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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission File Number: 1-9610 Commission File Number: 1-15136
CARNIVAL CORPORATION CARNIVAL PLC
-------------------- ------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
REPUBLIC OF PANAMA ENGLAND AND WALES
------------------ -----------------
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
59-1562976 NONE
---------- ----
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
3655 N.W. 87TH AVENUE CARNIVAL HOUSE, 5 GAINSFORD STREET,
MIAMI, FLORIDA 33178-2428 LONDON SE1 2NE, UNITED KINGDOM
-------------- ---------- ------------------------------
(Address of principal (Address of principal
executive offices) executive offices)
(Zip code) (Zip code)
(305) 599-2600 011 44 20 7940 5381
- ------------------------------- -------------------------------
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
NONE NONE
- ---------------------------- -----------------------------
(Former name, former address (Former name, former address
and former fiscal year, if and former fiscal year, if
changed since last report.) changed since last report.)
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrants are accelerated filers
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
At October 10, 2003, Carnival Corporation At October 10, 2003, Carnival plc
had outstanding 629,913,044 shares of had outstanding 209,945,707 ordinary
common stock, $.01 par value. shares, $1.66 stated value.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except earnings per share)
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
----------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Cruise
Passenger tickets $3,671,039 $2,552,846 $1,863,185 $1,089,331
Onboard and other 1,003,125 665,635 466,468 252,782
Other 227,087 125,546 194,087 98,474
---------- ---------- ---------- ----------
4,901,251 3,344,027 2,523,740 1,440,587
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Operating
Cruise
Passenger tickets 747,323 508,569 361,268 197,426
Onboard and other 154,806 85,335 82,531 35,891
Payroll and related 520,009 339,730 218,277 116,497
Food 275,636 189,456 118,165 68,691
Other ship operating 864,360 527,398 368,697 199,657
Other 164,932 96,530 130,707 67,506
---------- ---------- ---------- ----------
Total 2,727,066 1,747,018 1,279,645 685,668
Selling and administrative 648,312 440,931 259,582 147,407
Depreciation and amortization 416,990 281,431 175,782 99,088
Impairment charge 20,000 20,000
---------- ---------- ---------- ----------
3,792,368 2,489,380 1,715,009 952,163
---------- ---------- ---------- ----------
OPERATING INCOME 1,108,883 854,647 808,731 488,424
NONOPERATING (EXPENSE) INCOME
Interest income 20,042 25,168 6,717 10,627
Interest expense, net of
capitalized interest (128,660) (86,431) (57,754) (28,839)
Other income (expense), net 8,506 (5,251) 4,934 1,879
---------- ---------- ---------- ----------
(100,112) (66,514) (46,103) (16,333)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,008,771 788,133 762,628 472,091
INCOME TAX (EXPENSE) BENEFIT, NET (19,836) 36,472 (28,367) 28,673
---------- ---------- ---------- ----------
NET INCOME $ 988,935 $ 824,605 $ 734,261 $ 500,764
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $1.43 $1.41 $0.92 $0.85
===== ===== ===== =====
Diluted $1.42 $1.40 $0.90 $0.85
===== ===== ===== =====
DIVIDENDS PER SHARE $0.315 $0.315 $0.105 $0.105
====== ====== ====== ======
1
The accompanying notes are an integral part of these consolidated financial
statements.
2
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par/stated values)
AUGUST 31, NOVEMBER 30,
2003 2002
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 988,008 $ 666,700
Short-term investments 60,974 39,005
Accounts receivable, net 347,188 108,327
Inventories 159,644 91,310
Prepaid expenses and other 240,491 148,420
Fair value of derivative contracts 114,083
Fair value of hedged firm commitments 78,390
----------- -----------
Total current assets 1,910,388 1,132,152
----------- -----------
PROPERTY AND EQUIPMENT, NET 17,508,139 10,115,404
GOODWILL 3,615,858 681,056
OTHER ASSETS 361,274 297,175
FAIR VALUE OF HEDGED FIRM COMMITMENTS 1,356 109,061
----------- -----------
$23,397,015 $12,334,848
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 65,100
Current portion of long-term debt 299,959 $ 154,633
Accounts payable 639,088 268,687
Accrued liabilities 482,546 290,391
Customer deposits 1,201,078 770,637
Dividends payable 83,767 61,612
Fair value of derivative contracts 3,961 73,846
Fair value of hedged firm commitments 113,398
----------- -----------
Total current liabilities 2,888,897 1,619,806
----------- -----------
LONG-TERM DEBT 6,636,160 3,013,758
DEFERRED INCOME AND OTHER LONG-TERM LIABILITIES 277,544 170,814
FAIR VALUE OF DERIVATIVE CONTRACTS 25,670 112,567
COMMITMENTS AND CONTINGENCIES (Notes 2, 6 and 7)
SHAREHOLDERS' EQUITY
Common stock of Carnival Corporation; $.01 par
value; 1,960,000 shares at 2003 and 960,000 at 2002
authorized; 629,828 shares at 2003 and 586,788 shares
at 2002 issued and outstanding 6,298 5,868
Ordinary shares of Carnival plc; $1.66 stated value;
225,300 shares authorized; 209,830 shares issued 348,317
Additional paid-in capital 7,105,379 1,089,125
Retained earnings 7,085,427 6,325,850
Unearned stock compensation (20,474) (11,181)
Accumulated other comprehensive income 102,447 8,241
Treasury stock, 41,881 shares of Carnival plc at cost (1,058,650)
----------- -----------
Total shareholders' equity 13,568,744 7,417,903
----------- -----------
$23,397,015 $12,334,848
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED AUGUST 31,
----------------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 988,935 $ 824,605
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 416,990 281,431
Impairment charge 20,000
Accretion of original issue discount 15,034 14,469
Other 2,632 8,761
Changes in operating assets and liabilities,
excluding business acquired
(Increase) decrease in
Receivables (88,916) (29,618)
Inventories (8,648) 1,908
Prepaid expenses and other 30,786 (57,072)
Increase (decrease) in
Accounts payable 60,856 38,066
Accrued and other liabilities (8,419) (49,843)
Customer deposits (13,820) 115,720
---------- ----------
Net cash provided by operating activities 1,395,430 1,168,427
---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment (1,896,490) (1,022,464)
Cash acquired from (expended for) the acquisition of
Carnival plc, net 141,429 (27,834)
Proceeds from retirement of property and equipment 50,919 4,071
Purchase of short-term investments, net (17,898) (6,437)
Other, net (8,318) (16,343)
---------- ----------
Net cash used in investing activities (1,730,358) (1,069,007)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,477,817 117,902
Principal repayments of long-term debt (662,675) (154,082)
Dividends paid (207,210) (184,712)
Proceeds from short-term borrowings, net 65,100
Proceeds from issuance of common stock and
ordinary shares, net 39,556 6,927
Other (12,446) 101
---------- ----------
Net cash provided by (used in)
financing activities 700,142 (213,864)
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents (43,906) (6,414)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 321,308 (120,858)
Cash and cash equivalents at beginning
of period 666,700 1,421,300
---------- ----------
Cash and cash equivalents at end of period $ 988,008 $1,300,442
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
DESCRIPTION OF BUSINESS
Carnival Corporation is a Panamanian corporation and Carnival plc
(formerly known as P&O Princess Cruises plc) is incorporated in England and
Wales and, along with their consolidated subsidiaries, are referred to
collectively in these consolidated financial statements and elsewhere in this
joint Quarterly Report on Form 10-Q as "Carnival Corporation & plc," "our,"
"us," and "we."
We are a global cruise company and one of the largest vacation
companies in the world. 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 (1) MARKET
------ --------------- ------------ ------
Carnival Cruise
Lines ("CCL") (2) 19 41,322 North America
Princess Cruises
("Princess") (3)(4) 11 19,880 North America
Holland America Line
("Holland America") (4) 12 16,342 North America
Costa Cruises ("Costa") 9 12,868 Europe
P&O Cruises 4 7,730 United Kingdom
AIDA (5) 3 3,730 Germany
Cunard Line ("Cunard")(6) 2 2,458 United Kingdom/
North America
Ocean Village 1 1,610 United Kingdom
A'ROSA (5) 1 1,590 Germany
P&O Cruises Australia (2)(3) 1 1,200 Australia
Swan Hellenic 1 676 United Kingdom
Seabourn Cruise Line
("Seabourn") 3 624 North America
Windstar Cruises
("Windstar") 3 604 North America
-- -------
70 110,634
== =======
(1) In accordance with the cruise industry practice, passenger capacity is
calculated based on two passengers per cabin even though some cabins can
accommodate three or more passengers.
