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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 May 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 7805 1200
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
None December 31
(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 registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No__
At July 11, 2003, At July 11, 2003,
Carnival Corporation Carnival plc
had outstanding 629,586,781 had outstading 209,390,300
shares of its common stock, ordinary shares,
$.01 par value. $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)
Six Months Three Months
Ended May 31, Ended May 31,
2003 2002 2003 2002
Revenues $2,365,721 $1,896,430 $1,334,616 $989,899
Costs and Expenses
Operating 1,435,175 1,054,340 819,981 534,777
Selling and
administrative 389,186 293,524 212,068 142,122
Depreciation and
amortization 241,208 182,343 134,725 92,589
2,065,569 1,530,207 1,166,774 769,488
Operating Income 300,152 366,223 167,842 220,411
Nonoperating (Expense) Income
Interest income 13,325 14,415 9,096 7,752
Interest expense,
net of capitalized
interest (70,906) (57,467) (41,514) (28,011)
Other income (expense),
net 3,572 (7,129) (11,156) (12,087)
(54,009) (50,181) (43,574) (32,346)
Income Before
Income Taxes 246,143 316,042 124,268 188,065
Income Tax Benefit, Net 8,531 7,799 3,527 6,136
Net Income $ 254,674 $ 323,841 $ 127,795 $194,201
Earnings Per Share
Basic $0.40 $0.55 $0.19 $0.33
Diluted $0.40 $0.55 $0.19 $0.33
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par/stated values)
May 31, November 30,
2003 2002
ASSETS
Current Assets
Cash and cash equivalents $1,381,033 $ 666,700
Short-term investments 67,999 39,005
Accounts receivable, net 347,054 108,327
Inventories 157,779 91,310
Prepaid expenses and other 292,136 148,420
Fair value of derivative contracts 255,715
Fair value of hedged firm commitments 45,370 78,390
Total current assets 2,547,086 1,132,152
Property and Equipment, Net 16,708,612 10,115,404
Goodwill 3,649,236 681,056
Other Assets 325,116 297,175
Fair Value of Derivative Contracts 133,415
Fair Value of Hedged Firm Commitments 109,061
$23,363,465 $12,334,848
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 49,500 $
Current portion of long-term debt 296,802 154,633
Accounts payable 615,782 268,687
Accrued liabilities 482,663 290,391
Customer deposits 1,436,914 770,637
Dividends payable 82,476 61,612
Fair value of derivative contracts 10,440 73,846
Fair value of hedged firm commitments 280,447
Total current liabilities 3,255,024 1,619,806
Long-Term Debt 6,707,841 3,013,758
Deferred Income and Other
Long-Term Liabilities 307,495 170,814
Fair Value of Derivative Contracts 17,250 112,567
Fair Value of Hedged Firm Commitments 82,279
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;
628,727 shares at 2003 and 586,788 shares
at 2002 issued and outstanding 6,288 5,868
Ordinary shares of Carnival plc;
$1.66 stated value; 225,300 shares
authorized; 209,067 shares issued 347,052
Additional paid-in capital 7,117,454 1,089,125
Retained earnings 6,434,958 6,325,850
Unearned stock compensation (19,404) (11,181)
Accumulated other comprehensive income 165,878 8,241
Treasury stock, 41,881 shares of
Carnival plc at cost (1,058,650)
Total shareholders' equity 12,993,576 7,417,903
$23,363,465 $12,334,848
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended May 31,
2003 2002
OPERATING ACTIVITIES
Net income $ 254,674 $ 323,841
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 241,208 182,343
Accretion of original issue discount 10,022 9,644
Other 4,593 9,218
Changes in operating assets and liabilities,
excluding business acquired
Decrease (increase) in
Receivables (38,742) (17,020)
Inventories (4,606) 3,323
Prepaid expenses and other (41,413) (42,268)
Increase (decrease) in
Accounts payable 56,306 2,490
Accrued and other liabilities (33,830) (59,125)
Customer deposits 216,645 294,367
Net cash provided by operating activities 664,857 706,813
INVESTING ACTIVITIES
Additions to property and equipment, net (612,564) (594,355)
Acquired from (expended for) the acquisition of
Carnival plc, net 156,042 (16,841)
Purchase of short-term investments (26,098) (159,888)
Proceeds from retirement of property and equipment 50,919
Other, net (4,680) (2,088)
Net cash used in investing activities (436,381) (773,172)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 898,410 77,739
Principal repayments of long-term debt (284,239) (10,743)
Dividends paid (123,245) (123,120)
Proceeds from short-term borrowings, net 49,500
Proceeds from issuance of common stock and
ordinary shares, net 13,922 4,966
Other (12,204) (191)
Net cash provided by (used in)
financing activities 542,144 (51,349)
Effect of exchange rate changes on cash
and cash equivalents (56,287) (6,490)
Net increase (decrease) in cash and
cash equivalents 714,333 (124,198)
Cash and cash equivalents at beginning
of period 666,700 1,421,300
Cash and cash equivalents at end of period $1,381,033 $1,297,102
The accompanying notes are an integral part of these consolidated financial
statements
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
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
(in thousands)
Carnival Cruise
Lines ("CCL") (2) 19 41,322 North America
Princess Cruises
("Princess") (2)(3)(6) 11 19,880 North America
Holland America Line
("Holland America")(2)(6) 12 16,342 North America
Costa Cruises ("Costa") 9 12,868 Europe
P&O Cruises 4 7,730 United Kingdom
AIDA 3 3,730 Germany
Cunard Line ("Cunard")(4) 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 Carnival Glory, Princess includes the Island Princess,
and Holland America includes the Oosterdam, which were all delivered
after May 31, 2003. In addition, included within the CCL capacity is the
1,486-passenger Jubilee, which we expect to transfer to P&O Cruises
Australia in the fall of 2004.
(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) Cunard includes the Caronia, which was sold in May 2003 and is chartered
back for use by Cunard until November 2004.
(5) A'ROSA also operates our three river cruise vessels on Europe's Danube
River, which have a total passenger capacity of 600 lower berths.
(6) 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.
Basis of Presentation
The accompanying consolidated balance sheet at May 31, 2003 and the
consolidated statements of operations and cash flows for the six and three
months ended May 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 six and three month periods and Carnival plc's
consolidated results of operations have been included 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.
NOTE 2 - Dual Listed Company ("DLC") Transaction
On April 17, 2003, Carnival Corporation and Carnival plc completed a DLC
transaction, which implemented Carnival Corporation's and Carnival plc's DLC
structure. The DLC transaction combined the businesses of Carnival
Corporation and Carnival plc through a number of contracts and amendments to
Carnival Corporation's articles of incorporation and by-laws and to Carnival
plc's memorandum of association and articles of association. The two
companies have retained their separate legal identities, and each company's
shares continue to be publicly traded on the New York Stock Exchange for
Carnival Corporation and the London Stock Exchange for Carnival plc.
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.
