EXHIBIT 13
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended November 30,
------------------------
2005 2004 2003
---- ---- ----
Revenues
Cruise
Passenger tickets $ 8,379 $ 7,357 $ 5,039
Onboard and other 2,356 2,070 1,420
Other 352 300 259
-------- ------- -------
11,087 9,727 6,718
-------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 1,665 1,572 1,021
Onboard and other 408 359 229
Payroll and related 1,145 1,003 744
Food 615 550 393
Fuel 709 493 340
Other ship operating 1,425 1,270 897
Other 250 210 190
-------- ------- -------
Total 6,217 5,457 3,814
Selling and administrative 1,329 1,285 936
Depreciation and amortization 902 812 585
-------- ------- -------
8,448 7,554 5,335
-------- ------- -------
Operating Income 2,639 2,173 1,383
-------- ------- -------
Nonoperating (Expense) Income
Interest income 28 17 27
Interest expense, net of
capitalized interest (330) (284) (195)
Other (expense) income, net (7) (5) 8
-------- ------- -------
(309) (272) (160)
-------- ------- -------
Income Before Income Taxes 2,330 1,901 1,223
Income Tax Expense, Net (73) (47) (29)
-------- ------- -------
Net Income $ 2,257 $ 1,854 $ 1,194
======== ======= =======
Earnings Per Share
Basic $ 2.80 $ 2.31 $ 1.66
======== ======= =======
Diluted $ 2.70 $ 2.24 $ 1.63
======== ======= =======
Dividends Per Share $ 0.80 $ 0.525 $ 0.44
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
November 30,
---------------
ASSETS 2005 2004
---- ----
Current Assets
Cash and cash equivalents $ 1,178 $ 643
Short-term investments 9 17
Accounts receivable, net 408 409
Inventories 250 240
Prepaid expenses and other 370 419
-------- --------
Total current assets 2,215 1,728
-------- --------
Property and Equipment, Net 21,312 20,823
Goodwill 3,206 3,321
Trademarks 1,282 1,306
Other Assets 417 458
-------- --------
$ 28,432 $ 27,636
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 300 $ 381
Current portion of long-term debt 1,042 681
Convertible debt subject to current put option 283 600
Accounts payable 690 631
Accrued liabilities and other 832 868
Customer deposits 2,045 1,873
-------- --------
Total current liabilities 5,192 5,034
-------- --------
Long-Term Debt 5,727 6,291
Other Long-Term Liabilities and Deferred Income 541 551
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Equity
Common stock of Carnival Corporation; $.01 par
value; 1,960 shares authorized; 639 shares at 2005
and 634 shares at 2004 issued 6 6
Ordinary shares of Carnival plc; $1.66 par value;
226 shares authorized; 212 shares at 2005 and
2004 issued 353 353
Additional paid-in capital 7,381 7,311
Retained earnings 10,233 8,623
Unearned stock compensation (13) (16)
Accumulated other comprehensive income 156 541
Treasury stock; 2 shares of Carnival Corporation
at 2005 and 42 shares of Carnival plc at 2005
and 2004, at cost (1,144) (1,058)
-------- --------
Total shareholders' equity 16,972 15,760
-------- --------
$ 28,432 $ 27,636
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended November 30,
------------------------
2005 2004 2003
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,257 $ 1,854 $ 1,194
Adjustments to reconcile net income to
Fuel
Depreciation and amortization 902 812 585
Investment write-down 22
Accretion of original issue discount 20 21 20
Other 15 16 8
Changes in operating assets and liabilities,
excluding business acquired
Receivables (71) 11 (91)
Inventories (15) (73) (17)
Prepaid expenses and other (105) (54) 82
Accounts payable 84 (28) 43
Accrued and other liabilities 89 178 (16)
Customer deposits 212 479 125
------- ------- -------
Net cash provided by operating activities 3,410 3,216 1,933
------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment (1,977) (3,586) (2,516)
Sales of short-term investments 943 1,216 3,745
Purchases of short-term investments (935) (772) (3,803)
Cash acquired from the acquisition of P&O Princess, net 140
Proceeds from retirement of property and equipment 77 51
Other, net (1) (24) (50)
------- ------- -------
Net cash used in investing activities (1,970) (3,089) (2,433)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,152 843 2,123
Principal repayments of long-term debt (1,096) (932) (1,137)
Dividends paid (566) (400) (292)
(Repayments of) proceeds from short-term borrowings, net (58) 272 94
Proceeds from exercise of stock options 63 142 53
Purchase of treasury stock (386)
Other (1) (4) (15)
------- ------- -------
Net cash (used in) provided by
financing activities (892) (79) 826
------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents (13) (15) (23)
------- ------- -------
Net increase in cash and cash equivalents 535 33 303
Cash and cash equivalents at beginning of year 643 610 307
------- ------- -------
Cash and cash equivalents at end of year $ 1,178 $ 643 $ 610
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
Compre- Additional
hensive Common Ordinary paid-in Retained
income stock shares capital earnings
----------- ----------- ----------- ----------- -----------
Balances at November 30, 2002 $ 6 $ 1,089 $ 6,326
Comprehensive income
Net income $ 1,194 $ 1,194
Foreign currency
translation adjustment 162
Unrealized losses on
marketable securities, net (1)
Changes related to cash flow
derivative hedges, net (9)
-----------
Total comprehensive income $ 1,346
===========
Cash dividends declared (329)
Acquisition of Carnival plc $ 346 6,010
Issuance of stock under stock
plans 3 64
Amortization of unearned stock
compensation
----------- ----------- ----------- -----------
Balances at November 30, 2003 6 349 7,163 7,191
Comprehensive income
Net income $ 1,854 1,854
Foreign currency
translation adjustment 398
Unrealized loss on
marketable securities (1)
Minimum pension liability
adjustments (3)
Changes related to cash flow
derivative hedges, net (13)
-----------
Total comprehensive income $ 2,235
===========
Cash dividends declared (422)
Issuance of stock under stock
plans 4 148
Amortization of unearned stock
compensation
----------- ----------- ----------- -----------
Balances at November 30, 2004 6 353 7,311 8,623
Comprehensive income
Net income $ 2,257 2,257
Foreign currency
translation adjustment (398)
Minimum pension liability
adjustments (2)
Changes related to cash flow
derivative hedges, net 15
-----------
Total comprehensive income $ 1,872
===========
Cash dividends declared (647)
Issuance of stock under stock
plans 73
Amortization of unearned stock
compensation
Purchase of treasury stock
Issuance of common stock upon
conversion of convertible debt (3)
----------- ----------- ----------- -----------
Balances at November 30, 2005 $ 6 $ 353 $ 7,381 $ 10,233
=========== =========== =========== ===========
Unearned Accumulated Total
stock other share-
compen- comprehensive Treasury holders'
sation income (loss) stock equity
----------- -------------- ----------- -----------
Balances at November 30, 2002 $ (11) $ 8 $ 7,418
Comprehensive income
Net income 1,194
Foreign currency
translation adjustment 162 162
Unrealized losses on
marketable securities, net (1) (1)
Changes related to cash flow
derivative hedges, net (9) (9)
Total comprehensive income
Cash dividends declared (329)
Acquisition of Carnival plc $ (1,058) 5,298
Issuance of stock under stock
plans (14) 53
Amortization of unearned stock
compensation 7 7
----------- -------------- ----------- -----------
Balances at November 30, 2003 (18) 160 (1,058) 13,793
Comprehensive income
Net income 1,854
Foreign currency
translation adjustment 398 398
Unrealized loss on
marketable securities (1) (1)
Minimum pension liability
adjustments (3) (3)
Changes related to cash flow
derivative hedges, net (13) (13)
Total comprehensive income
Cash dividends declared (422)
Issuance of stock under stock
plans (7) 145
Amortization of unearned stock
compensation 9 9
----------- -------------- ----------- -----------
Balances at November 30, 2004 (16) 541 (1,058) 15,760
Comprehensive income
Net income 2,257
Foreign currency
translation adjustment (398) (398)
Minimum pension liability
adjustments (2) (2)
Changes related to cash flow
derivative hedges, net 15 15
Total comprehensive income
Cash dividends declared (647)
Issuance of stock under stock
plans (9) 64
Amortization of unearned stock
compensation 12 12
Purchase of treasury stock (386) (386)
Issuance of common stock upon
conversion of convertible debt 300 297
----------- -------------- ----------- -----------
Balances at November 30, 2005 $ (13) $ 156 $ (l,144) $ 16,972
=========== ============== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CARNIVAL CORPORATION & PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Description of Business
Carnival Corporation is incorporated in Panama, and Carnival plc is
incorporated in England and Wales. The accompanying consolidated financial
statements include the accounts of Carnival Corporation and Carnival plc and
their respective subsidiaries. Together with their consolidated subsidiaries
they are referred to collectively in these consolidated financial statements and
elsewhere in this 2005 Annual Report as "Carnival Corporation & plc," "our,"
"us," and "we." Our consolidated financial statements only include the results
of operations and cash flows of the former P&O Princess Cruises plc since April
17, 2003.
Carnival Corporation and Carnival plc (formerly known as P&O Princess
Cruises plc or "P&O Princess") operates as a dual listed company ("DLC"),
whereby the businesses of Carnival Corporation and Carnival plc are combined
through a number of contracts and through 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, however, they operate as if they were a single
economic enterprise. Each company's shares continue to be publicly traded; on
the New York Stock Exchange ("NYSE") for Carnival Corporation and the London
Stock Exchange for Carnival plc. In addition, Carnival plc American Depository
Shares ("ADSs") are traded on the NYSE. See Note 3.
We are the largest cruise company and one of the largest vacation
companies in the world. As of November 30, 2005, 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:
Number of Passenger Primary
Cruise Brands Cruise Ships Capacity (a) Market
------------- ------------ ------------ ------
Carnival Cruise
Lines 21 47,820 North America
Princess Cruises
("Princess") 14 29,152 North America
Holland America Line 12 16,930 North America
Costa Cruises ("Costa") 10 17,262 Europe
P&O Cruises 5 8,844 United Kingdom
AIDA Cruises ("AIDA") 4 5,378 Germany
Cunard Line ("Cunard") 2 4,410 North America and United Kingdom
P&O Cruises Australia(b) 3 3,680 Australia and New Zealand
Ocean Village 1 1,578 United Kingdom
Swan Hellenic 1 678 United Kingdom
Seabourn Cruise Line
("Seabourn") 3 624 North America
Windstar Cruises 3 604 North America
-- -------
79 136,960
== =======
(a) In accordance with cruise industry practice, passenger capacity is
calculated based on two passengers per cabin even though some cabins can
accommodate three or more passengers.
(b) In December 2005, we entered into an agreement for the sale of P&O Cruises
Australia's Pacific Sky, which is expected to leave our fleet in May 2006.
Preparation of Financial Statements
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
and disclosed in our financial statements. Actual results could differ from
these estimates. All significant intercompany balances and transactions are
eliminated in consolidation.
F-5
NOTE 2 - Summary of Significant Accounting Policies
Basis of Presentation
We consolidate entities over which we have control (see Note 3), as
typically evidenced by a direct ownership interest of greater than 50%. For
affiliates where significant influence over financial and operating policies
exists, as typically evidenced by a direct ownership interest from 20% to 50%,
the investment is accounted for using the equity method.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include investments with original maturities of
three months or less, which are stated at cost. At November 30, 2005 and 2004,
cash and cash equivalents included $980 million and $495 million of investments,
respectively, primarily comprised of time deposits, investment grade
asset-backed debt obligations, commercial paper and money market funds.
Substantially all of our short-term investments, which consist of
investments with original maturities greater than three months, are comprised of
investment grade variable rate debt obligations, which are asset-backed and
categorized as available-for-sale. Our investments in these securities are
recorded at cost, which approximates their fair value due to these investments
having variable interest rates, which typically reset every 28 days. Despite the
long-term nature of their stated contractual maturities, we have the ability to
quickly liquidate these securities. As a result of the resetting variable rates,
at November 30, 2005 and 2004 we had no cumulative gross unrealized or realized
holding gains or losses from these investments. All income generated from these
investments was recorded as interest income.
Inventories
Inventories consist of provisions, gift shop and art merchandise held for
resale, fuel and supplies carried at the lower of cost or market. Cost is
determined using the weighted-average or first-in, first-out methods.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
were computed using the straight-line method over our estimates of average
useful lives and residual values, as a percentage of original cost, as follows:
Residual
Values Years
--------- -----
Ships 15% 30
Ship improvements 0% or 15% 2 to remaining
life of ship
Buildings and improvements 0-10% 5-40
Transportation equipment and other 0-25% 2-20
Leasehold improvements, including port facilities Shorter of lease term
or related asset life
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable. The assessment of possible impairment is based on our ability
to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of the asset, an impairment charge is
recognized for the excess, if any, of the asset's carrying value over its
estimated fair value.
Dry-dock costs primarily represent planned major maintenance activities
that are incurred when a ship is taken out of service for scheduled maintenance.
These costs are included in prepaid expenses and are amortized to other ship
operating expenses using the straight-line method generally over one to two
years.
F-6
Ship improvement costs that we believe add value to our ships are
capitalized to the ships, and depreciated over the improvements' estimated
useful lives, while costs of repairs and maintenance are charged to expense as
incurred. Upon replacement or refurbishment of previously capitalized ship
components, these assets' estimated cost and accumulated depreciation are
written off.
We capitalize interest on ships and other capital projects during their
construction period.
Goodwill
We review our goodwill for impairment annually, or, when events or
circumstances dictate, more frequently. All of our goodwill has been allocated
to our cruise reporting units. There were no significant changes to our goodwill
carrying amounts since November 30, 2003, other than the changes resulting from
using different foreign currency translation rates at each balance sheet date,
except as noted below.
During 2004, we increased the fair values of the P&O Princess publicly
traded debt, and correspondingly, goodwill, by $61 million to take into account
the extension of Carnival Corporation's guarantee to cover this debt as of April
2003, the acquisition date. In addition, we reduced the fair value of P&O
Princess' trademarks and, correspondingly increased goodwill by $54 million to
properly value our acquired trademarks as of the acquisition date. The impact of
these changes on our financial statements was immaterial.
Our goodwill impairment reviews consist of a two-step process of first
determining the fair value of the reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting unit. Fair values of
our reporting units were determined based on our estimates of comparable market
price or discounted future cash flows. If this fair value exceeds the carrying
value, which was the case for our reporting units, no further analysis or
goodwill write-down is required. If the fair value of the reporting unit is less
than the carrying value of the net assets, the implied fair value of the
reporting unit is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written-down to its implied
fair value.
Trademarks
The cost of developing and maintaining our trademarks have been expensed
as incurred. However, for acquisitions made after June 2001 we have allocated a
portion of the purchase price to the acquiree's identified trademarks. The
trademarks that Carnival Corporation recorded as part of its acquisition of P&O
Princess, which are estimated to have an indefinite useful life and, therefore,
are not amortizable, are reviewed for impairment annually, or more frequently
when events or circumstances indicate that the trademark may be impaired. Our
trademarks would be considered impaired if their carrying value exceeds their
fair value.
Derivative Instruments and Hedging Activities
We utilize derivative and nonderivative financial instruments, such as
foreign currency swaps and foreign currency obligations, to limit our exposure
to fluctuations in foreign currency exchange rates and interest rate swaps to
manage our interest rate exposure and to achieve a desired proportion of
variable and fixed rate debt (see Notes 6 and 11).
All derivatives are recorded at fair value, and the changes in fair value
must be immediately included in earnings if the derivatives do not qualify as
effective hedges. If a derivative is a fair value hedge, then changes in the
fair value of the derivative are offset against the changes in the fair value of
the underlying hedged item. If a derivative is a cash flow hedge, then changes
in the fair value of the derivative are recognized as a component of accumulated
other comprehensive income ("AOCI") until the underlying hedged item is
recognized in earnings. If a derivative or a nonderivative financial instrument
is designated as a hedge of a net investment in a foreign operation, then
changes in the fair value of the financial instrument are recognized as a
component of AOCI to offset the change
F-7
in the translated value of the net investment being hedged, until the investment
is liquidated. We formally document all relationships between hedging
instruments and hedged items, as well as our risk management objectives and
strategies for undertaking our hedge transactions.
We classify the fair value of our derivative contracts and the fair value
of our offsetting hedged firm commitments as either current or long-term, which
are included in prepaid and other assets and accrued and other liabilities,
depending on whether the maturity date of the derivative contract is within or
beyond one year from our balance sheet dates. The cash flows from derivatives
treated as hedges are classified in our statements of cash flows in the same
category as the item being hedged.
