================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 6-K
P&O PRINCESS CRUISES PLC
REPORT OF FOREIGN ISSUER
PURSUANT TO RULES 13a - 16 OR 15d - 16 OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------
For the month of
March 2003
Not Applicable
(Translation of registrant's name into English)
77 New Oxford Street, London WC1A 1PP
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
This report on Form 6-K, including the attached P&O Princess Cruises plc
Circular to P&O Princess Shareholders and Notice of Extraordinary General
Meeting (the "Circular"), except for the sections of the Circular under the
captions "Report on unaudited reconciliations to UK GAAP from
PricewaterhouseCoopers LLP" in Section 2, Part B; "Report on unaudited
reconciliations to Carnival accounting policies from KPMG Audit Plc" in Section
3, Part B; "Report on pro forma financial information from KPMG Audit Plc" in
Section 4, Part B; "Working Capital" in Section 8, paragraph 11; and "Consents"
with respect to the consents of PricewaterhouseCoopers LLP and KPMG Audit Plc
in Section 8, paragraphs 14(c) and 14(d), shall be deemed to be incorporated by
reference into the prospectus included in the registration statement on Forms
S-4/F-4 (Registration No. 333-102443) filed by Carnival Corporation and P&O
Princess Cruises plc in respect of the registration of P&O Princess shares in
connection with the DLC transaction and Carnival shares in connection with the
Partial Share Offer, and to be a part thereof from the date on which this
report is filed, to the extent not superseded by documents or reports
subsequently filed or furnished.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
P&O PRINCESS CRUISES PLC
Date: March 14, 2003 By: /s/ SIMON PEARCE
----------------------------------
Name: Simon Pearce
Title: Company Secretary
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Attached is a draft of a circular that will ultimately be mailed, following
approval by the UK Listing Authority, to shareholders of P&O Princess Cruises
plc in connection with the Extraordinary General Meeting to approve the
Carnival--P&O Princess DLC transaction. This draft circular has not been
circulated or approved by the UK Listing Authority. The final circular will
only be mailed following approval by the UK Listing Authority.
[LOGO] P&O Princess Cruises plc
PROPOSED DLC TRANSACTION
WITH
[LOGO] CARNIVAL
CORPORATION
CIRCULAR TO P&O PRINCESS SHAREHOLDERS
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in
any doubt as to the action you should take, you should immediately seek your
own personal financial advice from your stockbroker, bank manager, solicitor,
accountant or other independent professional adviser authorised, in the UK,
under the Financial Services and Markets Act 2000.
If you have sold or otherwise transferred all of your P&O Princess shares or
P&O Princess ADSs, please send this document, the form of proxy and any
accompanying documents, as soon as possible, to the purchaser or transferee, or
to the stockbroker, bank or other agent through whom the sale or transfer was
effected for delivery to the purchaser or transferee.
--------------------------------------------------------------------------------
P&O PRINCESS CRUISES PLC
Proposed DLC Transaction
with
CARNIVAL CORPORATION
Circular to P&O Princess Shareholders
and
Notice of Extraordinary General Meeting
--------------------------------------------------------------------------------
This document is not an offer to sell securities, and it is not soliciting an
offer to buy securities, in any jurisdiction where the offer or sale is not
permitted.
Your attention is drawn to the letter from the Chairman of P&O Princess, which
is set out at the beginning of this document and which recommends that you vote
in favour of the resolution to be proposed at the P&O Princess EGM referred to
below.
The Notice of the P&O Princess EGM, to be held at 10:00 a.m. (London time) on
16 April 2003 at the Queen Elizabeth II Conference Centre, Broad Sanctuary,
Westminster, London SWIP 3EE, is set out at the end of this document. The form
of proxy for use by P&O Princess shareholders at the meeting is enclosed with
this document and, to be valid, should be completed in accordance with the
instructions on it and returned as soon as possible, but in any event it must
be received by P&O Princess' registrars, Computershare Investor Services PLC,
The Pavilions, Bridgwater Road, Bristol BS13 8FB, no later than 10:00 a.m.
(London time) on 14 April 2003.
Schroder Salomon Smith Barney which is regulated in the United Kingdom by the
Financial Services Authority is acting for P&O Princess and no-one else in
connection with the DLC transaction and will not be responsible to anyone other
than P&O Princess for providing the protections afforded to clients of Schroder
Salomon Smith Barney, or for providing advice in relation to the DLC
transaction.
Merrill Lynch International and UBS Limited, a subsidiary of UBS AG, are acting
as joint financial advisers and joint corporate brokers exclusively to Carnival
and no-one else in connection with the DLC proposal 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 DLC proposal.
YOU ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS DOCUMENT IN ITS
ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" IN PART C OF
SECTION 4 OF THIS DOCUMENT.
Carnival Shareholders
A Special Meeting of the shareholders of Carnival Corporation will take place
at 10:00 a.m. (New York City time) on 14 April 2003 to approve the
Implementation Agreement and the transactions contemplated in such agreement,
including the proposed amendments to the existing articles of incorporation and
by-laws of Carnival. For that purpose, a proxy statement/prospectus is being
sent to Carnival shareholders explaining the DLC transaction. A copy of that
document is available for inspection by P&O Princess shareholders as described
in paragraph 16 of Section 8.
CONTENTS
EXPECTED TIMETABLE OF EVENTS FOR THE DLC TRANSACTION 1
IMPORTANT INFORMATION 2
LETTER FROM THE CHAIRMAN OF P&O PRINCESS 4
Section 1. SUMMARY 15
Part A Summary information on Carnival and P&O Princess 15
Part B Summary of the DLC transaction 16
Part C Information about the P&O Princess EGM 23
Section 2. INFORMATION ON CARNIVAL 24
Part A Description of Carnival's business 24
Part B Financial information on Carnival 44
Section 3. INFORMATION ON P&O PRINCESS 71
Part A Description of P&O Princess' business 71
Part B Financial information on P&O Princess 89
Section 4. INFORMATION ON THE COMBINED GROUP 136
Part A Description of the Combined Group 136
Part B Unaudited pro forma financial information of the Combined Group 152
Part C Risk factors 172
Section 5. THE DLC STRUCTURE 180
Part A Background to the DLC proposal 180
Part B Details of the DLC structure 185
Section 6. SUMMARY OF THE AGREEMENTS RELATING TO THE DLC STRUCTURE 194
Section 7. SUMMARY OF THE PROPOSED CHANGES TO THE P&O PRINCESS
MEMORANDUM AND ARTICLES 212
Section 8. ADDITIONAL INFORMATION 220
DEFINITIONS 272
NOTICE OF EXTRAORDINARY GENERAL MEETING 277
EXPECTED TIMETABLE OF EVENTS FOR THE DLC TRANSACTION
Posting of this document 17 March 2003
Carnival Special Meeting 10:00 a.m. (New York City time) on 14
April 2003
Latest time and date for receipt of 10:00 a.m. (London time) on 14 April
forms of proxy for the P&O Princess 2003
EGM
P&O Princess EGM 10:00 a.m. (London time) on 16 April
2003
Completion of the DLC transaction 17 April 2003
Reorganisation of P&O Princess shares 10:00 p.m. (London time) on 17 April
2003
Dealings commence in consolidated P&O 8:00 a.m. (London time) on 22 April 2003
Princess shares
These expected dates and times are indicative only and may be subject to change.
SHAREHOLDER HELPLINE
If you have any queries in relation to the DLC transaction and/or the Partial
Share Offer you may call the UK helpline from within the UK on 0800 953 0083
between 9:00 a.m. and 5:30 p.m. (London time) on any business day until
completion of the DLC transaction. If you are calling from the U.S., the
helpline number is 1 866 203-2636. If you are calling from anywhere else, the
helpline number is + 44 870 889 3147 (calls will be charged at the applicable
rate). For legal reasons, the helpline will only be able to assist you with
information contained in this document and the helpline cannot provide advice
on the merits of the proposals or give any financial advice. Calls may be
monitored for quality control purposes.
1
IMPORTANT INFORMATION
Certain definitions
Certain words and terms used in this document are defined in the section headed
"Definitions" on pages 272 to 276 of this document.
Cautionary note concerning factors that may affect future results
Certain statements contained in this document are "forward-looking statements"
that involve risks, uncertainties and assumptions with respect to P&O Princess
and Carnival and their respective subsidiaries and the Combined Group,
including certain statements concerning the transactions described in this
document, profit forecasts, working capital, future results, plans and goals
and other events which have not yet occurred. You can find many (but not all)
of these statements by looking for words like "will", "may", "believes",
"expects", "anticipates", "forecast", "future", "intends", "plans" and
"estimates" and for similar expressions.
Because forward-looking statements involve risks and uncertainties, there are
many factors that could cause the transactions described in this document not
to occur and/or each of P&O Princess', Carnival's and the Combined Group's
actual results, performance or achievements to differ materially from those
expressed or implied in this document. These factors include, but are not
limited to:
.. shareholder approvals of the DLC transaction;
.. achievement of expected benefits from the DLC transaction;
.. risks associated with the combination of Carnival's and P&O Princess'
businesses by means of the DLC structure;
.. liquidity and index inclusion as a result of the implementation of the DLC
structure, including a possible mandatory exchange;
.. risks associated with the uncertainty of the tax status of the DLC
structure;
.. general economic and business conditions which may impact levels of
disposable income of consumers and the net revenue yields for the cruise
brands of Carnival, P&O Princess and the Combined Group;
.. 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 and other world events and negative media publicity and their
impact on the demand for cruises;
.. accidents and other incidents at sea affecting the health, safety, security
and vacation satisfaction of passengers;
.. the ability of Carnival, P&O Princess and the Combined Group to implement
their shipbuilding programmes and brand strategies and to continue to
expand their businesses worldwide;
.. the ability of Carnival, P&O Princess and the Combined Group to attract and
retain shipboard crew;
.. the ability to obtain financing on terms that are favourable or consistent
with Carnival's, P&O Princess' and the Combined Group's expectations;
.. the impact of changes in operating and financing costs, including changes
in foreign currency and interest rates and security, fuel, food and
insurance costs;
.. changes in the tax, environmental and other regulatory regimes under which
each company operates; and
.. the ability of a small group of shareholders effectively to control the
outcome of shareholder voting.
2
These risks and other risks are detailed in the section entitled "Risk factors"
in Part C of Section 4 of this document. That section contains important
cautionary statements and a discussion of many of the factors that could
materially affect the accuracy of each company's forward-looking statements
and/or adversely affect their respective businesses, results of operations and
financial positions.
Forward-looking statements should not be relied upon as a prediction of actual
results. Subject to any continuing obligations under applicable law or any
relevant listing rules, Carnival and P&O Princess expressly disclaim any
obligation to disseminate, after the date of this document, 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.
Shareholder disclosure obligations
Any person who, alone or acting together with any other person(s) pursuant to
an agreement or understanding (whether formal or informal) to acquire or
control securities of Carnival or P&O Princess, owns or controls, or becomes
the owner or controller, directly or indirectly, of one per cent. or more of
any class of securities of Carnival or P&O Princess is generally required under
the provisions of Rule 8 of the Takeover Code to disclose to a Regulatory
Information Service and the Panel every dealing in such securities during the
period from 16 December 2001, the date of Carnival's announcement of its
original offer for P&O Princess, until the completion of the DLC transaction.
Dealings by Carnival or P&O Princess or by their respective "associates"
(within the definitions set out in the Takeover Code) in any class of
securities of Carnival or P&O Princess must also be disclosed. Please consult
your financial adviser immediately if you believe this rule may be applicable
to you.
Disclosure should be made on an appropriate form before 12 noon (London time)
on the business day following the date of the dealing transaction. These
disclosures should be registered with a Regulatory Information Service (e.g.
the Company Announcements Office of the London Stock Exchange (fax number: +44
20 7588 6057)) and to the Panel (fax number: +44 20 7256 9386).
Financial information
The extracts from the consolidated financial statements of, and the other
financial information about, Carnival and P&O Princess appearing in this
document are presented in U.S. dollars. Carnival's historical financial
statements are prepared in accordance with U.S. GAAP and P&O Princess'
historical financial statements are prepared in accordance with UK GAAP. For
the purposes of this document, Carnival has prepared reconciliations of certain
financial information to UK GAAP and P&O Princess has prepared reconciliations
of certain financial information to U.S. GAAP. U.S. GAAP and UK GAAP differ
from one another in some significant respects. A description of the principal
differences between U.S. GAAP and UK GAAP as they relate to the reconciliations
in this document is contained in Part B of Sections 2 and 3.
Unaudited pro forma financial information on the Combined Group that gives
effect to the DLC transaction and has been prepared in accordance with UK GAAP
is contained in Part B of Section 4 to this document. In addition, unaudited
pro forma financial information on the Combined Group that gives effect to the
DLC transaction and has been prepared in accordance with U.S. GAAP is also
contained in Part B of Section 4 to this document.
Applicable disclosure requirements
Investors should be aware that this document has been prepared to comply with
both English and U.S. securities laws, regulations and requirements and
accordingly may not be in the standard format and style for a document of this
type.
3
LETTER FROM THE CHAIRMAN OF P&O PRINCESS
[LOGO]
P&O PRINCESS 77 New Oxford Street
Cruises plc London WC1A 1PP
17 March 2003
To all holders of P&O Princess shares and P&O Princess ADSs and, for
information only, to participants in the P&O Princess Employee Share Incentive
Plans
Dear Shareholder
Recommended DLC transaction between P&O Princess and Carnival
Introduction
On 8 January 2003, P&O Princess announced that it had accepted and recommended
Carnival's proposal to combine with P&O Princess under a DLC structure.
The purpose of this document is to set out the background to and reasons for
the DLC transaction and to provide information on the businesses of Carnival,
P&O Princess and the Combined Group. This document also contains the
recommendation of the board of P&O Princess that P&O Princess shareholders vote
in favour of the DLC transaction at the P&O Princess EGM to be held at 10:00
a.m. on 16 April 2003.
The Combined Group will be the largest cruise vacation group in the world,
based on revenues, passengers carried and available capacity with a wide
portfolio of complementary brands, including some of the best known cruise
brands globally. By effecting the combination using a DLC structure, P&O
Princess is expected to remain in the FTSE 100 index, which will allow P&O
Princess shareholders to continue to participate in the long term growth of the
global cruise industry through P&O Princess.
Background
In November 2001, P&O Princess announced that it had reached agreement with
Royal Caribbean on a proposed dual listed company combination. In December
2001, Carnival announced a pre-conditional share exchange offer for P&O
Princess, which it subsequently increased in January and February 2002. As a
result of the P&O Princess board's views about the value, structure and
regulatory approval prospects of Carnival's offers, P&O Princess could not
negotiate with Carnival without breaching its agreement with Royal Caribbean.
After Carnival received all necessary regulatory clearances for its offer on 4
October 2002, the P&O Princess board re-examined Carnival's offer and, in
particular, Carnival's proposal to enter into a dual listed company transaction
with P&O Princess as an alternative to its share acquisition offer. The P&O
Princess board determined that Carnival's DLC proposal was more favourable
financially to P&O Princess shareholders than the Royal Caribbean DLC
combination and was reasonably likely to be consummated since all regulatory
clearances had been obtained. As a result, P&O Princess was then able to enter
into talks with Carnival to discuss its DLC proposal.
On 24 October 2002, following negotiations with P&O Princess, Carnival
announced a pre-conditional offer to enter into a DLC transaction with P&O
Princess. On 25 October 2002, P&O Princess announced that its board had
withdrawn its recommendation of the Royal Caribbean DLC combination and on 29
October 2002, P&O Princess wrote to P&O Princess shareholders informing them of
the termination of its agreements with Royal Caribbean.
Further details of the background to the DLC proposal are contained in Part A
of Section 5.
4
Carnival's business
Carnival is a global cruise vacation and leisure travel company. Carnival
offers a broad range of cruise brands serving the contemporary cruise sector
through Carnival Cruise Lines and Costa Cruises, the premium cruise sector
through Holland America Line, the premium/luxury cruise sector through Cunard
Line and the luxury cruise sector through Seabourn Cruise Line and Windstar
Cruises. Carnival has a multi-brand strategy which provides products and
services appealing to the widest possible target audience across all major
segments of the vacation industry.
Carnival operates 45 cruise ships with passenger capacity of 67,282 lower
berths. Carnival reported revenues and net income, in accordance with U.S.
GAAP, of $4.4 billion and $1.0 billion, respectively, for its fiscal year ended
30 November 2002.
The Combined Group
The implementation of the DLC structure will involve a strategic combination of
the businesses of Carnival and P&O Princess. The two companies will have a
single senior executive management team and identical boards of directors, and
will be run as if they were a single economic enterprise. The two companies
will pursue a common set of business objectives established by the identical
boards and single management team, who will evaluate these strategies and other
operational decisions from the perspective of all shareholders.
On a pro forma basis in accordance with UK GAAP, the Combined Group would have
reported revenues of $6.9 billion and net income of $1.3 billion for the
financial year ended 31 December 2002 (P&O Princess' financial year-end). On
the same basis, the Combined Group would have reported net assets of $12.1
billion as at 31 December 2002. On a pro forma basis in accordance with U.S.
GAAP, the Combined Group would have reported revenues of $6.9 billion and net
income of $1.3 billion for the financial year ended 30 November 2002
(Carnival's financial year-end). On the same basis, the Combined Group would
have reported shareholders' equity of $12.8 billion as at 30 November 2002.
These pro forma figures are extracted from the unaudited pro forma financial
information of the Combined Group set out in Part B of Section 4.
Rationale for and benefits of the creation of the Combined Group with Carnival
P&O Princess and Carnival believe that the principal benefits of the creation
of the Combined Group are as set forth below and that the DLC structure is the
optimal structure to seek to achieve all of these benefits:
Complementary well-known brands operating globally
The Combined Group will be the largest cruise vacation group in the world,
based on revenues, passengers carried and available capacity. It will have a
wide portfolio of complementary brands, both by geography and product offering,
and will include some of the best known cruise brands globally. The combination
will allow the Combined Group to offer a wider range of vacation choices for
its passengers. In addition, the combination is expected to enhance its ability
to attract more passengers from land-based vacations, based on its ability to
provide vacations in most of the largest vacation markets in the world, and its
strategy of entering new and developing markets by building on its brand
strength, global presence and ability to strategically deploy its brands and
diversified fleet.
The Combined Group's brands will include Carnival Cruise Lines, Princess
Cruises, Holland America Line, P&O Cruises (UK), Costa Cruises, Cunard Line,
Seabourn Cruise Line, Windstar Cruises, AIDA, A'ROSA, Swan Hellenic, Ocean
Village and P&O Cruises (Australia). The Combined Group will serve all of the
key cruising destinations outside the Far East, including Alaska, Australia,
Bahamas, Bermuda, Canada, the Caribbean, Europe, the Hawaiian Islands, the
Mexican Riviera, the Mediterranean, New England, the Panama Canal, South
America and other exotic destinations worldwide.
Benefits of sharing best practices and generating cost savings
The Combined Group will be managed as if the two companies constituted a single
economic enterprise by a single senior executive management team and identical
boards of directors.
5
Carnival and P&O Princess expect that the Combined Group will generate
significant cost savings, estimated to be at least $100 million on an
annualised basis, commencing in the first full financial year following
completion of the DLC transaction. Carnival and P&O Princess expect that these
cost savings will be generated principally through the dissemination of best
practices between the companies, economies of scale and the rationalisation of
certain shoreside operations. One-time cash costs of achieving these cost
savings are expected to be approximately $30 million.
Financial flexibility and access to capital markets
The Combined Group will have substantial financial flexibility, with strong
operating cash flow, low leverage and a strong balance sheet and expects to
maintain a strong investment grade credit rating.
The Combined Group is also expected to have greater access to capital markets.
P&O Princess' shares will remain listed on the London Stock Exchange and are
expected to remain eligible for inclusion in the FTSE series of indices and are
expected to remain included with full weighting in the FTSE 100. Carnival's
shares will remain listed on the NYSE and are expected to remain included in
the S&P 500.
High quality combined fleet to enhance growth within the cruise industry
As of 31 January 2003, Carnival and P&O Princess together had a fleet of 65
cruise ships with an aggregate capacity of 99,982 lower berths. At that date,
P&O Princess and Carnival together had an additional 18 new cruise ships on
order, with an aggregate capacity of 42,260 lower berths, scheduled for
delivery in the next three and a half years. P&O Princess and Carnival also
expect that the Combined Group will have one of the youngest and most modern
fleets in the cruise industry, with an average vessel age (weighted by lower
berths) of 7.5 years as at 31 January 2003.
The Combined Group expects to deploy its diversified fleet strategically in
order to increase its global reach and enter new and developing markets. This
strategic deployment is expected to allow the Combined Group to appeal to the
largest target audience by providing brands, products and itineraries with the
widest appeal in a particular geographic region.
The DLC structure allows continued participation in the global cruise industry
for P&O Princess shareholders who wish to continue to hold shares in a
UK-listed company
As described above, following the implementation of the DLC structure, P&O
Princess is expected to remain included in the FTSE 100. This will allow P&O
Princess shareholders who are required, or wish, to hold shares in a UK-listed
company included in the FTSE indices to continue to do so, and, as a result, to
continue to participate as a shareholder in the global cruise industry through
P&O Princess. A share acquisition or exchange offer or other more common means
of combining the businesses of P&O Princess and Carnival in which all P&O
Princess shareholders would receive Carnival shares, which are not eligible for
inclusion in the FTSE series of indices, and/or a partial cash alternative
would not have afforded all P&O Princess shareholders this opportunity.
Additionally, the Partial Share Offer for up to 20 per cent. of P&O Princess'
share capital allows those P&O Princess shareholders who would prefer to
participate in the Combined Group by holding shares in a U.S.-listed company
the opportunity to do so for at least some of their holdings.
Potential risks
The structure of the DLC transaction involves risks not associated with the
more common ways of combining the management and operations of two companies. A
discussion of these and certain other risks associated with the DLC transaction
and an investment in the Combined Group are set out in Part C of Section 4 of
this document.
Details of the DLC structure
The DLC structure will not involve a merger or transfer of assets between
Carnival and P&O Princess. Instead, the two companies will be managed and
operated as if they were a single economic enterprise pursuant to contractual
arrangements and amendments to each company's constitutional documents.
Accordingly, the companies will continue to exist as separate publicly-quoted
companies and their shares will remain in issue and continue to be listed on
their current stock exchanges. Notwithstanding
6
this, the boards of Carnival and P&O Princess will be identical and the
Combined Group will be managed by a single senior executive management team.
The two companies will pursue a common set of business objectives established
by the identical boards and single management team, who will evaluate these
strategies and other operational decisions from the perspective of all the
shareholders.
The current Carnival shareholders will hold approximately 74 per cent. of the
equity (including economic interest) in the Combined Group in the form of
Carnival shares. The current P&O Princess shareholders will hold approximately
26 per cent. of the equity (including economic interest) in the Combined Group
in the form of P&O Princess shares or, to the extent that they participate in
the Partial Share Offer described below, Carnival shares. These are the same
percentage equity interests that these shareholders would have had in an
enlarged Carnival group if Carnival had completed the share exchange offer made
on 7 February 2002 (without giving effect to the pre-conditional partial cash
alternative). If the Partial Share Offer is taken up in full, approximately 79
per cent. of the equity (including economic interest) in the Combined Group
would be held by Carnival shareholders (including approximately 5 per cent.
held by those P&O Princess shareholders who elected for the Partial Share
Offer) and approximately 21 per cent. by P&O Princess shareholders who retained
their P&O Princess shares.
To implement the DLC structure, the companies will enter into contractual
arrangements and amend their constitutional documents to give the shareholders
of both companies rights to distributions of both income and capital and voting
rights on an equalised basis in accordance with a fixed equalisation ratio.
Initially the equalisation ratio will be one P&O Princess share for each 0.3004
Carnival shares, which is the same as the exchange ratio in Carnival's
pre-conditional share exchange offer of 7 February 2002. However, on completion
of the DLC transaction, P&O Princess will reorganise and consolidate its share
capital so that the equalisation ratio will adjust to 1:1. This will be
achieved by consolidating each 3.3289 existing P&O Princess shares of $0.50
into one reorganised P&O Princess share of $1.66 each. After this
reorganisation, one Carnival share will have the same rights to distributions
of income and capital and voting rights as one P&O Princess share. This
reorganisation is being done to simplify the equalisation ratio so that it is
easier to compare earnings per share and dividends per share of the two
companies. This reorganisation is described in greater detail below.
An amount of $49.4 million will be payable by either P&O Princess or Carnival
to the other company in the event that the transaction does not proceed under
certain circumstances. Further details of these arrangements are contained in
Part B of Section 5.
The DLC structure is described in detail in Section 5. This description
includes further information on:
.. combined and separate voting by the shareholders of the two companies;
.. restrictions on purchases by either company of its own, or the other
company's, shares;
.. the equalisation ratio;
.. dividends and other distributions;
.. takeover restrictions; and
.. changes to the rights of any shares of one company that are owned by the
other company.
Mandatory Exchange
In certain limited circumstances, P&O Princess shares can be mandatorily
exchanged (in accordance with the then prevailing equalisation ratio) for
Carnival shares. These circumstances include:
.. a change in tax law that has a material adverse impact on the DLC structure
that cannot be avoided by other commercially reasonable means, and the
mandatory exchange is approved by two-thirds of shareholders of P&O
Princess and Carnival voting together on a joint electorate action (joint
electorate actions are described in more detail in paragraph 3.5.2 of
Section 6); and
.. the P&O Princess board reasonably determining that all or a substantial
part of the DLC documents are illegal or unenforceable and the illegality
or unenforceability cannot be eliminated by other commercially reasonable
means.
Upon a mandatory exchange, P&O Princess shareholders would no longer hold their
investment in the Combined Group in the form of P&O Princess shares listed
primarily on the London Stock Exchange and included in the FTSE series of
indices, but would instead hold their investment in the form of Carnival shares
listed on the NYSE. This is described in detail in paragraph 7 of Section 5.
7
P&O Princess share reorganisation
As described above, at 10:00 p.m. on the day that the Partial Share Offer
becomes or is declared unconditional, the share capital of P&O Princess will be
reorganised and consolidated so that the equalisation ratio will adjust to 1:1.
This will be achieved by consolidating each 3.3289 existing P&O Princess shares
of $0.50 into one reorganised P&O Princess share of $1.66 each. Any
entitlements to fractions of P&O Princess shares arising out of the
consolidation will be aggregated, consolidated and sold into the market and the
net proceeds (rounded down to the nearest whole pence) distributed to the
relevant P&O Princess shareholders. Following completion of the reorganisation
and P&O Princess' change of name to Carnival plc, as proposed at the P&O
Princess EGM, new share certificates will be dispatched by post to shareholders
who, upon completion of the DLC transaction, hold P&O Princess shares in
certificated form. The new share certificates will reflect the revised number
of shares held following the reorganisation, the new nominal value of each P&O
Princess share (changing from $0.50 to $1.66) and P&O Princess' change of name
to Carnival plc. These new share certificates are to be used in place of, and
should be substituted for, your current share certificates. Shareholders who,
upon completion of the DLC transaction, hold P&O Princess shares in
uncertificated form will, on the first day of dealings in new P&O Princess
shares on the London Stock Exchange, have the appropriate stock account in
CREST amended by CRESTCo to reflect the new number and nominal value of P&O
Princess shares and the change of name of P&O Princess to Carnival plc.
Shareholder approval is required for this reorganisation. By voting to approve
the DLC transaction, P&O Princess shareholders will also be voting to approve
the share reorganisation. The P&O Princess share reorganisation will not affect
the net assets of either P&O Princess or the Combined Group. Following the
reorganisation, the P&O Princess shares will still rank pari passu with each
other.
Application will be made for the reorganised P&O Princess shares to be admitted
for listing on the UK Listing Authority's Official List and to the London Stock
Exchange for trading on its market for listed securities. The listing for the
existing P&O Princess shares will be cancelled immediately prior to the listing
of the reorganised P&O Princess shares becoming effective to effect the DLC
structure, with no interruption to trading. It is expected that the
reorganisation will take effect at 10:00 p.m. on 17 April 2003, with dealings
in the reorganised and consolidated P&O Princess shares of $1.66 each
commencing after the Easter holiday at the start of trading on 22 April 2003.
The proportion of the issued ordinary share capital of P&O Princess held by
each P&O Princess shareholder following the P&O Princess share reorganisation
will, as far as practicable, remain the same. Reorganised P&O Princess shares
will carry the same rights as the existing P&O Princess shares which they will
replace (as amended by the changes to P&O Princess' current articles of
association described in Section 7).
In the U.S., P&O Princess shares trade on the NYSE in the form of P&O Princess
ADSs, each of which represents four P&O Princess shares. Simultaneously with
the reorganisation of P&O Princess shares, the ratio of P&O Princess shares to
P&O Princess ADSs will also be adjusted to 1:1 so as to have a 1:1 ratio with
Carnival shares. This will be effected by each existing P&O Princess ADS being
replaced by 1.2016 reorganised P&O Princess ADSs.
Board and management
Carnival and P&O Princess will be managed and operated as if they were a single
economic enterprise. Although each of Carnival and P&O Princess will continue
to exist as a separate company with its own board of directors and senior
management, the boards and senior executive management of each company will be
identical. The proposed directors of each of Carnival and P&O Princess
following implementation of the DLC structure are set out in paragraph 8 of
Part A of Section 4. In addition to their normal fiduciary duties to the
company and obligation to have regard to the interests of its shareholders, the
directors of each company will be entitled to have regard to the interests of
the other company and its shareholders. Micky Arison, the Chairman and Chief
Executive Officer of Carnival, will be Chairman and Chief Executive Officer of
both Carnival and P&O Princess, Howard S. Frank, the Vice-Chairman and Chief
Operating Officer of Carnival, will be the Vice-Chairman and Chief Operating
Officer of both Carnival and P&O Princess and Gerald R. Cahill, the Chief
Financial Officer and Chief Accounting Officer of Carnival, will be the Chief
Financial Officer and Chief Accounting Officer of both Carnival and P&O
Princess. The headquarters of the Combined Group will be in Miami with a
corporate office in London.
8
Name change
As part of the DLC transaction, P&O Princess intends to change its name to
Carnival plc as proposed at the P&O Princess EGM. The name change is intended
to communicate that, as a result of the DLC transaction, the two companies will
combine their management and operations as if they were a single economic
enterprise. The existing well-established brands operated by P&O Princess will
not be affected by the change to the parent company name.
Dividends
Following completion of the DLC transaction, P&O Princess shareholders will
continue to receive dividends declared by P&O Princess and Carnival
shareholders will continue to receive dividends declared by Carnival. Dividends
in respect of both P&O Princess shares and Carnival shares declared after
completion of the DLC transaction will be paid at about the same time and in
equalised amounts in accordance with the equalisation ratio (see Part B of
Section 5) disregarding any amounts required to be deducted or withheld in
respect of taxes and the amount of any applicable tax credits.
Carnival will continue to pay dividends in U.S. dollars. P&O Princess
shareholders will continue to have the option to elect to receive dividends in
U.S. dollars or pounds sterling in accordance with P&O Princess' existing
procedures.
In order to align the timing of the dividends of the two companies and to
ensure that there is no interruption to the entitlement of quarterly dividends
for shareholders of either company as a result of the DLC transaction, the
board of P&O Princess declared on 7 January 2003 a dividend of 3.0 cents per
P&O Princess share in respect of the fourth quarter of the 2002 financial year.
Holders of P&O Princess ADSs will receive their dividends of $0.12 per P&O
Princess ADS in U.S. dollars. This dividend was paid on 14 March 2003 to P&O
Princess shareholders on the P&O Princess share register on 21 February 2003.
Carnival paid its regular quarterly dividend on the same date.
In recent quarters, Carnival has paid quarterly dividends of 10.5 cents per
Carnival share, which, based on the equalisation ratio prior to the
reorganisation, equates to approximately 3.15 cents per P&O Princess share. In
recent quarters, P&O Princess has paid quarterly dividends of 3.0 cents per P&O
Princess share. Following completion of the DLC transaction, it is intended
that the value of dividends received by P&O Princess shareholders will be
consistent with Carnival's regular quarterly dividend. Accordingly, had the DLC
structure been in place for the last four quarters, the dividends received by
P&O Princess shareholders would have been approximately five per cent. higher.
It is intended that the first dividend to be paid by the Combined Group will be
declared in April 2003, with a record date in May 2003 and a payment date in
June 2003.
Accounting treatment and reporting
The companies expect to account for the DLC transaction as a purchase by
Carnival under U.S. GAAP and an acquisition by Carnival under UK GAAP.
Following completion of the DLC transaction, the Combined Group intends to
publish combined financial statements denominated in U.S. dollars and prepared
in accordance with U.S. GAAP. P&O Princess and Carnival will also prepare any
other financial information needed to meet their respective legal and
regulatory requirements. P&O Princess will change its financial year end to 30
November so that it will be the same as Carnival's current financial year end.
P&O Princess Employee Share Incentive Plans
On completion of the DLC transaction, all awards and options granted under the
P&O Princess Employee Share Incentive Plans will vest in full and become
capable of release or exercise immediately following completion of the DLC
transaction. Details of these awards and options are set out in paragraph 4 of
Section 8 of this document.
Partial Share Offer
In connection with the DLC transaction, Carnival is making the Partial Share
Offer. The Partial Share Offer is a mechanism designed to enable those P&O
Princess shareholders who would prefer to hold
9
their interest in the Combined Group in the form of Carnival shares listed on
the NYSE to do so by exchanging at least part of their P&O Princess shares for
Carnival shares (up to an aggregate maximum of 20 per cent. of P&O Princess'
share capital).
You do not need to participate in the Partial Share Offer in order to
participate in the Combined Group. If you would prefer to continue to hold P&O
Princess shares primarily listed on the London Stock Exchange and do not want
to hold Carnival shares listed on the NYSE, you should not accept the Partial
Share Offer.
Please note that the P&O Princess board is not making any recommendation as to
whether P&O Princess shareholders should accept the Partial Share Offer. The
P&O Princess board is not making any recommendation because once the DLC
structure has been implemented, both P&O Princess shares and Carnival shares
will represent an investment with respect to the Combined Group and the
decision by each P&O Princess shareholder about which type of shares to hold
will depend upon the individual shareholder's particular preferences and
circumstances. To the best of P&O Princess' knowledge, some, but not all, of
its directors and executive officers intend to participate in the Partial Share
Offer.
However, P&O Princess shareholders should be aware of certain factors that
could influence whether they wish to accept the Partial Share Offer:
. Listing and index inclusion - P&O Princess shares will continue to be
listed on the London Stock Exchange and are expected to remain included
in the FTSE series of indices, while the Carnival shares issued to those
accepting the Partial Share Offer will be listed on the NYSE and are
expected to remain included in the S&P 500;
. Relative market prices - the relative market prices of the shares of P&O
Princess and Carnival may not exactly reflect the equalisation ratio and
P&O Princess shares could therefore trade at either a premium or
discount to the Carnival shares. This is because although the economic
interests of the shares of the two companies will be contractually
aligned in accordance with the equalisation ratio, the shares of the two
companies will remain outstanding, will not be exchangeable for each
other at the option of the shareholder and will primarily trade in
separate markets with different characteristics and in different
currencies;
. Liquidity - the liquidity and aggregate market value of P&O Princess
shares could decrease following the completion of the DLC transaction
and the Partial Share Offer, and could be further reduced by any future
repurchase or buy-backs of P&O Princess shares. However, under the terms
of the DLC transaction, other than with the approval of both companies'
shareholders, voting separately, neither Carnival nor P&O Princess may
buy back P&O Princess shares in the two-year period following the date
on which the DLC structure is implemented and, after the end of this
initial two-year period, neither Carnival nor P&O Princess may buy back
P&O Princess shares in excess of 5 per cent. of the then issued P&O
Princess shares in each of the subsequent three years.