(2) CCL includes the 1,486-passenger Jubilee, which we expect to transfer to
P&O Cruises Australia in the fall of 2004 and rename the Pacific Sun.
(3) One ship, the Pacific Princess, which is only included in Princess'
capacity, operates on a split deployment between Princess and P&O Cruises
Australia.
(4) Holland America and Princess also operate the leading tour companies in
Alaska and the Canadian Yukon, Holland America Tours and Princess Tours,
respectively, that primarily complement their cruise operations.
(5) A'ROSA includes the 1,590-passenger A'ROSA Blu, which we expect to transfer
to AIDA in the spring of 2004 and rename the AIDA Blu. The A'ROSA brand
name and its three river boats, which are not included above, are expected
to be sold in the fourth quarter of 2004.
(6) Cunard includes the Caronia, which was sold in May 2003 and is chartered
back for use by Cunard until November 2004.
BASIS OF PRESENTATION
5
The accompanying consolidated balance sheet at August 31, 2003, the
consolidated statements of operations for the nine and three months ended August
31, 2003 and 2002 and the consolidated statements of cash flows for the nine
months ended August 31, 2003 and 2002 are unaudited and, in the opinion of our
management, contain all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation. Our consolidated financial
statements include the consolidated results of operations of Carnival
Corporation for the entire nine and three month periods and Carnival plc's
consolidated results of operations since April 17, 2003 (see Note 2). Our
interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the related notes included in the
Carnival Corporation 2002 Annual Report on Form 10-K and the Carnival plc 2002
Annual Report on Form 20-F. Our operations are seasonal and results for interim
periods are not necessarily indicative of the results for the entire year.
Reclassifications have been made to prior period amounts to conform to the
current period presentation.
Commencing with this joint Quarterly Report on Form 10-Q, 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. Our ship
operating expenses are largely fixed once our ship capacity levels are
determined.
NOTE 2 - DUAL LISTED COMPANY ("DLC") TRANSACTION
On April 17, 2003, Carnival Corporation and Carnival plc completed a
DLC transaction. 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, both companies
operate as if they were a single economic enterprise. 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 plc and Carnival
Corporation 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. In addition, Carnival
6
Corporation and Carnival plc may agree that the Carnival Corporation deed of
guarantee will apply to any other indebtedness or obligations of Carnival plc,
whether incurred before or after the closing of the DLC transaction. The terms
of Carnival plc's deed of guarantee are identical to those of Carnival
Corporation's. 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 expect to enter into such 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 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 4l.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 United Kingdom ("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 UK,
Germany, Australia and the United States ("U.S."). 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 Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations." 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
7
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 $5.37 billion, computed as described
above, has been preliminarily allocated to the assets and liabilities of
Carnival plc as follows (in millions):
8
Ships $5,159
Ships under construction 406
Other tangible assets 712
Goodwill 2,908
Debt (2,879)
Other liabilities (941)
------
$5,365
======
We have engaged an appraisal firm to assist us in establishing the fair
value of Carnival plc's cruise ships and amortizable and non-amortizable
intangible assets and liabilities. However, based on the information currently
available, it is not expected that the amount of separately identifiable
amortizable intangible assets will be material to the Carnival Corporation & plc
financial statements. Until the valuation work is completed, we will continue to
assume that the fair values of ships in use and under construction are the same
as their net book value at the date of acquisition. However, as noted above, we
are having an appraisal performed of these cruise ships, and we believe it is
possible that the fair value of some of these ships could be less than their
carrying value, thus reducing depreciation expense. No assurance can be given
that the preliminary fair value estimates noted above will not be materially
changed as a result of these valuations or other additional information being
obtained and, accordingly, the amounts preliminarily allocated to Carnival plc's
opening balance sheet assets and liabilities may change, which would also change
the pro forma information provided below.
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' historical
financial information and, accordingly, the pro forma information should be read
in conjunction with the companies' historical 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 plc's 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 below covers the same periods of time for both companies.
The pro forma information presented below has been prepared as if the
DLC transaction had occurred on December 1, 2001, rather than April 17, 2003,
and has not been adjusted to reflect any net transaction benefits. In addition,
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.
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31, 2002
---------------- ---------------------
2003 2002
---- ----
(in millions, except earnings per share)
Pro forma revenues $5,780 $5,170 $2,259
====== ====== ======
Pro forma net income (a)(b) $ 956 $1,106 $ 710
====== ====== ======
Pro forma earnings per share
Basic $1.20 $1.39 $ 0.89
===== ===== ======
Diluted $1.19 $1.38 $ 0.89
===== ===== ======
Pro forma weighted-average
shares outstanding
Basic 796.0 794.7 794.9
===== ===== =====
Diluted 805.6 799.6 799.4
===== ===== =====
9
(a) In accordance with SFAS No. 141, the above pro forma net income includes
Carnival plc's 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. If the above pro
forma net income excluded these transaction costs, as required by Article
11 of the Securities and Exchange Commission Regulation S-X and as reported
by us in our joint Current Report on Form 8-K, dated September 18, 2003,
then the pro forma net income would have been $1.00 billion and $1.13
billion for the nine months ended August 31, 2003 and 2002, respectively,
and $721 million for the three months ended August 31, 2002.
(b) The excess of purchase price over net assets acquired from Carnival plc
through the DLC transaction is primarily estimated to include the value
attributed to Carnival plc's goodwill and trademarks. Management believes
that these trademarks have indefinite lives and, accordingly, based on SFAS
No. 142, "Goodwill and Other Intangible Assets," no adjustment for pro
forma amortization is required. It is not possible at this time to
reasonably estimate the separate amounts attributable to identifiable
intangible assets or goodwill since the measurement of these assets
requires the expertise of the appraisal firm which has not yet completed
its valuation work. Accordingly, the entire amount of the excess of the
purchase price has currently been allocated to goodwill in the accompanying
August 31, 2003 balance sheet, but is expected to be allocated between
goodwill and other identifiable intangible assets such as trademarks based
primarily on the appraisal firm's valuation. Since it is expected that the
material intangibles that will be identified and valued will have
indefinite lives, no material impact on the statement of operations is
expected as a result of this presentation on the Carnival Corporation & plc
balance sheet, as neither goodwill nor these indefinite lived intangibles
are amortized under SFAS No. 142.
NOTE 3 - STOCK-BASED COMPENSATION
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, 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. As recommended by SFAS No. 123, the
fair values of options were estimated using the Black-Scholes option-pricing
model. 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 been as follows (in thousands,
except per share amounts):
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $988,935 $824,605 $734,261 $500,764
Stock-based compensation
expense included in
net income, as reported 4,694 3,869 1,565 1,292
Total stock-based compensation
expense determined under
the fair value-based
method for all awards (26,870) (22,489) (9,508) (7,499)
-------- -------- -------- --------
Adjusted net income for basic
earnings per share 966,759 805,985 726,318 494,557
Interest on zero-coupon notes 5,299 5,299
-------- -------- -------- --------
Adjusted net income for diluted
earnings per share $972,058 $805,985 $731,617 $494,557
======== ======== ======== ========
Earnings per share
10
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Basic
As reported $ 1.43 $ 1.41 $ 0.92 $ 0.85
Adjusted $ 1.40 $ 1.37 $ 0.91 $ 0.84
Diluted
As reported $ 1.42 $ 1.40 $ 0.90 $ 0.85
Adjusted $ 1.39 $ 1.37 $ 0.89 $ 0.84
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.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
AUGUST 31, NOVEMBER 30,
2003 2002
---- ----
Ships (a) $17,857,361 $10,665,958
Ships under construction 998,969 712,447
----------- -----------
18,856,330 11,378,405
Land, buildings and improvements,
and port facilities 483,731 314,448
Transportation equipment and other 543,495 409,310
----------- -----------
Total property and equipment 19,883,556 12,102,163
Less accumulated depreciation and
amortization (2,375,417) (1,986,759)
----------- -----------
$17,508,139 $10,115,404
=========== ===========
(a) At August 31, 2003, 8 ships with an aggregate net book value of $2.38
billion were pledged as collateral pursuant to mortgages related to $1.04
billion of debt and a $469 million contingent obligation (see Notes 5 and
7). During the quarter ended August 31, 2003, $1.04 billion of ship
collateral, which was pledged against $675 million of Carnival plc debt was
released as collateral in exchange for revising the maturity date of this
debt and providing a Carnival Corporation guarantee (see Note 5).
