For Immediate Release
15 April 2003
P&O Princess Cruises plc
Release of Carnival Corporation Form 10-Q
Carnival Corporation ("Carnival") has informed P&O Princess Cruises plc ("P&O
Princess") that, following the close of business yesterday in the UK, Carnival
filed with the US Securities and Exchange Commission ("SEC") its quarterly
report on Form 10-Q (the "10-Q") for the quarter ended 28 February 2003. The
schedule to this announcement contains Part I of the 10-Q.
P&O Princess is issuing this notice of the filing in accordance with the
requirements of the UK Listing Authority, following P&O Princess'
recommendation of the proposed dual listed company combination with Carnival.
The full 10-Q (including the portion extracted for this announcement) is
available for viewing on the SEC website at www.sec.gov and on the Carnival
website at www.carnivalcorp.com. In addition, a full copy of the 10-Q will be
available for inspection at the Document Viewing Facility at the Financial
Services Authority, 25 The North Colonnade, London E14 5HS.
- Ends -
Following the announcements of 8 January 2003 concerning the agreed DLC
transaction between P&O Princess and Carnival, Carnival is now acting as if it
is subject to the continuing obligation rules of the UK Listing Authority. As
such, P&O Princess is required by the UK Listing Authority to notify the
Company Announcements Office of all announcements and filings made by Carnival
prior to completion of the DLC transaction.
The directors of Carnival accept responsibility for the information contained
in this announcement. To the best of the knowledge and belief of the directors
of Carnival (who have taken all reasonable care to ensure such is the case),
the information contained within this announcement for which they accept
responsibility is in accordance with the facts and does not omit anything
likely to affect the import of such information.
Merrill Lynch International and UBS Limited, a subsidiary of UBS AG, are acting
as joint financial advisors and joint corporate brokers exclusively to Carnival
and no-one else in connection with the Carnival DLC transaction and the Partial
Share Offer and will not be responsible to anyone other than Carnival for
providing the protections afforded to clients respectively of Merrill Lynch
International and UBS Limited. as the case may be or for providing advice in
relation to the Carnival DLC transaction and the Partial Share Offer.
Citigroup Global Markets Limited ("Citigroup") and Credit Suisse First Boston
(Europe) Limited are acting for P&O Princess and no one else in connection with
the matters referred to herein and will not be responsible to any other person
for providing the protections afforded to clients of Citigroup or Credit Suisse
First Boston (Europe) Limited or for providing advice in relation to the
matters referred to herein.
SCHEDULE
Set out below is the text of Part I of the 10-Q filed by Carnival yesterday
(which has been extracted from the 10-Q as filed with the SEC):
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except earnings per share)
Three Months Ended
February 28
2003 2002
Revenues $1,031,105 $906,531
__________ __________
Costs and Expenses
Operating 615,194 519,562
Selling and administrative 177,118 151,403
Depreciation and amortization 106,483 89,754
__________ __________
898,795 760,719
__________ __________
Operating Income 132,310 145,812
__________ __________
Nonoperating (Expense) Income
Interest income 4,229 6,663
Interest expense, net of capitalized (29,392) (29,455)
interest
Other income, net 14,729 4,959
__________ __________
(10,434) (17,833)
__________ __________
Income Before Income Taxes 121,876 127,979
Income Tax Benefit, Net 5,003 1,661
========== ==========
Net Income $ 126,879 $ 129,640
Earnings Per Share
Basic $0.22 $0.22
========== ==========
Diluted $0.22 $0.22
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par value)
February 28 November 30
2003 2002
ASSETS
Current Assets $ $
Cash and cash equivalents 732,919 666,700
Short-term investments 37,575 39,005
Accounts receivable, net 110,132 108,327
Inventories 95,410 91,310
Prepaid expenses and other 178,675 148,420
Fair value of derivative contracts 58,324
Fair value of hedged firm commitments 9,702 78,390
__________ __________
Total current assets 1,222,737 1,132,152
__________ __________
Property and Equipment, Net 10,238,832 10,115,404
Goodwill 706,490 681,056
Other Assets 314,775 297,175
Fair Value of Hedged Firm Commitments 10,284 109,061
__________ __________
$12,493,118 $12,334,848
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities $ $
Short-term borrowings 70,000
Current portion of long-term debt 156,744 154,633
Accounts payable 304,938 268,687
Accrued liabilities 277,444 290,391
Customer deposits 728,998 770,637
Dividends payable 61,632 61,612
Fair value of derivative contracts 10,944 73,846
Fair value of hedged firm commitments 52,549
__________ __________
Total current liabilities 1,663,249 1,619,806
__________ __________
Long-Term Debt 3,083,621 3,013,758
Deferred Income and Other Long-Term 190,003 170,814
Liabilities
Fair Value of Derivative Contracts 19,213 112,567
Commitments and Contingencies (Notes 4
and 5)
Shareholders' Equity
Common stock; $.01 par value; 960,000
shares
authorized; 586,973 shares at 2003 and
586,788 shares at 2002 issued and 5,870 5,868
outstanding
Additional paid-in capital 1,093,230 1,089,125
Retained earnings 6,391,097 6,325,850
