Exhibit 13
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended November 30,
-------------------------------
2003 2002 2001
------- ------- -------
Revenues
Cruise
Passenger tickets $ 5,039 $ 3,346 $ 3,530
Onboard and other 1,420 898 841
Other 259 139 178
------- ------- -------
6,718 4,383 4,549
------- ------- -------
Costs and Expenses
Operating
Cruise
Passenger tickets 1,021 658 813
Onboard and other 229 116 116
Payroll and related 744 458 459
Food 393 256 265
Other ship operating 1,237 734 694
Other 194 108 135
------- ------- -------
Total 3,818 2,330 2,482
Selling and administrative 932 609 619
Depreciation and amortization 585 382 372
Impairment charge 20 140
Loss from affiliated operations, net 44
------- ------- -------
5,335 3,341 3,657
------- ------- -------
Operating Income 1,383 1,042 892
------- ------- -------
Nonoperating (Expense) Income
Interest income 27 32 34
Interest expense, net of
capitalized interest (195) (111) (121)
Other income (expense), net 8 (4) 109
------- ------- -------
(160) (83) 22
------- ------- -------
Income Before Income Taxes 1,223 959 914
Income Tax (Expense) Benefit, Net (29) 57 12
------- ------- -------
Net Income $ 1,194 $ 1,016 $ 926
======= ======= =======
Earnings Per Share
Basic $ 1.66 $ 1.73 $ 1.58
======= ======= =======
Diluted $ 1.66 $ 1.73 $ 1.58
======= ======= =======
Dividends Per Share $ 0.44 $ 0.42 $ 0.42
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
45
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par/stated values)
November 30,
---------------------
ASSETS 2003 2002
-------- --------
Current Assets
Cash and cash equivalents $ 1,070 $ 667
Short-term investments 1 39
Accounts receivable, net 403 108
Inventories 171 91
Prepaid expenses and other 212 149
Fair value of derivative contracts 275
Fair value of hedged firm commitments 78
-------- --------
Total current assets 2,132 1,132
-------- --------
Property and Equipment, Net 17,522 10,116
Goodwill 3,031 681
Trademarks 1,324
Other Assets 345 297
Fair Value of Derivative Contracts 135
Fair Value of Hedged Firm Commitments 2 109
-------- --------
$ 24,491 $ 12,335
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 94
Current portion of long-term debt 392 $ 155
Accounts payable 645 269
Accrued liabilities 441 290
Customer deposits 1,352 771
Dividends payable 100 61
Fair value of hedged firm commitments 264
Fair value of derivative contracts 27 74
-------- --------
Total current liabilities 3,315 1,620
-------- --------
Long-Term Debt 6,918 3,014
Deferred Income and Other Long-Term Liabilities 299 170
Fair Value of Hedged Firm Commitments 103
Fair Value of Derivative Contracts 63 113
Commitments and Contingencies (Notes 8, 9 and 14)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares at 2003 and 960 at 2002
authorized; 630 shares at 2003 and
587 shares at 2002 issued and outstanding 6 6
Ordinary shares of Carnival plc; $1.66 stated value;
226 shares authorized; 210 shares issued 349
Additional paid-in capital 7,163 1,089
Retained earnings 7,191 6,326
Unearned stock compensation (18) (11)
Accumulated other comprehensive income 160 8
Treasury stock; 42 shares of Carnival plc at cost (1,058)
-------- --------
Total shareholders' equity 13,793 7,418
-------- --------
$ 24,491 $ 12,335
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
46
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended November 30,
-------------------------------
2003 2002 2001
------- ------- -------
OPERATING ACTIVITIES
Net income $ 1,194 $ 1,016 $ 926
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 585 382 372
Impairment charge 20 140
Gain on sale of investments in affiliates, net (117)
Loss from affiliated operations and
dividends received 57
Accretion of original issue discount 20 19 2
Other 8 14 19
Changes in operating assets and liabilities,
excluding business acquired
(Increase) decrease in
Receivables (91) (5) (7)
Inventories (17) 2 9
Prepaid expenses and other 82 (81) 44
Increase (decrease) in
Accounts payable 43 (12) (63)
Accrued and other liabilities (16) (28)
Customer deposits 125 142 (143)
------- ------- -------
Net cash provided by operating activities 1,933 1,469 1,239
------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment (2,516) (1,986) (827)
Proceeds from sale of investments in affiliates 531
Cash acquired from (expended for) the acquisition
of Carnival plc, net 140 (30)
Proceeds from retirement of property and equipment 51 4 15
Sale (purchase) of short-term investments, net 42 2 (33)
Other, net (50) (10) (28)
------- ------- -------
Net cash used in investing activities (2,333) (2,020) (342)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 2,123 232 2,574
Principal repayments of long-term debt (1,137) (190) (1,971)
Dividends paid (292) (246) (246)
Proceeds from short-term borrowings, net 94
Proceeds from issuance of common stock and
ordinary shares 53 7 5
Other (15) (1) (25)
------- ------- -------
Net cash provided by (used in)
financing activities 826 (198) 337
------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents (23) (5) (2)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 403 (754) 1,232
Cash and cash equivalents at beginning of year 667 1,421 189
------- ------- -------
Cash and cash equivalents at end of year $ 1,070 $ 667 $ 1,421
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
47
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
Unearned
Compre- Additional stock
hensive Common Ordinary paid-in Retained compen-
income stock shares capital earnings sation
------ ----- ------ ------- -------- ------
Balances at November 30, 2000 $ 6 $ 1,773 $ 4,884 $ (12)
Comprehensive income
Net income $ 926 926
Foreign currency
translation adjustment, net 46
Unrealized gains on
marketable securities, net 6
Minimum pension liability
adjustment (6)
Changes related to cash flow
derivative hedges, net (4)
Transition adjustment for
cash flow derivative hedges (4)
-------
Total comprehensive income $ 964
=======
Cash dividends declared (246)
Issuance of stock under
stock plans 32 (5)
Amortization of unearned stock
compensation 5
Other (8)
--- ----- ------- ------- -----
Balances at November 30, 2001 6 1,805 5,556 (12)
Comprehensive income
Net income $ 1,016 1,016
Foreign currency
translation adjustment 51
Minimum pension liability
adjustment (9)
Unrealized gains on
marketable securities, net 3
-------
Total comprehensive income $ 1,061
=======
Cash dividends declared (246)
Issuance of stock under
stock plans 11 (4)
Retirement of treasury stock (727)
Amortization of unearned stock
compensation 5
--- ----- ------- ------- -----
Balances at November 30, 2002 6 1,089 6,326 (11)
Comprehensive income
Net income $ 1,194 1,194
Foreign currency
translation adjustment 162
Unrealized losses on
marketable securities, net (1)
Changes related to cash flow
derivative hedges, net (9)
-------
Total comprehensive income $ 1,346
=======
Cash dividends declared (329)
Acquisition of Carnival plc $ 346 6,010
Issuance of stock under
stock plans 3 64 (14)
Amortization of unearned stock
compensation 7
--- ----- ------- ------- -----
Balances at November 30, 2003 $ 6 $ 349 $ 7,163 $ 7,191 $ (18)
=== ===== ======= ======= =====
Accumulated Total
other share-
comprehensive Treasury holders'
income (loss) stock equity
------------- ----- ------
Balances at November 30, 2000 $ (75) $ (705) $ 5,871
Comprehensive income
Net income 926
Foreign currency
translation adjustment, net 46 46
Unrealized gains on
marketable securities, net 6 6
Minimum pension liability
adjustment (6) (6)
Changes related to cash flow
derivative hedges, net (4) (4)
Transition adjustment for
cash flow derivative hedges (4) (4)
Total comprehensive income
Cash dividends declared (246)
Issuance of stock under
stock plans (22) 5
Amortization of unearned stock
compensation 5
Other (8)
----- -------- --------
Balances at November 30, 2001 (37) (727) 6,591
Comprehensive income
Net income 1,016
Foreign currency
translation adjustment 51 51
Minimum pension liability
adjustment (9) (9)
Unrealized gains on
marketable securities, net 3 3
Total comprehensive income
Cash dividends declared (246)
Issuance of stock under
stock plans 7
Retirement of treasury stock 727
Amortization of unearned stock
compensation 5
----- -------- --------
Balances at November 30, 2002 8 7,418
Comprehensive income
Net income 1,194
Foreign currency
translation adjustment 162 162
Unrealized losses on
marketable securities, net (1) (1)
Changes related to cash flow
derivative hedges, net (9) (9)
Total comprehensive income
Cash dividends declared (329)
Acquisition of Carnival plc (1,058) 5,298
Issuance of stock under
stock plans 53
Amortization of unearned stock
compensation 7
----- -------- --------
Balances at November 30, 2003 $ 160 $ (1,058) $ 13,793
===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Description of Business
On April 17, 2003, Carnival Corporation and Carnival plc (formerly known
as P&O Princess Cruises plc) completed a dual listed company ("DLC") transaction
(the "DLC transaction"), which implemented Carnival Corporation & plc's DLC
structure. The DLC transaction combined the businesses of Carnival Corporation
and Carnival plc through a number of contracts and amendments to Carnival
Corporation's articles of incorporation and by-laws and to Carnival plc's
memorandum of association and articles of association. The two companies have
retained their separate legal identities, and each company's shares continue to
be publicly traded on the New York Stock Exchange ("NYSE") for Carnival
Corporation and the London Stock Exchange for Carnival plc. In addition,
Carnival plc ADS's are traded on the NYSE. However, the two companies operate as
if they were a single economic enterprise (see Note 3).
Carnival Corporation is a Panamanian corporation and Carnival plc is
incorporated in England and Wales. Together with their consolidated subsidiaries
they are referred to collectively in these consolidated financial statements and
elsewhere in this 2003 Annual Report as "Carnival Corporation & plc," "our,"
"us," and "we." Our consolidated financial statements include the consolidated
results of operations of Carnival Corporation for all periods presented and
Carnival plc's consolidated results of operations since April 17, 2003.
We are a global cruise company and one of the largest vacation companies
in the world. As of February 15, 2004, a summary of the number of cruise ships
we operate, by brand, their passenger capacity and the primary areas in which
they are marketed is as follows:
Cruise Number Passenger Primary
Brands of Cruise Ships Capacity (a) Market
------ --------------- ------------ ------
Carnival Cruise
Lines ("CCL") 20 43,446 North America
Princess Cruises
("Princess") 11 19,880 North America
Holland America Line 12 16,320 North America
Costa Cruises ("Costa") 10 15,570 Europe
P&O Cruises 4 7,724 United Kingdom
AIDA 4 5,314 Germany
Cunard Line ("Cunard") 3 5,078 United Kingdom/North America
Ocean Village 1 1,602 United Kingdom
P&O Cruises Australia 1 1,200 Australia
Swan Hellenic 1 678 United Kingdom
Seabourn Cruise Line
("Seabourn") 3 624 North America
Windstar Cruises ("Windstar") 3 604 North America
-- -------
73 118,040
== =======
(a) In accordance with cruise industry practice, passenger capacity is
calculated based on two passengers per cabin even though some cabins can
accommodate three or more passengers.
Preparation of Financial Statements
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
and disclosed in our financial statements. Actual results could differ from
these estimates. All material intercompany accounts, transactions and unrealized
profits and losses on transactions within our consolidated group and with
affiliates are eliminated in consolidation.
Commencing in 2003, we changed the reporting format of our consolidated
statements of operations to present our significant revenue sources and their
directly related variable costs and expenses. In addition, we have separately
identified certain ship operating expenses, such as payroll and related expenses
and food costs. All prior periods were reclassified to conform to the current
year presentation.
49
NOTE 2 - Summary of Significant Accounting Policies
Basis of Presentation
We consolidate entities over which we have control, as typically evidenced
by a direct ownership interest of greater than 50%. For affiliates where
significant influence over financial and operating policies exists, as typically
evidenced by a direct ownership interest from 20% to 50%, the investment is
accounted for using the equity method. See Note 6.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include investments with original maturities of
three months or less, which are stated at cost. At November 30, 2003 and 2002,
cash and cash equivalents included $937 million and $616 million of investments,
respectively, primarily comprised of strong investment grade asset-backed debt
obligations, commercial paper and money market funds.
Short-term investments are comprised of marketable debt and equity
securities which are categorized as available for sale and, accordingly, are
stated at their fair values. Unrealized gains and losses are included as a
component of accumulated other comprehensive income ("AOCI") within
shareholders' equity until realized. The specific identification method is used
to determine realized gains or losses.
Inventories
Inventories consist primarily of provisions, gift shop and art merchandise
held for resale, spare parts, supplies and fuel carried at the lower of cost or
market. Cost is determined using the weighted average or first-in, first-out
methods.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
were computed using the straight-line method over our estimates of average
useful lives and residual values, as a percentage of original cost, as follows:
Residual
Values Years
-------- -----
Ships 15% 30
Buildings and improvements 0-10% 5-40
Transportation equipment and other 0-25% 2-20
Leasehold improvements, including port facilities Shorter of lease term
or related asset life
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable. The assessment of possible impairment is based on our ability
to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of the asset, an impairment charge is
recognized for the excess, if any, of the assets carrying value over its
estimated fair value (see Note 5).
Dry-dock costs are included in prepaid expenses and are amortized to other
ship operating expenses using the straight-line method generally over one year.
Ship improvement costs that we believe add value to our ships are
capitalized to the ships, and depreciated over the improvements' estimated
useful lives, while costs of repairs and maintenance are charged to expense as
incurred. We capitalize interest on ships and other capital projects during
their construction period. Upon the replacement or refurbishment of previously
capitalized ship components, these assets' estimated cost and accumulated
depreciation are written-off and any resulting loss is recognized in our results
of operations. No such material losses were recognized in fiscal 2003, 2002 or
2001. See Note 4.
Goodwill
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" requires companies to stop amortizing goodwill and
requires an annual,
50
or when events or circumstances dictate, a more frequent, impairment review of
goodwill. Accordingly, upon adoption of SFAS No. 142 on December 1, 2001, we
ceased amortizing our goodwill, all of which had been allocated to our cruise
reporting units. In April 2003, we recorded $2.25 billion of additional goodwill
as a result of our acquisition of Carnival plc, which was also allocated to our
cruise reporting units (see Note 3). There was no other change to our goodwill
carrying amount since November 30, 2001, other than the changes resulting from
using different foreign currency translation rates at each balance sheet date.
The SFAS No. 142 goodwill impairment review consists of a two-step process
of first determining the fair value of the reporting unit and comparing it to
the carrying value of the net assets allocated to the reporting unit. Fair
values of our reporting units were determined based on our estimates of
comparable market price or discounted future cash flows. If this fair value
exceeds the carrying value, which was the case for our reporting units, no
further analysis or goodwill write-down is required. If the fair value of the
reporting unit is less than the carrying value of the net assets, the implied
fair value of the reporting unit is allocated to all the underlying assets and
liabilities, including both recognized and unrecognized tangible and intangible
assets, based on their fair value. If necessary, goodwill is then written-down
to its implied fair value.
Prior to fiscal 2002, our goodwill was reviewed for impairment pursuant to
the same policy as our other long-lived assets as discussed above (see Note 5)
and our goodwill was amortized over 40 years using the straight-line method.
If goodwill amortization, including goodwill expensed as part of our loss
from affiliated operations, had not been recorded for fiscal 2001 our adjusted
net income would have been $952 million and our adjusted basic and diluted
earnings per share would have been $1.63 and $1.62, respectively.
Trademarks
The cost of developing and maintaining our trademarks have been expensed
as incurred. However, pursuant to SFAS No. 141, "Business Combinations,"
commencing for acquisitions made after June 2001, we have allocated a portion of
the purchase price to the acquiree's identified trademarks. The trademarks that
Carnival Corporation recorded as part of the DLC transaction, which are
estimated to have an indefinite useful life and, therefore, are not amortizable,
are reviewed for impairment annually, or more frequently when events or
circumstances indicate that the trademark may be impaired. Our trademarks are
considered impaired if their carrying value exceeds their fair value. See Note
3.
Derivative Instruments and Hedging Activities
We utilize derivative and nonderivative financial instruments, such as
forward foreign currency contracts, cross currency swaps and foreign currency
debt obligations to limit our exposure to fluctuations in foreign currency
exchange rates and interest rate swaps to manage our interest rate exposure and
to achieve a desired proportion of variable and fixed rate debt (see Note 12).
All derivatives are recorded at fair value, and the changes in fair value
must be immediately included in earnings if the derivatives do not qualify as
effective hedges. If a derivative is a fair value hedge, then changes in the
fair value of the derivative are offset against the changes in the fair value of
the underlying hedged firm commitment. If a derivative is a cash flow hedge,
then changes in the fair value of the derivative are recognized as a component
of AOCI until the underlying hedged item is recognized in earnings. If a
derivative or a nonderivative financial instrument is designated as a hedge of a
net investment in a foreign operation, then changes in the fair value of the
financial instrument are recognized as a component of AOCI to immediately offset
the change in the translated value of the net investment being hedged, until the
investment is liquidated.