The liquidity of the market for the P&O Princess shares could also be
adversely affected if they were to cease to be eligible for inclusion in
the FTSE 100, which could occur if P&O Princess' market capitalisation
was to fall significantly compared to the other constituents of the
index; and
. Taxation - the tax consequences of accepting the Partial Share Offer may
differ according to the tax positions of different shareholders. See
paragraphs 2 and 3 of Appendix IV of the Partial Share Offer document,
although shareholders are encouraged to seek their own advice in this
regard.
You must decide whether you want to receive Carnival shares and, if so, how
many P&O Princess shares to tender. If you are in any doubt as to whether to
accept the Partial Share Offer, you should immediately seek your own personal
financial advice from your stockbroker, bank manager, solicitor, accountant or
other independent professional adviser authorised, in the UK, under the
Financial Services and Markets Act 2000.
For more information about the Partial Share Offer, shareholders should refer
to the separate Partial Share Offer document enclosed with this document.
10
Taxation
The tax consequences of the DLC transaction, the P&O Princess share
reorganisation and the Partial Share Offer to P&O Princess shareholders will
depend upon their own particular circumstances. P&O Princess shareholders
should consult with their tax advisers to determine the particular UK tax and
U.S. federal income tax and any state, local, or other applicable foreign
income and other tax consequences of the DLC transaction, the P&O Princess
share reorganisation and the Partial Share Offer.
UK tax
The P&O Princess directors believe that, under current tax law, UK P&O Princess
shareholders who do not accept the Partial Share Offer will not be treated as
having disposed of their P&O Princess shares for UK capital gains tax purposes
either on the P&O Princess share reorganisation or upon completion of the DLC
transaction.
UK P&O Princess shareholders who do not accept the Partial Share Offer will
continue to be taxed on dividends on their existing holdings in the same way as
before the DLC transaction.
UK P&O Princess shareholders who accept the Partial Share Offer will make a
taxable disposal or part disposal of their P&O Princess shares for the purposes
of UK tax on chargeable gains. This disposal or part disposal may give rise to
a liability to UK tax on chargeable gains depending on the shareholder's
circumstances (including the availability of exemptions or allowable losses).
Acceptance of the Partial Share Offer will give rise to the exchange of P&O
Princess shares for shares issued by Carnival, and any future dividends
received will therefore be Carnival dividends, which are taxed differently from
P&O Princess dividends received by shareholders who are resident or ordinarily
resident in the UK.
General information on the application of current UK tax law and Inland Revenue
practice applicable to UK P&O Princess shareholders in respect of the DLC
transaction and the P&O Princess share reorganisation is set out in paragraph 5
of Section 8. For further information on the UK tax consequences of the Partial
Share Offer please refer to the Partial Share Offer document.
U.S. federal income tax
Although there is no U.S. federal income tax authority addressing the tax
consequences of a dual listed company transaction, the DLC transaction should
not give rise to taxable income or gain for U.S. P&O Princess shareholders for
U.S. federal income tax purposes. However, the Internal Revenue Service may
assert that U.S. P&O Princess shareholders received taxable income as a result
of the various voting and equalisation provisions necessary to implement the
DLC structure. Such voting and other rights, if any, received by shareholders
are expected to have only nominal value and, therefore, the receipt of such
rights by U.S. P&O Princess shareholders would only result in a nominal amount
of income. It is possible, however, that the Internal Revenue Service may
disagree with this conclusion.
The P&O Princess share reorganisation should not give rise to taxable gain or
income to U.S. P&O Princess shareholders except with respect to a gain, if any,
upon the disposition of fractional shares. U.S. P&O Princess shareholders who
dispose of fractional shares under the P&O Princess share reorganisation will
recognise gain or loss in an amount equal to the difference between the cash
received and the shareholder's adjusted tax basis in his/her P&O Princess
shares or P&O Princess ADSs allocable to the fractional share, as the case may
be.
The exchange of P&O Princess shares or P&O Princess ADSs for Carnival shares
pursuant to the Partial Share Offer will likely be a taxable transaction for
U.S. federal income tax purposes in which U.S. P&O Princess shareholders
recognise gain or, subject to the possible application of the "wash sale" rule
as described below, loss in an amount equal to the difference between the fair
market value of such Carnival shares received and the shareholder's adjusted
tax basis in the P&O Princess shares or P&O Princess ADSs, as the case may be.
If the P&O Princess shares or P&O Princess ADSs are deemed to be "substantially
identical", for the purposes of the wash sale rule of the Internal Revenue Code
and applicable Treasury Regulations, to the Carnival shares received by a U.S.
holder pursuant to the Partial Share Offer, such holder will not be able to
recognise a loss on such exchange. Any loss that is disallowed through the
application of the wash sale rule would not be eliminated but would rather be
deferred and a U.S. holder's holding period and tax basis in their P&O Princess
shares exchanged pursuant to the Partial Share Offer would carry over to the
Carnival shares received pursuant to such exchange.
11
General information on the application of current U.S. tax laws applicable to
U.S. P&O Princess shareholders in respect of the DLC transaction and the P&O
Princess share reorganisation is set out in paragraph 6 of Section 8. For
further information on the U.S. tax consequences of the Partial Share Offer,
please refer to the Partial Share Offer document.
Shareholder approval
Completion of the DLC transaction requires approval by the shareholders of both
companies. As set out at the end of this letter, the directors of P&O Princess
voting on the DLC transaction have recommended that the P&O Princess
shareholders approve the DLC transaction at the P&O Princess EGM. The directors
of Carnival have also recommended that the Carnival shareholders approve the
DLC transaction at the Carnival Special Meeting to be held on 14 April 2003.
Takeover Code
The UK Takeover Panel has confirmed that, on the basis of information available
to it, upon completion of the DLC transaction, neither P&O Princess nor
Carnival will be a company to which the Takeover Code applies. The Takeover
Code provides a number of protections for shareholders, particularly in
relation to mandatory offers where a person or group of persons acting in
concert acquires in excess of 30 per cent. of the voting rights of a company.
Provisions will be included in the constitutional documents of Carnival and P&O
Princess in order to replicate certain of the protections provided by the
Takeover Code. To the extent that any person, or group of persons acting in
concert, acquires shares in the Combined Group so that such person(s) acquires,
or acquires voting rights over, 30 per cent. or more of the combined votes
which could be cast on most shareholder resolutions (called joint electorate
actions and described in further detail in paragraph 3.5 of Section 6), or any
person(s) that already holds not less than 30 per cent., but not more than 50
per cent., of the combined votes which could be cast on a joint electorate
action acquires, or acquires voting rights over, any shares which increase the
percentage of votes which such person(s) could cast on a joint electorate
action, such shares will be disenfranchised (that is, the owner of those shares
would cease to have any economic or voting rights in those shares) unless an
offer for all shares in the Combined Group at a price equivalent to that
applicable to the acquisition has been made.
There are certain exceptions to these provisions in the case of Micky Arison,
other members of the Arison family and trusts for their benefit, which together
will hold approximately 35 per cent. of the equity of the Combined Group. To
enable Carnival and/or P&O Princess to include Micky Arison in share option
plans, under the DLC Agreements the Arison family and trusts for their benefit
may acquire shares in the Combined Group without triggering these provisions,
as long as their aggregate holdings do not increase by more than 1 per cent. of
the voting power of the Combined Group in any period of 12 consecutive months,
subject to their combined holdings not exceeding 40 per cent. of the voting
power of the Combined Group at any time.
The Arison family and associates
Micky Arison (Carnival's Chairman and Chief Executive Officer, who will also
become the Chairman and Chief Executive Officer of P&O Princess following
completion of the DLC transaction), other members of the Arison family and
trusts for their benefit have entered into undertakings under which they will
be required to cause shares beneficially owned by them representing
approximately 47 per cent. of the voting rights in Carnival to vote in favour
of the resolutions required to implement the DLC structure at the Carnival
Special Meeting. Such undertakings are irrevocable except in circumstances
where the DLC proposal is withdrawn or lapses. These undertakings are described
in more detail in paragraph 7 of Section 8.
Following completion of the DLC transaction, Micky Arison, other members of the
Arison family and trusts for their benefit will beneficially own shares
representing approximately 35 per cent. of the combined voting power of the
issued shares of the Combined Group. There are certain restrictions on their
ability to increase their aggregate holdings beyond 40 per cent. of the voting
power of the Combined Group, unless they acquire additional shares or voting
power by making comparable offers to acquire all the equity of the Combined
Group as described in Part B of Section 5.
12
Carnival has in place a Code of Business Conduct and Ethics for directors and
employees, including Micky Arison, which, among other things, prohibits an
employee or his family from: having a financial relationship with businesses
that do business with Carnival or any of its subsidiaries without prior written
approval (in Micky Arison's case from the Carnival board); having ownership
interests in any entity that is competing, or doing, or seeking to do business,
with Carnival (except through publicly traded securities with less than one per
cent. of voting control); and using Carnival's property, information or his
position at Carnival for personal gain. A similar code will be adopted by P&O
Princess after the implementation of the DLC structure.
In addition, Micky Arison's executive long-term compensation agreement with
Carnival, dated 11 January 1999, contains certain non-competition provisions
which prohibit him from, directly or indirectly, within the US or its
territories, engaging in any business activity, directly or indirectly,
competitive with Carnival, or any of its subsidiaries or divisions, or serving
as an officer, director, owner, consultant or employee of any organisation then
in competition with Carnival, or any of its subsidiaries or divisions, at any
time during his employment with Carnival (and for five years following the
termination of his employment, except in certain limited circumstances),
without the prior written approval of the Carnival board. If breached, his
unpaid stock options would not be payable and his unvested stock options and
restricted stock would be forfeited. These non-competition provisions will be
extended to cover P&O Princess following completion of the DLC transaction
Carnival is, and following implementation of the DLC structure the Combined
Group will be, capable of carrying on its business independently of this group
of shareholders. Carnival has a policy to ensure that all transactions and
relationships between it and its affiliated entities (which include such
shareholders and entities controlled by them) are on an arm's length basis and
also on a normal commercial basis (i.e. it may not engage in business
transactions with any affiliate on terms and conditions less favourable to
Carnival than the terms and conditions available at the time for comparable
transactions with unaffiliated persons). On completion of the DLC transaction,
P&O Princess will adopt a similar policy on transactions with this group of
shareholders. Thus, following implementation of the DLC structure, any business
transactions between the Combined Group and this group of shareholders will be
at arm's length and on a normal commercial basis.
Deferred consideration payable in respect of Aida Cruises
In September 2000, P&O Princess acquired the 49 per cent. it did not own in
Aida Cruises from Deutsche Seereederei GmbH ("DS") (a company wholly-owned by
Horst Rahe, a director of P&O Princess, and his family). An element of deferred
consideration in respect of this transaction was also payable in respect of any
12 month period up to the end of 2005. In the event of a change of control of
P&O Princess or if certain members of the P&O Princess group fail to comply
with other specific restrictions (including material breach of
non-compete/non-solicitation provisions), DS is entitled to accelerate the
payment of the total outstanding balance of the deferred consideration.
Completion of the DLC transaction will trigger the right to such payment. Since
P&O Princess entered into the Implementation Agreement DS has confirmed to P&O
Princess that it will exercise this right. Accordingly, P&O Princess will pay
(Euro)58.8 million to DS shortly after completion, and the sale and purchase
agreement (referred to in paragraph 7 of section 8) will then terminate.
Trading and prospects
Paragraph 12 of Part A of Section 4 contains a description of the trading and
prospects of P&O Princess, Carnival and the Combined Group.
P&O Princess EGM
As indicated above, completion of the DLC transaction is subject, among other
things, to the approval of the P&O Princess shareholders, which will be sought
at the P&O Princess EGM. At that meeting, a single special resolution as set
out in the Notice of Meeting at the end of this document will be proposed to
approve, among other things, the DLC transaction and, conditional upon
completion of the DLC transaction, the P&O Princess share reorganisation, the
changes to the P&O Princess memorandum, the adoption of the new P&O Princess
articles of association, the change of P&O Princess' name and the authorisation
of the allotment of the P&O Princess special voting and equalisation shares.
13
Further information
Your attention is drawn to the information set out in this document. The board
of P&O Princess encourages you to, and you should, read the entire document. In
particular, Section 4 contains information on the Combined Group and Section 2
and Section 3 contain information on Carnival and P&O Princess, respectively.
Section 5 contains information on the DLC structure.
Action you should now take
This DLC transaction is an important event in the history of P&O Princess and
one that the directors of P&O Princess recommend and believe is in the best
interest of P&O Princess shareholders. You should read and consider the
information set out in this document carefully and the board of P&O Princess
urges you to exercise your voting rights. You may do so by attending the P&O
Princess EGM in person or by completing and signing the enclosed blue form of
proxy in accordance with the instructions set out on it and returning it as
soon as possible, but in any event it must be received by P&O Princess'
registrars, Computershare Investor Services PLC, The Pavilions, Bridgwater
Road, Bristol, BS13 8FB, by not later than 10:00 a.m. (London time) on 14 April
2003. By returning the blue form of proxy you will not preclude yourself from
attending the P&O Princess EGM and voting in person should you wish to do so.
If you are a corporation and considering appointing a corporate representative
to represent you and vote your shareholding in P&O Princess at the P&O Princess
EGM you are strongly encouraged to pre-register your corporate representative
to make registration on the day of the meeting more efficient. You may obtain a
pre-registration pack by contacting the company's registrar, Computershare
Investor Services PLC, on 0870 703 6050 from within the UK or +44 870 703 6050
from elsewhere (attention: John Miller or Robert Mole). Please note that P&O
Princess' registrar cannot provide advice on the merits of the proposals or
give any financial advice. Whether or not you intend to appoint a corporate
representative, you are strongly encouraged to return the enclosed blue form of
proxy to P&O Princess' registrars as explained above.
Recommendation of the P&O Princess board
The P&O Princess board, which has been so advised by Schroder Salomon Smith
Barney, considers the terms of the DLC transaction to be fair and reasonable.
In providing advice to the P&O Princess board, Schroder Salomon Smith Barney
has taken account of the P&O Princess board's commercial assessments of the DLC
transaction.
The P&O Princess board considers that the resolution to be proposed at the P&O
Princess EGM is in the best interests of the P&O Princess shareholders as a
whole. The P&O Princess board recommends you to vote in favour of the
resolution to be proposed at the P&O Princess EGM as they intend to do in
respect of their beneficial holdings. Horst Rahe, a non-executive director,
excused himself from the P&O Princess board's decision on the DLC transaction
as a result of a potential conflict of interest related to the Aida Cruises
sale and purchase agreement referred to in paragraph 7 of Section 8.
Yours faithfully
/s/ Lord Sterling
Lord Sterling of Plaistow
Chairman
14
SECTION 1
SUMMARY
This summary highlights selected information from this document in question and
answer format and does not contain all of the information that is important to
you. To understand the DLC proposal fully, you should read this document in its
entirety. The page references included below direct you to a more complete
description of the topics presented in this summary.
Part A. Summary Information on Carnival and P&O Princess
Carnival
Carnival is a global cruise vacation and leisure travel company. Carnival
offers a broad range of cruise brands serving the vacation market through
Carnival Cruise Lines, Holland America Line, Costa Cruises, Cunard Line,
Seabourn Cruise Line and Windstar Cruises. Carnival's various brands operate 45
cruise ships, offering a total of 67,282 lower berths, in Alaska, Australia,
Bahamas, Bermuda, Canada, the Caribbean, Europe, the Hawaiian Islands, the
Mexican Riviera, the Mediterranean, New England, the Panama Canal, South
America and other exotic worldwide destinations. Carnival has 13 additional
cruise ships on order, which will offer a further 30,580 lower berths. These
ships are expected to enter service over the next three and a half years. In
addition to its cruise operations, Carnival operates a tour business through
Holland America Tours, which markets sightseeing tours both separately and as a
part of its cruise/tour packages. Holland America Tours operates 13 hotels in
Alaska and the Canadian Yukon, two luxury dayboats and a fleet of over 300
motorcoaches and 13 rail cars. Carnival's business strategy is to use this
wide, diverse range of vacation options to attract consumers from other
land-based vacation choices.
Carnival was incorporated under the laws of the Republic of Panama in November
1974 and is listed on the NYSE. Its shares trade under the symbol "CCL". The
address of Carnival's principal executive offices is 3655 N.W 87/th/ Avenue,
Miami, Florida 33178-2428.
P&O Princess
P&O Princess is a global cruise vacation company operating under the following
brand names: Princess Cruises in North America; P&O Cruises, Ocean Village and
Swan Hellenic in the UK; AIDA and A'ROSA in Germany; and P&O Cruises in
Australia. P&O Princess provides cruises to Alaska, the Caribbean, Europe, the
Mediterranean, the Panama Canal and other exotic destinations. The P&O Princess
Group had a fleet of 20 ocean cruise ships and two river boats offering a total
of 33,100 lower berths as at 31 January 2003, with five additional ocean cruise
ships and two river boats on order as at that date, offering a further 12,080
lower berths. The new ships are expected to be delivered over the next two
years. P&O Princess' tour division, Princess Tours, is a tour operator in
Alaska with five riverside lodges, a fleet of motorcoaches and Midnight Sun
Express rail cars.
P&O Princess was incorporated and registered in England and Wales in July 2000.
P&O Princess shares are listed on the London Stock Exchange and P&O Princess
ADSs are listed on the NYSE. Both P&O Princess shares and P&O Princess ADSs
trade under the symbol "POC" on their respective exchanges. P&O Princess'
registered office is at 77 New Oxford Street, London WC1A 1PP, England.
Where can I find more information about Carnival and P&O Princess?
You can find more information about Carnival and P&O Princess from various
sources described in the sections entitled "Where you can find additional
information about Carnival" and "Where you can find additional information
about P&O Princess" in Part A of Sections 2 and 3 of this document.
15
Part B. Summary of the DLC transaction
Why am I receiving these documents?
On 24 October 2002, Carnival announced the terms of a pre-conditional offer to
enter into the DLC transaction with P&O Princess and make the Partial Share
Offer for up to, in aggregate, a maximum of 20 per cent. of the issued share
capital of P&O Princess. On 8 January 2003, P&O Princess announced that the P&O
Princess board had accepted and recommended Carnival's offer to enter into the
DLC transaction with P&O Princess.
As a P&O Princess shareholder, you are entitled to vote on whether to approve
the implementation of the DLC structure and to participate in the Partial Share
Offer. You are receiving this document in connection with your vote on the DLC
transaction, and enclosed with this document is a separate Partial Share Offer
document in connection with the Partial Share Offer.
What is the DLC transaction?
The DLC transaction is a means of enabling P&O Princess and Carnival to combine
their management and operations as if they were a single economic enterprise,
while retaining their separate legal identities. This will be accomplished
through contractual arrangements and amendments to each company's
constitutional documents. In addition, the constitutional documents of the two
companies will be harmonised, to the extent practicable and permitted by law,
to ensure their corporate procedures are substantially similar. As part of the
DLC transaction, P&O Princess intends to change its name to Carnival plc as
proposed at the P&O Princess EGM.
What is the Partial Share Offer?
In connection with the DLC transaction, Carnival is making an offer to P&O
Princess shareholders to exchange all or part of their P&O Princess shares for
Carnival shares, subject to an aggregate maximum of 20 per cent. of P&O
Princess' issued share capital. This offer is referred to in this document as
the "Partial Share Offer." Whether or not you accept the Partial Share Offer
will not influence whether or not the DLC transaction will proceed. If the DLC
transaction is not completed due to lack of shareholder approval or for any
other reason, the Partial Share Offer will not be completed. If the DLC
transaction is completed, then your participation in the Partial Share Offer
will only affect how you participate in the Combined Group, whether through
ownership of Carnival shares, P&O Princess shares or both. The Partial Share
Offer is open to all shareholders of P&O Princess, whether you hold P&O
Princess shares directly or in the form of P&O Princess ADSs. For more
information please refer to the Partial Share Offer document enclosed with this
document.
Do I need to accept the Partial Share Offer to participate in the Combined
Group?
No. You do not need to participate in the Partial Share Offer in order to
participate as a shareholder in the Combined Group. If you would prefer to
continue to hold P&O Princess shares listed on the London Stock Exchange and do
not want to hold Carnival shares listed on the NYSE, you should not accept the
Partial Share Offer. However, the board of P&O Princess encourages you to
exercise your voting rights to approve the DLC transaction.
Why does P&O Princess want to combine with Carnival?
The P&O Princess board believes that combining with Carnival is advantageous
for P&O Princess and in the best interests of P&O Princess and its shareholders
as a whole. A combination of P&O Princess and Carnival will create the largest
cruise vacation group in the world, based on revenue, passengers carried and
available capacity. The Combined Group will have a wide range of complementary
brands, a significant presence in the key cruise vacation regions worldwide, a
strong balance sheet from which to drive future capacity and growth and leading
management and operating practices. In addition, cost savings are expected to
be generated by combining the two companies.
Why does P&O Princess want to use a DLC structure to combine with Carnival?
P&O Princess wants to use a DLC structure to combine with Carnival because,
following the implementation of the DLC structure, P&O Princess shareholders
who are required, or wish, to hold
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shares in a UK-listed company included in the FTSE indices may continue to do
so, and, as a result, continue to participate as a shareholder in the global
cruise industry through P&O Princess. As described above, P&O Princess is
expected to remain included in the FTSE 100 index. A share acquisition or
exchange offer or other more common means of combining the businesses of
Carnival and P&O Princess in which all P&O Princess shareholders would receive
Carnival shares, which are not eligible for inclusion in the FTSE series of
indices, and/or a partial cash alternative would not have afforded all P&O
Princess shareholders this opportunity. Additionally, the Partial Share Offer
for up to 20 per cent. of P&O Princess' issued share capital allows those P&O
Princess shareholders who would prefer to participate in the Combined Group by
holding shares in a U.S.-listed company the opportunity to do so.
What is the premium implied by the DLC transaction?
The "look through" value per P&O Princess share under the DLC transaction,
based on the closing price of $26.00 per Carnival share on 23 October 2002, the
last business day prior to the announcement of the DLC transaction, was 504
pence. This represents a premium of 59.1 per cent. to the closing middle-market
price of 317 pence per P&O Princess share on 19 November 2001, the last
business day prior to the announcement of the Royal Caribbean DLC combination,
a premium of 40.1 per cent. to the closing middle market price of 360 pence per
P&O Princess share on 14 December 2001, the last business day prior to the
announcement of Carnival's first pre-conditional offer for P&O Princess, and a
premium of 10.8 per cent. to the closing middle-market price of 455 pence per
P&O Princess share on 23 October 2002.
The look through value per P&O Princess share under the DLC transaction, based
on the closing price of $20.75 per Carnival share on 12 March 2003, the latest
practicable day prior to the publication of this document, was 386 pence. This
represents a premium of 21.9 per cent. to the closing middle-market price of
317 pence per P&O Princess share on 19 November 2001, the last business day
prior to the announcement of the Royal Caribbean DLC combination, a premium of
7.4 per cent. to the closing middle market price of 360 pence per P&O Princess
share on 14 December 2001, the last business day prior to the announcement of
Carnival's first pre-conditional offer for P&O Princess, and a discount of 15.1
per cent. to the closing middle-market price of 455 pence per P&O Princess
share on 23 October 2002 and values the entire existing share capital of P&O
Princess at approximately (Pounds)2.7 billion.
The look through value is, however, based upon the closing price of Carnival
shares on the applicable date, and P&O Princess shareholders should note that
P&O Princess shares may trade at a discount to Carnival shares.
What votes are required to approve the DLC transaction?
The DLC transaction must be approved by the shareholders of both P&O Princess
and Carnival. P&O Princess shareholders must approve the resolution required to
implement the DLC structure by not less than three-quarters of the votes that
are cast at the P&O Princess EGM in favour of the DLC transaction. Carnival
shareholders must approve the resolutions required to implement the DLC
structure by the affirmative vote of a majority of all outstanding Carnival
shares entitled to vote at the Carnival Special Meeting. Micky Arison, other
members of the Arison family and trusts for their benefit have entered into
undertakings under which they will be required to cause shares beneficially
owned by them representing approximately 47 per cent. of the voting power of
Carnival to vote in favour of the resolutions to implement the DLC structure at
the Carnival Special Meeting. These undertakings are irrevocable except in
circumstances where the DLC proposal is withdrawn or lapses.
Does the P&O Princess board recommend the approval of the DLC transaction?
Yes. The P&O Princess directors consider the DLC transaction to be in the best
interests of the P&O Princess shareholders as a whole and recommend that you
vote in favour of the resolution to approve, among other matters, the DLC
transaction at the P&O Princess EGM. Horst Rahe excused himself from the
decision for the reasons described in the Chairman's letter. As at the date of
this document, the directors and executive officers of P&O Princess
beneficially hold approximately 0.2 per cent. of P&O Princess' existing issued
ordinary share capital. Such directors and executive officers intend to vote
their beneficial holdings in favour of the resolution.
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Does the Carnival board recommend the approval of the DLC transaction?
Yes. The Carnival board of directors has approved the DLC transaction and has
recommended to its shareholders that they vote for the resolutions set out in
its notice of the Carnival Special Meeting. As of 11 March 2003 (the latest
practicable date prior to the publication of this document), the directors and
executive officers of Carnival and their affiliates beneficially hold an
aggregate of 234,661,927 Carnival shares, which represent 39.8 per cent. of
Carnival's outstanding shares entitled to vote. Such directors and executive
officers intend to vote their beneficial holdings in favour of these
resolutions.
What will happen to my P&O Princess shares?
Except to the extent that you elect to exchange P&O Princess shares for
Carnival shares in the Partial Share Offer described above, following the
completion of the DLC transaction you will continue to own your P&O Princess
shares. P&O Princess shares will continue to have a primary listing on the
London Stock Exchange and it is currently intended that P&O Princess ADSs will
continue to be listed on the NYSE for the foreseeable future. The existing full
index participation of P&O Princess in the FTSE 100 index is expected to be
retained. However, the rights accompanying your P&O Princess shares will change
to give effect to the DLC transaction described below.
The economic and voting interests represented by an individual share in each
company will be equalised based on an "equalisation ratio". The current
equalisation ratio is one P&O Princess share for each 0.3004 Carnival shares,
which is the same as the exchange ratio in Carnival's pre-conditional share
exchange offer of 7 February 2002. On completion of the DLC transaction, P&O
Princess will reorganise and consolidate its share capital so that the
equalisation ratio will adjust to 1:1. This will be achieved by consolidating
each 3.3289 existing P&O Princess shares of $0.50 into one reorganised P&O
Princess share of $1.66 each. If you hold fewer than four P&O Princess shares,
you will not receive any P&O Princess shares under the reorganisation. Instead,
you will receive a cash sum reflecting the market value of your P&O Princess
shares sold into the market. After this reorganisation one Carnival share will
have the same rights to distributions of income and capital and voting rights
as one P&O Princess share. Following the reorganisation of P&O Princess shares,
the equalisation ratio will be subject to adjustment only in a limited number
of circumstances, as described in Part B of Section 5 of this document. In no
event will the take-up of the Partial Share Offer affect the equalisation ratio.
Why is the number of P&O Princess shares I hold reducing?
The number of P&O Princess shares in issue will be reduced as a result of the
P&O Princess share reorganisation which will take effect at 10.00 p.m., London
time, on the day that the Partial Share Offer becomes or is declared
unconditional. This share reorganisation will not result in any change in your
ownership percentage of P&O Princess shares. To enable the economic and voting
rights of each share in P&O Princess to be equal to the economic and voting
rights of each share in Carnival, P&O Princess' share capital is being
reorganised at completion of the DLC transaction. This will be achieved by
consolidating each 3.3289 existing P&O Princess shares of $0.50 into one
reorganised P&O Princess share of $1.66 each. If you hold fewer than four P&O
Princess shares, you will not receive any P&O Princess shares under the
reorganisation. Instead you will receive a cash sum reflecting the market value
of your P&O Princess shares sold into the market. In addition, any entitlement
to fractions of P&O Princess shares arising out of the reorganisation will be
aggregated, consolidated and sold into the market and the net proceeds (rounded
down to the nearest whole pence) distributed to the relevant P&O Princess
shareholders.
The current P&O Princess shareholders will hold approximately 26 per cent. of
the equity in the Combined Group in the form of P&O Princess shares or, to the
extent that they participate in the Partial Share Offer described above,
Carnival shares.
What are P&O Princess ADSs?
In the U.S., P&O Princess shares trade on the NYSE in the form of P&O Princess
ADSs. Each P&O Princess ADS currently represents four P&O Princess shares.
Simultaneously with the reorganisation of P&O Princess shares, the ratio of P&O
Princess shares to P&O Princess ADSs will also be adjusted to 1:1 in order to
have a 1:1 ratio with Carnival shares.
The rights of P&O Princess ADS holders are derivative of the rights of holders
of P&O Princess shares because P&O Princess ADSs represent underlying P&O
Princess shares. As described in the prospectus issued at the time the P&O
Princess ADSs were offered to the public in the U.S., the rights of P&O
Princess ADS holders are not, however, identical to the rights of holders of
ordinary shares.
18
For example, the rights of P&O Princess ADS holders are based on the deposit
agreement with the P&O Princess ADS depositary bank, as P&O Princess ADS
holders are not in the P&O Princess share register and voting is effected
through the P&O Princess ADS depositary bank and not directly by the ADS
holders. These differences are not impacted by the DLC transaction or the
reorganisation of P&O Princess shares. P&O Princess ADS holders will be
impacted to the same extent as holders of P&O Princess shares by the
implementation of the DLC structure.
What will happen to my future dividends?
After the completion of the DLC transaction, P&O Princess shareholders will
continue to receive dividends declared by P&O Princess and Carnival
shareholders will continue to receive dividends declared by Carnival. However,
no dividend or other distribution may be made by either company in respect of
its shares unless an equivalent per share dividend or other distribution
(before taxes and other deductions) is made by the other company. Dividends and
other distributions will be equalised on a per share basis in accordance with
the equalisation ratio. The payment of dividends by P&O Princess in the future
will depend on business conditions, its financial condition and earnings and
the financial condition and earnings of the Combined Group, the ability of
Carnival to pay an equivalent dividend and other factors. It is intended that
the first dividend to be paid by the Combined Group will be declared in April
2003, with a record date in May 2003 and a payment date in June 2003.
What will happen to Carnival shares?
Carnival shareholders will continue to hold their Carnival shares. In addition,
Carnival shareholders will be receiving trust shares relating to a trust the
trustee of which will hold a "special voting share" issued by P&O Princess.
Through this special voting share, the votes of Carnival shareholders at
Carnival shareholder meetings will be reflected at P&O Princess shareholder
meetings on joint electorate actions and class rights actions. These voting
rights are described below under "Will my voting rights change?" The trust
shares will be paired with the Carnival shares and will be listed and traded on
the New York Stock Exchange together with the Carnival shares.
Will P&O Princess shareholders also receive trust shares?
No. Carnival will issue a special voting share through which the votes of P&O
Princess shareholders at P&O Princess shareholder meetings will be reflected at
Carnival shareholder meetings, but it will be held by a special voting
corporation rather than the trustee of a trust. However, the absence of these
trust shares in respect of the Carnival "special voting share" will in no way
affect the operation of the special voting share or the ability of P&O Princess
shareholders to have their votes reflected at Carnival shareholder meetings for
purposes of joint electorate actions and class rights actions.
Will my voting rights change?
Yes. On most matters that affect all of the shareholders of the Combined Group,
the shareholders of P&O Princess and Carnival will effectively vote together as
a single decision-making body on matters requiring the approval of shareholders
of either company. These matters will be specified in the constitutional
documents of each company as "joint electorate actions". Combined voting will
be accomplished through a special voting share that will be issued by each
company. Certain matters where the interests of the two shareholder bodies may
diverge will be specified in the constitutional documents of each company as
"class rights actions". These class rights actions will be voted on separately
by the shareholders of each company. If either group of shareholders does not
approve a class rights action, that action generally cannot be taken by either
company.
What impact will the implementation of the DLC structure have on me for UK or
U.S. tax purposes?
The tax consequences of the DLC transaction, the P&O Princess share
reorganisation and the Partial Share Offer on P&O Princess shareholders will
depend upon each shareholder's particular circumstances, including whether such
shareholder is a UK P&O Princess shareholder or a U.S. P&O Princess
shareholder. Accordingly, the P&O Princess board strongly urges P&O Princess
shareholders to consult with their tax advisers to determine the particular UK,
U.S. federal, state, local, or other applicable foreign tax consequences of the
DLC transaction, the P&O Princess share reorganisation and the Partial Share
Offer.
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UK P&O Princess shareholders
Under current UK tax law, UK P&O Princess shareholders who do not accept the
Partial Share Offer will not be treated as having disposed of their P&O
Princess shares for UK capital gains tax purposes by virtue of either the
implementation of the DLC structure or the P&O Princess share reorganisation.
UK P&O Princess shareholders who continue to hold P&O Princess shares after
completion of the DLC transaction will be taxed on dividends received in
respect of their P&O Princess shares on the same basis as that in effect prior
to the DLC transaction.
UK P&O Princess shareholders who accept the Partial Share Offer will make a
taxable disposal or part disposal of their P&O Princess shares for the purposes
of UK tax on chargeable gains.
General information on the application of current UK tax law and Inland Revenue
practice applicable to UK P&O Princess shareholders in respect of the DLC
transaction and the P&O Princess share reorganisation is set out in paragraph 5
of Section 8. For further information on the UK tax consequences of the Partial
Share Offer, refer to the Partial Share Offer document.
U.S. P&O Princess shareholders
Although there is no U.S. federal income tax authority addressing the tax
consequences of a dual listed company transaction, the DLC transaction should
not give rise to taxable income or gain for U.S. P&O Princess shareholders for
U.S. federal income tax purposes. However, the Internal Revenue Service may
assert that U.S. P&O Princess shareholders received taxable income as a result
of the various voting and equalisation provisions necessary to implement the
DLC structure. Such voting and other rights, if any, received by shareholders
are expected to have only nominal value and, therefore, the receipt of such
rights by U.S. P&O Princess shareholders would only result in a nominal amount
of income. It is possible, however, that the Internal Revenue Service may
disagree with this conclusion.
The P&O Princess share reorganisation should not give rise to taxable gain or
income to U.S. P&O Princess shareholders except with respect to gain, if any,
upon the disposition of fractional shares. U.S. P&O Princess shareholders who
dispose of fractional shares under the P&O Princess share reorganisation will
recognise gain or loss in an amount equal to the difference between the cash
received and the shareholder's adjusted tax basis in his/her P&O Princess
shares or P&O Princess ADSs allocable to the fractional share, as the case may
be.
U.S. P&O Princess shareholders will be taxed on dividends received in respect
of their P&O Princess shares or P&O Princess ADSs after completion of the DLC
transaction on the same basis as they were prior to the DLC transaction.
The exchange of P&O Princess shares or P&O Princess ADSs for Carnival shares
pursuant to the Partial Share Offer will likely be a taxable transaction for
U.S. federal income tax purposes.
General information on the application of current U.S. tax laws applicable to
U.S. P&O Princess shareholders in respect of the DLC transaction and P&O
Princess share reorganisation is set out in paragraph 6 of Section 8. For
further information on the tax consequences of the Partial Share Offer, refer
to the Partial Share Offer document.
What percentage of the Combined Group will be controlled by existing P&O
Princess shareholders?
If the DLC transaction is approved, existing P&O Princess shareholders will
hold 26 per cent. of the equity of the Combined Group following its
implementation. This percentage will not be affected by the extent of the
take-up of the Partial Share Offer. However, depending on the extent that P&O
Princess shares are exchanged for Carnival shares under the Partial Share
Offer, part of the interest in the Combined Group held by existing P&O Princess
shareholders will be in the form of Carnival shares rather than P&O Princess
shares. If the Partial Share Offer is taken up in full, approximately 21 per
cent. of the equity of the Combined Group will be held through P&O Princess
shares and the balance of the equity in the Combined Group will be held through
Carnival shares.
Will P&O Princess become a subsidiary of Carnival?