At August 31, 2003, ship costs included a preliminarily estimated fair
value of approximately $5.56 billion for Carnival plc ships, which were acquired
on April 17, 2003. As previously noted, this estimate will be adjusted to a
final estimated fair value when the appraisals of these cruise ships are
completed (see Note 2).
Capitalized interest, primarily on our ships under construction,
amounted to $38 million and $25 million for the nine months ended August 31,
2003 and 2002, respectively, and $16 million and $9 million for the three months
ended August 31, 2003 and 2002, respectively.
11
NOTE 5 - DEBT
Short-term borrowings consisted of unsecured fixed rate notes, bearing
interest at libor plus 0.15% (1.30% weighted-average interest rate at August 31,
2003), payable to a bank through November 2003.
Long-term debt consisted of the following (in thousands):
AUGUST 31, 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 August 31, 2003),
due through 2015 (b) $ 629,596
Euro floating rate note, collateralized by one
ship, bearing interest at euribor plus 0.5% (2.73%
at August 31, 2003 and 4.0% at November 30, 2002),
due through 2008 106,446 $ 118,727
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through 2012 178,211
Capitalized lease obligations, collateralized by
two ships, implicit interest at 3.66%, due
through 2005 114,754
Other 18,971
----------- ----------
1,047,978 118,727
UNSECURED
Fixed rate notes, bearing interest at 4.4% to 8.2%,
due through 2028 (b)(c) 1,692,631 856,680
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 August 31,
2003 and November 30, 2002, respectively), due
through 2008 (b)(d) 1,028,377 570,187
Euro revolving credit facilities, bearing interest
at euribor plus 0.53% and euro libor plus 0.98%
(2.7% to 3.2% and 3.6% at August 31, 2003 and
November 30, 2002, respectively), due through
2006 (b) 484,322 110,190
Sterling fixed rate notes, bearing interest at 6.4%,
due in 2012 (b) 331,730
Euro fixed rate notes, bearing interest at 5.57%,
due in 2006 325,818 297,195
Floating rate notes, bearing interest at libor plus
1.29% and libor plus 1.33% (2.45% and 2.67%
at August 31, 2003), due through 2008 (b) 271,049
Revolving credit facility, bearing interest at
libor plus 0.17% (1.6% at November 30, 2002),
due through 2006 50,000
Other 43,404 44,468
Convertible notes, bearing interest at 2%, due in
2021, with first put option in 2005 600,000 600,000
Zero-coupon convertible notes, net of discount,
with a face value of $1.05 billion, due in 2021,
with first put option in 2006 (e) 535,734 520,944
Convertible notes, net of discount, with a face
value of $889 million, due in 2033, with first
put option in 2008 (f) 575,076
----------
5,888,141 3,049,664
---------- ----------
6,936,119 3,168,391
Less portion due within one year (299,959) (154,633)
---------- ----------
12
AUGUST 31, NOVEMBER 30,
2003(a) 2002(a)
---- ----
$6,636,160 $3,013,758
========== ==========
13
(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.
(b) At August 31, 2003, all of Carnival plc's $1.17 billion of debt was
unconditionally guaranteed by P&O Princess Cruises International Limited
("POPCIL"), a 100% direct wholly-owned subsidiary of Carnival plc. POPCIL's
2002 consolidated financial statements are included in its Registration
Statement on Form F-3, filed with the Securities and Exchange Commission on
June 19, 2003. 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 indebtedness and related
obligations that Carnival Corporation and Carnival plc agreed to guarantee
under their deeds of guarantee.
Finally, in exchange for certain amendments to Carnival plc's consolidated
indebtedness, which was outstanding prior to April 17, 2003, Carnival
Corporation has guaranteed $2.03 billion of the Carnival plc
pre-acquisition consolidated indebtedness outstanding at August 31, 2003.
(c) We have entered into interest rate swap agreements, which mature through
2010, and effectively converted $594 million ($225 million at November 30,
2002) of this fixed rate debt to floating rate debt.
(d) Euro floating rate notes in the amount of $701 million ($278 million at
November 30, 2002) have been swapped into euro fixed rate notes through
2008.
(e) As of the end of the 2003 third quarter, Carnival Corporation's zero-coupon
notes became convertible into Carnival Corporation common stock for the
2003 fourth quarter as a result of Carnival Corporation's common stock
achieving its target conversion trigger price per share of $33.77 for the
requisite period of time (see Note 10).
(f) These convertible notes, issued on April 29, 2003, are convertible into a
maximum of 20.9 million shares of Carnival Corporation common stock and are
guaranteed by Carnival plc and POPCIL. These notes 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, the $63.73 per share conversion
trigger price increases each quarter based on an annual rate of 1.75%,
until maturity. In addition, holders may also surrender the notes for
conversion if they have been called for redemption or, for other specified
occurrences, including the credit rating assigned to the 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 these notes were not met during the third
fiscal quarter of 2003.
These notes bear interest at 1.132% per year on the principal amount at
maturity, payable in cash semi-annually in arrears, commencing October 29,
2003 through April 29, 2008. Effective April 30, 2008, these notes no
longer require a cash interest payment, but interest will accrete on the
principal amount of the notes at a semi-annual bond equivalent rate of
1.75% per year.
At August 31, 2003, we were in compliance with all of our debt covenants.
At August 31, 2003, the scheduled annual maturities of our long-term debt
was as follows (in thousands):
FISCAL
------
Remaining three months of 2003 $ 165,078
2004 259,342
2005 1,568,250(a)
14
FISCAL
------
2006 1,498,151(a)
2007 442,235
Thereafter 3,003,063(a)
---------
$6,936,119
==========
(a) Includes $600 million of our 2% convertible notes in 2005, $536 million of
our zero-coupon convertible notes in 2006, and $575 million of our
convertible notes in 2008, based in each case on the date of the
noteholders' first put option.
NOTE 6 - COMMITMENTS
SHIP COMMITMENTS
A description of our ships under contract for construction at August
31, 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 2,670 $ 535
Caribbean Princess 4/04 Fincantieri(c) 3,110 500
Sapphire Princess 5/04 Mitsubishi 2,670 535
Newbuild 6/06 Fincantieri 3,110 500
------ -----
Total Princess 11,560 2,070(d)
------ -----
CCL
Carnival Miracle 2/04 Masa-Yards (c) 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
------ -----
COSTA
Costa Fortuna 11/03 Fincantieri(e) 2,716 470
Costa Magica 11/04 Fincantieri(e) 2,716 500
------ -----
Total Costa 5,432 970
------ -----
CUNARD
Queen Mary 2 1/04 Chantiers de
l'Atlantique(c) 2,620 780
Queen Victoria 4/05 Fincantieri (c) 1,968 410
------ -----
Total Cunard 4,588 1,190
------ -----
HOLLAND AMERICA
Westerdam 4/04 Fincantieri(c) 1,848 410
Newbuild 2/06 Fincantieri(c) 1,848 410
------ -----
Total Holland America 3,696 820
------ -----
A'ROSA (RIVER BOAT)
Newbuild (f) 4/04 Meyer Werft 200 20
------ ------
Total 33,548 $6,415
====== ======
(a) The expected service date is the date 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.
(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 estimated fair value of these contracts are being evaluated by an
appraisal firm as part of our accounting for the acquisition of Carnival
plc and, accordingly, we believe the amounts that ultimately are recorded
on our balance sheet for these ships may be lower than their estimated
total cost (see Note 2).