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 Corporation and Carnival plc may
agree that the Carnival Corporation deed of guarantee may 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 the global cruise
industry for 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 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 effectively issued in the
combined entity for purchase accounting purposes was 209.6 million. In
addition, Carnival Corporation has estimated that it will incur 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):
Ships $5,159
Ships under construction 406
Other tangible assets 856
Goodwill 2,912
Debt (2,930)
Other liabilities (1,038)
$5,365
We have engaged an appraisal firm who has not yet completed its
valuation work, which is being performed 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. Prior to the completion of this
valuation work, we have assumed 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 above information should be read
in conjunction with the companies' historical financial statements, as well
as the pro forma information included in the companies' joint Current Reports
on Form 8-K, dated May 29, 2003 and June 25, 2003.
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.
Six months Three months
ended May 31, ended May 31,
2003 2002 2003 2002
(in millions, except earnings per share and shares)
Pro forma revenues $3,241 $2,902 $1,624 $1,513
Pro forma net income (a)(b)(c)(d) $ 221 $ 396 $ 98 $ 242
Pro forma earnings per share
Basic $ 0.28 $ 0.50 $ 0.12 $ 0.31
Diluted $ 0.28 $ 0.49 $ 0.12 $ 0.30
Pro forma weighted-average
shares outstanding
Basic 795 795 796 795
Diluted 799 800 799 800
(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, then the pro forma net income would have been $266
million and $407 million for the six months ended May 31, 2003 and 2002,
respectively, and $122 million and $250 million for the three months
ended May 31, 2003 and 2002, respectively.
(b) The six and three months ended May 31, 2003 includes expenses totalling
approximately $20 million and $13 million, respectively, due to the major
marketing, promotion and other expenses incurred by Carnival plc's
introduction into UK service of four vessels: the Oceana; Minerva II;
Ocean Village; and Adonia.
(c) Carnival plc is expected to receive insurance company and/or shipyard
payments related to the Diamond Princess fire and the Island Princess
delayed delivery. The present value of these payments, which
approximates $99 million, has been recorded on the balance sheet of
Carnival Corporation & plc as a Carnival plc fair value acquisition
adjustment.
(d) 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 trademarks, brand names and goodwill.
Management believes that these trademarks and brand names 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 who 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 May 31, 2003 balance
sheet, but is expected to be allocated between goodwill and other
identifiable intangible assets such as brand names and trademarks,
subsequent to the completion of the DLC transaction based primarily on
the appraisal firm's valuation. However, 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 allowed to be amortized under SFAS No. 141.
Computershare Investor Services plc ("Computershare") acted as the UK
Receiving Agent and Escrow Agent for Carnival Corporation in connection with
the PSO to shareholders of Carnival plc. Computershare wrongfully rejected
the tender of over 53 million Carnival plc shares. Chase Nominees Limited
tendered the rejected shares on behalf of these Carnival plc shareholders.
On July 3, 2003, we entered into a cash settlement agreement with Chase
Nominees Limited, on behalf of itself and the affected Carnival plc
shareholders, to settle this dispute. Our nonoperating expenses for the three
months ended May 31, 2003 included estimated expenses of $16 million related
to this dispute and other costs associated with the DLC transaction.
NOTE 3 - Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standard ("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):
Six Months Three months
ended May 31, ended May 31,
2003 2002 2003 2002
Net income, as reported $254,674 $323,841 $127,795 $194,201
Stock-based compensation
expense included in
net income, as reported 2,719 2,577 1,431 1,337
Total stock-based compensation
expense determined under
the fair value-based
method for all awards (17,332) (14,990) (9,032) (7,543)
Adjusted net income $240,061 $311,428 $120,194 $187,995
Earnings per share
Basic
As reported $ 0.40 $ 0.55 $ 0.19 $ 0.33
Adjusted $ 0.38 $ 0.53 $ 0.17 $ 0.32
Diluted
As reported $ 0.40 $ 0.55 $ 0.19 $ 0.33
Adjusted $ 0.38 $ 0.53 $ 0.17 $ 0.32
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):
May 31, November 30,
2003 2002
Ships (a) $16,715,131 $10,665,958
Ships under construction 1,234,755 712,447
17,949,886 11,378,405
Land, buildings and improvements,
and port facilities 467,048 314,448
Transportation equipment and other 549,209 409,310
Total property and equipment 18,966,143 12,102,163
Less accumulated depreciation and
amortization (2,257,531) (1,986,759)
$16,708,612 $10,115,404
(a) At May 31, 2003, 11 ships with an aggregate net book value of $3.04
billion were pledged as collateral pursuant to mortgages related to $1.48
billion of debt and a $469 million contingent obligation (see Notes 5
and 7).
At May 31, 2003, ship costs included a preliminarily estimated fair
value of approximately $5.16 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 $22 million and $16 million for the six months ended May 31, 2003
and 2002, respectively, and $13 million and $8 million for the three months
ended May 31, 2003 and 2002, respectively.
NOTE 5 - Debt
Short-term borrowings consisted of unsecured fixed rate notes, bearing
interest at libor plus 0.15% (1.48% weighted-average interest rate at May 31,
2003), payable to a bank through August 2003.
Long-term debt consisted of the following (in thousands):
May 31, November 30,
2003(a) 2002(a)
Secured
Floating rate notes, collateralized by ships, bearing
interest at rates ranging from libor plus 1.25% to
libor plus 1.33% (2.63% to 2.69% at May 31, 2003),
due through 2016 $ 602,112
Euro floating rate notes, collateralized by ships,
bearing interest at rates ranging from euribor plus
0.5% to euribor plus 1.37% (3.0% to 3.85% at May 31,
2003 and 4.0% at November 30, 2002), due through
2016 565,684 $ 118,727
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through
2012 (b) 198,574
Capitalized lease obligations, collateralized by ships,
implicit interest at 3.66%, due through 2005 116,251
Other 20,401
1,503,022 118,727
Unsecured
Fixed rate notes, bearing interest at rates ranging
from 4.4% to 8.2%, due through 2028 (c)(d) 1,740,952 856,680
Euro floating rate notes, bearing interest
at rates ranging from euribor plus 0.35% to euribor
plus 0.47% (3.2% to 3.4% and 3.8% to 4.0% at May 31,
2003 and November 30, 2002, respectively), due
through 2006 (e) 682,730 570,187
Euro revolving credit facilities, bearing interest
at euribor plus 0.53% and euro libor plus 0.98%
(3.0% to 3.6% and 3.6% at May 31, 2003 and
November 30, 2002, respectively), due through 2006 607,245 110,190
Sterling fixed rate bonds, bearing interest
at 6.4%, due in 2012 (d) 343,393
Euro fixed rate notes, bearing interest at 5.57%,
due in 2006 355,965 297,195
Revolving credit facilities, bearing interest at rates
ranging from libor plus 0.17% to libor plus 0.98%
(2.3% at May 31, 2003 and 1.6% at November 30, 2002),
due through 2006 16,500 50,000
Other 48,956 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 530,804 520,944
Convertible notes, net of discount, with a
face value of $889 million, due in 2033,
with first put option in 2008 (f) 575,076
5,501,621 3,049,664
7,004,643 3,168,391
Less portion due within one year (296,802) (154,633)
$6,707,841 $3,013,758
(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) We have entered into interest rate swap agreements, which mature through
2012, and convert this fixed rate debt to floating rate debt. In
addition, we have entered into foreign currency swap transactions, which
have effectively converted this euro debt into sterling debt.