No. P&O Princess will continue to exist as a separate publicly quoted company
and its shares will continue to be listed on the London Stock Exchange. The
boards of Carnival and P&O Princess will be identical and the Combined Group
will be managed by a single senior executive management team. The two companies
will pursue a common set of business objectives established by the identical
boards and single managment team, who will evaluate these strategies and other
operational decisions from the perspective of all shareholders.
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Will there be any transfer of assets between P&O Princess and Carnival in
connection with the DLC transaction?
The implementation of the DLC structure will not result in the transfer of any
assets between P&O Princess and Carnival. Following completion of the DLC
transaction, management of the Combined Group will determine whether assets
will be owned by Carnival or P&O Princess as is most efficient and appropriate
under the then prevailing circumstances. The Combined Group will comprise all
of the assets held by P&O Princess and Carnival immediately prior to the
implementation of the DLC transaction. No transfer of assets between the two
companies will affect the equalisation ratio or the relative economic interests
of P&O Princess shareholders and Carnival shareholders in the Combined Group.
What accounting treatment and reporting requirements will be applicable to the
Combined Group?
It is expected that under U.S. GAAP the DLC transaction will be accounted for
using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 "Business Combinations". In accordance
with the purchase method of accounting, the P&O Princess U.S. GAAP accounting
policies will be conformed to Carnival's accounting policies upon completion of
the DLC transaction.
Following the completion of the DLC transaction, P&O Princess will change its
financial year end from 31 December to 30 November so that it will be the same
as Carnival's current financial year end. The Combined Group intends to publish
combined financial statements denominated in U.S. dollars and prepared in
accordance with U.S. GAAP. It is envisaged that these combined financial
statements will be included in a combined annual report. P&O Princess also
expects to include summary balance sheet information and summary income
statement information prepared in accordance with UK GAAP, without notes, in
the combined annual report. P&O Princess shareholders will be able to request
an additional document containing P&O Princess financial statements prepared in
accordance with UK GAAP, which together with the other published information
would constitute the full annual report and financial statements.
In addition, Carnival and P&O Princess will file periodic and current reports
with the SEC on a joint basis in accordance with the rules applicable to U.S.
domestic reporting companies. The financial statements presented in the
periodic reports will consist of combined financial statements of the Combined
Group prepared in accordance with U.S. GAAP. See paragraph 10 of Part A of
Section 4 of this document.
Who will be the directors and senior executive management team of the Combined
Group?
Carnival and P&O Princess will be managed and operated as if they were a single
economic enterprise. Although each of Carnival and P&O Princess will continue
to exist as a separate company with its own board of directors and senior
executive management, the boards and senior executive management of each
company will be identical. The proposed directors of each of P&O Princess and
Carnival following implementation of the DLC structure are set out in paragraph
8 of Part A of Section 4. In addition to their normal fiduciary duties to the
company and obligation to have regard to the interests of its shareholders, the
directors of each company will be entitled to have regard to the interests of
the other company and its shareholders. Micky Arison, the Chairman and Chief
Executive Officer of Carnival, will be Chairman and Chief Executive Officer of
both Carnival and P&O Princess, Howard S. Frank, the Vice-Chairman and the
Chief Operating Officer of Carnival, will be the Vice-Chairman and Chief
Operating Officer of both Carnival and P&O Princess and Gerald R. Cahill, the
Chief Financial Officer and Chief Accounting Officer of Carnival, will be the
Chief Financial Officer and Chief Accounting Officer of both Carnival and P&O
Princess. The headquarters of the Combined Group will be in Miami with a
corporate office in London.
How will the directors of Carnival and P&O Princess be elected?
Resolutions relating to the appointment, removal and re-election of directors
will be considered as a joint electorate action and voted upon by the
shareholders of each company effectively voting together as a single
decision-making body. No person may be a member of the board of directors of
Carnival or P&O Princess without also being a member of the board of directors
of the other company.
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When will we elect the new directors of Carnival and P&O Princess?
Carnival and P&O Princess expect to hold their next annual meetings in June
2003 at which the re-election of each of the directors will be considered as
joint electorate actions.
What corporate governance requirements will apply to the Combined Group?
Carnival and P&O Princess comply with, and the Combined Group will comply with,
the applicable corporate governance requirements of the U.S. Sarbanes-Oxley Act
of 2002 and the NYSE. These are the corporate governance rules applicable to
U.S. public companies. P&O Princess will also continue to comply with the rules
of the UK Listing Authority (including certain annual disclosure requirements
regarding compliance with the Combined Code, appended to those rules) and the
London Stock Exchange. Upon completion of the DLC transaction, it is expected
that P&O Princess will not comply with the recommendation of the Combined Code
to have a separate chairman and chief executive officer.
Will the Takeover Code apply to P&O Princess after completion of the DLC
transaction?
No. The UK Takeover Panel has confirmed that, on the basis of information
available to it, upon completion of the DLC transaction, neither P&O Princess
nor Carnival will be a company to which the Takeover Code applies. However,
provisions will be included in the constitutional documents of Carnival and P&O
Princess in order to replicate certain of the protections provided by the
Takeover Code. See "Takeover regulation of the Combined Group" in Part B of
Section 5.
When do you expect to complete the DLC transaction?
P&O Princess and Carnival are working to complete the DLC transaction as soon
as possible. P&O Princess and Carnival hope to complete the DLC transaction as
soon as practicable after the Carnival Special Meeting and the P&O Princess EGM
if the required shareholder approvals are obtained at those meetings. In
addition to shareholder approvals, the companies must satisfy all of the other
closing conditions specified in the Implementation Agreement. Subject to these
conditions, the completion of the DLC transaction is expected to take place
early in the second quarter of 2003.
Should I vote?
Yes. The proposed DLC transaction is an important step in the history of P&O
Princess. Your vote is critical to this process, which the P&O Princess board
believes is in the best interests of its shareholders and recommends that you
vote for the DLC resolution. Please complete and send in the blue form of proxy
included with this document. See "Information about the P&O Princess EGM" in
Part C of Section 1 of this document and the Notice of Meeting at the end of
this document for more information on how to vote at the P&O Princess EGM.
Who can answer questions I might have about the DLC transaction?
If you have any queries in relation to the DLC transaction and/or the Partial
Share Offer you may call the UK helpline from within the UK on 0800 953 0083
between 9:00 a.m. and 5:30 p.m. (London time) on any business day until
completion of the DLC transaction. If you are calling from the U.S., the
helpline number is 1 866 203-2636 (calls will be toll-free within the U.S.) If
you are calling from anywhere else, the number is +44 870 889 3147 (calls will
be charged at the applicable rate). For legal reasons, the helpline will only
be able to assist you with information contained in this document and the
helpline cannot provide advice on the merits of the proposals or give any
financial advice. Calls may be monitored for quality control purposes.
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Part C. Information about the P&O Princess EGM
When and where is the P&O Princess EGM being held?
The P&O Princess EGM is being held on 16 April 2003 at 10:00 a.m. (London time)
at the Queen Elizabeth II Conference Centre, Broad Sanctuary, London SW1P 3EE.
Who is entitled to attend and vote at the P&O Princess EGM?
If you are a P&O Princess shareholder registered in the register of members of
P&O Princess at 11:00 p.m. on 14 April 2003 you will be entitled to attend in
person and vote at the P&O Princess EGM in respect of the number of P&O
Princess shares registered in your name at that time, regardless of whether you
have tendered any or all of your P&O Princess shares in the Partial Share
Offer. You may also appoint one or more proxies to attend and (on a poll) vote
instead of you. If you are a corporation you may appoint a corporate
representative to represent you and vote your shareholding in P&O Princess at
the P&O Princess EGM. For further details regarding appointing a proxy or
corporate representative please see below.
How do I vote my P&O Princess shares without attending the P&O Princess EGM?
You may vote your P&O Princess shares at the P&O Princess EGM by completing and
signing the enclosed blue form of proxy in accordance with the instructions set
out on the form and returning it as soon as possible, but in any event so as to
be received by P&O Princess' registrar, Computershare Investor Services PLC,
The Pavilions, Bridgwater Road, Bristol, BS13 8FB, by not later than 10:00 a.m.
(London time) on 14 April 2003. By returning the blue form of proxy you will
not preclude yourself from attending the P&O Princess EGM and voting in person
should you wish to do so.
If you are a corporation you can vote your P&O Princess shares at the P&O
Princess EGM by appointing a corporate representative. You are strongly
encouraged to pre-register your corporate representative to make registration
on the day of the P&O Princess EGM more efficient. You may obtain a
pre-registration pack by contacting the company's registrars, Computershare
Investor Services PLC, on 0870 703 6050 from within the UK or +44 870 703 6050
from elsewhere (attention: John Miller or Robert Mole). Please note that P&O
Princess' registrar cannot provide advice on the merits of the proposals or
give any financial advice. Corporate representatives themselves are urged to
arrive at least two hours before commencement of the P&O Princess EGM to assist
P&O Princess' registrar with the appropriate registration formalities. Whether
or not you intend to appoint a corporate representative, you are strongly
encouraged to return the enclosed blue form of proxy to the P&O Princess'
registrar as explained above.
Can I change my vote given by proxy or by my corporate representative?
Yes, in certain circumstances. You may change your proxy vote by either
completing, signing and dating a new form of proxy in accordance with its
instructions and returning it to P&O Princess' registrars by no later than
10:00 a.m. (London time) on 14 April 2003, or by attending and voting in person
at the P&O Princess EGM. If you do not attend and vote in person at the P&O
Princess EGM and wish to revoke the appointment of your proxy or corporate
representative you must do so by delivering a notice of such revocation to P&O
Princess' registrars at least three hours before the start of the P&O Princess
EGM.
Where can I find the voting results of the P&O Princess EGM?
The results of the P&O Princess EGM will be announced on a Regulatory
Information Service as soon as practicable following the P&O Princess EGM and
will be posted on the P&O Princess and Carnival websites
(www.poprincesscruises.com and www.carnivalcorp.com, respectively).
23
SECTION 2
INFORMATION ON CARNIVAL
Part A. Description of Carnival's business
1. General
Carnival is a global cruise vacation and leisure travel company that offers a
broad range of cruise brands serving the contemporary cruise sector through
Carnival Cruise Lines, or CCL, and Costa Cruises, or Costa, the premium sector
through Holland America Line, or Holland America, the premium/luxury cruise
sector through Cunard Line, or Cunard, and the luxury cruise sector through
Seabourn Cruise Line, or Seabourn, and Windstar Cruises, or Windstar. Carnival
has a multi-brand strategy which provides products and services appealing to
the widest possible target audience across all major segments of the vacation
industry.
Additional summary information about Carnival's cruise brands is as follows:
Number of Passenger
Cruise Brand Ships Capacity/(1)/ Primary Location of Customers
CCL 18 38,348 North America
Holland America 11 14,494 North America
Costa 8 10,754 Europe
Cunard 2 2,458 Europe/North America
Seabourn 3 624 North America
Windstar 3 604 North America
-- ------
45 67,282
--------
(1)In accordance with cruise industry practice, all passenger capacities are
measured in lower berths calculated based on two passengers per cabin even
though some cabins can accommodate three or more passengers.
Carnival currently has signed agreements with three shipyards providing for the
construction of 13 additional cruise ships during the next three and a half
years. This will increase Carnival's passenger capacity by 30,580 lower berths,
or 46 per cent., assuming none of Carnival's existing ships are sold or retired
from service. However, it is possible that some of Carnival's older ships may
be retired or sold during the next three to four years, thus reducing the
increase to Carnival's fleet over this period.
In addition to Carnival's cruise operations, Carnival operates a tour business
under the brand name Holland America Tours. Holland America Tours is a leading
cruise/tour operator in the state of Alaska and the Canadian Yukon and
currently markets and/or operates:
.. 13 hotels in Alaska and the Canadian Yukon;
.. two luxury dayboats offering tours to the glaciers of Alaska and the Yukon
River;
.. over 300 motor coaches used for sightseeing and charters in the states of
Washington and Alaska and in British Columbia, Canada and the Canadian
Yukon;
.. 13 private, domed rail cars which are run on the Alaska Railroad between
Anchorage and Fairbanks; and
.. sightseeing packages both separately and as part of Carnival's cruise/tour
packages to Carnival's Alaska bound cruise passengers and to the public.
2. Cruise operations
The multi-night cruise industry is a small part of the overall global vacation
market. Carnival estimates that the global cruise industry carried more than 10
million passengers in 2002. The principal sources for cruise passengers are
North America, Europe, Asia/South Pacific including Australia, and South
America. Carnival sources passengers principally from North America, the
largest cruise sector in the world and, to a lesser extent, from Europe. A
small percentage of Carnival's passengers are sourced from South America and
Asia/South Pacific.
24
Passengers, capacity and occupancy
Carnival's cruise operations had worldwide cruise passengers, passenger
capacity and occupancy as follows/(1)/:
Cruise Passenger
Fiscal Year Passengers Capacity Occupancy/(3)/
1998 2,045,000 39,466 106.3%
1999 2,366,000 43,810 104.3%
2000 2,669,000 48,196 105.4%
2001 3,385,000 58,346 104.7%
2002 3,549,000 67,282/(2)/ 105.2%
-----
(1)Information presented is as of the end of Carnival's fiscal year for
passenger capacity. Costa's passengers, capacity and occupancy are only
included in 2001 and 2002.
(2)Excludes Windstar Cruises' 148 passenger capacity ship, Wind Song, which was
removed from service in December 2002.
(3)In accordance with cruise industry practice, occupancy is determined based
on double occupancy per cabin even though some cabins can accommodate three
or more passengers. Accordingly, the percentages in excess of 100 per cent.
indicate that more than two passengers occupied some cabins.
The actual occupancy percentage for all cruises on Carnival ships during each
quarter indicated below was as follows:
Quarters Ended Occupancy
30 November 2000 103.4%
28 February 2001 105.2%
31 May 2001 102.5%
31 August 2001 113.0%
30 November 2001 97.9%/(1)/
28 February 2002 102.8%
31 May 2002 101.9%
31 August 2002 113.7%
30 November 2002 102.1%
--------
(1)Carnival's fourth quarter 2001 occupancy decreased compared to the fourth
quarter of 2000 due primarily to the impact of the events of September 11,
2001 and their aftermath.
Carnival's passenger capacity has grown from 39,466 berths at 30 November 1998
to 67,282 berths at 31 January 2003. In 1999 capacity increased by 4,344
berths, primarily due to the deliveries of the Carnival Triumph and Holland
America's Volendam. During 2000 capacity increased by 4,386 berths, primarily
due to the deliveries of the Carnival Victory and Holland America's Zaandam and
Amsterdam, partially offset by the 1,214 berth decrease due to the sale of
Holland America's Nieuw Amsterdam. During 2001 capacity increased by 10,150
berths, primarily due to the acquisition and consolidation of Costa's 9,200
berths and the delivery of the Carnival Spirit, partially offset by the removal
from service of the 946 berth Costa Riviera and the 232 berth decrease due to
the sale of the Seabourn Goddess I and II. During 2002, capacity increased by
8,936 berths primarily due to the deliveries of the Carnival Pride, Carnival
Legend, Carnival Conquest and Holland America's Zuiderdam, partially offset by
the removal from service of the 148 berth Wind Song.
Cruise ships and itineraries
CCL's 18 cruise ships operate in the contemporary sector and are primarily
marketed in North America. All of the CCL ships were designed by and built for
CCL, including four that are among the world's largest, the Carnival Conquest,
the Carnival Victory, the Carnival Triumph and the Carnival Destiny. In
addition, CCL introduced the first three of its new "Spirit" class ships, the
Carnival Spirit, the Carnival Pride and the Carnival Legend, which have 80 per
cent. outside cabins, with 80 per cent. of those outside cabins having
balconies. Sixteen of the CCL cruise ships operate to destinations in the
Bahamas or the Caribbean during all or a portion of the year and two CCL ships
call on ports on the Mexican Riviera year round. CCL ships also offer cruises
to Alaska, Bermuda, Canada, New England, the Hawaiian Islands and the Panama
Canal.
25
Through Carnival's wholly-owned subsidiary, HAL Antillen, N.V. ("HAL
Antillen"), Carnival operates 11 cruise ships in the premium sector, which are
primarily marketed in North America under the Holland America brand. HAL
Antillen also operates three sailing ships in the luxury cruise sector under
the Windstar brand.
The Holland America cruise ships offer premium cruises of various lengths to
destinations in Alaska, the Caribbean, the Panama Canal, Europe, the
Mediterranean, Bahamas, the Hawaiian Islands, South America and other worldwide
locations. Cruise lengths vary from three to 100 days, with a large proportion
of cruises being seven or ten days. Periodically, the Holland America ships
make longer cruises or operate on special itineraries in order to increase
travel opportunities for their passengers and diversify their cruise offerings.
For example, in 2002, Holland America offered a 100-day world cruise. The
majority of the Holland America ships operate to destinations in the Bahamas
and the Caribbean during fall to spring and in Alaska and Europe during spring
to fall. In order to offer a unique destination and, to compete more
effectively while operating in the Bahamas and the Caribbean, Holland America
includes in certain of its Bahamas and Caribbean itineraries, a private island
destination known as Half Moon Cay. Half Moon Cay is a 2,400-acre island owned
by Holland America. Facilities were constructed on the island on 45 acres along
a crescent-shaped white sand beach. The remainder of the island remains
undeveloped. The facilities on Half Moon Cay include bars, shops, restrooms, a
post office, a chapel and an ice cream shop, as well as a food pavilion with
open-air dining shelters.
Windstar currently markets cruises to destinations in the Caribbean, Europe,
Central America and Tahiti and offers a casual, yet luxurious, cruise
experience on board its modern sail ships. The Windstar ships are primarily
marketed in North America.
Costa's eight ships operate in Europe during the spring to fall. During the
fall to spring, Costa repositions most of its ships to the Caribbean and South
America. The Costa ships serve the contemporary sector and are primarily
marketed in Europe. Costa is the number one cruise line in continental Europe
based on passengers carried and capacity of its ships, principally serving
customers in Italy, France, Germany and Spain. The Costa ships call on 105
European ports with 44 different itineraries and to various other ports in the
Caribbean and South America. Costa has also expanded its presence in Germany by
launching a new cruise product aimed exclusively at Germans, with European and
Caribbean sailings aboard the 762 berth Costa Marina, which began in the spring
2002.
Under the Cunard brand, Carnival operates two cruise ships in the
premium/luxury sector, which are primarily marketed in North America, the UK,
Germany and Australia. Cunard's flagship, the Queen Elizabeth 2, offers the
only regularly scheduled transatlantic crossings between New York and
Southampton, England. In addition, Cunard repositioned the Caronia to service
the growing UK region, with round-trip cruises from Southampton, which
commenced in May 2002. Both of Cunard's ships offer cruises to other worldwide
destinations, with many of the cruises ranging generally between six and 26
days. The Cunard ships also offer extended cruises, such as the QE2's world
cruise.
The three Seabourn cruise ships ("The Yachts of Seabourn") offer an intense
focus on personalised service and quality cuisine aboard its intimately sized
all-suite ships. The Yachts of Seabourn serve the luxury sector and are
primarily marketed in North America. These ships concentrate their operations
in Europe, Asia and the Americas with cruises generally in the seven to 14 day
range.
26
Summary information of Carnival's ships as at 31 January 2003 is as follows:
Calendar Passenger Approx. Gross
Ship Registry Year Built Capacity Registered Tons
CCL
Carnival Conquest Panama 2002 2,974 110,000
Carnival Legend Panama 2002 2,124 88,500
Carnival Pride Panama 2001 2,124 88,500
Carnival Spirit Panama 2001 2,124 88,500
Carnival Victory Panama 2000 2,758 102,000
Carnival Triumph Bahamas 1999 2,758 102,000
Paradise Panama 1998 2,052 70,000
Elation Panama 1998 2,052 70,000
Carnival Destiny Bahamas 1996 2,642 101,000
Inspiration Bahamas 1996 2,052 70,000
Imagination Bahamas 1995 2,052 70,000
Fascination Bahamas 1994 2,052 70,000
Sensation Bahamas 1993 2,052 70,000
Ecstasy Panama 1991 2,052 70,000
Fantasy Panama 1990 2,056 70,000
Celebration Panama 1987 1,486 47,000
Jubilee Bahamas 1986 1,486 47,000
Holiday Bahamas 1985 1,452 46,000
------
Total CCL 38,348
------
Holland America
Zuiderdam Netherlands 2002 1,848 81,800
Zaandam Netherlands 2000 1,440 63,000
Amsterdam Netherlands 2000 1,380 62,000
Volendam Netherlands 1999 1,440 63,000
Rotterdam Netherlands 1997 1,316 62,000
Veendam Bahamas 1996 1,266 55,000
Ryndam Netherlands 1994 1,266 55,000
Maasdam Netherlands 1993 1,266 55,000
Statendam Netherlands 1993 1,266 55,000
Prinsendam Netherlands 1988 792 38,000
Noordam Netherlands 1984 1,214 34,000
------
Total Holland America 14,494
------
Costa
Costa Atlantica Italy 2000 2,114 86,000
Costa Victoria Italy 1996 1,928 76,000
Costa Romantica Italy 1993 1,344 53,000
Costa Allegra Italy 1992 806 30,000
Costa Classica Italy 1991 1,302 53,000
Costa Marina Italy 1990 762 25,500
Costa Europa Italy 1986 1,476 54,000
Costa Tropicale Italy 1982 1,022 37,000
------
Total Costa 10,754
------
Cunard
Caronia UK 1973 668 24,500
QE2 UK 1969 1,790 70,000
------
Total Cunard 2,458
------
Seabourn
Seabourn Legend Bahamas 1992 208 10,000
Seabourn Spirit Bahamas 1989 208 10,000
Seabourn Pride Bahamas 1988 208 10,000
------
Total Seabourn 624
------
Windstar Cruises
Wind Surf Bahamas 1990 308 14,750
Wind Spirit Bahamas 1988 148 5,700
Wind Star Bahamas 1986 148 5,700
------
Total Windstar 604
------
Total Passenger Capacity 67,282
======
27
Cruise ship construction and cruise port facility development
Carnival has signed agreements with three shipyards providing for the
construction of 13 new cruise ships which have 30,580 berths. Primarily in
cooperation with private or public entities, Carnival is engaged in the
development of new or enhanced cruise port facilities. These facilities are
expected to provide Carnival's passengers with an improved holiday experience.
Carnival's involvement typically includes providing cruise port facility
development and management expertise and assistance with financing. During
2002, Carnival was primarily involved in the development of cruise port
facilities in Long Beach, California, Galveston, Texas, La Romana, Dominican
Republic, which opened in December 2002, San Juan, Puerto Rico, Savona, Italy
and Cozumel, Mexico. No assurance can be given that any of these cruise port
facilities that are still being developed will be completed.
Ship Commitments
A description of Carnival's ships under contract for construction is as follows
(in millions, except passenger capacity data):
Expected Estimated
Service Passenger Total
Ship Date/(1)/ Shipyard Capacity/(2)/ Cost/(3)/
CCL
Carnival Glory 7/03 Fincantieri 2,974 $ 510
Carnival Miracle 3/04 Masa-Yards/(4)/ 2,124 375
Carnival Valor 11/04 Fincantieri/(4)/ 2,974 510
Newbuild 1/06 Fincantieri 2,974 460
------ ------
Total CCL 11,046 1,855
------ ------
Holland America
Oosterdam 7/03 Fincantieri/(4)/ 1,848 410
Westerdam 5/04 Fincantieri/(4)/ 1,848 410
Newbuild 11/05 Fincantieri/(4)/ 1,848 410
Newbuild 6/06 Fincantieri 1,848 390
------ ------
Total Holland America 7,392 1,620
------ ------
Costa
Costa Mediterranea 6/03 Masa-Yards/(5)/ 2,114 360
Costa Fortuna 12/03 Fincantieri/(5)/ 2,720 440
Costa Magica 11/04 Fincantieri/(5)/ 2,720 460
------ ------
Total Costa 7,554 1,260
------ ------
Cunard
Queen Mary 2 1/04 Chantiers de l'Atlantique/(4)/ 2,620 780
Newbuild 2/05 Fincantieri/(4)/ 1,968 410
------ ------
Total Cunard 4,588 1,190
------ ------
Total 30,580 $5,925
====== ======
--------
(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, capitalised 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 utilisation of forward foreign currency
contacts. The $178 million of unrealised losses from these forward
contracts has been recorded as fair value of derivative contract
liabilities on Carnival's 30 November 2002 balance sheet and are also
included in the above estimated total cost of these construction 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 30 November 2002 exchange rate.
28
In connection with Carnival's ships under contract for construction, Carnival
has paid approximately $712 million through 30 November 2002 and anticipates
paying the remaining estimated total costs as follows (U.S. dollars in
millions):
Fiscal Year
2003 $1,630
2004 2,110
2005 1,140
2006 330
------
$5,210
======
Cruise pricing
Each of Carnival's cruise brands publishes brochures with prices for the
upcoming seasons. In many regions, brochure prices vary by cruise line, by
category of cabin, by ship, by season and by itinerary. Brochure prices are
regularly discounted through early booking discount programmes and other
promotions. The cruise ticket price includes accommodations, meals and most
onboard entertainment, such as the use of, or admission to, a wide variety of
activities and facilities, including on substantially all ships a fully
equipped casino, nightclubs, theatrical shows, movies, parties, a disco, a
jogging track, a health club, swimming pools, whirlpools and saunas.
When a passenger elects to purchase air transportation from Carnival, both
Carnival's cruise revenues and operating expenses generally increase by
approximately the same amount.
Onboard and other revenues
Carnival derives revenues from other onboard activities and services including
casino gaming, bar sales, gift shop sales, entertainment arcades, shore
excursions, art auctions, photo sales, spa services, bingo games and lottery
tickets, video diaries, snorkel equipment rentals, internet and telephone
usage, vacation protection insurance and promotional advertising by merchants
located in Carnival's ports of call.
The casinos, which contain slot machines and gaming tables including blackjack,
and in most cases craps and roulette, are generally open only when Carnival's
ships are at sea in international waters. Carnival also earns revenue from the
sale of alcoholic and other beverages. Onboard activities are either performed
directly by Carnival or by independent concessionaires, from which Carnival
collects a percentage of their revenues.
Carnival receives additional revenues from the sale to Carnival's passengers of
shore excursions at each ship's ports of call. These excursions include, among
other things, bus and taxi sightseeing and adventure outings, local boat and
beach parties and nightclub and casino visits. For the CCL, Costa, Windstar,
Cunard and Seabourn ships, the shore excursions are primarily operated by
independent tour operators. For the Holland America ships and other of
Carnival's brands operating to destinations in Alaska, shore excursions are
operated by Holland America Tours and independent parties.
In conjunction with cruise vacations on Carnival ships, all of Carnival's
cruise brands sell pre- and post-cruise land packages. CCL land packages
generally include from one to four-night vacations at nearby attractions, such
as Universal Studios and Walt Disney World in Orlando, Florida, Busch Gardens
in Tampa, Florida, or in proximity to other vacation destinations in Central
and South Florida, Galveston, Texas, New Orleans, Louisiana, Los Angeles,
California and San Juan, Puerto Rico. Holland America land packages outside of
Alaska generally include up to four-night vacations, including stays in unique
European port cities or near attractions in Central and South Florida. Costa's
land packages generally include one or two-night vacations in well-known
European cities or at vacation destinations in Central or South Florida.
Cunard, Seabourn and Windstar packages include numerous luxury and/or exotic
pre- and post-cruise land programmes, such as world class golf programmes and
London and Paris luxury holidays.
In conjunction with Carnival's Alaska cruise vacations on its Holland America,
CCL and Seabourn ships, Carnival sells pre- and post-cruise land packages,
which are more fully described under "Tour Segment".
29
Sales and marketing
Carnival's cruise vacations appeal to a broad range of customers of all ages
and interests, generating high-levels of repeat business for Carnival's
different brands. Carnival's target audience in North America, comprised of
households with an income of $40,000 or more and headed by a person who is at
least 25 years old, includes approximately 128 million people. Industry surveys
show that approximately half of these people have expressed an interest in
taking a cruise as a vacation alternative. In addition, Cruise Lines
International Association, or CLIA, a leading industry trade group, forecasts
that 27 million North Americans will take a cruise over the next three years
versus an estimated 7.4 million North American cruisers in 2002.
In addition, cruising has traditionally appealed to the middle and older
segments of the population. These are the fastest growing segments of the
population and are forecast to expand over the next 10 years, which Carnival
expects will provide a major source of new business for Carnival. Furthermore,
cruising is also attracting interest from younger people.
Cruise passengers tend to rate their overall satisfaction with a cruise-based
vacation higher than comparable land-based hotel and resort vacations. In North
America, industry studies indicate that cruise passengers experience a high
level of satisfaction with their cruise product, with 69 per cent. of cruisers
finding the value of the cruise vacation experience to be as good as, or better
than, the value of other vacations.
Carnival believes that both its ability to attract passengers and its
customers' satisfaction levels are enhanced by the levels of choice and
innovative new facilities onboard its cruise ships, such as balconies, multiple
restaurants, including some open 24 hours a day, offering flexible dining, and
amenities such as modern gymnasiums and health spas, internet cafes, theatres,
discos and wedding chapels. Cruise ships are now floating resorts and
Carnival's brands are positioned to appeal to each of the three major sectors
of the cruise industry - contemporary, premium and luxury. Each of its brands
offers a particular style of cruise vacationing from the excitement and variety
of a CCL "Fun Ship", the five-star sophistication of Holland America, the
classic British tradition of Cunard, the indulgent intimacy and luxury onboard
the Yachts of Seabourn, the casual elegance of Windstar and the Italian charm
of Costa - individual brands with individual styles.
During 1998, Carnival created the "World's Leading Cruise Lines" marketing
alliance for Carnival's family of six cruise brands in order both to educate
the consumer about the overall breadth of Carnival's cruise brands, as well as
to increase the effectiveness and efficiency of marketing Carnival brands.
During 2000, Carnival launched "VIP", or Vacation Interchange Privileges, a
loyalty programme that provides special considerations to repeat guests aboard
any of Carnival's six brands.
Carnival's various cruise lines employ over 530 personnel, excluding
reservation agents, in the sales and sales support area who, among other
things, focus on motivating, training and supporting the retail travel agent
community which sells substantially all of Carnival's cruises, typically on a
non-exclusive basis to individuals and families, and fraternal, religious and
other groups. Travel agents generally receive a standard commission of 10 per
cent. plus the potential of additional commissions based on sales volume.
Commission rates on cruise vacations are usually higher than commission rates
earned by travel agents on sales of airline tickets and hotel rooms. Moreover,
since cruise vacations are substantially all-inclusive, sales of Carnival's
cruise vacations generally yield higher commissions to travel agents than
commissions earned on selling airline tickets and hotel rooms. During fiscal
2002, no controlled group of travel agencies accounted for more than 10 per
cent. of Carnival's revenues.
Historically, a significant portion of Carnival's brands' cruises were booked
from several months in advance of the sailing date for contemporary brands to
up to a year in advance of sailing for Carnival's luxury brands. This lead-time
allowed Carnival to adjust its prices, if necessary, in relation to demand for
available cabins, as indicated by the level of advance bookings. Carnival's
fares, such as CCL's Supersaver fares and Holland America's Early Savings and
Alumni Savings fares, are designed to encourage potential passengers to book
cruise reservations earlier, which helps to manage more effectively Carnival's
overall net revenue yields. Carnival brands' payment terms generally require
that a passenger pay a deposit to confirm their reservation with the balance
due well before the departure date. As a result of September 11, 2001 and its
aftermath, Carnival brands have generally experienced a closer-to-sailing
booking pattern than was historically experienced. This change in pattern has
30
caused a reduction in the cash flows that Carnival receives from early advance
bookings and, as would be expected, has adversely affected Carnival's early
booking programmes. Generally, this trend has continued into 2003. However,
Carnival's revenue management personnel have adjusted their cabin inventories
and pricing programmes to deal with these changing booking patterns in order to
optimise Carnival's revenue yields.
Initially, Carnival's cruise brands were marketed primarily in North America.
Carnival began to globalise its cruise business by expanding into Europe
through the acquisition of a 50 per cent. interest in Costa in June 1997 and
Cunard in May 1998. In September 2000, Carnival positioned itself to better
take advantage of this expanding presence by acquiring the balance of Costa.
This acquisition solidified Carnival's ownership of a cruise line that Carnival
believes is as recognisable in southern Europe and South America as Carnival is
in North America. Carnival has leveraged Costa's European leadership position
by increasing its new ship development commitment to the Costa brand, as well
as by transferring CCL's Tropicale in 2001 and Holland America's Westerdam in
2002 to the Costa fleet. Carnival has specifically tailored the Costa Marina to
German passengers, and began marketing her exclusively for German-speaking
passengers in spring 2002. Additionally, Carnival repositioned Cunard's Caronia
to target UK passengers with round-trip cruises from Southampton in May 2002,
and has also committed to the construction of a new 1,968 passenger ship to
serve Cunard's UK customers upon its expected in-service date of February 2005.
CCL
CCL believes that its success is due partly to its unique brand positioning
within the vacation industry. CCL markets its cruises not only as alternatives
to competitors' cruises, but as vacation alternatives to competitive land-based
resorts and sightseeing destinations. CCL seeks to attract passengers from the
broad vacation market, including those who have never been on a cruise ship
before and who might not otherwise consider a cruise as a vacation alternative.
CCL's strategy has been to emphasise the cruise experience itself rather than
particular destinations, as well as the advantages of a prepaid, all-inclusive
vacation package. CCL regularly engages in comparative pricing advertisements
in which it compares the cost of a cruise with land-based vacations. CCL
markets its cruises as the "Fun Ships" experience, which includes a wide
variety of onboard activities and entertainment, such as full-scale casinos and
nightclubs, an atmosphere of pampered service and high quality food.
CCL uses, among others, the themes "So Much Fun. So Many Places" and "The Most
Popular Cruise Line in the World!". CCL advertises nationally directly to
consumers primarily on network and cable television and through extensive print
media. CCL believes its advertising generates interest in cruise vacations
generally and results in a higher degree of consumer awareness of the "Fun
Ships" concept and the "Carnival" name in particular. CCL's consumer web site,
www.carnival.com, serves as a marketing and research tool for its current and
potential customers. During 2001, CCL and Capital One launched an affordable
cruise financing programme bundled with a co-branded credit card featuring a
comprehensive rewards programme. The Fun Finance Plan enables cruise passengers
to pay for a CCL cruise through fixed monthly credit card payments.
CCL has expanded its ship embarkation locations in the U.S. and Canada over the
past several years to help generate additional drive-in business, which reduces
the cost and increases the convenience of a CCL vacation compared to cruise or
land-based alternatives that require air or other more expensive travel
arrangements. Specifically, CCL now has cruises originating from Baltimore,
Charleston, Ensenada, Fort Lauderdale, Galveston, Honolulu, New Orleans, New
York, Norfolk, Philadelphia, San Diego, Seward, Tampa and Vancouver, in
addition to its traditional home ports of Miami, Los Angeles, Port Canaveral
and San Juan. In addition, CCL is offering shorter cruises, which also reduces
the cost of a cruise vacation to CCL's passengers.
Most of CCL's cruise bookings are made through travel agents. In fiscal 2002,
CCL took reservations from about 25,000 of approximately 33,000 travel agency
locations known to CCL in the U.S. and Canada. In addition, CCL markets and
sells its cruises to tour operators and through travel agents located in
numerous other countries, including the UK, Mexico, Bermuda, Bahamas, Italy and
Venezuela.
31
CCL engages in substantial promotional efforts designed to motivate and educate
retail travel agents about its "Fun Ships" cruise vacations. CCL employs
approximately 95 business development managers and 75 in-house service
representatives and administrative support personnel to motivate independent
travel agents and to promote its cruises as an alternative to competitive
land-based vacations or other cruise lines. CCL believes it has one of the
largest sales forces in the cruise industry.
To facilitate access and to simplify the reservation process, CCL employs
approximately 1,250 reservation agents. CCL's fully automated reservation
system allows its reservation agents to respond quickly to book cabins on its
ships. Additionally, through various third-party computer reservation systems
or CCL's internet booking engine, travel agents and consumers have the ability
to make reservations directly into CCL's computerised reservations system.
