EXHIBIT 99.1
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(Note 2)
Years Ended November 30,
----------------------------
2005 2004 2003
---- ---- ----
Revenues
Cruise
Passenger tickets $ 8,399 $ 7,357 $ 5,039
Onboard and other 2,338 2,070 1,420
Other 357 300 259
-------- -------- --------
11,094 9,727 6,718
-------- -------- --------
Costs and Expenses
Operating
Cruise
Commissions, transportation and other 1,645 1,572 1,021
Onboard and other 412 359 229
Payroll and related 1,122 1,003 744
Fuel 707 493 340
Food 613 550 393
Other ship operating 1,465 1,315 904
Other 254 210 190
-------- -------- --------
Total 6,218 5,502 3,821
Selling and administrative 1,335 1,285 936
Depreciation and amortization 902 812 585
-------- -------- --------
8,455 7,599 5,342
-------- -------- --------
Operating Income 2,639 2,128 1,376
-------- -------- --------
Nonoperating (Expense) Income
Interest income 29 17 27
Interest expense, net of
capitalized interest (330) (284) (195)
Other (expense) income, net (13) (5) 8
-------- -------- --------
(314) (272) (160)
-------- -------- --------
Income Before Income Taxes 2,325 1,856 1,216
Income Tax Expense, Net (72) (47) (29)
-------- -------- --------
Net Income $ 2,253 $ 1,809 $ 1,187
======== ======== ========
Earnings Per Share
Basic $ 2.80 $ 2.25 $ 1.65
======== ======== ========
Diluted $ 2.70 $ 2.18 $ 1.62
======== ======== ========
Dividends Per Share $ 0.80 $ 0.525 $ 0.44
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Note 2)
November 30,
----------------
ASSETS 2005 2004
---- ----
Current Assets
Cash and cash equivalents $ 1,178 $ 643
Short-term investments 9 17
Trade and other receivables, net 430 409
Inventories 250 240
Prepaid expenses and other 254 331
-------- --------
Total current assets 2,121 1,640
-------- --------
Property and Equipment, Net 21,312 20,823
Goodwill 3,206 3,321
Trademarks 1,282 1,306
Other Assets 428 458
-------- --------
$ 28,349 $ 27,548
======== ========
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 477 469
Accrued liabilities and other 1,032 1,030
Customer deposits 2,051 1,873
-------- --------
Total current liabilities 5,185 5,034
-------- --------
Long-Term Debt 5,727 6,291
Other Long-Term Liabilities and Deferred Income 554 551
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 10,141 8,535
Unearned stock compensation (13) (16)
Accumulated other comprehensive income 159 541
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 16,883 15,672
-------- --------
$ 28,349 $ 27,548
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Note 2)
Years Ended November 30,
-----------------------
2005 2004 2003
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,253 $ 1,809 $ 1,187
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 902 812 585
Non-cruise 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 (136) (9) 89
Accounts payable 53 (28) 43
Accrued and other liabilities 155 178 (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
Purchases 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.
CARNIVAL CORPORATION & PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions)
(Note 2)
Unearned Accumulated Total
Compre- Additional stock other share-
hensive Common Ordinary paid-in Retained compen- comprehensive Treasury holders'
income stock shares capital earnings sation income (loss) stock equity
------ ----- ------ ------- -------- ------ ------------- ----- ------
Balances at November 30, 2002 $ 6 $ 1,089 $ 6,290 $ (11) $ 11 $ 7,385
Comprehensive income
Net income $1,187 1,187 1,187
Foreign currency
translation adjustment 161 161 161
Unrealized losses on
marketable securities, net (1) (1) (1)
Changes related to cash flow
derivative hedges, net (9) (9) (9)
------
Total comprehensive income $1,338
======
Cash dividends declared (329) (329)
Acquisition of Carnival plc $ 346 6,010 $ (1,058) 5,298
Issuance of stock under stock
plans 3 64 (14) 53
Amortization of unearned stock
compensation 7 7
------ ------ -------- -------- -------- ------- -------- --------
Balances at November 30, 2003 6 349 7,163 7,148 (18) 162 (1,058) 13,752
Comprehensive income
Net income $1,809 1,809 1,809
Foreign currency
translation adjustment 396 396 396
Unrealized loss on
marketable securities (1) (1) (1)
Minimum pension liability
adjustments (3) (3) (3)
Changes related to cash flow
derivative hedges, net (13) (13) (13)
------
Total comprehensive income $2,188
======
Cash dividends declared (422) (422)
Issuance of stock under stock
plans 4 148 (7) 145
Amortization of unearned stock
compensation 9 9
------ ------ -------- -------- -------- ------- -------- --------
Balances at November 30, 2004 6 353 7,311 8,535 (16) 541 (1,058) 15,672
Comprehensive income
Net income $2,253 2,253 2,253
Foreign currency
translation adjustment (395) (395) (395)
Minimum pension liability
adjustments (2) (2) (2)
Changes related to cash flow
derivative hedges, net 15 15 15
------
Total comprehensive income $1,871
======
Cash dividends declared (647) (647)
Issuance of stock under stock
plans 73 (9) 64
Amortization of unearned stock
compensation 12 12
Purchases of treasury stock (386) (386)
Issuance of common stock upon
conversion of convertible debt (3) 300 297
------ ------ -------- -------- -------- ------- -------- --------
Balances at November 30, 2005 $ 6 $ 353 $ 7,381 $ 10,141 $ (13) $ 159 $ (1,144) $ 16,883
====== ====== ======== ======== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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. Carnival Corporation and Carnival plc
(formerly known as P&O Princess Cruises plc or "P&O Princess") operate as a dual
listed company ("DLC"), whereby the businesses of Carnival Corporation and
Carnival plc are combined through a number of contracts and through provisions
in Carnival Corporation's articles of incorporation and by-laws and 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.