The ineffective portion of a hedge's change in fair value is immediately
recognized in earnings. We formally document all relationships between hedging
instruments and hedged items, as well as our risk management objectives and
strategies for undertaking our hedge transactions.
We classify the fair value of our derivative contracts and the fair value
of our offsetting hedged firm commitments as either current or long-term assets
and liabilities depending on whether the maturity date of the derivative
contract is within or beyond one year from our balance sheet dates,
respectively. The cash flows from derivatives treated as hedges are classified
in our statements of cash flows in the same category as the item being hedged.
51
During fiscal 2003, 2002 and 2001, all net changes in the fair value of
both our fair value hedges and the offsetting hedged firm commitments and our
cash flow hedges were immaterial, as were any ineffective portions of these
hedges. No fair value hedges or cash flow hedges were derecognized or
discontinued in fiscal 2003, 2002 or 2001, and the amount of estimated cash flow
hedges unrealized net losses which are expected to be reclassified to earnings
in the next twelve months is not material. At November 30, 2003 and 2002, AOCI
included $17 million and $8 million of unrealized net losses, respectively, from
cash flow hedge derivatives, the majority of which were variable to fixed
interest rate swap agreements.
Finally, if any shipyard with which we have contracts to build our ships
is unable to perform, we would be required to perform under our foreign currency
forward contracts related to these shipbuilding contracts. Accordingly, based
upon the circumstances, we may have to discontinue the accounting for those
forward contracts as hedges, if the shipyard cannot perform. However, we believe
that the risk of shipyard nonperformance is remote.
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially
recorded as customer deposit liabilities when received. Customer deposits are
subsequently recognized as cruise revenues, together with revenues from onboard
and other activities and all associated direct costs of a voyage, generally upon
completion of voyages with durations of ten days or less and on a pro rata basis
for voyages in excess of ten days. Future travel discount vouchers issued to
guests are recorded as a reduction of revenues when such vouchers are utilized.
Revenues and expenses from our tour and travel services are recognized at the
time the services are performed or expenses are incurred.
Advertising Costs
Substantially all of our advertising costs are charged to expense as
incurred, except costs which result in tangible assets, such as brochures, which
are recorded as prepaid expenses and charged to expense as consumed. Media
production costs are also recorded as prepaid expenses and charged to expense
upon the first airing of the advertisement. Advertising expenses totaled $334
million, $208 million and $214 million in fiscal 2003, 2002 and 2001,
respectively. At November 30, 2003 and 2002, the amount of advertising costs
included in prepaid expenses was not material.
Foreign Currency Translations and Transactions
For our foreign subsidiaries and affiliates using the local currency as
their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet dates. Translation adjustments resulting
from this process are reported as cumulative translation adjustments, which are
a component of AOCI. Revenues and expenses of these foreign subsidiaries and
affiliates are translated at weighted-average exchange rates for the period.
Therefore, the U.S. dollar value of these items on the income statement
fluctuates from period to period, depending on the value of the dollar against
these functional currencies. Exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved are immediately included in our earnings.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock and ordinary shares
outstanding during each period. Diluted earnings per share is computed by
dividing adjusted net income by the weighted-average number of shares of common
stock and ordinary shares, common stock equivalents and other potentially
dilutive securities outstanding during each period. See Note 15.
Stock-Based Compensation
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended, we elected to use the intrinsic value method of accounting for our
employee and director stock-based compensation awards. Accordingly, we have not
recognized compensation expense for our noncompensatory employee and director
stock option awards. Our adjusted net income and adjusted earnings per share,
had we elected to adopt the fair value approach of SFAS No. 123, which charges
earnings for the estimated fair value of stock options, would have
52
been as follows (in millions, except per share amounts):
Years ended November 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Net income, as reported $ 1,194 $ 1,016 $ 926
Stock-based compensation
expense included in
net income, as reported 7 5 5
Total stock-based compensation
expense determined under
the fair value-based
method for all awards (36) (30) (27)
-------- -------- --------
Adjusted net income for basic
earnings per share 1,165 991 904
Interest on dilutive convertible notes 5
-------- -------- --------
Adjusted net income for diluted
earnings per share $ 1,170 $ 991 $ 904
======== ======== ========
Earnings per share
Basic
As reported $ 1.66 $ 1.73 $ 1.58
======== ======== ========
Adjusted $ 1.62 $ 1.69 $ 1.54
======== ======== ========
Diluted
As reported $ 1.66 $ 1.73 $ 1.58
======== ======== ========
Adjusted $ 1.62 $ 1.69 $ 1.54
======== ======== ========
As recommended by SFAS No. 123, the fair value of options were estimated
using the Black-Scholes option-pricing model. The Black-Scholes weighted-average
assumptions were as follows:
Fair value of options at the
dates of grant $ 13.33 $ 12.16 $ 12.67
======== ======== ========
Risk free interest rates 3.5% 4.3% 4.5%
======== ======== ========
Dividend yields 1.30% 1.23% 1.16%
======== ======== ========
Expected volatility 48.7% 48.0% 50.0%
======== ======== ========
Expected option life (in years) 6 6 6
======== ======== ========
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting or trading restrictions
and are fully transferable. In addition, option-pricing models require the input
of subjective assumptions, including expected stock price volatility. Because
our options have characteristics different from those of traded options, the
existing models do not necessarily provide a reliable single measure of the fair
value of our options.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of
credit risk associated with financial and other institutions with which we
conduct significant business. Credit risk, including counterparty nonperformance
under derivative instruments, contingent obligations and new ship progress
payment guarantees, is considered minimal, as we primarily conduct business with
large, well-established financial institutions who have long-term credit ratings
of A or above and we seek to diversify our counterparties. In addition, we have
established guidelines regarding credit ratings and investment maturities that
we follow to maintain safety and liquidity. We do not anticipate nonperformance
by any of our significant counterparties.
We also monitor the creditworthiness of our customers to which we grant
credit terms in the normal course of our business. Concentrations of credit risk
associated with these receivables are considered minimal primarily due to their
short maturities and large number of accounts within our customer base. We have
experienced only minimal credit losses on our trade receivables. We do not
normally require collateral or other security to support normal credit sales.
However, we do normally require collateral and/or guarantees to support notes
receivable on significant asset sales and new ship progress payments to
shipyards.
53
Reclassifications
Reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 3 - DLC Transaction
The contracts governing the DLC structure provide that Carnival
Corporation and Carnival plc each continue to have separate boards of directors,
but the boards and senior executive management of both companies are identical.
The amendments to the constituent documents of each of the companies also
provide that, on most matters, the holders of the common equity of both
companies effectively vote as a single body. On specified matters where the
interests of Carnival Corporation's shareholders may differ from the interests
of Carnival plc's shareholders (a "class rights action"), each shareholder body
will vote separately as a class, such as transactions primarily designed to
amend or unwind the DLC structure. Generally, no class rights action will be
implemented unless approved by both shareholder bodies.
Upon the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed the Equalization and Governance Agreement, which provides for
the equalization of dividends and liquidation distributions based on an
equalization ratio and contains provisions relating to the governance of the DLC
structure. Because the current equalization ratio is 1 to 1, one Carnival plc
ordinary share is entitled to the same distributions, subject to the terms of
the Equalization and Governance Agreement, as one share of Carnival Corporation
common stock. In a liquidation of either company or both companies, if the
hypothetical potential per share liquidation distributions to each company's
shareholders are not equivalent, taking into account the relative value of the
two companies' assets and the indebtedness of each company, to the extent that
one company has greater net assets so that any liquidation distribution to its
shareholders would not be equivalent on a per share basis, the company with the
ability to make a higher net distribution is required to make a payment to the
other company to equalize the possible net distribution to shareholders, subject
to certain exceptions.
At the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed deeds of guarantee. Under the terms of Carnival Corporation's
deed of guarantee, Carnival Corporation has agreed to guarantee all indebtedness
and certain other monetary obligations of Carnival plc that are incurred under
agreements entered into on or after the closing date of the DLC transaction. The
terms of Carnival plc's deed of guarantee are identical to those of Carnival
Corporation's. In addition, Carnival Corporation and Carnival plc have each
extended their respective deeds of guarantee to the other's pre-DLC indebtedness
and other monetary obligations, thus effectively cross guaranteeing all Carnival
Corporation and Carnival plc indebtedness and other monetary obligations. Each
deed of guarantee provides that the creditors to whom the obligations are owed
are intended third party beneficiaries of such deed of guarantee.
The deeds of guarantee are governed and construed in accordance with the
laws of the Isle of Man. Subject to the terms of the guarantees, the holders of
indebtedness and other obligations that are subject to the guarantees will have
recourse to both Carnival plc and Carnival Corporation though a Carnival plc
creditor must first make written demand on Carnival plc and a Carnival
Corporation creditor on Carnival Corporation. Once the written demand is made by
letter or other form of notice, the holders of indebtedness or other obligations
may immediately commence an action against the relevant guarantor. There is no
requirement under the deeds of guarantee to obtain a judgment, take other
enforcement actions or wait any period of time prior to taking steps against the
relevant guarantor. All actions or proceedings arising out of or in connection
with the deeds of guarantee must be exclusively brought in courts in England.
Under the terms of the DLC transaction documents, Carnival Corporation and
Carnival plc are permitted to transfer assets between the companies, make loans
or investments in each other and otherwise enter into intercompany transactions.
The companies have entered into some of these types of transactions and expect
to enter into additional transactions in the future to take advantage of the
flexibility provided by the DLC structure and to operate both companies as a
single unified economic enterprise in the most effective manner. In addition,
under the terms of the Equalization and Governance Agreement and the deeds of
guarantee, the cash flow and assets of one company are required to be used to
pay the obligations of the other company, if necessary.
Given the DLC structure as described above, we believe that providing
separate
54
financial statements for each of Carnival Corporation and Carnival plc would not
present a true and fair view of the economic realities of their operations.
Accordingly, separate financial statements for both Carnival Corporation and
Carnival plc have not been presented.
Simultaneously with the completion of the DLC transaction, a partial share
offer ("PSO") for 20% of Carnival plc's shares was made and accepted, which
enabled 20% of Carnival plc shares to be exchanged for 41.7 million Carnival
Corporation shares. The 41.7 million shares of Carnival plc held by Carnival
Corporation as a result of the PSO, which cost $1.05 billion, are being
accounted for as treasury stock in the accompanying balance sheet. The holders
of Carnival Corporation shares, including the new shareholders who exchanged
their Carnival plc shares for Carnival Corporation shares under the PSO, now own
an economic interest equal to approximately 79%, and holders of Carnival plc
shares now own an economic interest equal to approximately 21%, of Carnival
Corporation & plc.
The management of Carnival Corporation and Carnival plc ultimately agreed
to enter into the DLC transaction because, among other things, the creation of
Carnival Corporation & plc would result in a company with complementary
well-known brands operating globally with enhanced growth opportunities,
benefits of sharing best practices and generating cost savings, increased
financial flexibility and access to capital markets and a DLC structure, which
allows for continued participation in an investment in the global cruise
industry by Carnival plc's shareholders who wish to continue to hold shares in a
UK-listed company.
Carnival plc was the third largest cruise company in the world and
operated many well-known global brands with leading positions in the U.S., UK,
Germany and Australia. The combination of Carnival Corporation with Carnival plc
under the DLC structure has been accounted for under U.S. generally accepted
accounting principles ("GAAP") as an acquisition of Carnival plc by Carnival
Corporation pursuant to SFAS No. 141. The purchase price of $25.31 per share was
based upon the average of the quoted closing market price of Carnival
Corporation's shares beginning two days before and ending two days after January
8, 2003, the date the Carnival plc board agreed to enter into the DLC
transaction. The number of additional shares effectively issued in the combined
entity for purchase accounting purposes was 209.6 million. In addition, Carnival
Corporation incurred approximately $60 million of direct acquisition costs,
which have been included in the purchase price. The aggregate purchase price of
$5.36 billion, computed as described above, has been allocated to the assets and
liabilities of Carnival plc as follows (in millions):
Ships $ 4,669
Ships under construction 233
Other tangible assets 868
Goodwill 2,248
Trademarks 1,291
Debt (2,879)
Other liabilities (1,072)
-------
$ 5,358
=======
During the fourth quarter of fiscal 2003 an appraisal firm who we engaged
completed its valuation work in connection with establishing the estimated fair
values of Carnival plc's cruise ships and non-amortizable and amortizable
intangible assets as of the April 17, 2003 acquisition date. Accordingly, we
reduced the carrying values of 15 Carnival plc ships, including three ships
which were under construction at the acquisition date, by $689 million.
Trademarks are non-amortizable and represent the Princess, P&O Cruises, P&O
Cruises Australia, AIDA, and A'ROSA trademarks' estimated fair values. There
were no significant amortizable intangible assets identified in this appraisal
firm's valuation study.
The information presented below gives pro forma effect to the DLC
transaction between Carnival Corporation and Carnival plc. Management has
prepared the pro forma information based upon the companies' reported financial
information and, accordingly, the pro forma information should be read in
conjunction with the companies' financial statements.
As noted above, the DLC transaction has been accounted for as an
acquisition of Carnival plc by Carnival Corporation, using the purchase method
of accounting. Carnival
55
plc's accounting policies have been conformed to Carnival Corporation's
policies. Carnival plc's reporting period has been changed to Carnival
Corporation's reporting period and the information presented below covers the
same periods of time for both companies.
This pro forma information has been prepared as if the DLC transaction had
occurred on December 1, 2002 and 2001, respectively, rather than April 17, 2003,
and has not been adjusted to reflect any net transaction benefits. In addition,
this pro forma information does not purport to represent what the results of
operations actually could have been if the DLC transaction had occurred on
December 1, 2002 and 2001 or what those results will be for any future periods.
Years ended November 30,
------------------------
2003 2002
------ ------
(in millions, except earnings per share)
Pro forma revenues $7,596 $6,768
====== ======
Pro forma net income (a)-(d) $1,159 $1,271
====== ======
Pro forma earnings per share
Basic $ 1.46 $ 1.60
====== ======
Diluted $ 1.45 $ 1.59
====== ======
Pro forma weighted-average
shares outstanding
Basic 797 795
====== ======
Diluted 805 800
====== ======
(a) In accordance with SFAS No. 141, pro forma net income was reduced by $51
million in 2003 and $104 million in 2002 for Carnival plc's nonrecurring
costs related to its terminated Royal Caribbean transaction and the
completion of the DLC transaction with Carnival Corporation, which were
expensed by Carnival plc prior to April 17, 2003.
(b) As a result of the reduction in depreciation expenses due to the
revaluation of Carnival plc's ships carrying values, pro forma net income
has been increased by $16 million in 2003 and $14 million in 2002.
(c) The 2002 pro forma net income included a $51 million nonrecurring income
tax benefit related to an Italian incentive tax law, which allowed Costa
to receive an income tax benefit for contractual expenditures during 2002
incurred on the construction of a new ship.
(d) The 2003 pro forma net income included a $13 million nonrecurring expense
related to a DLC litigation matter and $19 million of income related to
the receipt of nonrecurring net insurance proceeds.
NOTE 4 - Property and Equipment
Property and equipment consisted of the following (in millions):
November 30,
-----------------------
2003 2002
-------- --------
Ships $ 18,134 $ 10,666
Ships under construction 886 713
-------- --------
19,020 11,379
Land, buildings and improvements,
and port facilities 504 315
Transportation equipment and other 549 409
-------- --------
Total property and equipment 20,073 12,103
Less accumulated depreciation and amortization (2,551) (1,987)
-------- --------
$ 17,522 $ 10,116
======== ========
Capitalized interest, primarily on our ships under construction, amounted
to $49 million, $39 million and $29 million in fiscal 2003, 2002 and 2001,
respectively. Ships under construction include progress payments for the
construction of the ship, as well as design and engineering fees, capitalized
interest, construction oversight costs and various owner supplied items. At
November 30, 2003, seven ships with an aggregate net book value of $1.94 billion
were pledged as collateral pursuant to mortgages related to $1.04 billion of
debt and a $469 million contingent obligation (see Notes 7 and 9). During fiscal
2003, $1.05 billion of ship collateral, which was pledged against $697 million
of Carnival plc debt was released as collateral in exchange for revising the
maturity dates of this debt
56
and providing Carnival Corporation guarantees (see Note 7).
Maintenance and repair expenses and dry-dock amortization were $251
million, $175 million and $160 million in fiscal 2003, 2002 and 2001,
respectively.
NOTE 5 - Impairment Charge
In fiscal 2002 we reduced the carrying value of one of our ships by
recording an impairment charge of $20 million. In fiscal 2001, we recorded an
impairment charge of $140 million, which consisted principally of a $71 million
reduction in the carrying value of ships, a $36 million write-off of Seabourn
goodwill, a $15 million write-down of a Holland America Line note receivable,
and a $11 million loss on the sale of the Seabourn Goddess I and II. The
impaired ships' and note receivable fair values were based on third party
appraisals, negotiations with unrelated third parties or other available
evidence, and the fair value of the impaired goodwill was based on our estimates
of discounted future cash flows.
