Note 1. General
Description of Business
Royal Caribbean Cruises Ltd., a Liberian corporation, and its subsidiaries (the "Company"), is a global cruise company. In July 1997, the Company acquired 100% of the outstanding stock of Celebrity Cruise Lines Inc. ("Celebrity"). (See Note 4 – Acquisition.) The Company operates two cruise brands, Royal Caribbean International, which operates 12 cruise ships (one of which has been sold and will operate under a charter agreement until March 1999), and Celebrity Cruises, which operates five cruise ships. The Company's ships call on destinations in Alaska, the Bahamas, Bermuda, the Caribbean, Canada, Europe, 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 passenger 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 refurbishing 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, 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 $76.7, $62.5 and $46.6 million, and brochure, production and direct mail costs were $63.2, $33.7 and $29.2 million for the years 1998, 1997 and 1996, 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 adopted Statement of Financial Accounting Standards No. 131 – Disclosures About Segments of an Enterprise and Related Information for the year ended December 31, 1998. Although 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.

 
 
    1998 1997 1996
  Revenues:      
  United States 84% 85% 85%
  All Other Countries 16% 15% 15%
   

 
 

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, 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, 1996.

  
 
  (in thousands, except per share amounts)   1997   1996
 
  Revenue $ 2,196,571 $ 1,769,216
  Income before extraordinary item $ 174,406 $ 136,498
  Net income $ 166,848 $ 136,498
  Earnings per share        
      Income before extraordinary item        
          Basic $ 1.10 $ 0.96
          Diluted $ 1.10 $ 0.95
      Net income        
          Basic $ 1.05 $ 0.96
          Diluted $ 1.05 $ 0.95
   

 
  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): 		 
 
      1998   1997
 
  Land $ 5,320 $ 5,320
  Vessels   4,457,070   4,201,443
  Vessels under capital lease   763,350   760,941
  Vessels under construction   285,243   160,771
  Other   170,290   139,281
 
    5,681,273   5,267,756
  Less–accumulated depreciation        
      and amortization   (608,265)   (482,465)
   
    $ 5,073,008 $ 4,785,291 
   

 
  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 $15.0, $15.8 and $15.9 million for the years 1998, 1997 and 1996, respectively. Accumulated amortization related to vessels under capital lease was $67.9 and $45.8 million at December 31, 1998 and 1997, 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 objective to maintain a modernized fleet, 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 current 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. In October 1996, the Company sold Song of Norway for $40.0 million and recognized a gain on the sale of $10.3 million. The Company has recorded the gains in Other income (expense).

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

  
 
      1998   1997
  $1 billion revolving credit facility,
   LIBOR plus 0.30% interest rate
   on balances outstanding,
   0.15% facility fee, due 2003  		 $ – $ 60,000 
 
Senior Notes and Senior Debentures
   bearing interest at rates ranging
   from 6.75% to 8.25%, due 2002
   through 2008, 2018 and 2027		   1,390,006  1,090,443 
 
Unsecured fixed rate loan bearing
   interest at 8.0%, due 2006  		   185,277    211,075 
 
Fixed rate loans bearing interest
   at rates ranging from 6.7% to
   8.0%, due through 2005, secured
   by certain Celebrity vessels		   403,560    595,147 
 
Variable rate loans bearing interest
   at 6.5% through Nov. 2001,
   LIBOR plus 0.45% through 2004,
   due through 2004, secured by
   certain Celebrity vessels  		   30,978    142,670 
 
Capital lease obligations,
   implicit interest rates ranging
   from 7.0% to 7.2%,
   due through 2011  		   459,261    473,361 
   
      2,469,082    2,572,696 
  Less–current portion    (127,919)   (141,013)
   
  Long-term portion  $ 2,341,163  $ 2,431,683 
   
 
 

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 addition, the $1 Billion Revolving Credit Facility contains a competitive bid provision which may allow the Company to borrow funds at less than the contractual interest rate.