Unearned stock compensation (12,733) (11,181)
Accumulated other comprehensive income 59,568 8,241
__________ __________
Total shareholders' equity 7,537,032 7,417,903
__________ __________
$12,493,118 $12,334,848
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended February
28
2003 2002
OPERATING ACTIVITIES $ $
Net income 126,879 129,640
Adjustments to reconcile net income
to
net cash provided by operating
activities
Depreciation and amortization 106,483 89,754
Accretion of original issue discount 5,009 4,822
Other (3,505) 911
Changes in operating assets and
liabilities
Decrease (increase) in
Receivables 1,512 (17,593)
Inventories (2,988) 1,627
Prepaid expenses and other (26,427) (31,280)
Increase (decrease) in
Accounts payable 27,193 1,817
Accrued and other liabilities (19,379) (25,082)
Customer deposits (43,966) 60,287
__________ __________
Net cash provided by operating 170,811 214,903
activities
__________ __________
INVESTING ACTIVITIES
Additions to property and equipment, (112,137) (443,393)
net
Proceeds from retirement of property 30,919 1,632
and equipment
Other, net (4,484) (4,802)
__________ __________
Net cash used in investing (85,702) (446,563)
activities
__________ __________
FINANCING ACTIVITIES
Proceeds from issuance of debt 148,238 37,560
Principal repayments of debt (109,485) (9,729)
Dividends paid (61,613) (61,548)
Proceeds from issuance of common 1,267 1,556
stock, net
Other (1) (173)
__________ __________
Net cash used in financing (21,594) (32,334)
activities
__________ __________
Effect of exchange rate changes on
cash
and cash equivalents 2,704 4,340
__________ __________
Net increase (decrease) in cash and
cash equivalents 66,219 (259,654)
Cash and cash equivalents at
beginning
of period 666,700 1,421,300
__________ __________
Cash and cash equivalents at end of $ 732,919 $1,161,646
period
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying financial statements have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Carnival Corporation, together with its consolidated subsidiaries,
is referred to collectively in these consolidated financial statements and
elsewhere in this Form 10-Q as "our," "us" and "we."
The accompanying consolidated balance sheet at February 28, 2003 and the
consolidated statements of operations and cash flows for the three months ended
February 28, 2003 and 2002 are unaudited and, in the opinion of our management,
contain all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation. These interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the related notes included in our 2002 Annual Report
on Form 10-K.
Our operations are seasonal and results for interim periods are not necessarily
indicative of the results for the entire year. Reclassifications have been made
to prior period amounts to conform to the current period presentation.
NOTE 2 - Property and Equipment
Property and equipment consisted of the following (in thousands):
February 28 November 30
2003 2002
$ $
Ships 10,799,551 10,665,958
Ships under construction 788,886 712,447
__________ __________
11,588,437 11,378,405
Land, buildings and improvements,
and port facilities 328,061 314,448
Transportation equipment and other 418,231 409,310
__________ __________
Total property and equipment 12,334,729 12,102,163
Less accumulated depreciation and
amortization (2,095,897) (1,986,759)
$10,238,832 $10,115,404
========= ==========
Capitalized interest, primarily on our ships under construction, amounted to $9
million and $8 million for the three months ended February 28, 2003 and 2002,
respectively.
NOTE 3 - Debt
Short-term borrowings consisted of unsecured fixed rate notes, bearing interest
at libor plus 0.15% (1.5% weighted-average interest rate at February 28, 2003),
payable to a bank through May 2003.
Long-term debt consisted of the following (in thousands):
February 28 November 30
2003(a) 2002(a)
Euro floating rate note,
collateralized by
one Costa Cruises ("Costa")ship,
bearing
interest at euribor plus 0.5% (4.0%
at February
28, 2003 and November 30, 2002), due $ $
through
2008 117,664 118,727
Unsecured fixed rate notes, bearing
interest
at stated rates ranging from 6.15%
to 7.7%,
due through 2028(b) 856,309 856,680
Unsecured floating rate euro notes,
bearing
interest at rates ranging from
euribor plus
0.35% to euribor plus 0.53% (3.1% to
3.4% and
3.6% to 4.0% at February 28, 2003
and November
30, 2002, respectively), due 2005 772,021 680,377
and 2006
Unsecured fixed rate euro notes,
bearing
interest at 5.57%, due in 2006 324,040 297,195
Unsecured $1.4 billion revolving
credit facility,
bearing interest at libor plus 0.17%
(1.6% at
November 30, 2002), due in 2006 50,000
Other 44,457 44,468
Unsecured 2% convertible notes, due 600,000 600,000
in 2021
Unsecured zero-coupon convertible
notes, net of
discount, with a face value of $1.05
billion,
due in 2021 525,874 520,944
__________ __________
3,240,365 3,168,391
Less portion due within one year (156,744) (154,633)
__________ __________
$3,083,621 $3,013,758
========== ==========
(a) All borrowings are in U.S. dollars unless otherwise noted.
Euro denominated notes have been translated to U.S. dollars
at the period end exchange rates.
(b) These notes are not redeemable prior to maturity. We have
entered into two interest rate swap agreements, which
mature in 2003 and 2004, and effectively convert $225
million of this fixed rate debt to variable rate debt.
At February 28, 2003, we were in compliance with all of our
debt covenants.