NOTE 6 - Investments In and Advances To Affiliates
On June 1, 2001, we sold our equity investment in Airtours plc, which
resulted in a nonoperating net gain of $101 million and net cash proceeds of
$492 million. Cumulative foreign currency translation losses of $59 million were
reclassified from AOCI and included in determining the 2001 net gain.
NOTE 7 - Debt
Short-Term Borrowings
Short-term borrowings consisted of unsecured notes, bearing interest at
libor plus 0.18% (1.3% weighted-average interest rate at November 30, 2003),
repaid to a bank in December 2003.
Long-Term Debt
Long-term debt consisted of the following (in millions):
November 30,
---------------------
2003(a) 2002(a)
---- ----
Secured
Floating rate notes, collateralized by two ships,
bearing interest at libor plus 1.25% and libor
plus 1.29% (2.24% and 2.33% at November 30, 2003),
due through 2015 (b) $ 631
Euro floating rate note, collateralized by one
ship, bearing interest at euribor plus 0.5% (2.75% and
4.0 % at November 30, 2003 and 2002, respectively),
due through 2008 115 $ 119
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through 2012 (b) 182
Capitalized lease obligations, collateralized by
two ships, implicit interest at 3.66%, due
through 2005 115
Other 3 3
------- -------
1,046 122
------- -------
Unsecured
Fixed rate notes, bearing interest at 3.75% to 8.2%,
due through 2028 (b) 2,123 857
Euro floating rate notes, bearing interest at
euribor plus 0.35% to euribor plus 1.29%
(2.4% to 3.9% and 3.8% to 4.0% at November 30,
2003 and 2002, respectively), due through 2008 (b) 1,129 570
Euro revolving credit facilities, bearing interest
at euribor plus 0.50% and euro libor plus 0.98%
(2.6% to 3.2% and 3.6% at November 30, 2003 and
2002, respectively), due through 2006 (b) 300 110
Sterling fixed rate notes, bearing interest at 6.4%,
due in 2012 (b) 355
Euro fixed rate notes, bearing interest at 5.57%,
due in 2006 353 297
Floating rate note, bearing interest at libor plus
1.33% (2.45% at November 30, 2003), due through 2008 (b) 244
Revolving credit facility, bearing interest at
libor plus 0.17% (1.6% at November 30, 2002),
due through 2006 50
Other 44 42
Convertible notes, bearing interest at 2%, due in
2021, with first put option in 2005(b) 600 600
Zero-coupon convertible notes, net of discount,
with a face value of $1.05 billion, due in 2021,
with first put option in 2006(b) 541 521
Convertible notes, bearing interest at 1.75%, net of
discount, with a face value of $889 million, due in 2033,
with first put option in 2008(b) 575
------- -------
6,264 3,047
------- -------
7,310 3,169
Less portion due within one year (392) (155)
------- -------
$ 6,918 $ 3,014
======= =======
57
(a) All borrowings are in U.S. dollars unless otherwise noted. Euro and
sterling denominated notes have been translated to U.S. dollars at the
period-end exchange rates. At November 30, 2003, 67%, 28% and 5% of our
debt was U.S. dollar, euro and sterling denominated, respectively, and at
November 30, 2002, 65% was U.S. dollar and 35% was euro denominated.
(b) At November 30, 2003, all of Carnival plc's $1.20 billion of debt was
unconditionally guaranteed by P&O Princess Cruises International Limited
("POPCIL"), a 100% direct wholly-owned subsidiary of Carnival plc. On June
19, 2003, POPCIL, Carnival Corporation and Carnival plc executed a deed of
guarantee under which POPCIL agreed to guarantee all indebtedness and
related obligations of both Carnival Corporation and Carnival plc incurred
under agreements entered into after April 17, 2003, the date the DLC
transaction was completed. Under this deed of guarantee, POPCIL also
agreed to guarantee all other Carnival Corporation and Carnival plc
indebtedness and related obligations that Carnival Corporation and
Carnival plc agreed to guarantee under their deeds of guarantee. We
anticipate that, in connection with corporate reorganization transactions
that we expect to complete shortly, the POPCIL guarantee will terminate in
accordance with its terms.
In addition, in exchange for certain amendments to Carnival plc's
consolidated indebtedness, which was outstanding prior to April 17, 2003,
Carnival Corporation has guaranteed substantially all of the Carnival plc
consolidated pre-acquisition debt outstanding at November 30, 2003.
Finally, Carnival plc has guaranteed all of the Carnival Corporation
pre-acquisition debt outstanding at November 30, 2003.
Carnival Corporation's 2% convertible notes ("2% Notes"), its zero-coupon
convertible notes ("Zero-Coupon Notes") and its 1.75% convertible notes ("1.75%
Notes") are convertible into 15.3 million shares, 17.4 million shares and a
maximum of 20.9 million shares, respectively, of Carnival Corporation common
stock.
The 2% Notes are convertible at a conversion price of $39.14 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than $43.05 per share for a
defined duration of time in the preceding fiscal quarter. The conditions for
conversion of the 2% Notes have not been met since their issuance in 2001
through November 30, 2003.
The Zero-Coupon Notes have a 3.75% yield to maturity and are convertible
during any fiscal quarter for which the closing price of the Carnival
Corporation common stock is greater than a specified trigger price for a defined
duration of time in the preceding fiscal quarter. The trigger price commenced at
a low of $31.94 per share for the first quarter of fiscal 2002 and increases at
an annual rate of 3.75% thereafter, until maturity. As of the end of the 2003
third and fourth quarters, the Zero-Coupon Notes became convertible into
Carnival Corporation common stock for the 2003 fourth quarter and the 2004 first
quarter as a result of Carnival Corporation's common stock achieving its target
conversion trigger price per share of $33.77 and $34.09, respectively, for the
requisite periods of time (see Note 15). No Zero-Coupon Notes were converted in
fiscal 2003.
58
The 1.75% Notes, which were issued in April 2003, are convertible at a
conversion price of $53.11 per share, subject to adjustment, during any fiscal
quarter for which the closing price of the Carnival Corporation common stock is
greater than a specified trigger price for a defined duration of time in the
preceding fiscal quarter. During the fiscal quarters ending from August 31, 2003
through April 29, 2008, the trigger price will be $63.73 per share. Thereafter,
this conversion trigger price increases each quarter based on an annual rate of
1.75%, until maturity. In addition, holders may also surrender the 1.75% Notes
for conversion if they have been called for redemption or, for other specified
occurrences, including the credit rating assigned to the 1.75% Notes being Baa3
or lower by Moody's Investors Service and BBB- or lower by Standard & Poor's
Rating Services, as well as certain corporate transactions. The conditions for
conversion of the 1.75% Notes were not met during fiscal 2003. The 1.75% Notes
interest is payable in cash semi-annually in arrears, commencing October 29,
2003 through April 29, 2008. Effective April 30, 2008, the 1.75% Notes no longer
require a cash interest payment, but interest will accrete at a 1.75% yield to
maturity.
Subsequent to April 29, 2008 and October 23, 2008, we may redeem all or a
portion of the 1.75% Notes and Zero-Coupon Notes, respectively, at their
accreted values and subsequent to April 14, 2008, we may redeem all or a portion
of our 2% Notes at their face value plus any unpaid accrued interest.
In addition, on April 29, 2008, 2013, 2018, 2023 and 2028 the 1.75%
Noteholders, on April 15 of 2005, 2008 and 2011 the 2% Noteholders and on
October 24 of 2006, 2008, 2011 and 2016 the Zero-Coupon Noteholders may require
us to repurchase all or a portion of the outstanding 1.75% Notes and Zero-Coupon
Notes at their accreted values and the 2% Notes at their face value plus any
unpaid accrued interest.
Upon conversion, redemption or repurchase of the 1.75% Notes, the 2% Notes
and the Zero-Coupon Notes we may choose to deliver Carnival Corporation common
stock, cash or a combination of cash and common stock with a total value equal
to the value of the consideration otherwise deliverable. If the 1.75% Notes, 2%
Notes and Zero-Coupon Notes were to be put back to us, we would expect to settle
them for cash and, accordingly, they are not included in our diluted earnings
per share common stock calculations, unless they become convertible and are
dilutive to our earnings per share computation. However, no assurance can be
given that we will have sufficient liquidity to make such cash payments. See
Note 15.
Costa has a 257.5 million euro ($303 million U.S. dollars at the November
30, 2003 exchange rate) unsecured euro revolving credit facility, which expires
in May 2006, of which $219 million was available at November 30, 2003. In
addition, POPCIL has $710 million of unsecured revolving multi-currency credit
facilities, which expire in September 2005, of which $494 million was available
at November 30, 2003.
Carnival Corporation's $1.4 billion unsecured multi-currency revolving
credit facility matures in June 2006. This facility currently bears interest at
libor/eurolibor plus 20 basis points ("BPS"), which interest rate spread over
the base rate will vary based on changes to Carnival Corporation's senior
unsecured debt ratings, and provides for an undrawn facility fee of ten BPS.
Carnival Corporation's commercial paper program is supported by this revolving
credit facility and, accordingly, any amounts outstanding under its commercial
paper program, none at November 30, 2003 and 2002, reduce the aggregate amount
available under this facility. At November 30, 2003, the entire facility was
available.
This $1.4 billion facility and other of our loan and derivative agreements
contain covenants that require us, among other things, to maintain a minimum
debt service coverage and limits our debt to capital ratios and debt to equity
ratio, and the amounts of our secured assets and secured indebtedness, and
shareholders' equity. In addition, if our business suffers a material adverse
change or if other events of default under our loan agreements are triggered,
then pursuant to cross default acceleration clauses, substantially all of our
outstanding debt and derivative contract payables could become due and the
underlying facilities could be terminated. At November 30, 2003, we were in
compliance with all of our debt covenants.
In November 2003, we issued $550 million of unsecured 3.75% Notes due in
November 2007, the proceeds of which we used to repay some of the amounts
outstanding under the POPCIL $710 million credit facilities and for working
capital purposes.
At November 30, 2003, the scheduled annual maturities of our long-term
debt was as follows (in millions):
59
Fiscal
------
2004 $ 392
2005 1,263(a)
2006 1,587(a)
2007 999
2008 1,492(a)
Thereafter 1,577
------
$7,310
======
(a) Includes $600 million of Carnival Corporation's 2% Notes in 2005, $541
million of its Zero-Coupon Notes in 2006, and $575 million of its 1.75%
Notes in 2008, based in each case on the date of the noteholders' first
put option.
Debt issuance costs are generally amortized to interest expense using the
straight-line method, which approximates the effective interest method, over the
term of the notes or the noteholders first put option date, whichever is
earlier. In addition, all loan issue discounts are amortized to interest expense
using the effective interest rate method over the term of the notes.
NOTE 8 - Commitments
Ship Commitments
A description of our ships under contract for construction at November 30,
2003 was as follows (in millions, except passenger capacity):
Expected Estimated
Service Passenger Total
Brand and Ship Date(a) Shipyard Capacity Cost(b)
- -------------- ------- -------- -------- ---------
Princess
Diamond Princess 3/04 Mitsubishi 2,674 $ 475
Caribbean Princess 4/04 Fincantieri(c) 3,114 500
Sapphire Princess 6/04 Mitsubishi 2,674 475
Newbuild 6/06 Fincantieri 3,114 500
------ ------
Total Princess 11,576 1,950
------ ------
CCL
Carnival Miracle 2/04 Masa-Yards (c)(d) 2,124 375
Carnival Valor 12/04 Fincantieri(c) 2,974 510
Carnival Liberty 8/05 Fincantieri 2,974 460
------ ------
Total CCL 8,072 1,345
------ ------
Holland America Line
Westerdam 4/04 Fincantieri(c) 1,848 410
Noordam 2/06 Fincantieri(c) 1,848 410
------ ------
Total Holland America Line 3,696 820
------ ------
Cunard
Queen Mary 2 1/04 Chantiers de
L'Atlantique(c)(d) 2,620 800
Queen Victoria 4/05 Fincantieri (c) 1,968 410
------ ------
Total Cunard 4,588 1,210
------ ------
Costa
Costa Magica 11/04 Fincantieri(e) 2,702 545
------ ------
Total 30,634 $5,870
====== ======
(a) The expected service date is the month in which the ship is currently
expected to begin its first revenue generating cruise.
(b) Estimated total cost of the completed ship includes the contract price
with the shipyard, design and engineering fees, capitalized interest,
construction oversight costs and various owner supplied items.
60
(c) These construction contracts are denominated in euros and have been fixed
into U.S. dollars through the utilization of forward foreign currency
contracts.
(d) The Carnival Miracle and the Queen Mary 2 were delivered in February 2004
and December 2003, respectively.
(e) This construction contract is denominated in euros, which is Costa's
functional currency and, therefore, we have not entered into a forward
foreign currency contract to hedge this commitment. The estimated total
cost has been translated into U.S. dollars using the November 30, 2003
exchange rate.
In addition to these ship construction contracts, in January 2004, Costa
entered into a letter of intent for a 3,004-passenger ship with Fincantieri for
a Summer 2006 delivery date at an estimated total cost of 450 million euros.
In connection with our cruise ships under contract for construction, we
have paid $876 million through November 30, 2003 and anticipate paying the
remaining estimated total costs as follows: $2.98 billion in 2004, $1.24 billion
in 2005 and $775 million in 2006.
Operating Leases
Rent expense under our operating leases, primarily for office and
warehouse space, was $48 million, $15 million and $13 million in fiscal 2003,
2002 and 2001, respectively. At November 30, 2003, minimum annual rentals for
our operating leases, with initial or remaining terms in excess of one year,
were as follows (in millions): $57, $49, $36, $26, $23 and $85 in fiscal 2004
through 2008 and thereafter, respectively.
Port Facilities and Other
At November 30, 2003, we had commitments through 2052, with initial or
remaining terms in excess of one year, to pay minimum amounts for our annual
usage of port facilities and other contractual commitments as follows (in
millions): $57, $32, $33, $35, $35 and $200 in fiscal 2004 through 2008 and
thereafter, respectively.
NOTE 9 - Contingencies
Litigation
In 2002, two actions (collectively, the "Facsimile Complaints") were filed
against Carnival Corporation on behalf of purported classes of persons who
received unsolicited advertisements via facsimile, alleging that Carnival
Corporation and other defendants distributed unsolicited advertisements via
facsimile in contravention of the U.S. Telephone Consumer Protection Act. The
plaintiffs seek to enjoin the sending of unsolicited facsimile advertisements
and statutory damages. The advertisements referred to in the Facsimile
Complaints were not sent by Carnival Corporation, but rather were distributed by
a professional faxing company at the behest of travel agencies that referenced a
CCL product. We do not advertise directly to the traveling public through the
use of facsimile transmission. The ultimate outcomes of the Facsimile Complaints
cannot be determined at this time. We believe that we have meritorious defenses
to these claims and, accordingly, we intend to vigorously defend against these
actions.
In February 2001, Holland America Line-USA, Inc. ("HAL-USA"), a
wholly-owned subsidiary, received a grand jury subpoena requesting that it
produce documents and records relating to the air emissions from Holland America
Line ships in Alaska. HAL-USA responded to the subpoena. The ultimate outcome of
this matter cannot be determined at this time.
On August 17, 2002, an incident occurred in Juneau, Alaska onboard Holland
America Line's Ryndam involving a wastewater discharge from the ship. As a
result of this incident, various Ryndam ship officers and crew have received
grand jury subpoenas from the Office of the U.S. Attorney in Anchorage, Alaska
requesting that they appear before a grand jury. One subpoena also requested the
production of Holland America Line documents, which Holland America Line has
produced. Holland America Line is also complying with a subpoena for additional
documents. If the investigation results in charges being filed, a judgment could
include, among other forms of relief, fines and debarment from federal
contracting, which would prohibit operations in Glacier Bay National Park and
Preserve during the period of debarment. The State of Alaska is separately
investigating this incident. The ultimate outcomes of these matters cannot be
determined at this time. However, if Holland America
61
Line were to lose its Glacier Bay permits we would not expect the impact on our
financial statements to be material to us since we believe there are additional
attractive alternative destinations in Alaska that can be substituted for
Glacier Bay.
Costa has instituted arbitration proceedings in Italy to confirm the
validity of its decision not to deliver its ship, the Costa Classica, to the
shipyard of Cammell Laird Holdings PLC ("Cammell Laird") under a 79 million euro
denominated contract for the conversion and lengthening of the ship. Costa has
also given notice of termination of the contract. It is now expected that the
arbitration tribunal's decision will be made in late-2004 at the earliest. In
the event that an award is given in favor of Cammell Laird, the amount of
damages, which Costa would have to pay, if any, is not currently determinable.
The ultimate outcome of this matter cannot be determined at this time.