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, 1998. Following is a schedule of principal repayments on long-term debt (in thousands):

  
 
  Year    
 
  1999 $ 127,919
  2000   128,086
  2001   109,982
  2002   259,853
  2003   110,948
  Thereafter   1,732,294
   
    $ 2,469,082
   

 
  Note 7. Shareholders' Equity
The following represents an analysis of the changes in shareholders' equity for the years 1998, 1997, and 1996 (in thousands):

  
     Preferred
Stock		  Common
Stock		   Paid-in
Capital		  Retained
Earnings		  Treasury
Stock		   Total  
 
 
  Balance, January 1, 1996 $ – $ 1,270 $ 548,339  $ 419,030  $ (3,551) $ 965,088   
  Issuance under Employee Related Plans   –   6   3,606    –   (248)   3,364   
  Common stock dividends   –   –   –   (34,384)   –   (34,384)  
  Net Income   –   –   –   150,866    –   150,866   
 
 
  Balance, December 31, 1996   –   1,276   551,945    535,512    (3,799)   1,084,934   
  Issuance of Convertible Preferred Stock   172,500   –   (5,470)   –   –   167,030   
  Acquisition of Celebrity   –   148   269,852    –   –   270,000   
  Issuance of Common Stock   –   187   364,444    –   –   364,631   
  Issuance under Employee Related Plans   –   10   7,533    –   (560)   6,983   
  Preferred stock dividends   –   –   –   (9,201)   –   (9,201)  
  Common stock dividends   –   –   –   (40,783)   –   (40,783)  
  Net Income   –   –   –   175,127    –   175,127   
 
 
  Balance, December 31, 1997   172,500   1,621   1,188,304    660,655    (4,359)   2,018,721   
  Issuance of Common Stock   –   61   165,471    –   –   165,532   
  Issuance under Employee Related Plans   –   8   8,021    –   (560)   7,469   
  Preferred stock dividends   –   –   –   (12,506)   –   (12,506)  
  Common stock dividends   –   –   –   (55,228)   –   (55,228)  
  Net Income   –   –   –   330,770    –   330,770   
 
 
  Balance, December 31, 1998 $ 172,500 $ 1,690 $ 1,361,796  $ 923,691  $ (4,919) $ 2,454,758   
   
 

 

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, 7,699,310 shares were sold by selling shareholders, and the balance of 6,100,690 shares were sold by the Company. 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 35,546, 33,276 and 49,560 were issued under the Employee Stock Purchase Plan at an average price of $28.33, $16.48 and $11.50 during 1998, 1997 and 1996, 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 1998, 1997 and 1996.

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 6,703,000 shares and 2,700,000 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.

  
 
Stock Options Activity
  
 
  Number of
Options 		 Average
Price		  
 
 
Balance at January 1, 1996 4,243,928  $ 9.74  
Granted 1,706,094  $ 12.62  
Exercised (425,778) $ 6.56  
Canceled (202,544) $ 12.48  
   
     
Balance at December 31, 1996 5,321,700  $ 10.81  
         
Granted 1,080,000  $ 19.49  
Exercised (831,608) $ 7.87  
Canceled (95,776) $ 13.16  
   
     
Balance at December 31, 1997 5,474,316  $ 12.92  
         
Granted 2,013,000  $ 25.07  
Exercised (652,474) $ 9.90  
Canceled (342,452) $ 16.74  
   
 
Balance at December 31, 1998 6,492,390  $ 16.78  
   
     
Available for Future Grants,      
    End of the Year 1,274,360     
 
 
Stock Options Outstanding
  
  As of December 31, 1998      Outstanding     Exercisable           
   
 
  Exercise
Price Range		 Shares Average
Remaining
Life		  Average
Exercise
Price		 Shares  Average
Exercise
Price		  
 
 
  $  6.28–  $12.16 1,641,816 4.4 years $ 9.00 1,188,494 $ 8.08  
  $ 13.16–  $13.78 1,814,474 6.6 years $ 13.49 983,322 $ 13.49  
  $ 14.03–  $22.31 1,860,100 8.9 years $ 20.45 81,930 $ 14.24  
  $ 25.59–  $32.84 1,176,000 9.2 years $ 26.95 – –  
       
     
     
        6,492,390 7.2 years $ 16.78 2,253,746 $ 10.66  
       
     
     
  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 $8.2, $4.0 and $2.6 million or $0.05, $0.03 and $0.02 per share in 1998, 1997 and 1996, respectively. The weighted-average fair value of options granted during 1998, 1997 and 1996 was $10.49, $7.80 and $5.42, respectively. Fair market value information for the Company's stock options for 1998, 1997 and 1996 was estimated using the Black-Scholes Model assuming an expected dividend rate of 1.5%, an estimated term of six years, a risk- free rate of return of approximately 5% in 1998 and 6% in 1997 and 1996 and an expected volatility of 35.0% in 1998 and 28.0% in 1997 and 1996.