During fiscal 2005, 2004 and 2003, all net changes in the fair value of
both our fair value hedges and the offsetting hedged firm commitments and our
cash flow hedges were immaterial, as were any ineffective portions of these
hedges. No fair value hedges or cash flow hedges were derecognized or
discontinued in fiscal 2005, 2004 or 2003. In addition, the amount of realized
net losses or gains from cash flow hedges that were reclassified into earnings
during fiscal 2005, 2004 and 2003 was not significant. The amount of estimated
cash flow hedges unrealized net losses which are expected to be reclassified to
earnings in the next twelve months is approximately $4 million.
Finally, if any shipyard with which we have contracts to build our ships
is unable to perform, we would be required to perform under our foreign currency
swaps related to these shipbuilding contracts. Accordingly, based upon the
circumstances, we may have to discontinue the accounting for those currency
swaps as hedges, if the shipyard cannot perform. However, we believe that the
risk of shipyard nonperformance is remote.
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially
recorded as customer deposit liabilities when received. Customer deposits are
subsequently recognized as cruise revenues, together with revenues from onboard
and other activities and all associated direct costs of a voyage, upon
completion of voyages with durations of ten nights or less and on a pro rata
basis for voyages in excess of ten nights. Future travel discount vouchers
issued to guests are typically recorded as a reduction of revenues when such
vouchers are utilized. Revenues and expenses from our tour and travel services
are recognized at the time the services are performed or expenses are incurred.
Insurance/Self-Insurance
We use a combination of insurance and self-insurance for a number of risks
including claims related to crew and passengers, hull and machinery, war risk,
workers' compensation and general liability. Liabilities associated with these
risks, including estimates for crew and passenger claims, are estimated based
on, among other things, historical claims experience, severity factors and other
actuarial assumptions. Our expected loss accruals are based on estimates, and
while we believe the amounts accrued are adequate, the ultimate loss may differ
from the amounts provided.
Advertising Costs
Advertising costs are charged to expense as incurred except for brochures
and media production costs. The brochures and media production costs are
recorded as prepaid expenses and charged to expense as consumed or upon the
first airing of the advertisement, respectively. Advertising expenses totaled
$455 million, $464 million and $335 million in fiscal 2005, 2004 and 2003,
respectively. At November 30, 2005 and 2004, the amount of advertising costs
included in prepaid expenses was not significant.
Foreign Currency Translations and Transactions
For our foreign subsidiaries and affiliates using the local currency as
their functional currency, assets and liabilities are translated at exchange
rates in effect at the balance sheet dates. Revenues and expenses of these
foreign subsidiaries and affiliates are translated at weighted-average exchange
rates for the period. Equity is translated at
F-8
historical rates, and the resulting cumulative foreign currency translation
adjustments resulting from this process are included as a component of AOCI.
Therefore, the U.S. dollar value of these items in our financial statements
fluctuates from period to period, depending on the value of the dollar against
these functional currencies.
Exchange gains and losses arising from the remeasurement of monetary
assets and liabilities and foreign currency transactions denominated in a
currency other than the functional currency of the entity involved are
immediately included in our earnings, unless such net liabilities have been
designated to act as a hedge of a net investment in a foreign operation. In
addition, the unrealized exchange gains or losses on our long-term intercompany
receivables denominated in a non-functional currency, which are not expected to
be repaid in the foreseeable future and are therefore considered to form part of
our net investment, are recorded as a foreign currency translation adjustment,
which is included as a component of AOCI. Finally, net foreign currency
transaction gains or losses recorded in our earnings were not significant in
fiscal 2005, 2004 and 2003.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock and ordinary shares
outstanding during each period. Diluted earnings per share is computed by
dividing adjusted net income by the weighted-average number of shares of common
stock and ordinary shares, common stock equivalents and other potentially
dilutive securities outstanding during each period. All shares that are issuable
under our outstanding convertible notes that have contingent share conversion
features have been considered outstanding for our diluted earnings per share
computations, if dilutive, using the "if converted" method of accounting from
the date of issuance.
Stock-Based Compensation
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," as amended, we elected to use the
intrinsic value method of accounting for our employee and director stock-based
compensation awards instead of the fair value method. Accordingly, we have not
recognized compensation expense for our noncompensatory employee and director
stock option awards. Our pro forma net income and pro forma 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 millions, except per share amounts):
Years ended November 30,
-----------------------------
2005 2004 2003
---- ---- ----
Net income, as reported $2,257 $ 1,854 $ 1,194
Stock-based compensation
expense included in net
income, as reported 12 11 7
Total stock-based compensation
expense determined under
the fair value-based
method for all awards(c) (86)(a) (66)(b) (36)
------ ------- -------
Pro forma net income for basic
earnings per share 2,183 1,799 1,165
Interest on dilutive convertible notes 47 49 43
------ ------- -------
Pro forma net income for diluted
earnings per share $2,230 $ 1,848 $ 1,208
====== ======= =======
Earnings per share
Basic
As reported $ 2.80 $ 2.31 $ 1.66
====== ======= =======
Pro forma $ 2.71 $ 2.24 $ 1.62
====== ======= =======
Diluted
As reported $ 2.70 $ 2.24 $ 1.63
====== ======= =======
Pro forma $ 2.62 $ 2.18 $ 1.60
====== ======= =======
F-9
(a) In January 2005, Carnival Corporation granted approximately 1.4 million
employee stock options, with a $57.30 exercise price and a 2-year vesting
term, in substitution for a similar number of outstanding options whose
termination date was accelerated because of a corporate reorganization of
our European and U.S. operations that was completed in 2004 ("2004
reorganization"). Due to the unusually short vesting period of these
options, we would be required upon the adoption of SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R)"), to recognize a large
charge for stock compensation expense in 2006. Such a charge would distort
stock compensation expense in 2006 and not be indicative of our expected
future normal annual charge for stock options. Accordingly, in the fourth
quarter of 2005, we authorized the immediate vesting of these options,
resulting in an increase of $11 million in stock compensation expense in
the 2005 pro forma net income. In addition, prior to this accelerated
vesting we had expensed $8 million for 2005 pro forma stock expense
compensation related to these options. In addition, for employee stock
options granted after September 2005, we reduced the options contractual
term from 10 years to 7 years, in order to reduce the options' expected
option life, thus reducing its estimated fair value.
(b) As a result of the 2004 reorganization, 1.6 million unvested options held
by employees vested immediately and their termination dates were
accelerated. This vesting occurred either in accordance with the terms of
the option plan or to avoid having these employees and Carnival
Corporation incur unduly burdensome taxes upon the exercise of such
options at a later date. As a result of this accelerated vesting, we
included an additional $19 million of stock-based compensation expense in
the 2004 pro forma net income.
(c) These amounts include the expensing of stock options made to
retirement-eligible employees over the expected vesting period of the
option. SFAS 123(R), when adopted, will require the expensing of future
option grants over the period to retirement eligibility, if less than the
vesting period, because vesting is not contingent upon any future
performance.
As recommended by SFAS No. 123, the fair value of options were estimated
using the Black-Scholes option-pricing model. 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 and dividend yields. Because our options have
characteristics different from those of traded options and because changes in
the subjective assumptions can materially affect our estimate of the fair value
of stock options, we believe that the existing valuation models, including
Black-Scholes, do not necessarily provide a reliable single measure of the fair
value of our options. Since 2004, we have continued to refine our Black-Scholes'
estimates and assumptions based upon more in-depth reviews of the underlying
information in order to more accurately value our options. The impact of such
changes has generally been to reduce the estimated fair value of our option
awards. The Black-Scholes weighted-average assumptions were as follows:
Years ended November 30,
--------------------------
2005 2004 2003
---- ---- ----
Fair value of options at the
dates of grant $12.99 $15.87 $13.33
====== ====== ======
Risk free interest rate 4.1% 3.4% 3.5%
====== ====== ======
Expected dividend yield 1.90% 1.36% 1.30%
====== ====== ======
Expected volatility(a) 27.0% 35.0% 48.7%
====== ====== ======
Expected option life (in years) 4.74 5.75 6.00
====== ====== ======
(a) In 2003, our volatility assumption was based on the historical volatility of
Carnival Corporation common stock. Subsequent to 2003, we also considered the
implied volatilities derived from our exchange traded options and convertible
notes in determining our expected volatility assumption since we believe these
implied market volatilities should be considered in estimating our expected
future volatilities.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), which will require us to recognize compensation costs in our
financial statements in an amount equal to the fair value of share-based
payments granted to employees and directors over the corresponding service
period, and also requires an estimation of forfeitures when calculating
compensation expense, instead of accounting for forfeitures as incurred, which
is our current method. This statement is effective for us in the first quarter
of fiscal 2006
F-10
and is expected to increase our full year 2006 share-based compensation expense
by approximately $55 million compared to 2005. We have not yet determined which
of the two alternative transition methods we will use upon adoption of this new
statement.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of
credit risk associated with financial and other institutions with which we
conduct significant business. Credit risk, including counterparty nonperformance
under derivative instruments, contingent obligations and new ship progress
payment guarantees, is considered minimal, as we primarily conduct business with
large, well-established financial institutions who have long-term credit ratings
of A or above and we seek to diversify our counterparties. In addition, we have
established guidelines regarding credit ratings and investment maturities that
we follow to maintain safety and liquidity. We do not anticipate nonperformance
by any of our significant counterparties.
We also monitor the creditworthiness of our customers to which we grant
credit terms in the normal course of our business. Concentrations of credit risk
associated with these receivables are considered minimal primarily due to their
short maturities and the large number of accounts within our customer base. We
have experienced only minimal credit losses on our trade receivables. We do not
normally require collateral or other security to support normal credit sales.
However, we do normally require collateral and/or guarantees to support notes
receivable on significant asset sales and new ship progress payments to
shipyards.
Reclassifications
Reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE 3 - DLC Transaction
On April 17, 2003, Carnival Corporation and Carnival plc completed a DLC
transaction, which implemented Carnival Corporation & plc's DLC structure. The
contracts governing the DLC structure provide that Carnival Corporation and
Carnival plc each continue to have separate boards of directors, but the boards
and senior executive management of both companies are identical. The amendments
to the constituent documents of each of the companies also provide that, on most
matters, the holders of the common equity of both companies effectively vote as
a single body. On specified matters where the interests of Carnival
Corporation's shareholders may differ from the interests of Carnival plc's
shareholders (a "class rights action"), each shareholder body will vote
separately as a class, such as transactions primarily designed to amend or
unwind the DLC structure. Generally, no class rights action will be implemented
unless approved by both shareholder bodies.
Upon the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed the Equalization and Governance Agreement, which provides for
the equalization of dividends and liquidation distributions based on an
equalization ratio and contains provisions relating to the governance of the DLC
structure. Because the current equalization ratio is 1 to 1, one Carnival plc
ordinary share is entitled to the same distributions, subject to the terms of
the Equalization and Governance Agreement, as one share of Carnival Corporation
common stock. In a liquidation of either company or both companies, if the
hypothetical potential per share liquidation distributions to each company's
shareholders are not equivalent, taking into account the relative value of the
two companies' assets and the indebtedness of each company, to the extent that
one company has greater net assets so that any liquidation distribution to its
shareholders would not be equivalent on a per share basis, the company with the
ability to make a higher net distribution is required to make a payment to the
other company to equalize the possible net distribution to shareholders, subject
to certain exceptions.
At the closing of the DLC transaction, Carnival Corporation and Carnival
plc also executed deeds of guarantee. Under the terms of Carnival Corporation's
deed of guarantee, Carnival Corporation has agreed to guarantee all indebtedness
and certain other monetary obligations of Carnival plc that are incurred under
agreements entered into on or after the
F-11
closing date of the DLC transaction. The terms of Carnival plc's deed of
guarantee are identical to those of Carnival Corporation's. In addition,
Carnival Corporation and Carnival plc have each extended their respective deeds
of guarantee to the other's pre-DLC indebtedness and certain other monetary
obligations, or alternatively standalone guarantees in lieu of utilization of
these deeds of guarantee, thus effectively cross guaranteeing all Carnival
Corporation and Carnival plc indebtedness and other monetary obligations. Each
deed of guarantee provides that the creditors to whom the obligations are owed
are intended third party beneficiaries of such deed of guarantee.
The deeds of guarantee are governed and construed in accordance with the
laws of the Isle of Man. Subject to the terms of the guarantees, the holders of
indebtedness and other obligations that are subject to the guarantees will have
recourse to both Carnival plc and Carnival Corporation though a Carnival plc
creditor must first make written demand on Carnival plc and a Carnival
Corporation creditor on Carnival Corporation. Once the written demand is made by
letter or other form of notice, the holders of indebtedness or other obligations
may immediately commence an action against the relevant guarantor. There is no
requirement under the deeds of guarantee to obtain a judgment, take other
enforcement actions or wait any period of time prior to taking steps against the
relevant guarantor. All actions or proceedings arising out of or in connection
with the deeds of guarantee must be exclusively brought in courts in England.
Under the terms of the DLC transaction documents, Carnival Corporation and
Carnival plc are permitted to transfer assets between the companies, make loans
or investments in each other and otherwise enter into intercompany transactions.
The companies have entered into some of these types of transactions and expect
to enter into additional transactions in the future to take advantage of the
flexibility provided by the DLC structure and to operate both companies as a
single unified economic enterprise in the most effective manner. In addition,
under the terms of the Equalization and Governance Agreement and the deeds of
guarantee, the cash flow and assets of one company are required to be used to
pay the obligations of the other company, if necessary.
Given the DLC structure as described above, we believe that providing
separate financial statements for each of Carnival Corporation and Carnival plc
would not present a true and fair view of the economic realities of their
operations. Accordingly, separate financial statements for both Carnival
Corporation and Carnival plc have not been presented.
Simultaneously with the completion of the DLC transaction, a partial share
offer ("PSO") for 20% of Carnival plc's shares was made and accepted, which
enabled 20% of Carnival plc shares to be exchanged for 41.7 million Carnival
Corporation shares. The 41.7 million shares of Carnival plc held by Carnival
Corporation as a result of the PSO, which cost $1.05 billion, are being
accounted for as treasury stock in the accompanying balance sheets.
Carnival plc was the third largest cruise company in the world and
operated many well-known global brands with leading positions in the U.S., UK,
Germany and Australia. The combination of Carnival Corporation with Carnival plc
under the DLC structure has been accounted for under U.S. generally accepted
accounting principles ("GAAP") as an acquisition of Carnival plc by Carnival
Corporation pursuant to SFAS No. 141, "Business Combinations." The number of
additional shares effectively issued in the combined entity for purchase
accounting purposes was 209.6 million. In addition, Carnival Corporation
incurred $60 million of direct acquisition costs, which have been included in
the aggregate purchase price of $5.36 billion.
The following pro forma information has been prepared assuming the DLC
transaction had occurred on December 1, 2002, 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, 2002. For fiscal 2003, our pro forma revenues and net income would
have been $7.60 billion and $1.16 billion, respectively, and our basic and
diluted pro forma earnings per share would have been $1.46 and $1.43, based on
797 million and 840 million pro forma weighted-average shares outstanding.
F-12
NOTE 4 - Property and Equipment
Property and equipment consisted of the following (in millions):
November 30,
-----------------
2005 2004
---- ----
Ships $ 23,506 $ 22,572
Ships under construction 540 429
-------- --------
24,046 23,001
Land, buildings and improvements,
and port facilities 593 555
Transportation equipment and other 692 628
-------- --------
Total property and equipment 25,331 24,184
Less accumulated depreciation and amortization (4,019) (3,361)
-------- --------
$ 21,312 $ 20,823
======== ========
Capitalized interest, primarily on our ships under construction, amounted
to $21 million, $26 million and $49 million in fiscal 2005, 2004 and 2003,
respectively. Amounts related to ships under construction include progress
payments for the construction of the ship, as well as design and engineering
fees, capitalized interest, construction oversight costs and various owner
supplied items. At November 30, 2005, 7 ships with an aggregate net book value
of $2.63 billion were pledged as collateral pursuant to mortgages related to
$1.37 billion of debt and a $483 million contingent obligation (see Notes 6 and
7).
Maintenance and repair expenses and dry-dock amortization were $445
million, $353 million and $256 million in fiscal 2005, 2004 and 2003,
respectively.