On April 23, 2003, Festival Crociere S.p.A. commenced an action against
the European Commission (the "Commission") in the Court of First Instance of the
European Communities in Luxembourg seeking to annul the Commission's antitrust
approval of the DLC transaction (the "Festival Action"). We have been granted
leave to intervene in the Festival Action and intend to contest such action
vigorously. A successful third party challenge of an unconditional Commission
clearance decision would be unprecedented, and based on a review of the law and
the factual circumstances of the DLC transaction, as well as the Commission's
approval decision in relation to the DLC transaction, we believe that the
Festival Action will not have a material adverse effect on the companies or the
DLC transaction. However, the ultimate outcome of this matter cannot be
determined at this time.
In the normal course of our business, various other claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits are
covered by insurance and, accordingly, the maximum amount of our liability is
typically limited to our self-insurance retention levels. However, the ultimate
outcome of these claims and lawsuits which are not covered by insurance cannot
be determined at this time.
Contingent Obligations
At November 30, 2003, we had contingent obligations totaling $1.08 billion
to participants in lease out and lease back type transactions for three of our
ships. At the inception of the leases, the entire amount of the contingent
obligations was paid by us to major financial institutions to enable them to
directly pay these obligations. Accordingly, these obligations were considered
extinguished, and neither funds nor the contingent obligations have been
included on our balance sheets. We would only be required to make any payments
under these contingent obligations in the remote event of nonperformance by
these financial institutions, all of which have long-term credit ratings of AAA
or AA. In addition, we obtained a direct guarantee from another AAA rated
financial institution for $298 million of the above noted contingent
obligations, thereby further reducing the already remote exposure to this
portion of the contingent obligations. If the major financial institutions'
credit ratings fall below AA-, we would be required to move a majority of the
funds from these financial institutions to other highly-rated financial
institutions. If Carnival Corporation's credit rating falls below BBB, we would
be required to provide a standby letter of credit for $90 million, or
alternatively provide mortgages in the aggregate amount of $90 million on two of
Carnival Corporation's ships.
In the unlikely event that we were to terminate the three lease agreements
early or default on our obligations, we would, as of November 30, 2003 have to
pay a total of $168 million in stipulated damages. As of November 30, 2003, $177
million of standby letters of credit have been issued by a major financial
institution in order to provide further security for the payment of these
contingent stipulated damages. In the event we were to default under our $1.4
billion revolving credit facility, we would be required to post cash collateral
to support the stipulated damages standby letters of credit. Between 2017 and
2022, we have the right to exercise options that would terminate these
transactions at no cost to us. As a result of these three transactions, we have
$40 million and $43 million of deferred income recorded on our balance sheets as
of November 30, 2003 and 2002, respectively, which is being amortized to
nonoperating income through 2022.
Other Contingent Obligations
Some of the debt agreements that we enter into include indemnification
provisions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes, changes
in laws that increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms and were entered
into in the normal course of business. There are no
62
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 a request for indemnification is probable.
NOTE 10 - Income and Other Taxes
We believe that substantially all of our income, with the exception of our
U.S. source income from the transportation, hotel and tour businesses of Holland
America Tours and Princess Tours and the items listed in the regulations under
Section 883 that the Internal Revenue Service does not consider to be incidental
to ship operations discussed in the following paragraph, is exempt from U.S.
federal income taxes. If we were found not to qualify for exemption pursuant to
applicable income tax treaties or under the Internal Revenue Code or if the
income tax treaties or Internal Revenue Code were to be changed in a manner
adverse to us, a portion of our income would become subject to taxation by the
U.S. at higher than normal corporate tax rates.
On August 26, 2003, final regulations under Section 883 of the Internal
Revenue Code were published in the Federal Register. Section 883 is the primary
provision upon which we rely to exempt certain of our international ship
operation earnings from U.S. income taxes. The final regulations list elements
of income that are not considered to be incidental to ship operations and, to
the extent earned within the U.S., are subject to U.S. income tax. Among the
items identified in the final regulations are income from the sale of air and
other transportation, shore excursions and pre-and post cruise land packages.
These rules will first be effective for us in fiscal 2004.
AIDA, A'ROSA, Ocean Village, P&O Cruises, P&O Cruises Australia and Swan
Hellenic are all strategically and commercially managed in the UK and have
elected to enter the UK tonnage tax regime. Accordingly, these operations pay UK
corporation tax on shipping profits calculated by reference to the net tonnage
of qualifying vessels. Income not considered to be shipping profits is taxable
under the normal UK tax rules. We believe that substantially all of the income
attributable to these brands constitutes shipping profits and, accordingly,
income tax expense from these operations has been and is expected to be minimal.
Some of our subsidiaries, including Costa, Holland America Tours, Princess
Tours and other of our non-shipping activities, are subject to foreign and/or
U.S. federal and state income taxes. In fiscal 2003, we recognized a net $29
million income tax expense, primarily related to these operations. In 2002, we
recognized a net $57 million income tax benefit primarily due to an Italian
investment incentive law, which allowed Costa to receive a $51 million income
tax benefit based on contractual expenditures during 2002 on the construction of
a new ship. At November 30, 2003, Costa had a remaining net deferred tax asset
of approximately $61 million relating primarily to the tax benefit of the net
operating loss carryforwards arising from this incentive law, which expire in
2007. In fiscal 2001, we recognized a $9 million income tax benefit from Costa
primarily due to changes in Italian tax law.
We do not expect to incur income taxes on future distributions of
undistributed earnings of foreign subsidiaries and, accordingly, no deferred
income taxes have been provided for the distribution of these earnings.
In addition to or in place of income taxes, virtually all jurisdictions
where our ships call, impose taxes based on passenger counts, ship tonnage or
some other measure. These taxes, other than those directly charged to and/or
collected from passengers by us, are recorded as operating expenses in the
accompanying statements of operations.
NOTE 11 - Shareholders' Equity
Carnival Corporation's articles of incorporation authorize its Board of
Directors, at its discretion, to issue up to 40 million shares of its preferred
stock and Carnival plc has 100,000 authorized preference shares. At November 30,
2003 and 2002, no Carnival Corporation preferred stock had been issued and only
a nominal amount of Carnival plc preferred shares had been issued.
At November 30, 2003, there were 91.7 million shares of Carnival
Corporation common stock reserved for issuance pursuant to its convertible notes
and its employee benefit and dividend reinvestment plans. In addition, Carnival
plc shareholders have authorized 4.8 million ordinary shares for future issuance
under its employee benefit plans.
63
At November 30, 2003 and 2002, AOCI included cumulative foreign currency
translation adjustments which increased shareholders' equity by $191 million and
$29 million, respectively.
NOTE 12 - Financial Instruments
We estimated the fair value of our financial instruments through the use
of public market prices, quotes from financial institutions and other available
information. Considerable judgment is required in interpreting data to develop
estimates of fair value and, accordingly, amounts are not necessarily indicative
of the amounts that we could realize in a current market exchange. Our financial
instruments are not held for trading or other speculative purposes.
Cash and Cash Equivalents
The carrying amounts of our cash and cash equivalents approximate their
fair values due to their short maturities.
Other Assets
At November 30, 2003 and 2002, long-term other assets included marketable
securities held in rabbi trusts for certain of our nonqualified benefit plans
and notes and other receivables. These assets had carrying and fair values of
$225 million at November 30, 2003 and $173 million at November 30, 2002. Fair
values were based on public market prices, estimated discounted future cash
flows or estimated fair value of collateral.
Debt
The fair values of our non-convertible debt and convertible notes were
$5.8 billion and $1.92 billion, respectively, at November 30, 2003 and $2.04
billion and $1.28 billion at November 30, 2002. These fair values were greater
than the related carrying values by $140 million and $205 million, respectively,
at November 30, 2003 and $4 million and $162 million at November 30, 2002. The
net difference between the fair value of our debt and its carrying value was due
primarily to our issuance of debt obligations at fixed interest rates that are
above market interest rates in existence at the measurement dates, as well as
the impact of changes in the Carnival Corporation common stock value on our
convertible notes on those dates. The fair values of our unsecured fixed rate
public notes, convertible notes, sterling bonds and unsecured 5.57% euro notes
were based on their public market prices. The fair values of our other debt were
estimated based on appropriate market interest rates being applied to this debt.
Foreign Currency Contracts
We have forward foreign currency contracts, designated as foreign currency
fair value hedges, for seven of our euro denominated shipbuilding contracts (see
Note 8). At November 30, 2003 and 2002, the fair value of these forward
contracts was an unrealized gain of $363 million and an unrealized loss of $178
million, respectively. These forward contracts mature through 2006. The fair
values of our forward contracts were estimated based on prices quoted by
financial institutions for these instruments.
We have cross currency swaps totaling $644 million that are designated as
hedges of our net investments in foreign subsidiaries, which have euro and
sterling denominated functional currencies. These cross currency swaps were
entered into to effectively convert U.S. dollar denominated debt into euro or
sterling debt, which acts as a hedge of our net investments in cruise lines
whose functional currencies are the euro and sterling. At November 30, 2003, the
fair value of these cross currency swaps was an unrealized loss of $49 million,
of which $39 million is included in the cumulative translation adjustment
component of AOCI. These currency swaps mature through 2007. We also have $171
million of cross currency swaps, which effectively converts euro denominated
debt into sterling debt, which is the functional currency of our subsidiary
which was the borrower. At November 30, 2003, the fair value of these cross
euro/sterling currency swaps was a loss of $21 million. These currency swaps
mature through 2012. The fair value of our cross currency swaps were estimated
based on prices quoted by financial institutions for these instruments. Finally,
we have designated $355 million of outstanding sterling debt, which is a
nonderivative and matures in 2012, as a hedge of our net investments in foreign
operations and, accordingly, have included $24 million of foreign currency
transaction losses in the cumulative translation adjustment component of AOCI at
November 30, 2003.
Interest Rate Swaps
We have interest rate swap agreements designated as fair value hedges
whereby we
64
receive fixed interest rate payments in exchange for making variable interest
rate payments. At November 30, 2003 and 2002, these interest rate swap
agreements effectively changed $1.19 billion and $225 million of fixed rate debt
to Libor-based floating rate debt.
In addition, we also have interest rate swap agreements designated as cash
flow hedges whereby we receive variable interest rate payments in exchange for
making fixed interest rate payments. At November 30, 2003 and 2002, these
interest rate swap agreements effectively changed $760 million and $468 million,
respectively, of euribor floating rate debt to fixed rate debt.
These interest rate swap agreements mature through 2012. At November 30,
2003 and 2002, the fair value of our interest rate swaps was a loss of $6
million and $0.1 million, respectively. The fair values of our interest rate
swap agreements were estimated based on prices quoted by financial institutions
for these instruments.
NOTE 13 - Segment Information
Our cruise segment included thirteen cruise brands since April 17, 2003,
and six Carnival Corporation cruise brands from December 1, 2001 to April 16,
2003, which have been aggregated as a single reportable segment based on the
similarity of their economic and other characteristics.
Our other segment represents the transportation, hotel and tour operations
of Holland America Tours and Princess Tours and the business to business travel
agency operations of P&O Travel Ltd., the latter two since completion of the DLC
transaction on April 17, 2003. The significant accounting policies of our
segments are the same as those described in Note 2 -"Summary of Significant
Accounting Policies." Information for our cruise and other segments as of and
for the year ended November 30, was as follows (in millions):
Selling
and Depreciation Operating Capital
Operating adminis- and income expend- Total
Revenues(a)(b) expenses trative amortization (loss) itures assets
-------- -------- ------- ------------ ------ ------ ------
2003
Cruise $ 6,459 $ 3,624 $896 $ 568 $ 1,371 $ 2,454 $24,090
Other 345 280 36 17 12 62 401(c)
Intersegment
elimination (86) (86)
------- ------- ---- ------ ------- -------- -------
$ 6,718 $ 3,818 $932 $ 585 $ 1,383 $ 2,516 $24,491
======= ======= ==== ====== ======= ======== =======
2002
Cruise(d) $ 4,244 $ 2,222 $577 $ 371 $ 1,055(c) $ 1,949 $12,120
Other 176 145 32 11 (13) 37 215(c)
Intersegment
elimination (37) (37)
------- ------- ---- ------ ------- -------- -------
$ 4,383 $ 2,330 $609 $ 382 $ 1,042 $ 1,986 $12,335
======= ======= ==== ====== ======= ======== =======
2001
Cruise(d) $ 4,371 $ 2,347 $584 $ 361 $ 946(e) $ 802 $11,375
Other 229 186 35 11 (10)(e) 25 189(c)
Affiliated
operations(f) (44)
Intersegment
elimination (51) (51)
------- ------- ---- ------ ------- -------- -------
$ 4,549 $ 2,482 $619 $ 372 $ 892 $ 827 $11,564
======= ======= ==== ====== ======= ======== =======
(a) Other revenues included revenues for the cruise portion of a tour, when a
cruise is sold along with a land tour package by Holland America Tours and
Princess Tours, and shore excursion and port hospitality services provided
to cruise passengers by these tour companies. These intersegment revenues
are eliminated from other revenues in the line "Intersegment elimination."
(b) Revenue amounts in 2002 and 2001 have been reclassified to conform to the
2003 presentation.
(c) Other assets primarily included hotels and lodges in Alaska and the
Canadian Yukon, luxury dayboats offering tours to the glaciers of Alaska
and the Yukon River, motor coaches used for sightseeing and charters in
the States of Washington and Alaska, British Columbia, Canada and the
Canadian Yukon and private, domed rail cars, which run on the Alaska
Railroad between Anchorage and Fairbanks.
65
(d) In 2003, we commenced allocating all corporate expenses to our cruise
segment. Accordingly, the 2002 and 2001 presentations have been restated
to allocate the previously unallocated 2002 and 2001 corporate expenses
and assets to our cruise segment.
(e) Cruise operating income included impairment charges of $20 million in 2002
and $134 million in 2001 and other operating loss included an impairment
charge of $6 million in 2001.
(f) On June 1, 2001, we sold our investment in Airtours. Accordingly, we did
not record any equity in the earnings or losses of Airtours after May 31,
2001.
Foreign revenues for our cruise brands represent sales generated from
outside the U.S. primarily by foreign tour operators and foreign travel
agencies. Substantially all of these foreign revenues are from the UK, Italy,
Germany, Canada, France, Australia, Spain, Switzerland and Brazil. Substantially
all of our long-lived assets are located outside of the U.S. and consist
principally of our goodwill, trademarks, ships and ships under construction.
Revenue information by geographic area for fiscal 2003, 2002 and 2001 was
as follows (in millions):
2003 2002 2001
------ ------ ------
U.S $4,513 $3,304 $3,500
Foreign 2,205 1,079 1,049
------ ------ ------
$6,718 $4,383 $4,549
====== ====== ======
NOTE 14 - Benefit Plans
Stock Option Plans
We have stock option plans primarily for supervisory and management level
employees and members of our Board of Directors. The Carnival Corporation and
Carnival plc plans are administered by a committee of three of our directors
(the "Committee") which determines who is eligible to participate, the number of
shares for which options are to be granted and the amounts that may be exercised
within a specified term. The Carnival Corporation and Carnival plc option
exercise price is generally set by the Committee at 100% of the fair market
value of the common stock/ordinary shares on the date the option is granted.
Substantially all Carnival Corporation options granted during fiscal 2003, 2002
and 2001 and Carnival plc options granted in 2003 were granted at an exercise
price per share equal to the fair market value of the Carnival Corporation
common stock and Carnival plc ordinary shares, respectively, on the date of
grant. Carnival Corporation employee options generally vest evenly over five
years and have a ten year term. Carnival plc employee options generally vest at
the end of three years and have a ten year term. Carnival Corporation director
options granted subsequent to fiscal 2000 vest evenly over five years and have a
ten year term. At November 30, 2003, Carnival Corporation had 34.9 million
shares and Carnival plc had 4.8 million shares, which were available for future
grants under the option plans.
A combined summary of the activity and status of the Carnival Corporation
and Carnival plc stock option plans was as follows:
Weighted
Average Exercise Price Number of Options
Per Share Years Ended November 30,
2003 2002 2001 2003 2002 2001
-------- -------- -------- ----------- ----------- -----------
Outstanding options-
beginning of year $ 29.26 $ 28.95 $ 26.80 11,828,958 12,774,293 8,840,793
Carnival plc
outstanding options
at April 17, 2003(a) $ 19.64 5,523,013
Options granted $ 30.88 $ 26.54 $ 26.44 5,464,109 33,000 6,580,250
Options exercised(b) $ 17.35 $ 14.35 $ 11.70 (2,919,554) (404,615) (2,218,075)
Options canceled $ 28.64 $ 32.80 $ 35.15 (598,547) (573,720) (428,675)
----------- ----------- -----------
Outstanding options-
end of year (e) $ 28.79 $ 29.26 $ 28.95 19,297,979(c) 11,828,958 12,774,293
=========== =========== ===========
Options exercisable-
end of year $ 27.68 $ 28.71 $ 25.96 7,848,335(d) 4,775,894 2,972,498
=========== =========== ===========
(a) All Carnival plc unvested options outstanding on the date the DLC
transaction was completed vested fully on such date, except for 1.3
million options, which were granted on April 15, 2003.