Holland America and Windstar
The Holland America and Windstar ships cater to the premium and luxury sector,
respectively. Carnival believes that the hallmarks of the Holland America
experience are beautiful ships and gracious, attentive service. Holland America
communicates this difference as "A Tradition of Excellence", a reference to its
long-standing reputation for "world class" service and cruise itineraries.
Holland America seeks to attract consumers who want an enhanced vacation in
terms of service, style, space and comfort and a higher staff-to-guest ratio.
Substantially all of Holland America's bookings are made through travel agents.
In fiscal 2002, Holland America took reservations from about 17,000 of
approximately 33,000 travel agency locations known to Carnival in the U.S. and
Canada. In addition, Holland America and Windstar market and sell their cruises
to tour operators and through travel agents located in numerous other
countries, including the UK, Australia and the Netherlands.
Holland America has focused much of its sales efforts at creating an excellent
relationship with the travel agency community. This is due principally to its
marketing philosophy that travel agents have a large impact on the consumer
vacation selection process and will recommend Holland America more often
because of its excellent reputation for service to both its guests and their
independent travel agents. Holland America solicits continuous feedback from
customers and the independent travel agents making bookings with Holland
America to ensure they are receiving excellent service. Holland America and
Windstar believe that their web sites at www.hollandamerica.com and
www.windstarcruises.com help to enrich the consumers' web-based research
experience.
Holland America's marketing communication strategy is primarily composed of
newspaper and magazine advertising, large-scale brochure distribution, direct
mail solicitations to past passengers and others and network and cable
television and radio spots. Holland America engages in substantial promotional
efforts designed to motivate and educate retail travel agents about its
products. Holland America employs approximately 50 field sales representatives,
30 inside sales representatives and 15 sales and service representatives to
support this field sales force. To facilitate access and to simplify the
reservation process, Holland America employs approximately 305 reservation
agents primarily to take bookings from travel agents. Additionally, through
various third-party computer reservation systems or Holland America's internet
booking engine, travel agents and consumers have the ability to make
reservations directly into Holland America's computerised reservations system.
Windstar has its own marketing and reservations staff. Field sales
representatives for both Holland America and CCL also act as field sales
representatives for Windstar. Marketing efforts are devoted primarily to travel
agent support and awareness, direct mail solicitation of past passengers and
distribution of brochures. The marketing features the distinctive nature of the
graceful, modern sail ships and the distinctive "casually elegant" experience
on "intimate itineraries," apart from the normal cruise experience. Windstar's
luxury cruise sector positioning is embodied in its marketing phrase "180
degrees from ordinary".
Costa
From June 1997 to 28 September 2000, Carnival owned 50 per cent. of Costa. On
29 September 2000, Carnival completed the acquisition of the remaining 50 per
cent. interest in Costa.
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Costa is headquartered in Genoa, Italy and is Europe's largest cruise line
based on number of passengers carried and available capacity. Costa is targeted
to the contemporary sector with most of its cruises sold to European
passengers, primarily from Italy, France, Germany, Spain, England and
Switzerland. Approximately 91 per cent. of Costa's revenues in fiscal 2002 were
generated by non-U.S. tour operators and travel agents. Costa has sales offices
in Argentina, Brazil, the UK, France, Germany, Italy, Mexico, Spain,
Switzerland and the U.S., and employs over 215 personnel in the sales and sales
support area, excluding reservation agents. Costa sales offices focus much of
their effort at motivating and educating travel agents. These efforts include,
among other things, newspaper, television, radio and magazine advertising,
direct mail solicitation and brochure distribution. In addition, through the
use of the internet, at web sites specifically designed for the country and
guest that Costa is targeting, the consumers are educated about cruising and
Costa (e.g.: www.costacruises.com and www.costa.it). To facilitate access and
to simplify the reservation process, Costa employs approximately 150
reservation agents primarily to take bookings from travel agents. Additionally,
through either Costa's internet booking engine or through third party computer
reservation systems, Costa's European and South American travel agents
generally have the ability to make reservations directly into Costa's
reservations system.
Carnival believes that one of the principal ways that Costa distinguishes
itself from other brands is by immersing its guests in the Italian ambiance on
its ships. The moment guests board a ship, they are greeted by Italian decor
and art, the decks and restaurants are sometimes named after well-known Italian
places, the cuisine is prepared with an Italian flair and the officers and key
personnel are all Italian. A voyage on board Costa is meant to capture the
charm and flavour of a visit to Italy.
Cunard and Seabourn
Carnival owns 100 per cent. of Cunard Line Limited, which owns Cunard and
Seabourn. Currently five ships are being offered under these two brands, which
are marketed separately.
The Cunard brand operates two ships in the premium/luxury cruise sectors.
Cunard's most visible ship is the QE2. The QE2 is the only active passenger
ship of its size built specifically for navigating ocean waters and offering
regularly scheduled transatlantic cruises, and thus enjoys a unique standing
among modern passenger ships. Over the past year, Cunard has repositioned
itself as the brand with the most famous ocean liners in the world. The fame of
the QE2, as well as the worldwide anticipation of the arrival of the Queen Mary
2, which is expected to enter service in January 2004, reinforces this brand
identity. The line's other cruise ship, the Caronia, is based in Southampton
and has been dedicated to attracting UK consumers since May 2002.
The Seabourn brand operates three ships under the trade name "The Yachts of
Seabourn", offering ultra-luxury cruising with an intense focus on service and
cuisine. It is the exceptionally high level of service which Carnival believes
enables The Yachts of Seabourn to be one of the most celebrated cruise lines in
the world.
Cunard and Seabourn market and sell their products through their sales offices
in Miami, Florida, the UK, Germany and Carnival's office in Australia.
Approximately 61 per cent. and 31 per cent. of Cunard and Seabourn's revenues,
respectively, are generated by non-U.S. tour operators and travel agents.
Marketing efforts are devoted primarily to travel agent support and awareness,
direct mail solicitation, loyalty marketing to past passengers, targeted print
media campaigns and brochure distribution and the education of consumers at the
Cunard and Seabourn web sites located at www.cunard.com and www.seabourn.com,
respectively.
Substantially all of Cunard's and Seabourn's bookings are made through travel
agents. In fiscal 2002, Cunard and Seabourn took reservations from about 6,100
of approximately 33,000 travel agency locations known to Carnival in the U.S.
and Canada. Cunard and Seabourn employ approximately 15 field sales
representatives, 10 inside sales representatives and 20 sales and service
representatives to support its worldwide field sales force. They also employ
approximately 45 reservation agents worldwide primarily to take bookings,
substantially all of which come from travel agents.
Seasonality
Carnival's revenue from the sale of passenger tickets is moderately seasonal.
Historically, demand for cruises has been greatest during the summer months.
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Governmental regulation
Maritime regulations
Carnival's ships are regulated by various international, national, state and
local laws, regulations and treaties in force in the jurisdictions in which its
ships operate. In addition, Carnival's ships are registered in the Bahamas, the
UK, Italy, the Netherlands and Panama, and, accordingly, are regulated by these
jurisdictions and by the international conventions governing the safety of
Carnival's ships and guests that these jurisdictions have ratified or adhere
to. Each country of registry conducts periodic inspections to verify compliance
with these regulations as discussed more fully below. In addition, the
directives and regulations of the European Union are applicable to some aspects
of Carnival's ship operations. Carnival cannot estimate the ultimate cost of
complying with these requirements or the impact of these requirements on the
resale value or useful lives of its ships.
Specifically, the International Maritime Organization, or IMO, which operates
under the United Nations, has adopted safety standards as part of the Safety of
Life at Sea, or SOLAS Convention, which is applicable to all of Carnival's
ships. Generally, SOLAS establishes vessel design, structural features,
materials, construction and life saving equipment requirements to improve
passenger safety and security. The SOLAS requirements are revised from time to
time, with the most recent modifications being phased in through 2010.
In 1993, SOLAS was amended to adopt the International Safety Management Code,
referred to as the ISM Code. The ISM Code provides an international standard
for the safe management and operation of ships and for pollution prevention.
The ISM Code became mandatory for passenger vessel operators, such as Carnival,
on 1 July 1998. All of Carnival's operations and ships have obtained the
required certificates demonstrating compliance with the ISM Code and are
regularly inspected and controlled by the national authorities, as well as the
international authorities acting under the provisions of the international
agreements related to Port State Control; the process by which a nation
exercises authority over foreign ships when the ships are in the waters subject
to its jurisdiction.
Carnival's ships are subject to a programme of periodic inspection by ship
classification societies who conduct annual, intermediate, dry-docking and
class renewal surveys. Classification societies conduct these surveys not only
to ensure that Carnival's ships are in compliance with international
conventions adopted by the flag state and domestic rules and regulations, but
also to verify that Carnival's ships have been maintained in accordance with
the rules of the society and recommended repairs have been satisfactorily
completed.
Carnival's ships that call on U.S. ports are subject to inspection by the U.S.
Coast Guard for compliance with the SOLAS Convention and by the U.S. Public
Health Service for sanitary standards. Carnival's ships are also subject to
similar inspections pursuant to the laws and regulations of various other
countries its ships visit. In addition, the U.S. Congress recently enacted the
Maritime Transportation Security Act of 2002 which implements a number of
security measures at U.S. ports, including measures that relate to foreign
flagged vessels calling at U.S. ports.
Carnival believes that health, safety and security issues will continue to be
areas of focus by relevant government authorities both in the U.S. and abroad.
Resulting legislation or regulations, or changes in existing legislation or
regulations, could impact Carnival's operations and would likely subject it to
increasing compliance costs in the future.
Other environmental, health and safety matters
Carnival is subject to various international, national, state and local
environmental protection and health and safety laws, regulations and treaties
that govern, among other things, air emissions, employee health and safety,
waste discharge, water management and disposal and storage, handling, use and
disposal of hazardous substances, such as chemicals, solvents, paints and
asbestos.
In particular, in the U.S., the Oil Pollution Act of 1990, or the OPA, provides
for strict liability for water pollution, such as oil pollution or threatened
oil pollution incidents in the 200-mile exclusive economic zone of the U.S.,
subject to monetary limits. These monetary limits do not apply, however, where
the discharge is caused by gross negligence or wilful misconduct of, or the
violation of, an applicable
34
regulation by a responsible party. Pursuant to the OPA, in order for Carnival
to operate in U.S. waters, Carnival is also required to obtain Certificates of
Financial Responsibility from the U.S. Coast Guard for each of Carnival's
ships. These certificates demonstrate Carnival's ability to meet removal costs
and damages related to water pollution, such as for an oil spill or a release
of a hazardous substance up to Carnival's ship's statutory liability limit.
In addition, most U.S. states that border a navigable waterway or seacoast have
enacted environmental pollution laws that impose strict liability on a person
for removal costs and damages resulting from a discharge of oil or a release of
a hazardous substance. These laws may be more stringent than U.S. federal law.
Furthermore, many countries have ratified and adopted IMO Conventions which,
among other things, impose liability for pollution damage subject to defences
and to monetary limits, which monetary limits do not apply where the spill is
caused by the owner's actual fault or by the owner's intentional or reckless
conduct. In jurisdictions that have not adopted the IMO Conventions, various
national, regional or local laws and regulations have been established to
address oil pollution.
If Carnival violates or fails to comply with environmental laws, regulations or
treaties, Carnival could be fined or otherwise sanctioned by regulators.
Carnival has made, and will continue to make, capital and other expenditures to
comply with environmental laws and regulations.
Pursuant to a settlement with the U.S. government in April 2002, Carnival pled
guilty to certain environmental violations. Carnival was sentenced under a plea
agreement pursuant to which it paid fines in fiscal 2002 totalling $18 million
to the U.S. government and other parties. Carnival had accrued for these fines
in fiscal 2001. Carnival was also placed on probation for a term of five years.
Under the terms of the probation, any future violation of environmental laws by
Carnival may be deemed a violation of probation. In addition, Carnival was
required as a special term of probation to develop, implement and enforce a
worldwide environmental compliance programme. Carnival is in the process of
implementing the environmental compliance programme and expects to incur
approximately $10 million in additional annual environmental compliance costs
in 2003 as a result of the programme.
From time to time, environmental and other regulators consider more stringent
regulations which may affect Carnival's operations and increase Carnival's
compliance costs. As evidenced from the preceding paragraphs, the cruise
industry is affected by a substantial amount of environmental rules and
regulations. Carnival believes that the impact of cruise ships on the global
environment will continue to be an area of focus by the relevant authorities
and, accordingly, this will likely subject Carnival to increasing compliance
costs in the future.
Consumer regulations
In addition, Carnival's ships that call on U.S. ports are regulated by the
Federal Maritime Commission, referred to as the FMC. Public Law 89-777 which is
administered by the FMC requires most cruise line operators to establish
financial responsibility for their liability to passengers for non-performance
of transportation as well as casualty and personal injury. The FMC's
regulations require that a cruise line demonstrate its financial responsibility
through a guarantee, escrow arrangement, surety bond or insurance. Currently,
the amount required must equal 110 per cent. of the cruise line's highest
amount of customer deposits over a two year period up to a maximum coverage
level of $15 million. The FMC has recently proposed various changes to the
financial responsibility regulations for non performance of transportation,
including a proposal to significantly increase the amount of financial
responsibility required to be maintained by cruise lines which would increase
Carnival's compliance costs. In addition, other jurisdictions, including
Argentina, Australia, Brazil, the UK and Germany require the establishment of
financial responsibility for passengers from their jurisdictions.
Permits for Glacier Bay
In connection with a significant portion of Carnival's Alaska cruise
operations, Holland America and CCL rely on concession permits from the U.S.
National Park Service, which are periodically renewed, to operate their cruise
ships in Glacier Bay National Park and Preserve. There can be no assurance that
these permits will continue to be renewed or that regulations relating to the
renewal of such permits, including preference or historical rights, will remain
unchanged in the future.
35
Carnival believes it has all the necessary licenses to conduct its business.
From time to time, various other regulatory and legislative changes may be
proposed or adopted that could have an effect on the cruise industry in general
and Carnival's business in particular.
3. Tour Segment
In addition to Carnival's cruise business it operates Holland America Tours,
which is a leading cruise/tour operator in the state of Alaska and the Canadian
Yukon. Holland America Tours also markets sightseeing packages both separately
and as part of Carnival's cruise/tour packages. Since a substantial portion of
its business is derived from the sale of tour packages in Alaska during the
summer season, Holland America Tours' operations are highly seasonal.
Holland America Tours
Holland America Tours is comprised of a group of companies, which together
comprise the tour operations and perform three independent yet interrelated
functions. During 2002, as part of an integrated travel programme to
destinations in Alaska, the Canadian Yukon and Washington, the tour service
group offered 31 different tour programmes varying in length from 8 to 21 days.
The transportation group and hotel group supports the tour service group by
supplying facilities needed to conduct tours. Facilities include dayboats,
motor coaches, rail cars and hotels.
Two luxury dayboats perform an important role in the integrated travel
programme offering tours to the glaciers of Alaska and the Yukon River. The
Yukon Queen II cruises the Yukon River between Dawson City, Yukon Territory and
Eagle, Alaska and the Ptarmigan operates on Portage Lake in Alaska. The two
dayboats have a combined capacity of 360 passengers.
A fleet of over 300 motor coaches operate in Alaska, Washington, British
Columbia, Canada and the Canadian Yukon. These motor coaches are used for
extended trips, city sightseeing tours and charter hire. Additionally, Holland
America Tours operates express motor coach service between downtown Seattle,
Washington and the Seattle-Tacoma International Airport and also provides
transit and meet and greet services for some of CCL's and Costa's cruise
passengers at certain of their U.S. and Canadian ports of call.
Thirteen private, domed rail cars, which are called "McKinley Explorers", run
on the Alaska Railroad between Anchorage and Fairbanks, stopping at Denali
National Park.
In connection with its tour operations, Holland America Tours owns or leases
motor coach maintenance shops in Seattle, Washington, and in Juneau, Fairbanks,
Anchorage, Skagway and Ketchikan, Alaska. Holland America Tours also owns or
leases service offices at Anchorage, Denali Park, Fairbanks, Juneau, and
Skagway in Alaska, at Whitehorse in Canada's Yukon Territory, in Seattle,
Washington and Vancouver and Victoria, British Columbia.
Westmark hotels
During 2002, Holland America Tours operated 14 hotels in Alaska and the
Canadian Yukon under the name Westmark Hotels (one hotel was sold in August
2002). Four of the hotels are located in Canada's Yukon Territory and offer a
combined total of 587 rooms. The remaining ten hotels, located throughout
Alaska, provide a total of 1,393 rooms, bringing the total number of hotel
rooms to 1,980. Twelve of the hotels were wholly owned by Holland America
Tours' subsidiaries and Westmark operated two under a management agreement.
The hotels play an important role in Holland America Tours' tour programmes
during the summer months when they provide accommodation to the tour
passengers. The hotels located in the larger metropolitan areas remain open
during the entire year, acting during the winter season as centres for local
community activities while continuing to accommodate the travelling public.
Most of the Westmark hotels include dining, lounge and conference or meeting
room facilities. Some hotels have gift shops and other tourist services on the
premises.
For the five hotels that operated year-round in 2002, the occupancy percentage
for fiscal 2002 was 51.5 per cent., and for the nine hotels that operated only
during the summer months, the occupancy percentage for fiscal 2002 was 59.4 per
cent.
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Sales and marketing
Holland America Tours has its own marketing staff devoted to travel agent
support and awareness, direct mail solicitation of past customers, use of
consumer magazine and newspaper advertising to develop prospects and enhance
awareness and distribution of brochures. Additionally, television and radio
spots are used to market its tour and cruise packages. The Holland America
Tours marketing message builds on its 55 years of Alaska tourism leadership and
its extensive array of hotel and transportation assets to create a brand
preference for Holland America Tours. To the prospective vacationer the
marketing endeavours to convince them that "Holland America Tours is Alaska".
Holland America Tours' products are marketed both separately and as part of
cruise/tour packages. Although most of Holland America Tours' cruise/tours
include a Holland America cruise as the cruise segment, other cruise lines also
market Holland America Tours as a part of their cruise/tour packages and
sightseeing excursions. Tours that are sold separately are marketed through
independent travel agents and also directly by Holland America Tours, utilising
sales desks in major hotels. General marketing for the hotels is done through
various media in Alaska, Canada and the contiguous U.S. Travel agents,
particularly in Alaska, are solicited, and displays are used in airports in
Seattle, Washington, Portland, Oregon and various Alaskan cities. Room rates at
Westmark Hotels are on the upper end of the scale for hotels in Alaska and the
Canadian Yukon.
Seasonality
Holland America Tours' revenues from tours are highly seasonal with a large
majority generated during the late spring and summer months in connection with
the Alaska cruise season. The tours are conducted in Alaska, the Canadian Yukon
and Washington. The Alaska and Canadian Yukon tours coincide to a great extent
with the Alaska cruise season, May through September. Washington tours are
conducted year-round although demand is greatest during the summer months.
During periods in which tour demand is lower Holland America Tours seeks to
maximise its motor coach charter activity, such as operating charter tours to
ski resorts in Washington.
Competition
Holland America Tours competes with independent tour operators and motor coach
charter operators in Alaska, British Columbia, the Canadian Yukon and
Washington. The primary competitors in these areas are Princess Tours, Alaska
Sightseeing/Trav-Alaska, with approximately 15 motor coaches, and Royal
Celebrity Tours with approximately 40 motor coaches and four domed rail cars.
The primary competitors in Washington are Hesselgrave International, with
approximately 40 motor coaches and Pacific Northwest Coaches with approximately
20 motor coaches.
Westmark Hotels compete with various hotels throughout Alaska, many of which
charge prices below those charged by Westmark Hotels. Dining facilities in the
hotels also compete with the many restaurants in the same geographic areas.
Government regulations
Holland America Tours' motor coach operations are subject to regulation both at
the federal and state levels, including primarily the U.S. Department of
Transportation, the Washington Utilities and Transportation Commission, the
British Columbia Motor Carrier Commission, the Yukon Motor Transport Board and
the Alaska Department of Transportation. Certain activities of Holland America
Tours involve federal or state properties and may require concession permits
and are subject to regulation by various federal or state agencies, such as the
U.S. National Park Service, the U.S. Forest Service and the State of Alaska
Department of Natural Resources. In addition, Holland America Tours is also
subject to federal, state and local environmental regulations.
In connection with the operation of its beverage facilities in the Westmark
Hotels, Holland America Tours is required to comply with state, county and/or
city ordinances regulating the sale and consumption of alcoholic beverages.
Violations of these ordinances could result in fines, suspensions or revocation
of licenses and preclude the sale of any alcoholic beverages by the hotel
involved.
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In the operation of its hotels, Holland America Tours is required to comply
with applicable building and fire codes. Changes in these codes have in the
past and may in the future require expenditures to ensure continuing compliance.
From time to time, various other regulatory and legislative changes have been
or may be proposed or adopted that could have an effect on the tour industry in
general and Holland America Tours in particular.
4. Employees
Carnival's operations have approximately 5,600 full-time and 2,100
part-time/seasonal employees engaged in shoreside operations. Carnival also
employs approximately 29,500 officers, crew and staff on Carnival's 45 ships.
Due to the seasonality of its Alaska and Canadian operations, HAL Antillen and
its subsidiaries increase their work force during the summer months, employing
additional seasonal personnel which have been included above. Carnival has
entered into agreements with unions covering certain employees in Carnival's
hotel, motor coach and ship operations. Carnival considers its employee and
union relations generally to be good.
Carnival sources its shipboard officers primarily from Italy, Holland, the UK
and Norway. The remaining crew positions are manned by persons from around the
world. Carnival utilises various manning agencies in many countries and regions
to help secure its shipboard employees.
5. Suppliers
Carnival's largest purchases are for airfare, travel agency commissions,
advertising, fuel, food and beverages, hotel and restaurant supplies and
products, repairs and maintenance and dry-docking, port charges and for the
construction of Carnival's ships. Although Carnival utilises a limited number
of suppliers for most of its food and beverages, and hotel and restaurant
supplies and products, most of these purchases are available from numerous
sources at competitive prices. The use of a limited number of suppliers enables
Carnival to, among other things, obtain volume discounts. Carnival purchases
fuel at some of its ports of call and port-related services at all of its ports
of call from a limited number of suppliers. In addition, Carnival performs its
major dry-dock and ship improvement work at dry-dock facilities in the Bahamas,
British Columbia, Canada, the Caribbean, Europe and the U.S. Carnival believes
there are sufficient dry-dock facilities to meet its anticipated requirements.
Finally, Carnival has entered into agreements with three shipyards for the
construction of its 13 additional cruise ships.
6. Insurance
General
Carnival maintains insurance to cover a number of risks associated with owning
and operating vessels in international trade. All such insurance policies are
subject to limitations, exclusions and deductible levels. Premiums charged by
both marine and non-marine insurers will likely be adversely impacted by the
losses incurred in the direct and reinsurance markets regardless of Carnival's
own loss experience. Since September 11, 2001, Carnival has experienced premium
increases and expects most of its insurance premiums to increase significantly
at the time of their renewals during the period from February to April 2003. No
assurance can be given that affordable and viable direct and reinsurance
markets will be available to Carnival in the future. Carnival maintains certain
levels of self-insurance for the below-mentioned risks through the use of
substantial deductibles, which may increase in the future in response to
expected premium increases. Carnival does not typically carry coverage related
to loss of earnings or revenues for its cruise, tour and related operations.
Protection and indemnity ("P&I") cover
Third-party liabilities in connection with Carnival's cruise activities are
covered by entry in a P&I club. P&I cover is available through mutual indemnity
associations, known as clubs, that are owned by ship owners. Carnival's vessels
are entered in three P&I clubs as follows: The West of England Shipowners
Mutual Insurance Association (Luxembourg), Steamship Mutual Underwriting
Association Ltd. and the United Kingdom Mutual Steamship Assurance Association
(Bermuda) Limited. The P&I clubs in which
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Carnival participates are part of a worldwide network of P&I clubs, known as
the International Group (the "IG"). The IG insures directly, and through
reinsurance markets, a large portion of the world's shipping fleets. The terms
of Carnival's P&I coverage are governed by the rules of its P&I clubs, while
the amount of insurance is governed by the rules of the IG. Carnival vessel
entries cover legal, statutory or pre-approved contract liabilities and other
related expenses related to crew, passengers and other third parties on its'
ships in operation. This coverage also includes shipwreck removal, pollution
and damage to third party property.
Hull and machinery insurance
Carnival maintains insurance on the hull and machinery of each ship in amounts
equal to the approximate estimated market value of each ship. The coverage for
hull and machinery is provided by international marine insurance carriers. Most
insurance underwriters make it a condition for insurance coverage that a ship
be certified as "in class" by a classification society that is a member of the
International Association of Classification Societies ("IACS"). All of
Carnival's ships are currently certified as in class with an IACS member. These
certifications have either been issued or endorsed within the last twelve
months.
War risks insurance
Subject to certain limitations, Carnival maintains war risk insurance on each
of its ships, which includes legal liability to crew and passengers, including
terrorist risks for which coverage would be excluded under the coverage
provided by the P&I clubs mentioned above. The war risk coverage is provided by
international marine insurance carriers. Carnival does not carry war risk
insurance coverage for physical damage to the ship, which coverage is excluded
from its hull policy. However, as required by certain agreements, war risk
insurance covering physical damage to the ship is carried for five ships. As is
typical for war risk policies in the marine industry, under the terms of the
policy, underwriters can give seven days notice to the insured that the policy
can be cancelled and reinstated at different premium rates. This gives
underwriters the ability to increase Carnival's premiums following events that
they deem increase their risk. As a result of the September 11, 2001 attacks,
Carnival's war risk insurance premiums have increased substantially. No
assurance can be given that affordable and viable direct and reinsurance
markets will be available to Carnival for war risk insurance.
Other insurance
Carnival, as currently required by the FMC, maintains at all times three $15
million performance bonds for ships operated by CCL, Holland America and Cunard
Line, which embark passengers in U.S. ports, to cover passenger ticket
liabilities in the event of a cancelled or interrupted cruise. Costa maintains
insurance as required by the FMC to cover their ticket liabilities in the event
of a cancelled or interrupted cruise. Carnival also maintains other performance
bonds as required by various foreign authorities that regulate certain of its
operations in their jurisdictions.
Carnival also maintains various other insurance policies to protect the assets
of Holland America Tours and for other activities.
The Athens Convention
Current conventions generally in force applying to passenger ships are the
Athens Convention relating to the Carriage of Passengers and their Luggage by
Sea (1974), the 1976 Protocol to the Athens Convention and the Convention on
Limitation of Liability for Maritime Claims (1976). The U.S. has not ratified
any Athens Convention Protocol. However, vessels flying the flag of a country
that has ratified it may contractually enforce the 1976 Athens Convention
Protocol for cruises that do not call at a U.S. port.
The International Maritime Organisation Diplomatic Conference agreed a new
protocol to the Athens Convention on 1 November 2002. The new protocol, which
has not yet been ratified, substantially increases the level of compulsory
insurance which must be maintained by passenger ship operators and provides a
direct action provision, which will allow claimants to proceed directly against
insurers. Most of the countries in the European Union, where many of Carnival's
vessels operate, supported the new protocol and are likely to ratify it in the
future, however, the timing of such ratification, if obtained,
39
is unknown. No assurance can be given that affordable and viable direct and
reinsurance arrangements will be available to provide the level of coverage
required under the new protocol. Carnival also expects insurance costs may
increase once the new protocol is ratified.
7. Trademarks
Carnival owns numerous trademarks, which Carnival believes are widely
recognised throughout the world and have considerable value. These trademarks
include the names of Carnival's cruise lines, each of which Carnival believes
is a widely-recognised brand name in the cruise vacation industry.
8. Properties
CCL's principal shoreside operations and the Carnival corporate headquarters
are located at 3655 N.W. 87th Avenue, Miami, Florida. These facilities are
owned by Carnival and have approximately 456,000 square feet of office space.
HAL's principal shoreside operations and its headquarters are located at 300
Elliott Avenue West in Seattle, Washington in approximately 154,000 square feet
of leased office space. Costa's principal shoreside operations and its
headquarters are located in Genoa, Italy in approximately 125,000 square feet
of owned and leased space. Cunard Line Limited's principal shoreside operations
and its headquarters are located at 6100 Blue Lagoon Drive in Miami, Florida in
approximately 51,000 square feet of leased office space. Carnival also leases
office space in Colorado Springs, Colorado for use as an additional CCL
reservation centre and has leases for additional office space in Southampton
and London, England for Cunard's UK operations and Carnival's UK sales and
shipbuilding technical service offices, respectively. Finally, Carnival leases
office space in Miramar and Hollywood, Florida for additional CCL sales
personnel, and for Costa's South Florida sales office.
Carnival's cruise ships and Holland America's private island, Half Moon Cay,
are described in the Cruise ships and itineraries section under paragraph 2 of
this Part A of Section 2.
Carnival's cruise ships, Holland America Tours' properties, shoreside
operations and headquarter facilities are well maintained and in good
condition. Carnival evaluates its needs periodically and obtains additional
facilities when deemed necessary. Carnival believes that these facilities are
adequate for its current needs.
9. Taxation
Taxation of Carnival and its subsidiaries
The following discussion of the application of the principal U.S. federal
income tax laws, prior to the implementation of the DLC structure, to Carnival
and its subsidiaries is based upon existing U.S. federal income tax law,
including the Internal Revenue Code, proposed, temporary and final U.S.
treasury regulations, certain current income tax treaties, administrative
pronouncements, and judicial decisions, as currently in effect, all of which
are subject to change, possibly with retroactive effect.
Carnival is a foreign corporation engaged in a trade or business in the U.S.,
and its ship-owning subsidiaries are foreign corporations that, in many cases,
depending upon the itineraries of their ships, receive income from sources
within the U.S. for U.S. federal income tax purposes. To the best of its
knowledge, Carnival believes that, under Section 883 of the Internal Revenue
Code and applicable income tax treaties, its income and the income of its
ship-owning subsidiaries, in each case derived from or incidental to the
international operation of a ship or ships, is currently exempt from U.S.
federal income tax. Carnival believes that substantially all of its income, and
the income of its ship-owning subsidiaries, with the exception of the U.S.
source income from the transportation, hotel and tour businesses of Holland
America Tours, is derived from or incidental to the international operation of
a ship or ships within the meaning of Section 883 and applicable income tax
treaties.
Application of Section 883 of the Internal Revenue Code
In general, under Section 883, certain non-U.S. corporations are not subject to
U.S. federal income tax or branch profits tax on certain U.S. source income
derived from the international operation of a ship or ships. Carnival believes
that it and many of its ship-owning subsidiaries currently qualify for the
Section 883 exemption since each is organised in a qualifying jurisdiction and
the common stock of Carnival is
40
primarily and regularly traded on an established securities market in the U.S.
To date, however, no final U.S. treasury regulations or other definitive
interpretations of the relevant portions of Section 883 have been promulgated,
although, as discussed below, regulations have been proposed. Any such final
regulations or official interpretations could differ materially from Carnival's
interpretation of this Internal Revenue Code provision and, even in the absence
of differing regulations or official interpretations, the Internal Revenue
Service might successfully challenge such interpretation. In addition, the
provisions of Section 883 are subject to change at any time by legislation.
Moreover, changes could occur in the future with respect to the trading volume
or trading frequency of Carnival's shares or with respect to the identity,
residence, or holdings of the direct or indirect shareholders of Carnival that
could affect Carnival and its subsidiaries' eligibility for the Section 883
exemption. Accordingly, although Carnival believes it is unlikely, it is
possible that Carnival and its ship-owning or operating subsidiaries whose tax
exemption is based on Section 883 could lose this exemption. If Carnival and/or
its ship-owning or operating subsidiaries were not entitled to the benefit of
Section 883, Carnival and/or its ship-owning or operating subsidiaries would be
subject to U.S. federal income taxation on a portion of their income, which
would reduce their net income.
On 2 August 2002, the U.S. Treasury Department issued revised proposed treasury
regulations under Section 883 relating to income derived by foreign
corporations from the international operation of ships and aircraft. The
proposed regulations provide, in general, that a corporation organised in a
qualified foreign country and engaged in the international operation of ships
or aircraft shall exclude qualified income from gross income for purposes of
U.S. federal income taxation provided that the corporation can satisfy certain
ownership requirements, including, among other things, that its stock is
publicly traded. For a discussion of the rules in the proposed treasury
regulations for determining whether a foreign corporation will be considered to
be publicly-traded, see paragraph 11 of Part A of Section 4 under the heading
"Exemption under Section 883 of the Internal Revenue Code".
Carnival believes that it currently qualifies as a publicly traded corporation
under the proposed regulations and substantially all of its income, with the
exception of its U.S. source income from the transportation, hotel and tour
business of Holland America Tours, would continue to be exempt from U.S.
federal income taxes. However, because various members of the Arison family and
trusts established for their benefit currently own approximately 47 per cent.
of the Carnival shares, there is the potential that another shareholder could
acquire 5 per cent. or more of the Carnival shares, which could jeopardise
Carnival's qualification as a publicly traded corporation. If, in the future,
Carnival were to fail to qualify as a publicly traded corporation, Carnival and
all of its ship-owning or operating subsidiaries would be subject to U.S.
federal income tax on their income associated with their cruise operations in
the U.S. In such event, the net income of Carnival and that of its ship-owning
or operating subsidiaries would be materially reduced, which would likely have
a significant negative impact on its stock price.
As a precautionary matter, Carnival amended its second amended and restated
articles of incorporation to ensure that it will continue to qualify as a
publicly traded corporation under the proposed regulations. This amendment
provides that no one person or group of related persons, other than certain
members of the Arison family and trusts established for their benefit, may own
or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code more than 4.9 per cent. of the Carnival shares, whether measured
by vote, value or number of shares. Any Carnival shares acquired in violation
of this provision will be transferred to a trust and, at the direction of the
Carnival board of directors, sold to a person whose shareholding does not
violate that provision. No profit for the purported transferee may be realised
from any such sale. In addition, under specified circumstances, the trust may
transfer the common stock at a loss to the purported transferee. Because
certain of Carnival notes are convertible into Carnival shares, the transfer of
these notes are subject to similar restrictions. These transfer restrictions
may also have the effect of delaying or preventing a change in the control of
Carnival or other transactions in which the shareholders might receive a
premium for their Carnival shares over the then prevailing market price or
which the shareholders might believe to be otherwise in their best interest.
Exemption under applicable income tax treaties
Carnival believes that the income of some of its ship-owning or operating
subsidiaries currently qualifies for exemption from U.S. federal income tax
under applicable bilateral U.S. income tax treaties. These treaties may be
abrogated by either applicable country, replaced or modified with new
agreements that treat shipping income differently than under the agreements
currently in force. If any of Carnival's subsidiaries that currently claim
exemption from U.S. taxation on their U.S. source
41
shipping income under an applicable treaty do not qualify for benefits under
the existing treaties or if the existing treaties are abrogated, replaced or
materially modified in a manner adverse to the interests of Carnival and, with
respect to U.S. federal income tax only, if any of its subsidiaries do not
qualify for Section 883 exemption, Carnival's ship-owning or operating
subsidiaries may be subject to U.S. federal income taxation on a portion of
their income, which would reduce Carnival's net income.
In the absence of an exemption under Section 883 or any applicable U.S. income
tax treaty, as appropriate, Carnival and/or its subsidiaries would be subject
to either the net income and branch profits tax regimes of Section 882 and
Section 884 of the Internal Revenue Code (the "net tax regime") or the four per
cent. of gross income tax regime of Section 887 of the Internal Revenue Code
(the "four per cent tax regime") described in more detail in paragraph 11 of
Part A of Section 4 under the heading "Taxation in the absence of an exemption
under Section 883 or any applicable U.S. income tax treaty".