(e) These construction contracts are denominated in euros, which is Costa's
functional currency. The estimated total costs have been translated into
U.S.
15
dollars using the August 31, 2003 exchange rate.
(f) We have entered into a letter of intent to sell the A'ROSA river boat
business, including this contractual commitment.
In connection with our ships under contract for construction, we have
paid $999 million through August 31, 2003 and anticipate paying $2.97 billion
during the twelve months ending August 31, 2004 and $2.45 billion thereafter.
16
OPERATING LEASES
At August 31, 2003, minimum annual rentals for our operating leases, with
initial or remaining terms in excess of one year were approximately as follows
(in thousands):
FISCAL
Remaining three months of 2003 $ 10,000
2004 36,000
2005 31,000
2006 21,000
2007 16,000
Thereafter 82,000
--------
$196,000
========
PORT FACILITIES AND OTHER
At August 31, 2003 we had commitments through 2027, 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 approximately as
follows (in thousands):
FISCAL
Remaining three months of 2003 $ 16,000
2004 46,000
2005 32,000
2006 33,000
2007 34,000
Thereafter 185,000
--------
$346,000
========
NOTE 7 - 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
Carnival Corporation wholly-owned subsidiary, received a grand jury subpoena
requesting that it produce documents and records relating to the air emissions
from Holland America 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'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 documents, which Holland America has produced.
Holland America is also complying with a subpoena for additional documents. If
the investigation results in charges being
17
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 outcome of these
matters cannot be determined at this time. However, if Holland America 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. In the event that an
award is given in favor of Cammell Laird, the amount of damages, if any, which
Costa would have to pay 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 sought 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.
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 August 31, 2003, we had contingent obligations totaling $1.07
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 $294 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 $89 million, or
alternatively provide mortgages in the aggregate amount of $89 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 August 31, 2003
have to pay a total of $168 million in stipulated damages. As of August 31,
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.
18
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 $41 million and $43 million of deferred income recorded on
our balance sheets as of August 31, 2003 and November 30, 2002, respectively,
which is being amortized to nonoperating income through 2022. 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.
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 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 8 - COMPREHENSIVE INCOME
Comprehensive income was as follows (in thousands):
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $988,935 $824,605 $734,261 $500,764
Foreign currency translation
adjustment, net 86,341 46,789 (77,382) 22,044
Unrealized gains (losses) on
marketable securities, net 3,473 1,739 981 (4,541)
Changes related to cash flow
derivative hedges 4,392 1,787 12,970 (2,784)
---------- -------- -------- --------
Total comprehensive income $1,083,141 $874,920 $670,830 $515,483
========== ======== ======== ========
19
NOTE 9 - 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
further discussion of the composition of our cruise revenues.
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.
Selected segment information was as follows (in thousands):
NINE MONTHS THREE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
--------------------- -----------------------
2003(a) 2002(a)(b) 2003(a) 2002(a)(b)
------- ---------- ------- ----------
Revenues
Cruise $4,674,164 3,218,481 $2,329,653 $1,342,113
Other 303,125 158,902 257,332 125,407
Intersegment
elimination (76,038) (33,356) (63,245) (26,933)
---------- ---------- ---------- ----------
$4,901,251 $3,344,027 $2,523,740 $1,440,587
========== ========== ========== ==========
Operating income (loss)
Cruise $1,085,236 $ 856,468 $ 763,353 $ 469,866
Other 23,647 (1,821) 45,378 18,558
---------- ---------- ---------- ----------
$1,108,883 $ 854,647 $ 808,731 $ 488,424
========== ========== ========== ==========
(a) Other revenues included revenues for the cruise portion of a tour, when a
cruise is sold as part of a tour package and billings by Holland America
Tours and Princess Tours to some of our cruise brands for providing shore
excursion and port hospitality services to cruise passengers. These
intersegment revenues are eliminated from other revenues in the line
"Intersegment elimination."
(b) Revenue amounts in 2002 have been reclassified to conform to the 2003
presentation. In addition, in 2003 we commenced allocating all corporate
expenses to our cruise segment. Accordingly, the 2002 presentation has been
restated to allocate the previously unallocated 2002 corporate expenses to
our cruise segment.
In addition, at August 31, 2003, substantially all of our assets are
included within our cruise segment.
NOTE 10 - EARNINGS PER SHARE
Our basic and diluted earnings per share were computed as follows (in
thousands, except per share data):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $988,935 $824,605 $734,261 $500,764
Interest on zero-coupon notes 5,299 5,299
-------- -------- -------- --------
Net income for diluted earnings
per share $994,234 $824,605 $739,560 $500,764
======== ======== ======== ========
20
Weighted-average common shares
outstanding 690,949 586,496 797,015 586,672
Dilutive effect of zero-coupon
notes 5,800 17,400
Dilutive effect of stock plans 1,947 1,621 3,776 1,245
-------- -------- -------- --------
Diluted weighted-average shares
outstanding 698,696 588,117 818,191 587,917
======== ======== ======== ========
Basic earnings per share $1.43 $1.41 $0.92 $0.85
===== ===== ===== =====
Diluted earnings per share $1.42 $1.40 $0.90 $0.85
===== ===== ===== =====
The weighted-average common shares outstanding for the nine months
ended August 31, 2003 includes the pro rata Carnival plc shares since April 17,
2003.
If Carnival Corporation's common stock price reaches specified targeted
levels 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 target 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 common stock price reached $33.77 per share for
a defined duration of time during the three months ended August 31, 2003 and,
therefore, its zero-coupon notes are convertible into Carnival Corporation
common stock during its 2003 fourth quarter at a conversion price of $30.70 per
share. 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
the nine and three months ended August 31, 2003 included the weighted-average of
the 17.4 million shares that can be converted at the noteholders' option.
Our diluted earnings per share computation for the nine and three
months ended August 31, 2003 did not include a maximum of 36.2 million (32.7
million in 2002) 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.
Options to purchase 3.1 million and 6.1 million shares for the three
months ended August 31, 2003 and 2002, respectively, and 7.4 million and 5.2
million for the nine months ended August 31, 2003 and 2002, respectively, were
excluded from our diluted earnings per share computation since the effect of
including them was anti-dilutive.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENT
In January 2003, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
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 first quarter. In accordance
with FIN No. 46, we have determined that we are carrying an investment,
initially made in April 2001, in 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 investment will not be consolidated in our
financial statements. At August 31, 2003, our interest in this VIE, which is
also our maximum exposure to loss, was $41 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
21
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this joint Quarterly Report on Form 10-Q are "forward-looking statements" that
involve risks, uncertainties and assumptions with respect to Carnival
Corporation & plc, 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 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 Carnival Corporation & plc's actual
results, performance or achievements to differ materially from those expressed
or implied in this joint Quarterly Report on Form 10-Q. 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 the 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 at sea 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 businesses worldwide;
- our ability to attract and retain 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
22
this joint Quarterly Report on Form 10-Q, 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.
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 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 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
onboard 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.
23
For segment information related to our revenues and operating income
see Note 9 in the accompanying financial statements. Operations data expressed
as a percentage of total revenues and selected statistical information were as
follows(a):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Cruise
Passenger tickets 74.9% 76.3% 73.8% 75.6%
Onboard and other 20.5 19.9 18.5 17.6
Other 4.6 3.8 7.7 6.8
----- ----- ----- -----
100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Operating
Cruise
Passenger tickets 15.2 15.2 14.3 13.7
Onboard and other 3.2 2.5 3.3 2.5
Payroll and related 10.6 10.1 8.6 8.1
Food 5.6 5.7 4.7 4.8
Other ship operating 17.6 15.8 14.6 13.8
Other 3.4 2.9 5.2 4.7
----- ----- ----- -----
Total 55.6 52.2 50.7 47.6
Selling and administrative 13.3 13.2 10.3 10.2
Depreciation and amortization 8.5 8.4 7.0 6.9
Impairment charge 0.6 1.4
----- ----- ----- -----
OPERATING INCOME 22.6 25.6 32.0 33.9
NONOPERATING EXPENSE, NET (2.0) (2.0) (1.8) (1.1)
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 20.6 23.6 30.2 32.8
INCOME TAX (EXPENSE) BENEFIT, NET (.4) 1.1 (1.1) 2.0
----- ----- ----- -----
NET INCOME 20.2% 24.7% 29.1% 34.8%
===== ===== ===== =====
SELECTED STATISTICAL INFORMATION
Passengers carried (in thousands) 3,769 2,640 1,629 1,036
Occupancy percentage (b) 104.4% 106.3% 109.8% 113.7%
(a) The information presented above includes the results of Carnival plc since
April 17, 2003. Accordingly, the information for periods prior to April 17,
2003 is not comparable to subsequent periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below for
additional 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.