NOTE 5 - Variable Interest Entity
In accordance with FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," we have determined that we are carrying a loan, initially
made in April 2001, to a ship repair facility that is a variable interest entity
("VIE"). Although we use this facility for some of our ship repair work, we are
not a "primary beneficiary" and, accordingly, this entity is not consolidated in
our financial statements. At November 30, 2005 and 2004, our loan to this VIE,
which is also our maximum exposure to loss, was $46 million and $41 million,
respectively.
NOTE 6 - Debt
Short-Term Borrowings
Short-term borrowings were unsecured and consisted of the following (in
millions):
November 30,
-------------
2005 2004
---- ----
Euro commercial paper (a) $ 187
Euro bank loans (a) $ 284
Bank loans (b) 113 97
------ -----
$ 300 $ 381
====== =====
Weighted-average interest rate 3.1% 2.4%
====== =====
(a) These euro denominated borrowings have been translated to U.S. dollars at
the period-end exchange rates.
(b) These loans are denominated in U.S. dollars.
F-13
Long-Term Debt
Long-term debt consisted of the following (in millions):
November 30,
-----------------
2005(a) 2004(a)
---- ----
Secured
Floating rate notes, collateralized by four ships,
bearing interest from libor plus 1.13% to libor
plus 1.29% (4.9% to 5.7% at 2005 and 3.0% to 3.6%
at 2004), due through 2015 (b) $ 788 $ 904
Fixed rate notes, collateralized by two ships, bearing
interest at 5.4% and 5.5%, due through 2016 (b) 380 381
Euro floating rate note, collateralized by one ship,
bearing interest at euribor plus 0.5% (2.75%
at 2005 and 2004), due through 2008 64 101
Euro fixed rate note, collateralized by one ship,
bearing interest at 4.74%, due through 2012 142 183
Capitalized lease obligations, collateralized by
two ships, implicit interest at 3.66% 110
Other 2 3
------- -------
Total Secured 1,376 1,682
------- -------
Unsecured
Fixed rate notes, bearing interest at 3.75% to 7.2%,
due through 2028(c) 2,239 2,039
Euro floating rate notes, bearing interest at euribor
plus 0.25% to euribor plus 1.29% (2.4% to 2.6% at
2005 and 2.4% to 3.5% at 2004), due through 2010(d) 933 1,265
Sterling fixed rate notes, bearing interest at 5.63%,
due in 2012 372 415
Euro fixed rate notes, bearing interest at 5.57%,
due in 2006 355 399
Sterling floating rate note, bearing interest at libor
plus 0.33% (4.91% at 2005), due in 2010(d) 285
Other 34 36
Convertible notes, bearing interest at 2%, due in
2021, with next put option in 2008 600 600
Convertible notes, bearing interest at 1.75%, net of
discount, with a face value of $889 million, due in
2033, with first put option in 2008 575 575
Zero-coupon convertible notes, net of discount,
with a face value of $510 million and $1.05 billion
at 2005 and 2004, respectively, due in 2021, with
first put option in 2006 283 561
------- -------
Total Unsecured 5,676 5,890
------- -------
7,052 7,572
Less portion due within one year (1,325) (1,281)
------- -------
$ 5,727 $ 6,291
======= =======
(a) All borrowings are in U.S. dollars unless otherwise noted and all interest
rates are as of year ends. Euro and sterling denominated notes have been
translated to U.S. dollars at the period-end exchange rates. At November
30, 2005, 56%, 30% and 14%, (60%, 29% and 11% at November 30, 2004) of our
long-term debt was U.S. dollar, euro and sterling denominated,
respectively, including the effect of foreign currency swaps. In addition,
at November 30, 2005, 75% of the interest cost on our long-term debt was
fixed (68% at November 30, 2004) and 25% was variable (32% at November 30,
2004), including the effect of interest rate swaps.
(b) In 2004, we borrowed an aggregate of $739 million to finance a portion of
the Diamond Princess and Sapphire Princess purchase prices, which loans
have both a fixed and variable interest rate component.
(c) In July 2005, we borrowed $328 million under an unsecured term loan
facility, to pay a portion of the Carnival Liberty purchase price. This
facility bears interest at 4.51% and
F-14
is repayable in semi-annual installments through July 2017. In addition,
we entered into a foreign currency swap, which effectively converted this
U.S. dollar debt to euro debt.
(d) In March 2005, Carnival plc entered into a five-year unsecured
multi-currency term loan facility, bearing interest at euribor/libor plus
0.33%, which margin will vary based on Carnival plc's senior unsecured
credit rating. Under this facility, we borrowed 368 million euros ($436
million U.S. dollars at the November 30, 2005 exchange rate) to repay a
368 million euro note, which bore interest at euribor plus 0.60%, prior to
its October 2008 maturity date. We also borrowed 165 million sterling
under this facility ($285 million U.S. dollars at the November 30, 2005
exchange rate), which we used to pay a portion of P&O Cruises' purchase
price for the Arcadia. Finally, we entered into interest rate swap
agreements to fix the interest rates on these euro and sterling borrowings
at 3.50% and 5.40%, respectively.
Convertible Notes
Carnival Corporation's 2% convertible notes ("2% Notes"), its 1.75%
convertible notes ("1.75% Notes") and its zero-coupon convertible notes
("Zero-Coupon Notes") are convertible into 15.3 million shares, a maximum of
20.9 million shares (11.1 million shares during fiscal 2005) and 8.5 million
shares, respectively, of Carnival Corporation common stock.
The 2% Notes are convertible at a conversion price of $39.14 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than $43.05 per share for a
defined duration of time in the preceding fiscal quarter. The conditions for
conversion of the 2% Notes were satisfied since the first quarter of 2004 and,
accordingly, the 2% Notes have been convertible into Carnival Corporation common
stock since the second quarter of fiscal 2004. A nominal amount of 2% Notes were
converted in fiscal 2005 and 2004. At November 30, 2004, our 2% Notes were
classified as a current liability, since the noteholders had the right to
require us to repurchase them on April 15, 2005. However, substantially all of
the noteholders did not exercise their rights. Accordingly, subsequent to April
15, 2005 we have again classified our 2% Notes as long-term debt, since the next
date that the noteholders can require us to repurchase them is on April 15,
2008.
The 1.75% Notes are convertible at a conversion price of $53.11 per share,
subject to adjustment, during any fiscal quarter for which the closing price of
the Carnival Corporation common stock is greater than a specified trigger price
for a defined duration of time in the preceding fiscal quarter. During the
fiscal quarters ending from August 31, 2003 through April 29, 2008, the trigger
price will be $63.73 per share. Thereafter, this conversion trigger price
increases each quarter based on an annual rate of 1.75%, until maturity. In
addition, holders may also surrender the 1.75% Notes for conversion if they have
been called for redemption or for other specified occurrences, including the
credit rating assigned to the 1.75% Notes being Baa3 or lower by Moody's
Investors Service and BBB- or lower by Standard & Poor's Rating Services, as
well as certain corporate transactions. The conditions for conversion of the
1.75% Notes have not been met since their issuance. The 1.75% Notes interest is
payable in cash semi-annually in arrears through April 29, 2008. Effective April
30, 2008, the 1.75% Notes no longer require a cash interest payment, but
interest will accrete at a 1.75% yield to maturity.
The Zero-Coupon Notes have a 3.75% yield to maturity and are convertible
during any fiscal quarter for which the closing price of the Carnival
Corporation common stock is greater than a specified trigger price for a defined
duration of time in the preceding fiscal quarter. The trigger price commenced at
a low of $31.94 per share for the first quarter of fiscal 2002 and increases at
an annual rate of 3.75% thereafter, until maturity. The trigger price was $36.72
for the 2005 fourth quarter. Since the third quarter of 2003, the Zero-Coupon
Notes have been convertible into Carnival Corporation common stock. During
fiscal 2005, $297 million of our Zero-Coupon Notes were converted at their
accreted value into 9.0 million shares of Carnival Corporation common stock, of
which 6.2 million shares were issued from treasury stock. No Zero-Coupon Notes
were converted prior to fiscal 2005.
At November 30, 2005, the Zero-Coupon Notes were classified as a current
liability, since the noteholders have the right to require us to repurchase them
on October 24, 2006 at their accreted values. If the noteholders do not exercise
their rights in full, we will change the classification of any outstanding
Zero-Coupon Notes to long-term debt, as the next
F-15
repurchase date does not occur until October 24, 2008. We currently expect that
we will satisfy any Zero-Coupon Note conversions through the issuance of
Carnival Corporation common stock.
Subsequent to April 29, 2008 and October 23, 2008, we may redeem all or a
portion of the 1.75% Notes and Zero-Coupon Notes, respectively, at their
accreted values and subsequent to April 14, 2008, we may redeem all or a portion
of our 2% Notes at their face value plus any unpaid accrued interest, subject to
the noteholders' right to convert.
In addition, on April 29 of 2008, 2013, 2018, 2023 and 2028 the 1.75%
noteholders, on April 15 of 2008 and 2011 the 2% noteholders and on October 24
of 2006, 2008, 2011 and 2016 the Zero-Coupon noteholders may require us to
repurchase all or a portion of the outstanding 1.75% Notes and Zero-Coupon Notes
at their accreted values and the 2% Notes at their face value plus any unpaid
accrued interest.
Upon conversion, redemption or repurchase of the 1.75% Notes, the 2% Notes
and the Zero-Coupon Notes, we may choose to deliver Carnival Corporation common
stock, cash or a combination of cash and common stock with a total value equal
to the value of the consideration otherwise deliverable.
Revolving Credit and Committed Financing Facilities
In October 2005, simultaneously with the termination of the Carnival
Corporation $1.4 billion, the Carnival plc 600 million euro and the Costa 257.5
million euro revolving credit facilities, Carnival Corporation, Carnival plc,
and certain of Carnival plc's subsidiaries, entered into a five-year unsecured
multi-currency revolving credit facility for $1.2 billion, 400 million euros and
200 million sterling (aggregating $2.02 billion U.S. dollars at the November 30,
2005 exchange rates) (the "Facility"). The Facility currently bears interest at
libor/euribor plus a margin of 17.5 basis points ("BPS"). In addition, we are
required to pay a commitment fee of 30% of the margin per annum. Both the margin
and the commitment fee will vary based on changes to Carnival Corporation's
senior unsecured credit ratings. Finally, an additional utilization fee of 5 BPS
per annum of the outstanding amounts under the Facility is payable if such
outstanding amounts exceed 50% of the aggregate commitments.
Our multi-currency commercial paper programs are supported by this Facility
and,accordingly, any amounts outstanding under our commercial paper programs
effectively reduce the aggregate amount available under this Facility. At
November 30, 2005, we had borrowed 158 million euros ($187 million U.S. dollars
at the November 30, 2005 exchange rate) under our euro commercial paper program,
which is classified as a short-term borrowing since we do not expect to
refinance it using proceeds from our long-term Facility. This Facility also
supports up to $700 million for bonds and letters of credit issued by the
facility lenders on behalf of Carnival Corporation & plc. The issuance of any
such bonds or letters of credit, none outstanding at November 30, 2005, will
reduce the aggregate amount available under this Facility. At November 30, 2005,
$1.83 billion was available under the Facility, based on the November 30, 2005
exchange rates.
In 2005 and January 2006, we entered into five unsecured long-term loan
financing facilities, which provide us with the option to borrow up to an
aggregate of $1.65 billion for a portion of the purchase price of five ships.
These ships are expected to be delivered through 2009. These facilities are
repayable semi-annually over a 12 year period. However, we have the option to
terminate them up until 60 days prior to the ships' delivery dates.
The Facility and other of our loan and derivative agreements, contain
covenants that require us, among other things, to maintain minimum debt service
coverage, minimum shareholders' equity and limits our debt to capital and debt
to equity ratios, and the amounts of our secured assets and secured
indebtedness. Generally, if an event of default under any loan agreement is
triggered, then pursuant to cross default acceleration clauses, substantially
all of our outstanding debt and derivative contract payables could become due
and the underlying facilities could be terminated. At November 30, 2005, we were
in compliance with all of our debt covenants.
F-16
At November 30, 2005, the scheduled annual maturities of our long-term
debt was as follows (in millions):
Fiscal
------
2006 $1,325(a)
2007 1,035
2008 1,672(a)
2009 169
2010 944
Thereafter 1,907
------
$7,052
======
(a) Includes $283 million of Carnival Corporation's Zero-Coupon Notes in 2006,
$600 million and $575 million of its 2% Notes and 1.75% Notes in 2008,
based in each case on the date of the noteholders' next put option.
Debt issuance costs are generally amortized to interest expense using the
straight-line method, which approximates the effective interest method, over the
term of the notes or the noteholders first put option date, whichever is
earlier. In addition, all loan issue discounts are amortized to interest expense
using the effective interest rate method over the term of the notes.
F-17
NOTE 7 - Commitments
Ship Commitments
A description of our ships under contract for construction at November 30,
2005, as adjusted for our December 2005 ship orders, was as follows:
Expected
Service Passenger Estimated Total Cost(b)
Brand and Ship Date(a) Capacity Euros Sterling USD
- -------------- ---- -------- ---------------------------------
(in millions)
Carnival Cruise Lines
Carnival Freedom 3/07 2,974 $ 500
Newbuild 6/08 3,000 (euro) 485
Newbuild(c) 10/09 3,608 560
------ ----------- ------
Total Carnival Cruise Lines 9,582 1,045 500
------ ----------- ------
Princess
Crown Princess 6/06 3,100 500
Emerald Princess 4/07 3,100 525
Newbuild(c) 10/08 3,100 570
------ ------
Total Princess 9,300 1,595
------ ------
Holland America Line
Noordam(d) 2/06 1,918 420
Newbuild(c) 7/08 2,044 450
------ ------
Total Holland America Line 3,962 870
------ ------
AIDA
Newbuild(e) 4/07 2,030 315
Newbuild(e) 4/08 2,030 315
Newbuild(e) 4/09 2,030 315
------ -----------
Total AIDA 6,090 945
------ -----------
Costa
Costa Concordia(e) 7/06 3,000 450
Costa Serena(e) 6/07 3,000 475
Newbuild(c)(e) 6/09 3,000 485
------ -----------
Total Costa 9,000 1,410
------ -----------
Total Euro Commitments (euro)3,400
-----------
Total Euro Commitments converted to USD(f) 4,035
------
P&O Cruises
Ventura(d) 4/08 3,100 (pound) 355
Cunard
Queen Victoria(d) 12/07 1,982 270 45
------ ----------- ------
Total Sterling Commitments (pound) 625
-----------
Total Sterling Commitments converted to USD(f) 1,085
------
Grand Total 43,016
======
Grand Total in USD $8,130
======
(a) The expected service date is the month in which the ship is currently
expected to begin its first revenue generating cruise.
(b) Estimated total cost of the completed ship includes the contract price
with the shipyard, design and engineering fees, capitalized interest,
construction oversight costs and various owner supplied items. All of our
ship construction contracts are with the Fincantieri shipyards in Italy,
except for AIDA's which are with the Meyer Werft shipyard
F-18
in Germany. In addition, the estimated total cost reflects the currency
denomination that we are committed to expend, including the effect of
foreign currency swaps.
(c) These construction contracts aggregating $2.26 billion were entered into
in December 2005.
(d) These construction contracts are denominated in euros, except for $45
million of the Queen Victoria costs, which are denominated in USD. The
euro denominated contract amounts have been fixed into U.S. dollars or
sterling by utilizing foreign currency swaps.
(e) These construction contracts are denominated in euros, which is the
functional currency of the cruise line which will operate the ship and,
therefore, we do not expect to enter into foreign currency swaps to hedge
these commitments.
(f) The estimated total costs of these contracts denominated in euros and
sterling have been translated into U.S. dollars using the November 30,
2005 exchange rate.
In connection with our cruise ships under contract for construction listed
above, we have paid $540 million through November 30, 2005 and anticipate paying
the remaining estimated total costs as follows: $1.71 billion, $2.34 billion,
$2.13 billion and $1.41 billion in fiscal 2006, 2007, 2008 and 2009,
respectively.
Operating Leases
Rent expense under our operating leases, primarily for office and
warehouse space, was $50 million in each of fiscal 2005 and 2004 and $48 million
in fiscal 2003. At November 30, 2005, minimum annual rentals for our operating
leases, with initial or remaining terms in excess of one year, were as follows
(in millions): $43, $30, $25, $20 and $16 and $66 in fiscal 2006 through 2010
and thereafter, respectively.