U.S. federal income tax consequences of the DLC transaction for U.S. holders
The following is a discussion of the material U.S. federal income tax
consequences which, in the opinion of Carnival's U.S. tax advisers, are
generally applicable to U.S. holders of Carnival shares in respect of the DLC
transaction. This discussion is based upon existing U.S. federal income tax
law, including the Internal Revenue Code, proposed, temporary and final
Treasury Regulations, certain current income tax treaties, administrative
pronouncements, and judicial decisions, as in effect as of the date hereof, all
of which are subject to change, possibly with retroactive effect. Carnival has
not and will not seek a ruling from the Internal Revenue Service with respect
to the U.S. federal income tax consequences described below and, as a result,
there can be no assurance that the Internal Revenue Service will agree with, or
that a court will uphold, any of the conclusions set forth herein.
This discussion assumes that each of the Carnival shares has been held as a
capital asset as defined in Section 1221 of the Internal Revenue Code in the
hands of the U.S. holder at all relevant times. This discussion assumes that
Carnival is not a "controlled foreign corporation," "foreign personal holding
company" or "passive foreign investment company" ("PFIC") for U.S. federal
income tax purposes. This discussion does not address state, local or foreign
tax consequences to U.S. holders, nor does this discussion discuss all the tax
consequences that may be relevant to a U.S. holder in light of such holder's
particular circumstances or to U.S. holders subject to special rules, including
certain financial institutions, regulated investment companies, insurance
companies, dealers in securities, tax-exempt organisations, persons who hold
Carnival shares as part of a position in a "straddle" or "appreciated financial
position" or as part of a "hedging" or "conversion" transaction, persons that
own or have owned, actually or constructively, 10 per cent. or more of the
Carnival shares, persons who acquired their Carnival shares through the
exercise or cancellation of employee stock options or otherwise as compensation
for services, U.S. holders whose functional currency is not the U.S. dollar and
holders of Carnival shares that are not U.S. holders.
Although there is no U.S. federal income tax authority addressing the tax
consequences of a dual listed company transaction, Carnival believes that the
DLC transaction should not give rise to taxable income or gain for U.S.
Carnival shareholders for U.S. federal income tax purposes. However, the
Internal Revenue Service may assert that U.S. Carnival shareholders received
taxable income as a result of the various voting and equalisation provisions
necessary to implement the DLC structure. Carnival believes that such voting
and other rights, if any, received by shareholders are expected to have only
nominal value and, therefore, the receipt of such rights by U.S. Carnival
shareholders would only result in a nominal amount of income. It is possible,
however, that the Internal Revenue Service may disagree with this conclusion.
Holders of Carnival shares should consult their independent professional
advisers in the light of their particular circumstances as to the U.S. federal
income tax consequences of the DLC transaction, as well as to the effect of any
state, local or applicable foreign tax law.
10. Where you can find additional information about Carnival
Carnival is required to comply with the reporting requirements of the Exchange
Act and, in accordance with those requirements, Carnival files reports, proxy
statements and other information with the SEC. You can inspect and copy these
reports, proxy statements and other information at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC.
In addition, the SEC maintains a website (www.sec.gov) that contains the
reports, proxy statements and other information that Carnival has filed.
Material that Carnival has filed may also be inspected at the library of the
NYSE, 20 Broad Street, New York, New York 10005.
42
11. Dividends
For each of the years ended 30 November 2002, 30 November 2001 and 30 November
2000, Carnival paid a quarterly dividend of U.S.$0.105 per share (a total of
U.S.$0.42 per share).
2002 2001 2000
Quarter ending 28 February - $0.105 per share (2001 - $0.105,
2000 - $0.105) $ 61.5 $ 61.4 $ 64.8
Quarter ending 31 May - $0.105 per share (2001 - $0.105, 2000 - $0.105) 61.6 61.4 64.8
Quarter ending 31 August - $0.105 per share (2001 - $0.105, 2000 -
$0.105) 61.6 61.5 63.3
Quarter ending 30 November - $0.105 per share (2001 - $0.105,
2000 - $0.105) 61.6 61.5 61.4
------ ------ ------
Total $246.3 $245.8 $254.3
====== ====== ======
43
Part B. Financial information on Carnival
Carnival financial information for the three years ended 30 November 2002
The consolidated financial information below for the years ended 30 November
2002, 2001 and 2000 has been extracted from Carnival's audited consolidated
financial statements for the years ended 30 November 2002, 2001 and 2000
without material adjustment. PricewaterhouseCoopers LLP Miami, Florida, U.S.A.
has issued unqualified audit opinions on each of the three years. The financial
information is presented under U.S. GAAP.
44
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
Years ended November 30,
2002 2001 2000
Revenues $4,368,269 $4,535,751 $3,778,542
---------- ---------- ----------
Costs and Expenses
Operating 2,311,919 2,468,730 2,058,342
Selling and administrative 611,948 618,664 487,403
Depreciation and amortization 382,343 372,224 287,667
Impairment charge 20,000 140,378 --
Loss (income) from affiliated operations, net -- 44,024 (37,828)
---------- ---------- ----------
3,326,210 3,644,020 2,795,584
---------- ---------- ----------
Operating Income 1,042,059 891,731 982,958
---------- ---------- ----------
Nonoperating (Expense) Income
Interest income 32,140 34,255 16,506
Interest expense, net of capitalized interest (110,740) (120,692) (41,372)
Other (expense) income, net (4,080) 108,649 8,460
---------- ---------- ----------
(82,680) 22,212 (16,406)
---------- ---------- ----------
Income Before Income Taxes 959,379 913,943 966,552
Income Tax Benefit (Expense), Net 56,562 12,257 (1,094)
---------- ---------- ----------
Net Income $1,015,941 $ 926,200 $ 965,458
========== ========== ==========
Earnings Per Share:
Basic $ 1.73 $ 1.58 $ 1.61
========== ========== ==========
Diluted $ 1.73 $ 1.58 $ 1.60
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
45
CARNIVAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
November 30,
2002 2001 2000
Assets
Current Assets
Cash and cash equivalents $ 666,700 $ 1,421,300 $ 189,282
Short-term investments 39,005 36,784 5,470
Accounts receivable, net 108,327 90,763 95,361
Inventories 91,310 91,996 100,451
Prepaid expenses and other 148,420 113,798 158,918
Fair value of hedged firm commitments 78,390 204,347 --
----------- ----------- ----------
Total current assets 1,132,152 1,958,988 549,482
Property and Equipment, Net 10,115,404 8,390,230 8,001,318
Investments in and Advances to Affiliates -- -- 437,391
Goodwill 681,056 651,814 701,385
Other Assets 297,175 188,915 141,744
Fair Value of Hedged Firm Commitments 109,061 373,605 --
----------- ----------- ----------
$12,334,848 $11,563,552 $9,831,320
=========== =========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ 148,642 $ 21,764 $ 248,219
Accounts payable 268,687 269,467 332,694
Accrued liabilities 290,391 298,032 302,585
Customer deposits 770,637 627,698 770,425
Dividends payable 61,612 61,548 61,371
Fair value of derivative contracts 79,837 201,731 --
----------- ----------- ----------
Total current liabilities 1,619,806 1,480,240 1,715,294
----------- ----------- ----------
Long-Term Debt 3,011,969 2,954,854 2,099,077
Deferred Income and Other Long-Term Liabilities 170,814 157,998 146,332
Fair Value of Derivative Contracts 114,356 379,683 --
Commitments and Contingencies (Notes 7 and 8)
Shareholders' Equity
Common stock; $.01 par value; 960,000 shares
authorized; 586,788 shares issued and outstanding at
2002 (620,019 and 617,568 shares issued at 2001 and
2000 respectively) 5,868 6,200 6,176
Additional paid-in capital 1,089,125 1,805,248 1,772,897
Retained earnings 6,325,850 5,556,296 4,884,023
Unearned stock compensation (11,181) (12,398) (12,283)
Accumulated other comprehensive income (loss) 8,241 (36,932) (75,059)
Treasury stock; 33,848 in 2001 and 33,087 in 2000
shares at cost -- (727,637) (705,137)
----------- ----------- ----------
Total shareholders' equity 7,417,903 6,590,777 5,870,617
----------- ----------- ----------
$12,334,848 $11,563,552 $9,831,320
=========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
46
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended November 30,
2002 2001 2000
Operating Activities
Net income $ 1,015,941 $ 926,200 $ 965,458
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 382,343 372,224 287,667
Impairment charge 20,000 140,378 --
Gain on sale of investments in affiliates, net -- (116,698) --
Loss (income) from affiliated operations and dividends
received -- 56,910 (21,362)
Accretion of original issue discount 19,294 2,174 199
Other 14,664 19,025 (14,888)
Changes in operating assets and liabilities, excluding
businesses acquired and consolidated
(Increase) decrease in
Receivables (5,452) (7,134) (15,132)
Inventories 1,667 8,455 (8,205)
Prepaid expenses and other (80,593) 43,691 (21,972)
(Decrease) increase in:
Accounts payable (12,011) (63,227) 58,133
Accrued and other liabilities (28,380) (335) (5,977)
Customer deposits 141,559 (142,727) 55,614
----------- ----------- -----------
Net cash provided by operating activities 1,469,032 1,238,936 1,279,535
----------- ----------- -----------
Investing Activities
Additions to property and equipment, net (1,986,482) (826,568) (1,003,348)
Proceeds from sale of investments
in affiliates -- 531,225 --
Proceeds from sale of property and equipment 4,071 15,000 51,350
Acquisition of consolidated subsidiary, net -- -- (383,640)
Sale (purchase) of short-term investments, net 2,213 (33,395) 22,170
Other, net (39,855) (28,178) 21,441
----------- ----------- -----------
Net cash used in investing activities (2,020,053) (341,916) (1,292,027)
----------- ----------- -----------
Financing Activities
Proceeds from issuance of long-term debt 231,940 2,574,281 1,020,091
Purchase of treasury stock -- -- (705,137)
Principal repayments of long-term debt (189,678) (1,971,026) (388,429)
Dividends paid (246,323) (245,844) (254,333)
Proceeds from issuance of common stock, net 7,240 5,274 7,811
Other, principally debt issuance costs (1,544) (25,531) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (198,365) 337,154 (319,997)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (5,214) (2,156) --
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (754,600) 1,232,018 (332,489)
Cash and cash equivalents at beginning of year 1,421,300 189,282 521,771
----------- ----------- -----------
Cash and cash equivalents at end of year $ 666,700 $ 1,421,300 $ 189,282
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
47
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Additional Unearned
Comprehensive Common paid-in Retained stock
income stock capital earnings compensation
------------- ------ ---------- ---------- ------------
Balances at November 30, 1999 $6,170 $1,757,408 $4,176,498 $ (9,945)
Comprehensive income:
Net income $ 965,458 965,458
Foreign currency translation adjustment (73,943)
Unrealized losses on marketable securities, net (2,232)
----------
Total comprehensive income $ 889,283
==========
Cash dividends (250,923)
Issuance of stock under stock plans 6 15,489 (5,977)
Amortization of unearned stock compensation 3,639
Effect of conforming Costa's reporting period (7,010)
Purchase of treasury stock
------ ---------- ---------- --------
Balances at November 30, 2000 6,176 1,772,897 4,884,023 (12,283)
Comprehensive income:
Net income $ 926,200 926,200
Foreign currency translation adjustment, net 45,781
Unrealized gains on marketable securities, net 6,411
Minimum pension liability adjustment (5,521)
Changes related to cash flow derivative hedges, net (4,330)
Transition adjustment for cash flow derivative hedges (4,214)
----------
Total comprehensive income $ 964,327
==========
Cash dividends (246,021)
Issuance of stock under stock plans 24 32,351 (4,601)
Amortization of unearned stock compensation 4,486
Effect of conforming Airtours' reporting period (7,906)
------ ---------- ---------- --------
Balances at November 30, 2001 6,200 1,805,248 5,556,296 (12,398)
Comprehensive income:
Net income $1,015,941 1,015,941
Foreign currency translation adjustment 51,294
Minimum pension liability adjustment (9,166)
Unrealized gains on marketable securities, net 2,579
Changes related to cash flow derivative hedges, net 466
----------
Total comprehensive income $1,061,114
==========
Cash dividends (246,387)
Issuance of stock under stock plans 6 11,176 (3,942)
Retirement of treasury stock (338) (727,299)
Amortization of unearned stock compensation 5,159
------ ---------- ---------- --------
Balances at November 30, 2002 $5,868 $1,089,125 $6,325,850 $(11,181)
====== ========== ========== ========
Accumulated
other Total
comprehensive Treasury shareholders'
income (loss) stock equity
------------- --------- -------------
Balances at November 30, 1999 $ 1,116 $5,931,247
Comprehensive income:
Net income 965,458
Foreign currency translation adjustment (73,943) (73,943)
Unrealized losses on marketable securities, net (2,232) (2,232)
Total comprehensive income
Cash dividends (250,923)
Issuance of stock under stock plans 9,518
Amortization of unearned stock compensation 3,639
Effect of conforming Costa's reporting period (7,010)
Purchase of treasury stock $(705,137) (705,137)
-------- --------- ----------
Balances at November 30, 2000 (75,059) (705,137) 5,870,617
Comprehensive income:
Net income 926,200
Foreign currency translation adjustment, net 45,781 45,781
Unrealized gains on marketable securities, net 6,411 6,411
Minimum pension liability adjustment (5,521) (5,521)
Changes related to cash flow derivative hedges, net (4,330) (4,330)
Transition adjustment for cash flow derivative hedges (4,214) (4,214)
Total comprehensive income
Cash dividends (246,021)
Issuance of stock under stock plans (22,500) 5,274
Amortization of unearned stock compensation 4,486
Effect of conforming Airtours' reporting period (7,906)
-------- --------- ----------
Balances at November 30, 2001 (36,932) (727,637) 6,590,777
Comprehensive income:
Net income 1,015,941
Foreign currency translation adjustment 51,294 51,294
Minimum pension liability adjustment (9,166) (9,166)
Unrealized gains on marketable securities, net 2,579 2,579
Changes related to cash flow derivative hedges, net 466 466
Total comprehensive income
Cash dividends (246,387)
Issuance of stock under stock plans 7,240
Retirement of treasury stock 727,637
Amortization of unearned stock compensation 5,159
-------- --------- ----------
Balances at November 30, 2002 $ 8,241 $ $7,417,903
======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
48
CARNIVAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
Description of Business
Carnival Corporation is a Panamanian corporation and, together with its
consolidated subsidiaries, is referred to collectively in these consolidated
financial statements and elsewhere in this 2002 Annual Report as "our," "us"
and "we." We are a global cruise vacation and leisure travel provider that
operates six cruise lines under the brand names Carnival Cruise Lines ("CCL"),
Costa Cruises ("Costa"), Cunard Line ("Cunard"), Holland America Line ("Holland
America"), Seabourn Cruise Line ("Seabourn") and Windstar Cruises ("Windstar")
and a tour business, Holland America Tours ("Tours"). CCL operates eighteen
cruise ships with destinations primarily to the Caribbean, the Bahamas and the
Mexican Riviera. Holland America operates eleven cruise ships with destinations
primarily to Alaska, the Caribbean and Europe. Costa operates eight cruise
ships with destinations primarily to Europe, the Caribbean and South America.
Cunard operates two premium/luxury cruise ships and Seabourn and Windstar each
operate three luxury cruise ships with destinations to the Caribbean, Europe,
Central America, Tahiti and other worldwide destinations. Our current fleet of
45 ships has a passenger capacity of 67,282 lower berths. Tours is a leading
cruise/tour operator in Alaska and the Canadian Yukon. Tours also markets
sightseeing packages, both separately and as a part of our cruise/tour packages.
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 material intercompany accounts, transactions and
unrealized profits and losses on transactions within our consolidated group and
with affiliates are eliminated in consolidation.
Note 2 - Summary Of Significant Accounting Policies
Basis of Presentation
We consolidate subsidiaries over which we have control, 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. See Note 5.
Prior to our acquisition of Costa in late fiscal 2000, we accounted for our 50%
interest in Costa using the equity method and recorded our portion of Costa's
operating results as earnings from affiliated operations on a two-month lag
basis. As of November 30, 2000, we changed how we report Costa's operating
results from a two-month lag basis to reporting on Costa's current month's
results. Accordingly, our November 30, 2000 consolidated balance sheet included
Costa's November 30, 2000 balance sheet. The impact of conforming Costa's
reporting period on our fiscal 2000 revenues, operating income and net income
was not material. Commencing in fiscal 2001, Costa's results of operations were
also consolidated on a current month basis in the same manner as our other
wholly-owned subsidiaries. See Note 17.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents including investments with original maturities of
three months or less are stated at cost. At November 30, 2002 and 2001, cash
and cash equivalents included $616 million and $1.38 billion of investments,
respectively, primarily comprised of strong investment grade asset-backed debt
obligations and money market funds.
Short-term investments are comprised of marketable debt and equity securities
which are categorized as available for sale and, accordingly, are stated at
their fair values. Unrealized gains and losses are included as a component of
accumulated other comprehensive income (loss) ("AOCI") within shareholders'
equity until realized. The specific identification method is used to determine
realized gains or losses.
49
Inventories
Inventories consist primarily of provisions, spare parts, supplies and fuel
carried at the lower of cost or market. Cost is determined using the weighted
average or first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization was
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
Buildings and improvements 0-10% 5-40
Transportation equipment and other 0-25% 2-20
Leasehold improvements, including port facilities Shorter of lease term or
related asset life
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
fully recoverable. The assessment of possible impairment is based on our
ability to recover the carrying value of our asset based on our estimate of its
undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of the asset, an impairment charge is
recognized for the excess, if any, of the assets carrying value over its
estimated fair value (see Notes 4 and 16).
Dry-dock costs are included in prepaid expenses and are amortized to operating
expenses using the straight-line method generally over one year.
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. We
capitalize interest on ships and other capital projects during their
construction period. Upon the replacement or refurbishment of previously
capitalized ship components, these assets' estimated cost and accumulated
depreciation are written-off and any resulting gain or loss is recognized in
our results of operations. No such material gains or losses were recognized in
fiscal 2002, 2001 or 2000. See Note 3.
Gains or losses on the sale of property and equipment are classified as
nonoperating other income or expense. In fiscal 2002, we realized an $8 million
loss on the sale of the former Nieuw Amsterdam.
Goodwill
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" requires companies to stop amortizing goodwill and
requires an annual, or when events or circumstances dictate a more frequent,
impairment review of goodwill. Accordingly, upon adoption of SFAS No. 142 on
December 1, 2001, we ceased amortizing our goodwill, all of which has been
allocated to our Costa, Cunard and Holland America reportable units, which are
all part of our reportable cruise segment. We completed the transitional and
annual impairment tests of these reporting units' existing goodwill as of
December 1, 2001 and July 31, 2002, respectively, and determined that their
goodwill was not impaired. There has been no change to our goodwill carrying
amount since November 30, 2001, other than the change resulting from using a
different foreign currency translation rate at November 30, 2002 compared to
November 30, 2001. If goodwill amortization, including goodwill expensed as
part of our loss or income from affiliated operations, had not been recorded
for fiscal 2001 and 2000 our adjusted net income and adjusted basic and diluted
earnings per share would have been as follows (in thousands, except per share
amounts):
2001 2000
Net income $926,200 $965,458
Goodwill amortization 25,480 23,046
-------- --------
Adjusted net income $951,680 $988,504
======== ========
Adjusted earnings per share
Basic $ 1.63 $ 1.65
======== ========
Diluted $ 1.62 $ 1.64
======== ========
50
The SFAS No. 142 goodwill impairment review consists 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.
Prior to fiscal 2002, our goodwill was reviewed for impairment pursuant to the
same policy as our other long-lived assets as discussed above (see Note 4) and
our goodwill was amortized over 40 years using the straight-line method. In
addition, accumulated goodwill amortization at November 30, 2001 was $118
million.
Derivative Instruments and Hedging Activities
We utilize derivative instruments, such as forward foreign currency contracts
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 Note 11).
Our most significant contracts to buy foreign currency are forward contracts
entered into to fix the cost in United States ("U.S.") dollars of seven of our
foreign currency denominated shipbuilding commitments (see Note 7). If our
shipbuilding contract is denominated in the functional currency of the cruise
line that is expected to be operating the ship, we have not entered into a
forward foreign currency contract to hedge that commitment.
Effective December 1, 2000, we adopted SFAS No. 133, as amended, "Accounting
for Derivative Instruments and Hedging Activities," which requires that all
derivative instruments be recorded on our balance sheet at their fair values.
Derivatives that are not hedges must be recorded at fair value and the changes
in fair value must be immediately included in earnings. 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 firm commitment.
If a derivative is a cash flow hedge, then changes in the fair value of the
derivative are recognized as a component of AOCI until the underlying hedged
item is recognized in earnings. The ineffective portion of a hedge derivative's
change in fair value is immediately recognized in earnings. 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. Upon adoption, we recorded an adjustment of $4.2 million in AOCI
to record the unrealized net losses from our cash flow hedges that existed on
December 1, 2000.
The total $187 million and $578 million of current and long-term fair value of
hedged firm commitment assets on our November 30, 2002 and 2001 balance sheets,
respectively, includes $178 million and $567 million, respectively, of
unrealized gains on our shipbuilding commitments denominated in foreign
currencies because of the strengthening of the dollar compared to the euro. In
addition, the total $194 million and $581 million of fair value of derivative
contract liabilities on our November 30, 2002 and 2001 balance sheets,
respectively, includes $178 million and $567 million of unrealized losses on
our forward foreign currency contracts relating to those same shipbuilding
commitments, which are used to fix the cost of our shipbuilding commitments in
U.S. dollars, and effectively offsets the related hedged firm commitment assets.
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
liabilities and assets depending on whether the maturity date of the derivative
contract is within or beyond one year from our balance sheet dates,
respectively. 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.
Derivative gains and losses included in AOCI are reclassified into earnings at
the same time the underlying hedged transaction is recorded in earnings. During
fiscal 2002 and 2001, 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 2002 and
2001, and the amount of estimated unrealized net losses which are expected to
be reclassified to earnings in the next twelve
51
months is not material. At November 30, 2002 and 2001, AOCI included $8 million
and $8.5 million of unrealized net losses, respectively, from cash flow hedge
derivatives, which were substantially all variable to fixed interest rate swap
agreements.
Finally, if any of the three shipyards with which we have contracted to build
our ships is unable to perform, we would still be required to perform under our
foreign currency forward contracts related to that shipyard's shipbuilding
contracts. Accordingly, based upon the circumstances, we may have to
discontinue the accounting for those forward contracts as hedges, if the
shipyard cannot perform.
Prior to fiscal 2001, changes in the fair values of and any discounts or
premiums on, our shipbuilding forward foreign currency contract hedges were
recorded at maturity, which coincided with the dates when the related foreign
currency payments were to be made, with any resulting gains or losses recorded
as a decrease or increase, respectively, to the cost paid for our ships.
Revenue and Expense Recognition
Guest cruise deposits represent unearned revenues and are initially recorded as
customer deposit liabilities on our balance sheet when received. Customer
deposits are subsequently recognized as cruise revenues, together with revenues
from onboard activities and all associated direct costs of a voyage, generally
upon completion of voyages with durations of ten days or less and on a pro rata
basis for voyages in excess of ten days. Future travel discount vouchers issued
to guests are recorded as a reduction of revenues when such vouchers are
utilized. Revenues and expenses from our tour and related services are
recognized at the time the services are performed or expenses are incurred.
Advertising Costs
Substantially all of our advertising costs are charged to expense as incurred,
except costs which result in tangible assets, such as brochures, which are
recorded as prepaid expenses and charged to expense as consumed. Media
production costs are also recorded as prepaid expenses and charged to expense
upon the first airing of the advertisement. Advertising expenses totaled $208
million, $214 million and $181 million in fiscal 2002, 2001 and 2000,
respectively. At November 30, 2002 and 2001, the amount of advertising costs
included in prepaid expenses was not material.
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. Translation adjustments resulting from this
process are reported in AOCI. Revenues and expenses of these foreign
subsidiaries and affiliates are translated at weighted-average exchange rates
for the period. Exchange gains and losses arising from transactions denominated
in a currency other than the functional currency of the entity involved are
immediately included in our earnings.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock, common stock equivalents and
other potentially dilutive securities outstanding during each period. See Note
14.
Stock-Based Compensation
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," we elected
to use the intrinsic value method of accounting for our employee and director
stock-based compensation awards. Accordingly, we have not recognized
compensation expense for our noncompensatory employee and director stock option
awards. Our pro forma net income and earnings per share for fiscal 2002 and
2001, had we elected to adopt the fair value approach of SFAS No. 123, which
charges earnings for the estimated fair value of stock options, would have been
$991 million and $904 million and $1.69 and $1.54, respectively, and would not
have been materially different from reported net income and earnings per share
for fiscal 2000.
As determined below, the weighted-average fair values of options we granted
during fiscal 2002, 2001 and 2000 were $12.16, $12.67 and $13.31 per share,
respectively, at the dates of grant. As
52
recommended by SFAS No. 123, the fair values of options were estimated using
the Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 2002, 2001 and 2000, respectively; expected dividend
yields of 1.23%, 1.16% and 1.17%; expected volatility of 48.0%, 50.0% and
28.9%; risk free interest rates of 4.3%, 4.5% and 6.4%; and expected option
life of six years for all periods.
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting or trading restrictions and
are fully transferable. In addition, option-pricing models require the input of
subjective assumptions, including expected stock price volatility. Because our
options have characteristics different from those of traded options, the
existing models do not necessarily provide a reliable single measure of the
fair value of our options.
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. We have experienced only minimal credit losses on our trade
receivables. We do not normally require collateral or other security to support
normal credit sales. However, we do normally require collateral and/or
guarantees to support notes receivable on significant asset sales and new ship
progress payments to shipyards.
Reclassifications
Reclassifications have been made to prior year amounts to conform to the
current year presentation.
Note 3 - Property and Equipment
Property and equipment consisted of the following (in thousands):
November 30,
2002 2001
Ships $10,665,958 $ 8,892,412
Ships under construction 712,447 592,781
----------- -----------
11,378,405 9,485,193
Land, buildings and improvements, and port facilities 314,448 264,294
Transportation equipment and other 409,310 349,188
----------- -----------
Total property and equipment 12,102,163 10,098,675
Less accumulated depreciation and amortization (1,986,759) (1,708,445)
----------- -----------
$10,115,404 $ 8,390,230
=========== ===========
Capitalized interest, primarily on our ships under construction, amounted to
$39 million, $29 million and $41 million in fiscal 2002, 2001 and 2000,
respectively. 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, 2002, two ships with an aggregate net book value of $623 million
were pledged as collateral pursuant to a $119 million note and a $463 million
contingent obligation (see Notes 6 and 8).
Maintenance and repair expenses and dry-dock amortization were $175 million,
$160 million and $132 million in fiscal 2002, 2001 and 2000, respectively.
Note 4 - Impairment Charge
During fiscal 2002 and 2001 we reviewed our long-lived assets and goodwill for
which there were indications of possible impairment or as required annually
pursuant to SFAS No. 142. As a result of
53
these reviews, in fiscal 2002 we reduced the carrying value of one of our ships
by recording an impairment charge of $20 million. In fiscal 2001, we recorded
an impairment charge of $140 million, which consisted principally of a $71
million reduction in the carrying value of ships, a $36 million write-off of
Seabourn goodwill, a $15 million write-down of a Holland America note
receivable and a $11 million loss on the sale of the Seabourn Goddess I and II.
The impaired ships' and note receivable fair values were based on third party
appraisals, negotiations with unrelated third parties or other available
evidence, and the fair value of the impaired goodwill was based on our
estimates of discounted future cash flows.
Note 5 - Investments In and Advances To Affiliates
On June 1, 2001, we sold our investment in Airtours plc, which resulted in a
nonoperating net gain of $101 million and net cash proceeds of $492 million.
Cumulative foreign currency translation losses of $59 million were reclassified
from AOCI and included in determining this 2001 net gain. We also recorded a
direct charge of $8 million to our retained earnings in fiscal 2001, which
represented our share of Airtours' losses for April and May 2001, since
Airtours results were reported on a two-month lag.
In fiscal 2001, we sold our interest in CRC Holdings, Inc. ("CRC") to an
unrelated third party, which resulted in a nonoperating net gain of $16 million
and net cash proceeds of $39 million. One of the members of our Board of
Directors was a principal shareholder in CRC.
Dividends received from affiliates were $13 million and $16 million in fiscal
2001 and 2000, respectively, which reduced the carrying value of our
investments in affiliates in accordance with the equity method of accounting.
Income statement and segment information for fiscal 2000 for our affiliated
companies accounted for using the equity method, including Airtours and Costa,
was as follows: revenues - $6.7 billion, gross margin - $1.3 billion, operating
income - $5 million, depreciation and amortization - $152 million, net income -
$20 million and capital expenditures - $650 million. Since we sold our interest
in Airtours and CRC during fiscal 2001, no data has been presented for fiscal
2002 and 2001.
Note 6 - Long-Term Debt
Long-term debt consisted of the following (in thousands):
November 30,
2002/(a)/ 2001/(a)/
Euro floating rate note, collateralized by one Costa ship, bearing interest at
euribor plus 0.5% (4.0% and 4.8% at November 30, 2002 and 2001,
respectively), due through 2008 $ 118,727 $ 125,770
Unsecured fixed rate notes, bearing interest at rates ranging from 6.15% to
7.7%, due through 2028/(b)/ 848,900 848,779
Unsecured floating rate euro notes, bearing interest at rates ranging from
euribor plus 0.35% to euribor plus 0.53% (3.6% to 4.0% and 3.9% to
4.9% at November 30, 2002 and 2001, respectively), due 2005 and 2006 680,377 604,068
Unsecured fixed rate euro notes, bearing interest at 5.57%, due in 2006 297,195 266,223
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 44,468 29,833
Unsecured 2% convertible notes, due in 2021 600,000 600,000
Unsecured zero-coupon convertible notes, net of discount, with a face value
of $1.05 billion, due in 2021 520,944 501,945
---------- ----------
3,160,611 2,976,618
Less portion due within one year (148,642) (21,764)
---------- ----------
$3,011,969 $2,954,854
========== ==========
--------
(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.
At November 30, 2002 and 2001, 65% and 66% of our debt was U.S. dollar
denominated and 35% and 34% was euro denominated, respectively.
(b)These notes are not redeemable prior to maturity.
54
Our unsecured 2% convertible notes ("2% Notes") and our zero-coupon convertible
notes ("Zero-Coupon Notes") are convertible into 15.3 million shares and 17.4
million shares, respectively, of our common stock. Our 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 our common stock is greater than
$43.05 per share for a defined duration of time. Our Zero-Coupon Notes have a
3.75% yield to maturity and are convertible during any fiscal quarter for which
the closing price of our common stock reaches certain targeted levels for a
defined duration of time. These levels commenced at a low of $31.94 per share
for the first quarter of fiscal 2002 and increase at an annual rate of 3.75%
thereafter, until maturity. The conditions for conversion of our 2% Notes or
Zero-Coupon Notes were not met during fiscal 2002 and 2001.
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, and subsequent to October
23, 2008, we may redeem all or a portion of our Zero-Coupon Notes at their
accreted value.
In addition, on April 15 of 2005, 2008 and 2011 our 2% Noteholders and on
October 24 of 2006, 2008, 2011 and 2016 our Zero-Coupon Noteholders may require
us to repurchase all or a portion of the outstanding 2% Notes at their face
value plus any unpaid accrued interest and the Zero-Coupon Notes at their
accreted value.
Upon conversion, redemption or repurchase of our 2% Notes and Zero-Coupon Notes
we may choose to deliver common stock, cash or a combination of cash and common
stock with a total value equal to the value of the consideration otherwise
deliverable. If our 2% Notes and Zero-Coupon Notes were to be put back to us,
we expect to settle them for cash and, accordingly, they are not included in
our diluted earnings per share common stock calculations. However, no assurance
can be given that we will have sufficient liquidity to make such cash payments.
See Note 14.
In May 2001, Costa entered into a five-year 257.5 million euro (255.6 million
U.S. dollars at the November 30, 2002 exchange rate) unsecured floating rate
euro denominated revolving credit facility, of which $145 million was available
at November 30, 2002.
Our $1.4 billion unsecured multi-currency revolving credit facility matures in
June 2006. This facility currently bears interest at libor/euribor plus 17
basis points ("BPS"), which interest rate spread over libor/euribor will vary
based on changes to our senior unsecured debt ratings, and provides for an
undrawn facility fee of eight BPS. Our commercial paper program is supported by
this revolving credit facility and, accordingly, any amounts outstanding under
our commercial paper program, none at November 30, 2002 and 2001, reduce the
aggregate amount available under this facility. At November 30, 2002, $1.35
billion of this facility was available. This facility and other of our loan
agreements contain covenants that require us, among other things, to maintain a
minimum debt service coverage and limits our debt to tangible capital ratio and
the amount of our secured indebtedness. In addition, our ability to draw upon
the then available portion of our $1.4 billion credit facility could be
terminated and we could also be required to repay the amounts outstanding under
our one collateralized and three unsecured euro notes, which amounted to $722
million at November 30, 2002, if our business suffers a material adverse
change. At November 30, 2002, we were in compliance with all of our debt
covenants.
At November 30, 2002, the scheduled annual maturities of our long-term debt was
as follows (in thousands):
Fiscal
2003 $ 148,642
2004 127,985
2005 907,648/(a)/
2006 1,387,209/(a)/
2007 22,833
Thereafter 566,294
-------------
$ 3,160,611
=============
--------
(a)Includes $600 million of our 2% Notes in 2005 and $521 million of our
Zero-Coupon Notes in 2006 based on the date of the noteholders first put
option.
55
Debt issuance costs are generally amortized to interest expense using the
straight-line method over the term of the notes or to the noteholders first put
option date, whichever is earlier. In addition, all loan issue discounts are
amortized to interest expense using the effective interest method over the term
of the notes.
Note 7 - Commitments
Ship Commitments
A description of our ships under contract for construction at November 30, 2002
was as follows (in millions, except passenger capacity data):
Expected Estimated
Service Passenger Total
Ship Date/(1)/ Shipyard Capacity/(2)/ Cost/(3)/
CCL
Carnival Glory 7/03 Fincantieri 2,974 $ 510
Carnival Miracle 3/04 Masa-Yards/(4)/ 2,124 375
Carnival Valor 11/04 Fincantieri/(4)/ 2,974 510
Newbuild 1/06 Fincantieri 2,974 460
------ ------
Total CCL 11,046 1,855
------ ------
Holland America
Oosterdam 7/03 Fincantieri/(4)/ 1,848 410
Westerdam 5/04 Fincantieri/(4)/ 1,848 410
Newbuild 11/05 Fincantieri/(4)/ 1,848 410
Newbuild 6/06 Fincantieri 1,848 390
------ ------
Total Holland America 7,392 1,620
------ ------
Costa
Costa Mediterranea 6/03 Masa-Yards/(5)/ 2,114 360
Costa Fortuna 12/03 Fincantieri/(5)/ 2,720 440
Costa Magica 11/04 Fincantieri/(5)/ 2,720 460
------ ------
Total Costa 7,554 1,260
------ ------
Cunard
Queen Mary 2 Chantiers de
1/04 l'Atlantique/(4)/ 2,620 780
Newbuild 2/05 Fincantieri/(4)/ 1,968 410
------ ------
Total Cunard 4,588 1,190
------ ------
Total 30,580 $5,925
====== ======
--------
(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. The $178 million of unrealized losses from these forward
contracts has been recorded as fair value of derivative contract liabilities
on our November 30, 2002 balance sheet and are also included in the above
estimated total cost of these construction 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 November 30, 2002 exchange rate.
In connection with our ships under contract for construction, we have paid
approximately $712 million through November 30, 2002 and anticipate paying the
remaining estimated total cost as follows (in millions):
Fiscal
2003 $1,630
2004 2,110
2005 1,140
2006 330
------
$5,210
======
56
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.