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 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.
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.
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
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.
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
Dry-dock costs primarily represent planned major maintenance activities
that are incurred when a ship is taken out of service for scheduled maintenance.
During the second quarter of 2006 we elected to change our method of accounting
for dry-dock costs from the deferral method, under which we amortized our
deferred dry-dock costs over the estimated period of benefit between dry-docks,
to the direct expense method, under which we expense all dry-dock costs as
incurred. We believe the direct method is preferable as it eliminates the
significant amount of time and subjectivity that is needed to determine which
costs and activities related to dry-docking should be deferred. In connection
with adopting this change in accounting policy, we elected to early adopt
Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections", which requires that we report changes in
accounting policy by retrospectively applying the new policies to all prior
periods presented, unless it is impractical to determine the prior period
impacts. Accordingly, we have adjusted our previously reported financial
statements for all periods presented for this change in dry-dock policy. The
effects of this change in accounting policy for the years ended and at November
30 were as follows (in millions, except for earnings per share):
Consolidated Statement of Operations
2005 2004 2003
--------------------------------- ------------------------------ --------------------------------
Deferral Direct Effect Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change Method Method of Change Method Method of Change
------ ------ --------- ------ ------ --------- ------ ------ ---------
Other ship
operating
expenses $1,461 $1,465 $ 4 $1,270 $1,315 $ 45 $ 897 $ 904 $ 7
Net income $2,257 $2,253 $ (4) $1,854 $1,809 $ (45) $1,194 $1,187 $ (7)
Earnings
per share
Basic $ 2.80 $ 2.80 $ 0.00 $ 2.31 $ 2.25 $(0.06) $ 1.66 $ 1.65 $(0.01)
====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted $ 2.70 $ 2.70 $ 0.00 $ 2.24 $ 2.18 $(0.06) $ 1.63 $ 1.62 $(0.01)
====== ====== ====== ====== ====== ====== ====== ====== ======
Consolidated Balance Sheets
2005 2004
----------------------------- -----------------------------
Deferral Direct Effect Deferral Direct Effect
Method(a) Method of Change(b) Method Method of Change
------ ------ --------- ------ ------ ---------
Prepaid expenses and other $ 343 $ 254 $ (89) $ 419 $ 331 $ (88)
Retained earnings $10,233 $10,141 $ (92) $8,623 $8,535 $ (88)
Accumulated other
comprehensive income (loss) $ 156 $ 159 $ 3 $ 541 $ 541
(a) In order to simplify comparisons, the amounts shown under the previously
reported deferral method have been adjusted to include the
reclassifications that were made as a result of our adopting a new chart
of accounts (see "Reclassifications" below).
In addition, retained earnings at November 30, 2003 decreased by $43
million to $7.15 billion from $7.19 billion, as a result of this change in
accounting method.
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 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.
Our sale to passengers of air and other transportation to and from our
ships and the related cost of purchasing this service is recorded as cruise
passenger ticket revenues and cruise transportation costs, respectively, in the
accompanying Consolidated Statements of Operations. The proceeds that we collect
from the sale of third party shore excursions and on behalf of onboard
concessionaires, net of the amounts remitted to them, are recorded as concession
revenues, on a net basis, in onboard and other cruise revenues. Transportation
and shore excursion revenues and costs are recognized as described above.