(b) Included 1.8 million Carnival plc options in 2003, of which 1.0 million
had a
66
sterling denominated exercise price.
(c) Included 3.6 million of Carnival plc options at a weighted average
exercise price of $20.89 per share, based on the November 30, 2003 U.S.
dollar to sterling exchange rate.
(d) Included 2.2 million of Carnival plc options at a weighted average
exercise price of $18.06 per share.
(e) On December 1, 2003, as a result of the Princess cruise operations being
transferred to the Carnival Corporation side of the DLC structure, options
to purchase 567,000 shares of Carnival plc vested immediately, and the
termination date of 1.5 million Carnival plc exercisable options were
shortened to the earlier of 12 months after the December 1, 2003
reorganization date or 42 months after the date of grant. All such changes
have been made pursuant to the original terms of the Carnival plc plan.
Combined information with respect to outstanding and exercisable Carnival
Corporation and Carnival plc stock options at November 30, 2003 was as follows:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Shares Life (Years) Price Shares Price
- ----------- ----------------------------------- ---------------------
$ 1.94-$ 2.25 30,980 (a) $ 2.07 30,980 $ 2.07
$10.59-$15.00 735,102 5.4 $13.54 735,102 $13.54
$16.28-$22.57 4,477,849 7.1 $20.71 2,617,539 $19.70
$23.04-$27.88 5,714,089 8.4 $26.44 1,319,694 $25.00
$28.21-$34.91 5,518,009 8.4 $32.12 1,172,570 $30.27
$36.72-$41.34 102,000 4.8 $38.09 97,600 $38.06
$43.56-$48.56 2,719,950 5.7 $44.36 1,874,850 $44.50
---------- --- ------ --------- ------
Total 19,297,979 7.6 $28.79 7,848,335 $27.68
========== === ====== ========= ======
(a) These stock options do not have an expiration date.
Carnival Corporation Restricted Stock
Carnival Corporation has issued restricted stock to a few officers. These
shares have the same rights as Carnival Corporation common stock, except for
transfer restrictions and forfeiture provisions. During fiscal 2003, 2002 and
2001, 455,000 shares, 150,000 shares and 150,000 shares, respectively, of
Carnival Corporation common stock were issued, which were valued at $14 million,
$4 million and $5 million, respectively. Unearned stock compensation was
recorded within shareholders' equity at the date of award based on the quoted
market price of the Carnival Corporation common stock on the date of grant and
is amortized to expense using the straight-line method from the grant date
through the earlier of the vesting date or the officers estimated retirement
date. These shares either have three or five-year cliff vesting or vest evenly
over five years after the grant date. As of November 30, 2003 and 2002 there
were 1,055,000 shares and 750,000 shares, respectively, issued under the plan
which remained to be vested.
Defined Benefit Pension Plans
We have several defined benefit pension plans, which cover some of our
shipboard and shoreside employees. The U.S. and UK shoreside employee plans are
closed to new membership. The plans are funded, at a minimum, in accordance with
U.S. or UK regulatory requirements, with the remaining plans being primarily
unfunded. In determining our plans' benefit obligations at November 30, 2003, we
used assumed weighted-average discount rates of 6.0% and 5.3% for our U.S. and
foreign plans, respectively. The net liabilities related to the obligations
under these single employer defined benefit pension plans are not material.
A minimum pension liability adjustment is required when the actuarial
present value of accumulated benefits exceeds plan assets and accrued pension
liabilities. At November 30, 2003 and 2002, our single employer plans had
aggregated additional minimum pension liability adjustments, less allowable
intangible assets, of $14 million and $15 million, respectively, which are
included in AOCI.
In addition, P&O Cruises participated in a Merchant Navy Ratings Pension
Fund ("MNRPF"), which is a defined benefit multiemployer pension plan. This plan
has a significant funding deficit and has been closed to further benefit accrual
since prior to the completion of the DLC transaction. P&O Cruises, along with
other unrelated employers,
67
are making payments into this plan under a non-binding Memorandum of
Understanding to reduce the deficit. Accordingly, at November 30, 2003, we had
recorded a long-term pension liability of $19 million, which represented our
estimate of the present value of the entire liability due by us under this plan.
P&O Cruises, Princess and Cunard Line Limited also participate in an
industry-wide British merchant navy officers pension fund ("MNOPF"), which also
is a defined benefit multiemployer pension plan that is available to certain of
their shipboard British officers. The MNOPF is divided into two sections, the
"New Section" and the "Old Section", each of which covers a different group of
participants, with the Old Section closed to further benefit accrual and the New
Section only closed to new membership. Holland America Line also participates in
a Dutch shipboard officers defined benefit multiemployer pension plan. Our
multiemployer yearly pension fund plan expenses are based on the amount of
contributions we are required to make annually into the plans.
Total expense for all of our defined benefit pension plans, including our
multiemployer plans, was $17 million, $11 million and $8 million in fiscal 2003,
2002 and 2001, respectively.
As of March 31, 2003, the date of the most recent formal actuarial
valuation prepared by the MNOPF's actuary, the New Section of the MNOPF was
estimated to have a fund deficit of approximately 200 million sterling, or $340
million, assuming a 7.7% discount rate. At November 30, 2003, our external
actuary informally updated the March 31, 2003 valuation and estimated that the
New Section deficit was approximately 640 million sterling, or $1.1 billion,
assuming a 5.3% discount rate. The 5.3% is the assumed discount rate we have
used for determining our other foreign pension plans obligations. Based solely
upon our share of current contributions to the MNOPF, our share of these deficit
amounts would be between $27 million and $85 million, depending on whether the
deficit was $340 million or $1.1 billion, respectively. However, the extent of
our portion of any liability with respect to the fund's deficit is uncertain,
and is the subject of ongoing litigation, the outcome of which cannot be
determined at this time. In addition, the amount of the fund deficit is subject
to estimates and assumptions, which could cause the deficit amount to vary
considerably.
A substantial portion of any MNOPF fund deficit liability which we may
have relates to P&O Cruises and Princess liabilities which existed prior to the
DLC transaction. However, since the MNOPF is a multiemployer plan and it is not
probable that we will withdraw from the plan nor is our share of the liability
certain, we are required to record our MNOPF plan expenses, including any
contributions to fund the deficit, as they are contributed, instead of as a
Carnival plc acquisition liability that existed at the DLC transaction date. It
is currently expected that deficit funding contributions, if any, will be
required to be paid over at least ten years.
Defined Contribution Plans
We have several defined contribution plans available to substantially all
employees. We contribute to these plans based on employee contributions, salary
levels and length of service. Total expense relating to these plans was $12
million, $8 million and $8 million in fiscal 2003, 2002 and 2001, respectively.
NOTE 15 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Years
Ended November 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Net income $ 1,194 $ 1,016 $ 926
Interest on dilutive convertible notes 5
-------- -------- --------
Net income for diluted earnings
per share $ 1,199 $ 1,016 $ 926
======== ======== ========
Weighted-average common and ordinary
shares outstanding 718 587 585
Dilutive effect of convertible notes 4
Dilutive effect of stock plans 2 1 2
-------- -------- --------
Diluted weighted-average shares
outstanding 724 588 587
======== ======== ========
Basic earnings per share $ 1.66 $ 1.73 $ 1.58
======== ======== ========
Diluted earnings per share $ 1.66 $ 1.73 $ 1.58
======== ======== ========
68
The weighted-average shares outstanding for the year ended November 30,
2003 includes the pro rata Carnival plc shares since April 17, 2003.
If Carnival Corporation's common stock price reaches specified trigger
prices for a defined duration of time within a completed quarter, then, under
the terms of various classes of Carnival Corporation's convertible debt
securities (each having its own trigger prices), such classes of debt securities
will become convertible for the next succeeding quarter, and the shares of
Carnival Corporation common stock into which those debt securities become
convertible will be considered outstanding for the most recently completed
quarter's diluted earnings per share computation, if dilutive.
Carnival Corporation's Zero-Coupon Notes' contingent conversion trigger
price was reached in the second half of fiscal 2003. Accordingly, the diluted
earnings per share computation included an adjustment to increase net income for
the imputed interest expense recorded on these Zero-Coupon Notes and the diluted
weighted-average shares outstanding for fiscal 2003 included the
weighted-average of the 17.4 million shares that could be converted at the
noteholders' options. The conversion of these notes was only dilutive in the
2003 third quarter.
Our diluted earnings per share computation for fiscal 2003 did not include
a maximum of 36.2 million (32.7 million in 2002 and 2001) shares of Carnival
Corporation common stock issuable upon conversion of its convertible debt, as
this common stock was not issuable under the contingent conversion provisions of
these debt instruments (see Note 7).
Options to purchase 8.4 million, 6.0 million and 5.4 million shares for
fiscal 2003, 2002 and 2001, respectively, were excluded from our diluted
earnings per share computation since the effect of including them was
anti-dilutive.
NOTE 16 - Supplemental Cash Flow Information
Years Ended November 30,
--------------------------
2003 2002 2001
---- ---- ----
(in millions)
Cash paid for
Interest, net of amount capitalized $156 $110 $109
Income taxes, net $ 21 $ 4
Other noncash investing and financing
activities
Common stock received as payment of
stock option exercise price $ 23
Notes received upon the sale of
the Nieuw Amsterdam $ 60
NOTE 17 - Recent Accounting Pronouncement
In January 2003, as amended, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Standards Board Interpretation ("FIN") No.
46, "Consolidation of Variable Interest Entities." FIN No. 46 requires
consolidation of variable interest entities ("VIE's") by the "primary
beneficiary", as defined, if certain criteria are met. FIN No. 46 is effective
immediately for VIE's created or acquired after January 31, 2003. For
pre-existing VIE's, disclosure requirements are effective immediately and
consolidation provisions are effective for our 2004 second quarter. In
accordance with FIN No. 46, we have determined that we are carrying a loan,
initially made in April 2001, to a ship repair facility that is a VIE. Although
we use this facility for some of our ship repair work, we are not a "primary
beneficiary" and, accordingly, this entity will not be consolidated in our
financial statements. At November 30, 2003, our loan to this VIE, which is also
our maximum exposure to loss, was $41 million.
69
Report of Independent Certified Public Accountants
To the Boards of Directors and Shareholders of
Carnival Corporation and Carnival plc
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Carnival
Corporation & plc (comprising Carnival Corporation and Carnival plc and their
respective subsidiaries) at November 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, the Company adopted SFAS
No.142 "Goodwill and Other Intangible Assets" which changed the method of
accounting for goodwill and other intangible assets effective December 1, 2001.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
January 29, 2004
70
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this 2003 Annual Report are
"forward-looking statements" that involve risks, uncertainties and assumptions
with respect to us, including some statements concerning future results, plans,
outlook, goals and other events which have not yet occurred. These statements
are intended to qualify for the safe harbors from liability provided by Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. You can find many, but not all, of these statements by
looking for words like "will," "may," "believes," "expects," "anticipates,"
"forecast," "future," "intends," "plans," and "estimates" and for similar
expressions.
Because forward-looking statements involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this 2003
Annual Report. Forward-looking statements include those statements which may
impact the forecasting of our earnings per share, net revenue yields, booking
levels, pricing, occupancy, operating, financing and tax costs, costs per
available lower berth day, estimates of ship depreciable lives and residual
values, outlook or business prospects. These factors include, but are not
limited to, the following:
- - achievement of expected benefits from the DLC transaction;
- - risks associated with the DLC structure;
- - risks associated with the uncertainty of the tax status of the DLC
structure;
- - general economic and business conditions, which may impact levels of
disposable income of consumers and net revenue yields for our cruise
brands;
- - conditions in the cruise and land-based vacation industries, including
competition from other cruise ship operators and providers of other
vacation alternatives and increases in capacity offered by cruise ship and
land-based vacation alternatives;
- - the impact of operating internationally;
- - the international political and economic climate, armed conflicts,
terrorist attacks, availability of air service and other world events and
adverse publicity, and their impact on the demand for cruises;
- - accidents and other incidents affecting the health, safety, security and
vacation satisfaction of passengers;
- - our ability to implement our shipbuilding programs and brand strategies
and to continue to expand our business worldwide;
- - our ability to attract and retain qualified shipboard crew and maintain
good relations with employee unions;
- - our ability to obtain financing on terms that are favorable or consistent
with our expectations;
- - the impact of changes in operating and financing costs, including changes
in foreign currency and interest rates and fuel, food, payroll, insurance
and security costs;
- - changes in the tax, environmental, health, safety, security and other
regulatory regimes under which we operate;
- - continued availability of attractive port destinations;
- - our ability to successfully implement cost improvement plans and to
integrate business acquisitions;
- - continuing financial viability of our travel agent distribution system;
- - weather patterns or natural disasters; and
- - the ability of a small group of shareholders to effectively control the
outcome of shareholder voting.
Forward-looking statements should not be relied upon as a prediction of
actual results. Subject to any continuing obligations under applicable law or
any relevant listing rules, we expressly disclaim any obligation to disseminate,
after the date of this 2003 Annual Report, any updates or revisions to any such
forward-looking statements to reflect any change in expectations or events,
conditions or circumstances on which any such statements are based.
Executive Overview
Over the past three years our net revenue yields have declined (see "Key
Performance
71
Indicators" below). We believe this decline has been a result of a number of
factors affecting consumers' vacation demand including, among other things,
armed conflicts in the Middle East and elsewhere, terrorist attacks in the U.S.
and elsewhere, minor passenger and crew illnesses, the uncertain worldwide
economy and adverse publicity surrounding these and other events. In addition to
these concerns, the recent large increase in new ship capacity in the cruise
industry over this period has intensified competition to attract customers from
land-based vacation alternatives, which has also contributed to lower cruise
ticket prices.
In addition to the lower pricing trends over this period, the cruise
industry has also experienced historically high fuel costs; significant
increases in insurance and security costs, precipitated by the events of
September 11, 2001; and higher environmental costs, resulting primarily from
upgrading environmental compliance programs. It is possible that some of these
increasing cost trends will continue in the future. However, as we have done in
the past, we expect to be able to partially offset these increases through the
continuing benefits of scale, as well as cost containment measures.
The factors mentioned above have put pressure on our earnings over this
period, especially since most of our costs are largely fixed once we put a ship
into service. Although it is impossible to quantify the financial impact on us
of each of the foregoing factors, these events adversely impacted the entire
leisure and travel industry in general, and the cruise industry and us in
particular.
During 2003, we were able to complete the largest acquisition in our
history, the DLC transaction with P&O Princess. We have made significant
progress in integrating our two organizations, including announcing the expected
redeployment in late 2004 of CCL's Jubilee to the P&O Cruises Australia fleet,
the transfer of a Holland America newbuild shipyard slot to Princess for a new
ship deployment in 2006, the consolidation of our German and London office
operations and the sale of our German river boat business, global procurement
savings and the implementation of many best practices among our brands. As a
result, we are well on our way to realizing the $100 million of annual DLC
transaction synergies we initially targeted.
In addition, during the second half of 2003, we saw a strong rebound in
our booking volumes, which commenced shortly after the conclusion of the Iraqi
war, although our cruise ticket prices were still somewhat lower than last year.
As mentioned above, the entire cruise industry had a large increase in
capacity during this three year period, including our introduction of seven new
ships into service during 2003. Even with our 17.5% pro forma capacity increase
in fiscal 2003, we were able to maintain our occupancy level at over 103%. As a
large part of our operating costs are fixed in nature, we strategically manage
our prices to enable us to fill our ships at the highest possible prices, since
incremental passengers contribute to our fixed costs. Our ability to maintain
these high occupancy levels helped us to achieve an increasing level of onboard
and other revenues, which partially offset the impact of lower cruise ticket
prices.
Throughout this period, despite the adverse external travel and leisure
environment and the significant increase in cruise industry capacity, we
generated significant cash flows. These results provide an indication of the
strength of our business. However, our operations are subject to many risks, as
briefly noted above and under the caption "Cautionary Note Concerning Factors
That May Affect Future Results," which could significantly impact our future
results.
The year over year percentage increases in Carnival Corporation & plc's
available lower berth day ("ALBD") capacity for fiscal 2004 (versus fiscal 2003
pro forma ALBD, assuming that the DLC transaction was completed and Carnival plc
was consolidated for the full period in 2003), 2005 and 2006, resulting
primarily from new ships entering service, is currently expected to be 17.5%,
9.2% and 5.3%, respectively.
We believe that given a more stable geopolitical environment, our net
revenue yields will increase in 2004, despite the expected significant increase
in our 2004 passenger capacity.
Outlook For Fiscal 2004 ("2004")
As of December 18, 2003, we said that we expected our first quarter 2004
earnings per share to be in the range of $0.17 to $0.20 versus 2003 pro forma
first quarter earnings per share of $0.16 ($0.18 less a $0.02 per share
non-recurring gain from insurance settlements). We also said that we were
comfortable with consensus earnings estimates for
72
the 2004 year, which at that time was $1.98 per share, assuming no significant
geopolitical or economic shocks.