The completion of the DLC transaction between P&O Princess and us is subject to
approval by P&O Princess' shareholders and our shareholders. 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 $30 million of transaction
costs as of November 30, 2002, 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 $30 million plus all costs incurred and deferred subsequent to
November 30, 2002, resulting in an estimated total write-off of approximately
$45 million to $50 million. If the DLC transaction or another transaction with
P&O Princess is completed by us, these deferred costs, together with any
additional direct costs, which may be incurred, would be capitalized as part of
the transaction.
If our agreement with P&O Princess is terminated under certain circumstances,
we would be required to pay P&O Princess a break fee of $49 million. These
circumstances include, among other things, our board of directors withdrawing
or adversely modifying its recommendation to shareholders to approve the DLC
transaction, our board of directors recommending an alternative acquisition
proposal to shareholders, or our shareholders failing to approve the DLC
transaction if a third-party acquisition proposal exists at the time of our
meeting or if we breach our exclusivity covenant and a third party acquisition
proposal with respect to us is completed prior to July 2004. Similarly, P&O
Princess would be obligated to pay us a break fee of $49 million upon the
occurrence of reciprocal circumstances.
If the DLC transaction is completed, we expect to account for it as an
acquisition of P&O Princess by us, which will be accounted for using the
purchase method.
Operating Leases
Rent expense under our operating leases, primarily for office and warehouse
space, was $15 million, $13 million and $10 million in fiscal 2002, 2001 and
2000, respectively. At November 30, 2002,
57
minimum annual rentals for our operating leases, with initial or remaining
terms in excess of one year, were as follows (in thousands):
Fiscal
2003 $10,700
2004 9,300
2005 9,100
2006 9,100
2007 6,000
Thereafter 25,300
-------
$69,500
=======
Port Facilities and Other
At November 30, 2002, we had commitments through 2027, with initial or
remaining terms in excess of one year, to pay minimum amounts for our annual
usage of port facilities and other contractual commitments as follows (in
thousands):
Fiscal
2003 $ 52,100
2004 38,800
2005 25,300
2006 25,800
2007 27,100
Thereafter 179,600
--------
$348,700
========
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 November 30, 2002, approximately $123 million of these
travel vouchers are available to be used for future travel prior to their
expiration, principally in fiscal 2005.
Note 8 - Contingencies
Litigation
Several actions (collectively, the "ADA Complaints") have been filed against
Costa, Cunard and Tours alleging that they violated the Americans with
Disabilities Act by failing to make certain cruise ships accessible to
individuals with disabilities. The plaintiffs seek injunctive relief to require
modifications to certain vessels to increase accessibility to disabled
passengers and fees and costs. Costa and the plaintiffs have agreed to settle
this action, subject to court approval. Cunard and Tours are in ongoing
settlement negotiations with the plaintiffs.
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 pending ADA and 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.
58
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. Recently, 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, the
parties have 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' attorneys 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.
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. We are not able to estimate the impact or the ultimate
outcome of any such actions, which are not covered by insurance.
Contingent Obligations
At November 30, 2002, we had contingent obligations totaling $1.05 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 $285 million of the above noted contingent
obligations, thereby reducing even the 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 $91 million, or alternatively provide mortgages in the aggregate
amount of $91 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 November 30, 2002 have to
pay a total of $180 million in stipulated damages. As of November 30, 2002,
$148 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
59
stipulated damages. An additional $40 million of standby letters of credit
would be required to be issued if our three credit ratings fall below A-/A3.
Between 2017 and 2022, we have the right to exercise options that would
terminate these transactions at no cost to us. We entered into these three
transactions in order to receive $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 9 - Income and Other Taxes
We believe that substantially all of our income, with the exception of our U.S.
source income from the transportation, hotel and tour businesses of Tours, is
exempt from U.S. federal income taxes. 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.
Some of our subsidiaries, including Costa and Tours, are subject to foreign
and/or U.S. income taxes. In fiscal 2002, we recognized a net $57 million
income tax benefit primarily due to a new Italian investment incentive law,
which allowed Costa to receive a $51 million income tax benefit based on
contractual expenditures during 2002 on the construction of new ships. At
November 30, 2002, Costa had a remaining net deferred tax asset of
approximately $45 million relating to the tax benefit of the net operating loss
carryforwards arising from this incentive law, which expire in 2007. In fiscal
2001, we recognized a $9 million income tax benefit from Costa primarily due to
changes in Italian tax law.
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 collected
from passengers by us, are recorded as operating expenses in the
accompanying statements of operations.
Note 10 - 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
November 30, 2002 and 2001, no preferred stock had been issued.
In February 2000, our Board of Directors authorized the repurchase of up to $1
billion of our common stock. As of November 30, 2001, we had repurchased 33.1
million shares of our common stock at a cost of $705 million pursuant to this
authorization. In addition in 2001, we received 761,000 shares of our common
stock from our chief executive officer valued at its quoted market price of $23
million, which we recorded as treasury stock, in payment of the exercise price
for two million shares of our common stock issued to him pursuant to a stock
option plan (see Note 13). In fiscal 2002, we retired all of our treasury stock.
At November 30, 2002, there were 77.5 million shares of our common stock
reserved for issuance pursuant to our convertible notes and our stock option,
employee stock purchase, restricted stock and dividend reinvestment plans.
During fiscal 2002, 2001 and 2000 we declared cash dividends aggregating $0.42
per share for each year.
At November 30, 2002 and 2001, AOCI included cumulative foreign currency
translation adjustments which increased shareholders' equity by $29 million and
decreased shareholders' equity by $22 million, respectively.
Note 11 - Financial Instruments
We estimated the fair value of our financial instruments through the use of
public market prices, quotes from financial institutions and other available
information. Considerable judgment is required in
60
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
The carrying amounts of our cash and cash equivalents approximate their fair
values due to their short maturities.
Other Assets
At November 30, 2002 and 2001, long-term other assets included marketable
securities held in rabbi trusts for certain of our nonqualified benefit plans
and notes and other receivables, principally collateralized by a ship, the
former Nieuw Amsterdam. These assets had carrying and fair values of $173
million at November 30, 2002 and $143 million at November 30, 2001. Fair values
were based on public market prices, estimated discounted future cash flows or
estimated fair value of collateral.
Long-Term Debt
At November 30, 2002 and 2001, the fair value of our long-term debt, including
the current portion, was $3.33 billion and $2.95 billion, respectively, which
was $166 million greater than and $26 million less than its carrying value on
those respective dates. The net difference between the fair value of our
long-term debt and its carrying value was due primarily to our issuance of debt
obligations at fixed interest rates that are below or above market interest
rates in existence at the measurement dates. The fair values of our unsecured
fixed rate notes, convertible notes and unsecured 5.57% euro notes were based
on their public market prices. The fair values of our other long-term debt were
estimated based on appropriate market interest rates being applied to this debt.
Foreign Currency Contracts
We have forward foreign currency contracts, designated as foreign currency fair
value hedges, for seven of our euro denominated shipbuilding contracts (see
Note 7). At November 30, 2002 and 2001, the fair value of these forward
contracts was an unrealized loss of $178 million and $567 million,
respectively. These forward contracts mature through 2005. The fair values of
our forward contracts were estimated based on prices quoted by financial
institutions for these instruments.
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, 2002 and 2001, these interest rate swap
agreements effectively changed $225 million of fixed rate debt with a
weighted-average fixed interest rate of 6.8% 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, 2002 and 2001, these
interest rate swap agreements effectively changed $468 million and $637
million, respectively, of euribor floating rate debt to fixed rate debt with a
weighted-average fixed interest rate of 5.5% and 5.3%, respectively.
These interest rate swap agreements mature through 2006. At November 30, 2002
and 2001, the fair value of our interest rate swaps was a net unrealized loss
of $0.1 million and $3.3 million, respectively. The fair values of our interest
rate swap agreements were estimated based on appropriate market interest rates
being applied to these instruments.
Note 12 - Segment Information
Our cruise segment included six cruise brands (five, excluding Costa, prior to
fiscal 2001), 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 Tours.
61
The significant accounting policies of the segments are the same as those
described in Note 2--"Summary of Significant Accounting Policies." Cruise
revenues included intersegment revenues, which primarily represent billings to
the tour segment for the cruise portion of a tour when a cruise is sold as a
part of a tour package. In addition, cruise and tour operating expenses
included a cost allocation of certain corporate and other expenses. Information
for the cruise and tour segments for fiscal 2002, 2001 and 2000 was as follows
(in thousands):
Operating Depreciation
income and Capital Total
2002 Revenues (loss) amortization expenditures assets
Cruise/(b)/ $4,229,124 $1,065,797/(a)/ $369,565 $1,949,565 $11,399,130
Tour 175,831 (13,401) 11,345 36,802 214,405/(c)/
Intersegment elimination (36,686)
Corporate/(e)/ (10,337) 1,433 115 721,313
---------- ---------- -------- ---------- -----------
$4,368,269 $1,042,059 $382,343 $1,986,482 $12,334,848
========== ========== ======== ========== ===========
2001
Cruise/(b)/ $4,357,942 $ 958,273/(a)/ $359,314 $ 801,453 $ 9,905,353
Tour 229,483 (10,357)/(a)/ 11,474 25,108 188,296/(c)/
Affiliated operations/(d)/ (44,024)
Intersegment elimination (51,674)
Corporate/(e)/ (12,161) 1,436 7 1,469,903
---------- ---------- -------- ---------- -----------
$4,535,751 $ 891,731 $372,224 $ 826,568 $11,563,552
========== ========== ======== ========== ===========
2000
Cruise $3,578,372 $ 957,226 $276,483 $ 972,270 $ 9,093,646/(b)/
Tour 259,662 7,664 10,825 30,129 199,722/(c)/
Affiliated operations 37,828/(b)/ 437,391
Intersegment elimination (59,492)
Corporate(e) (19,760) 359 949 100,561
---------- ---------- -------- ---------- -----------
$3,778,542 $ 982,958 $287,667 $1,003,348 $ 9,831,320
========== ========== ======== ========== ===========
--------
(a)Cruise operating income included impairment charges of $20 million in 2002
and $134 million in 2001 and Tour operating loss included $6 million in 2001
(see Note 4).
(b)In 2002 and 2001, the cruise segment information included Costa. At November
30, 2000, Costa's total assets were included in the cruise segment, but its
2000 results of operations were included in the affiliated operations
segment (See Notes 2 and 17).
(c)Tour assets primarily included hotels in Alaska and the Canadian Yukon,
luxury dayboats offering tours to the glaciers of Alaska and the Yukon
River, motor coaches 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 are run on the Alaska Railroad between
Anchorage and Fairbanks.
(d)On June 1, 2001, we sold our investment in Airtours. Accordingly, we did not
record any equity in the earnings or losses from the affiliated operations
of Airtours after our quarter ended May 31, 2001.
(e)Operating loss represented corporate expenses not allocated to segments.
Corporate assets primarily included cash, cash equivalents, short-term
investments, debt issuance costs, deferred P&O Princess acquisition costs
and transportation assets.
See Note 5 for affiliated operations segment information, which were not
included in our consolidated operations.
Foreign revenues for our cruise brands, excluding Costa in 2000, represent
sales generated from outside the U.S. primarily by foreign tour operators and
foreign travel agencies. The majority of these foreign revenues are from Italy,
Canada, United Kingdom, France, Germany and Spain. Substantially all of our
long-lived assets are located outside of the U.S. and consist principally of
our goodwill, ships and ships under construction.
Revenue information by geographic area for fiscal 2002, 2001 and 2000 was as
follows (in thousands):
2002 2001 2000
U.S. $3,292,533 $3,489,913 $3,180,667
Foreign 1,075,736 1,045,838 597,875
---------- ---------- ----------
$4,368,269 $4,535,751 $3,778,542
========== ========== ==========
62
Note 13 - Benefit Plans
Stock Option Plans
We have stock option plans primarily for supervisory and management level
employees and members of our Board of Directors. The plans are administered by
a committee of three of our directors (the "Committee") which 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
option exercise price is generally set by the Committee at 100% of the fair
market value of the common stock on the date the option is granted.
Substantially all options granted during fiscal 2002, 2001 and 2000 were
granted at an exercise price per share equal to the fair market value of our
common stock on the date of grant. Employee options generally have vested
evenly over five years and have a ten year term and director options granted
prior to fiscal 2001 have vested immediately and have a five or ten year term.
Director options granted subsequent to fiscal 2000 will vest evenly over five
years and have a ten year term. At November 30, 2002, options for 40.7 million
shares were available for future grants under the above plans. A summary of the
activity and status of our stock option plans was as follows:
Weighted
Average Exercise Price Number of Options
Per Share Years Ended November 30,
2002 2001 2000 2002 2001 2000
Outstanding options - beginning of
year $28.95 $26.80 $22.70 12,774,293 8,840,793 6,517,168
Options granted $26.54 $26.44 $35.92 33,000 6,580,250 2,910,575
Options exercised $14.35 $11.70 $13.43 (404,615) (2,218,075) (244,850)
Options canceled $32.80 $35.15 $35.91 (573,720) (428,675) (342,100)
------ ------ ------ ---------- ---------- ---------
Outstanding options - end of year $29.26 $28.95 $26.80 11,828,958 12,774,293 8,840,793
====== ====== ====== ========== ========== =========
Options exercisable - end of year $28.71 $25.96 $15.82 4,775,894 2,972,498 4,042,452
====== ====== ====== ========== ========== =========
Information with respect to outstanding and exercisable stock options at
November 30, 2002 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-$ 2.25 32,980 /(1)/ $ 2.06 32,980 $ 2.06
$ 6.94-$10.31 17,300 0.7 $ 9.76 17,300 $ 9.76
$10.59-$15.00 666,050 2.3 $11.32 666,050 $11.32
$16.28-$22.57 3,901,084 8.1 $21.66 1,236,830 $20.75
$24.63-$27.78 1,182,894 6.3 $26.24 667,294 $26.35
$28.21-$34.88 3,070,500 8.1 $30.05 673,100 $30.47
$36.72-$41.34 102,000 5.8 $38.09 77,200 $38.05
$43.56-$48.56 2,856,150 6.7 $44.36 1,405,140 $44.57
---------- --- ------ --------- ------
Total 11,828,958 7.2 $29.26 4,775,894 $28.71
========== === ====== ========= ======
--------
(1)These stock options do not have an expiration date.
Restricted Stock Plan
We have a restricted stock plan under which three executive officers have been
issued restricted shares of our common stock. These shares have the same rights
as our common stock, except for restriction and forfeiture provisions. During
fiscal 2002, 2001 and 2000, 150,000 shares of common stock were issued each
year, which were valued at $4 million, $5 million and $6 million, respectively.
Unearned stock compensation was recorded within shareholders' equity at the
date of award based on the quoted market price of the shares on the date of
grant and is amortized to expense using the straight-line method from the grant
date through the vesting date. These shares vest five years after the grant
date. As of November 30, 2002 and 2001 there were 750,000 shares and 647,000
shares, respectively, issued under the plan which remain to be vested.
63
Defined Benefit Pension Plans
We have one qualified and one nonqualified defined benefit pension plan that
are available to full-time CCL and corporate shoreside employees (the
"Shoreside Plans"), who were employed by CCL or corporate before January 1,
1998. Our funding policy for this qualified plan is to annually contribute at
least the amount required under the applicable labor regulations. The
nonqualified plan is unfunded. In addition, we have five nonqualified defined
benefit plans, one for the CCL shipboard employees, except for deck and engine
officers, two for Holland America shipboard employees, except for officers, one
for certain Holland America shipboard officers, and one supplemental executive
retirement plan ("SERP") in which two executive officers currently participate.
The Carnival shipboard nonqualified plan is funded by contributions into a
rabbi trust and the Holland America and SERP plans, are unfunded. In addition,
Cunard Line Limited participated in an industry-wide merchant navy officers
("MNO") defined benefit plan that is available to certain Cunard shipboard
officers. Our MNO plan expense is based on the amount of contributions required
by the plan. Total expense for these defined benefit pension plans was $11
million, $8 million and $6 million in fiscal 2002, 2001 and 2000, respectively.
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, 2002 and 2001, the CCL shipboard plan and the
Shoreside Plans have aggregated additional minimum pension liability
adjustments, less allowable intangible assets, of $14.7 million and $5.5
million, respectively, which are included in AOCI.
Defined Contribution Plans
We have several defined contribution plans available to substantially all U.S.
and Canadian employees, to Cunard's United Kingdom employees, to Seabourn's
Scandinavian shipboard officers and to CCL's shipboard deck and engine
officers. We contribute to these plans based on employee contributions, salary
levels and length of service. Total expense relating to these plans was $8
million in both fiscal 2002 and 2001 and $7 million in fiscal 2000.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan, which is authorized to issue up to
4,000,000 shares of our common stock to substantially all of our employees. The
purchase price is derived from a formula based on 85% of the fair market value
of our common stock during the six-month purchase period, as defined. During
fiscal 2002, 2001 and 2000, we issued 62,223, 82,733 and 171,886 shares,
respectively, at a weighted-average share price of $23.92, $21.94 and $26.36,
respectively, under this plan.
Note 14 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in
thousands, except per share data):
Years Ended November 30,
2002 2001 2000
Net income $1,015,941 $926,200 $965,458
========== ======== ========
Weighted average common shares outstanding 586,567 585,064 599,665
Dilutive effect of stock plans 1,489 1,798 2,247
---------- -------- --------
Diluted weighted average shares outstanding 588,056 586,862 601,912
========== ======== ========
Basic earnings per share $ 1.73 $ 1.58 $ 1.61
========== ======== ========
Diluted earnings per share $ 1.73 $ 1.58 $ 1.60
========== ======== ========
During fiscal 2002, 2001 and 2000, the exercise prices for 6.0 million, 5.4
million and 4.4 million options, respectively, were greater than the average
fair market prices of our common stock for those periods and, consequently,
were excluded from our diluted earnings per share computations since they were
anti-dilutive.
In addition, our 2002 and 2001 diluted earnings per share computation 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 (see Note 6).
64
Note 15 - Supplemental Cash Flow Information
Years Ended November 30,
2002 2001 2000
(in thousands)
Cash paid (received) for
Interest, net of amount capitalized $110,148 $109,321 $40,431
Income taxes, net $ 19 $ 3,931 $ (800)
Noncash investing and financing activities
Common stock received as payment of stock option exercise price $ 22,500
Notes received upon the sale of the Nieuw Amsterdam $ 59,935 $84,500
Note 16 - Recent Accounting Pronouncements
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. SFAS No. 144 requires (i) the recognition and
measurement of the impairment of long-lived assets to be held and used and (ii)
the measurement of long-lived assets to be held for sale. We have completed our
review of SFAS No. 144 and its adoption on December 1, 2002 did not have a
material effect on our financial statements.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 requires that liabilities for
costs associated with an exit activity or disposal of long-lived assets be
recognized when the liabilities are incurred and can be measured at fair value.
SFAS No. 146 is effective for us for any exit or disposal activities that are
initiated after December 31, 2002.
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 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 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.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123 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.
Note 17 - Costa Acquisition
From June 1997 through September 28, 2000, we owned 50% of Costa. On September
29, 2000, we acquired the remaining 50% interest in Costa from Airtours at a
cost of $511 million. Substantially all of the purchase price was funded by
euro denominated borrowings. We accounted for this transaction using the
purchase accounting method.
65
CARNIVAL CORPORATION
UK GAAP RECONCILIATION
Unaudited summary of differences between U.S. GAAP and UK GAAP for each of the
years ended 30 November 2002, 2001 and 2000
Carnival's financial statements have been prepared in accordance with U.S. GAAP
and Carnival's accounting policies, which differ in certain material respects
from UK GAAP and P&O Princess' accounting policies.
The following is a summary of the material adjustments to attributable profit
(net income) and shareholders' funds, which would have been required to adjust
for significant differences between Carnival's accounting policies under U.S.
GAAP and P&O Princess' accounting policies under UK GAAP.
Reconciliations of consolidated profit and loss account for the years ended 30
November:
2002 2001 2000
Notes U.S.$m U.S. $m U.S. $m
Net income under U.S. GAAP 1,015.9 926.2 965.5
UK GAAP adjustments:
Cruise revenues and expenses A (1.0) (2.4) 3.8
Dry-docking B 4.4 4.4 3.7
Marketing and promotion costs C (1.7) 21.8 3.3
Income from affiliated operations H -- (7.7) (8.8)
Adjustment to gain on sale of affiliated operation I -- 26.0 --
------- ----- -----
Profit attributable to shareholders in accordance with UK GAAP and
P&O Princess' accounting policies 1,017.6 968.3 967.5
======= ===== =====
Earnings
Basic earnings per share in accordance with UK GAAP (in cents)
and P&O Princess' accounting policies 173.5 165.5 161.3
Weighted average number of shares used in basic earnings per
share calculation (millions) 586.6 585.1 599.7
Reconciliations of consolidated shareholders' funds at 30 November:
2002 2001 2000
Notes U.S.$m U.S. $m U.S. $m
Shareholders' equity in accordance with U.S. GAAP 7,417.9 6,590.8 5,870.6
UK GAAP adjustments:
Cruise revenues and expenses A 7.5 8.5 10.9
Dry-docking B 23.4 19.1 14.7
Marketing and promotion costs C 135.9 137.6 115.8
Unrealised (gains) losses on marketable securities, net D (1.9) 0.7 7.1
Derivative instruments and hedging activities E 8.1 8.5 --
Dividends F (61.6) (61.6) (61.4)
Minimum pension liability adjustment G 14.7 5.5 --
Income from affiliated operations H -- -- 3.0
Treasury stock J -- 727.6 705.1
------- ------- -------
Shareholders' funds in accordance with UK GAAP and P&O
Princess' accounting policies 7,544.0 7,436.7 6,665.8
======= ======= =======
66
The differences in accounting treatment as a result of differences between
Carnival's accounting policies under U.S. GAAP and P&O Princess' accounting
policies under UK GAAP are noted below.
A. Cruise revenues and expenses
Carnival's accounting policy under U.S. GAAP is to initially record deposits
received on sales of guest cruises as customer deposits and recognise them,
together with revenues from onboard activities and all associated direct
costs of a voyage, generally upon completion of voyages with durations of
ten days or less and on a pro rata basis for voyages in excess of ten days.
P&O Princess' accounting policy under UK GAAP is to recognise these items on
a pro rata basis at the time of the voyage.
B. Dry-docking
Carnival's accounting policy under U.S. GAAP is to capitalise dry-docking
costs and amortise them to operating expense using the straight-line method
generally over one year. P&O Princess' accounting policy under UK GAAP is
the same as Carnival's, except that the capitalised costs are amortised to
expense through the date of the next scheduled dry-dock, which typically is
over two to three years.
C. Marketing and promotion costs
Carnival's accounting policy under U.S. GAAP is to expense marketing and
promotion costs as incurred except those costs which result in tangible
assets, such as brochures, which are recorded as prepaid expenses and
charged to expense as consumed. Media production costs are also recorded as
prepaid expenses and charged to expense upon the first airing of the
advertisement. P&O Princess' accounting policy under UK GAAP is to expense
marketing and promotion costs over the period of benefit, not exceeding one
year from the end of the year the cost is incurred.
D. Unrealised gains and losses on marketable securities
Under U.S. GAAP, unrealised gains and losses on marketable securities are
included within shareholders' equity until realised. P&O Princess'
accounting policy under UK GAAP is that marketable securities are carried at
the lower of cost or net realisable value.
E. Derivative instruments and hedging activities
Under U.S. GAAP, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, requires that all derivative instruments be recorded on the balance
sheet at their fair value. This statement became effective for Carnival on 1
December 2000. SFAS No. 133 requires that changes in the fair value of
instruments that are designated as cash flow hedges be recognised as a
component of shareholders' equity until the underlying hedged item is
recognised in earnings. P&O Princess' accounting policy under UK GAAP is
that gains and losses on instruments used for hedging are not recognised
until the exposure that is being hedged is itself recognised.
F. Dividends
Under U.S. GAAP, dividends are accounted for in the period in which they are
declared. Under UK GAAP, dividends are recognised in the period to which
they relate, which may be earlier than the date of declaration.
G. Minimum pension liability adjustment
Under U.S. GAAP, an additional defined benefit plan liability is recorded
for the actuarially determined unfunded accumulated benefit obligation if it
exceeds the fair value of plan assets. U.S. GAAP also requires that an
intangible asset be recorded to effectively offset this liability, to the
extent that the intangible asset is not in excess of the unrecognised prior
service cost and unrecognised transition obligation. Any excess is recorded
as a minimum pension liability adjustment within shareholders' equity. Under
UK GAAP, no such additional adjustment is required.
67
H. Income from affiliated operations
Carnival's share of the net income of its affiliated operations have been
adjusted from U.S. GAAP to UK GAAP on the basis of the adjustments described
herein.
In addition, Carnival recorded its share of the net income of its foreign
affiliates on a two-month lag basis. Under U.S. GAAP, when Carnival adjusted
for the two-month lag of these affiliates, these affiliates' net losses for
the two-month lag period were charged directly to retained earnings. Under
UK GAAP, when a change is made to conform year ends, the net income or loss
for the lag period is recorded within the profit and loss accounts.
I. Adjustment to gain on sale of affiliated operation
Carnival's investment balance differs under U.S. GAAP and UK GAAP as
described herein. Carnival's gain on sale of its investment in Airtours
under U.S. GAAP is adjusted under UK GAAP to reflect Carnival's UK GAAP
investment balance as of the sale date. Under U.S. GAAP, the $59 million
cumulative foreign currency translation loss relating to Carnival's
investment in Airtours was considered in determining the gain on sale of its
investment. Under UK GAAP, this cumulative translation loss is not taken
into consideration in determining the gain.
J. Treasury stock
Under U.S. GAAP, shares of Carnival's common stock, which have been
purchased by Carnival ("treasury stock") are treated as a reduction to
shareholders' equity. Under UK GAAP, treasury stock has been classified as a
long-term asset.
68
Report on unaudited reconciliations to UK GAAP from PricewaterhouseCoopers LLP
The following is the text of a report on the unaudited reconciliations to UK
GAAP for Carnival from PricewaterhouseCoopers LLP.
[LOGO] PRICEWATERHOUSECOOPERS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
First Union Financial Center, Suite 190
200 S. Biscayne Blvd.
Miami FL 33131
Carnival Corporation
Carnival Place
3655 N. W. 87/th/ Avenue
Miami
Florida, USA 33178-2482
The Directors
P&O Princess Cruises plc
77 New Oxford Street
London WC1A 1PP
Salomon Brothers International Limited
(trading as Schroder Salomon Smith Barney)
Citigroup Centre
33 Canada Square
Canary Wharf
London E14 5LB
17 March 2003
Dear Sirs
Carnival Corporation ("Carnival")
We report on the unaudited restatements, under United Kingdom Generally
Accepted Accounting Principles ("UK GAAP") as applied in the financial
statements of P&O Princess Cruises plc ("P&O Princess") ("the UK GAAP
restatements"), of the consolidated statements of profit attributable to
shareholders of Carnival for each of the three years ended 30 November 2002 and
of Carnival's consolidated shareholders' equity as at 30 November 2000, 2001
and 2002, prepared under United States of America Generally Accepted Accounting
Principles ("U.S. GAAP") as applied in the financial statements of Carnival.
The UK GAAP restatements are set out in Part B of Section 2 of the circular
dated 17 March 2003 issued by P&O Princess (the "Circular").
Responsibility
Carnival is responsible for the preparation of the UK GAAP restatements in
accordance with paragraph 12.11 of the Listing Rules of the United Kingdom
Listing Authority ("the Listing Rules"). The directors of P&O Princess are
responsible for the Circular in which the UK GAAP restatements and this report
are included. The directors of Carnival are responsible for information which
relates to Carnival included in the Circular. It is our responsibility to form
an opinion, as required by the Listing Rules, on the UK GAAP restatements and
to report our opinion to you.
The UK GAAP restatements incorporate significant adjustments to the historical
consolidated financial statements of Carnival. The historical consolidated
financial statements of Carnival for each of the three years ended 30 November
2002 were the responsibility of Carnival and were prepared under U.S. GAAP.
These financial statements were audited by us and we gave unqualified reports
thereon.
We do not accept any responsibility for any report previously given by us on
the consolidated financial statements of Carnival for each of the three years
ended 30 November 2002 used in the compilation of the UK GAAP restatements
beyond that owed by us to those to whom the report was addressed by us at the
date of its issue.
69
Basis of opinion
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board in the United
Kingdom. Our work, which involved no independent examination of any historical
underlying financial information, consisted primarily of making enquiries of
management of Carnival to establish the accounting policies which were applied
in the preparation of the historical underlying financial information.
Consequently our work was substantially less in scope than an audit in
accordance with any generally accepted auditing standards.
Our work has not been carried out in accordance with auditing standards
generally accepted in the United States of America and accordingly should not
be relied upon as if it had been carried out in accordance with those standards.
We have considered the evidence supporting the UK GAAP restatements and
discussed the UK GAAP restatements with Carnival and with the directors of P&O
Princess.
Opinion
In our opinion the adjustments made are those appropriate for the purpose of
presenting the consolidated profit attributable to shareholders of Carnival for
each of the three years ended 30 November 2002 and of Carnival's consolidated
shareholders' equity as at 30 November 2000, 2001, and 2002, on the basis
consistent in all material respects with UK GAAP and the accounting policies of
P&O Princess, and the UK GAAP restatements have been properly compiled on the
basis stated.
Yours faithfully
PricewaterhouseCoopers LLP
Miami, Florida
70
SECTION 3
INFORMATION ON P&O PRINCESS
Part A. Description of P&O Princess' business
P&O Princess is an international cruise vacation company, with operations in
North America, the United Kingdom, Germany and Australia. It is a leading
provider of cruises to Alaska, the Caribbean, Europe, the Mediterranean, the
Panama Canal and other locations (principally South America, the South Pacific,
the Orient and India).
Historical background
P&O Princess was formed by the demerger of the cruise business of The
Peninsular and Oriental Steam Navigation Company in October 2000. P&O Princess'
cruise business has had over 150 years of maritime history. From established
positions in the United Kingdom and Australian cruise industries, P&O Princess
improved its position in the North American cruise industry in the 1970s and
1980s through the acquisitions of Princess Cruises and Sitmar Cruises. Over the
last decade, P&O Princess has grown mainly through new shipbuildings.
In the United Kingdom, P&O Princess has a long history of passenger cruising
which began in the 1840s and has included such well-known vessels as the
Canberra. P&O Princess has capitalised on the strength of the P&O Cruises brand
with the successful introduction of four ships over the last seven years, two
of which have been built specifically for the British market. In 2002 P&O
Princess announced the launch of a new United Kingdom cruise brand, Ocean
Village, which is scheduled to commence operations in May 2003.
In 1999, P&O Princess entered the German cruise industry with the acquisition
of a majority stake in AIDA Cruises, which in its first seven years of
operation has, according to commissioned third-party research, become one of
the best known cruise products in Germany. In 2000, P&O Princess acquired the
remainder of AIDA Cruises and in 2002 commenced the operation of a new brand,
A'ROSA, in Germany.
In October 2002, P&O Princess acquired two of the former Renaissance Cruises
vessels under a lease purchase structure.
The P&O Princess fleet
As at 31 January 2003, P&O Princess had a fleet of 20 ocean cruise ships and
two river vessels with an aggregate capacity of 33,100 lower berths. As at that
date, P&O Princess also had an additional five ocean cruise ships and two river
vessels on order with an aggregate capacity of 12,080 lower berths scheduled
for delivery during the next two years. P&O Princess has also announced the
withdrawal of the chartered Minerva from its fleet in April 2003 and its
replacement at that date by the former Renaissance Cruises vessel, R8, which
has been renamed Minerva II, also under a charter arrangement.
Brands and products
P&O Princess has some of the most widely recognised brands in the cruise
industry. An overview of each brand is provided below.
Princess Cruises
Fleet deployment and market position
P&O Princess currently has a fleet of 11 cruise ships under the Princess
Cruises brand in North America. In 2002, Princess Cruises carried approximately
850,000 passengers. Princess Cruises' passengers come mainly from North
America, but are also sourced from elsewhere, including the United Kingdom. In
January 2002, Princess took delivery of Star Princess which commenced
71
passenger carryings in February 2002. In October 2002, P&O Princess took
delivery of the former Renaissance Cruises vessels, R3 and R4, which were
acquired in August 2002 under a lease purchase structure and renamed Pacific
Princess and Tahitian Princess respectively. Pacific Princess entered passenger
service in November 2002 and is the first P&O Princess ship to operate a split
deployment between brands. In the period to April 2003 she will offer cruises
to Australians under the P&O Cruises brand and from May to November 2003, will
be marketed mainly to North Americans under the Princess Cruises brand.
Tahitian Princess commenced passenger carryings under the Princess brand in
December 2002. Coral Princess entered passenger service in January 2003 and
Island Princess, after a slight delay in construction, is expected to enter
passenger service in July 2003.
Ocean Princess left the Princess fleet in October 2002 and was transferred to
P&O Cruises in the UK (and renamed Oceana) and the 1971-built Pacific Princess
left the P&O Princess fleet in November 2002. Sea Princess is scheduled to be
transferred to the P&O Cruises fleet in the UK in the second quarter of 2003,
where she will be renamed Adonia.
The planned Winter 2002/2003 and Summer 2003 deployment for vessels in the
Princess fleet is shown in the table below.
Capacity
Year of (lower Winter Summer
Vessel delivery berths) 2002/2003 2003
Royal Princess 1984 1,200 Exotics/(1)/ Europe
Regal Princess 1991 1,590 Exotics/(1)/ Europe
Sun Princess 1995 2,020 Panama Canal, Alaska
Mexico/Hawaii
Dawn Princess 1997 2,000 Caribbean Alaska
Grand Princess 1998 2,590 Caribbean Caribbean/(6)/
Sea Princess/(2)/ 1998 2,010 Caribbean n/a
Pacific Princess/(3)/ 1999 670 n/a Alaska
Tahitian Princess/(4)/ 1999 670 Exotics/(1)/ Exotics/(1)/
Golden Princess 2001 2,600 Caribbean Europe
Star Princess 2002 2,600 Mexico Alaska
Coral Princess 2002 1,970 Panama Canal Alaska
Island Princess/(5)/ 2003 1,970 n/a Alaska
--------
(1)Principally Tahiti, South America, the South Pacific, the Orient and India.
(2)Due to be transferred to P&O Cruises in the UK in the second quarter of 2003
and renamed Adonia.
(3)Former Renaissance Cruises' vessel R3, delivered pursuant to a lease
purchase structure in October 2002. The ship commenced passenger operations
in Australia in November 2002, and will be deployed under the Princess
Cruises brand from May 2003 to November 2003.
(4)Former Renaissance Cruises' vessel R4, delivered pursuant to a lease
purchase structure in October 2002. The ship commenced passenger operations
in December 2002.
(5)Due to enter passenger service in July 2003.
(6)Vessel redeployment from Europe to the Caribbean announced in February 2003.
Princess Cruises is the third largest cruise vacation brand in North America
measured in terms of berths and is a leading provider of cruises to Alaska,
Europe, the Panama Canal and other exotic locations (principally South America,
the South Pacific, the Orient and India). Princess Cruises refers to these as
the destination trades. Operating cruises to these destinations and providing
suitable tour and shore excursion programmes requires a complex supply and
logistics organisation, and Princess Cruises has extensive experience in
providing this type of cruising. Princess Cruises is also a leading provider of
cruises to the Caribbean.
Princess Cruises also operates a private destination port of call known as
"Princess Cays" on the Bahamian Island of Eleuthera which features retail
outlets, watersports, beach and sports facilities, restaurants, bars and other
amenities.
Brand and product positioning
The quality of the Princess Cruises fleet has allowed Princess Cruises to
retain a leading position in the destination trades of Alaska, Europe, the
Panama Canal, and other exotic locations, (principally South America, the South
Pacific, the Orient and India) as well as to expand in the Caribbean trade.
72
In 1995 Princess Cruises introduced Sun Princess, the first of a class of
vessel characterised by a high proportion of balcony cabins and a wide choice
of dining, entertainment and other activities.