GENERAL
Our cruise and other operations experience varying degrees of
seasonality. Our revenue from the sale of passenger tickets for our cruise
operations is seasonal, with the third quarter being the strongest. The
consolidation of Carnival plc has caused our third quarter results to be
slightly more seasonal than we have recently experienced. 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.
The Carnival Corporation available lower berth day ("ALBD") capacity,
excluding Carnival plc, is currently expected to increase by 18.0% in the fourth
quarter of
24
fiscal 2003, as compared to the same period of fiscal 2002. Assuming that the
DLC transaction was completed and Carnival plc was consolidated for the full
period in 2002, our ALBD capacity is currently expected to increase 19.2% in the
fourth quarter of fiscal 2003, as compared to pro forma ALBD for the same period
of fiscal 2002.
The year over year percentage increases in Carnival Corporation & plc's
ALBD capacity for fiscal 2004(versus fiscal 2003 pro forma ALBD), 2005 and 2006,
resulting primarily from new ships entering service, is currently expected to be
17.6%, 9.7% and 4.3%, respectively.
For a discussion of our critical accounting estimates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is included in the Carnival Corporation 2002 Annual Report on
Form 10-K.
INCOME TAXES
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 our 2004 fiscal year. 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.
OUTLOOK FOR REMAINDER OF FISCAL 2003
On September 18, 2003, in our press release announcing third quarter
2003 earnings, we said that our estimates for earnings per share for the fourth
quarter of 2003 are expected to be in the range of $0.24 to $0.28. We also
continued to note that because the booking curve remains very close to sailing,
the forecasting of future results is less predictable than in prior years.
NINE MONTHS ENDED AUGUST 31, 2003 ("2003") COMPARED TO NINE MONTHS ENDED AUGUST
31, 2002 ("2002")
Given that our reported results for 2003 include the results of
Carnival plc for only a portion of this year and none of last year, where one or
both of the periods we compare includes periods prior to the completion of the
DLC transaction, we believe that the most meaningful presentation of our
operating performance measures is on a pro forma basis, which reflects the
results of both Carnival Corporation and Carnival plc for the entirety of any
such periods. Accordingly, we have disclosed pro forma information, as well as
the required historical information, in the discussion of our results of
operations. The pro forma financial information for all relevant periods has
been prepared in accordance with Article 11 of Regulation S-X.
REVENUES
Cruise revenues increased $1.46 billion, or 45.2%, to $4.67 billion in
2003 from $3.22 billion in 2002. Approximately $1.10 billion of our cruise
revenue increase was due to the consolidation of Carnival plc and $359 million
(an 11.1% increase over 2002) was due to increased revenues from Carnival
Corporation's cruise brands.
25
Carnival Corporation's increase in cruise revenues resulted primarily from a
17.0% 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 us.
Included in onboard and other revenues were concession revenues of $128
million in 2003 and $101 million in 2002.
Our pro forma ALBD capacity increase was 16.8% in 2003 compared to
2002. Pro forma gross revenue yields (gross revenue per ALBD) declined 3.4%
(historical declined 1.6%) 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 2.9% (historical declined 2.6%) 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, along with the uncertain world economy.
Other non-cruise revenues increased $102 million, or 80.9%, to $227
million in 2003 from $125 million in 2002 due to the consolidation of Princess
Tours and P&O Travel.
COSTS AND EXPENSES
Total cruise operating expenses increased $912 million, or 55.2%, in
2003 compared to 2002. Approximately $615 million of our increase was due to the
consolidation of Carnival plc, and the remaining $297 million (an 18.0% increase
over 2002) of the increase was from Carnival Corporation. Carnival Corporation's
increase was primarily a result of the impact of the 17.0% increase in its ALBD
capacity. In addition, higher fuel prices added approximately $48 million of
additional expenses in 2003 compared to 2002. Finally, the increase in each of
the individual cruise operating expenses was primarily a result of the same
factors as discussed above. Pro forma cruise operating expenses increased $506
million, or 19.1%, to $3.16 billion in 2003 from $2.65 billion in 2002 primarily
as a result of the 16.8% increase in pro forma ALBD capacity and higher fuel
costs.
Other non-cruise operating expenses increased $68 million, or 70.9%, to
$165 million in 2003 from $97 million in 2002 due to the consolidation of
Princess Tours and P&O Travel.
Cruise selling and administrative expenses increased $203 million, or
48.5%, to $622 million in 2003 from $419 million in 2002. Approximately $144
million of our increase was due to the consolidation of Carnival plc and the
remaining $59 million (a 14.1% increase over 2002) of the increase was from
Carnival Corporation, which was primarily due to the 17.0% increase in ALBD
capacity. Pro forma cruise selling and administrative expenses, excluding
Carnival plc DLC transaction expenses, increased $127 million, or 19.2%, to $785
million from $659 million in 2002, primarily as a result of the 16.8% increase
in pro forma ALBD capacity, as well as approximately $20 million of major
marketing, promotion and other costs related to the introduction of four ships
by Carnival plc, partially offset by the benefits of scale and some synergy
savings.
Pro forma gross cruise costs per ALBD increased by 2.0% (historical
increased 4.3%) in 2003 compared to 2002. Pro forma net cruise costs per ALBD
increased 5.3% (historical increased 4.8%) 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.
Depreciation and amortization increased by $136 million, or 48.2%, to
$417 million in 2003 from $281 million in 2002. This increase was primarily from
the consolidation of Carnival plc, which accounted for approximately $81 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 $88 million, or
21.8%, to $491 million from $403
26
million largely due to the expansion of the pro forma combined fleet and ship
improvement expenditures.
NONOPERATING (EXPENSE) INCOME
Interest expense, net of interest income and excluding capitalized
interest, increased to $147 million in 2003 from $87 million in 2002, or $60
million, which increase was comprised primarily of an $82 million increase in
interest expense from our increased level of average borrowings, partially
offset by a $27 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 5 in the accompanying financial
statements).
Other income was $9 million in 2003, which was primarily comprised of
$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, less $13 million related to a DLC litigation matter.
THREE MONTHS ENDED AUGUST 31, 2003 ("2003") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 2002 ("2002")
REVENUES
Cruise revenues increased $988 million, or 73.6%, to $2.33 billion in
2003 from $1.34 billion in 2002. Approximately $814 million of our cruise
revenue increase was due to the consolidation of Carnival plc and $174 million
(a 13.0% increase over 2002) was due to increased revenues from Carnival
Corporation's cruise brands. Carnival Corporation's increase in cruise revenue
resulted primarily from a 19.6% increase in its standalone ALBD capacity in 2003
compared to 2002, partially offset by lower cruise ticket prices.
Included in onboard and other revenues were concession revenues of $53
million in 2003 and $37 million in 2002.
Our ALBD capacity increase was 18.4% in 2003 compared to pro forma
2002. Pro forma gross revenue yields declined 4.2% (historical declined 3.3%) in
2003 compared to 2002 primarily for the same reason as the decline in net
revenue yields discussed below. Pro forma net revenue yields declined 3.4%
(historical declined 5.2%) in 2003 compared to 2002 primarily because of lower
cruise ticket prices.
Other non-cruise revenues increased $96 million, or 97.1%, to $194
million in 2003 from $98 million in 2002 due to the consolidation of Princess
Tours and P&O Travel.