Port Facilities and Other
At November 30, 2005, we had commitments through 2052, with initial or
remaining terms in excess of one year, to pay minimum amounts for our annual
usage of port facilities and other contractual commitments as follows (in
millions): $58, $70, $70, $56, $52, and $294 in fiscal 2006 through 2010 and
thereafter, respectively.
NOTE 8 - Contingencies
Litigation
In January 2006, a lawsuit was filed against Carnival Corporation and its
subsidiaries and affiliates, and other non-affiliated cruise lines in the U.S.
District Court for the Southern District of New York on behalf of James Jacobs
and a purported class of owners of intellectual property rights to musical plays
and other works performed in the U.S. The plaintiffs claim infringement of
copyrights to Broadway, off Broadway and other plays. The suit seeks payment of
(i) damages, (ii) disgorgement of alleged profits and (iii) an injunction
against future infringement. The ultimate outcome of this matter cannot be
determined at this time. We intend to vigorously defend this lawsuit.
In November 2005, two separate lawsuits were filed against Carnival
Corporation and Princess Cruise Lines, Ltd. in the U.S. District Court for the
Southern District of Florida on behalf of some current and former crewmembers
alleging that Carnival Cruise Lines and Princess failed to pay the plaintiffs
for overtime. These suits seek payment of (i) damages for breach of contract,
(ii) damages under the Seaman's Wage Act and (iii) interest. The ultimate
outcome of these matters cannot be determined at this time. However, we believe
we have meritorious defenses and we intend to vigorously defend these lawsuits.
In March 2005, a lawsuit was filed against Carnival Corporation in the
U.S. District Court for the Southern District of Florida on behalf of some
current and former crew members alleging that Carnival Cruise Lines failed to
pay the plaintiffs for overtime and minimum wages. The suit seeks payment of (i)
the wages alleged to be owed, (ii) damages under the Seaman's Wage Act and (iii)
interest. On August 5, 2005, the court dismissed the lawsuit. The plaintiffs
filed an appeal of their overtime claim to the Eleventh Circuit U. S. Court of
Appeals on August 15, 2005, which is currently pending, but have voluntarily
dismissed their minimum wage claim. The ultimate outcome of this matter cannot
be determined at this time. However, we believe we have meritorious defenses and
we intend to vigorously defend this lawsuit.
F-19
In April 2003, Festival Crociere S.p.A. ("Festival") commenced an action
against the European Commission (the "Commission") in the Court of First
Instance of the European Communities in Luxembourg seeking to annul the
Commission's antitrust approval of the DLC transaction (the "Festival Action").
We have been granted leave to intervene in the Festival Action and filed a
Statement in Intervention with the court. Festival was declared bankrupt in May
2004 and Festival did not submit observations on our Statement in Intervention.
The oral hearing was scheduled to take place on December 15, 2005 but has been
postponed while the Court seeks clarification of the status of the Festival
Action with the Italian judge presiding over Festival's bankruptcy proceedings.
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 2002 and 2004, three actions 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. One of the actions filed in 2002 has
been settled for a nominal amount leaving two open actions (collectively, the
"Facsimile Complaints"). The plaintiffs seek to enjoin the sending of
unsolicited facsimile advertisements and statutory damages. The advertisements
referred to in the 2002 Facsimile Complaints that reference a Carnival Cruise
Line product were not sent by Carnival Corporation, but rather were distributed
by a professional faxing company at the behest of third party travel agencies.
The faxes involved in the 2004 case were sent to a travel agency with whom we
had conducted business. We do not advertise directly to the traveling public
through the use of facsimile transmission. The ultimate outcomes of the
Facsimile Complaints cannot be determined at this time. However, we believe that
we have meritorious defenses and we intend to vigorously defend against these
actions.
Costa instituted arbitration proceedings in Italy in 2000 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 in November
2000. Costa also gave notice of termination of the contract in January 2001. It
is expected that the arbitration tribunal's decision will be made in 2007 at the
earliest. In the event that an award is given in favor of Cammell Laird, the
amount of damages, which Costa would have to pay, if any, is not currently
determinable. The ultimate outcome of this matter cannot be determined at this
time.
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, net
of any insurance recoverables, is typically limited to our self-insurance
retention levels. However, the ultimate outcome of these claims and lawsuits
which are not covered by insurance cannot be determined at this time.
Contingent Obligations
At November 30, 2005, Carnival Corporation had contingent obligations
totaling approximately $1.1 billion to participants in lease out and lease back
type transactions for three of its ships. At the inception of the leases, the
entire amount of the contingent obligations was paid by Carnival Corporation to
major financial institutions to enable them to directly pay these obligations.
Accordingly, these obligations were considered extinguished, and neither the
funds nor the contingent obligations have been included on our balance sheets.
Carnival Corporation would only be required to make any payments under these
contingent obligations in the remote event of nonperformance by these financial
institutions, all of which have long-term credit ratings of AA or higher. In
addition, Carnival Corporation obtained a direct guarantee from another AA+
rated financial institution for $306 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-, Carnival Corporation would be required to move a
majority of the
F-20
funds from these financial institutions to other highly-rated financial
institutions. If Carnival Corporation's credit rating falls below BBB, it would
be required to provide a standby letter of credit for $88 million, or
alternatively provide mortgages in the aggregate amount of $88 million on two of
its ships.
In the unlikely event that Carnival Corporation were to terminate the
three lease agreements early or default on its obligations, it would, as of
November 30, 2005, have to pay a total of $171 million in stipulated damages. As
of November 30, 2005, $179 million of standby letters of credit have been issued
by a major financial institution in order to provide further security for the
payment of these contingent stipulated damages. In addition, in 2004 Carnival
Corporation entered into a five year $170 million unsecured revolving credit
facility, guaranteed by Carnival plc, which is being used to support these
standby letters of credit through the issuance of a back-up letter of credit. In
the event we were to default under covenants in our loan agreements, any amounts
outstanding under the $170 million unsecured revolving credit facility would be
due and payable, and we would be required to post cash collateral to support the
stipulated damages standby letters of credit in excess of $170 million. Between
2017 and 2022, we have the right to exercise options that would terminate these
transactions at no cost to us. As a result of these three transactions, we have
$40 million and $43 million of deferred income recorded on our balance sheets as
of November 30, 2005 and 2004, respectively, which is being amortized to
nonoperating income through 2022.
Some of the debt agreements that we enter into include indemnification
provisions that obligate us to make payments to the counterparty if certain
events occur. These contingencies generally relate to changes in taxes, changes
in laws that increase lender capital costs and other similar costs. The
indemnification clauses are often standard contractual terms and were entered
into in the normal course of business. There are no stated or notional amounts
included in the indemnification clauses and we are not able to estimate the
maximum potential amount of future payments, if any, under these indemnification
clauses. We have not been required to make any material payments under such
indemnification clauses in the past and, under current circumstances, we do not
believe a request for material future indemnification payments is probable.
War Risk Insurance
We maintain war risk insurance, subject to coverage limits and exclusions
for claims such as those arising from chemical and biological attacks, on all of
our ships covering our legal liability to crew, passengers and other third
parties arising from war or war-like actions, including terrorist risks. Due
primarily to its high costs, we only carry war risk insurance coverage for
physical damage to 43 of our 79 ships, which includes terrorist risks. Under the
terms of our war risk insurance coverage, which is typical for war risk policies
in the marine industry, underwriters can give seven days notice to the insured
that the liability and physical damage policies can be cancelled. If one or more
of our 36 uninsured ships suffer damage in an attack, then the cost of any such
damages would be expensed, and such amounts could be material.
NOTE 9 - Income and Other Taxes
For fiscal 2004 and 2003, we believe that substantially all of our income,
with the exception of our U.S. source income principally from the
transportation, hotel and tour businesses of Holland America Tours and Princess
Tours, is derived from, or incidental to, the international operation of ships,
and is therefore exempt from U.S. federal income taxes. For fiscal 2005,
regulations under Section 883 of the Internal Revenue Code limiting the types of
income considered to be derived from the international operation of a ship first
became effective. Section 883 is the primary provision upon which we rely to
exempt certain of our international ship operation earnings from U.S. income
taxes. Accordingly, the 2005 provision for U.S. federal income taxes includes
taxes on a portion of our ship operating income that is in addition to the U.S.
source transportation, hotel and tour income on which U.S. taxes have
historically been provided. In addition, during the fourth quarter of 2005 we
chartered three ships to the Military Sealift Command in connection with the
Hurricane Katrina relief effort. Income from these charters is not considered to
be income from the international operation of our ships and, accordingly,
approximately $18 million of income taxes were provided on the net earnings of
these charters in our 2005 fourth quarter at an
F-21
effective tax rate of approximately 60%.
If we were found not to qualify for exemption pursuant to applicable
income tax treaties or under the Internal Revenue Code or if the income tax
treaties or Internal Revenue Code were to be changed in a manner adverse to us,
a portion of our income would become subject to taxation by the U.S. at higher
than normal corporate tax rates.
Cunard, Ocean Village, P&O Cruises, P&O Cruises Australia, Swan Hellenic,
AIDA (except for prior to November 2004), and Costa, since the beginning of
fiscal 2005, are subject to income tax under the tonnage tax regimes of either
the United Kingdom or Italy. Under both tonnage tax regimes, shipping profits,
as defined under the applicable law, are subject to corporation tax by reference
to the net tonnage of qualifying vessels. Income not considered to be shipping
profits under tonnage tax rules is taxable under either the normal UK income tax
rules or the tax regime applicable to Italian-registered ships. We believe that
substantially all of the income attributable to these brands constitutes
shipping profits and, accordingly, Italian and UK income tax expenses for these
operations has been and is expected to be minimal under the current tax regimes.
We do not expect to incur income taxes on future distributions of
undistributed earnings of foreign subsidiaries and, accordingly, no deferred
income taxes have been provided for the distribution of these earnings.
In addition to or in place of income taxes, virtually all jurisdictions
where our ships call impose taxes based on passenger counts, ship tonnage or
some other measure. These taxes, other than those directly charged to and/or
collected from passengers by us, are recorded as operating expenses in the
accompanying statements of operations.
NOTE 10 - Shareholders' Equity
Carnival Corporation's articles of incorporation authorize its Board of
Directors, at its discretion, to issue up to 40 million shares of its preferred
stock and Carnival plc has 100,000 authorized preference shares. At November 30,
2005 and 2004, no Carnival Corporation preferred stock had been issued and only
a nominal amount of Carnival plc preferred shares had been issued.
In October 2004, the Boards of Directors authorized the repurchase of up
to an aggregate of $1 billion of Carnival Corporation common stock and/or
Carnival plc ordinary shares commencing in 2005 subject to certain repurchase
restrictions on Carnival plc shares. Through February 6, 2006, we repurchased
8.0 million shares of Carnival Corporation common stock for $386 million. No
expiration date has been specified for this authorization.
At November 30, 2005, there were 75.5 million shares of Carnival
Corporation common stock reserved for issuance pursuant to its convertible notes
and its employee benefit and dividend reinvestment plans. In addition, Carnival
plc shareholders have authorized 13.5 million ordinary shares for future
issuance under its employee benefit plans.
At November 30, 2005 and 2004 accumulated other comprehensive income was
as follows (in millions):
2005 2004
---- ----
Cumulative foreign currency translation adjustments, net $190 $588
Minimum pension liability adjustments (19) (17)
Unrealized losses on cash flow derivative hedges, net (15) (30)
---- ----
$156 $541
==== ====
NOTE 11 - Financial Instruments
Considerable judgment is required in interpreting data to develop
estimates of fair value and, accordingly, amounts are not necessarily indicative
of the amounts that we could realize in a current market exchange. Our financial
instruments are not held for trading or other speculative purposes.
F-22
Cash and Cash Equivalents and Short-Term Investments
The carrying amounts of our cash and cash equivalents and short-term
investments approximate their fair values due to their short maturities or
variable interest rates.
Other Assets
At November 30, 2005 and 2004, long-term other assets included notes and
other receivables and marketable securities held in rabbi trusts for certain of
our nonqualified benefit plans. These assets had carrying and fair values of
$406 million and $405 million at November 30, 2005, respectively, and carrying
and fair values of $240 million and $227 million at November 30, 2004. Fair
values were based on public market prices, estimated discounted future cash
flows or estimated fair value of collateral.
Debt
The fair values of our non-convertible debt and convertible notes were
$5.98 billion and $2.03 billion, respectively, at November 30, 2005 and $6.32
billion and $2.53 billion at November 30, 2004. These fair values were greater
than the related carrying values by $86 million and $572 million, respectively,
at November 30, 2005 and by $100 million and $790 million at November 30, 2004.
The net difference between the fair value of our non-convertible debt and its
carrying value was due primarily to our issuance of debt obligations at fixed
interest rates that are above market interest rates in existence at the
measurement dates. The net difference between the fair value of our convertible
notes and its carrying value is largely due to the impact of changes in the
Carnival Corporation common stock value on the value of our convertible notes on
those dates. The fair values of our unsecured fixed rate public notes,
convertible notes, sterling bonds and unsecured 5.57% euro notes were based on
their public market prices. The fair values of our other debt were estimated
based on appropriate market interest rates being applied to this debt.
Foreign Currency Swaps and Other Hedging Instruments
We have foreign currency swaps that are designated as foreign currency
fair value hedges for three of our euro denominated shipbuilding contracts (see
Note 7). At November 30, 2005 and 2004, the fair value of the foreign currency
swaps related to our shipbuilding commitments was a net unrealized gain of $29
million and $219 million, respectively. These foreign currency swaps mature
through 2008.
At November 30, 2005, we have foreign currency swaps totaling $1.11
billion that are effectively designated as hedges of our net investments in
foreign subsidiaries, which have euro and sterling denominated functional
currencies. These foreign currency swaps were entered into to effectively
convert $237 million and $736 million of U.S. dollar denominated debt into
sterling debt and euro debt ($251 million and $466 million at November 30,
2004), respectively. In addition, $138 million and $170 million of euro
denominated debt was effectively converted into sterling debt at November 30,
2005 and 2004, respectively. At November 30, 2005 and 2004, the fair value of
these foreign currency swaps was an unrealized loss of $58 million and $137
million, respectively, which is included in the cumulative translation
adjustment component of AOCI. These currency swaps mature through 2017.
The fair values of these foreign currency swaps were estimated based on
prices quoted by financial institutions for these instruments.
Finally, we have designated $1.58 billion and $1.1 billion of our
outstanding euro and sterling debt and other obligations, which are
nonderivatives and mature through 2012, as hedges of our net investments in
foreign operations and, accordingly, have included $95 million and $194 million
of foreign currency transaction losses in the cumulative translation adjustment
component of AOCI at November 30, 2005 and 2004, respectively.
Interest Rate Swaps
We have interest rate swap agreements designated as fair value hedges
whereby we receive fixed interest rate payments in exchange for making variable
interest rate payments. At November 30, 2005 and 2004, these interest rate swap
agreements effectively changed $926
F-23
million and $929 million, respectively, of fixed rate debt to libor-based
floating rate debt.
In addition, we also have interest rate swap agreements designated as cash
flow hedges whereby we receive variable interest rate payments in exchange for
making fixed interest rate payments. At November 30, 2005 and 2004, these
interest rate swap agreements effectively changed $1.25 billion and $828
million, respectively, of euribor and GBP libor floating rate debt to fixed rate
debt.
These interest rate swap agreements mature through 2010. At November 30,
2005 and 2004, the fair value of our interest rate swaps designated as cash flow
hedges was an unrealized loss of $6 million and $22 million, respectively. The
fair values of our interest rate swap agreements were estimated based on prices
quoted by financial institutions for these instruments.