Effective January 1, 1998, the Company instituted a program to award stock to employees up to a maximum of 1,400,000 shares of common stock. Employees are awarded five shares of the Company's stock at the end of each year of employment 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 $3.6 million in 1998 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, 1998, 1997 and 1996 (in thousands, except per share amounts).
  
      1998  1997    1996    
   
 
  For the Years Ended December 31,  Income Shares  Per
Share		  Income Shares  Per
Share		 Income Shares  Per
Share		  
 
 
  Income before extraordinary item $ 330,770 $ 182,685 $ 150,866  
  Less: Preferred stock dividend (12,506) (10,765) –  
 
 
  Basic earnings per share 318,264 167,577 $ 1.90 171,920 141,010 $ 1.22 150,866 127,295 $ 1.19  
 
 
  Effect of Dilutive Securities  
      Stock options 2,940 1,978 1,132  
      Convertible preferred stock 12,506 10,648 10,765 9,186 – –  
 
 
  Diluted earnings per share $ 330,770 181,165 $ 1.83 $ 182,685 152,174 $ 1.20 $ 150,866 128,427 $ 1.17  
   
 
 
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 $6.9, $4.9 and $4.3 million for the years 1998, 1997 and 1996, respectively.

Note 10. Operating Leases
The Company is obligated under noncancelable operating leases for various facilities, primarily office and warehouse space. As of December 31, 1998, future minimum lease payments under noncancelable operating leases were as follows (in thousands):

  
 
  Year      
 
 
  1999 $ 5,134  
  2000   4,444  
  2001   4,205  
  2002   4,110  
  2003   4,023  
  Thereafter   26,017  
   
 
    $ 47,933  
   
 
 
 
Total rent expense for all operating leases amounted to $6.9, $5.7 and $4.9 million for the years 1998, 1997 and 1996, respectively.

Note 11. 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 12. Financial Instruments
The estimated fair values of the Company's financial instruments are as follows (in thousands):		  
 
      1998     1997    
   
 
      Carrying
Amount		   Fair
Value		   Carrying
Amount		   Fair
Value		  
 
 
  Cash and Cash                  
  Equivalents $ 172,921 $ 172,921 $ 110,793 $ 110,793  
  Long-Term Debt                  
      (including
    current
    portion of
    long-term debt)		   (2,469,082)   (2,564,985)   (2,572,696)   (2,668,447)  
  Interest Rate                  
      Swap
    Agreements
    in a net
    receivable
    position		   2,370   48,558   1,567   21,372  
   
 
 
 
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, 1998 or 1997 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, 1998, the Company had agreements in effect which exchanged floating interest rates for fixed interest rates in a notional amount of $100.0 million maturing in 1999 and fixed interest rates for floating interest rates in a notional amount of $668.8 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.

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 – Accounting for Derivative Instruments and Hedging Activities ("FAS 133") which requires all derivative instruments to be carried at fair market value on the balance sheet with changes in fair value recognized in income in the period they occur. FAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). The Company has not yet determined the impact that the adoption of FAS 133 will have on its earnings or statement of financial position.

Note 13. Commitments and Contingencies
The Company has nine ships on order. Three are Eagle-class vessels designated for the Royal Caribbean International fleet, the first of which, Voyager of the Seas is scheduled for delivery in the fourth quarter of 1999, followed by two sister vessels scheduled for delivery in the third quarter of 2000 and second quarter of 2002. The Company also has two Vantage-class vessels designated for the Royal Caribbean International fleet scheduled for delivery in the first quarter of 2001 and second quarter of 2002 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 nine ships, which excludes capitalized interest and other ancillary costs, is approximately $3.6 billion, of which the Company deposited $144.6 million during 1998 and $74.3 million during 1997. Additional deposits are due prior to the dates of delivery of $237.4 million in 1999, $88.1 million in 2000 and $25.0 million in 2001.

In June 1998, the Company entered into a plea agreement with the U.S. Department of Justice settling previously filed charges contained in two indictments pending in the U.S. District of Puerto Rico and the Southern District of Florida, respectively. The indictments, which pertained to events that occurred in 1994 and prior years, contained a total of 11 felony counts related to improper disposal of oil-contaminated bilge water and attempts to conceal such activities from the U.S. Coast Guard. Under the plea agreement, the Company pled guilty to eight of the 11 counts and agreed to pay $9.0 million. The U.S. government is continuing its investigation of the Company's bilge water and other waste disposal practices through federal grand jury proceedings in Anchorage, Alaska, Los Angeles, California, Miami, Florida and New York, New York. In February 1999, the Company was indicted by the grand jury in Los Angeles on charges that it presented false oil record books for one of its vessels to the U.S. Coast Guard three times during 1994. Each of the three counts in the indictment carries a maximum fine of $500,000, subject to increase under certain circumstances. Although the Company is not able at this time to estimate the timing or impact of the continuing investigations, the Company may be subject to additional charges for violations of U.S. law.