COSTS AND EXPENSES
Total cruise operating expenses increased $531 million, or 85.9%, in
2003 compared to 2002. Approximately, $427 million of our increase was due to
the consolidation of Carnival plc, and the remaining $104 million (a 16.7%
increase over 2002) of the increase was from Carnival Corporation. Carnival
Corporation's increase was primarily a result of the impact of the 19.6%
increase in its ALBD capacity. In addition, higher fuel prices added
approximately $9 million of additional expenses in 2003 compared to 2002.
Finally, the increase in each of the individual cruise operating expenses was
primarily a result of the same factors as discussed above. Pro forma cruise
operating expenses increased $160 million, or 16.2%, to $1.15 billion in 2003
from $989 million in 2002 primarily as a result of the 18.4% increase in pro
forma ALBD capacity and higher fuel costs.
Other non-cruise operating expenses increased $63 million, or 93.6% to
$131 million in 2003 from $68 million in 2002 due to the consolidation of
Princess Tours and P&O Travel.
27
Cruise selling and administrative expenses increased $109 million, or
77.9%, to $250 million in 2003 from $140 million in 2002. Approximately $91
million of our increase was due to the consolidation of Carnival plc and the
remaining $18 million (a 12.7% increase over 2002) of the increase was from
Carnival Corporation, which was primarily due to the 19.6% increase in ALBD
capacity. Pro forma cruise selling and administrative expenses, excluding
Carnival plc DLC transaction expenses, increased $25 million, or 11.1%, to $250
million from $225 million in pro forma 2002, primarily as a result of the 18.4%
increase in pro forma ALBD capacity, partially offset by some synergy savings.
Pro forma gross cruise costs per ALBD decreased 2.7% in 2003
(historical increased 2.7%) compared to 2002, while pro forma net cruise costs
were down 0.2% (historical increased 1.3%). Pro forma gross and net cruise costs
per ALBD in 2003 compared to 2002 were down primarily due to the realization of
some DLC synergy savings, as well as benefits of scale of the 18.4% pro forma
ALBD increase, which offset higher fuel and insurance costs.
Depreciation and amortization increased by $77 million, or 77.4%, to
$176 million in 2003 from $99 million in 2002. This increase was primarily from
the consolidation of Carnival plc, which accounted for approximately $55 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.
Depreciation and amortization expense increased by $32 million, or 22.6%, to
$176 million in 2003 from $143 million in pro forma 2002 largely due to the
expansion of the pro forma combined fleet and ship improvement expenditures.
In the third quarter of 2002, we reduced the carrying value of one of
our ships by recording an impairment charge of $20 million.
NONOPERATING (EXPENSE) INCOME
Interest expense, net of interest income and excluding capitalized
interest, increased to $67 million in 2003 from $28 million in 2002, or $39
million, which increase was comprised primarily of a $53 million increase in
interest expense from our increased level of average borrowings, partially
offset by an $18 million decrease in interest expense due to lower average
borrowing rates. The higher average debt balances were primarily due to the
consolidation of Carnival plc's debt.
The $57 million increase in our income tax provision, net, in 2003
compared to 2002 was primarily due to the income tax benefit recognized in 2002
for approximately $34 million, which was recorded by Costa as a result of an
Italian investment incentive, and the consolidation of Carnival plc.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Our business provided $1.40 billion of net cash from operations during
the nine months ended August 31, 2003, an increase of $227 million, or 19.4%,
compared to the nine months ended August 31, 2002 primarily due to the
consolidation of Carnival plc.
During the nine months ended August 31, 2003, our net expenditures for
capital projects were $1.90 billion, of which $1.70 billion was spent for our
ongoing shipbuilding program. The $200 million of nonshipbuilding capital
expenditures consisted primarily of ship refurbishments, Alaska tour assets,
cruise port facility developments and information technology assets. In
addition, we received $141 million from Carnival plc's existing cash balances
upon its acquisition, net of acquisition costs.
28
During the nine months ended August 31, 2003, we issued convertible
notes for gross proceeds of $575 million for general corporate purposes,
including financing our shipbuilding program and other capital expenditures. We
also borrowed $568 million under Costa's and POPCIL's revolving credit
facilities and $65 million of net borrowings under our short-term loan
agreements. Finally, we borrowed $335 million under Carnival plc's previously
committed finance facility to finance the acquisition of the Island Princess in
June 2003. In addition, we made principal repayments of $663 million, which
included $50 million under our $1.4 billion revolver, $552 million on Costa's
and POPCIL's revolving credit facilities and $61 million on other debt. We also
paid cash dividends of $207 million in the first nine months of fiscal 2003.
FUTURE COMMITMENTS AND FUNDING SOURCES
Our contractual cash obligations, with initial or remaining terms in
excess of one year, and contingent obligations at August 31, 2003 compared to
November 30, 2002 changed significantly because of the consolidation of Carnival
plc. At August 31, 2003, the Carnival Corporation & plc outstanding debt was
$7.00 billion, of which $365 million is due in one year. In addition, we had
non-cancelable shipbuilding commitments for 13 new cruise ships and one river
boat due over the next three years of approximately $6.42 billion, of which
$2.97 billion is due in the twelve months ending August 31, 2004. See Notes 5, 6
and 7 in the accompanying financial statements for our debt, shipbuilding and
other commitments and contingent obligations as of August 31, 2003.
At August 31, 2003, we had liquidity of $3.69 billion, which consisted
of $1.05 billion of cash, cash equivalents and short-term investments, $1.90
billion available for borrowing under our $2.39 billion of revolving credit
facilities obtained through a group of banks and $736 million under committed
ship financing arrangements. Our revolving credit facilities mature in 2005 with
respect to $710 million, and in 2006 with respect to $1.68 billion. A key to our
access to liquidity is the maintenance of our strong long-term credit ratings.
We believe that our liquidity, including cash and committed financings,
and cash flows 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 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 financing from banks or through the offering of
debt and/or equity securities in the public or private markets. No assurance can
be given, however, that our future operating cash flow will be sufficient to
fund future obligations or that we will be able to obtain additional financing,
if necessary.
MARKET RISKS
We have broadened our global presence as a result of the DLC
transaction. Specifically, our new international business operations in the UK
and Germany subject us to an increased level of foreign currency exchange risk
related to the sterling and euro. 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 in our consolidated financial statements. Strengthening
of the U.S. dollar has the opposite effect.
At August 31, 2003, we had foreign currency swap transactions to sell
137 million of sterling forward in exchange for $200 million. This derivative
has been designated
29
as a hedge of our sterling denominated net investments and is designed to
mitigate a portion of our foreign currency exchange rate risk.
Finally, our higher level of debt resulting from the DLC transaction
increases our exposure to interest rate movements. At August 31, 2003, the fixed
and variable interest rate portions of our debt, after the effect of our
designated interest rate swaps, was 65% and 35%, respectively, and our debt was
denominated 65% in U.S. dollars, 30% in euros and 5% in sterling.
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.
