the wages alleged to be owed, (ii) penalty wages under U.S. law and (iii) punitive damages. In November 1999, a purported class action suit was filed in the same court alleging a similar cause of action. The Company is not able at this time to estimate the impact of these proceedings on the Company; there can be no assurance that such proceedings, if decided adversely, would not have a material adverse effect on the Company's results of operations.

The Company is routinely involved in other claims typical to the cruise industry. The majority of these claims are covered by insurance. Management believes that the outcome of such other claims which are not covered by insurance are not expected to have a material adverse effect upon the Company's financial condition or results of operations.

OPERATING LEASES
The Company is obligated under noncancelable operating leases for various facilities, primarily office and warehouse space. As of December 31, 1999, future minimum lease payments under noncancelable operating leases were as follows (in thousands):

Total rent expense for all operating leases amounted to $5.1, $6.9 and $5.7 million for the years 1999, 1998 and 1997, respectively.

OTHER
At December 31, 1999, the Company has commitments through 2014 to pay a minimum amount for its annual usage of certain port facilities as follows (in thousands):

Note 13. Quarterly Data (unaudited)