Since early January, the cruise industry has entered the "wave season" (a
period of higher booking levels than during the rest of the year). As we had
expected, bookings during this year's wave season have been significantly higher
than during the comparable period last year, which was adversely impacted by the
build up to the war in Iraq. Since the beginning of January, company wide
booking levels have been running 59% higher than during the same period last
year, which is significantly above the company's 17.5% proforma capacity
increase for 2004.
We now expect that first quarter 2004 net revenue yields will increase 3%
to 4% (versus an increase of 1% to 2% in our previous guidance) and net cruise
costs per ALBD, will be at the low end of our previous guidance of an increase
of 1% to 3%. The increase in expected net revenue yields is largely due to the
weakening of the U.S. dollar, and to a lesser extent, higher than expected
pricing on close to sailing bookings. The weak dollar also had the effect of
increasing net cruise costs per ALBD, however that is expected to be more than
offset by lower than anticipated advertising costs, which is partially timing
and is expected to be expended later in the year, and lower than forecasted fuel
costs. We now expect first quarter 2004 earnings per share to be in the range of
$0.21 to $0.22.
Net revenue yields for the year 2004 are now forecast to increase 5% to
7%, versus our previous forecast of an increase of 2% to 4%. The increase in
expected net revenue yields is largely due to weakness in the U.S. dollar (our
current to guidance is based on an exchange rate of $1.27 to the euro and $1.84
to the sterling), and to a lesser extent, strengthening booking levels noted
during wave season. Net cruise costs per ALBD is forecast to increase 2% to 3%
versus our earlier guidance of flat compared to 2003 proforma costs. The
increase in expected net cruise costs per ALBD is due to the weaker U.S. dollar.
Carnival Corporation's 2% Notes become convertible if the share price of
its common stock closes above $43.05 for 20 days out of the last 30 trading days
of the quarter. If the 2% Notes become convertible, earnings per share for the
full year 2004 will be reduced by $0.02 per share. Assuming this dilution
occurs, we are comfortable with the current consensus 2004 earnings estimates of
$2.02 per share, assuming no geopolitical or economic shocks.
Income Taxes
The new U.S. income tax regulations under Section 883 of the Internal
Revenue Code have become effective for us in 2004. Although we are still in the
process of analyzing the impact of these new rules on our operations, based upon
our preliminary analysis, we currently estimate that their application will
reduce our 2004 earnings per share by approximately $0.02 to $0.03.
Key Performance Indicators
We use net cruise revenues per ALBD ("net revenue yields") and net cruise
costs per ALBD as significant non-GAAP financial measures of our cruise segment
financial performance. We believe that net revenue yields are commonly used in
the cruise industry to measure a company's revenue performance and pricing
power. This measure is also used for revenue management purposes. In calculating
net revenue yields, we use net cruise revenues rather than gross cruise
revenues. We believe that "net cruise revenues" is a more meaningful measure in
determining revenue yield than gross cruise revenues because it reflects the
cruise revenues earned by us net of its most significant variable costs (travel
agent commissions, cost of air transportation and certain other variable direct
costs associated with onboard revenues). Substantially all of our remaining
cruise costs are largely fixed once our ship capacity levels have been
determined.
Net cruise costs per ALBD is the most significant measure we use to
monitor our ability to control costs. In calculating this measure, we exclude
the same variable costs as described above, which are included in the
calculation of net cruise revenues. This is done to avoid duplicating these
variable costs in the two non-GAAP financial measures described above.
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our
most significant judgments about the effect of matters that are inherently
uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties
73
used to make them and the likelihood that materially different estimates would
be reported under different conditions or using different assumptions, is set
forth below.
Ship Accounting
Our most significant assets are our ships and ships under construction,
which represent 78% of our total assets. We make several critical accounting
estimates dealing with our ship accounting. First, we compute our ships'
depreciation expense, which represents 11.9% of our cruise operating expenses in
fiscal 2003, which requires us to estimate the average useful life of each of
our ships, as well as their residual values. Secondly, we account for ship
improvement costs by capitalizing those costs, which we believe will add value
to our ships and depreciate those improvements over their estimated useful
lives. Finally, we account for the replacement or refurbishment of our ship
components and recognize the resulting loss in our results of operations.
We determine the average useful lives of our ships based primarily on our
estimates of the average useful lives of the ships' major component systems,
such as cabins, main diesels, main electric, superstructure and hull. In
addition, we consider, among other things, the impact of anticipated
technological changes, long-term vacation market conditions and competition and
historical useful lives of similarly-built ships. We have estimated our new
ships' average useful lives at 30 years and their residual values at 15% of our
original ship cost.
Given the very large and complex nature of our ships, ship accounting
estimates require considerable judgment and are inherently uncertain. We do not
have cost segregation studies performed to specifically componetize our ship
systems; therefore, our overall estimates of the relative costs of these
component systems are based principally on general and technical information
known about major ship component system lives and our knowledge of the cruise
industry. In addition, we do not identify and track the depreciation of specific
component systems, but instead utilize estimates when determining the net cost
basis of assets being replaced or refurbished. If materially different
conditions existed, or if we materially changed our assumptions of ship lives
and residual values, our depreciation expense or loss on replacement or
refurbishment of ship assets and net book value of our ships would be materially
different. In addition, if we change our assumptions in making our
determinations as to whether improvements to a ship add value, the amounts we
expense each year as repair and maintenance costs could increase, partially
offset by a decrease in depreciation expense, as less costs would have been
initially capitalized to our ships. Our fiscal 2003 ship depreciation expense
would have increased by approximately $18 million for every year we reduced our
estimated average 30 year ship useful life. In addition, if our ships were
estimated to have no residual value, our fiscal 2003 depreciation expense would
have increased by approximately $78 million. Some ships in our fleet are over 30
years old.
We believe that the estimates we made for ship accounting purposes are
reasonable and our methods are consistently applied and, accordingly, result in
depreciation expense that is based on a rational and systematic method to
equitably allocate the costs of our ships to the periods during which services
are obtained from their use. In addition, we believe that the estimates we made
are reasonable and our methods consistently applied (1) in determining the
average useful life and residual values of our ships; (2) in determining which
ship improvement costs add value to our ships; and (3) in determining the net
cost basis of ship component assets being replaced or refurbished. Finally, we
believe our critical ship accounting estimates are generally comparable with
those of other major cruise companies.
Asset Impairment
The impairment reviews of our ship and trademark assets and of our
goodwill, which has been allocated to our reporting units, such as our cruise
lines, require us to make significant estimates to determine the fair values,
including the cash flows, of these assets or reporting units.
The determination of fair value includes numerous uncertainties, unless a
viable actively traded market exists for the asset or for a comparable reporting
unit, which is usually not the case for cruise ships, cruise lines and
trademarks. For example, in determining fair values of ships and cruise lines
utilizing discounted forecasted cash flows, significant judgments are made
concerning, among other things, future net revenue yields, net cruise costs per
ALBD, interest and discount rates, cruise itineraries, ship additions and
retirements, technological changes, consumer demand, governmental regulations
74
and the effects of competition. In addition, third party appraisers are
sometimes used to determine fair values and some of their valuation
methodologies are also subject to similar types of uncertainties. Also, the
determination of fair values of reporting units using a price earnings multiple
approach also requires significant judgments, such as determining reasonably
comparable multiples. Finally, determining trademark fair values also requires
significant judgments in determining both the estimated trademark cash flows,
and the appropriate royalty rates to be applied to those cash flows to determine
their fair value. We believe that we have made reasonable estimates and
judgments in determining whether our ships, goodwill and trademarks have been
impaired. However, if there is a material change in the assumptions used in our
determination of fair value or if there is a material change in the conditions
or circumstances influencing fair value, we could be required to recognize a
material impairment charge.
Contingencies
We periodically assess the potential liabilities related to any lawsuits
or claims brought against us, as well as for other known unasserted claims,
including environmental, legal and tax matters. While it is typically very
difficult to determine the timing and ultimate outcome of these matters, we use
our best judgment to determine if it is probable that we will incur an expense
related to the settlement or final adjudication of such matters and whether a
reasonable estimation of such probable loss, if any, can be made. In assessing
probable losses, we make estimates of the amount of insurance recoveries, if
any. We accrue a liability when we believe a loss is probable and the amount of
the loss can be reasonably estimated, in accordance with the provisions of SFAS
No. 5, "Accounting for Contingencies," as amended. Such accruals are typically
based on developments to date, management's estimates of the outcomes of these
matters, our experience in contesting, litigating and settling other similar
matters and any related insurance coverage. See Notes 9 and 14 in the
accompanying financial statements for additional information concerning our
contingencies.
Given the inherent uncertainty related to the eventual outcome of these
matters and potential insurance recoveries, it is possible that all or some of
these matters may be resolved for amounts materially different from any
provisions or disclosures that we may have made with respect to their
resolution. In addition, as new information becomes available, we may need to
reassess the amount of probable liability that needs to be accrued related to
our contingencies. All such revisions in our estimates could materially impact
our results of operations and financial position.
Property, Plant and Equipment Draft Statement of Position
In late 2003, the Accounting Standards Executive Committee issued a new
Statement of Position draft, entitled "Accounting for Certain Costs and
Activities Related to Property, Plant and Equipment" ("PP&E SOP"), the adoption
of which is subject to the final clearance of the FASB. If issued in its new
form, the PP&E SOP would allow us the choice of selecting the level at which we
componetize our ships, as long as the identified components are at or below the
"functional unit level", which is the ship itself. If we elect to identify and
track ship components below the ship level, the PP&E SOP will require us, among
other things, to maintain very detailed historical cost records for these ship
parts and determine separate depreciable lives for each component, which may
result in changes in the amount and timing of depreciation and repair and
maintenance expenses and the amount of loss recognized on the replacement or
refurbishment of ship parts. Alternatively, the PP&E SOP allows us to identify
our entire ship as one component; however, electing each ship as one component
will require us to expense as incurred all otherwise capitalizable expenditures
incurred after the ship is placed into service, rather than capitalize and
depreciate these expenditures over their estimated useful lives. In addition,
the PP&E SOP will require us to expense our dry-dock costs as incurred, instead
of amortizing our dry-dock costs to expense generally over one year.
We have not decided what level of componentization we will choose nor have
we completed an analysis of the impact this PP&E SOP would have on our financial
statements, although it may be material, dependent upon the alternatives we
choose in relation to identifying components. The PP&E SOP is expected to be
effective for fiscal years beginning after December 15, 2004 (fiscal 2006 for
us), with earlier application encouraged.
Results of Operations
We earn our cruise revenues primarily from the following:
- sales of passenger cruise tickets and, in some cases, the sale of
air and other
75
transportation to and from our ships. The cruise ticket price
includes accommodations, meals, entertainment and many onboard
activities, and
- the sale of goods and/or services primarily on board our ships,
which include bar and beverage sales, casino gaming, shore
excursions, gift shop and spa sales, photo and art sales and pre-and
post cruise land packages. These activities are either performed
directly by us or by independent concessionaires, from which we
receive a percentage of their revenues.
We incur cruise operating costs and expenses for the following:
- the costs of passenger cruise tickets which represent costs that
vary directly with passenger cruise ticket revenues, and include
travel agent commissions, air and other travel related costs and
credit card fees,
- onboard and other cruise costs which represent costs that vary
directly with onboard and other revenues, and include the costs of
liquor and beverages, costs of tangible goods sold from our gift,
photo and art auction activities, pre-and post cruise land packages
and credit card fees. Concession revenues do not have any
significant amount of costs associated with them, as the costs and
services incurred for these activities are provided by our
concessionaires,
- payroll and related costs which represent costs for all our
shipboard personnel, including deck and engine officers and crew and
hotel and administrative employees,
- food costs which include both our passenger and crew food costs, and
- other ship operating costs which include fuel, repairs and
maintenance, port charges, insurance, entertainment and all other
shipboard operating costs and expenses.
We do not allocate payroll and related costs, food costs or other ship
operating costs to the passenger cruise ticket costs or to onboard and other
cruise costs since they are incurred to support the total cruise experience and
do not vary significantly with passenger levels.
For segment information related to our revenues, expenses, operating
income and other financial information see Note 13 in the accompanying financial
statements. Operations data expressed as a percentage of total revenues and
selected statistical information were as follows (a):
Years Ended November 30,
---------------------------------
2003 2002 2001
------- ------- -------
Revenues
Cruise
Passenger tickets 75.0% 76.3% 77.6%
Onboard and other 21.1 20.5 18.5
Other 3.9 3.2 3.9
------- ------- -------
100.0 100.0 100.0
------- ------- -------
Costs and Expenses
Operating
Cruise
Passenger tickets 15.2 15.0 17.9
Onboard and other 3.4 2.7 2.6
Payroll and related 11.1 10.5 10.1
Food 5.8 5.8 5.8
Other ship operating 18.4 16.7 15.2
Other 2.9 2.5 3.0
------- ------- -------
Total 56.8 53.2 54.6
Selling and administrative 13.9 13.9 13.6
Depreciation and amortization 8.7 8.7 8.2
Impairment charge 0.4 3.0
Loss from affiliated operations, net 1.0
------- ------- -------
Operating Income 20.6 23.8 19.6
Nonoperating (Expense) Income, Net (2.4) (1.9) 0.5
------- ------- -------
Income Before Income Taxes 18.2 21.9 20.1
Income Tax (Expense) Benefit, Net (0.4) 1.3 0.3
------- ------- -------
Net Income 17.8% 23.2% 20.4%
======= ======= =======
Selected Statistical Information
Passengers carried (in thousands) 5,038 3,549 3,385
Occupancy percentage (b) 103.4% 105.2% 104.7%
76
(a) The information presented above includes the results of Carnival plc since
April 17, 2003. See below for discussion of pro forma results.
(b) In accordance with cruise industry practice, occupancy percentage is
calculated using a denominator of two passengers per cabin even though
some cabins can accommodate three or more passengers. The percentages in
excess of 100% indicate that more than two passengers occupied some
cabins.
Fiscal 2003 ("2003") Compared To Fiscal 2002 ("2002")
Given that our reported results for 2003 include the results of Carnival
plc for only the last seven and one-half months of 2003 and the preceding year
does not include any of Carnival plc's results, we believe that the most
meaningful presentation of our operating performance measures for 2003 is on a
pro forma basis, which reflects the results of both Carnival Corporation and
Carnival plc for the entirety of both years. Accordingly, we have disclosed pro
forma information, as well as the required reported information, in the
discussion of our results of operations.
Revenues
Cruise revenues increased $2.22 billion, or 52.2%, to $6.46 billion in
2003 from $4.24 billion in 2002. Approximately $1.75 billion of our cruise
revenue increase was due to the consolidation of Carnival plc and $462 million
(a 10.9% increase over 2002) was due to increased revenues from Carnival
Corporation's cruise brands. Carnival Corporation's increase in cruise revenues
resulted primarily from a 17.3% increase in its standalone ALBD capacity in 2003
compared to 2002, partially offset by lower cruise ticket prices and, to a
lesser extent, a reduced number of passengers purchasing air transportation from
Carnival Corporation.
Included in onboard and other revenues were concession revenues of $198
million in 2003 and $154 million in 2002.
Our pro forma ALBD capacity increase was 17.5% in 2003 compared to 2002.
Pro forma gross revenue yields (gross revenue per ALBD) declined 3.8% (reported
declined 2.1%) in 2003 compared to 2002 primarily for the same reasons as the
decline in net revenue yields discussed below. Pro forma net revenue yields
declined 3.2% (reported declined 3.4%) in 2003 compared to 2002 largely because
of lower cruise ticket prices and, to a lesser extent, lower occupancy levels.
Our revenue yields were adversely affected by consumer concerns about travel
during the period leading up to the war with Iraq and its eventual outbreak, the
uncertain world economy and the increase in cruise industry capacity. Finally,
our pro forma net revenue yields in 2003 were favorably impacted by the
strengthening of the euro and sterling against the dollar.
Other non-cruise revenues increased $169 million, or 96.0%, to $345
million in 2003 from $176 million in 2002 due to the consolidation of Princess
Tours and P&O Travel Ltd.
Costs and Expenses
Total cruise operating expenses increased $1.40 billion, or 63.1%, to
$3.62 billion in 2003 from $2.22 billion in 2002. Approximately $1.02 billion of
our increase was due to the consolidation of Carnival plc, and the remaining
$380 million (a 17.1% increase over 2002) of the increase was from Carnival
Corporation. Carnival Corporation's increase was primarily a result of the
impact of the 17.3% increase in its standalone ALBD capacity in 2003 compared to
2002. In addition, higher fuel prices added approximately $44 million to the
Carnival Corporation standalone expenses in 2003 compared to 2002. Finally, the
increase in each of the individual cruise operating expense line items was
primarily a result of the same factors as discussed above. Pro forma cruise
operating expenses increased $655 million, or 18.4%, to $4.2 billion in 2003
from $3.57 billion in 2002
77
primarily as a result of the 17.5% increase in pro forma ALBD capacity and
higher fuel costs.