(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. In addition, we
have entered into foreign currency swap transactions, which have
effectively converted $225 million of this dollar debt into sterling
debt.
(d) At May 31, 2003, $1.23 billion of Carnival plc's 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. Carnival Corporation
expects to guarantee all or a substantial portion of the existing
indebtedness of Carnival plc, subject to some amendments being made to
the terms of that indebtedness.
(e) Euro floating rate notes in the amount of $333 million ($278 million
at November 30, 2002) have been swapped into euro fixed rate notes
through 2005.
(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 between August 31, 2003 through April 29, 2008, for
which the closing price of the Carnival Corporation common stock is
greater than $63.73 per share, for a defined duration of time.
Thereafter, the $63.73 per share conversion trigger price increases each
quarter at 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 second fiscal quarter of 2003. Upon
conversion, redemption or repurchase of the above notes, we may choose to
deliver Carnival Corporation common stock, cash or a combination of cash
and Carnival Corporation common stock with a total value equal to the
value of the consideration otherwise deliverable. If these convertible
notes were to be put back to us, we expect to settle them for cash and,
accordingly, they are not included in our diluted earnings per share
common stock calculations. However, no assurance can be given that we
will have sufficient liquidity to make such cash payments. See Note 11.
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 rate of 1.75% per
year.
At May 31, 2003, we were in compliance with all of our debt covenants.
At May 31, 2003, the scheduled annual maturities of our long-term debt
was as follows (in thousands):
Fiscal
Remaining six months of 2003 $ 206,898
2004 254,279
2005 1,625,858(a)
2006 1,645,602(a)
2007 443,023
Thereafter 2,828,983(a)
$7,004,643
(a) Includes $600 million of our 2% convertible notes in 2005, $531 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 May 31,
2003 was as follows (in millions, except passenger capacity data):
Expected Estimated
Service Passenger Total
Brand and Ship Date(a) Shipyard Capacity Cost(b)
CCL
Carnival Glory 7/03 Fincantieri(c) 2,974 $ 510
Carnival Miracle 3/04 Masa-Yards (d) 2,124 375
Carnival Valor 12/04 Fincantieri(d) 2,974 510
Carnival Liberty 8/05 Fincantieri 2,974 460
Total CCL 11,046 1,855
Princess
Island Princess 7/03 Chantiers de
l'Atlantique(c)(d)(e) 1,970 480
Diamond Princess 3/04 Mitsubishi (e) 2,670 535
Caribbean Princess 4/04 Fincantieri (d) 3,110 500
Sapphire Princess 6/04 Mitsubishi (e) 2,670 535
Newbuild 6/06 Fincantieri 3,110 500
Total Princess 13,530 2,550(g)
Holland America
Oosterdam 8/03 Fincantieri(c)(d) 1,848 410
Westerdam 5/04 Fincantieri(d) 1,848 410
Newbuild 2/06 Fincantieri(d) 1,848 410
Total Holland America 5,544 1,230
Costa
Costa Fortuna 12/03 Fincantieri(f) 2,720 510
Costa Magica 11/04 Fincantieri(f) 2,720 545
Total Costa 5,440 1,055
Cunard
Queen Mary 2 1/04 Chantiers de
l'Atlantique(d) 2,620 780
Queen Victoria 4/05 Fincantieri (d) 1,968 410
Total Cunard 4,588 1,190
A'ROSA (river boat)
Newbuild 4/04 Meyer Werft 200 20
Total 40,348 $7,900
(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) The Island Princess, Carnival Glory and Oosterdam were delivered to us by
the shipyard on June 18, June 27 and July 11, 2003, respectively.
(d) These construction contracts are denominated in euros and have been fixed
into U.S. dollars through the utilization of forward foreign currency
contracts.
(e) At May 31, 2003, we had arranged committed financing for $1.06
billion to fund the delivery payments for these ships.
(f) These construction contracts are denominated in euros, which is Costa's
functional currency. The estimated total costs have been translated into
U.S. dollars using the May 31, 2003 exchange rate.
(g) 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).
In connection with our ships under contract for construction, we have
paid $1.2 billion through May 31, 2003 and anticipate paying $4.2 billion
during the twelve months ending May 31, 2004 and $2.5 billion thereafter.
NOTE 7 - Contingencies
Litigation
In 2002, three 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 pending 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 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 recent subpoena for
additional documents. If the investigation results in charges being filed, a
judgment could include, among other forms of relief, fines and debarment from
federal contracting, which would prohibit operations in Glacier Bay National
Park and Preserve during the period of debarment. The State of Alaska is
separately investigating this incident. The ultimate 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 mid-2004 at
the earliest. In the event that an award is given in favor of Cammell Laird,
the amount of damages, which Costa will have to pay, if any, is not currently
determinable. The ultimate outcome of this matter cannot be determined at
this time.
On April 23, 2003, Festival Crociere S.p.A. commenced an action against
the European Commission (the "Commission") in the Court of First Instance of
the European Communities in Luxembourg seeking to annul the Commission's
antitrust approval of the DLC transaction (the "Festival Action"). We have
recently 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. However, the
ultimate outcome of this matter cannot be determined at this time.
In the normal course of our business, various other claims and lawsuits
have been filed or are pending against us. Most of these claims and lawsuits
are covered by insurance and, accordingly, the maximum amount of our
liability is typically limited to our self-insurance retention levels.
However, the ultimate outcome of these claims and lawsuits which are not
covered by insurance cannot be determined at this time.
Operating Leases
At May 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 six months of 2003 $ 18,000
2004 33,000
2005 31,000
2006 21,000
2007 16,000
Thereafter 82,000
$201,000
Port Facilities and Other
At May 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 six months of 2003 $ 29,000
2004 46,000
2005 32,000
2006 33,000
2007 34,000
Thereafter 185,000
$359,000
Contingent Obligations
At May 31, 2003, we had contingent obligations totaling $1.06 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 lease 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 $291 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 $87
million, or alternatively provide mortgages in the aggregate amount of $87
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 May 31, 2003
have to pay a total of $168 million in stipulated damages. As of May 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. 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 entering into these three transactions we received $67
million, which was recorded as deferred income on our balance sheets and 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,
increased 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.
We have provided counter-indemnities of approximately $335 million
relating to bonds provided by third parties in support of our obligations
arising in the normal course of business. Generally, these bonds are
required by travel industry regulators in the various jurisdictions in which
we operate.
NOTE 8 - Shareholders' Equity
Carnival Corporation's Articles of Incorporation and Carnival plc's
Memorandum and Articles of Association authorize their boards of directors,
at their discretion, to issue up to 40 million shares and 100,000 shares of
preferred stock, respectively. At May 31, 2003 and November 30, 2002, no
Carnival Corporation nor Carnival plc preferred stock had been issued.
During the six months ended May 31, 2003 and 2002, Carnival Corporation
declared quarterly cash dividends of $0.105 per share in each quarter, or an
aggregate of $123 million for each six month period to its stockholders. In
addition, Carnival plc also declared dividends of $.105 per share in the 2003
second quarter, or an aggregate of $18 million, which was paid in June 2003.