Beginning in December 1995, several purported class action suits were filed alleging that Royal Caribbean International and Celebrity misrepresented to its passengers the amount of its port charge expenses. The suits seek declaratory relief and damages in an unspecified amount. 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 port charges included in the price of cruise fares. The suit seeks damages in an unspecified amount. Similar suits are pending against other companies in the cruise industry. In February 1997, Royal Caribbean International, Celebrity and certain other cruise lines entered into an Assurance of Voluntary Compliance with the Florida Attorney General's office. Under the Assurance of Voluntary Compliance, Royal Caribbean International and Celebrity agreed to include all components of the cruise ticket price, other than governmental taxes and fees, in the advertised price. In January 1999, Royal Caribbean International entered into an agreement to settle certain of the class-action suits filed on behalf of its passengers. Celebrity entered into a similar settlement agreement. Under the terms of the settlement agreements, each of Royal Caribbean International and Celebrity will issue travel vouchers having face amounts ranging from $8 to $30, in the case of Royal Caribbean International, and from $20 to $45 in the case of Celebrity, to passengers who are U.S. residents and who sailed on Royal Caribbean International or Celebrity, as the case may be, between April 1992 and April 1997. Such vouchers may be applied to reduce the cruise fare of a future cruise on Royal Caribbean International or Celebrity, as the case may be, and are valid for up to three years from the date of issuance. The settlements have received preliminary court approval but are subject to final court approval. Since the amount and timing of the vouchers to be redeemed and the effect of redemption on revenues is not reasonably determinable, the Company has not established a liability for the vouchers and will account for their redemption as a reduction of future revenues. In December 1998, a Florida state court judge dismissed one of the class-action suits filed on behalf of travel agents 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 the travel agent proceedings on the Company.

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

Note 14. Quarterly Data (unaudited)		  
          First Quarter       Second Quarter         Third Quarter        Fourth Quarter  
   
 
  (in thousands, except
per share amounts)		   1998   1997   1998   1997   1998   1997   1998   1997  
 
 
  Revenues $ 659,777 $ 394,590 $ 656,456 $ 403,467  $ 744,910 $ 612,542 $ 575,148 $ 528,408  
  Operating Income   119,461   60,637   121,533   67,397    183,592   116,911   64,149   58,610  
  Income Before Extraordinary Item   77,537   38,481   79,770   45,918    150,038   75,931   23,425   22,355  
  Extraordinary Item   –   –   –   (7,558)   –   –   –   –  
   
 
  Net Income $ 77,537 $ 38,481 $ 79,770 $ 38,360  $ 150,038 $ 75,931 $ 23,425 $ 22,355  
   
 
  Basic Earnings Per Share:(1)                                  
      Income before extraordinary item $ 0.45 $ 0.29 $ 0.45 $ 0.33  $ 0.87 $ 0.50 $ 0.12 $ 0.12  
      Extraordinary item   –   –   –   (0.05)   –   –   –   –  
   
 
      Net income $ 0.45 $ 0.29 $ 0.45 $ 0.28  $ 0.87 $ 0.50 $ 0.12 $ 0.12  
   
 
  Diluted Earnings Per Share:(1)                                  
      Income before extraordinary item $ 0.44 $ 0.29 $ 0.44 $ 0.32  $ 0.82 $ 0.48 $ 0.12 $ 0.12  
      Extraordinary item   –   –   –   (0.05)   –   –   –   –  
   
 
      Net Income $ 0.44 $ 0.29 $ 0.44 $ 0.27  $ 0.82 $ 0.48 $ 0.12 $ 0.12  
   
 
  Dividends Declared Per Share $ 0.08 $ 0.07 $ 0.08 $ 0.07  $ 0.09 $ 0.08 $ 0.09 $ 0.08  
   
 
  (1) Earnings per share is computed after giving effect to the two-for-one stock split effective July 31, 1998. Prior year amounts have been restated.