NOTE 4 - Commitments
Ship Commitments
A description of our ships under contract for construction at February 28, 2003
was as follows (in millions, except passenger capacity data):
Ship Expected Shipyard Passenger Estimated
Service Cpacity(2) Total
Date(1) Cost(3)
Carnival Cruise $
Lines
("CCL")
Carnival Glory 7/03 Fincantieri 2,974 510
Carnival Miracle 3/04 Masa-Yards 2,124 375
(4)
Carnival Valor 11/04 Fincantieri 2,974 510
(4)
Carnival Liberty 8/05 Fincantieri 2,974 460
__________ __________
Total CCL 11,046 1,855
__________ __________
Holland America
Line
("HAL")
Oosterdam 8/03 Fincantieri 1,848 410
(4)
Westerdam 5/04 Fincantieri 1,848 410
(4)
Newbuild 11/05 Fincantieri 1,848 410
(4)
Newbuild 6/06 Fincantieri 1,848 390
__________ __________
Total Holland 7,392 1,620
America
__________ __________
Costa
Costa 6/03 Masa-Yards 2,114 390
Mediterranea (5)
Costa Fortuna 12/03 Fincantieri 2,720 480
(5)
Costa Magica 11/04 Fincantieri 2,720 500
(5)
__________ __________
Total Costa 7,554 1,370
__________ __________
Cunard Line
("Cunard")
Queen Mary 2 1/04 Chantiers de 2,620 780
l'Atlantique
(4)
Queen Victoria 2/05 Fincantieri 1,968 410
(4)
__________ __________
Total Cunard 4,588 1,190
__________ __________
Total 30,580 $6,035
========== ==========
(1) The expected service date is the date the ship is currently
expected to begin its first revenue generating cruise.
(2) 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.
(3) 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.
(4) These construction contracts are denominated in euros and have
been fixed into U.S. dollars through the utilization of forward
foreign currency contracts.
(5) These construction contracts are denominated in euros, which is
Costa's functional currency. The estimated total costs have been
translated into U.S. dollars using the February 28, 2003
exchange rate.
In connection with our ships under contract for construction, we have paid $789
million through February 28, 2003 and anticipate paying $2.5 billion during the
twelve months ending February 28, 2004 and $2.7 billion thereafter.
Proposed Dual-Listed Company Transaction with P&O Princess Cruises plc ("P&O
Princess")
After a series of preconditional offers made to the shareholders of P&O
Princess by us, commencing in December 2001, on January 8, 2003 we entered into
an agreement with P&O Princess, the world's third largest cruise company,
providing for a combination of both companies (the "Combined Group") under a
dual-listed company ("DLC") structure.
If the DLC transaction is completed, it would create a combination of the two
companies through a number of contracts and certain amendments to our Articles
of Incorporation and By-Laws and to P&O Princess' Memorandum and Articles of
Association. The two companies would retain their separate legal identities,
and each company's shares would continue to be publicly traded on the New York
Stock Exchange for us and the London Stock Exchange for P&O Princess. However,
both companies would operate as if they were a single economic enterprise. The
contracts governing the DLC structure would provide that the boards of
directors of the two companies would be identical, the companies would be
managed by a unified senior management team and that, as far as possible, P&O
Princess' and our shareholders would be placed in substantially the same
economic position as if they held shares in a single enterprise which owned all
of the assets of both companies. The net effect of the DLC transaction would be
that our existing shareholders would own an economic interest equal to
approximately 74% of the Combined Group and the existing shareholders of P&O
Princess would own an economic interest equal to approximately 26% of the
Combined Group. Also in connection with the DLC transaction, we will be making
a Partial Share Offer ("PSO") for 20% of P&O Princess' shares, which will
enable P&O Princess shareholders to exchange P&O Princess shares for our shares
on the basis of 0.3004 of our shares for each P&O Princess share up to, in
aggregate, a maximum of 20% of P&O Princess issued share capital. If the
maximum number of P&O Princess' shares are exchanged under the PSO, holders of
our shares, including our new shareholders who exchanged their P&O Princess
shares for our shares under the PSO, would own an economic interest equal to
approximately 79% of the Combined Group and holders of P&O Princess shares
would own an economic interest equal to approximately 21% of the Combined
Group. The PSO is conditional on, among other things, the closing of the DLC
transaction. Upon completion of the DLC transaction, P&O Princess will
reorganize and consolidate its share capital so that one share of P&O Princess
will have the same economic and voting interest as one of our shares. In
addition, P&O Princess and we expect to execute deeds of guarantee under which
each company would guarantee all of the indebtedness and similar obligations of
the other company incurred after the closing date of the DLC transaction.
The completion of the DLC transaction between P&O Princess and us is subject to
approval by P&O Princess' shareholders, who are currently expected to meet on
April 16, 2003 to vote on the approval of the DLC transaction. Our shareholders
met on April 14, 2003 and voted to approve the DLC transaction. If approved by
P&O Princess shareholders, we expect the closing of the DLC transaction to
occur on April 17, 2003. No assurance can be given that the DLC transaction
will be completed and, if it is completed, when completion will take place. If
the DLC transaction is not completed by September 30, 2003, either party can
terminate the agreement if it is not in material breach of its obligations. We
have incurred $34 million of transaction costs as of February 28, 2003, and
continue to incur costs, which have been or will be deferred in connection with
the DLC transaction. In the event a transaction with P&O Princess is not
consummated, we would be required to write off the above $34 million plus all
costs incurred and deferred subsequent to February 28, 2003. If the DLC
transaction or another business combination transaction with P&O Princess is
completed by us, these deferred costs, which are estimated to total
approximately $60 million upon completion, would be capitalized as part of the
transaction.