NOTE 9 - Comprehensive Income
Comprehensive income was as follows (in thousands):
Six Months Three Months
Ended May 31, Ended May 31,
2003 2002 2003 2002
Net income $254,674 $323,841 $127,795 $194,201
Foreign currency translation
adjustment, net 163,723 24,745 109,165 32,901
Unrealized gains on
marketable securities, net 2,492 6,280 3,629 3,847
Changes related to cash flow
derivative hedges (8,578) 4,571 (6,484) (8)
Total comprehensive income $412,311 $359,437 $234,105 $230,941
NOTE 10 - 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. Cruise revenues are
comprised of sales of passenger cruise tickets, and in some cases the sale of
air transportation to and from our cruise ships. The cruise ticket price
includes the overall cruise vacation experience, including accommodations,
meals, entertainment and many onboard activities. Cruise revenues also
include the sale of goods and/or services on board our cruise ships, which
are made available to our passengers to enhance their cruise experience,
while generating additional revenues for us. These revenues 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 collect a percentage of their revenues. The
other segment represents the transportation, hotel and tour operations of
Holland America Tours, the hotel and transportation operations of 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):
Six Months Ended May 31,
2003(a) 2002(a)(b)
Operating Operating
income income
Revenues (loss) Revenues (loss)
Cruise $2,336,532 $321,389 $1,869,358 $386,602
Other 41,983 (21,237) 33,495 (20,379)
Intersegment elimination (12,794) (6,423)
$2,365,721 $300,152 $1,896,430 $366,223
Three Months Ended May 31,
2003(a) 2002(a)(b)
Operating Operating
income income
Revenues (loss) Revenues (loss)
Cruise $1,309,057 $177,832 $968,096 $229,619
Other 36,464 (9,990) 27,788 (9,208)
Intersegment elimination (10,905) (5,985)
$1,334,616 $167,842 $989,899 $220,411
(a) Cruise revenues included billings to Holland America Tours for the cruise
portion of a tour, when a cruise is sold as part of a tour package. In
addition, other revenues included billings by Princess Tours for the land
portion of a tour, when a tour is sold as part of a cruise package, and
billings by Holland America Tours and Princess Tours to some of our
cruise brands for providing port hospitality services to cruise
passengers. These intersegment billings are eliminated from 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 May 31, 2003, substantially all of our assets are
included within the cruise segment.
NOTE 11 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
thousands, except per share data):
Six Months Ended Three Months Ended
May 31, May 31,
2003 2002 2003 2002
Net income $254,674 $323,841 $127,795 $194,201
Weighted-average common shares
outstanding 637,916 586,395 688,937 586,520
Dilutive effect of stock plans 1,033 1,799 1,181 2,259
Diluted weighted-average shares
outstanding 638,949 588,194 690,118 588,779
Basic earnings per share $0.40 $0.55 $0.19 $0.33
Diluted earnings per share $0.40 $0.55 $0.19 $0.33
The weighted-average common shares outstanding for the six and three
months ended May 31, 2003 includes the pro rata Carnival plc shares since
April 17, 2003. In addition, our diluted earnings per share computation for
the six and three months ended May 31, 2003 and 2002 did not include a
maximum of 53.6 million and 32.7 million shares of Carnival Corporation
common stock issuable upon conversion of all its convertible debt, as this
common stock was not issuable under the contingent conversion provisions of
these debt instruments.
If Carnival Corporation's common stock price reaches $33.77 per share
for a defined duration of time in the three months ended August 31, 2003,
then an additional 17.4 million shares of its stock, which is issuable under
its zero-coupon notes, will be considered outstanding for our diluted third
quarter earnings per share computation. In addition, we would increase third
quarter net income to eliminate the imputed interest expense we recorded on
these zero-coupon notes for the diluted third quarter earnings per share
computation.
NOTE 12 - Recent Accounting Pronouncements
In November 2002, Financial Accounting Standards Board Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Indirect Guarantees of Indebtedness of Others" was
issued. FIN No. 45 requires that upon issuance of a guarantee, the guarantor
must recognize a liability for the fair value of the obligation it assumes
under the guarantee. Guarantors will also be required to meet expanded
disclosure obligations. The initial recognition and measurement provisions
of FIN No. 45 are effective for guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for annual and interim
financial statements that end after December 15, 2002. We have adopted FIN
No. 45 in the first quarter of 2003.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
and director compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for annual financial statements for
fiscal years ending after December 15, 2002 and for interim financial
statements commencing after such date. We adopted the disclosure
requirements of SFAS No. 148 for our quarter ended May 31, 2003 (see Note 3).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this 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, 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, including those statements made in
our "Outlook for Remainder of Fiscal 2003" section and others 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 or business prospects, 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 Quarterly Report on Form 10-Q. 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, 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 effectively to control the
outcome of shareholder voting.
Forward-looking statements should not be relied upon as a prediction of
actual results. Subject to any continuing obligations under applicable law
or any relevant listing rules, we expressly disclaim any obligation to
disseminate, after the date of this 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 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, such as 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 collect a
percentage of their revenues.
We also derive revenues and incur costs from the operations of Holland
America Tours and Princess Tours. These operations' revenues are primarily
generated in conjunction with the Alaska cruise vacations provided by our
HAL, Princess and CCL cruise brands. In addition, we also derive revenues
and incur costs from our business to business travel agency, P&O Travel Ltd.,
which is also responsible for the purchasing of part of our air travel
requirements.
We currently do not accumulate and report all costs separately for our
onboard and other revenue producing activities because we view these costs
principally as part of the overall cruise services provided to our
passengers. We primarily use, and intend to continue to use, other metrics,
such as net revenue yields and per diems and net operating costs per
available lower berth day, to measure our cruise segment performance and help
manage our cruise business. However, we currently plan to commence
segregating our revenues and the directly related variable costs and expenses
associated with these revenue streams within our consolidated statements of
operations to be included in our Quarterly Report on Form 10-Q for the
quarter ending August 31, 2003.
For segment information related to our revenues and operating income
see Note 10 in the accompanying financial statements. Operations data
expressed as a percentage of total revenues and selected statistical
information were as follows:
Six Months Ended Three Months Ended
May 31, May 31,
2003 2002 2003 2002
Revenues 100% 100% 100% 100%
Costs and Expenses
Operating 61 56 61 54
Selling and administrative 16 15 16 15
Depreciation and amortization 10 10 10 9
Operating Income 13 19 13 22
Nonoperating Expense (2) (2) (3) (3)
Income Before Income Taxes 11 17 10 19
Income Tax Benefit, Net 1
Net Income 11% 17% 10% 20%
Selected Statistical Information
Passengers carried (in thousands) 2,140 1,603 1,218 831
Occupancy percentage (a) 100.3% 102.3% 98.5% 101.9%
(a) 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 moderately seasonal, with the third quarter being the
strongest. The consolidation of Carnival plc is expected to cause 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 ALBD capacity, excluding Carnival plc, is
currently expected to increase by 19.5% and 18.0% in the third and fourth
quarters of fiscal 2003, respectively, as compared to the same periods of
fiscal 2002. Assuming that the DLC transaction was completed and Carnival
plc was consolidated for the full periods in both years, our pro forma ALBD
capacity is currently expected to increase 18.9% and 19.4% in the third and
fourth quarters of fiscal 2003, respectively, as compared to the same periods
of fiscal 2002.