Other non-cruise operating expenses increased $135 million, or 93.1%, to
$280 million in 2003 from $145 million in 2002 due to the consolidation of
Princess Tours and P&O Travel Ltd.
Cruise selling and administrative expenses increased $319 million, or
55.3%, to $896 million in 2003 from $577 million in 2002. Approximately $247
million of our increase was due to the consolidation of Carnival plc and the
remaining $72 million (a 12.5% increase over 2002) of the increase was from
Carnival Corporation, which was primarily due to the 17.3% increase in
standalone ALBD capacity. Pro forma cruise selling and administrative expenses,
excluding Carnival plc nonrecurring DLC transaction expenses, increased $142
million, or 15.6%, to $1.05 billion from $912 million in 2002, primarily as a
result of the 17.5% increase in pro forma ALBD capacity, partially offset by the
benefits of scale and synergy savings from the DLC transaction.
Pro forma gross cruise costs per ALBD increased by 0.2% (reported
increased 3.9%) in 2003 compared to 2002. Pro forma net cruise costs per ALBD
increased 2.9% (reported increased 4.0%) in 2003 compared to 2002. Pro forma
gross and net cruise costs per ALBD in 2003 compared to 2002 were higher largely
because of higher fuel costs. Finally, our pro forma net cruise costs were
unfavorably affected by the weakening of the dollar against the euro and
sterling.
Depreciation and amortization increased by $203 million, or 53.1%, to $585
million in 2003 from $382 million in 2002. A large portion of this increase was
from the consolidation of Carnival plc, which accounted for approximately $126
million of the increase. The majority of the remaining increase was a result of
the expansion of the Carnival Corporation fleet and ship improvement
expenditures. Pro forma depreciation and amortization expense increased by $120
million, or 22.5%, to $654 million from $534 million largely due to the
expansion of the combined fleet and ship improvement expenditures.
Nonoperating (Expense) Income
Interest expense, net of interest income and excluding capitalized
interest, increased to $217 million in 2003 from $118 million in 2002, or $99
million, which increase was comprised primarily of a $125 million increase in
interest expense from our increased level of average borrowings, partially
offset by a $31 million decrease in interest expense due to lower average
borrowing rates. The higher average debt balances were primarily a result of our
consolidation of Carnival plc's debt (see Note 7 in the accompanying financial
statements) and new ship deliveries. Capitalized interest increased $10 million
during 2003 compared to 2002 due primarily to higher average levels of
investments in ship construction projects.
Other income was $8 million in 2003, which included $19 million from net
insurance proceeds, $10 million as a result of Windstar's Wind Song casualty
loss and $9 million as a reimbursement of expenses incurred in prior years,
partially offset by $13 million related to a DLC-related litigation matter.
Income Taxes
The income tax provision of $29 million in 2003 was primarily due to the
consolidation of Carnival plc's U.S. based Princess Tours and Costa's Italian
taxable income.
Fiscal 2002 ("2002") Compared to Fiscal 2001 ("2001")
Revenues
Cruise revenues decreased $127 million, or 2.9%, to $4.24 billion in 2002
from $4.37 billion in 2001. Our cruise revenue change resulted from a 7.0%
decrease in our gross revenue per passenger cruise day, partially offset by a
3.6% increase in passenger capacity and a 0.5% increase in our occupancy rate.
This decrease in our gross revenue per passenger cruise day was primarily caused
by a significant decline in the number of guests purchasing air transportation
from us in 2002 compared to 2001. When a guest elects to provide his or her own
transportation, rather than purchasing air transportation from us, both our
cruise revenues and operating expenses decrease by approximately the same
amount. Also adding to the reduction in gross revenue per passenger cruise day
was the adverse impact of the September 11, 2001 events, which resulted in lower
cruise ticket prices. Net revenue yield was down 2.7% (gross revenue yield was
down 6.3%) in 2002 compared to 2001.
78
Included in onboard and other revenues were concession revenues of $154
million in 2002 and $136 million in 2001.
Other revenues, which consisted of Holland America Tours decreased $53
million, or 23.1%, to $176 million in 2002 from $229 million in 2001 principally
due to a lower number of Alaska and Canadian Yukon cruise/tours sold. This
revenue decrease was primarily as a result of one less ship offering land tours
to its guests in 2002 compared to 2001 and increased competition. In addition,
three isolated cancellations of Holland America Alaska cruises in 2002 resulting
primarily from mechanical malfunctions also contributed to this decrease in
revenues.
Costs and Expenses
Total cruise operating costs decreased by $125 million, or 5.3%, to $2.22
billion in 2002 from $2.35 billion in 2001. Approximately $116 million of this
decrease was due to reduced air travel and related costs primarily due to fewer
guests purchasing air transportation through us, and $41 million was primarily
due to lower commissions because of lower cruise revenues. This decrease was
partially offset by an increase in fuel and other cruise operating expenses,
which was largely due to costs associated with our 3.6% increase in passenger
capacity. Net cruise operating costs per ALBD decreased 2.4% (gross cruise
operating costs per ALBD decreased 7.8%), partially as a result of the cost
reduction initiatives we undertook after the events of September 11, 2001.
Other operating expenses, which consisted of Holland America Tours,
decreased $41 million, or 22.0%, to $145 million in 2002 from $186 million in
2001 principally due to the reduction in the number of cruise/tours sold.
Selling and administrative expenses decreased $10 million, or 1.6%, to
$609 million in 2002 from $619 million in 2001. Selling and administrative
expenses decreased in 2002 primarily because of our 4.7% decrease in cruise
selling and administrative costs per ALBD, partially offset by additional
expenses associated with our 3.6% increase in passenger capacity. Our costs per
ALBD decreased partially because of the cost containment actions taken after
September 11, 2001.
Depreciation and amortization increased by $10 million, or 2.7%, to $382
million in 2002 from $372 million in 2001. Depreciation and amortization in 2002
compared to 2001 increased by $30 million primarily as a result of the expansion
of our fleet and ship improvement expenditures, partially offset by the
elimination of $20 million of annual goodwill amortization upon our adoption of
SFAS No. 142 on December 1, 2001 (see Note 2 in the accompanying financial
statements).
See Notes 5 and 6 in the accompanying financial statements for a
discussion of the 2002 and 2001 impairment charge and 2001 affiliated
operations.
Nonoperating (Expense) Income
Interest income decreased by $2 million in 2002 compared to 2001, which
was comprised of a $25 million reduction in interest income due to lower average
interest rates, partially offset by a $23 million increase in interest income
from our higher average invested cash balances. Interest expense was the same in
2002 and in 2001, which was comprised of a $22 million increase in interest
expense due to our increased level of average borrowings, offset by a $22
million reduction in interest expense due to lower average borrowing rates. The
higher level of average borrowings in 2002 were due primarily from the issuance
of our convertible notes in April and October 2001. Capitalized interest
increased $10 million during 2002 compared to 2001 due primarily to higher
average levels of investments in ship construction projects.
Other expense in 2002 of $4 million consisted primarily of a $8 million
loss, including related expenses, resulting from the sale of Holland America
Line's former Nieuw Amsterdam, partially offset by $4 million of income related
to the termination of an over funded pension plan.
79
Income Taxes
The income tax benefit of $57 million recognized in 2002 was substantially
all due to an Italian investment incentive law, which allowed Costa to receive
an income tax benefit of $51 million based on contractual expenditures during
2002 on the construction of a new ship.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $1.93 billion of net cash from operations during
fiscal 2003, an increase of $464 million, or 31.6%, compared to fiscal 2002, due
primarily to the consolidation of Carnival plc. We continue to generate
substantial cash from operations and remain in a strong financial position.
During fiscal 2003, our net expenditures for capital projects were $2.52
billion, of which $2.25 billion was spent for our ongoing new shipbuilding
program. The remaining capital expenditures consisted primarily of $133 million
for ship improvements and refurbishments, and $130 million for Alaska tour
assets, cruise port facility developments and information technology assets.
During fiscal 2003, we borrowed net proceeds of $1.08 billion primarily to
finance a portion of our shipbuilding programs and other capital expenditures,
and for working capital purposes. Specifically, we issued 1.75% Notes and 3.75%
unsecured notes for gross proceeds of $1.12 billion, and we borrowed $335
million for the acquisition of the Island Princess. We also paid cash dividends
of $292 million in fiscal 2003.
Future Commitments and Funding Sources
At November 30, 2003, our contractual cash obligations, with initial or
remaining terms in excess of one year, and the effects such obligations are
expected to have on our liquidity and cash flow in future periods were as
follows (in millions):
Payments Due by Fiscal Year
---------------------------------------------------------------
Contractual Cash
Obligations (a) Total 2004 2005 2006 2007 2008 Thereafter
- ----------------- ------- ------ ------ ------ ------ ------ ----------
Long-term debt $ 7,310 $ 392 $1,263 $1,587 $ 999 $1,492 $1,577
Shipbuilding 4,994 2,982 1,237 775
Port and other
commitments 392 57 32 33 35 35 200
Operating leases 276 57 49 36 26 23 85
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations $12,972 $3,488 $2,581 $2,431 $1,060 $1,550 $1,862
======= ====== ====== ====== ====== ====== ======
(a) See Notes 7, 8, 9 and 14 in the accompanying financial statements for
additional information regarding our debt, shipbuilding and other
contractual cash obligations and commitments and our contingent
obligations.
At November 30, 2003, we had liquidity of $3.92 billion, which consisted
of $1.07 billion of cash and cash equivalents, $2.11 billion available for
borrowing under our $2.41 billion revolving credit facilities, and $736 million
under committed ship financing arrangements. Our revolving credit facilities
mature in September 2005 with respect to $710 million, and in May and June 2006
with respect to $1.70 billion. A key to our access to liquidity is the
maintenance of our strong credit ratings.
We believe that our liquidity, including cash and committed financings,
and cash flow from future operations will be sufficient to fund most of our
expected capital projects, debt service requirements, dividend payments, working
capital and other firm commitments. However, our forecasted cash flow from
future operations, as well as our credit ratings, may be adversely affected by
various factors, including, but not limited to, those factors noted under
"Cautionary Note Concerning Factors That May Affect Future Results." To the
extent that we are required, or choose, to fund future cash requirements,
including our future shipbuilding commitments, from sources other than as
discussed above, we believe that we will be able to secure such financing from
banks or through the offering of debt and/or equity securities in the public or
private markets. No assurance can be given that
80
our future operating cash flow will be sufficient to fund future obligations or
that we will be able to obtain additional financing, if necessary.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including
guarantee contracts, retained or contingent interests, certain derivative
instruments and variable interest entities, that either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
Other Matters
Market Risks
We are principally exposed to market risks from fluctuations in foreign
currency exchange rates, bunker fuel prices and interest rates. We seek to
minimize foreign currency and interest rate risks through our normal operating
and financing activities, including netting certain exposures to take advantage
of any natural offsets, through our long-term investment and debt portfolio
strategies and, when considered appropriate, through the use of derivative
financial instruments. The financial impacts of these hedging instruments are
generally offset by corresponding changes in the underlying exposures being
hedged. Our policy is to not use financial instruments for trading or other
speculative purposes.
Exposure to Foreign Currency Exchange Rates
One of our primary foreign currency exchange risks is related to our
outstanding commitments under ship construction contracts denominated in a
currency other than the functional currency of the cruise brand that is expected
to be operating the ship. These currency commitments are affected by
fluctuations in the value of the functional currency as compared to the currency
in which the shipbuilding contract is denominated. Foreign currency forward
contracts are generally used to manage this risk (see Notes 2, 8 and 12 in the
accompanying financial statements). Accordingly, increases and decreases in the
fair value of these foreign currency forward contracts offset changes in the
fair value of the foreign currency denominated ship construction commitments,
thus resulting in the elimination of such risk.
We have forward foreign currency contracts for seven of our euro
denominated shipbuilding contracts. At November 30, 2003, the fair value of
these forward contracts was an unrealized gain of $363 million which is
recorded, along with an offsetting $363 million fair value liability related to
our shipbuilding firm commitments, on our accompanying 2003 balance sheet. Based
upon a 10% strengthening or weakening of the U.S. dollar compared to the euro as
of November 30, 2003, assuming no changes in comparative interest rates, the
estimated fair value of these contracts would decrease or increase by $247
million, which would be offset by a decrease or increase of $247 million in the
U.S. dollar value of the related foreign currency ship construction commitments
resulting in no net dollar impact to us.
The cost of shipbuilding orders that we may place in the future for our
cruise lines who generate their cash flows in a currency that is different than
the shipyard's operating currency, generally the euro, is expected to be
affected by foreign currency exchange rate fluctuations. Given the recent
decline in the U.S. dollar relative to the euro, the U.S. dollar cost to order
new cruise ships at current exchange rates has increased significantly. We
currently have on order new cruise ships for delivery through 2006. Should the
U.S. dollar remain at current levels or decline further, this may affect our
ability to order new cruise ships for 2007 or later years.
In addition to the foreign currency denominated operations of our Costa
subsidiary, we have broadened our global presence as a result of Carnival plc's
foreign operations. Specifically, our expanded international business operations
through P&O Cruises, Ocean Village and Swan Hellenic in the UK and Aida in
Germany subject us to an increasing level of foreign currency exchange risk
related to the sterling and euro. These are the primary currencies for which we
have U.S. dollar exchange rate exposures. Accordingly, these foreign currency
exchange fluctuations against the dollar will affect our reported financial
results since the reporting currency for our consolidated financial statements
is the U.S. dollar and the functional currency for our international operations
is generally the local currency. Any weakening of the U.S. dollar against these
local functional currencies has the financial statement effect of increasing the
U.S. dollar values reported
81
for cruise revenues and cruise expenses in our consolidated financial
statements. Strengthening of the U.S. dollar has the opposite effect. We will
continue to monitor the effect of such exposures to determine if any additional
actions, such as the issuance of additional foreign currency denominated debt or
use of other financial instruments would be warranted to reduce such risk.
We consider our investments in foreign subsidiaries to be denominated in
relatively stable currencies and/or of a long-term nature. However, we partially
hedge these exposures by denominating our debt in our subsidiary's functional
currency (generally euros or sterling). Specifically, we have $815 million of
cross currency swaps, whereby we have converted U.S. dollar debt to euro and
sterling debt and euro debt to sterling debt, thus partially offsetting this
foreign currency exchange risk. At November 30, 2003, the fair value of these
cross currency swaps was a loss of $70 million, $39 million of which is recorded
in AOCI and offsets a portion of the gains recorded in AOCI upon translating
these foreign subsidiaries net assets into U.S. dollars. Based upon a 10%
hypothetical increase or decrease in the November 30, 2003 foreign currency
exchange rate, we estimate that these contracts fair values would increase or
decrease by $82 million, which would be offset by a decrease or increase of $82
million in the U.S. dollar value of our net investments.
Exposure to Bunker Fuel Prices
Other cruise ship operating expenses are impacted by changes in bunker
fuel prices. Fuel consumed over the past three fiscal years ranged from
approximately 5.5% in fiscal 2003 to 4.5% in fiscal 2002 and 4.2% in fiscal 2001
of our cruise revenues. We have typically not used financial instruments to
hedge our exposure to the bunker fuel price market risk.
Based upon a 10% hypothetical increase or decrease in the November 30,
2003 bunker fuel price, we estimate that our fiscal 2004 bunker fuel cost would
increase or decrease by approximately $45 million.
Exposure to Interest Rates
In order to limit our exposure to interest rate fluctuations, we have
entered into a substantial number of fixed rate debt instruments. We
continuously evaluate our debt portfolio, including interest rate swap
agreements, and make periodic adjustments to the mix of floating rate and fixed
rate debt based on our view of interest rate movements. Accordingly in 2003 and
2001, we entered into fixed to variable interest rate swap agreements, which
lowered our fiscal 2003, 2002 and 2001 interest costs and are also expected to
lower our fiscal 2004 interest costs. At November 30, 2003, 61% of the interest
cost on our debt was effectively fixed and 39% was variable, including the
effect of our interest rate swaps.
At November 30, 2003, our long-term debt had a carrying value of $7.31
billion. At November 30, 2003, our interest rate swap agreements effectively
changed $1.19 billion of fixed rate debt to Libor-based floating rate debt. In
addition, interest rate swaps at November 30, 2003 effectively changed $760
million of euribor floating rate debt to fixed rate debt. The fair value of our
long-term debt and interest rate swaps at November 30, 2003 was $7.69 billion.
Based upon a hypothetical 10% decrease or increase in the November 30, 2003
market interest rates, the fair value of our long-term debt and swaps would
increase or decrease by $128 million. In addition, based upon a hypothetical 10%
decrease or increase in our November 30, 2003 common stock price, the fair value
of our convertible notes would increase or decrease by approximately $97
million.