NOTE 12 - Segment Information
Our cruise segment includes all of our cruise brands, which have been
aggregated as a single reportable segment based on the similarity of their
economic and other characteristics, including products and services they
provide. Our other segment primarily represents the hotel, tour and
transportation operations of Holland America Tours and Princess Tours, and the
business to business travel agency operations of P&O Travel Ltd., the latter two
since completion of the DLC transaction on April 17, 2003. The significant
accounting policies of our segments are the same as those described in Note 2 -
"Summary of Significant Accounting Policies." Information for our cruise and
other segments as of and for the years ended November 30 was as follows (in
millions):
Selling
and Depreciation Capital
Operating adminis- and Operating expend- Total
Revenues(a) expenses trative amortization income itures assets
----------- -------- ------- ------------ ------ ------ ------
2005
Cruise $ 10,735 $ 5,967 $ 1,276 $ 873 $ 2,619 $l,892 $ 27,883
Other 467 365 53 29 20 85 549(b)
Intersegment
elimination (115) (115)
-------- -------- -------- -------- -------- -------- --------
$ 11,087 $ 6,217 $ 1,329 $ 902 $ 2,639 $ 1,977 $ 28,432
======== ======== ======== ======== ======== ======== ========
2004
Cruise $ 9,427 $ 5,247 $ 1,231 $ 791 $ 2,158 $ 3,512 $ 27,136
Other 398 308 54 21 15 74 500(b)
Intersegment
elimination (98) (98)
-------- -------- -------- -------- -------- -------- --------
$ 9,727 $ 5,457 $ 1,285 $ 812 $ 2,173 $ 3,586 $ 27,636
======== ======== ======== ======== ======== ======== ========
2003
Cruise $ 6,459 $ 3,624 $ 896 $ 568 $ 1,371 $ 2,454 $ 24,090
Other 345 276 40 17 12 62 401(b)
Intersegment
elimination (86) (86)
-------- -------- -------- -------- -------- -------- --------
$ 6,718 $ 3,814 $ 936 $ 585 $ 1,383 $ 2,516 $ 24,491
======== ======== ======== ======== ======== ======== ========
(a) A portion of other segment revenues include revenues for the cruise
portion of a tour, when a cruise is sold along with a land tour package by
Holland America Tours or Princess Tours, and shore excursion and port
hospitality services provided to cruise passengers by these tour
companies. These intersegment revenues, which are included in full in the
cruise segment, are eliminated from the other segment revenues in the line
"Intersegment elimination."
(b) Other segment assets primarily included hotels and lodges in Alaska and
the Canadian Yukon, luxury dayboats offering tours to a glacier in Alaska
and on the Yukon River, motorcoaches used for sightseeing and charters in
the States of Washington and Alaska, British Columbia, Canada and the
Canadian Yukon and private, domed rail cars, which run on the Alaska
Railroad between Anchorage and Fairbanks, Whittier and Denali, and
Whittier and Talkeetna.
F-24
Foreign revenues for our cruise brands represent sales generated from
outside the U.S. primarily by foreign tour operators and foreign travel
agencies. Substantially all of these foreign revenues are from the UK, Germany,
Italy, Canada, France, Australia, Spain, Switzerland and Brazil. Substantially
all of our long-lived assets are located outside of the U.S. and consist
principally of our ships and ships under construction and exclude goodwill and
trademarks.
Revenue information by geographic area for fiscal 2005, 2004 and 2003 was
as follows (in millions):
2005 2004 2003
---- ---- ----
U.S. $ 6,439 $5,788 $4,513
Continental Europe 1,681 1,549 971
UK 1,520 1,341 724
Canada 665 562 231
Australia and New Zealand 311 215 71
Others 471 272 208
------- ------ ------
$11,087 $9,727 $6,718
======= ====== ======
NOTE 13 - Benefit Plans
Stock Option Plans
We have stock option plans primarily for management level employees and
members of our Board of Directors. The Carnival Corporation and Carnival plc
plans are administered by a committee of our independent directors (the
"Committee"), that determines who is eligible to participate, the number of
shares for which options are to be granted and the amounts that may be exercised
within a specified term. The Carnival Corporation and Carnival plc option
exercise price is generally set by the Committee at 100% of the fair market
value of the common stock/ordinary shares on the date the option is granted.
Substantially all Carnival Corporation and Carnival plc options granted during
fiscal 2005, 2004 and 2003 were granted at an exercise price per share equal to
or greater than the fair market value of the Carnival Corporation common stock
and Carnival plc ordinary shares on the date of grant. Carnival Corporation and
Carnival plc employee options generally vest evenly over five years and at the
end of three years, respectively. Our employee options granted prior to October
2005 have a ten-year term and those options granted thereafter had a seven-year
term. Carnival Corporation director options granted subsequent to fiscal 2000
vest evenly over five years and have a ten-year term. At November 30, 2005,
Carnival Corporation had 27.9 million shares and Carnival plc had 13.5 million
shares, which were available for future grants under the option plans.
A combined summary of the activity and status of the Carnival Corporation
and Carnival plc stock option plans was as follows:
Weighted-
Average Exercise Price Number of Options
Per Share Years Ended November 30,
---------------------------- ----------------------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Outstanding options-
beginning of year $35.61 $28.79 $29.26 18,203,942 19,297,979 11,828,958
Carnival plc
outstanding options
at April 17, 2003(a) $19.64 5,523,013
Options granted $51.88 $47.52 $30.88 4,446,260(d) 5,306,802 (c) 5,464,109
Options exercised(b) $30.56 $25.23 $17.35 (1,953,396) (5,686,484)(c) (2,919,554)
Options canceled $36.11 $30.17 $28.64 (638,554) (714,355) (598,547)
----------- ----------- -----------
Outstanding options-
end of year $39.15 $35.61 $28.79 20,058,252(e) 18,203,942(e) 19,297,979(e)
=========== =========== ===========
Options exercisable-
end of year $36.87 $32.05 $27.68 8,560,318(d,f) 5,920,890(d,f) 7,848,335(f)
=========== =========== ===========
(a) All Carnival plc unvested options outstanding on the date the DLC
transaction was
F-25
completed vested fully on such date, except for 1.3 million options, which
were granted on April 15, 2003.
(b) Included 0.4 million, 2.0 million and 1.8 million Carnival plc options in
2005, 2004 and 2003, of which 0.3 million, 0.8 million and 1.0 million had
a sterling denominated exercise price, respectively.
(c) During 2004, as a result of Costa being transferred to the Carnival plc
side of the DLC structure, options to purchase 973,000 shares of Carnival
Corporation vested immediately and their termination dates were
accelerated to 2004. These vested options, along with all of Costa
employees' already exercisable options, were exercised in 2004 to avoid
unduly burdensome taxes. In 2004, Carnival plc granted 1.1 million options
to replace the 973,000 options and another 127,000 of options that were
terminated early at an exercise price equal to the fair market value of
Carnival plc ordinary shares on the grant date. See Note 2.
(d) On December 1, 2003, as a result of the Princess cruise operations being
transferred to the Carnival Corporation side of the DLC structure, options
to purchase 743,000 shares of Carnival plc vested immediately, and the
termination dates on all Princess employees' Carnival plc exercisable
options were shortened. All such changes have been made pursuant to the
original terms of the Carnival plc plan. In January 2005, Carnival
Corporation granted 1.4 million options to replace the 657,000 options and
another 743,000 options that were terminated early at an exercise price
per share equal to the fair market value of Carnival Corporation common
stock on the grant date. In late 2005, these 1.4 million unvested options
were vested. See Note 2.
(e) Included 3.2 million, 3.3 million and 3.6 million of Carnival plc options
at a weighted- average exercise price of $38.29, $38.42 and $20.89 per
share, based on the November 30, 2005, 2004 and 2003 U.S. dollar to
sterling exchange rate, respectively.
(f) Included 0.7 million, 0.9 million and 2.2 million of Carnival plc options
at a weighted- average exercise price of $23.89, $22.15 and $18.06 per
share, based on the November 30, 2005, 2004 and 2003 U.S. dollar to
sterling exchange rate, respectively.
Combined information with respect to outstanding and exercisable Carnival
Corporation and Carnival plc stock options at November 30, 2005 was as follows:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Shares Life (Years) Price Shares Price
- ----------- ----------------------------------- ---------------------
$ 1.94-$ 5.73 30,980 (a) $ 2.07 30,980 $ 2.07
$ 5.74-$17.19 245,674 4.0 $16.51 245,674 $16.51
$17.20-$22.92 1,612,064 5.5 $22.08 1,132,313 $21.88
$22.93-$28.65 3,426,680 6.5 $26.82 1,457,132 $26.12
$28.66-$34.38 1,881,786 5.2 $30.19 1,310,425 $30.15
$34.39-$40.11 1,924,441 7.6 $34.60 524,931 $35.01
$40.12-$45.84 3,886,238 5.7 $44.35 1,963,880 $44.30
$45.85-$51.57 4,488,284 8.0 $48.09 539,930 $48.37
$51.58-$57.30 2,562,105 8.1 $55.46 1,355,053 $57.30
---------- --- ------ --------- ------
Total 20,058,252 6.8 $39.15 8,560,318 $36.87
========== === ====== ========= ======
(a) These stock options do not have an expiration date.
In addition, at November 30, 2005, Carnival Corporation had 50,998
restricted stock units ("RSUs") outstanding, which do not have an exercise
price, and either have three or five-year cliff vesting terms. The
weighted-average remaining vesting period of these RSUs is 2.9 years.
Carnival Corporation Nonvested Stock
Carnival Corporation has issued nonvested stock to a few officers and some
non-executive board members. These shares have the same rights as Carnival
Corporation common stock, except for transfer restrictions and forfeiture
provisions. During fiscal 2005, 2004 and 2003, 158,750 shares, 160,000 shares
and 455,000 shares, respectively, of Carnival
F-26
Corporation common stock were issued, which were valued at $9 million, $7
million and $14 million, respectively. Unearned stock compensation was recorded
within shareholders' equity at the date of award based on the quoted market
price of the Carnival Corporation common stock on the date of grant and is
amortized to expense using the straight-line method from the grant date through
the earlier of the vesting date or the officers' and directors' estimated
retirement date. The shares granted to the executive officers either have three
or five-year cliff vesting terms and the shares granted to the non-executive
board members vest evenly over five years after the grant date. As of November
30, 2005 and 2004 there were 1,063,750 shares and 1,065,000 shares,
respectively, issued under the plan, which remained to be vested.
Defined Benefit Pension Plans
We have several defined benefit pension plans, which cover some of our
shipboard and shoreside employees. The U.S. and UK shoreside employee plans are
closed to new membership and are funded at or above the level required by U.S.
or UK regulations. The remaining defined benefit plans are primarily unfunded.
In determining our plans' benefit obligations at November 30, 2005, we used
assumed weighted-average discount rates of 5.5% and 4.8% for our U.S. and
foreign plans, respectively. The net liabilities related to the obligations
under these single employer defined benefit pension plans are not material.
A minimum pension liability adjustment is required when the actuarial
present value of accumulated benefits exceeds plan assets and accrued pension
liabilities. At November 30, 2005 and 2004, our single employer plans had
aggregated additional minimum pension liability adjustments, less allowable
intangible assets, of $19 million and $17 million, respectively, which are
included in AOCI.
In addition, P&O Cruises participated in a Merchant Navy Ratings Pension
Fund, which is a defined benefit multiemployer pension plan that was available
to their shipboard non-officers. This plan has a significant funding deficit and
has been closed to further benefit accrual since prior to the completion of the
DLC transaction. P&O Cruises, along with other unrelated employers, are making
payments into this plan under a non-binding Memorandum of Understanding to
reduce the deficit. Accordingly, at November 30, 2005 and 2004, we had recorded
a long-term pension liability of $22 million and $26 million, which represented
our estimate of the present value of our entire liability under this plan, based
on our current intention to continue to make these voluntary payments.
P&O Cruises, Princess and Cunard participate in an industry-wide British
Merchant Navy Officers Pension Fund ("MNOPF"), which is a defined benefit
multiemployer pension plan that is available to certain of their British
shipboard officers. The MNOPF is divided into two sections, the "New Section"
and the "Old Section," each of which covers a different group of participants,
with the Old Section closed to further benefit accrual and the New Section only
closed to new membership. At November 30, 2005, the New Section was estimated to
have a funding deficit and the Old Section was estimated to have a funding
surplus.
Substantially all of any MNOPF New Section deficit liability which we may
have relates to P&O Cruises and Princess obligations, which existed prior to the
DLC transaction. However, since the MNOPF is a multiemployer plan and it was not
probable that we would withdraw from the plan nor was our share of the liability
certain, we could not record our estimated share of the ultimate deficit as a
Carnival plc acquisition liability that existed at the DLC transaction date. The
amount of our share of the fund's ultimate deficit could vary considerably if
different pension assumptions and/or estimates were used. Therefore, we expense
our portion of any deficit as amounts are invoiced by the fund's trustee. In
August 2005, we received an invoice from the fund for what the trustee
calculated to be our share of the entire MNOPF liability. Accordingly, we
recorded the full invoiced liability of $23 million in payroll and related
expense in 2005. It is possible that the fund's trustee may invoice us for
additional amounts in the future for various reasons, including if they believe
the fund requires further funding.
Total expense for all of our defined benefit pension plans, including our
multiemployer plans, was $45 million, $18 million and $17 million in fiscal
2005, 2004 and 2003, respectively.
F-27
Defined Contribution Plans
We have several defined contribution plans available to most of our
employees. We contribute to these plans based on employee contributions, salary
levels and length of service. Total expense relating to these plans was $14
million, $13 million and $12 million in fiscal 2005, 2004 and 2003,
respectively.
NOTE 14 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
millions, except per share data):
Years Ended November 30,
----------------------------
2005 2004 2003
---- ---- ----
Net income $2,257 $1,854 $1,194
Interest on dilutive convertible notes 47 49 43
------ ------ ------
Net income for diluted earnings
per share $2,304 $1,903 $1,237
====== ====== ======
Weighted-average common and ordinary
shares outstanding 806 802 718
Dilutive effect of convertible notes 42 44 39
Dilutive effect of stock plans 5 5 2
------ ------ ------
Diluted weighted-average shares
outstanding 853 851 759
====== ====== ======
Basic earnings per share $ 2.80 $ 2.31 $ 1.66
====== ====== ======
Diluted earnings per share $ 2.70 $ 2.24 $ 1.63
====== ====== ======
The weighted-average shares outstanding for the year ended November 30,
2003 includes the pro rata Carnival plc shares since April 17, 2003. Options to
purchase 2.1 million, 6.0 million and 8.4 million shares for fiscal 2005, 2004
and 2003, respectively, were excluded from our diluted earnings per share
computation since the effect of including them was anti-dilutive.
NOTE 15 - Supplemental Cash Flow Information
Total cash paid for interest was $314 million, $250 million and $156
million in fiscal 2005, 2004 and 2003, respectively. In addition, cash paid for
income taxes was $15 million, $8 million and $20 million in fiscal 2005, 2004
and 2003, respectively. Finally, in 2005 $297 million of our Zero-Coupon Notes
were converted through a combination of the issuance of Carnival Corporation
treasury stock and newly issued Carnival Corporation Common stock, which
represented a noncash financing activity.
F-28
Report of Independent Registered Certified Public Accounting Firm To the Boards
of Directors and Shareholders of Carnival Corporation and Carnival plc:
We have completed integrated audits of Carnival Corporation & plc's November 30,
2005 and 2004 consolidated financial statements and of its internal control over
financial reporting as of November 30, 2005, and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions on Carnival
Corporation's and Carnival plc's November 30, 2005, 2004 and 2003 consolidated
financial statements and its internal control over financial reporting as of
November 30, 2005, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Carnival
Corporation & plc (comprising Carnival Corporation and Carnival plc and their
respective subsidiaries, the "Company") at November 30, 2005 and November 30,
2004, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of November 30, 2005 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of November 30, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting
F-29
principles. A company's internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 8, 2006
F-30
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 2005 Annual Report are
"forward-looking statements" that involve risks, uncertainties and assumptions
with respect to us, including some statements concerning future results,
outlook, 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 involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this 2005
Annual Report. Forward-looking statements include those statements which may
impact the forecasting of our earnings per share, net revenue yields, booking
levels, pricing, occupancy, operating, financing and/or tax costs, fuel costs,
costs per available lower berth day ("ALBD"), estimates of ship depreciable
lives and residual values, outlook or business prospects. These factors include,
but are not limited to, the following:
- risks associated with the DLC structure, including the uncertainty of its
tax status;
- general economic and business conditions, which may impact levels of
disposable income of consumers and net revenue yields for our cruise
brands;
- conditions in the cruise and land-based vacation industries, including
competition from other cruise ship operators and providers of other
vacation alternatives and increases in capacity offered by cruise ship and
land-based vacation alternatives;
- risks associated with operating internationally;
- the implementation of U.S. regulations requiring U.S. citizens to obtain
passports for travel to or from additional foreign destinations;
- the international political and economic climate, armed conflicts,
terrorist attacks and threats thereof, availability of air service, other
world events and adverse publicity, and their impact on the demand for
cruises;
- accidents and other incidents affecting the health, safety, security and
vacation satisfaction of passengers, including machinery and equipment
failures, which could cause the alteration of itineraries or cancellation
of a cruise or a series of cruises and the impact of the spread of
contagious diseases;
- changing consumer preferences, which may, among other things, adversely
impact the demand for cruises;
- our ability to implement our shipbuilding programs and brand strategies
and to continue to expand our business worldwide;
- our ability to attract and retain qualified shipboard crew and maintain
good relations with employee unions;
- our ability to obtain financing on terms that are favorable or consistent
with our expectations;
- the impact of changes in financing and operating costs, including changes
in foreign currency exchange rates and interest rates and fuel, food,
payroll, insurance and security costs;
- the impact of pending or threatened litigation;
- changes in the environmental, health, safety, security, tax and other
regulatory regimes under which we operate;
- continued availability of attractive port destinations;
- our ability to successfully implement cost reduction plans;
- continuing financial viability of our travel agent distribution system and
air service providers; and
- unusual weather patterns or natural disasters, such as hurricanes and
earthquakes.