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 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.
Share-Based Compensation
Pursuant to SFAS No. 123, "Accounting for Share-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. Had we elected to
adopt the fair value approach as prescribed by SFAS No. 123, which charges
earnings for the estimated fair value of stock options, our pro forma net income
and pro forma earnings per share would have been as follows (in millions, except
per share amounts):
Years ended November 30,
------------------------------
2005 2004 2003
---- ---- ----
Net income, as reported $2,253 $1,809 $1,187
Share-based compensation
expense included in net
income, as reported 12 11 7
Total share-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 2,179 1,754 1,158
Interest on dilutive convertible notes 47 49 43
------ ------ ------
Pro forma net income for diluted
earnings per share $2,226 $1,803 $1,201
====== ====== ======
Earnings per share
Basic
As reported $ 2.80 $ 2.25 $ 1.65
====== ====== ======
Pro forma $ 2.70 $ 2.19 $ 1.61
====== ====== ======
Diluted
As reported $ 2.70 $ 2.18 $ 1.62
====== ====== ======
Pro forma $ 2.62 $ 2.13 $ 1.59
====== ====== ======
(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 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
We have reclassified certain 2005 and 2004 financial statement amounts to
conform them to future presentations primarily as a result of our adopting a new
chart of accounts in conjunction with our initial implementation of a new
worldwide accounting system in the second quarter of 2006. During this
implementation, we identified certain classification differences among our
operating subsidiaries and, accordingly, we have recorded the appropriate
reclassifications in 2005 and 2004 to improve comparability with future years.
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 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 $1.15 billion, respectively, and our basic and
diluted pro forma earnings per share would have been $1.45 and $1.42, based on
797 million and 840 million pro forma weighted-average shares outstanding.
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).
Repair and maintenance expenses, including dry-dock expenses, were $449
million, $398 million and $263 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.
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 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 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.
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.
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
Carnival Splendor 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
AIDAdiva(e) 4/07 2,030 315
AIDAbella(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 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.
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. In certain cases, if the credit ratings
of the major financial institutions who are directly paying the contingent
obligations fall below AA-, then Carnival Corporation will be required to move
those funds being held by those institutions to other financial institutions
whose credit ratings are AA- or above. 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 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 $193 $588
Minimum pension liability adjustments (19) (17)
Unrealized losses on cash flow derivative hedges, net (15) (30)
---- ----
$159 $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.
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 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 $10,737 $5,964 $1,289 $873 $2,611 $1,892 $27,782
Other 461 358 46 29 28 85 567(b)
Intersegment
elimination (104) (104)
------- ------ ------ ---- ------ ------ -------
$11,094 $6,218 $1,335 $902 $2,639 $1,977 $28,349
======= ====== ====== ==== ====== ====== =======
2004
Cruise $ 9,427 $5,292 $1,231 $791 $2,113 $3,512 $27,048
Other 398 308 54 21 15 74 500(b)
Intersegment
elimination (98) (98)
------- ------ ------ ---- ------ ------ -------
$ 9,727 $5,502 $1,285 $812 $2,128 $3,586 $27,548
======= ====== ====== ==== ====== ====== =======
2003
Cruise $ 6,459 $3,631 $ 896 $568 $1,364 $2,454 $24,049
Other 345 276 40 17 12 62 401(b)
Intersegment
elimination (86) (86)
------- ------ ------ ---- ------ ------ -------
$ 6,718 $3,821 $ 936 $585 $1,376 $2,516 $24,450
======= ====== ====== ==== ====== ====== =======
(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.
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. $ 6,435 $5,788 $4,513
Continental Europe 1,681 1,549 971
UK 1,544 1,341 724
Canada 654 562 231
Australia and New Zealand 311 215 71
Others 469 272 208
------- ------ ------
$11,094 $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 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 657,000 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 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.
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 $2,253 $1,809 $1,187
Interest on dilutive convertible notes 47 49 43
------ ------ ------
Net income for diluted earnings
per share $2,300 $1,858 $1,230
====== ====== ======
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 $ 2.25 $ 1.65
====== ====== ======
Diluted earnings per share $ 2.70 $ 2.18 $ 1.62
====== ====== ======
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.
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.
As discussed in Note 2 to the consolidated financial statements, effective March
1, 2006 the Company elected to change its method of accounting for costs
incurred in connection with dry-dock activities.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A of the 2005
Annual Report on Form 10-K (not presented herein), 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 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, except for dry-dock costs
and certain reclassifications as discussed in
Note 2, for which the date is November 6, 2006