30
HISTORICAL GAAP RECONCILING INFORMATION
Gross and net revenue yields were computed as follows (1):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except yields)
Cruise revenues
Passenger tickets $3,671,039 $2,552,846 $1,863,185 $1,089,331
Onboard and other 1,003,125 665,635 466,468 252,782
Gross cruise revenues 4,674,164 3,218,481 2,329,653 1,342,113
Less cruise costs
Passenger tickets (747,323) (508,569) (361,268) (197,426)
Onboard and other (154,806) (85,335) (82,531) (35,891)
---------- ---------- ---------- ----------
Net cruise revenues $3,772,035 $2,624,577 $1,885,854 $1,108,796
========== ========== ========== ==========
ALBDs(2) 23,381 15,842 9,915 5,524
========== ========== ========== ==========
Gross revenue yields (3) $ 199.91 $ 203.16 $ 234.96 $ 242.96
========== ========== ========== ==========
Net revenue yields (4) $ 161.32 $ 165.67 $ 190.20 $ 200.72
========== ========== ========== ==========
Gross and net cruise costs per ALBD were computed as follows (1):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except costs per ALBD)
Cruise operating expenses $2,562,134 $1,650,488 $1,148,938 $ 618,162
Cruise selling and
administrative expenses 622,438 419,102 249,522 140,249
---------- ---------- ---------- ----------
Gross cruise costs 3,184,572 2,069,590 1,398,460 758,411
Less cruise costs
Passenger tickets (747,323) (508,569) (361,268) (197,426)
Onboard and other (154,806) (85,335) (82,531) (35,891)
---------- ---------- ---------- ----------
Net cruise costs $2,282,443 $1,475,686 $ 954,661 $ 525,094
========== ========== ========== ==========
ALBDs(2) 23,381 15,842 9,915 5,524
========== ========== ========== ==========
Gross cruise costs
per ALBD (5) $ 136.20 $ 130.64 $ 141.04 $ 137.29
========== ========== ========== ==========
Net cruise costs per
ALBD (6) $ 97.62 $ 93.15 $ 96.28 $ 95.06
========== ========== ========== ==========
31
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 periods
noted below, would have been computed as follows (1)(7):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31, 2002
---------- ---------------
2003 2002
---- ----
(in thousands, except yields)
Cruise revenues
Passenger tickets $4,364,453 $3,905,987 $1,674,519
Onboard and other 1,182,472 1,010,784 380,515
---------- ---------- ----------
Gross cruise revenues 5,546,925 4,916,771 2,055,034
Less cruise costs
Passenger tickets (953,511) (870,638) (339,224)
Onboard and other (205,183) (176,795) (66,838)
---------- ---------- ----------
Net cruise revenues $4,388,231 $3,869,338 $1,648,972
========== ========== ==========
ALBDs (2) 27,625 23,648 8,375
========== ========== ==========
Gross revenue yields (3) $ 200.79 $ 207.91 $ 245.38
========== ========== ==========
Net revenue yields (4) $ 158.85 $ 163.62 $ 196.89
========== ========== ==========
Pro forma gross and net cruise costs per ALBD would have been computed as
follows (1)(7):
NINE MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, AUGUST 31, 2002
---------- ---------------
2003 2002
---- ----
(in thousands, except costs per ALBD)
Cruise operating expenses $3,156,468 $2,650,221 $ 989,030
Cruise selling and
administrative expenses 785,282 658,757 225,310
---------- ---------- ----------
Gross cruise costs 3,941,750 3,308,978 $1,214,340
Less cruise costs
Passenger tickets (953,511) (870,638) (339,224)
Onboard and other (205,183) (176,795) (66,838)
---------- ---------- ----------
Net cruise costs $2,783,056 $2,261,545 $ 808,278
========== ========== ==========
ALBDs(2) 27,625 23,648 8,375
========== ========== ==========
Gross cruise costs
per ALBD (5) $ 142.69 $ 139.93 $ 145.00
========== ========== ==========
Net cruise costs per
ALBD (6) $ 100.74 $ 95.63 $ 96.51
========== ========== ==========
For additional information related to our pro forma consolidated statements of
operations and pro forma net cruise revenues and net cruise costs, refer to our
joint Current Report on Form 8-K, filed with the SEC on September 18, 2003.
(1) 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 pricing
performance. This measure is
32
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 we received 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 deduct 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 non-GAAP financial cost measure described above
because these variable costs are directly associated with the revenues we
earn.
(2) Represent the 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.
(3) Represent gross cruise revenues divided by ALBDs.
(4) Represent net cruise revenues divided by ALBDs.
(5) Represent gross cruise costs divided by ALBDs.
(6) Represent net cruise costs divided by ALBDs.
(7) For additional information related to the pro forma statements of
operations see Note 2 in the accompanying financial statements.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Our Chief Executive Officer, Chief Operating Officer and Chief
Financial and Accounting Officer have evaluated the disclosure controls and
procedures of Carnival Corporation & plc and have concluded, as of August 31,
2003 that they are effective within the reasonable assurance threshold described
above.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation and there were no corrective actions with regard to significant
deficiencies or material weaknesses.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their stated goals under all potential future conditions.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Three actions referred to as the Facsimile Complaints were previously
reported in the Carnival Corporation Annual Report on Form 10-K for the year
ended November 30, 2002. One of the Facsimile Complaints, filed by Andrew
Syrett, has been settled. On
33
September 12, 2003, the court approved the settlement pursuant to which CCL will
issue coupons for a two category cabin upgrade within the same type of cabin to
approximately 5,800 class members.
On another Facsimile Complaint, filed by Mary Pelt, the court entered a
discovery scheduling order on August 20, 2003 that limited discovery to class
certification issues and scheduled a hearing on class certification for May 7,
2004.
A purported class action complaint filed against Princess in the Los
Angeles County Superior Court alleging that Princess inappropriately assessed
its passengers with certain port charges in addition to their cruise fare was
previously reported in our joint Quarterly Report on Form 10-Q for the quarter
ended May 31, 2003. The plaintiffs second attempt to bring a motion for class
certification was barred by the trial court. A trial date has been set for early
2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 15, 2003, the indenture for Carnival plc's $284,750,000 7.30%
Notes Due 2007 and $192,000,000 7.875% Debentures Due 2027 (the "PLC Public
Notes") was amended with the consent of the holders to reflect the
implementation of the DLC structure and the principle that Carnival Corporation
and Carnival plc operate as a single economic enterprise. The amendments
include: (1) amending the negative covenants to apply to Carnival Corporation &
plc on a consolidated basis; (2) clarifying that the delivery of Carnival
Corporation & plc financial information would satisfy the reporting
requirements; (3) an amendment so that all accounting terms not otherwise
defined in the indenture have the meanings given to them by U.S. GAAP, rather
than UK GAAP; (4) the addition of a covenant requiring Carnival Corporation to
pay additional amounts to holders of the PLC Public Notes as a result of
specified Panamanian taxes, if imposed; (5) an amendment to the covenant
regarding merger, consolidation and sale of assets to permit a merger or
consolidation with, or sale or other disposition of assets to, Carnival
Corporation without complying with the jurisdiction of incorporation
restriction, if certain conditions are satisfied; and (6) amendments to the
events of default to reflect the financial position of Carnival Corporation &
plc. In addition, Carnival Corporation guaranteed Carnival plc's obligations
under the indenture and the PLC Public Notes on an unsubordinated, unsecured
basis in return for consents to the amendments to the indenture.
On June 19, 2003, POPCIL guaranteed Carnival Corporation's obligations
under its Senior Convertible Debentures due 2033 on an unsubordinated, unsecured
basis. The guarantee was issued under the POPCIL deed of guarantee, which it
executed with Carnival plc and Carnival Corporation on June 19, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
All of the proposals voted on at the Carnival Corporation annual
shareholders meeting and the Carnival plc annual general meeting were joint
electorate actions. Other than (i) the approval of disapplication of preemption
rights for Carnival plc shares which was required to be approved by 75% of the
combined votes cast at both meetings and (ii) the shareholder proposal which was
not approved, all proposals were considered ordinary resolutions approved by a
majority of the combined votes cast at both the meetings.
CARNIVAL CORPORATION
The annual meeting of Carnival Corporation shareholders was held on
June 23, 2003 (the "Annual Meeting"). On all matters which came before the
Annual Meeting, holders of Carnival Corporation common stock were entitled to
one vote for each share held. Proxies for 493,198,239 of the 628,662,298 shares
of common stock entitled to vote were received in connection with the Annual
Meeting.
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The following table sets forth the matters which were submitted to
Carnival Corporation's shareholders for approval at the Annual Meeting and the
tabulation of the votes with respect to each such matter.