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 2005 Annual Report, any updates or revisions to any such
forward-looking statements to reflect any change in
F-31
expectations or events, conditions or circumstances on which any such statements
are based.
Executive Overview
In 2003, the demand for travel was challenged by, among other things, an
unstable geopolitical environment, a weaker economy, the emergence of Severe
Acute Respiratory Syndrome ("SARS") in Asia and the threat and eventual outbreak
of war in Iraq. These events had a negative effect on the public's willingness
to travel, and consequently, negatively impacted our net revenue yields (see
"Key Performance Indicators" below).
Since the beginning of 2004 and continuing through 2005, the effects of
those factors on the cruise industry were reduced, and we experienced a
substantial improvement in our net revenue yields. The improvement in net
revenue yields was primarily the result of higher passenger ticket prices,
onboard revenues and occupancy and, to a lesser extent, a weaker U.S. dollar
relative to the euro and sterling. The increase in 2005 pricing was achieved
despite an 8.5% increase in cruise capacity relating to the introduction of
three new ships in fiscal 2005. In addition, from 2003 through 2005, the cruise
industry was impacted by substantial increases in fuel prices. However, the 2005
increased net revenue yields more than compensated for the increase in fuel
costs. It is possible that fuel prices may continue to increase in 2006 and
future years. As discussed below, our 2006 earnings guidance is impacted by an
expectation of higher fuel costs.
Throughout this period we generated significant cash flows and remained in
a strong financial position, which is a high priority and we believe provides us
with a competitive advantage in the capital intensive cruise industry. However,
our operations are subject to many risks, as briefly noted above and under the
caption "Cautionary Note Concerning Factors That May Affect Future Results,"
which could adversely impact our future results.
During calendar 2005, we ordered six additional ships for our North
American and European brands, which are expected to be delivered between 2007
and 2009. As of January 30, 2006, we had signed agreements with two shipyards
providing for the construction of 16 additional cruise ships (see Note 7 in the
accompanying financial statements). These new ships are expected to continue to
help us maintain our leadership position within the cruise industry. The
year-over-year percentage increases in our ALBD capacity, resulting from new
ships entering service, is expected to be 5.1%, 7.5%, 8.4% and 6.5% for fiscal
2006, 2007, 2008 and 2009, respectively, based on ships currently on order and
net of the expected sale of the Pacific Sky by P&O Cruises Australia in May
2006.
Outlook For Fiscal 2006 ("2006")
As of December 16, 2005 we said that we expected our 2006 full year
earnings per share will be between $3.00 to $3.10. We also said that we expected
our first quarter 2006 earnings per share to be in the range of $0.34 to $0.36.
Our guidance was based on the then current forward fuel price curve for all of
2006 of $322 per metric ton and $312 per metric ton for the first quarter 2006.
In addition, this guidance was also based on currency exchange rates of $1.17 to
the euro and $1.73 to sterling.
Our 2006 outlook includes the impact of two accounting matters. Commencing
with the first quarter of fiscal 2006, we will begin to recognize compensation
costs in our statement of operations in an amount equal to the fair value of
share-based payments granted to employees and directors pursuant to SFAS No.
123(R). The increase in our share-based compensation expense in 2006 is expected
to be approximately $55 million compared to our reported fiscal 2005 stock-based
compensation expense (see Note 2). Also commencing with the first quarter of
fiscal 2006, we will change the period over which we amortize our deferred
dry-dock costs to the length of time between dry-docks, generally two to three
years, instead of amortizing them generally over one to two years. This change
in estimate reflects the lengthening of the time between dry-docks, resulting
from regulatory changes and technological enhancements to our ships. In 2006,
this change is expected to reduce dry-dock amortization by approximately $40
million compared to normal levels of dry-dock amortization.
Since the date of our December earnings release, the cruise industry has
begun a period of heavy bookings generally referred to as "wave season."
Bookings and pricing for our brands since the start of wave season are up
slightly compared to the corresponding period last year.
Since our December guidance, the forward prices for fuel for the full year
2006 and first quarter 2006 have increased from $322 per ton and $312 per ton to
$334
F-32
per ton and $321 per ton, respectively. If actual fuel prices for the full year
2006 and first quarter 2006 ultimately equal the more recent forward prices, our
diluted earnings per share would be reduced by $0.04 and $0.01 for the full year
2006 and first quarter 2006, respectively.
Partially offsetting the impact of fuel prices, the U.S. dollar has
weakened relative to both the euro and sterling, to currency exchange rates of
$1.20 to the euro and $1.75 to sterling. Assuming the exchange rates remain at
the current levels, our diluted earnings per share would increase by
approximately $0.01 for the year 2006 and would be unchanged for the 2006 first
quarter.
Key Performance Indicators and Pro Forma Information
We use net cruise revenues per ALBD ("net revenue yields") and net cruise
costs per ALBD as significant non-GAAP financial measures of our cruise segment
financial performance. We believe that net revenue yields are commonly used in
the cruise industry to measure a company's cruise segment revenue performance.
This measure is also used for revenue management purposes. In calculating net
revenue yields, we use "net cruise revenues" rather than "gross cruise
revenues." We believe that net cruise revenues is a more meaningful measure in
determining revenue yield than gross cruise revenues because it reflects the
cruise revenues earned by us net of our most significant variable costs, which
are travel agent commissions, cost of air transportation and certain other
variable direct costs associated with onboard revenues. Substantially all of our
remaining cruise costs are largely fixed once our ship capacity levels have been
determined.
Net cruise costs per ALBD is the most significant measure we use to
monitor our ability to control our cruise segment costs rather than gross cruise
costs per ALBD. In calculating net cruise costs, we exclude the same variable
costs that are included in the calculation of net cruise revenues. This is done
to avoid duplicating these variable costs in these two non-GAAP financial
measures.
In addition, because a significant portion of our operations utilize the
euro or sterling to measure their results and financial condition, the
translation of those operations to our U.S. dollar reporting currency results in
increases in reported U.S. dollar revenues and expenses if the U.S. dollar
weakens against these foreign currencies, and decreases in reported U.S. dollar
revenues and expenses if the U.S. dollar strengthens against these foreign
currencies. Accordingly, we also monitor our two non-GAAP financial measures
assuming the current period currency exchange rates have remained constant with
the prior year's comparable period rates, or on a "constant dollar basis," in
order to remove the impact of changes in exchange rates on our non-U.S. cruise
operations. We believe that this is a useful measure indicating the actual
growth of our operations in a fluctuating exchange rate environment. On a
constant dollar basis, net cruise revenues and net cruise costs would be $8.63
billion and $5.15 billion for fiscal 2005, respectively. In addition to our two
non-GAAP financial measures discussed above, our non-U.S. cruise operations'
depreciation and net interest expense were impacted by the changes in exchange
rates for fiscal 2005 compared to 2004.
Our 2003 reported results only included the results of P&O Princess since
April 17, 2003. Consequently, for the year ended November 30, 2004, we believe
that the most meaningful comparison of our annual operating income and revenue
and cost metrics is to the comparable pro forma results and metrics in 2003,
which reflect the operations of both Carnival Corporation and P&O Princess as if
the companies had been consolidated throughout 2003. Accordingly, we have
disclosed pro forma information for the year ended November 30, 2003, as well as
the required reported information, in the discussion of our results of
operations.
The 2003 pro forma information was computed by adding the results of P&O
Princess' annual operations, and acquisition adjustments of $16 million of
depreciation expense and $3 million of interest expense and excluding $51
million of nonrecurring DLC transaction costs, to the 2003 Carnival Corporation
reported results for the year ended November 30, 2003.
F-33
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our
most significant judgments about the effect of matters that are inherently
uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties used to make them and the likelihood that materially
different estimates would be reported under different conditions or using
different assumptions is as follows:
Ship Accounting
Our most significant assets are our ships and ships under construction,
which represent 85% of our total assets. We make several critical accounting
estimates dealing with our ship accounting. First, we compute our ships'
depreciation expense, which represented 11% of our cruise operating expenses in
fiscal 2005, which requires us to estimate the average useful life of each of
our ships, as well as their residual values. Secondly, we account for ship
improvement costs by capitalizing those costs, that we believe will add value to
our ships and depreciate those improvements over their estimated useful lives,
while expensing repairs and maintenance costs as they are incurred. Finally,
when we record the retirement of a ship component that is included within the
ship's cost basis, we estimate its net book value to determine the amount of
ship component retired.
We determine the average useful life of our ships and their residual
values based primarily on our estimates of the weighted-average useful lives and
residual values of the ships' major component systems, such as cabins, main
diesels, main electric, superstructure and hull. In addition, we consider, among
other things, long-term vacation market conditions and competition and
historical useful lives of similarly-built ships. We have estimated our new
ships' average useful lives at 30 years and their average residual values at 15%
of our original ship cost.
Given the very large and complex nature of our ships, ship accounting
estimates require considerable judgment and are inherently uncertain. We do not
have cost segregation studies performed to specifically componentize our ship
systems. In addition, since we do not separately componentize our ships, we do
not identify and track depreciation of specific component systems. Therefore, we
have to estimate the net book value of components that are replaced or
refurbished, based primarily upon their replacement or refurbishment cost and
the age of the ship.
If materially different conditions existed, or if we materially changed
our assumptions of ship lives and residual values, our depreciation expense or
loss on replacement or refurbishment of ship assets and net book value of our
ships would be materially different. In addition, if we change our assumptions
in making our determinations as to whether improvements to a ship add value, the
amounts we expense each year as repair and maintenance costs could increase,
partially offset by a decrease in depreciation expense, as less costs would have
been initially capitalized to our ships. Our fiscal 2005 ship depreciation
expense would have increased by approximately $23 million for every year we
reduced our estimated average 30 year ship useful life. In addition, if our
ships were estimated to have no residual value, our fiscal 2005 depreciation
expense would have increased by approximately $120 million.
We believe that the estimates we made for ship accounting purposes are
reasonable and our methods are consistently applied and, accordingly, result in
depreciation expense that is based on a rational and systematic method to
equitably allocate the costs of our ships to the periods during which services
are obtained from their use. In addition, we believe that the estimates we made
are reasonable and our methods consistently applied (1) in determining the
average useful life and average residual values of our ships; (2) in determining
which ship improvement costs add value to our ships; and (3) in determining the
net book value of ship component assets being replaced or refurbished. Finally,
we believe our critical ship accounting estimates are generally comparable with
those of other major cruise companies.
Asset Impairment
The impairment reviews of our ship, trademark assets and of our goodwill,
which has been allocated to our cruise line reporting units, require us to make
significant estimates to
F-34
determine the fair values of these assets or reporting units.
The determination of fair value includes numerous uncertainties, unless a
viable actively traded market exists for the asset or for a comparable reporting
unit, which is usually not the case for cruise ships, cruise lines and
trademarks. For example, in determining fair values of ships and cruise lines
utilizing discounted forecasted cash flows, significant judgments are made
concerning, among other things, future net revenue yields, net cruise costs per
ALBD, interest and discount rates, cruise itineraries, ship additions and
retirements, technological changes, consumer demand, governmental regulations
and the effects of competition. In addition, third party appraisers are
sometimes used to determine fair values and some of their valuation
methodologies are also subject to similar types of uncertainties. Also, the
determination of fair values of reporting units using a price earnings multiple
approach also requires significant judgments, such as determining reasonably
comparable multiples. Finally, determining trademark fair values also requires
significant judgments in determining both the estimated trademark cash flows,
and the appropriate royalty rates to be applied to those cash flows to determine
their fair value. We believe that we have made reasonable estimates and
judgments in determining whether our ships, goodwill and trademarks have been
impaired. However, if there is a material change in the assumptions used in our
determination of fair value or if there is a material change in the conditions
or circumstances influencing fair value, we could be required to recognize a
material impairment charge.
Contingencies
We periodically assess the potential liabilities related to any lawsuits
or claims brought against us, as well as for other known unasserted claims,
including environmental, legal, passenger and crew, and tax matters. While it is
typically very difficult to determine the timing and ultimate outcome of these
matters, we use our best judgment to determine if it is probable that we will
incur an expense related to the settlement or final adjudication of such matters
and whether a reasonable estimation of such probable loss, if any, can be made.
In assessing probable losses, we make estimates of the amount of insurance
recoveries, if any. We accrue a liability when we believe a loss is probable and
the amount of the loss can be reasonably estimated, in accordance with the
provisions of SFAS No. 5, "Accounting for Contingencies," as amended. Such
accruals are typically based on developments to date, management's estimates of
the outcomes of these matters, our experience in contesting, litigating and
settling other similar matters, historical claims experience and actuarially
determined assumptions of liabilities, and any related insurance coverage. See
Note 8 in the accompanying financial statements for additional information
concerning our contingencies.
Given the inherent uncertainty related to the eventual outcome of these
matters and potential insurance recoveries, it is possible that all or some of
these matters may be resolved for amounts materially different from any
provisions or disclosures that we may have made with respect to their
resolution. In addition, as new information becomes available, we may need to
reassess the amount of probable liability that needs to be accrued related to
our contingencies. All such revisions in our estimates could materially impact
our results of operations and financial position.
Results of Operations
We earn our cruise revenues primarily from the following:
- sales of passenger cruise tickets and, in some cases, the sale of
air and other transportation to and from our ships. The cruise
ticket price includes accommodations, most meals, some non-alcoholic
beverages, entertainment and many onboard activities,
- the sale of goods and/or services primarily on board our ships,
which include bar and some beverage sales, casino gaming, shore
excursions, gift shop and spa sales, photo and art sales, and pre-
and post cruise land packages. These goods and services are either
provided directly by us or by independent concessionaires, from
which we receive a percentage of their revenues.
F-35
We incur cruise operating costs and expenses for the following:
- the costs of passenger cruise tickets, which represent costs that
vary directly with passenger cruise ticket revenues, and include
travel agent commissions, air and other travel related costs,
- onboard and other cruise costs, which represent costs that vary
directly with onboard and other revenues, and include the costs of
liquor and some beverages, costs of tangible goods sold by us from
our gift, photo and art auction activities, pre- and post cruise
land packages and credit card fees. Concession revenues do not have
any significant amount of costs associated with them, as the costs
and services incurred for these activities are provided by our
concessionaires,
- payroll and related costs, which represent costs for all our
shipboard personnel, including deck and engine officers and crew and
hotel and administrative employees,
- food costs, which include both our passenger and crew food costs,
- fuel costs, which include fuel delivery costs, and
- other ship operating costs, which include repairs and maintenance,
port charges, insurance, entertainment and all other shipboard
operating costs and expenses.
For segment information related to our revenues, expenses, operating
income and other financial information see Note 12 in the accompanying financial
statements.