If our agreement with P&O Princess is terminated under certain circumstances, P
&O Princess would be required to pay us a break fee of $49 million. These
circumstances include, among other things, their Board of Directors withdrawing
or adversely modifying its recommendation to shareholders to approve the DLC
transaction, their Board of Directors recommending an alternative acquisition
proposal to shareholders, or their shareholders failing to approve the DLC
transaction if a third-party acquisition proposal exists at the time of their
meeting or if they breach their exclusivity covenant and a third party
acquisition proposal with respect to them is completed prior to July 2004.
If the DLC transaction is completed, we will account for it as an acquisition
of P&O Princess by us, using the purchase method.
Travel Vouchers
Pursuant to CCL's and Holland America's settlement of litigation, travel
vouchers with face values of $10 to $55 were required to be issued to qualified
past passengers. As of February 28, 2003, approximately $123 million of these
travel vouchers are available to be used for future travel prior to their
expiration, principally in fiscal 2005.
NOTE 5 - Contingencies
Litigation
Three actions (collectively, the "Facsimile Complaints") were filed against us
on behalf of purported classes of persons who received unsolicited
advertisements via facsimile, alleging that we and other defendants distributed
unsolicited advertisements via facsimile in contravention of the U.S. Telephone
Consumer Protection Act. The plaintiffs seek to enjoin the sending of
unsolicited facsimile advertisements and statutory damages. The advertisements
referred to in the Facsimile Complaints were not sent by us, but rather were
distributed by a professional faxing company at the behest of travel agencies
that referenced a CCL product. We do not advertise directly to the traveling
public through the use of facsimile transmission. The ultimate outcome of the
Facsimile Complaints cannot be determined at this time. We believe that we have
meritorious defenses to these claims and, accordingly, we intend to vigorously
defend against these actions.
Several actions filed in the U.S. District Court for the Southern District of
Florida against us and four of our executive officers on behalf of a purported
class of persons who purchased our common stock were consolidated into one
action in Florida (the "Stock Purchaser Complaint"). The plaintiffs have
claimed that statements we made in public filings violated federal securities
laws and seek unspecified compensatory damages and attorney and expert fees and
costs. A magistrate judge recommended that our motion to dismiss the Stock
Purchaser Complaint be granted and that the plaintiffs' amended complaint be
dismissed without prejudice. However, because it was dismissed without
prejudice, the plaintiffs may file a new amended complaint. Nevertheless, in
January 2003 the parties entered into a memorandum of understanding settling
the case pending confirmatory discovery and judicial approval. A substantial
portion of the $3.4 million settlement amount, which includes plaintiffs' legal
fees, will be covered by insurance.
In February 2001, Holland America Line-USA, Inc. ("HAL-USA"), our wholly-owned
subsidiary, received a grand jury subpoena requesting that it produce documents
and records relating to the air emissions from Holland America ships in Alaska.
HAL-USA responded to the subpoena. The ultimate outcome of this matter cannot
be determined at this time.
On August 17, 2002, an incident occurred in Juneau, Alaska onboard Holland
America's Ryndam involving a wastewater discharge from the ship. As a result of
this incident, various Ryndam ship officers have received grand jury subpoenas
from the Office of the U.S. Attorney in Anchorage, Alaska requesting that they
appear before a grand jury. One of the subpoenas also requests the production
of Holland America documents, which Holland America is producing. If the
investigation results in charges being filed, a judgment could include, among
other forms of relief, fines and debarment from federal contracting, which
would prohibit operations in Glacier Bay National Park and Preserve during the
period of debarment. The State of Alaska is separately investigating this
incident. The ultimate outcome of these matters cannot be determined at this
time. However, if Holland America were to lose its Glacier Bay permits we would
not expect the impact on our financial statements to be material to us since we
believe there are additional attractive alternative destinations in Alaska that
can be substituted for Glacier Bay.
Costa has instituted arbitration proceedings in Italy to confirm the validity
of its decision not to deliver its ship, the Costa Classica, to the shipyard of
Cammell Laird Holdings PLC ("Cammell Laird") under a 79 million euro
denominated contract for the conversion and lengthening of the ship. Costa has
also given notice of termination of the contract. It is now expected that the
arbitration tribunal's decision will be made in
mid-2004 at the earliest. In the event that an award is given in favor of
Cammell Laird, the amount of damages, which Costa will have to pay, if any, is
not currently determinable. The ultimate outcome of this matter cannot be
determined at this time.
In the normal course of our business, various other claims and lawsuits have
been filed or are pending against us. Most of these claims and lawsuits are
covered by insurance and, accordingly, the maximum amount of our liability is
typically limited to our self-insurance retention levels. However, the ultimate
outcome of these claims and lawsuits which are not covered by insurance cannot
be determined at this time.