Between 1997 and 2000, Princess Cruises introduced three sister ships to Sun
Princess, namely, Dawn Princess, Sea Princess and Ocean Princess. The Sun
Princess class was followed in 1998 by the Grand Princess design that further
developed and pioneered the concept of providing choice and a personalised
experience for cruise passengers. Golden Princess, the first of the sister
ships to Grand Princess, commenced operation in May 2001, and Star Princess,
the second sister ship to Grand Princess commenced passenger operation in
February 2002, as the first mega ship to be dedicated to the West Coast of
North America.
Coral Princess, a new class of maxi-ship able to transit the Panama Canal
entered passenger service in January 2003 and her sister ship, Island Princess,
is scheduled to enter passenger service in July 2003. Approximately 75 per
cent. of cabins on these ships have balconies.
P&O Princess Cruises has two new mega-ships under construction at Mitsubishi
Heavy Industries' Nagasaki shipyard, which are scheduled to join the Princess
Cruises brand as Diamond Princess and Sapphire Princess. On each of these
ships, over 70 per cent. of the cabins will be outside cabins and more than 75
per cent. of these will have private balconies. In October 2002, a major fire
broke out on board one of the ships whilst under construction in the shipyard.
The two ships from the yard will now be delivered in February and May 2004. The
first will have its inaugural season in Mexico and the second ship will be
based in Seattle for roundtrip Alaska cruises. The 3,100 lower berth Caribbean
Princess is also expected to join the fleet in the second quarter of 2004.
In addition, two of the former Renaissance Cruises vessels, R3 and R4, joined
the fleet as Pacific Princess and Tahitian Princess, respectively, in October
2002. These ships have similar features to the other vessels in the Princess
fleet with over two thirds of the cabins on each ship having balconies, and
with the ships incorporating a wide variety of dining alternatives. The
Princess fleet includes a choice of small, medium-sized and large vessels
appealing to a wide range of passenger tastes.
The changes described above will improve the overall quality of the Princess
fleet and will give its customers a broader choice of amenity filled ships. The
proportion of balconied cabins across the Princess fleet should increase from
39 per cent. at 31 December 2001 to 52 per cent. at 31 December 2003. The
weighted average berth age of the fleet should fall from 6.4 years to 5.4 years
over the same period. P&O Princess believes that these changes will also
improve the cost structure of its fleet.
Princess Cruises has continued to innovate and improve its product. Princess
has introduced a number of ways to give its passengers more opportunities to
customise their holiday experience. The introduction of "Personal Choice"
cruising has been very well received by passengers and continues to
differentiate its product. A key part of this has been Personal Choice Dining,
which Princess has rolled out across much of its fleet. This is a flexible
dining programme, which gives passengers freedom to choose between a restaurant
style dining option and the more traditional cruise experience of dining at an
assigned time, in an assigned restaurant with the same dining partners and
waiting staff throughout the cruise. The Princess Cruises website
(www.princess.com) includes a cruise personaliser enabling passengers to
pre-book their shore excursions and customise other aspects of their cruise.
Princess Cruises has a customer awareness programme called CRUISE ("Courtesy,
Respect, Unfailing in Service Excellence") which is designed to educate and
motivate staff to provide the highest levels of customer service.
The cruise-tour experience
Princess Cruises provides combined cruise and land based tours in Alaska.
Princess Cruises also offers cruise tours in a variety of other locations
worldwide, including the Orient, Africa, South America, Australia and Europe.
73
Princess Cruises is a leading Alaska cruise and cruise-tour operator offering
cruise itineraries that extend far north into the Gulf of Alaska beyond Glacier
Bay to locations such as College Fjord and Seward. From Seward, customers can
choose from a large selection of land-based tours, including excursions into
the Denali National Park and tours of the interior of Alaska. Princess Cruises
also offers tours of the Canadian Rockies.
Princess Cruises operates five lodges located throughout Alaska with a total of
approximately 1,100 rooms. All of these properties are situated beside rivers
and are properties that have been built to provide Princess Cruises' cruise
tour passengers with a comfortable "wilderness lodge" experience. The most
recently built lodge, the Copper River Wilderness Lodge in the Wrangell-St.
Elias region of Alaska, opened in May 2002.
Customers generally travel to these lodges by Princess Cruises' Midnight Sun
Express ULTRA DOME rail cars which offer excellent all-around views of the
terrain and mountains and a fine dining experience. Princess Cruises currently
operates ten ULTRA DOME rail cars. Princess Cruises also employs a fleet of
over 220 tour buses, which it uses to provide tours and transportation.
Princess Cruises offers a variety of further recreation options to its
customers that include hiking, horseback riding, river rafting, sightseeing and
visits to local places of interest.
P&O Cruises
Fleet deployment and market position
P&O Princess currently operates a fleet of four cruise ships serving UK cruise
passengers under the P&O Cruises brand. In 2002, P&O Cruises carried
approximately 154,000 passengers, sourced almost exclusively from the United
Kingdom. In the United Kingdom, P&O Cruises is the largest cruise operator by
number of berths. In November 2002, Oceana (formerly Ocean Princess) joined the
fleet from Princess Cruises, replacing Victoria which left the fleet in the
same month. Adonia (currently Sea Princess) is scheduled to join the P&O
Cruises fleet in May 2003. She will replace Arcadia which is scheduled to leave
the P&O Cruises fleet in March 2003 to join the new UK brand Ocean Village. The
planned Winter 2002/2003 and Summer 2003 deployment for the vessels in the P&O
Cruises fleet is shown in the table below.
Year of Capacity Winter Summer
Vessel delivery (lower berths) 2002/2003 2003
Arcadia/(1)/ 1989 1,450 Caribbean/Exotics n/a
Oriana 1995 1,830 Around the World Europe
Aurora 2000 1,870 Around the World Europe
Oceana 2000 2,020 Caribbean Europe
Adonia/(2)/ 1998 2,010 n/a Europe
--------
(1)In March 2003 Arcadia is scheduled to leave the fleet in preparation for its
transfer to the new Ocean Village brand.
(2)Adonia is scheduled to enter the UK fleet from the Princess Cruises fleet in
May 2003.
P&O Cruises also acts as a general sales agent for Princess Cruises in the UK.
Brand and product positioning
P&O Cruises introduced Oriana in 1995 and Aurora in 2000, making it one of the
only cruise operators to have recently designed and built new vessels
exclusively for UK cruise passengers. In November 2002, Oceana (formerly Ocean
Princess) entered the P&O Cruises fleet, having been refitted and tailored to
meet the tastes and preferences of UK passengers. She will be followed in May
2003 by Adonia, which is currently sailing in the Princess fleet as Sea
Princess. These new and transferred vessels have a wider choice of dining and
entertainment options and a higher proportion of cabins with balconies than
other ships specifically directed at UK cruise passengers. They have enabled
P&O Cruises to continue to develop a modern style of cruising for UK cruise
passengers, with a welcoming atmosphere and an emphasis on the attributes of
"Britishness", "professionalism" and "style". Market studies indicate that
these elements have appealed strongly to the British market and have further
developed P&O Cruises' reputation for quality and reliability. P&O Princess
believes that the more modern positioning has enabled P&O Cruises to increase
its appeal to younger and family passengers
74
as well as to older and more traditional British customers. Each of the ships
in the fleet has its own distinctive product positioning including one ship
(currently Arcadia and from second quarter 2003, Adonia) entirely dedicated to
adults. The fleet changes described above will further improve the quality of
the P&O Cruises' fleet. For instance, between 31 December 2001, and 31 December
2003 the weighted average berth age of its fleet should decrease from 10.1
years to 5.3 years and the proportion of cabins with balconies in the fleet
should increase from 19 per cent. to 35 per cent.
During 2001, P&O Cruises introduced bistro-style dining options onto all its UK
ships, giving its passengers increased flexibility and choice. P&O Princess in
the UK also successfully introduced the CRUISE customer service programme on
its ships and ashore. The Mayflower Cruise Terminal in Southampton, P&O
Cruises' home port, is currently being redeveloped to cater for the planned
expansion in the business.
Swan Hellenic
Swan Hellenic is a specialist provider of "discovery cruises" operating the
cruise vessel Minerva with itineraries throughout Europe, India and the Orient.
In 2002, Minerva carried approximately 7,500 passengers. This product is
intended to appeal to passengers seeking to discover more about the
destinations they are visiting. During these cruises, experts give talks and
demonstrations to enhance the discovery experience.
In March 2002, P&O Princess announced that Swan Hellenic had chartered the
former Renaissance Cruises vessel R8, which has been re-named Minerva II, to
replace the existing ship, Minerva. Minerva II, which was built in 2001, has
676 lower berths and is expected to start operations under the Swan Hellenic
brand in April 2003, when the current charter for Minerva ends. Over two thirds
of Minerva II's cabins have balconies, compared with only 7 per cent. on the
current ship. With its faster service speed, the new ship will also be able to
offer a wider range of destinations and itineraries.
Ocean Village
P&O Princess believes there is strong potential for growth in cruising within
the UK, and announced in April 2002 the creation of a new brand, Ocean Village,
which will target a young and active customer base, with the aim of further
expanding the appeal of cruising within the UK.
Initially, Ocean Village will have one ship, providing a dedicated fly-cruise
product for the UK from May 2003. The ship, currently called Arcadia and part
of the P&O Cruises UK fleet, will undergo a refit to provide 1,610 lower berths
(increased from the existing 1,450 lower berths), eight bars, an internet cafe
and a bistro endorsed by the TV chef, James Martin. She will provide a cruise
experience designed for British passengers, with a relaxed contemporary
atmosphere and an emphasis on informality, health and well-being. The 2003
summer season itineraries will offer one and two-week Mediterranean cruises,
together with cruise and stay holidays, based on two alternating seven night
itineraries sailing from Palma, Majorca. In Winter 2003/2004 the ship will
offer one and two-week Caribbean cruises, together with cruise and stay
holidays, based on two alternating seven-night itineraries sailing from
Barbados.
AIDA
Fleet deployment and market position
P&O Princess currently operates two ships under the AIDA brand. In 2002, AIDA
carried approximately 76,000 passengers sourced from German-speaking countries,
the majority of whom came from Germany. AIDA provides European summer and
Caribbean and Canary Island Winter cruises. In May 2002 the 1,270 lower berth
newbuild AIDAvita was added to the fleet and her sister ship, AIDAaura, is
scheduled for delivery in April 2003.
Brand and product positioning
AIDA is designed for, and caters exclusively to, German-speaking passengers.
AIDA's marketing is targeted at 20-50 year old package vacation customers who
would otherwise typically take a land-based vacation. AIDA refers to AIDA's
style and concept of cruising as "club cruising". Club cruising is
75
a more casual but sophisticated cruise experience with an emphasis on
lifestyle, informality, friendliness and activity. Spa areas and high quality,
but informal, dining options characterise the experience on board the vessels.
A'ROSA
In July 2001, P&O Princess launched A'ROSA, a new consumer cruise brand in
Germany with a destination-focused product in a German-speaking environment.
A'ROSA BLU, previously the Crown Princess, was refitted to meet German tastes
and the requirements of the A'ROSA brand and commenced operational service in
June 2002. A'ROSA BLU was deployed in the Baltic and the Mediterranean in
Summer 2002 and is scheduled to be deployed to the Caribbean and Canary Islands
in Winter 2002/2003. In 2002, A'ROSA BLU carried approximately 28,000
passengers. Regal Princess is currently expected to be transferred from the
Princess fleet in North America to the A'ROSA fleet in the second quarter of
2004.
In addition, P&O Princess operates A'ROSA Bella and A'ROSA Donna, two river
cruise vessels of 200 berths each, built in 2002. As at 31 January 2003, P&O
Princess had two further river vessels on order, A'ROSA Mia, which was
delivered in February 2003 and is expected to enter operational service in
April 2003, and an as yet unnamed vessel due in Spring 2004.
P&O Cruises (Australia)
Fleet deployment and market position
P&O Princess operates the cruise ship Pacific Sky serving Australian cruise
passengers under the P&O Cruises (Australia) brand and provides Sydney
round-trip itineraries to Vanuatu, New Caledonia and Fiji lasting nine days or
more. In 2002, Pacific Sky carried approximately 58,000 passengers. P&O Cruises
(Australia) is one of the leading Australian cruise operators and has the
largest share of the Sydney round-trip trade, which is the most popular type of
cruise among Australians. The Pacific Sky is the most modern ship deployed full
time in Australia. In 2002 Pacific Sky also offered a number of round-trip
cruises from Auckland for New Zealand passengers for the first time and the
success of this has ensured a planned repeat deployment in 2003.
In October 2002, P&O Princess took delivery of the former Renaissance Cruises
vessel R3 and renamed her Pacific Princess. Pacific Princess entered passenger
service in November 2002 and is the first P&O Princess ship to operate a split
deployment. In 2002, Pacific Princess carried approximately 3,000 passengers.
In the period to April 2003 she will be homeported in Sydney and will offer
cruises to Australians sailing to French New Caledonia and elsewhere in the
South Pacific. From May to November 2003, the vessel will be marketed mainly to
North Americans under the Princess Cruises brand.
With the addition of the Pacific Princess to Pacific Sky, P&O Cruises in
Australia will increase its capacity by approximately 30 per cent. and will
provide products designed to appeal to a wide range of Australian consumer
tastes.
Brand and product positioning
P&O Cruises (Australia) provides a contemporary experience on Pacific Sky. The
product on this ship is designed to appeal to Australians and to have a fun and
youthful image and passengers' experience on board the vessel is intended to be
casual and relaxed. P&O Cruises prices the product at a level which is intended
to be affordable, accessible and good value for money. P&O Cruises (Australia)
offers a premium product on Pacific Princess, designed to appeal to a more
experienced cruise passenger.
P&O Travel
In addition, P&O Princess also owns P&O Travel, a business-to-business travel
agency, which is also responsible for the purchasing of part of P&O Princess'
air travel requirements.
P&O Princess fleet
At 31 January 2003, P&O Princess' fleet consisted of 20 ocean cruise ships and
two river vessels with an aggregate capacity of 33,100 lower berths. At that
date P&O Princess' ocean cruise fleet had an
76
average vessel age (weighted by berths) of 6.1 years, an average vessel size of
approximately 1,635 lower berths and 38 per cent. of its cabins have private
balconies.
The majority of the P&O Princess fleet flies the British flag, known as the Red
Ensign, and is registered in the UK or Bermuda. P&O Princess believes that
ships flying the Red Ensign are expected to meet high standards for ship
operation and crew training.
The following table includes summary information concerning the ships in the
fleet as at 31 January 2003 and their registry, year of delivery, gross tonnage
and capacity:
Year of Gross Capacity
Vessels Registry delivery Tonnage (lower berths)
North America
Royal Princess UK 1984 45,000 1,200
Regal Princess/(1)/ UK 1991 70,000 1,590
Sun Princess UK 1995 77,000 2,020
Dawn Princess UK 1997 77,000 2,000
Grand Princess Bermuda 1998 109,000 2,590
Sea Princess/(2)/ UK 1998 77,000 2,010
Pacific Princess/(3)/ Gibraltar 1999 30,000 670
Tahitian Princess/(4)/ Gibraltar 1999 30,000 670
Golden Princess Bermuda 2001 109,000 2,600
Star Princess Bermuda 2002 109,000 2,600
Coral Princess Bermuda 2002 92,000 1,970
United Kingdom
Arcadia/(5)/ UK 1989 64,000 1,450
Oriana UK 1995 69,000 1,830
Minerva/(6)/ Bahamas 1996 13,000 360
Aurora UK 2000 76,000 1,870
Oceana UK 2000 77,000 2,020
Germany
AIDAcara UK 1996 39,000 1,190
AIDAvita UK 2002 42,000 1,270
A'ROSA BLU UK 1990 70,000 1,590
Germany (river boats)
A'ROSA Donna Germany 2002 3,500 200
A'ROSA Bella Germany 2002 3,500 200
Australia
Pacific Sky UK 1984 46,000 1,200
------
Total 33,100
--------
(1)Currently expected to be transferred to A'ROSA in the second quarter of 2004.
(2)To be transferred to P&O Cruises in the UK in the second quarter of 2003 and
renamed Adonia.
(3)Former Renaissance Cruises' vessel R3, delivered pursuant to a lease
purchase structure in October 2002. The ship commenced passenger operations
in November 2002 and operates on a split deployment between Princess Cruises
and P&O Cruises (Australia).
(4)Former Renaissance Cruises' vessel R4, delivered pursuant to a lease
purchase structure in October 2002. The ship commenced passenger operations
in December 2002.
(5)In March 2003, Arcadia is scheduled to leave the P&O Cruises UK fleet.
Following a refit which will result in the creation of an additional 160
lower berths, she will commence sailings under the Ocean Village brand in
May 2003.
(6)Chartered. To be withdrawn from the fleet in April 2003 and replaced by the
charter of Minerva II.
Vessel safety and reliability
P&O Princess has introduced a number of features and measures on its ships
operating out of North America and the UK to enhance the safety and protect the
value of these vessels which surpass the operating and safety systems required
by international laws and regulations. See "Regulation of the Cruise Industry"
below. Such features include equipping ships with voyage event recorders and
comprehensive back-up systems, the presence of which helps to reduce the
likelihood of breakdowns or other interruptions. P&O Princess believes these
features and measures have resulted in low unscheduled out-of-service periods
for its fleet and P&O Princess has also received a number of awards for its
environmental and safety policies.
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Cruise ship construction
As at 31 January 2003, P&O Princess had five cruise ships on order, information
on which is provided below:
Capacity
Vessel (lower berths) Yard Estimated delivery date
AIDAaura 1,270 Aker Werft Second quarter 2003
Island Princess 1,970 Chantiers de Second quarter 2003
l'Atlantique
Diamond Princess/(1)/ 2,670 Mitsubishi First quarter 2004
Sapphire Princess/(2)/ 2,670 Mitsubishi Second quarter 2004
Caribbean Princess 3,100 Fincantieri Second quarter 2004
--------
(1)Formerly due to be named Sapphire Princess
(2)Formerly due to be named Diamond Princess
No assurance can be made that the vessels under construction will be introduced
into service by the estimated delivery date.
With respect to its German operations, as of 31 January 2003 P&O Princess had
two further river cruise vessels of 200 berths each on order, the first of
which was delivered in February 2003 and the second is expected to be delivered
in Spring 2004.
The ship that was previously due to be named Diamond Princess (and which will
now be named Sapphire Princess), currently under construction in Mitsubishi
Heavy Industries' Nagasaki shipyard, suffered a major fire in early October
2002 following which a revised delivery schedule for both ships under
construction at the yard was announced. The estimated delivery date of the
second ship (which was previously due to be named Sapphire Princess) was
brought forward from May 2004 to February 2004 and it was announced that this
ship would be named Diamond Princess. It was announced that the ship that
suffered the fire would be delivered in May 2004 and would now be named
Sapphire Princess.
P&O Princess believes that its new vessels on order will further enhance its
reputation for innovation and choice. These ships will incorporate systems to
improve further the safety and reliability of vessels in the fleet and their
design will incorporate leading environmental protection technology. As was the
case with the Coral Princess, the three vessels currently on order from
Mitsubishi and Chantiers de l'Atlantique will incorporate major parts of their
propulsion systems, normally located in the vessel's engine rooms, in their
funnels. This will reduce the size of the engine rooms and associated exhaust
and other systems and release additional space for cabins and public area
amenities.
P&O Princess has diversified its sourcing for new vessels, having ships
constructed by five major shipyards throughout the world in the last few years,
and is the first major cruise line to place an order in Asia with Mitsubishi
Heavy Industries. P&O Princess believes that this will give it flexibility of
supply in the future.
Cruise pricing and revenues
P&O Princess derives its revenues from a number of sources. The principal
sources of revenue are sales of P&O Princess' cruises often including air
transportation to and from the cruise departure ports, tours and other related
activities. Included within the price of a cruise is a wide variety of
activities and amenities, including meals and entertainment, together with
access to a variety of facilities such as swimming pools, theatres and
nightclubs, cinemas, casinos, discos and health clubs. Cruise prices vary
depending on the destination, cruise length, cabin category and the time of
year the vacation takes place. P&O Princess also generally offers discounts as
part of early booking programmes and other promotional activities. The prices
of P&O Princess cruise-tours include the cruise, scheduled land tours, lodge
accommodation and access to the lodge facilities and attractions. Prices of the
lodge accommodation and land tours vary depending on the type and length of
land tour and the time of year the vacation takes place. For Swan Hellenic, the
cruise price also includes gratuities and a full programme of excursions.
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P&O Princess arranges air transportation as a service for customers who elect
to use P&O Princess' air reservation services generally as part of a fly-cruise
package. Air transportation prices can vary by gateway and destination.
P&O Princess engages in yield management techniques across its cruise business
to assist in pricing, inventory control and air routing. These techniques help
P&O Princess to maximise revenues and vessel and lodge occupancy by projecting
demand and allow it to focus its direct marketing and promotional efforts. P&O
Princess has developed and invested in sophisticated pricing and revenue
management systems which P&O Princess believes enables it to react quickly to
changes in market conditions.
In addition to the prices of cruises, tours and air transportation, P&O
Princess earns revenues from gaming in shipboard casinos, the sale of alcoholic
and other beverages, the sale of gift shop items, photography products and
services, spa products and services and shore excursions. While P&O Princess
operates and manages most on-board activities itself, some are managed by
independent concessionaires from whom P&O Princess collects a portion of their
income or a fee.
Shore excursions are provided at vessels' ports of call and include activities
such as general sightseeing, walking and trekking, water activities and sports,
visits to local attractions, and local boat and beach parties. Shore excursions
and tour components of cruise tours are operated either by P&O Princess or by
independent tour operators.
Sales relationships and marketing activities
P&O Princess is a customer service driven company and continues to invest in
its service organisation to assist travel agents and customers. P&O Princess
believes that its support systems and infrastructure are among the strongest in
the cruise industry.
P&O Princess sells its cruises and tours mainly through travel agents. These
relationships are not exclusive and most travel agents also sell cruises and
other vacations provided by P&O Princess' competitors. P&O Princess' policy
towards travel agents is to train and motivate them to support its products
with competitive sales and pricing policies and joint marketing programmes. P&O
Princess also uses a wide variety of marketing techniques, including websites,
seminars and videos, to familiarise the agents with its cruise brands and
products. In each of its principal markets, P&O Princess has familiarised the
travel agency community with its cruise brands and products.
Travel agents generally receive standard commissions of 10 per cent, plus the
potential of additional commissions based on sales volume. Due to the complex
nature of a cruise booking, commission rates earned by travel agents on cruise
vacations are usually higher than commission rates on sales of airline tickets
and hotel rooms.
P&O Princess' investment in customer service has been focused on the
development of systems and employees. P&O Princess has improved its systems
within the reservations, quality assurance, and customer relationship
management functions, emphasising the continued support of the travel agency
community while simultaneously developing greater contact and interactivity
with its customer base. P&O Princess has individual web sites for each of its
brands which provide access to information about its products to internet users
throughout the world. The Princess Cruises site provides a booking engine for
travel agents and access to booking information for passengers with existing
bookings, ship and wedding "web cams," and a shore excursion reservations
system that enables passengers to pre-reserve in advance of travel. P&O
Princess also supports booking capabilities through all major airline computer
reservation systems (CRS) including SABRE, Galileo, Amadeus and Worldspan.
P&O Princess has also invested in its customer databases. The Princess Cruises
passenger database contains information on over 7 million households. Over 2
million of these households contain people who have cruised with Princess
Cruises. In the UK, the P&O Cruises passenger database contains information on
over 0.6 million households.
P&O Princess has focused on staff training and development. The CRUISE
programme in North America is a customer awareness programme designed to
educate and motivate shipboard and shoreside staff to provide the highest
levels of customer service. The programme has been popular
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with employees, and P&O Princess believes this has contributed to the increased
satisfaction levels of Princess Cruises customers over the last two years. In
2000, the CRUISE programme was extended to cover shore excursion staff in the
Caribbean, Mexico and Alaska. In 2001, an equivalent CRUISE programme, was
successfully introduced in the UK both on board ships and shoreside.
Comprehensive marketing campaigns are also pursued by P&O Princess to market
its brands to customers. The principal media used are magazine and newspaper
advertisements and promotional campaigns. P&O Cruises uses television
advertising to a significant extent.
Suppliers
Excluding the purchase of cruise ships, P&O Princess' largest expenditures are
for airfare, travel agency commissions, advertising, food, beverage and hotel
supplies, port charges, repairs and maintenance and fuel. P&O Princess also
bears the costs of purchasing and developing hotel sites and related
infrastructure investment in Alaska. The supplies that are required for the
operation of its business are generally available at competitive prices from a
number of sources. Excluding contracts for the purchase of cruise ships, P&O
Princess is not aware of any contract with suppliers upon which it is dependent
or which is material to its business and profitability.
Employees
In 2002 P&O Princess employed an average of 3,654 staff in its corporate
offices, hotels, travel offices and other shoreside facilities and an average
of 16,298 officers, crew and staff on its vessels. A significant proportion of
employees that work on P&O Princess' ships are unionised or are party to
similar collective agreements. P&O Princess believes that its employee and
union relations are good.
P&O Princess sources the staff employed on vessels from around the world with
the principal sources being the Philippines, India, the UK, Mexico, Italy and
Eastern Europe. P&O Princess utilises a number of manning agents in these
countries to secure the required staff.
Pensions
P&O Princess is a contributing employer to various pension schemes, including
some multi-employer merchant navy industry schemes.
In the UK, P&O Princess operates its own defined benefit pension scheme, the
assets of which are managed on behalf of the trustee by independent fund
managers. This scheme is closed to new membership. As of 31 March 2001, the
date of the most recent formal actuarial valuation, the scheme had assets with
a market value of $60.9 million, representing 102 per cent. of the benefits
accrued to members allowing for future increases in earnings. Approximately 70
per cent. of the scheme's assets are invested in bonds and 30 percent in
equities.
The Merchant Navy Ratings Pension Fund ("MNRPF") is a defined benefit
multi-employer scheme in which sea staff employed by companies within the P&O
Princess group have participated. The scheme has a significant funding deficit
and has been closed to further benefit accrual. Companies within the P&O
Princess group, along with other employers, are making payments into the scheme
under a non-binding Memorandum of Understanding to reduce the deficit. Payments
by P&O Princess group companies to the scheme in 2002 totaled $2.0 million,
which represented 7 per cent. of the total payments made by all employers. As
of 31 March 2002, the date of the most recent formal actuarial valuation, the
scheme had assets with a market value of $814m, representing 84 per cent. of
the benefits accrued to members. Approximately 68 per cent. of the scheme's
assets were invested in bonds, 25 per cent. in equities and 7 per cent. in
property.
The Merchant Navy Officers Pension Fund ("MNOPF") is a defined benefit
multi-employer scheme in which officers employed by companies within the P&O
Princess Cruises group have participated and continue to participate. This
scheme is closed to new membership. The share of contributions being made to
the scheme by P&O Princess group companies (based on the year to 31 December
2002) was approximately 7 per cent. However, the extent of each participating
employer's liability for any deficit in the scheme is uncertain. Accordingly,
P&O Princess accounts for the scheme on a
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contributions paid basis, as if it were a defined contribution scheme. The
scheme is divided into two sections - the New Section and the Old Section. As
of 31 March 2000, the date of the most recent formal actuarial valuation, the
New Section had assets with a market value of $2,680m, representing
approximately 100 per cent. of the benefits accrued to members. At the date of
valuation, approximately 77 per cent. of the New Section's assets were invested
in equities, 14 per cent. in bonds and 9 per cent. in property and cash. As a
result of this asset distribution, it is expected that the fall in equity
markets since March 2000 will have resulted in the New Section now showing a
significant funding deficit. The Old Section has been closed to benefit accrual
since 1978. As of 31 March 2000, the date of the most recent formal actuarial
valuation, it had assets with a market value of $2,233m representing
approximately 111 per cent. of the benefits accrued to members. The assets of
the Old Section are substantially invested in bonds. Contributions from P&O
Princess group companies to the MNOPF during the year to 31 December 2002 were
$1.2m.
P&O Princess also operates a number of smaller defined benefit schemes in the
U.S. which are unfunded, other than assets in a Rabbi Trust held on the P&O
Princess group's balance sheet, and makes contributions to various defined
contribution schemes in various jurisdictions.
The actuarial valuations of the P&O Princess schemes and P&O Princess group's
share of the MNRPF have been updated to 31 December 2002. Based on the
assumptions used, which are best estimates chosen from a range of possible
actuarial assumptions which may not necessarily be borne out in practice, the
estimated net pension liability as at 31 December 2002 arising from these
schemes was $41.3 million.
It is estimated that the funding position of the MNOPF has changed
significantly since the valuation as at 31 March 2000 referred to above and
that the New Section is now in deficit. The Annual Report of the MNOPF for the
year ended 31 March 2002 showed that the market value of the assets of the New
Section at that date was $2,404m, of which 66 percent was invested in equities,
22 per cent in bonds and 12 percent in property and cash. The deficit in the
New Section at 31 December 2002 has been estimated, based on the estimated
movement in assets since 31 March 2002 and in liabilities since 31 March 2000.
As noted above, the extent of each employer's liability with respect to a
deficit in the fund is uncertain. Based on the share of current contributions
made to the scheme by P&O Princess, its share of the estimated deficit would be
approximately $85 million, although the appropriate share of the deficit
actually attributable to the P&O Princess group is believed to be lower than
this.
Trademarks and other intellectual property
P&O Princess and its subsidiaries own and have registered several trademarks,
including the names "Princess", "Swan Hellenic", "Ocean Village" and many of
the names of its cruise ships, and P&O Princess owns and is in the process of
securing registrations for a number of other trademarks including "AIDA",
"Seetours" and "A'ROSA". The P&O Princess group has also registered the domain
name "princess.com", "princesscruises.com" and owns and has applied to register
several other domain names. P&O Princess Cruises International Limited and its
affiliates have also been granted a licence by P&O to use the P&O name, the P&O
flag and associated logos and other relevant trademarks and domain names in
conjunction with cruising. This licence will continue after completion of the
DLC transaction.
P&O Princess believes that its principal trademarks are widely recognised in
their respective marketplaces.
Properties
P&O Princess owns or leases or has rights to use approximately 80 properties
globally. Of these, the principal properties are the P&O Princess lodges and
support facilities in Alaska and office facilities in Southampton and London,
England and in several locations in the United States.
Princess Cruises operates five Alaskan lodges, two situated adjacent to the
Denali National Park, one on the Kenai Peninsula, one in Fairbanks and one at
Copper River in the Wrangell-St. Elias region of Alaska. P&O Princess owns each
of these properties except for the land on which the Denali Princess Wilderness
Lodge is located, for which it has a long-term ground lease that includes a
right of first
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refusal on the freehold interest. Princess Cruises' Alaska hotels have a
combined capacity of approximately 1,100 guest rooms and the lodges and
surrounding land total approximately 220 acres.
Princess Cruises' principal U.S. offices are located in newly-constructed
office premises in Southern California. The leases expire in 2013, with two
five-year options to extend the term. Princess Cruises also leases office
facilities in Seattle, Washington and Fort Lauderdale, Florida and additional
offices and support facilities at several locations in Alaska. P&O Princess
leases office facilities in Southampton and London the majority of which have
remaining terms expiring between 2005 and 2016.
Insurance
General
There are a number of risks associated with owning and operating vessels in
international trade. P&O Princess maintains appropriate types and levels of
insurance coverage for its vessels. All insurance policies are subject to
limitations, exclusions and deductible levels. Premiums charged by both marine
and non-marine insurers will likely be impacted by the losses to the direct and
reinsurance markets regardless of the loss experience of individual insureds.
P&O Princess therefore expects higher premiums for upcoming insurance renewals,
but anticipates continuing appropriate types of insurance.
Hull and machinery insurance
P&O Princess maintains marine hull and machinery insurance policies and
associated marine insurance, including, in the case of total loss, coverage for
increased value. Coverage is maintained with underwriters in various first
class international insurance markets in the UK (Lloyd's and London Companies),
Scandinavia, U.S., Japan, Germany and others.
Most insurance underwriters make it a condition for insurance coverage that a
vessel be certified as "in class" by a classification society that is a member
of IACS. All of P&O Princess' vessels are currently certified as "in class"
with an IACS member. These certifications have either been issued or endorsed
within the last twelve months.
Protection and indemnity cover
Third-party liabilities in connection with P&O Princess' cruise activities are
covered by entry in a P&I Club. P&I cover is available through mutual indemnity
associations (clubs), the majority of which participate in the International
Group of Protection and Indemnity Associations.
Each of P&O Princess' vessels are entered in the UK P&I Club, whose members
have entered more than 15 per cent. of the world's commercially operated
vessels (as measured by gross tonnage) or the Steamship Mutual P&I Club, both
members of the International Group of Protection and Indemnity Associations.
P&O Princess' vessel entries cover legal, statutory and pre-approved contract
liabilities, including liability and other related expenses of injury or death
of crew, passengers or other third parties, repatriation, wreck removal and
pollution. P&O Princess' P&I cover for ocean vessels includes an extension of
cover for liabilities to passengers who have not yet sailed, but are intended
to sail on a cancelled or delayed voyage. The extension also broadens the scope
of vessel incidents covered by the entries.
Other marine insurance
P&O Princess also maintains war risk insurance through the United Kingdom
Mutual War Risks Association Ltd. War risk insurance includes coverage for the
risk of confiscation, seizure, capture, vandalism, sabotage and other war
related risks that are not covered under hull policies or rules of the
protection and indemnity insurance organisations.
P&O Princess maintains loss-of-earnings insurance. In the event that one or
more cruise vessels are unable to operate due to certain covered events, this
insurance policy pays for actual loss up to $50 million for any one occurrence
(reduced limits apply to the German cruise vessels). This cover is in place for
all the vessels with the exception of the river boats.
P&O Princess maintains coverage for freight, defence and demurrage with the
United Kingdom Freight Demurrage and Defence Association Limited or the
Steamship Mutual Underwriting Association (Bermuda) Limited. In addition, P&O
Princess has obtained delay in delivery cover and total loss and abandonment
insurance for its next two new buildings.
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The foregoing is a summary of the primary forms of insurance maintained by P&O
Princess. P&O Princess expects to maintain appropriate forms and levels of
insurance after completion of the DLC transaction and certain of P&O Princess'
insurance coverage may be harmonised with Carnival's policies and practices.
Accordingly, certain insurance coverage currently maintained by P&O Princess,
in particular coverage for passengers not yet sailed, loss of earnings, delay
in delivery and total loss and abandonment may be reduced or eliminated
following completion of the DLC transaction.
Shoreside property
P&O Princess has conventional insurance coverage for shoreside property,
hotels, shipboard consumables and inventory and general liability risks,
maintained with insurance underwriters in the UK, Germany and the U.S. P&O
Princess also maintains business interruption insurance for its shoreside
businesses, as well as coverage for the extra expense of offices and hotels in
the event of an interruption in business from a variety of perils.
The Athens Convention
Current conventions in force in the UK applying to passenger ships are the
Athens Convention relating to the Carriage of Passengers and their Luggage by
Sea (1974), the 1976 Protocol to the Athens Convention and the Convention on
Limitation of Liability for Maritime Claims (1976). In 1999, the UK increased
the limit of liability under the Athens Convention for any carrier whose
principal place of business is in the UK. The U.S. has not ratified any Athens
Convention Protocol. However, vessels flying the flag of a country that has
ratified it may contractually enforce the 1976 Athens Convention Protocol for
cruises that do not call at a U.S. port.
The International Maritime Organisation Diplomatic Conference agreed a new
protocol to the Athens Convention on 1 November 2002. The new protocol, which
has not yet been ratified, substantially increases the level of liability
limits and establishes compulsory insurance which must be maintained by
passenger ship operators and provides a direct action provision, which will
allow claimants access to insurers. Most of the countries in the European
Union, where many of P&O Princess' vessels operate, supported the new protocol
and are likely to ratify it in the future, however, the timing of such
ratification, if obtained, is unknown. No assurance can be given that
affordable and viable insurance and reinsurance arrangements will be available
to provide the level of coverage required under the new protocol. P&O Princess
also expects insurance costs to increase once the new protocol is ratified.