F-36
Summary
Our reported and pro forma results of operations and selected information
were as follows:
Years Ended November 30,
--------------------------------------------------
Pro Forma Reported
--------- --------
2005 2004 2003 2003
---- ---- ---- ----
(dollars in millions, except selected information)
Revenues
Cruise
Passenger tickets $ 8,379 $ 7,357 $ 5,732 $ 5,039
Onboard and other 2,356 2,070 1,600 1,420
Other 352 300 264 259
-------- ------- ------- -------
11,087 9,727 7,596 6,718
-------- ------- ------- -------
Costs and Expenses
Operating
Cruise
Commissions, transportation
and other 1,665 1,572 1,227 1,021
Onboard and other 408 359 279 229
Payroll and related 1,145 1,003 841 744
Food 615 550 447 393
Fuel 709 493 390 340
Other ship operating 1,425 1,270 1,038 897
Other 250 210 198 190
-------- ------- ------- -------
Total 6,217 5,457 4,420 3,814
Selling and administrative 1,329 1,285 1,103 936
Depreciation and amortization 902 812 653 585
-------- ------- ------- -------
Operating Income 2,639 2,173 1,420 1,383
Nonoperating Expense, Net (309) (272) (185) (160)
-------- ------- ------- -------
Income Before Income Taxes 2,330 1,901 1,235 1,223
Income Tax Expense, Net (73) (47) (25) (29)
-------- ------- ------- -------
Net Income $ 2,257 $ 1,854 $ 1,210 $ 1,194
======== ======= ======= =======
Selected Information
Passengers carried
(in thousands) 6,848 6,306 5,422 5,038
======== ======= ======= =======
Occupancy percentage 105.6% 104.5% 102.6% 103.4%
======== ======= ======= =======
Fuel cost per metric ton (a) $ 260 $ 194 $ 179 $ 182
======== ======= ======= =======
(a) Fuel cost per metric ton is calculated by dividing the cost of our fuel by
the number of metric tons consumed.
F-37
Non-GAAP Financial Measures
Gross and net revenue yields were computed by dividing the gross or net
revenues, without rounding, by ALBDs as follows:
Years Ended November 30,
--------------------------------------------------------
Pro Forma Reported
--------- --------
2005 2004 2003 2003
---- ---- ---- ----
(in millions, except ALBDs and yields)
Cruise revenues
Passenger tickets $ 8,379 $ 7,357 $ 5,732 $ 5,039
Onboard and other 2,356 2,070 1,600 1,420
------------ ------------ ------------ ------------
Gross cruise revenues 10,735 9,427 7,332 6,459
Less cruise costs
Commissions, transportation
and other (1,665) (1,572) (1,227) (1,021)
Onboard and other (408) (359) (279) (229)
------------ ------------ ------------ ------------
Net cruise revenues $ 8,662 $ 7,496 $ 5,826 $ 5,209
============ ============ ============ ============
ALBDs 47,754,627 44,009,061 37,554,709 33,309,785
============ ============ ============ ============
Gross revenue yields $ 224.80 $ 214.21 $ 195.23 $ 193.91
============ ============ ============ ============
Net revenue yields $ 181.39 $ 170.32 $ 155.11 $ 156.38
============ ============ ============ ============
Gross and net cruise costs per ALBD were computed by dividing the gross or
net cruise costs, without rounding, by ALBDs as follows:
Years Ended November 30,
---------------------------------------------------------
Pro Forma Reported
2005 2004 2003 2003
---- ---- ---- ----
(in millions, except ALBDs and costs per ALBD)
Cruise operating expenses $ 5,967 $ 5,247 $ 4,222 $ 3,624
Cruise selling and
administrative expenses 1,276 1,231 1,054 896
------------ ------------ ------------ ------------
Gross cruise costs 7,243 6,478 5,276 4,520
Less cruise costs included in net
cruise revenues
Commissions, transportation
and other (1,665) (1,572) (1,227) (1,021)
Onboard and other (408) (359) (279) (229)
------------ ------------ ------------ ------------
Net cruise costs $ 5,170 $ 4,547 $ 3,770 $ 3,270
============ ============ ============ ============
ALBDs 47,754,627 44,009,061 37,554,709 33,309,785
============ ============ ============ ============
Gross cruise costs per ALBD $ 151.67 $ 147.20 $ 140.50 $ 135.69
============ ============ ============ ============
Net cruise costs per ALBD $ 108.25 $ 103.31 $ 100.38 $ 98.16
============ ============ ============ ============
Fiscal 2005 ("2005") Compared to Fiscal 2004 ("2004")
Revenues
Net cruise revenues increased $1.17 billion, or 15.6%, to $8.66 billion in
2005 from $7.50 billion in 2004. The 8.5% increase in ALBDs between 2005 and
2004 accounted for $638 million of the increase, and the remaining $528 million
was from increased net revenue yields, which increased 6.5% in 2005 compared to
2004 (gross revenue yields increased by 4.9%). Net revenue yields increased in
2005 primarily from higher cruise ticket prices, a 1.1% increase in occupancy,
higher onboard revenues and the weaker U.S. dollar relative to the euro and
sterling. Net revenue yields as measured on a constant dollar basis increased
6.1% in 2005. Gross cruise revenues increased $1.31 billion, or 13.9%, in 2005
to $10.74
F-38
billion from $9.43 billion in 2004 for largely the same reasons as net cruise
revenues.
Onboard and other revenues included concession revenues of $289 million in
2005 and $261 million in 2004. Onboard and other revenues increased in 2005
compared to 2004, primarily because of the 8.5% increase in ALBDs and increased
passenger spending on our ships.
Other non-cruise revenues increased $69 million, or 17.3%, to $467 million
in 2005 from $398 million in 2004 primarily due to the increase in the number of
cruise/tours sold.
Costs and Expenses
Net cruise costs increased $623 million, or 13.7%, to $5.17 billion in
2005 from $4.55 billion in 2004. The 8.5% increase in ALBDs between 2004 and
2005 accounted for $387 million of the increase, and the remaining $236 million
was from increased net cruise costs per ALBD, which increased 4.8% in 2005
compared to 2004 (gross cruise costs per ALBD increased 3.0%). Net cruise costs
per ALBD increased primarily due to a $66 increase in fuel cost per metric ton,
or 34.0%, to $260 per metric ton in 2005, higher dry-dock amortization expense,
a $23 million MNOPF contribution (see Note 13 in the accompanying financial
statements) and a weaker U.S. dollar relative to the euro and to sterling in
2005. Net cruise costs per ALBD as measured on a constant dollar basis compared
to 2004 increased 4.3% in 2005 and were flat excluding fuel costs and the MNOPF
contribution, compared to 2004. Gross cruise costs increased $765 million, or
11.8%, in 2005 to $7.24 billion from $6.48 billion in 2004, which was a lower
percentage increase than net cruise costs primarily because of the lower
proportion of passengers who purchased air transportation from us in 2005.
Other non-cruise operating expense increased $57 million, or 18.5%, to
$365 million in 2005 from $308 million in 2004 primarily due to the increase in
the number of cruise/tours sold.
Depreciation and amortization expense increased by $90 million, or 11.1%,
to $902 million in 2005 from $812 million in 2004 largely due to the 8.5%
increase in ALBDs through the addition of new ships and ship improvement
expenditures.
Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased $31
million in 2005 to $323 million in 2005 from $292 million in 2004. This increase
was primarily due to a $36 million increase in interest expense from higher
average borrowing rates and a weaker U.S. dollar, partially offset by a $5
million increase in interest income due to higher average invested fund
balances.
Other expense in 2005 included a $22 million expense for the write-down of
a non-cruise investment, partially offset by $7 million income from the
settlement of litigation associated with the DLC transaction.
Income Taxes
Income tax expense increased by $26 million from 2004 to $73 million in
2005 from $47 million in 2004 primarily because we recorded approximately $18
million for U.S. income taxes related to the charter of three ships to the
Military Sealift Command ("MSC") in connection with the Hurricane Katrina relief
efforts. Commencing in September 2005, these three ships were chartered for six
months, and pursuant to our agreement with the MSC, the net earnings from the
charter will be equal to the amount of net earnings we would have earned on
these ships if we had not entered into this charter.
Fiscal 2004 ("2004") Compared to Pro Forma 2003 ("pro forma 2003") and Reported
Results 2003 ("reported 2003")
Revenues
Net cruise revenues increased $1.67 billion, or 29%, to $7.50 billion in
2004 from $5.83 billion in pro forma 2003. The 17.2% increase in ALBDs between
pro forma 2003 and 2004 accounted for $1.0 billion of the increase, and the
remaining $670 million was from increased
F-39
net revenue yields, which increased 9.8% in 2004 compared to pro forma 2003
(gross revenue yields increased by 9.7%). Net revenue yields increased in 2004
primarily from higher cruise ticket prices, a 1.9% increase in occupancy, higher
onboard revenues and the weaker U.S. dollar relative to the euro and sterling.
Net revenue yields as measured on a constant dollar basis increased 6.6% in
2004. Gross cruise revenues increased $2.10 billion, or 29%, in 2004 to $9.43
billion from $7.33 billion in pro forma 2003 primarily for the same reasons as
net cruise revenues.
Net cruise revenues increased $2.29 billion, or 44%, to $7.50 billion in
2004 from $5.21 billion in reported 2003. The 32.1% increase in ALBDs between
reported 2003 and 2004, which included P&O Princess for a full year in 2004, but
only since April 17, 2003 during 2003, accounted for $1.67 billion of the
increase, and the remaining $615 million was from increased net revenue yields,
which increased 8.9% in 2004 compared to 2003 (gross revenue yields increased by
10.5%). Net revenue yields increased primarily for the same reasons as noted
above. Gross cruise revenues increased $2.97 billion, or 46%, in 2004 to $9.43
billion from $6.46 billion for primarily the same reasons as net cruise
revenues.
Onboard and other revenues included concession revenues of $261 million in
2004, $201 million in pro forma 2003 and $192 million in reported 2003, which
increased in 2004 compared to both pro forma 2003 and reported 2003 primarily
because of the increases in ALBDs and increased passenger spending on our ships.
Other non-cruise revenues increased $48 million, or 13.7%, to $398 million
in 2004 from $350 million in proforma 2003 (an increase of $53 million, or 15.4%
from $345 million in reported 2003) primarily due to the increase in the number
of cruise/tours sold, as well as price increases.
Costs and Expenses
Net cruise costs increased $777 million, or 21%, to $4.55 billion in 2004
from $3.77 billion in pro forma 2003. The 17.2% increase in ALBDs between pro
forma 2003 and 2004 accounted for $650 million of the increase, and the
remaining $127 million was from increased net cruise costs per ALBD, which
increased 2.9% in 2004 compared to pro forma 2003 (gross cruise costs per ALBD
increased 4.8%). Net cruise costs per ALBD increased primarily due to a $15
increase in fuel cost per metric ton, or 8.4%, to $194 per metric ton in 2004
and the weaker U.S. dollar relative to the euro and the sterling in 2004. Net
cruise costs per ALBD as measured on a constant dollar basis compared to pro
forma 2003 declined 0.5% in 2004. The decrease in constant dollar net cruise
costs was primarily the result of the economies of scale associated with the pro
forma 17.2% ALBD increase and synergy savings from the integration efforts
following the DLC transaction. Gross cruise costs increased $1.20 billion, or
23%, in 2004 to $6.48 billion from $5.23 billion in pro forma 2003 primarily for
the same reasons as net cruise costs.
Net cruise costs increased $1.28 billion, or 39%, to $4.55 billion in 2004
from $3.27 billion in reported 2003. The 32.1% increase in ALBDs between
reported 2003 and 2004 accounted for $1.05 billion of the increase, and the
remaining $230 million was from increased net cruise costs per ALBD, which
increased 5.2% in 2004 compared to reported 2003 (gross cruise costs per ALBD
increased 8.5%). Net cruise costs per ALBD increased primarily for the same
reasons as noted above. Gross cruise costs increased $1.96 billion, or 43%, in
2004 to $6.48 billion from $4.52 billion in reported 2003 primarily for the same
reasons as net cruise costs and a higher proportion of P&O Princess brands'
customers who purchased air from us.
Other non-cruise operating expense increased $24 million, or 8.5%, to $308
million in 2004 from $284 million in pro forma 2003 (an increase of $32 million,
or 11.6%, from $276 million in reported 2003) primarily due to the increased
volume of cruise/tours sold in 2004.
Depreciation and amortization expense increased by $159 million, or 24.3%,
to $812 million in 2004 from $653 million in pro forma 2003 largely due to the
pro forma 17.2% expansion of the combined fleet and ship improvement
expenditures, as well as the impact of a weaker U.S. dollar. Depreciation and
amortization increased by $227 million, or 38.8%, to $812 million in 2004 from
$585 million in reported 2003. This increase was primarily due to the same
factors as noted above and the result of the consolidation of P&O Princess.
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Nonoperating (Expense) Income
Net interest expense, excluding capitalized interest, increased to $292
million in 2004 from $217 million in reported 2003, or $75 million, which
increase consisted primarily of a $102 million increase in interest expense from
our higher level of average borrowings and a weaker U.S. dollar, partially
offset by a $27 million decrease in interest expense due to lower average
borrowing rates. The higher average debt balances were primarily a result of our
consolidation of the former P&O Princess debt and new ship deliveries.
Income Taxes
Income tax expense increased $18 million from reported 2003 to $47 million
in 2004 primarily because of the increase in Costa's Italian taxable income and
other taxes relating to our operations.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $3.41 billion of net cash from operations during
fiscal 2005, an increase of $194 million, or 6.0%, compared to fiscal 2004. We
continue to generate substantial cash from operations and remain in a strong
financial position, thus providing us with substantial financial flexibility in
meeting operating, investing and financing needs.
During fiscal 2005, our net expenditures for capital projects were $1.98
billion, of which $1.47 billion was spent for our ongoing new shipbuilding
program, including the final delivery payments for the Carnival Valor, Carnival
Liberty and P&O Cruises' Arcadia. The remaining capital expenditures consisted
primarily of $324 million for ship improvements and refurbishments, and $179
million for Alaska tour assets, cruise port facility developments and
information technology assets. During fiscal 2004, our net expenditures for
capital projects were $3.59 billion primarily because we took delivery of seven
new ships.
During fiscal 2005, we borrowed $1.15 billion, of which a portion was used
to pay a part of the Arcadia and Carnival Liberty purchase prices and to
refinance debt as noted below. During fiscal 2005, we made $609 million of debt
repayments, which included the final payment on our capitalized lease
obligations of $110 million, $100 million repayment of our 7.05% fixed rate
notes and $253 million in repayments of Costa indebtedness. In addition, we
refinanced $487 million of euro debt in 2005 to reduce our future borrowing
rate. We also paid cash dividends of $566 million and purchased $386 million of
treasury stock during 2005.
F-41
Future Commitments and Funding Sources
At November 30, 2005, our contractual cash obligations, including ship
construction contracts entered into in December 2005, and the effects such
obligations are expected to have on our liquidity and cash flow in future
periods were as follows (in millions):
Payments Due by Fiscal Year
--------------------------------------------------------------------
Contractual Cash
Obligations Total 2006 2007 2008 2009 2010 Thereafter
----------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt(a) $ 7,052 $1,325 $1,035 $1,672 $ 169 $ 944 $1,907
Short-term borrowings(a) 300 300
Fixed-rate interest
payments(a) 1,679 203 188 166 146 128 848
Shipbuilding(a) 7,590 1,710 2,340 2,130 1,410
Port facilities and
other(a) 600 58 70 70 56 52 294
Operating leases(a) 200 43 30 25 20 16 66
Purchase obligations(b) 615 516 81 11 5 2
Other long-term
liabilities reflected
on the balance
sheet(c) 457 23 106 52 39 33 204
------- ------ ------ ------ ------ ------ ------
Total contractual
cash obligations(d) $18,493 $4,178 $3,850 $4,126 $1,845 $1,175 $3,319
======= ====== ====== ====== ====== ====== ======
(a) See Notes 6 and 7 in the accompanying financial statements for additional
information regarding these contractual cash obligations. Fixed-rate
interest payments represent cash outflows for fixed interest payments,
including interest swapped from a variable- rate to a fixed-rate, but does
not include interest payments on variable-rate debt or interest swapped
from a fixed-rate to a variable-rate. Ship construction contracts entered
into after November 30, 2005 aggregated $2.26 billion.
(b) Represents legally-binding commitments to purchase inventory and other
goods and services made in the normal course of business to meet
operational requirements. Many of our contracts contain clauses that allow
us to terminate the contract with notice, and with or without a
termination penalty. Termination penalties are generally an amount less
than the original obligation. Historically, we have not had any
significant defaults of our contractual obligations or incurred
significant penalties for termination of our contractual obligations.
(c) Represents cash outflows for certain of our long-term liabilities that
could be reasonably estimated. The primary outflows are for estimates of
our employee benefit plan obligations, crew and passenger claims, certain
deferred income taxes and other long-term liabilities. Other long-term
liabilities, such as deferred income, derivative contracts payable, which
convert fixed rate debt to variable rate debt, fair value of hedged
commitments and certain deferred income taxes, have been excluded from the
table as they do not require cash settlement in the future or the timing
of the cash outflow cannot be reasonably estimated.