Contingent Obligations
At February 28, 2003, we had contingent obligations totaling $1.06 billion to
participants in lease out and lease back type transactions for three of our
ships. At the inception of the leases, the entire amount of the contingent
obligations was paid by us to major financial institutions to enable them to
directly pay these obligations. Accordingly, these obligations were considered
extinguished, and neither funds nor the contingent obligations have been
included on our balance sheets. We would only be required to make any payments
under these lease contingent obligations in the remote event of nonperformance
by these financial institutions, all of which have long-term credit ratings of
AAA or AA. In addition, we obtained a direct guarantee from another AAA rated
financial institution for $287 million of the above noted contingent
obligations, thereby further reducing the already remote exposure to this
portion of the contingent obligations. If the major financial institutions'
credit ratings fall below AA-, we would be required to move a majority of the
funds from these financial institutions to other highly-rated financial
institutions. If our credit rating falls below BBB, we would be required to
provide a standby letter of credit for $86 million, or alternatively provide
mortgages in the aggregate amount of $86 million on two of our ships.
In the unlikely event that we were to terminate the three lease agreements
early or default on our obligations, we would, as of February 28, 2003 have to
pay a total of $168 million in stipulated damages. As of February 28, 2003,
$132 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. An additional standby letter of credit of $45
million will be required to be issued if both Moody's Investors Service and
Standard and Poor's credit ratings of our debt fall to A3 and A-, respectively.
Between 2017 and 2022, we have the right to exercise options that would
terminate these transactions at no cost to us. As a result of entering into
these three transactions we received $67 million, which was recorded as
deferred income on our balance sheets and is being amortized to nonoperating
income through 2022. In the event we were to default under our $1.4 billion
revolving credit facility, we would be required to post cash collateral to
support the stipulated damages standby letters of credit.
NOTE 6 - Shareholders' Equity
Our Articles of Incorporation authorize our Board of Directors, at their
discretion, to issue up to 40 million shares of our preferred stock. At
February 28, 2003 and November 30, 2002, no preferred stock had been issued.
During the three months ended February 28, 2003 and 2002, we declared cash
dividends of $.105 per share each period, or an aggregate of $62 million in
each period.
NOTE 7 - Comprehensive Income
Comprehensive income was as follows (in thousands):
Three Months Ended February
28,
2003 2002
$ $
Net income 126,879 129,640
Foreign currency translation
adjustment, net 54,558 (8,156)
Unrealized (losses) gains on
marketable securities, net (1,137) 2,433
Changes related to cash flow
derivative hedges (2,094) 4,579
__________ __________
Total comprehensive income $178,206 $128,496
========== ==========
NOTE 8 - Segment Information
Our cruise segment included six cruise brands, which have been aggregated as a
single reportable segment based on the similarity of their economic and other
characteristics. Cruise revenues are comprised of sales of passenger cruise
tickets, which includes accommodations, meals and most onboard activities, in
some cases the sale of air transportation to and from our cruise ships, and the
sale of certain onboard activities and other services. The tour segment
represents the transportation, hotel and tour operations of Holland America
Tours ("Tours").
Selected segment information was as follows (in thousands):
Three Months Ended February 28,
2003(a) 2002(a)(b)
Revenues Operating Revenues Operating
Income Income
(loss) (loss)
$ $ $ $
Cruise 1,027,475 143,557 901,263 $156,983
Tour 5,519 (11,247) 5,706 (11,171)
Intersegment (1,889) (438)
elimination
__________ __________ __________ __________
$1,031,105 $132,310 $906,531 $145,812
========== ========== ========== ==========
(a) Tour revenues included intersegment revenues, which primarily
represent billings by the tour segment to the cruise segment for
providing port hospitality services to cruise passengers.
(b) Revenue amounts in 2002 have been reclassified to conform to the
2003 presentation. In addition, in 2003 we commenced allocating
all corporate expenses to our cruise segment. Accordingly, the
2002 presentation has been restated to allocate, the previously
unallocated, 2002 corporate expenses to our cruise segment.
NOTE 9 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
thousands, except per share data):
Three Months Ended February
28
2003 2002
$ $
Net income 126,879 129,640
Weighted-average common shares
outstanding 586,895 586,268
Dilutive effect of stock plans 885 1,471
__________ __________
Dilutive weighted-average shares
Outstanding 587,780 587,739
========== ==========
Basic earnings per share $0.22 $0.22
==== ====
Diluted earnings per share $0.22 $0.22
==== ====
Our diluted earnings per share computation for the three months ended February
28, 2003 and 2002 did not include 32.7 million shares of our common stock
issuable upon conversion of our 2% Notes and Zero-Coupon Notes, as this common
stock was not issuable under the contingent conversion provisions of these debt
instruments.
NOTE 10 - Recent Accounting Pronouncements
In November 2002, Financial Accounting Standards Board Interpretation ("FIN")
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantors,
Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under the guarantee.
Guarantors will also be required to meet expanded disclosure obligations. The
initial recognition and measurement provisions of FIN No. 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for annual and interim financial statements that end
after December 15, 2002. We have adopted FIN No. 45 in the first quarter of
2003 and such adoption did not materially affect our financial statement
disclosures.