These hypothetical amounts are determined by considering the impact of the
hypothetical interest rates and common stock price on our existing long-term
debt and interest rate swaps. This analysis does not consider the effects of the
changes in the level of overall economic activity that could exist in such
environments or any relationships which may exist between interest rate and
stock price movements. Furthermore, since substantially all of our fixed rate
long-term debt cannot currently be called or prepaid and some of our variable
rate long-term debt is subject to interest rate swaps which effectively fix the
interest rate, it is unlikely we would be able to take any significant steps in
the short-term to mitigate our exposure in the unlikely event of a significant
decrease in market interest rates.
82
REPORTED GAAP RECONCILING INFORMATION
Gross and net revenue yields were computed as follows:
Years Ended November 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 5,039 $ 3,346 $ 3,530
Onboard and other 1,420 898 841
------------ ------------ ------------
Gross cruise revenues 6,459 4,244 4,371
Less cruise costs
Passenger tickets (1,021) (658) (813)
Onboard and other (229) (116) (116)
------------ ------------ ------------
Net cruise revenues $ 5,209 $ 3,470 $ 3,442
============ ============ ============
ALBDs(a) 33,309,785 21,435,828 20,685,123
============ ============ ============
Gross revenue yields (b) $ 193.91 $ 198.01 $ 211.33
============ ============ ============
Net revenue yields (c) $ 156.38 $ 161.91 $ 166.44
============ ============ ============
Gross and net cruise costs per ALBD were computed as follows:
Years Ended November 30,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 3,624 $ 2,222 $ 2,347
Cruise selling and
administrative expenses 896 577 584
------------ ------------ ------------
Gross cruise costs 4,520 2,799 2,931
Less cruise costs
Passenger tickets (1,021) (658) (813)
Onboard and other (229) (116) (116)
------------ ------------ ------------
Net cruise costs $ 3,270 $ 2,025 $ 2,002
============ ============ ============
ALBDs(a) 33,309,785 21,435,828 20,685,123
============ ============ ============
Gross cruise costs per ALBD (d) $ 135.69 $ 130.54 $ 141.66
============ ============ ============
Net cruise costs per ALBD (e) $ 98.16 $ 94.43 $ 96.76
============ ============ ============
83
PRO FORMA GAAP RECONCILING INFORMATION
Pro forma gross and net revenue yields, assuming that the DLC transaction
was completed and Carnival plc was consolidated for the full years noted below,
would have been computed as follows (f):
Years Ended November 30,
-------------------------------
2003 2002
------------ ------------
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 5,732 $ 5,128
Onboard and other 1,600 1,356
------------ ------------
Gross cruise revenues 7,332 6,484
Less cruise costs
Passenger tickets (1,227) (1,121)
Onboard and other (279) (240)
------------ ------------
Net cruise revenues $ 5,826 $ 5,123
============ ============
ALBDs (a) 37,554,709 31,962,000
============ ============
Gross revenue yields (b) $ 195.23 $ 202.85
============ ============
Net revenue yields (c) $ 155.11 $ 160.25
============ ============
Pro forma gross and net cruise costs per ALBD would have been computed as
follows (f):
Years Ended November 30,
-------------------------------
2003 2002
------------ ------------
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 4,222 $ 3,567
Cruise selling and
administrative expenses 1,054 912
------------ ------------
Gross cruise costs 5,276 4,479
Less cruise costs
Passenger tickets (1,227) (1,121)
Onboard and other (279) (240)
------------ ------------
Net cruise costs $ 3,770 $ 3,118
============ ============
ALBDs(a) 37,554,709 31,962,000
============ ============
Gross cruise costs per ALBD (d) $ 140.50 $ 140.15
============ ============
Net cruise costs per ALBD (e) $ 100.38 $ 97.55
============ ============
(a) Total passenger capacity for the period, assuming two passengers per
cabin, that we offer for sale, which is computed by multiplying passenger
capacity by revenue-producing ship operating days in the period.
(b) Gross cruise revenues divided by ALBDs.
(c) Net cruise revenues divided by ALBDs.
(d) Gross cruise costs divided by ALBDs.
(e) Net cruise costs divided by ALBDs.
(f) The pro forma information gives pro forma effect for the DLC transaction
between Carnival Corporation and Carnival plc, which was completed on
April 17, 2003, as if the DLC transaction had occurred on December 1,
2001. Management has prepared the pro forma information based upon the
companies' reported financial information and, accordingly, the above
information should be read in conjunction with the companies' financial
statements.
The DLC transaction has been accounted for as an acquisition of Carnival
plc by Carnival Corporation, using the purchase method of accounting. The
Carnival plc accounting policies have been conformed to Carnival
Corporation's policies. Carnival plc's reporting period has been changed
to the Carnival Corporation reporting period and the information presented
above covers the same periods of time for both companies.
The above pro forma information has not been adjusted to reflect any net
transaction benefits from the DLC transaction. In addition, it excludes
the costs related to the terminated Royal Caribbean transaction and the
completion of the DLC transaction with Carnival Corporation, which were
expensed by Carnival plc prior to April 17, 2003. The exclusion of these
nonrecurring costs is consistent with the requirements of Article 11 of
Regulation S-X. Finally, the pro forma information does not purport to
represent what the results of operations actually could have been if the
DLC transaction had occurred on December 1, 2001 or what those results
will be for any future periods.
The 2003 pro forma information is computed by adding four and one-half
months of Carnival plc's results of operations, adjusted for SFAS No. 141
acquisition accounting adjustments, to the reported Carnival Corporation &
plc results since the April 17, 2003 DLC transaction date. The 2002 pro
forma information is computed by adding Carnival plc's 2002 results,
adjusted for acquisition adjustments, to the 2002 Carnival Corporation
reported results. For additional information related to the pro forma
statements of operations see Note 3 in the accompanying financial
statements.
(g) We have not provided estimates of future gross revenue yields or gross
cruise costs per ALBD because we are unable to provide reconciliations of
forecasted net cruise revenues to forecasted gross cruise revenues or
forecasted net cruise costs to forecasted cruise operating expenses
without unreasonable effort. The reconciliations would require us to
forecast, with reasonable accuracy, the amount of air and other
transportation costs that our forecasted cruise passengers would elect to
purchase from us (the "air/sea mix"). Since the forecasting of future
air/sea mix involves several significant variables and the revenues from
the sale of air and other transportation approximate the costs of
providing that transportation, management focuses primarily on forecasts
of net cruise revenues and costs rather than gross cruise revenues and
costs. This does not impact, in any material respect, our ability to
forecast our future results, as any variation in the air/sea mix has no
material impact on our forecasted net cruise revenues or forecasted net
cruise costs.
84
Selected Financial Data
The selected consolidated financial data presented below for fiscal 1999
through 2003 and as of the end of each such year, are derived from our audited
financial statements and should be read in conjunction with those financial
statements and the related notes.
Years Ended November 30,
------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(in millions, except per share and other operating data)
Statement of Operations
and Cash Flow Data (a)(b)
Revenues(c) $ 6,718 $ 4,383 $ 4,549 $ 3,791 $ 3,509
Operating income $ 1,383 $ 1,042 $ 892 $ 983 $ 1,020
Net income(d) $ 1,194 $ 1,016(e) $ 926(e) $ 965 $ 1,027
Earnings per share (d)
Basic $ 1.66 $ 1.73 $ 1.58 $ 1.61 $ 1.68
Diluted $ 1.66 $ 1.73 $ 1.58 $ 1.60 $ 1.66
Dividends declared
per share $ 0.440 $ 0.420 $ 0.420 $ 0.420 $ 0.375
Cash from operations $ 1,933 $ 1,469 $ 1,239 $ 1,280 $ 1,330
Capital expenditures $ 2,516 $ 1,986 $ 827 $ 1,003 $ 873
Other Operating Data(a)(b)
Available lower berth days (f)
North America 24,388,144 17,037,860 16,536,756 15,033,370 13,505,014
Europe and Australia 8,921,641 4,397,968 4,148,367 855,034 831,466
----------- ----------- ----------- ----------- -----------
Total 33,309,785 21,435,828 20,685,123 15,888,404 14,336,480
=========== =========== =========== =========== ===========
Passengers carried 5,037,553 3,549,019 3,385,280 2,669,153 2,365,720
Occupancy percentages (g) 103.4% 105.2% 104.7% 105.4% 104.3%
As of November 30,
------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(in millions, except percentages)
Balance Sheet and Other
Data (a)(b)
Total assets $ 24,491(h) $ 12,335(h) $ 11,564(h) $ 9,831 $ 8,286
Long-term debt, excluding
current portion $ 6,918 $ 3,014 $ 2,955 $ 2,099 $ 868
Total shareholders'
equity $ 13,793 $ 7,418 $ 6,591 $ 5,871 $ 5,931
Debt to capital (i) 34.9% 29.9% 31.1% 28.6% 15.3%
85
(a) Includes the results of Carnival plc since April 17, 2003. Accordingly,
the information for 2003 is not comparable to the prior periods.
(b) From June 1997 through September 28, 2000, we owned 50% of Costa. On
September 29, 2000, we completed the acquisition of the remaining 50%
interest in Costa. We accounted for this transaction using the purchase
accounting method. Prior to the fiscal 2000 acquisition, we accounted for
our 50% interest in Costa using the equity method. Commencing in fiscal
2001, Costa's results of operations have been consolidated in the same
manner as our other wholly-owned subsidiaries. Our November 30, 2000 and
subsequent consolidated balance sheets include Costa's balance sheet. All
statistical information prior to 2001 does not include Costa.
(c) Reclassifications have been made to prior period amounts to conform to the
current period presentation.
(d) Effective December 1, 2001, we adopted SFAS No. 142, which required us to
stop amortizing goodwill as of December 1, 2001, and requires an annual,
or when events or circumstances dictate a more frequent, impairment review
of goodwill. If goodwill had not been recorded for periods prior to
December 1, 2001, our adjusted net income and adjusted basic and diluted
earnings per share would have been as follows (in millions, except per
share data):
Years Ended November 30,
--------------------------
2001 2000 1999
----- ----- ------
Net income $ 926 $ 965 $1,027
Goodwill amortization 26 23 21
----- ----- ------
Adjusted net income $ 952 $ 988 $1,048
===== ===== ======
Adjusted earnings per share
Basic $1.63 $1.65 $ 1.71
===== ===== ======
Diluted $1.62 $1.64 $ 1.70
===== ===== ======
(e) Our net income for fiscal 2002 and 2001 includes an impairment charge of
$20 million and $140 million, respectively, and fiscal 2001 includes a
nonoperating net gain of $101 million from the sale of our investment in
Airtours plc. In addition, fiscal 2002 includes a $51 million income tax
benefit as a result of an Italian investment incentive.
(f) Total annual passenger capacity for the period, assuming two passengers
per cabin, that we offered for sale, which is computed by multiplying
passenger capacity by revenue- producing ship operating days in the
period. North America brands in 2003 include CCL, Holland America Line,
Princess, Seabourn and Windstar. Europe brands in 2003 include AIDA,
A'ROSA, Costa, Cunard, Ocean Village, P&O Cruises and Swan Hellenic.
(g) In accordance with cruise industry practice, occupancy percentage is
calculated using a denominator of two passengers per cabin even though
some cabins can accommodate three or more passengers. The percentages in
excess of 100% indicate that more than two passengers occupied some
cabins.
(h) Effective December 1, 2000, we adopted SFAS No. 133, which requires that
all derivative instruments be recorded on our balance sheet. At November
30, 2003, total assets included $410 million of derivative contract fair
values. Total assets at November 30, 2002 and 2001 included $187 million
and $578 million, respectively, of fair value of hedged firm commitments.
See Note 2 in the accompanying financial statements.
(i) Percentage of total debt to the sum of total debt and shareholders'
equity.
Market Price for Common Stock and Ordinary Shares
Carnival Corporation's common stock, together with paired trust shares of
beneficial interest in the P&O Princess Special Voting Trust (which holds a
Special Voting Share of Carnival plc), is traded on the NYSE under the symbol
"CCL". Effective April 22, 2003, Carnival plc's ordinary shares trade on the
London Stock Exchange ("LSE") under the symbol "CCL" (formerly traded under
"POC"). Effective April 21, 2003, Carnival plc's American Depositary Shares or
ADSs, each one of which represents one Carnival plc ordinary share, are traded
on the NYSE under the symbol "CUK" (formerly traded under "POC"). The depository
for the ADSs is JPMorgan Chase Bank. The high and low stock sales price for the
periods indicated were as follows:
86
Carnival Corporation
High Low
------ ------
Fiscal 2003
Fourth Quarter $35.99 $32.76
Third Quarter $36.04 $30.50
Second Quarter $30.74 $20.34
First Quarter $28.15 $21.86
Fiscal 2002
Fourth Quarter $29.78 $22.07
Third Quarter $30.90 $22.81
Second Quarter $34.64 $27.40
First Quarter $28.62 $25.05
Carnival plc (a)
Price per Ordinary
Share (GBP) Price per ADS ($)
---------------- -----------------
High Low High Low
----- ----- ------ ------
Fiscal 2003
Fourth Quarter 21.80 18.72 $35.71 $31.21
Third Quarter 21.80 16.50 $33.98 $27.92
Second Quarter 17.41 11.24 $28.50 $18.54
First Quarter 16.82 11.97 $26.22 $19.97
Fiscal 2002
Fourth Quarter 17.88 12.32 $27.92 $20.72
Third Quarter 15.06 11.15 $23.13 $18.14
Second Quarter 16.64 12.98 $23.54 $19.35
First Quarter 13.85 11.75 $20.89 $17.06
(a) Per share price has been adjusted for the effect of the
consolidation of each 3.3289 existing shares into one share effected
in connection with the DLC transaction.
As of January 29, 2004, there were approximately 4,897 holders of record
of Carnival Corporation and 63,801 holders of record of Carnival plc ordinary
shares and 64 holders of record of Carnival plc ADSs.
Since the completion of the DLC transaction, Carnival plc dividends per
share are the same as Carnival Corporation's per share dividends and are
declared in U.S. dollars. Carnival plc UK ordinary shareholders can elect to
receive these dividends either in U.S. dollars or Sterling, based upon a current
U.S. dollar to Sterling exchange rate announced prior to the dividend payment
date.
87
Selected Quarterly Financial Data (Unaudited)
Our revenue from the sale of passenger tickets is seasonal, with our third
quarter being the strongest. Historically, demand for cruises has been greatest
during our third fiscal quarter, which includes the North American summer
months. The consolidation of Carnival plc has caused our quarterly results to be
slightly more seasonal than we had previously experienced, as their business is
more seasonal. This higher demand during the third quarter results in higher net
revenue yields and, accordingly, the largest share of our net income is earned
during this period. Revenues from our Holland America Tours and Princess Tours
units are highly seasonal, with a vast majority of those revenues generated
during the late spring and summer months in conjunction with the Alaska cruise
season.
Quarterly financial results for fiscal 2003 were as follows:
Quarters Ended
---------------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $1,035 $1,342 $2,523 $1,818
Operating income $ 132 $ 168 $ 809 $ 274
Net income $ 127(a) $ 128(b) $ 734 $ 205
Earnings per share
Basic $ 0.22 $ 0.19 $ 0.92 $ 0.26
Diluted $ 0.22 $ 0.19 $ 0.90 $ 0.26
Dividends declared
per share $0.105 $0.105 $0.105 $0.125
(a) Included $19 million of income from net insurance proceeds.
(b) Included $16 million of expenses related to litigation and other charges
associated with the DLC transaction.
Quarterly financial results for fiscal 2002 were as follows:
Quarters Ended
---------------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues(a) $ 910 $ 993 $1,440 $1,040
Operating income $ 146 $ 220 $ 488 $ 188
Net income $ 130 $ 194 $ 501(b) $ 191(b)
Earnings per share
Basic $ 0.22 $ 0.33 $ 0.85 $ 0.33
Diluted $ 0.22 $ 0.33 $ 0.85 $ 0.33
Dividends declared
per share $0.105 $0.105 $0.105 $0.105
(a) Reclassifications have been made to these amounts to conform to the 2003
presentation.
(b) Included a $17 million and a $34 million income tax benefit in the August
31 and November 30 quarters, respectively, from Costa, resulting from an
Italian investment incentive law. In addition, the August 31 quarter
included a $20 million impairment charge.
88
Glossary of Terms
The attached financial statements include certain U.S. accounting terminology,
which may not be familiar to a UK reader. The following glossary is provided to
assist in interpreting these financial statements:
UK Term U.S. Term
Acquisition accounting Purchase method of accounting
Associate/Joint venture Equity investment
Called up share capital Common stock at par value
Creditors Payables
Debtors Receivables
Finance lease Capital lease
Financial year Fiscal year
Gearing Debt/Capital (debt plus equity)
Interest payable Interest expense
Interest receivable Interest income
Profit Income
Profit and loss account Statement of operations
Profit and loss account reserves Retained earnings
Profit for the financial year Net income
Provisions Liabilities or reserves
Share premium Additional paid-in capital
Shareholders' funds Shareholders' equity
Stocks Inventories
Tangible fixed assets Property, plant and equipment
Turnover Revenue
89