(d) Foreign currency payments are based on the November 30, 2005 exchange
rates.
During 2004, the Boards of Directors authorized the repurchase of up to an
aggregate of $1 billion of Carnival Corporation common stock and/or Carnival plc
ordinary shares commencing in 2005, subject to certain repurchase restrictions
on Carnival plc shares. From December 1, 2004 through February 6, 2006, we had
repurchased 8.0 million shares for $386 million.
At November 30, 2005, as adjusted for $916 million of additional committed
ship financing facilities entered into in January 2006, we had liquidity of
$4.67 billion, which consisted of $1.19 billion of cash, cash equivalents and
short-term investments, $1.83 billion available for borrowing under our
revolving credit facility, and $1.65 billion under committed ship financing
facilities. Our revolving credit facility matures in 2010. A key to our access
to liquidity is the maintenance of our strong credit ratings.
Based primarily on our historical results, current financial condition and
future forecasts, we believe that our existing liquidity and cash flow from
future operations will be sufficient to fund most of our expected capital
projects, debt service requirements,
F-42
dividend payments, working capital and other firm commitments. In addition,
based on our future forecasted operating results and cash flows for fiscal 2006,
we expect to be in compliance with our debt covenants during 2006. However, our
forecasted cash flow from future operations, as well as our credit ratings, may
be adversely affected by various factors, including, but not limited to, those
factors noted under "Cautionary Note Concerning Factors That May Affect Future
Results." To the extent that we are required, or choose, to fund future cash
requirements, including our future shipbuilding commitments, from sources other
than as discussed above, we believe that we will be able to secure such
financing from banks or through the offering of debt and/or equity securities in
the public or private markets. No assurance can be given that our future
operating cash flow will be sufficient to fund future obligations or that we
will be able to obtain additional financing, if necessary.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including
guarantee contracts, retained or contingent interests, certain derivative
instruments and variable interest entities, that either have, or are reasonably
likely to have, a current or future material effect on our financial statements.
Foreign Currency Exchange Rate Risks
In 2003, we broadened our global presence through Carnival plc's foreign
operations, in addition to the foreign currency denominated operations of our
Costa subsidiary. Specifically, our expanded international business operations
through P&O Cruises, Ocean Village and Swan Hellenic in the UK and AIDA in
Germany subject us to an increasing level of foreign currency exchange risk
related to the sterling and euro because these operations have either the
sterling or the euro as their functional currency. Accordingly, exchange rate
fluctuations of the sterling and the euro 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 for cruise
revenues and cruise expenses in our consolidated financial statements.
Strengthening of the U.S. dollar has the opposite effect.
We seek to minimize the impact of fluctuations in foreign currency
exchange rates through our normal operating and financing activities, including
netting certain exposures to take advantage of any natural offsets and, when
considered appropriate, through the use of derivative financial instruments. The
financial impacts of these hedging instruments are generally offset by
corresponding changes in the underlying exposures being hedged. Our policy is to
not use any financial instruments for trading or other speculative purposes.
One of our primary foreign currency exchange rate risks is related to our
outstanding commitments under ship construction contracts denominated in a
currency other than the functional currency of the cruise brand that is expected
to be operating the ship. These currency commitments are affected by
fluctuations in the value of the functional currency as compared to the currency
in which the shipbuilding contract is denominated. We generally use foreign
currency swaps to manage foreign currency exchange rate risk from ship
construction contracts (see Notes 2, 7 and 11 in the accompanying financial
statements). Accordingly, increases and decreases in the fair value of these
foreign currency swaps offset changes in the fair value of the foreign currency
denominated ship construction commitments, thus resulting in the elimination of
such risk.
Specifically, we have foreign currency swaps for three of our euro
denominated shipbuilding contracts. At November 30, 2005, the fair value of
these foreign currency swaps was a net unrealized gain of $29 million which is
recorded, along with an offsetting $29 million fair value liability related to
our shipbuilding firm commitments, on our accompanying 2005 balance sheet. Based
upon a 10% strengthening or weakening of the U.S. dollar and sterling compared
to the euro as of November 30, 2005, assuming no changes in comparative interest
rates, the estimated fair value of these foreign currency swaps would decrease
or increase by $120 million, which would be offset by a decrease or increase of
$120 million in the U.S. dollar value of the related foreign currency ship
construction commitments resulting in no net dollar impact to us.
F-43
However, at November 30, 2005, as adjusted for our December 2005 ship
orders, we have two euro denominated shipbuilding contracts aggregating 1.05
billion in euros assigned to Carnival Cruise Lines, a U.S. dollar functional
currency operation, for which we have not entered into any foreign currency
swaps. Therefore, the U.S. dollar cost of these ships will increase or decrease
based upon changes in the exchange rate until the payments are made under the
shipbuilding contracts or we enter into a foreign currency swap. These euro
commitments effectively act as an economic hedge against a portion of our net
investment in euro-denominated cruise operations. Accordingly, any increase or
decrease in our ship costs resulting from changes in the exchange rate will be
offset by a corresponding change in the net assets of our euro-denominated
cruise operations. Based upon a 10% hypothetical increase or decrease in the
November 30, 2005 U.S. dollar to euro foreign currency exchange rate, the cost
of these ships would increase or decrease by $124 million. Decisions regarding
whether or not to hedge a given ship commitment are made on a case-by-case
basis, taking into consideration the amount and duration of the exposure, market
volatility, and economic trends.
The cost of shipbuilding orders that we may place in the future for our
cruise lines who generate their cash flows in a currency that is different than
the shipyard's operating currency, generally the euro, is expected to be
affected by foreign currency exchange rate fluctuations. Given the decline in
the U.S. dollar relative to the euro over the past several years, the U.S.
dollar cost to order new cruise ships at current exchange rates has increased
significantly. If the U.S. dollar remains at current levels or declines further,
this may affect our ability to order future new cruise ships for U.S. dollar
functional currency brands.
Finally, we consider our investments in foreign subsidiaries to be
denominated in relatively stable currencies and of a long-term nature. In
addition to the strategy discussed above, we also partially address these
exposures by denominating a portion of our debt, or entering into foreign
currency swaps, in our subsidiaries' functional currencies (generally euros or
sterling). Specifically, we have debt of $1.68 billion in euros and $657 million
in sterling and have $1.11 billion of foreign currency swaps, whereby we have
converted $237 million of U.S. dollar debt into sterling debt, $736 million of
U.S. dollar debt into euro debt and $138 million of euro debt into sterling
debt, thus partially offsetting this foreign currency exchange rate risk. At
November 30, 2005, the fair value of these foreign currency swaps was a net
unrealized loss of $58 million, which is recorded in AOCI and offsets a portion
of the gains recorded in AOCI upon translating these foreign subsidiaries net
assets into U.S. dollars. Based upon a 10% hypothetical increase or decrease in
the November 30, 2005 foreign currency exchange rate, we estimate that these
contracts' fair values would increase or decrease by $111 million, which would
be offset by a decrease or increase of $111 million in the U.S. dollar value of
our net investments.
Interest Rate Risks
We seek to minimize the impact of fluctuations in interest rates through
our long-term investment and debt portfolio strategies, which include entering
into a substantial amount of fixed rate debt instruments. We continuously
evaluate our debt portfolio, and make periodic adjustments to the mix of
floating rate and fixed rate debt based on our view of interest rate movements
through the use of interest rate swaps. At November 30, 2005, 75% of the
interest cost on our long-term debt was effectively fixed and 25% was variable,
including the effect of our interest rate swaps.
Specifically, we have interest rate swaps at November 30, 2005, which
effectively changed $926 million of fixed rate debt to libor-based floating rate
debt. In addition, we have interest rate swaps at November 30, 2005, which
effectively changed $961 million and $286 of euribor and GBP libor floating rate
debt, respectively, to fixed rate debt. The fair value of our long-term debt and
interest rate swaps at November 30, 2005 was $7.70 billion. Based upon a
hypothetical 10% decrease or increase in the November 30, 2005 market interest
rates, the fair value of our long-term debt and interest rate swaps would
increase or decrease by approximately $85 million and interest expense on our
variable rate debt, including the effect of our interest rate swaps, would
increase or decrease by approximately $7 million.
F-44
In addition, based upon a hypothetical 10% decrease or increase in
Carnival Corporation's November 30, 2005 common stock price, the fair value of
our convertible notes would increase or decrease by approximately $197 million.
These hypothetical amounts are determined by considering the impact of the
hypothetical interest rates and common stock price on our existing long-term
debt and interest rate swaps. This analysis does not consider the effects of the
changes in the level of overall economic activity that could exist in such
environments or any relationships which may exist between interest rate and
stock price movements. Furthermore, since substantially all of our fixed rate
long-term debt cannot currently be called or prepaid and $1.25 billion of our
variable rate long-term debt is subject to interest rate swaps which effectively
fix the interest rate, it is unlikely we would be able to take any significant
steps in the short-term to mitigate our exposure in the unlikely event of a
significant decrease in market interest rates.
Bunker Fuel Price Risks
We have typically not used financial instruments to hedge our exposure to
the bunker fuel price market risk. We estimate that our fiscal 2006 fuel cost
would increase or decrease by approximately $2.9 million for each $1 per metric
ton increase or decrease in our average bunker fuel price.
Selected Financial Data
The selected consolidated financial data presented below for fiscal 2001
through 2005 and as of the end of each such year, are derived from our audited
financial statements and should be read in conjunction with those financial
statements and the related notes.
Years Ended November 30,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in millions, except per share and other operating data)
Statement of Operations
and Cash Flow Data(a)
Revenues $11,087 $9,727 $6,718 $4,383 $4,549
Operating income $2,639 $2,173 $1,383 $1,042 $ 892
Net income(b) $2,257 $1,854 $1,194 $1,016(c) $ 926(c)
Earnings per share(b)
Basic $ 2.80 $ 2.31 $ 1.66 $ 1.73 $ 1.58
Diluted $ 2.70 $ 2.24 $ 1.63 $ 1.69 $ 1.57
Dividends declared
per share $0.800 $0.525 $0.440 $0.420 $0.420
Cash from operations $3,410 $3,216 $1,933 $1,469 $1,239
Capital expenditures $1,977 $3,586 $2,516 $1,986 $ 827
Other Operating Data(a)
Available lower berth days(d) 47,754,627 44,009,061 33,309,785 21,435,828 20,685,123
Passengers carried 6,848,386 6,306,168 5,037,553 3,549,019 3,385,280
Occupancy percentages(e) 105.6% 104.5% 103.4% 105.2% 104.7%
As of November 30,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(in millions, except percentages)
Balance Sheet and Other
Data(a)
Total assets $28,432 $27,636 $24,491 $12,335 $11,564
Long-term debt, excluding
current portion $ 5,727 $ 6,291 $ 6,918 $ 3,014 $ 2,955
Total shareholders' equity $16,972 $15,760 $13,793 $ 7,418 $ 6,591
Debt to capital(f) 30.2% 33.5% 34.9% 29.9% 31.1%
(a) Includes the results of Carnival plc since April 17, 2003. Accordingly,
the information from 2003 and thereafter is not comparable to the prior
periods. Our results for the
F-45
three years prior to fiscal 2004, were negatively affected by a number of
factors affecting consumers' vacation demands including, among other
things, armed conflicts in the Middle East and elsewhere, terrorist
attacks in the U.S. and elsewhere, the uncertain worldwide economy and
adverse publicity surrounding these and other events.
(b) Effective December 1, 2001, we adopted SFAS No. 142, which required us to
stop amortizing goodwill as of December 1, 2001. If amortization of
goodwill had not been recorded for fiscal 2001, our adjusted net income
would have been $952 million and our adjusted basic and diluted earnings
per share would have been $1.63 and $1.61, respectively.
(c) Our net income for fiscal 2002 and 2001 includes an impairment charge of
$20 million and $140 million, respectively, and fiscal 2001 includes a
nonoperating net gain of $101 million from the sale of our investment in
Airtours plc. In addition, fiscal 2002 includes a $51 million income tax
benefit as a result of an Italian investment incentive.
(d) Total annual passenger capacity for the period, assuming two passengers
per cabin, that we offered for sale, which is computed by multiplying
passenger capacity by revenue- producing ship operating days in the
period.
(e) 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.
(f) Percentage of total debt to the sum of total debt and shareholders'
equity.
Market Price for Common Stock and Ordinary Shares
Carnival Corporation's common stock, together with paired trust shares of
beneficial interest in the P&O Princess Special Voting Trust (which holds a
Special Voting Share of Carnival plc), is traded on the NYSE under the symbol
"CCL." Carnival plc's ordinary shares trade on the London Stock Exchange under
the symbol "CCL." Carnival plc's ADSs, each one of which represents one Carnival
plc ordinary share, are traded on the NYSE under the symbol "CUK." The
depository for the ADSs is JPMorgan Chase Bank. The high and low stock sales
price for the periods indicated were as follows:
Carnival Corporation Carnival plc
-------------------- ---------------------------------------------------
Price per Ordinary
Share (GBP) Price per ADS (USD)
------------------ -------------------
High Low High Low High Low
---- --- ---- --- ---- ---
Fiscal 2005
Fourth Quarter $54.98 $45.78 (pound)33.19 (pound)26.60 $56.48 $47.32
Third Quarter $55.75 $48.76 (pound)33.40 (pound)28.31 $58.10 $51.46
Second Quarter $55.96 $46.76 (pound)31.45 (pound)25.90 $59.21 $50.02
First Quarter $58.98 $48.90 (pound)32.69 (pound)29.13 $62.17 $56.50
Fiscal 2004
Fourth Quarter $53.65 $45.29 (pound)30.89 (pound)26.22 $57.15 $47.43
Third Quarter $48.05 $41.55 (pound)27.30 (pound)23.65 $50.03 $43.85
Second Quarter $46.50 $40.05 (pound)26.72 (pound)22.98 $48.05 $41.20
First Quarter $46.30 $34.95 (pound)26.12 (pound)20.30 $49.21 $35.13
As of February 6, 2006, there were 4,287 holders of record of Carnival
Corporation common stock and 48,601 holders of record of Carnival plc ordinary
shares and 69 holders of record of Carnival plc ADSs. The past performance of
our stock prices cannot be relied on as a guide to their future performance.
All dividends for both Carnival Corporation and Carnival plc are declared
in U.S. dollars. Holders of Carnival Corporation common stock or Carnival plc
ADS's receive a dividend payable in U.S. dollars. The dividends payable for
Carnival plc ordinary shares are payable in sterling, unless the shareholders
elect to receive the dividends in U.S. dollars. Dividends payable in sterling
will be converted from U.S. dollars into sterling based upon a current U.S.
dollar to sterling exchange rate announced prior to the dividend payment date.
Selected Quarterly Financial Data (Unaudited)
Our revenue from the sale of passenger tickets is seasonal. Historically,
demand for cruises has been the greatest during our third quarter which includes
the Northern Hemisphere summer months. This higher demand during the third
quarter results in higher net revenue
F-46
yields and, accordingly, the largest share of our net income is earned during
this period. Substantially all of Holland America Tours' and Princess Tours'
revenues and net income are generated from May through September in conjunction
with the Alaska cruise season.
Quarterly financial results for fiscal 2005 were as follows:
Quarters Ended
---------------------------------------------------
February 28 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $2,396 $2,519 $3,605 $2,567
Operating income $ 418 $ 482 $1,291 $ 448
Net income $ 345 $ 408 $1,151 (a) $ 353
Earnings per share
Basic $ 0.43 $ 0.51 $ 1.43 $ 0.44
Diluted $ 0.42 $ 0.49 $ 1.36 $ 0.43
Dividends declared
per share $ 0.15 $ 0.20 $ 0.20 $ 0.25
(a) Includes a $23 million expense related to the MNOPF contribution and a $22
million expense for a non-cruise investment write-down.
Quarterly financial results for fiscal 2004 were as follows:
Quarters Ended
---------------------------------------------------
February 29 May 31 August 31 November 30
----------- ------ --------- -----------
(in millions, except per share data)
Revenues $1,981 $2,253 $3,250 $2,243
Operating income $ 260 $ 406 $1,160 $ 347
Net income $ 203 $ 332 $1,025 $ 294
Earnings per share
Basic $ 0.25 $ 0.41 $ 1.28 $ 0.37
Diluted $ 0.25 $ 0.40 $ 1.22 $ 0.36
Dividends declared
per share $0.125 $0.125 $0.125 $ 0.15
F-47