The year over year percentage increase in Carnival Corporation's
standalone ALBD capacity, resulting primarily from new ships entering
service, for fiscal 2004, 2005 and 2006 is currently expected to be 17.5%,
9.6% and 5.0%, respectively. Our pro forma ALBD capacity increase for fiscal
2004, 2005 and 2006 is currently expected to be 18.4%, 9.2% 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.
Outlook For Remainder of Fiscal 2003 ("2003")
On June 25, 2003, in our press release announcing second quarter 2003
earnings, we said that, our estimates for earnings per share for the third
quarter of 2003 are expected to be in a range of $0.83 to $0.87 and for the
fourth quarter in a range of $0.24 to $0.28. We also noted, that because the
booking curve remains very close to sailing, the forecasting of future
results is less predictable than in prior years.
Six Months Ended May 31, 2003 ("2003") Compared To Six Months Ended May 31,
2002 ("2002")
Revenues
Revenues increased $469 million, or 25%, in 2003 compared to 2002.
Cruise revenues increased $467 million, or 25%, to $2.34 billion in 2003 from
$1.87 billion in 2002. Approximately $283 million of our cruise revenue
increase was due to the consolidation of Carnival plc and $184 million was
due to increased revenues from Carnival Corporation's cruise brands. Carnival
Corporation's cruise revenue change resulted primarily from a 15.7% increase
in its standalone ALBD capacity in 2003 compared to 2002, offset by a decline
in its gross revenue yields (gross revenues per available lower berth day).
Within this Quarterly Report on Form 10-Q, we disclose certain pro forma
information, which assumes that the DLC transaction was completed and
Carnival plc was included in the full period for both years. Our pro forma
ALBD capacity increase was 16.0% in 2003 compared to 2002. Historical and
pro forma gross revenue yields declined 4.2% and 3.2%, respectively, in 2003
compared to 2002 for the same reasons as the decline in net revenue yields
discussed below, as well as the reduced number of passengers purchasing air
transportation from us. Historical net revenue yields and pro forma net
revenue yields declined 4.6% and 2.8%, respectively, in 2003 compared to 2002
largely because of lower cruise ticket prices and lower occupancy levels.
Our cruise 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.
Onboard and other revenues, which are included in cruise revenues,
increased $123 million in 2003 to $529 million from $406 million in 2002.
Approximately $60 million of our onboard and other revenues increase was due
to the consolidation of Carnival plc and $63 million was due to increased
revenues from Carnival Corporation's cruise brands, primarily due to its
15.7% increase in ALBD capacity.
Costs and Expenses
Operating expenses increased $381 million, or 36%, in 2003 compared to
2002. Cruise operating expenses increased $380 million, or 37%, to $1.40
billion in 2003 from $1.03 billion in 2002. Approximately $187 million of
our cruise operating cost increase was due to the consolidation of Carnival
plc, and the remaining $193 million of the increase was from Carnival
Corporation. Carnival Corporation's increase was primarily a result of the
impact of the 15.7% increase in its ALBD capacity and higher fuel costs. Pro
forma operating expenses increased $335 million, or 20%, to $2.04 billion in
2003 from $1.70 billion in 2002 primarily as a result of the 16% increase in
ALBD capacity and higher fuel costs.
Selling and administrative expenses increased $96 million, or 33%, to
$389 million in 2003 from $295 million in 2002. Cruise selling and
administrative expenses increased $95 million, or 34%, to $373 million in
2003 from $279 million in 2002. Approximately $53 million of our increase
was due to the consolidation of Carnival plc and the remaining $42 million of
the increase was from Carnival Corporation, which was primarily due to the
15.7% increase in ALBD capacity and the front-loading of advertising expenses
into the first quarter of 2003. Pro forma selling and administrative
expenses increased $96 million, or 21%, to $552 million from $456 million in
2002, primarily as a result of the 16% increase in ALBD capacity, as well as
the $20 million of major marketing, promotion and other costs related to the
introduction of four ships by Carnival plc.
Historical and pro forma gross operating costs per ALBD both increased
by 4.5% in 2003 compared to 2002. Historical and pro forma net operating
costs per ALBD increased 7.2% and 8.4%, respectively, in 2003 compared to
2002. Historical gross and net operating costs per ALBD in 2003 were higher
as compared to 2002 largely because of Carnival plc's higher operating cost
levels compared to Carnival Corporation, because of higher fuel costs and due
to the front-loading of advertising expenses in the 2003 first quarter. Pro
forma gross and net operating costs per ALBD in 2003 compared to 2002 were
largely higher because of higher fuel costs and front-loading of advertising
expenses, as well as Carnival plc's marketing, promotion and other costs
mentioned above.
Depreciation and amortization increased by $59 million, or 32%, to $241
million in 2003 from $182 million in 2002. This increase was primarily from
the consolidation of Carnival plc, which accounted for approximately $25
million of the increase, and the majority of the remaining increase was
primarily as a result of the expansion of the Carnival Corporation fleet and
ship improvement expenditures. Pro forma depreciation and amortization
expense increased by $55 million, or 21%, to $315 million from $260 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 $80 million in 2003 from $59 million in 2002, or $21
million, which was comprised primarily of a $31 million increase in interest
expense from our increased level of average borrowings, partially offset by
an $11 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, which contributed $15 million of the
increase in interest expense, and Carnival Corporation's issuance of $575
million of convertible notes, net of discount, $500 million of which was
received in April 2003 (see Note 5 in the accompanying financial statements).
Other income was $4 million in 2003, which was 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 $16 million related to the Computershare matter and other charges
associated with the DLC transaction (see Note 2 in the accompanying financial
statements). The Computershare matter relate to the settlement of claims by
Carnival plc shareholders whose tender through Chase Nominees Limited of over
53 million Carnival plc shares in the partial share offer was wrongfully
rejected by Computershare, our UK Receiving and Escrow Agent.
Three Months Ended May 31, 2003 ("2003") Compared To Three Months Ended May
31, 2002 ("2002")
Revenues
Revenues increased $345 million, or 35%, in 2003 compared to 2002.
Cruise revenues increased $341 million, or 35%, to $1.31 billion in 2003 from
$968 million in 2002. Approximately $283 million of our cruise revenue
increase was due to the consolidation of Carnival plc and $58 million was due
to increased revenues in Carnival Corporation cruise brands. Carnival
Corporation's cruise revenue change resulted primarily from a 16.6% increase
in its standalone ALBD capacity in 2003 compared to 2002, offset by a decline
in its gross revenue yields. Our pro forma ALBD capacity increase was 15.4%
in 2003 compared to 2002. Historical and pro forma gross revenue yields
declined 7.2% and 6.3%, respectively, in 2003 compared to 2002 for the same
reasons as the decline in net revenue yields discussed below, as well as the
reduced number of passengers purchasing air transportation from us.
Historical net revenue yields and pro forma net revenue yields declined 8.6%
and 6.7%, respectively, in 2003 compared to 2002 largely because of lower
cruise ticket prices and lower occupancy levels. Our cruise 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.