Election of Directors
Withhold
Nominee For Authority
Micky Arison 464,424,908 28,772,634
Howard S. Frank 465,089,576 28,107,966
Robert H. Dickinson 464,416,815 28,780,727
Pier Luigi Foschi 465,087,623 28,109,919
A. Kirk Lanterman 464,997,854 28,199,688
Richard G. Capen, Jr. 464,404,882 28,792,660
Arnold W. Donald 464,349,713 28,847,829
Modesto A. Maidique 465,075,966 28,121,576
Baroness Hogg 488,836,017 4,361,525
Sir John Parker 488,832,266 4,365,276
Peter Ratcliffe 465,089,794 28,107,748
Stuart Subotnick 465,079,657 28,117,885
Uzi Zucker 465,068,380 28,129,162
Broker
Refrain/ Non-
Other Matters For Against Abstain Votes
To consider and approve the
amended and restated
Carnival Corporation 2002
Stock Plan 449,664,534 35,386,381 8,146,621 703
To ratify the selection
of PricewaterhouseCoopers
LLP as independent
certified public
accountants for Carnival
Corporation 459,117,548 26,369,856 7,710,835 0
To appoint Pricewaterhouse-
Coopers LLP as
independent auditors
for Carnival plc 458,808,732 26,672,163 7,717,344 0
To authorize the audit
committee of Carnival
plc to agree the
remuneration of the
independent auditors 456,606,796 28,515,631 8,075,810 2
To receive the accounts and
reports for P&O Princess
Cruises plc (now called
Carnival plc) for the
year ended December 31,
2002 485,370,642 103,380 7,724,217 0
To approve the directors'
remuneration report of
P&O Princess Cruises plc
(now called Carnival plc) 482,882,245 2,046,326 8,269,668 0
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To approve limits on the
authority to allot shares
by Carnival plc 450,165,004 2,105,393 7,783,038 33,144,804
To approve the disapplica-
tion of preemption rights
for Carnival plc shares 447,864,880 4,299,216 7,889,338 33,144,805
To approve the shareholder
proposal authorizing the
board of directors to take
the measures necessary to
change Carnival Corpora-
tion's jurisdiction of
incorporation to one of
the states of the United
States 47,863,457 408,027,331 4,161,942 33,145,509
CARNIVAL PLC
An annual general meeting of the shareholders of Carnival plc was held
on June 23, 2003 (the "AGM"). On all matters which came before the AGM, holders
of Carnival plc ordinary shares were entitled to one vote for each share held.
Proxies for 95,959,178 of the 168,319,516 shares of common stock entitled to
vote were received in connection with the AGM.
The following table sets forth the matters which were submitted to
Carnival plc's shareholders for approval at the AGM and the tabulation of the
votes with respect to each such matter.
Election of Directors
Nominee For Against Withheld
Micky Arison 82,049,640 3,545,105 10,346,409
Howard S. Frank 95,294,555 218,445 446,178
Robert H. Dickinson 95,304,611 207,174 447,393
Pier Luigi Foschi 88,292,319 2,147,696 5,519,163
A. Kirk Lanterman 89,495,333 3,651,370 2,812,475
Richard G. Capen, Jr. 93,957,688 1,529,868 471,622
Arnold W. Donald 95,528,748 146,680 283,750
Modesto A. Maidique 93,958,824 1,802,161 198,193
Baroness Hogg 95,081,838 438,945 438,395
Sir John Parker 95,100,940 424,811 433,427
Peter Ratcliffe 90,830,337 155,291 4,973,550
Stuart Subotnick 89,588,641 1,784,837 4,585,700
Uzi Zucker 89,342,737 1,788,450 4,827,991
Other Matters
To consider and approve the
amended and restated
Carnival Corporation 2002
Stock Plan 71,381,175 22,586,641 1,991,362
To ratify the selection of
PricewaterhouseCoopers LLP as
independent certified public
accountants for Carnival
Corporation 95,152,829 617,184 189,165
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To appoint Pricewaterhouse-
Coopers LLP as independent
auditors for Carnival plc 93,858,348 1,917,510 183,320
To authorize the audit
committee of Carnival plc to
agree the remuneration
of the independent auditors 93,923,164 1,843,912 192,102
To receive the accounts and
reports for P&O Princess
Cruises plc (now called
Carnival plc) for the year
ended December 31, 2002 95,272,171 410,139 276,868
To approve the directors'
remuneration report of
P&O Princess Cruises
plc (now called Carnival plc) 80,296,562 11,641,142 4,021,474
To approve limits on the
authority to allot shares
by Carnival plc 93,770,067 81,662 2,107,449
To approve the disapplication
of preemption rights for
Carnival plc shares 95,647,880 236,894 74,404
To approve the shareholder
proposal authorizing the
board of directors to take
the measures necessary to
change Carnival Corporation's
jurisdiction of incorporation
to one of the states of
the United States 11,626,535 70,554,635 13,776,826
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Third Amended and Restated Articles of Incorporation of Carnival
Corporation, incorporated by reference to Exhibit No. 3.1 to the
joint Current Report on Form 8-K of Carnival Corporation and
Carnival plc filed on April 17, 2003 (Commission File Nos. 1-9610
and 1-15136).
3.2 Amended and restated By-laws of Carnival Corporation, incorporated
by reference to Exhibit No. 3.2 to the joint Current Report on Form
8-K of Carnival Corporation and Carnival plc filed on April 17, 2003
(Commission File Nos. 1-9610 and 1-15136).
3.3 Articles of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.3 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003
(Commission File Nos. 1-9610 and 1-15136).
3.4 Memorandum of Association of Carnival plc, incorporated by reference
to Exhibit No. 3.4 to the joint Current Report on Form 8-K of
Carnival Corporation and Carnival plc filed on April 17, 2003
(Commission File Nos. 1-9610 and 1-15136).
37
4.1 Carnival Corporation Deed between Carnival Corporation and P&O
Princess Cruises plc for the benefit of the P&O Princess
Shareholders dated April 17, 2003.
4.2 Equalization and Governance Agreement dated April 17, 2003 between
Carnival Corporation and P&O Princess Cruises plc.
4.3 Agreement Relating to the Carnival Corporation Deed of Guarantee
between Carnival Corporation and Carnival plc for the benefit of the
holders of each of Carnival plc 7.3% Notes and 7.875% Debentures,
dated July 15 2003.
4.4 First Supplemental Indenture among Carnival plc, P&O Princess
Cruises International Limited and The Bank of New York, dated as of
July 15, 2003.
4.5 P&O Princess Cruises International Limited ("POPCIL") Deed of
Guarantee among POPCIL, Carnival Corporation and Carnival plc, dated
as of June 19, 2003, incorporated by reference to Exhibit No. 4.11
of the joint Carnival Corporation, Carnival plc and POPCIL
Registration Statement filed on June 19, 2003 (Commission File No.
333-106293).
10.1 Director Appointment letter between John McNulty and Carnival plc,
dated June 25, 2003.
10.2 Director Appointment letter between John McNulty and Carnival
Corporation, dated June 25, 2003.
12 Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial and Accounting Officer of Carnival
Corporation pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.4 Certification of Chief Executive Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.5 Certification of Chief Operating Officer of Carnival plc pursuant to
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.6 Certification of Chief Financial and Accounting Officer of Carnival
plc pursuant to Rule 13a-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Operating Officer of Carnival Corporation
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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32.3 Certification of Chief Financial and Accounting Officer of Carnival
Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.4 Certification of Chief Executive Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.5 Certification of Chief Operating Officer of Carnival plc pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.6 Certification of Chief Financial and Accounting Officer of Carnival
plc pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
Carnival Corporation and Carnival plc filed or furnished joint Current
Reports on Form 8-K on June 18, 2003 (Items 7 and 9), June 25, 2003 (Items 5, 7
and 9), June 27, 2003 (Items 5 and 7)and July 17, 2003 (Items 7 and 9).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARNIVAL CORPORATION CARNIVAL plc
By: /s/ Micky Arison By: /s/ Micky Arison
- -------------------- --------------------
Micky Arison Micky Arison
Chairman of the Board of Directors Chairman of the Board of Directors
and Chief Executive Officer and Chief Executive Officer
By: /s/ Howard S. Frank By: /s/ Howard S. Frank
- ---------------------- -----------------------
Howard S. Frank Howard S. Frank
Vice Chairman of the Board of Vice Chairman of the Board of
Directors and Chief Operating Officer Directors and Chief Operating Officer
By: /s/ Gerald R. Cahill By: /s/ Gerald R. Cahill
- ------------------------ ------------------------
Gerald R. Cahill Gerald R. Cahill
Senior Vice President-Finance Senior Vice President-Finance
and Chief Financial and and Chief Financial and
Accounting Officer Accounting Officer
Dated: October 15, 2003 Dated: October 15, 2003
40