In December 2002, Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment
of SFAS No. 123" was issued. SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee and director compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for annual financial statements for fiscal
years ending after December 15, 2002 and for interim financial statements
commencing after such date. We will adopt SFAS No. 148 in our Quarterly Report
on Form 10-Q for the quarter ending May 31, 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Note Concerning Factors That May Affect Future Results
Certain statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q
are "forward-looking statements" that involve risks, uncertainties and
assumptions with respect to us, including certain statements concerning future
results, plans and goals and other events which have not yet occurred. These
statements are intended to qualify for the safe harbors from liability provided
by Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934. You can find many (but not all) of these
statements by looking for words like "will," "may," "believes," "expects,"
"anticipates," "forecast," "future," "intends," "plans," and "estimates" and
for similar expressions.
Because forward-looking statements, including those which may impact the
forecasting of our net revenue yields, booking levels, pricing, occupancy,
operating, financing and tax costs, estimates of ship depreciable lives and
residual values or business prospects, involve risks and uncertainties, there
are many factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied in this
Quarterly Report on Form 10-Q. These factors include, but are not limited to,
the following:
- general economic and business conditions, which may impact
levels of disposable income of consumers and the net revenue
yields for our cruise brands;
- conditions in the cruise and land-based vacation industries,
including competition from other cruise ship operators and
providers of other vacation alternatives and increases in
capacity offered by cruise ship and land-based vacation
alternatives;
- the impact of operating internationally;
- the international political and economic climate, armed
conflict, terrorist attacks, availability of air service and
other world events and adverse publicity and their impact on the
demand for cruises;
- ccidents and other incidents at sea affecting the health,
safety, security and vacation satisfaction of passengers;
- our ability to implement our shipbuilding programs and brand
strategies and to continue to expand our businesses worldwide;
- our ability to attract and retain shipboard crew and maintain
good relations with employee unions;
- our ability to obtain financing on terms that are favorable or
consistent with our expectations;
- the impact of changes in operating and financing costs,
including changes in foreign currency and interest rates and
fuel, food, insurance and security costs;
- changes in the tax, environmental, health, safety, security and
other regulatory regimes under which we operate;
- continued availability of attractive port destinations;
- our ability to successfully implement cost improvement plans and
to integrate business acquisitions;
- continuing financial viability of our travel agent distribution
system;
- weather patterns or natural disasters; and
- the ability of a small group of shareholders effectively to
control the outcome of shareholder voting.
Forward-looking statements should not be relied upon as a prediction of actual
results. Subject to any continuing obligations under applicable law, we
expressly disclaim any obligation to disseminate any updates or revisions to
any such forward-looking statements to reflect any change in expectations or
events, conditions or circumstances on which any such statements are based.
Results of Operations
We earn our cruise revenues primarily from the following:
- the sale of passenger cruise tickets, which includes
accommodations, meals, and most onboard activities,
- in some cases the sale of air transportation to and from our
cruise ships, and
- the sale of goods and services on board our cruise ships, such
as casino gaming, bar sales, gift shop and photo sales, shore
excursions and spa services.
We also derive revenues from the tour and related operations of Tours.
For segment information related to our revenues and operating income see Note 8
in the accompanying financial statements. Operations data expressed as a
percentage of total revenues and selected statistical information were as
follows:
Three Months Ended February
28
2003 2002
Revenues 100% 100%
__________ __________
Costs and Expenses
Operating 60 57
Selling and administrative 17 17
Depreciation and amortization 10 10
__________ _________
Operating Income 13 16
Nonoperating Expense (1) (2)
__________ __________
Net Income 12% 14%
========= ==========
Statistical Information (in
thousands, except occupancy)
Passengers carried 923 772
Available lower berth days (a) 5,805 5,060
Occupancy percentage (b) 102.8% 102.8%
(a) Represents the total passenger capacity for the period, assuming
two passengers per cabin, that we offered for sale, which is
computed by multiplying passenger capacity by revenue-producing
ship operating days in the period.
(b) In accordance with cruise industry practice, occupancy
percentage is calculated using a denominator of two passengers
per cabin even though some cabins can accommodate three or more
passengers. The percentages in excess of 100% indicate that more
than two passengers occupied some cabins.
General
Our cruise and tour operations experience varying degrees of seasonality. Our
revenue from the sale of passenger tickets for our cruise operations is
moderately seasonal. Historically, demand for cruises has been greatest during
the summer months. Tour's revenues are highly seasonal, with a vast majority of
its revenues generated during the late spring and summer months in conjunction
with the Alaska cruise season.
We currently do not accumulate and report all costs separately for our onboard
and other revenue producing activities because we view these costs principally
as part of the overall cruise services provided to our passengers. We primarily
use, and intend to continue to use, other metrics to measure our cruise segment
performance and help manage this business. However, we intend to commence
segregating these revenues and their related costs and expenses within our
consolidated statements of operations to be included in our Quarterly Report on
Form 10-Q for the quarter ending August 31, 2003.
Our available lower berth day capacity is currently expected to increase by
16.6%, 19.6% and 18.4% in the second, third and fourth quarters of fiscal 2003,
as compared to the same periods of fiscal 2002, excluding any impact from the
proposed P&O Princess DLC transaction.