Onboard and other revenues, which are included in cruise revenues,
increased $92 million in 2003 to $301 million from $209 million in 2002.
Approximately $60 million of our onboard and other revenues increase was due
to the consolidation of Carnival plc and $32 million was due to increased
revenues from Carnival Corporation's cruise brands, primarily due to its
16.6% increase in ALBD capacity.
Costs and Expenses
Operating expenses increased $285 million, or 53%, in 2003 compared to
2002. Cruise operating expenses increased $283 million, or 55%, to $796
million in 2003 from $513 million in 2002. Approximately $187 million of our
cruise operating cost increase was due to the consolidation of Carnival plc,
and the remaining $96 million of the increase was from Carnival Corporation.
Carnival Corporation's increase was primarily a result of the impact of the
16.6% increase in its ALBD capacity and higher fuel costs. Pro forma
operating expenses increased $162 million, or 19%, to $1.03 billion in 2003
from $863 million in 2002 primarily as a result of the 15.4% increase in ALBD
capacity and higher fuel costs.
Selling and administrative expenses increased $70 million, or 49%, to
$212 million in 2003 from $142 million in 2002. Cruise selling and
administrative expenses increased $69 million, or 51%, to $204 million in
2003 from $135 million in 2002. Approximately $53 million of our increase
was due to the consolidation of Carnival plc and the remaining $16 million of
the increase was from Carnival Corporation, which was primarily due to the
16.6% increase in ALBD capacity. Pro forma selling and administrative
expenses increased $51 million, or 23%, to $273 million from $222 million in
2002, primarily as a result of the 15.4% increase in ALBD capacity, as well
as the $13 million of major marketing, promotion and other costs related to
the introduction of four ships by Carnival plc.
Historical and pro forma gross operating costs per ALBD increased 5.9%
and 5.2%, respectively, in 2003 as compared to 2002. Historical and pro
forma net operating costs per ALBD increased 8.4% and 9.2%, respectively, in
2003 compared to 2002. Historical gross and net operating costs per ALBD in
2003 were higher compared to 2002 largely because of Carnival plc's higher
operating cost levels compared to Carnival Corporation and because of higher
fuel costs. Pro forma gross and net operating costs per ALBD in 2003
compared to 2002 were largely higher because of higher fuel costs, and
Carnival plc's marketing, promotion and other costs mentioned above.
Depreciation and amortization increased by $42 million, or 46%, to $135
million in 2003 from $93 million in 2002. This increase was primarily from
the consolidation of Carnival plc, which accounted for approximately $25
million of the increase, and the majority of the remaining increase was
primarily as a result of the expansion of the Carnival Corporation fleet and
ship improvement expenditures. Pro forma depreciation and amortization
expense increased by $27 million, or 20%, to $160 million from $133 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 $46 million in 2003 from $28 million in 2002, or $18
million, which was comprised primarily of a $25 million increase in interest
expense from our increased level of average borrowings, partially offset by a
$6 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, which contributed $15 million of the increase in
interest expense and Carnival Corporation's issuance of $575 million of
convertible notes.
Other expense was $11 million in 2003, which includes $16 million related
to the Computershare matter and other charges associated with the DLC
transaction. Other expense was $12 million in 2002, which was primarily
comprised of $9 million of losses, including related expenses, resulting from
the sale of Holland America's former Nieuw Amsterdam, and $4 million of direct
costs associated with cancelled cruises.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $661 million of net cash from operations during
the six months ended May 31, 2003, a decrease of $46 million, or 6.5%,
compared to the six months ended May 31, 2002.
During the six months ended May 31, 2003, our net expenditures for
capital projects were $613 million, of which $511 million was spent for our
ongoing shipbuilding program. The $102 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 $156 million from Carnival plc's existing cash balances
upon its acquisition, net of acquisition costs. Finally, we received an
insurance reimbursement of $31 million related to the Wind Song casualty loss
and $20 million from the sale of Cunard's Caronia, which we chartered back
through November 2004.
During the six months ended May 31, 2003, we issued convertible notes
for gross proceeds of $575 million for general corporate purposes, including
financing our shipbuilding program and other capital commitments. We also
borrowed $323 million under Costa's and POPCIL's revolving credit facilities
and $49.5 million of net borrowings under our short-term loan agreements. In
addition, we made principal repayments of $284 million, which included $50
million under our $1.4 billion revolver, $213 million on Costa's and POPCIL's
revolving credit facilities and $21 million on Costa's and POPCIL's
collaterized debt. We also paid cash dividends of $123 million in the first
six 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 May 31, 2003 compared to
November 30, 2002 changed significantly because of the consolidation of
Carnival plc. At May 31, 2003, the Carnival Corporation & plc outstanding
debt was $7.05 billion, of which $346 million is due in one year. In
addition, we had non-cancelable shipbuilding commitments for 16 new cruise
ships and one river boat due over the next three years of approximately $6.7
billion, of which $4.2 billion is due in the twelve months ending May 31,
2004. See Notes 5, 6 and 7 in the accompanying financial statements for our
debt, shipbuilding, other commitments and contingent obligations as of May
31, 2003.
At May 31, 2003, we had liquidity of $4.30 billion, which consisted of
$1.45 billion of cash, cash equivalents and short-term investments, $1.79
billion available for borrowing under our $2.4 billion of revolving credit
facilities obtained through a group of banks, which have strong credit
ratings, and $1.06 billion under committed ship financing arrangements. Our
revolving credit facilities mature in 2005, with respect to $710 million of
availability, and in 2006, with respect to $1.7 billion of availability. A
key to our access to liquidity is the maintenance of our strong long-term
credit ratings. In the 2003 second quarter, Moody's Investors Service,
Standard and Poor's and FitchRatings announced that they had lowered our
senior unsecured debt rating from A2 to A3, from A to A- and from A to A-,
respectively, in anticipation of, among other things, the DLC transaction
with Carnival plc.
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. 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.
In addition, our higher level of debt resulting from the DLC transaction
increases our exposure to interest rate movements. At May 31, 2003, the fixed
and variable interest rate portions of our debt, after the effect of our
interest rate swaps, was 59% and 41%, respectively. Our debt, after the
effect of foreign currency swaps, was denominated 57% in U.S. dollars, 32% in
euros and 11% 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.
CARNIVAL CORPORATION & PLC
HISTORICAL GAAP RECONCILING INFORMATION
Gross and net revenue yields and gross and net revenue per diems were
computed as follows (1):
Six Months Ended Three Months Ended
May 31, May 31,
2003 2002 2003 2002
(in thousands, except yields and per diems)
Cruise revenues $2,336,532 $1,869,358 $1,309,057 $968,096
Less commissions, air
transportation and other (458,388) (360,587) (256,290) (177,399)
Net cruise revenues $1,878,144 $1,508,771 $1,052,767 $790,697
Available lower berth
days ("ALBD's")(2) 13,465 10,319 7,661 5,258
Gross revenue yields (3) $ 173.53 $ 181.16 $ 170.87 $ 184.12
Net revenue yields (4) $ 139.48 $ 146.21 $ 137.42 $ 150.38
Passenger cruise days
("PCD's")(5) 13,512 10,559 7,544 5,359
Gross revenue per diems (6) $ 172.92 $ 177.04 $ 173.52 $ 180.65
Net revenue per diems (7) $ 139.00 $ 142.89 $ 139.55 $ 147.55
Gross and net operating costs per ALBD were comprised as follows (1):
Six Months Ended Three Months Ended
May 31, May 31,
2003 2002 2003 2002
(in thousands, except yields and per diems)
Cruise operating expenses $1,405,258 $1,025,315 $795,848 $513,079
Less commissions, air
transportation and other (458,388) (360,587) (256,290) (177,399)
Cruise selling and
administrative expenses 373,372 278,853 203,872 135,077
Net cruise costs $1,320,242 $ 943,581 $743,430 $470,757
ALBD's 13,465 10,319 7,661 5,258
Gross operating costs
per ALBD (8) $ 132.09 $ 126.39 $ 130.49 $ 123.27
Net operating costs per
ALBD (9) $ 98.05 $ 91.44 $ 97.04 $ 89.53
CARNIVAL CORPORATION & PLC
PRO FORMA GAAP RECONCILING INFORMATION
Our pro forma gross and net revenue yields and gross and net per diems,
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)(10):
Six months ended Three months ended
May 31, May 31,
2003 2002 2003 2002
(in thousands, except yields and per diems)
Cruise revenues $3,192,346 $2,845,140 $1,592,937 $1,473,071
Less commissions,
air transportation
and other (697,876) (630,842) (335,293) (304,310)
Net cruise revenues $2,494,470 $2,214,298 $1,257,644 $1,168,761
ALBD's (2) 17,710 15,273 9,087 7,877
Gross revenue yields (3) $ 180.25 $ 186.29 $ 175.30 $ 187.01
Net revenue yields (4) $ 140.85 $ 144.98 $ 138.40 $ 148.38
PCD's (5) 17,588 15,496 8,925 7,985
Gross revenue per diems (6)$ 181.51 $ 183.60 $ 178.48 $ 184.48
Net revenue per diems (7) $ 141.83 $ 142.89 $ 140.91 $ 146.37
Gross and net operating costs per ALBD were comprised as follows (1)(10):
Six months ended Three months ended
May 31, May 31,
2003 2002 2003 2002
(in thousands, except yields and per diems)
Cruise operating expenses $1,985,403 $1,642,625 $993,484 $824,350
Less commissions,
air transportation and other (697,876) (630,842) (335,293) (304,310)
Cruise selling and
administrative expenses 530,477 434,473 262,969 211,213
Net cruise costs $1,818,004 $1,446,256 $921,160 $731,253
ALBD's 17,710 15,273 9,087 7,877
Gross operating costs
per ALBD (8) $ 142.06 $ 136.00 $ 138.27 $ 131.47
Net operating costs per
ALBD (9) $ 102.65 $ 94.69 $ 101.37 $ 92.83
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
June 25, 2003.
(1) We use net cruise revenue per available lower berth day ("net revenue
yields"), net cruise revenue per passenger cruise day ("net revenue per
diems") and net cruise costs per available lower berth day as significant
non-GAAP financial measures of our cruise segment financial performance.
We believe that net revenue yields and net revenue per diems are commonly
used in the cruise industry to measure a company's pricing performance.
These measures are also used for revenue management purposes. In
calculating net revenue yields and net revenue per diems, 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 operating costs per available lower berth day 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 revenues. This is done to avoid
duplicating these variable costs in the non-GAAP financial measures
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
passenger 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 ALBD's.
(4) Represent net cruise revenues divided by ALBD's.
(5) Represent the number of cruise passengers multiplied by the number of
revenue-producing ship operating days.
(6) Represent gross cruise revenues divided by PCD's.
(7) Represent net cruise revenues divided by PCD's.
(8) Represent gross operating expenses divided by ALBD's.
(9) Represent net cruise costs divided by ALBD's.
(10)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 each of Carnival Corporation and Carnival plc as of July 15, 2003 and
believe 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 and 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.
An action referred to as the Stock Purchase Complaint was previously
reported in the Carnival Corporation Annual Report on Form 10-K for the year
ended November 30, 2002. The parties to that action have signed a settlement
agreement dated June 3, 2003, which was submitted for judicial approval on
June 6, 2003.
An action referred to as the ADA Complaint against Holland America Tours
was previously reported in the Carnival Corporation Annual Report on Form 10-
K for the year ended November 30, 2002. Holland America Tours and the
plaintiffs have entered into a settlement agreement pursuant to an agreement
that Holland America Tours will make certain modifications to eleven of its
ships, with an option to include other ships into the settlement agreement.
On April 29, 2003, Holland America Tours and the plaintiffs jointly filed a
motion for class certification, fairness hearing, stay and for court approval
of the settlement. A hearing on the joint motion has not yet been scheduled.
An action was previously reported in the Carnival Corporation Annual
Report on Form 10-K for the year ended November 30, 2002 that certain of
Holland America's officers had received subpoenas relating to a wastewater
discharge from the Ryndam. 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.
On April 23, 2003, Festival Crociere S.p.A. commenced an action against
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. We have recently sought leave to intervene in the Festival
Action and intend to contest such action vigorously.
In April 1996, a purported class action complaint was 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. The plaintiffs have not claimed a specific damage
amount but settlement of this litigation had been agreed in principle with
the plaintiffs for coupons for future travel in amounts between $5 and $24,
with a total face value of approximately $13 million. However, on January
17, 2002, a Los Angeles, California Superior Court Judge ruled that he would
not consider the class-wide settlement agreed by the parties on the grounds
that he had previously ruled that there was no appropriate class. The
plaintiffs appealed the ruling, and the Court of Appeal upheld the lower
court's ruling. The plaintiff's writ to the California Supreme Court has
been denied. As a result of this ruling, the case remains pending.
An Italian subsidiary of Carnival plc made a claim for a tax deduction
in 1995 under the Italian Tremonti law, reducing taxable income by just over
129 million euros. Qualification for the deduction was dependent on
ownership of relevant assets. The subsidiary bareboat chartered a vessel,
for which a Tremonti benefit had been claimed, to an affiliate. In December
2001, the Italian tax authorities submitted an assessment for tax of 71
million euros plus penalties of 71 million euros on the grounds that the
subsidiary had finance leased, rather than chartered, the vessel and,
therefore, did not qualify for such a deduction. The Italian subsidiary
appealed against the assessment and the Low Tax Court of Palermo ruled in its
favor. We believe that it was probable that the tax authorities would have
appealed this ruling, and given the amount originally assessed, we decided to
settle this claim by making a 7 million euro payment in May 2003, which
liability had been recorded in the Carnival plc balance sheet prior to its
acquisition. Accordingly, these proceedings have been terminated.
Item 2. Changes in Securities and Use of Proceeds.
On April 17, 2003, Carnival Corporation and Carnival plc entered into a
DLC transaction. Because of the DLC transaction, the constituent instruments
defining the rights of holders of both Carnival Corporation's common stock,
par value $0.01 per share, and Carnival plc's ordinary shares, $1.66 stated
value per share, were modified. For a brief summary regarding the general
effect of those modifications, please refer to Note 2 in the accompanying
financial statements.