The year over year percentage increase in our available lower berth day
capacity, resulting primarily from new ships entering service, for fiscal 2004,
2005 and 2006 is currently expected to be 16.2%, 11.1% and 5.8%, respectively,
excluding any impact from the proposed P&O Princess DLC transaction.
As discussed in Note 4 in the accompanying financial statements, we have a
proposed DLC transaction with P&O Princess, which is subject to the approval of
P&O Princess' shareholders. If the DLC transaction is completed, the Combined
Group will be the largest cruise vacation group in the world, based on
revenues, passengers carried and available capacity. As of April 9, 2003, the
Combined Group would have had a fleet of 66 cruise ships offering 101,252 lower
berths, with 17 additional cruise ships having 40,990 lower berths scheduled to
be added through June 2006.
See the Liquidity and Capital Resources section below for additional discussion
of the proposed DLC transaction.
For a discussion of our critical accounting estimates, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
which is included in our 2002 Annual Report on Form 10-K.
Outlook For Remainder of Fiscal 2003 ("2003")
Looking to the remainder of 2003, the factors which affected our first quarter,
such as concerns about the war with Iraq and the uncertain worldwide economy,
are also impacting the balance of the year, particularly the second quarter.
With the start of the Iraqi war, we have seen a further impact on our booking
trends for the second quarter. Occupancy for the second quarter is behind where
we were at this time last year at prices that are well below that of the prior
year. Given the current circumstances, it is difficult to provide specific
revenue yield guidance for the second quarter, except that we expect revenue
yields to be significantly below that of the prior year.
Assuming air transportation costs are the same as in the second quarter 2002,
gross cruise operating and selling and administrative expenses per available
lower berth day are expected to rise approximately 7 to 9 percent in the second
quarter compared to last year's levels, due primarily to increased fuel costs,
front-loading of advertising expenses in the first half of 2003, increased
insurance, environmental and security expenses. Our fuel cost expectations are
based on our fuel prices during the week of March 10, 2003.
For the second half of 2003, bookings have also been impacted by the close-in
booking curve and the commencement of the war with Iraq. Occupancy for the
second half of 2003 is significantly behind that of the prior year at prices
that are slightly below that of the prior year. Given the current environment
and the close-in booking pattern, we are unable to provide revenue yield
guidance for the second half of 2003, except that it is likely that revenue
yields will be below that of the prior year.
Gross cruise operating and selling, general and administrative expenses per
available lower berth day for the second half of 2003 are expected to be down
slightly, compared to the same period in 2002, assuming no change in air
transportation costs and fuel prices from the levels experienced in the second
half of 2002.
Our previous guidance on costs per available lower berth day for the second
quarter and second half of 2003 that was given in our press release dated March
21, 2003 was based on "net" cruise costs (costs excluding the cost of air
transportation and travel agent commissions), while the cost guidance given
above is based on "gross" cruise costs, which includes air transportation and
travel agent commissions. We have made this change in our disclosure because of
the issuance of Regulation G by the Securities and Exchange Commission. Because
of this change in the basis of the computation, the percentage increase in
gross cost per available lower berth day disclosed above for the second quarter
is different from that included in our press release dated March 21, 2003,
although there has been no change in our cost guidance for either the second
quarter or second half of 2003.
This outlook does not take into consideration any impact from the completion of
the proposed P&O Princess DLC transaction.
Three Months Ended February 28, 2003 ("2003") Compared To Three Months Ended
February 28, 2002 ("2002")
Revenues
Revenues increased $125 million, or 13.7%, in 2003 compared to 2002. Cruise
revenues increased $126 million, or 14%, to $1.03 billion in 2003 from $901
million in 2002. Our cruise revenue change resulted primarily from a 14.7%
increase in our available lower berth day capacity. Our gross revenues per
available berth day were negatively impacted by the concerns about a war with
Iraq and the uncertain world economy, which resulted in slightly lower gross
cruise ticket prices.
Our cruise revenues discussed above included onboard and other revenues such as
bar sales, casino gaming, shore excursions, gift shop and spa sales, photo
sales and pre-and post-cruise land packages. These activities are either
performed directly by us or by independent concessionaires, from which we
collect a percentage of their revenues. In 2003 and 2002, onboard and other
revenues represented 22.2% and 21.8%, respectively, of cruise revenues.
Costs and Expenses
Operating expenses increased $96 million, or 18.4%, in 2003 compared to 2002.
Cruise operating expenses increased $97 million, or 19%, to $609 million in
2003 from $512 million in 2002. This increase was primarily a result of the
impact of the 14.7% increase in our available lower berth day capacity and the
$20 million increase in fuel prices, which resulted from a 51% increase in fuel
prices per metric ton, coupled with the increase in insurance, environmental
and security costs.
Selling and administrative expenses increased $26 million, or 17.0%, to $177
million in 2003 from $151 million in 2002. Cruise selling and administrative
expenses increased $26 million, or 17.9%, to $170 million in 2003 from $144
million in 2002. This increase was primarily due to the 14.7% increase in
available lower berth day capacity and the front-loading of advertising
expenses into the first half of 2003.
Depreciation and amortization increased by $17 million, or 18.6%, to $106
million in 2003 from $90 million in 2002. This increase was primarily as a
result of the expansion of our fleet and ship improvement expenditures.
Nonoperating (Expense) Income
Other income was $15 million in 2003 comprised of $19 million from net
insurance proceeds, $10 million as a result of Windstar Cruises' Wind Song's
casualty loss and $9 million as a reimbursement of expenses incurred in prior
years, less certain other nonoperating expenses.
Liquidity and Capital Resources
Sources and Uses of Cash
Our business provided $171 million of net cash from operations during the three
months ended February 28, 2003, a decrease of $44 million, or 20.5%, compared
to the three months ended February 28, 2002, due primarily to a decrease in
customers' advance ticket deposits. This decrease was principally a result of
the slowdown in bookings as concerns over the war with Iraq heightened, causing
a closer-in booking pattern.
During the three months ended February 28, 2003, our net expenditures for
capital projects were $112 million, of which $74 million was spent for our
ongoing shipbuilding program. The $38 million of nonshipbuilding capital
expenditures consisted primarily of ship refurbishments, Alaska tour assets,
cruise port facility developments and information technology assets. In
addition, we received an insurance reimbursement of $31 million related to the
Wind Song casualty loss.
During the three months ended February 28, 2003, we borrowed $148 million,
which included $90 million under short-term loan agreements and $58 million
under Costa's euro denominated revolving credit facility. In addition, we made
principal repayments of $109 million, which included $20 million under our
short-term loan agreements, a $50 million repayment under our $1.4 billion
revolver and $39 million on Costa's revolving credit facility and Costa's
collaterized debt. We also paid cash dividends of $62 million in the first
three months of fiscal 2003.
Future Commitments and Funding Sources
Our contractual cash obligations, with initial or remaining terms in excess of
one year, and contingent liabilities remained generally unchanged at February
28, 2003 compared to November 30, 2002, except for changes in our shipbuilding
and debt commitments discussed above and in Notes 3, 4 and 5 in the
accompanying financial statements.
As of February 28, 2003, we had noncancelable contracts for the delivery of
thirteen new ships over the next three years. Our remaining obligations related
to these ships under contract for construction is to pay $2.5 billion during
the twelve months ending February 28, 2004 and $2.7 billion thereafter.
At February 28, 2003, we had $3.3 billion of debt, of which $221 million is due
during the twelve months ending February 28, 2004. See Notes 3 and 4 in the
accompanying financial statements for more information regarding our debt and
commitments.
At February 28, 2003, we had liquidity of $2.3 billion, which consisted of $770
million of cash, cash equivalents and short-term investments, and $1.5 billion
available for borrowing under our revolving credit facilities obtained through
a group of banks, which have strong credit ratings. Our revolving credit
facilities mature in 2006. A key to our access to liquidity is the maintenance
of our strong long-term credit ratings. On April 14, 2003, Moody's Investors
Service, one of three debt rating agencies that rate our debt, announced that
they had lowered our senior unsecured debt rating from A2 to A3 in anticipation
of, among other things, the DLC transaction with P&O Princess. The other two
rating agencies have not yet issued a revised debt rating reflecting the DLC
transaction with P&O Princess. A reduction in Standard and Poor's credit rating
of our debt would require us to issue a $45 million standby letter of credit
(see Note 5 in the accompanying financial statements). We continue to believe
our senior unsecured debt will retain a strong investment grade rating.
We believe that our existing liquidity, together with our forecasted cash flow
from future operations, will be sufficient to fund most of our capital
projects, debt service requirements, dividend payments and working capital
needs. Our forecasted cash flow from future operations, as well as our credit
ratings, may be adversely affected by various factors, including, but not
limited to, those noted under "Cautionary Note Concerning Factors That May
Affect Future Results." To the extent that we are required, or choose, to fund
future cash requirements, including our future shipbuilding commitments, from
sources other than as discussed above, we believe that we will be able to
secure financing from banks or through the offering of debt and/or equity
securities in the public or private markets. No assurance can be given that our
future operating cash flow will be sufficient to fund future obligations or
that we will be able to obtain additional financing, if necessary.
Although no assurance can be given, we expect to complete our DLC transaction
with P&O Princess on April 17, 2003. As a result of the DLC transaction, the
Combined Group's outstanding long-term debt will be approximately $6.0 billion
and its shipbuilding commitments for 17 new cruise ships and one river boat
will be approximately $6.8 billion, which is a substantial increase over our
existing obligations and commitments. However, we believe that the Combined
Group's liquidity, including cash and committed financings, and cash flows from
future operations will be sufficient to fund the expected capital projects,
debt service requirements, dividend payments, working capital and other firm
commitments through at least the next twelve months.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee
contracts, retained or contingent interests, certain derivative instruments and
variable interest entities, that either have, or are reasonably likely to have,
a current or future material effect on our financial statements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit, is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.
Our Chief Executive Officer, Chief Operating Officer and Chief Financial and
Accounting Officer have evaluated our disclosure controls and procedures as of
April 9, 2003 and believe that they are effective.
Changes in Internal Controls
There were no significant changes in our internal controls or other factors
that could significantly affect these controls subsequent to the date of their
evaluation and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there can be no assurance that our controls will succeed in achieving their
stated goals under all potential future conditions, regardless of how remote.
END