During the second quarter, Carnival Corporation issued $889 million
aggregate principal amount at maturity of its Senior Convertible Debentures
due 2003 to "Qualified Institutional Buyers" as defined in Rule 144A under
the Securities Act. The initial purchaser of the debentures was Merrill
Lynch & Co. Carnival Corporation received $575 million in net proceeds from
that issuance, and the aggregate commissions paid were $11.5 million. The
debentures are convertible as described in Note 5 in the accompanying
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
Carnival Corporation
A special meeting of Carnival Corporation shareholders was held on April
14, 2003 (the "Special Meeting"). On all matters which came before the
Special Meeting, holders of Carnival Corporation common stock were entitled
to one vote for each share held. Proxies for 502,212,020 of the 586,972,729
shares of common stock entitled to vote were received in connection with the
Special Meeting.
The following table sets forth the matters which were submitted to
Carnival Corporation's shareholders for approval at the Special Meeting and
the tabulation of the votes with respect to each matter:
BROKER
MATTER FOR AGAINST WITHHELD NONVOTES
Approval of the Offer and
Implementation Agreement,
dated as of January 8, 2003,
between Carnival Corporation
and P&O Princess Cruises plc,
and the transactions contem-
plated by that agreement 497,809,658 1,730,574 2,671,788 0
Approval of amendments to
Carnival Corporation's
Articles of Incorporation and
By-laws in connection with the
transactions contemplated by
the Offer and Implementation
Agreement 464,054,299 35,440,272 2,717,449 0
Approval of an amendment to
the Articles of Incorporation
and By-laws of Carnival
Corporation to increase the
number of shares of common
stock that Carnival Corporation
has the authority to issue by
999,999,998 shares 493,737,115 4,923,579 3,551,326 0
Approval of an amendment to
the Articles of Incorporation
and By-laws of Carnival
Corporation to reduce the
quorum requirement for
meetings of the board of
directors of Carnival Corp-
oration from a majority, to
one-third, of the total number
of directors 356,953,713 141,030,982 4,227,325 0
Approval of an amendment to
the By-laws of Carnival
Corporation to reduce the
quorum requirement for
meetings of the shareholders
of Carnival Corporation from a
majority, to one-third, of the
total number of shares entitled
to be cast 381,675,433 116,309,188 4,227,399 0
Approval of an amendment to
the By-laws of Carnival
Corporation to remove the
ability of shareholders to act
by written consent 375,307,289 122,063,252 4,841,479 0
Carnival plc
An Extraordinary General Meeting of the shareholders of Carnival plc was
held on April 16, 2003 (the "EGM"). On all matters which came before the
EGM, holders of Carnival plc ordinary shares were entitled to one vote for
each share held. Proxies for 413,652,715 of the 693,741,420 ordinary shares
entitled to vote were lodged prior to the EGM.
The special resolution before the EGM was carried on a show of hands.
The following table sets forth the matter which was submitted to Carnival
plc's shareholders for approval at the EGM and the tabulation of the proxy
votes with respect to such matter lodged prior to the EGM:
REFRAIN/
MATTER FOR AGAINST ABSTAIN
To approve the dual listed
company transaction with
Carnival Corporation with
related acts, including the
share reorganization, the
creation and issue of a new
special voting share, a new
equalization share and new
preference shares, changes
to the company's memorandum
and articles of association
and the change of the company's
name to Carnival plc. 408,679,183 1,118,826 3,854,706
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 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).
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.16 to the joint registration statement on Form S-3 and
F-3 of Carnival Corporation, Carnival plc and POPCIL (Commission
File No. 333-106293).
4.2 Pairing Agreement, dated as of April 17, 2003, between Carnival
Corporation, The Law Debenture Trust Corporation (Cayman)
Limited, as trustee, and SunTrust Bank, as transfer agent,
incorporated by reference 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).
4.3 Voting Trust Deed, dated as of April 17, 2003, between Carnival
Corporation and The Law Debenture Trust Corporation (Cayman)
Limited, as trustee, incorporated by reference 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).
4.4 SVE Special Voting Deed, dated as of April 17, 2003 between
Carnival Corporation, DLS SVC Limited, P&O Princess
Cruises plc, The Law Debenture Trust Corporation (Cayman)
Limited, as trustee, and The Law Debenture Trust Corporation,
P.L.C., incorporated by reference 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).
4.5 Carnival Corporation Deed of Guarantee, between Carnival
Corporation and Carnival plc, dated as of April 17, 2003,
incorporated by reference to Exhibit 4.3 to the joint
registration statement on Form S-4 of Carnival Corporation and
Carnival plc (Commission File No. 333-105671).
4.6 Carnival plc (formerly P&O Princess Cruises plc) Deed of
Guarantee between Carnival Corporation and Carnival plc, dated as
of April 17, 2003, incorporated by reference to Exhibit 4.10 to
the joint registration statement on Form S-3 and F-3 of Carnival
Corporation, Carnival plc and POPCIL (Commission File No. 333-
106293).
4.7 Third Supplemental Indenture, dated as of April 29, 2003, between
Carnival Corporation and U.S. Bank National Association, as
trustee, creating a series of securities designated Senior
Convertible Debentures due 2033, incorporated by reference to
Exhibit 4.13 to the joint registration statement on Form S-3 and
F-3 of Carnival Corporation, Carnival plc and POPCIL (Commission
File No. 333-106293).
4.8 Form of Senior Convertible Debenture (included in Exhibit 4.7).
4.9 Form of deposit agreement among P&O Princess Cruises plc, Morgan
Guaranty Trust Company of New York, as depositary, and holders and
beneficial owners from time to time of ADRs issued thereunder,
incorporated by reference to P&O Princess' registration statement
on Form 20-F (Commission File No. 1-15136).
10.1 Amended and Restated Carnival Corporation 2002 Stock Plan.
10.2 Employment Agreement dated as of April 17, 2003 by and between P&O
Princess Cruises International, Ltd. and Peter Ratcliffe.
10.3 Registration Rights Agreement, dated as of April 29, 2003, by and
among Carnival Corporation, Carnival plc and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated
by reference to Exhibit 4.14 to the joint registration statement
on Form S-3 and F-3 of Carnival Corporation, Carnival plc and
POPCIL (Commission File No. 333-106293).
10.4 Director Appointment letter between Micky M. Arison and Carnival
plc, dated April 14, 2003.
10.5 Indemnification Agreement between Micky M. Arison and Carnival
Corporation, dated April 17, 2003.
10.6 Director Appointment letter between Richard G. Capen, Jr. and
Carnival plc, dated April 14, 2003.
10.7 Indemnification Agreement between Richard G. Capen, Jr. and
Carnival Corporation, dated April 17, 2003.
10.8 Director Appointment letter between Robert H. Dickinson and
Carnival plc, dated April 14, 2003.
10.9 Indemnification Agreement between Robert H. Dickinson and Carnival
Corporation, dated April 17, 2003.
10.10 Director Appointment letter between Arnold W. Donald and Carnival
plc, dated April 14, 2003.
10.11 Indemnification Agreement between Arnold W. Donal