Taxation
This section sets out a brief description of the taxation of P&O Princess prior
to the implementation of the DLC structure.
UK Taxation
P&O Princess is tax resident in the UK.
P&O Princess' ship owning and operating subsidiaries relating to the Princess
Cruises brand are incorporated mainly in Bermuda and the UK. The UK ship
owning/operating companies are subject to UK tax and entered into the UK
tonnage tax regime (see below) effective 1 January 2002.
The non-UK Princess brand vessel owning and operating subsidiaries are in
principle subject to the UK's controlled foreign company, or CFC, legislation
which would ordinarily tax their profits in the UK. However, these companies
currently benefit from an exemption, referred to as the Motive Test exemption,
to the CFC rules. If dividends were paid from these companies to the UK, they
would be subject to UK corporation tax in full.
UK tonnage taxation
The qualifying companies within the P&O Princess group entered the tonnage tax
regime on 1 January 2002.
Companies to which the regime applies pay corporation tax on profit calculated
by reference to the net tonnage of qualifying vessels. Corporation tax is not
chargeable under normal UK tax rules on such companies' relevant shipping
profits. An election for the tonnage tax regime to apply takes effect for ten
years and can be renewed on a rolling basis. For a company to be eligible for
the regime, it must be within the charge to UK corporation tax and, among other
matters, operate qualifying ships that are strategically and commercially
managed in the UK. There is also a seafarer training requirement to which the
tonnage tax companies are subject.
On entry into the tonnage tax regime, all expenditures qualifying for tax
depreciation not yet utilised for tax purposes relating to assets used for
tonnage tax activities are transferred to a new "tonnage tax
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pool" and no further tax depreciation is allowable in respect of the tonnage
tax pool for as long as the tonnage tax regime applies. Within the regime,
proceeds of future disposals of ships owned at the time of entry into the
regime, and which have previously been subject to UK corporation tax, are
deducted from this new pool and any excess proceeds are taxable under normal UK
corporation tax subject to taper relief over seven years or rollover relief
against new expenditure on qualifying ships.
Entry into the regime eliminates the need to provide for deferred tax on
accelerated capital allowances used under normal UK corporation tax rules to
offset profits that would otherwise be taxable.
Relevant shipping profits which are excluded from normal corporation tax
include income which is defined as relevant shipping income. Relevant shipping
income includes income from the operation of qualifying ships and broadly from
shipping related activities. It also includes dividends from foreign companies
which are subject to a tax on profits in their country of residence or
elsewhere and the activities of which broadly would qualify in full for the UK
tonnage tax regime if they were UK resident. In addition, more than 50 per
cent. of the voting power in the foreign company must be held by one or more
companies resident in an EU member state.
P&O Princess' UK non-shipping activities that do not qualify under the UK
tonnage tax regime, which are not forecast to be significant, remain subject to
normal corporation tax.
German and Australian taxation
The German brands and the Australian brands are operated by the UK operating
subsidiary of P&O Princess. The profits from these activities are subject to UK
tonnage tax as set out above. The majority of the profits are exempt from
German and Australian corporation tax by virtue of the UK/Germany and
UK/Australian double tax treaties. Part of the German profits arise from river
cruises and other activities which do not constitute international shipping. To
this extent, profits will be subject to German taxation. However, P&O Princess'
management does not believe that any such tax cost is or will be significant to
the P&O Princess group as a whole.
U.S. taxation
The following summary of the application of the principal U.S. federal income
tax laws, prior to the implementation of the DLC structure, to P&O Princess,
its subsidiaries and to U.S. holders of P&O Princess shares is based upon
existing U.S. federal income tax law, including the Internal Revenue Code,
proposed temporary and final Treasury Regulations, certain current income tax
treaties, administrative pronouncements, and judicial decisions, as in effect
as of the date hereof, all of which are subject to change, possibly with
retroactive effect.
P&O Princess and some of its ship-owning and operating subsidiaries are
non-U.S. corporations engaged in a trade or business in the U.S. that, in many
cases, depending upon the itineraries of their ships, receive income from
sources within the U.S. for U.S. federal income tax purposes. P&O Princess
believes that substantially all of the U.S. source shipping income earned by it
and its subsidiaries is currently exempt from U.S. federal income tax, either
under applicable income tax treaties or Section 883, as applicable. P&O
Princess believes that any U.S. federal income tax imposed on the non-exempt
portion would not be material to the P&O Princess group as a whole.
Application of Section 883 of the Internal Revenue Code
In general, under Section 883, certain non-U.S. corporations are not subject to
U.S. federal income tax on certain U.S. source income derived from the
international operation of a ship or ships. In order to be considered a
qualifying corporation, a corporation must be organised in a country that
grants an equivalent exemption to a U.S. corporation, and if it is a
subsidiary, its parent corporation must be organised in a country that grants
an equivalent exemption. In addition, it must satisfy certain ownership
requirements, including the publicly-traded test or qualified shareholder
tests. See paragraph 11 of Part A of Section 4 under the heading "Exemption
under Section 883 of the Internal Revenue Code" for a more detailed discussion
of the requirements for applicability of Section 883.
On 2 August 2002, the U.S. Treasury Department issued proposed Treasury
Regulations to Section 883 which would apply to P&O Princess. The proposed
Regulations require that corporations
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organised in a country that grants an equivalent exemption through an income
tax treaty must claim an exemption from U.S. federal income tax under such
treaty rather than pursuant to Section 883 (a recent IRS ruling can also be
read to take this position, although the Technical Explanation of the current
treaty supports the position that it provides for an exemption under Section
883). P&O Princess and certain of its subsidiaries are organised in such a
country (i.e. the UK). As discussed below, their U.S.-source shipping income
should be exempt from U.S. federal income tax under Article 8 of the current
UK-U.S. Income Tax Treaty.
Application of the United Kingdom-United States Income Tax Treaty
Article 8 of the current UK-U.S. Income Tax Treaty provides substantially the
same exemption from U.S. federal income tax on U.S.-source shipping income as
provided by Section 883. P&O Princess believes that substantially all of the
U.S.-source shipping income earned by it and its UK resident subsidiaries
should qualify for exemption from U.S. federal income tax under Article 8 of
the current UK-U.S. Income Tax Treaty.
The UK-U.S. Income Tax Treaty has been renegotiated and signed (though it still
has not entered into force as it is still pending ratification by the U.S.).
The provisions of Article 8, as renegotiated, are essentially the same as the
provisions in the existing treaty. However, the pending treaty, unlike the
current treaty, contains a Limitation on Benefits Article that requires one of
certain alternative tests to be satisfied in order for a party to be eligible
for benefits under the pending Treaty. P&O Princess believes that it and its UK
resident subsidiaries, would satisfy the Limitation on Benefits article of the
pending UK-U.S. Income Tax Treaty if it were to come into force prior to the
DLC transaction. The pending treaty also contains other limitations that would
deny the availability of treaty benefits for income earned through certain
entities. While these other limitations would apply to income earned through
certain P&O Princess entities, P&O Princess believes, based on its current
circumstances, that it will be able to reorganise as necessary by, for example,
moving the affected operations into a UK entity or one formed in another
equivalent exemption jurisdiction such that the relevant U.S. source shipping
income should qualify for an exemption from U.S. federal income tax, either
under the pending treaty or pursuant to Section 883.
Based upon the foregoing, P&O Princess believes that substantially all of the
U.S. source shipping income earned by it and its subsidiaries should qualify
for exemption from U.S. federal income tax, either under Section 883 or under
Article 8 of the UK-U.S. Income Tax Treaty, as currently applicable. P&O
Princess believes that any U.S. federal income tax imposed on the non-exempt
portion would not be material to the P&O Princess group as a whole.
To date no final U.S. Treasury regulations of the relevant portions of Section
883 have been promulgated, although, as discussed above, regulations have been
proposed. Those regulations, when finalised, or official interpretations could
differ materially from P&O Princess' interpretation of this Internal Revenue
Code provision and, even in the absence of differing regulations or official
interpretations, the Internal Revenue Service might successfully challenge such
interpretation.
Section 883 has been the subject of legislative modifications in past years
that have had the effect of limiting its availability to certain taxpayers and
there can be no assurance that future legislation or changes in the ownership
of P&O Princess shares will not preclude P&O Princess and its subsidiaries from
obtaining the benefits of Section 883. In addition, tax treaties may be
abrogated by either applicable country, replaced or modified with new
agreements that treat shipping income differently than under the agreements
currently in force. At this time, however, there is no known limiting
legislation pending before the U.S. Congress nor is P&O Princess aware of any
pending modifications relating to the taxation of shipping under the UK-U.S.
Income Tax Treaty, other than as discussed above.
Taxation in the absence of an exemption under Section 883 or the UK-U.S. Income
Tax Treaty
In the absence of an exemption under Section 883 or the UK-U.S. Income Tax
Treaty, as applicable, P&O Princess and/or its subsidiaries would be subject to
either the "net tax regime" or the "4 per cent. tax regime" described in more
detail in paragraph 11 of Part A of Section 4 under the heading "Taxation in
the absence of an exemption under Section 883 or any applicable U.S. income tax
treaty".
85
Taxation of shareholders
General information on the application of current UK tax law and Inland Revenue
practice and current U.S. federal income tax law applicable to P&O Princess
shareholders and P&O Princess ADS holders in respect of the DLC transaction and
the P&O Princess share reorganisation is set out in paragraphs 5 and 6,
respectively, of Section 8. For further information on the tax consequences of
the Partial Share Offer please refer to the Partial Share Offer document.
Holders of P&O Princess shares and P&O Princess ADSs should consult their
independent professional advisers in the light of their particular
circumstances as to the UK tax and U.S. federal income tax consequences and any
state, local or applicable foreign tax law of the DLC transaction, the P&O
Princess share reorganisation and, if accepted, the Partial Share Offer.
Regulation of the cruise industry
Maritime regulations
Government regulation materially affects the ownership and operation of P&O
Princess' vessels. This governmental regulation includes international
conventions, national, state and local laws and regulations in force in the
jurisdictions in which the vessels may operate, as well as in their country of
registration. P&O Princess cannot predict the ultimate cost of complying with
these requirements or the impact of these requirements on the resale value or
useful lives of its vessels.
The most relevant maritime regulations for P&O Princess' business are those
adopted by the International Maritime Organisation. In particular, the
International Maritime Organisation adopted the SOLAS Convention which imposes
a variety of standards to regulate design and operational functions.
The SOLAS Convention also incorporates the International Safety Management
Code. The International Safety Management Code requires operators of passenger
vessels to develop an extensive "Safety Management System" that includes, among
other things, the adoption of a safety and environmental protection policy.
That code came into force on 1 July 1998 and the required Document of
Compliance has been issued to P&O Princess companies and Safety Management
Certificates have been issued for all relevant P&O Princess vessels.
Each ship is also subject to the regulations issued by its country of registry
which conducts periodic inspections to verify compliance. Ships operating out
of U.S. ports are also subject to inspection by the U.S. Coast Guard and by the
U.S. Public Health Service.
All of P&O Princess' vessels are subject to a programme of periodic inspection
by classification societies which conduct annual, intermediate, dry-docking and
class renewal surveys. A classification society conducts these surveys not only
to ensure that vessels are in compliance with international conventions adopted
by the flag state as well as domestic rules and regulations, but also to verify
that a vessel has been maintained in accordance with the rules of the society
and recommended repairs have been conducted satisfactorily.
The U.S. Congress recently enacted the Maritime Transportation Antiterrorism
Act of 2002 which implements a number of security measures of U.S. ports,
including measures that relate to foreign flagged vessels calling at U.S.
ports. P&O Princess believes that the issue of safety and security will
continue to be an area of focus by relevant government authorities both in the
U.S. and elsewhere and, accordingly this will likely subject P&O Princess to
increasing compliance cost in the future.
Additional or new conventions, laws and regulations may be adopted which could
limit P&O Princess' ability to do business and which could have a material
adverse effect on P&O Princess' business and results of operations.
Permits for Glacier Bay, Alaska
In connection with certain of its Alaska cruise operations, Princess Cruises
relies on concession permits from the U.S. National Park Service, or "NPS", to
operate its cruise ships in Glacier Bay National Park. Such permits must be
periodically renewed and there can be no assurance that they will continue to
be renewed or that regulations relating to the renewal of such permits,
including preference
86
or historical rights, will remain unchanged in the future. In addition, there
can be no assurance that the NPS will not consider, under relevant regulations,
the DLC transaction to be a change of control, which could result in a loss of
preferential and historical rights of Princess Cruises.
A court decision of 23 February 2001 concerning the failure on the part of the
NPS in 1996 to prepare an environmental impact statement before the NPS
increased the number of cruise ship entry permits for Glacier Bay National Park
for the 2001 through 2004 period, resulted in the NPS being directed by law to
complete and issue an environmental impact statement by no later than 1 January
2004. The environmental impact statement is to be used to set the maximum level
of vessel entries in Glacier Bay National Park. Until the new level of entries
is set, the number of vessel entries into the park remains the same as the
number in effect during 2000, which includes the additional entry permits
issued by the NPS. The outcome of the environmental impact statement may result
in the additional entry permits being withdrawn and it is possible, but not
expected, that the environmental impact statement may result in certain
existing permits being withdrawn.
Any loss of rights or reduction of permits is not expected to impact materially
on P&O Princess because P&O Princess could still apply for permits to replace
its preferential or historical permits and additional attractive alternative
destinations in Alaska can be substituted for Glacier Bay.
Other environmental, health and safety matters
P&O Princess is subject to various international, national, state and local
environmental protection and health and safety laws, regulations and treaties
that govern, among other things, employee health and safety, air emissions,
water discharge, waste management and disposal and storage, handling, use and
disposal of hazardous substances such as solvents, paints and asbestos.
In particular, in the United States, the Oil Pollution Act of 1990 provides for
strict liability for oil pollution or threatened oil pollution incidents in the
200-mile exclusive economic zone of the United States, subject to monetary
limits. These monetary limits do not apply, however, where the discharge is
caused by gross negligence or wilful misconduct of, or the violation of, an
applicable regulation by a responsible party.
In order to operate in U.S. waters, P&O Princess is also required to obtain
Certificates of Financial Responsibility from the U.S. Coast Guard for each of
its vessels. These certificates demonstrate P&O Princess' ability to meet
removal costs and damages for an oil spill or a release of a hazardous
substance up to the vessel's statutory strict liability limit.
In the U.S., the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, more commonly known as Superfund, and its state
counterparts provide that the owner or operator (including for the purpose of
the statute, a bareboat charterer of a vessel) is strictly, jointly and
severally liable for damages, removal costs and investigative expenses incurred
in connection with the release of a hazardous substance. P&O Princess is named
as a "potentially responsible party" under the Superfund laws at a site in
California, although it believes that it has viable defences in relation to
this site and does not expect P&O Princess' liabilities under the Superfund
laws in connection with this site to be material.
In addition, most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal law.
Many countries have ratified and agreed to follow a stringent liability scheme
concerning oil pollution adopted by the International Maritime Organisation
which, among other things, imposes strict liability for pollution damage
subject to defences and to monetary limits, which monetary limits do not apply
where the spill is caused by the owner's actual fault or privity with the
offending party, or the owner's intentional or reckless conduct. In
jurisdictions that have not adopted the International Maritime Organisation oil
pollution liability scheme, various national, regional or local laws and
regulations have been established to address oil pollution.
If P&O Princess violates or fails to comply with environmental laws,
regulations or treaties, it could be fined or otherwise sanctioned by
regulators. Although P&O Princess has made, and will continue to
87
make, capital and other expenditures to comply with environmental laws and
regulations, P&O Princess does not expect these expenditures to have a material
impact on P&O Princess' financial status in 2003.
From time to time, environmental regulators consider more stringent regulations
which may affect P&O Princess' operations and its compliance costs. For example
in April, 2000, the U.S. Environmental Protection Agency or EPA launched a
national review of the cruise ship industry's waste disposal practices and the
quantity and content of waste discharges.
Consumer Regulations
Under regulations promulgated by the FMC each of P&O Princess' operating
companies that embark passengers in U.S. ports are required to obtain
certificates from the FMC evidencing their ability to meet liability in cases
of non-performance of obligations to passengers. Currently, this obligation has
a maximum of $15 million. A bond of $15 million has been provided to FMC and
counter indemnified by P&O Princess through a letter of credit for $16.5
million. A present proposed revision to the regulations would require P&O
Princess to significantly increase the amount of this bond based on the level
of customer deposits which will increase the cost of bonding or insurance. P&O
Princess has also obtained certificates of financial responsibility required by
the FMC to cover casualty and personal injury. P&O Princess also has obtained a
bond of $1 million in favour of the United States Tour Operators Association
Tour Depositor's Trust.
In the United Kingdom, P&O Princess is required to bond and obtain licenses
from various organisations in connection with the conduct of its business and
its ability to meet liability in the event of non-performance of obligations to
consumers. These organisations include the Passenger Shipping Association and
the Civil Aviation Authority. Under current regulations, P&O Princess is
required to provide bonds in the amount of approximately (Pounds)100 million as
a condition to obtaining the required licenses.
P&O Princess is required by German law to obtain a guarantee from a reputable
insurance company to ensure that in case of insolvency P&O Princess' customers
will be refunded any monies they have paid on account of a booking and, in
addition, that they will be repatriated without additional cost if insolvency
occurs after a journey starts.
In Australia, P&O Princess is a member of the Travel Compensation Fund which
provides compensation, as a last resort, to consumers who suffer losses in
their dealings with travel agents.
Where you can find additional information about P&O Princess
P&O Princess is subject to the reporting requirements of the Exchange Act and,
in accordance with those requirements, files reports and other information with
the SEC. However, as a foreign registrant, P&O Princess and its shareholders
are exempt from some of the Exchange Act reporting requirements. The reporting
requirements that do not apply to P&O Princess or its shareholders include
proxy solicitation rules, the short-swing profit disclosure rules of Section 16
of the Exchange Act and the rules regarding filing quarterly reports with the
SEC, which are required to be filed only if required in P&O Princess' home
country. You can inspect and copy the reports and other information filed by
P&O Princess with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC. In addition, the SEC
maintains a website (www.sec.gov) that contains the reports, proxy statements
and other information that P&O Princess has filed. Material that P&O Princess
has filed may also be inspected at the library of the NYSE, 20 Broad Street,
New York, New York 10005.
88
Part B. Financial Information of P&O Princess
P&O Princess financial information for the three years ended 31 December 2002
The financial information set out below does not constitute P&O Princess'
statutory accounts within the meaning of Section 246 of the Companies Act.
During the year ended 31 December, 2002 P&O Princess adopted Financial
Reporting Standard 19 Deferred Tax which resulted in full provision being made
for deferred tax assets and liabilities arising from timing differences between
the recognition of gains and losses in the financial statements and in tax
computations. This gave rise to restatement of the consolidated profit and loss
accounts and consolidated balance sheets and associated notes in respect of the
financial years ended 31 December 2001 and 31 December 2000. The consolidated
financial information below for the three years ended 31 December 2002, 2001
and 2000 and as at 31 December 2002, 2001 and 2000 has been extracted without
material adjustment from P&O Princess' audited financial statements for the
years ended 31 December 2002, 2001 and 2000.
KPMG Audit Plc, Chartered Accountants and Registered Auditor of 8 Salisbury
Square, London, EC4Y 8BB, United Kingdom was for each of the three years ended
31 December 2002 and is currently, the auditor of P&O Princess. KPMG Audit Plc
made reports under Section 235 of the Companies Act on the financial statements
for each of the three years ended 31 December 2002 which were unqualified and
did not contain a statement under Section 237(2) and (3) of the Companies Act.
The financial statements for each of the two years ended 31 December 2001 have
been delivered to the Registrar of Companies.
The financial information is presented under UK GAAP. A summary of differences
between UK and U.S. GAAP for the three years ended 31 December 2002 is
presented in note 28 to the consolidated financial information.
89
P&O PRINCESS CRUISES PLC
Group profit and loss account
Years ended December 31
2002 2001 2000
Note U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
Turnover 2 2,526.8 2,451.0 2,423.9
Cost of sales (1,896.3) (1,881.6) (1,842.0)
Administrative expenses
Administrative expenses before exceptional transaction
costs (214.8) (208.1) (208.8)
Exceptional transaction costs 2,3 (117.0) -- --
-------- -------- --------
(331.8) (208.1) (208.8)
-------- -------- --------
Operating costs 3 (2,228.1) (2,089.7) (2,050.8)
-------- -------- --------
Group operating profit 298.7 361.3 373.1
Share of operating results of joint ventures -- 0.1 0.5
-------- -------- --------
Total operating profit 2 298.7 361.4 373.6
Loss on disposal of ships 2 -- (1.9) (6.7)
Profit on sale of business 2 1.2 -- 0.2
-------- -------- --------
Profit on ordinary activities before interest 2 299.9 359.5 367.1
Net interest payable and similar items 4 (74.0) (58.0) (49.1)
-------- -------- --------
Profit on ordinary activities before taxation 225.9 301.5 318.0
Taxation 5 (17.1) 81.7 (57.4)
-------- -------- --------
Profit on ordinary activities after taxation 208.8 383.2 260.6
Equity minority interests 18 -- (0.1) (2.6)
-------- -------- --------
Profit for the financial year attributable to shareholders 208.8 383.1 258.0
Dividends 6 (83.2) (83.2) (83.1)
-------- -------- --------
Retained profit for the financial year 17 125.6 299.9 174.9
-------- -------- --------
Earnings per share
Basic earnings per share (in cents) 7 30.2c 55.4c 37.7c
Diluted earnings per share (in cents) 7 30.0c 55.1c 37.7c
Adjusted basic earnings per share (in cents) 7 47.1c 41.3c 37.7c
Adjusted diluted earnings per share (in cents) 7 46.8c 41.1c 37.7c
Each ADS represents an interest in four ordinary shares.
In all three years all profits and losses arise from continuing activities.
Adjusted earnings per share excludes exceptional transaction costs in 2002 and
exceptional tax items in 2001 (see note 7).
See accompanying notes to the financial statements.
90
P&O PRINCESS CRUISES PLC
Group balance sheet
As at December 31
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
Note (note 1) (note 1)
Fixed assets
Intangible assets
Goodwill 8 127.1 112.9 121.0
Tangible assets
Ships 9 5,380.0 4,038.4 3,608.0
Properties and other fixed assets 10 249.4 248.0 219.6
-------- -------- --------
5,629.4 4,286.4 3,827.6
Investments 11 16.3 19.0 10.9
-------- -------- --------
5,772.8 4,418.3 3,959.5
-------- -------- --------
Current assets
Stocks 12 87.4 74.3 79.8
Debtors 13 309.4 256.7 322.3
Cash at bank and in hand 162.1 120.4 247.2
-------- -------- --------
558.9 451.4 649.3
Creditors: amounts falling due within one year 14 (987.2) (825.3) (975.7)
-------- -------- --------
Net current liabilities (428.3) (373.9) (326.4)
-------- -------- --------
Total assets less current liabilities 5,344.5 4,044.4 3,633.1
Creditors: amounts falling due after more than one year 14 (2,516.8) (1,393.1) (1,062.7)
Provisions for liabilities and charges 15 (13.7) (21.7) (214.7)
-------- -------- --------
2,814.0 2,629.6 2,355.7
======== ======== ========
Capital and reserves
Called up share capital 16 346.7 346.3 346.3
Share premium account 17 3.7 0.2 --
Other reserves 17 93.1 82.4 82.4
Merger reserve 17 910.3 910.3 910.3
Profit and loss account 17 1,460.0 1,290.2 1,016.5
-------- -------- --------
Equity shareholders' funds 2,813.8 2,629.4 2,355.5
Equity minority interests 18 0.2 0.2 0.2
-------- -------- --------
2,814.0 2,629.6 2,355.7
======== ======== ========
See accompanying notes to the financial statements.
91
P&O PRINCESS CRUISES PLC
Group cash flow statement
Years ended December 31
2002 2001 2000
Note U.S.$m U.S.$m U.S.$m
Net cash inflow from operating activities 19 576.1 507.0 532.3
Returns on investments and servicing of finance
Interest received 5.9 6.6 2.6
Interest paid (109.9) (87.1) (78.5)
-------- ------ ------
Net cash outflow for returns on investments and servicing of
finance (104.0) (80.5) (75.9)
-------- ------ ------
Taxation 6.4 (171.0) (34.3)
Capital expenditure
Purchase of ships (1,124.1) (579.3) (749.8)
Purchase of other fixed assets (32.4) (53.5) (45.9)
Disposal of ships -- 46.6 14.7
Disposal of other fixed assets -- -- 0.2
-------- ------ ------
Net cash outflow for capital expenditure (1,156.5) (586.2) (780.8)
-------- ------ ------
Acquisitions and disposals
Disposal/(purchase) of subsidiaries and long term investments 11, 20 3.1 (6.3) (14.7)
Equity dividends paid (85.0) (145.5) --
-------- ------ ------
Net cash outflow before financing (759.9) (482.5) (373.4)
-------- ------ ------
Financing
Issues of stock 3.9 0.2 --
Movement on loans from P&O -- 3.7 356.2
Loan drawdowns 879.4 606.3 247.7
Loan repayments (65.4) (277.1) (39.3)
Net investment by P&O -- -- 1.2
Repayment of finance lease (2.6) -- --
-------- ------ ------
Net cash inflow from financing 815.3 333.1 565.8
-------- ------ ------
Increase/(decrease) in cash in the year 19 55.4 (149.4) 192.4
======== ====== ======
See accompanying notes to the financial statements.
The restatement for FRS 19 "Deferred Taxation" has no impact on the cash flow
as previously reported for the years ended December 31, 2001 and December 31,
2000.
92
P&O PRINCESS CRUISES PLC
Group statement of total recognized gains and losses
Years ended December 31
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note1) (note 1)
Profit for the year 208.8 383.1 258.0
Exchange movements on foreign currency net investments 44.2 (26.2) (5.5)
------ ----- -----
Total recognized gains and losses relating to the year 253.0 356.9 252.5
Prior year adjustment (note 1) (108.1) -- --
------ ===== =====
Total gains and losses recognized since last annual report 144.9
======
Reconciliation of movements in shareholders' funds
Years ended December 31
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
Total recognized gains and losses for the year 253.0 356.9 252.5
Dividends (83.2) (83.2) (83.1)
New shares issued 3.9 0.2 41.3
Shares to be issued 10.7 -- 46.8
Investment in P&O Princess Cruises by P&O -- -- 1.2
------- ------- -------
184.4 273.9 258.7
Shareholders' funds at beginning of the year
(The shareholders' funds for the Group at the beginning of 2001, as
previously reported, were $2,463.6m (2000: $2,188.8m) before
deducting the prior year adjustment of $108.1m (2000: $92.0m)) 2,629.4 2,355.5 2,096.8
------- ------- -------
Shareholders' funds at end of the year 2,813.8 2,629.4 2,355.5
======= ======= =======
See accompanying notes to the financial statements.
93
P&O PRINCESS CRUISES PLC
1 Accounting policies
The following accounting policies have been applied consistently in dealing
with items which are considered material in relation to the Group.
Basis of preparation of financial statements
The Group financial statements comprise the consolidation of the accounts of
the Company and all its subsidiaries and incorporate the Group's interest in
its joint ventures. The accounts of its subsidiaries and joint ventures are
made up to December 31.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United Kingdom ("U.K. GAAP")
under the historical cost convention, and in accordance with applicable U.K.
accounting standards. These principles differ in certain significant respects
from accounting principles generally accepted in the United States ("U.S.
GAAP"). Application of U.S. GAAP would have affected shareholders' funds at
December 31, 2002 and 2001 and profit attributable to shareholders for the
years ended December 31, 2002, 2001 and 2000, to the extent summarized in note
28, additional information for U.S. investors.
Basis of consolidation
P&O Princess Cruises plc acquired the cruise business of The Peninsular and
Oriental Steam Navigation Company ("P&O") on October 23, 2000. The acquisition
was effected by the issue of ordinary shares in P&O Princess Cruises plc to the
holders of deferred stock in P&O in settlement of a dividend declared by P&O.
The consolidated financial statements have been prepared using merger
accounting principles as if the businesses comprising P&O Princess Cruises had
been part of P&O Princess Cruises for all periods presented, since they have
been under common control throughout this period. Businesses acquired from or
disposed of to third parties during the periods presented have been accounted
for using acquisition accounting, from or to the date control passed.
Prior year adjustment on implementation of FRS 19
The Accounting Standards Board issued Financial Reporting Standard No. 19
"Deferred Tax" (FRS 19) in December 2000. The standard is effective for
accounting periods ending on or after January 23, 2002. The standard requires
full provision to be made for deferred tax assets and liabilities arising from
most types of timing difference between the recognition of gains and losses in
the financial statements and their recognition in a tax computation. Deferred
tax assets are, however, only to be recognized to the extent that it is
regarded as more likely than not that they will be recovered. P&O Princess
Cruises has adopted the standard as of January 1, 2002 resulting in the
restatement of comparative data from partial provisioning for deferred tax to
the full provision basis.
As a result of the implementation of FRS 19, the balance sheet as at December
31, 1999 was restated to reflect full provision for deferred tax, an increase
in deferred tax liabilities of $92.0 million.
The net effect on net assets and shareholders' funds as at December 31, 2000 as
a result of implementing FRS 19 is a reduction of $108.1 million with a charge
to the profit and loss account for the year of $16.1 million.
The tax credit in the profit and loss account for the year to December 31, 2001
has increased by $96.8 million to reflect the elimination of the majority of
future potential tax liabilities upon P&O Princess Cruises' election to enter
the U.K. tonnage tax regime. This is consistent with the elimination of the
partially provided deferred tax in the 2001 audited financial statements. The
net effect on net assets and shareholders' funds as at December 31, 2001 as a
result of implementing FRS 19 is a reduction of $11.3 million.
94
Use of estimates
Preparation of financial statements in conformity with U.K. GAAP and U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
turnover and expenses for an accounting period. Actual results could differ
from these estimates.
Goodwill arising on acquisitions
Goodwill arising on business acquisitions being the difference between the fair
value of consideration compared to the fair value of net assets acquired
represents the residual purchase price after allocation to all identifiable net
assets. Goodwill is included within intangible fixed assets and is stated at
cost less accumulated amortization. Amortization is calculated to write off
goodwill on a straight line basis over its expected useful life, which can be
up to 40 years. A life of more than 20 years is adopted when the directors
consider the period for which the value of the underlying business acquired
exceeds the value of the identifiable net assets is demonstrably longer than 20
years. Goodwill with an expected useful life of more than 20 years is reviewed
annually for any impairment, by comparing carrying value with discounted
cashflows.
Joint ventures
A joint venture is an entity in which the Group has a long term interest and
shares control with one or more co-venturers. Joint ventures are stated at P&O
Princess Cruises' share of underlying net assets. P&O Princess Cruises' share
of the profits or losses of joint ventures is included in the consolidated
profit and loss account on an equity accounting basis.
Investments
Investments in subsidiary undertakings are held at cost less provisions for
impairment.
Shares in P&O Princess Cruises plc held for the purpose of long term incentive
plans (LTIPs) are held within fixed asset investments. To the extent that these
shares have been identified for bonus awards, provision is made for the
difference between the book value of these shares and their residual value, if
any.
Tangible fixed assets
Ships are stated at cost less accumulated depreciation. Subsequent ship
improvement costs are capitalized as additions to the ship, while costs of
repairs and maintenance accounted for as dry docking costs.
Properties and other fixed assets, including computer hardware and software,
are stated at cost less accumulated depreciation.
Interest incurred in respect of payments on account of assets under
construction is capitalized to the cost of the assets concerned.
Depreciation is calculated to write off the cost to estimated residual value on
a straight line basis over the expected useful life of the asset concerned as
follows:
Cruise ships 30 years
Freehold buildings 40 years
Other fixed assets 3-16 years
Freehold land and ships under construction are not depreciated.
Dry-docking costs
Dry-docking costs are capitalized and expensed on a straight line basis to the
date of the next scheduled drydock.
95
Impairment of fixed assets
P&O Princess Cruises reviews all fixed assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable based on estimated future cash flows. Provision for
impairment in value of fixed assets is made in the profit and loss account.
Stocks
Stocks consist of provisions, supplies, fuel and gift shop merchandise and are
stated at the lower of cost or net realizable value.
Cash and borrowings
Cash and cash equivalents consist of cash, money market deposits and
certificates of deposit. All cash equivalents have original maturities of 90
days or less. Cash and cash equivalents at the balance sheet date are deducted
from bank loans and overdrafts where formal rights of set-off exist.
Turnover
Turnover comprises sales to third parties (excluding VAT and similar sales
taxes). Turnover includes air and land supplements and on board sales and is
taken before deducting travel agents' commission.
Deposits received on sales of cruises are initially recorded as deferred income
and are recognized, together with revenues from shipboard activities and all
associated direct costs of a voyage, on a pro rata basis over the period of the
cruise.
Marketing and promotion costs
Marketing and promotion costs are expensed over the period of benefit, not
exceeding one year from the end of the year the cost is incurred.
Leases
Assets acquired under finance leases are capitalized and the outstanding future
lease obligations are shown in creditors. Rentals under operating leases are
charged to the profit and loss account on a straight line basis over the life
of the lease.
Pension costs
Contributions in respect of defined contribution pension plans are charged to
the profit and loss account when they are payable. Contributions in respect of
defined benefit pension plans are calculated as a percentage, agreed on
actuarial advice, of the pensionable salaries of employees. The cost of
providing defined benefit pensions is charged to the profit and loss account on
a systematic basis over the periods benefiting from the services of employees,
and is calculated with the advice of an independent qualified actuary, using
the projected unit method. This is in accordance with Statement of Standard
Accounting Practice 24, 'Accounting for pension costs' the basis on which the
Group accounts for pension costs. Additional disclosure as required by FRS 17
is also provided.
Deferred taxation
Deferred tax is recognized without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting
purposes which have arisen but not reversed by the balance sheet date, except
as otherwise required by FRS 19. A net deferred tax asset is regarded as
recoverable and therefore recognized only when, on the basis of all available
evidence, it can be regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying
timing differences can be deducted.
Derivatives and other financial instruments
P&O Princess Cruises uses currency swaps, interest rate swaps and forward
currency contracts to manage its exposure to certain foreign currency and
interest rate risks and to hedge its major capital expenditure or lease
commitments by businesses in currencies other than their functional currency.
Gains and losses on instruments used for hedging are not recognized until the
exposure that is being hedged is itself recognized.
96
Foreign currencies
The functional and reporting currency of the Group is the U.S. dollar as the
majority of its trade and assets are denominated in that currency. Transactions
in currencies other than a business' functional currency are recorded at the
rate of exchange ruling at the date of the transaction. Profits and losses of
subsidiaries, branches, and joint ventures which have functional currencies
other than U.S. dollars are translated into U.S. dollars at average rates of
exchange. Assets and liabilities denominated in foreign currencies are
translated at the year end exchange rates.
Exchange differences arising from the retranslation of the opening net assets
of subsidiaries, branches, and joint ventures which have currencies of
operation other than U.S. dollars and any related loans are taken to reserves,
together with the differences arising when the profit and loss accounts are
translated at average rates and compared with rates ruling at the year end.
Other exchange differences are taken to the profit and loss account.
2 Segmental analysis
P&O Princess Cruises has a single business of operating cruise ships and
related landside assets under various brand names including; Princess Cruises,
P&O Cruises, Swan Hellenic, Ocean Village, AIDA, A'ROSA and P&O Cruises
(Australia). These brand names are marketed by operations in North America,
Europe and Australia.
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Turnover (by origin)
North America 1,698.8 1,754.9 1,796.7
Europe and Australia 828.0 696.1 627.2
------- ------- -------
2,526.8 2,451.0 2,423.9
======= ======= =======
Turnover in Europe and Australia includes turnover in relation to the United
Kingdom of $525.8m (2001 $476.3m, 2000 $454.0m).
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Total operating profit
North America 292.5 254.1 279.6
Europe and Australia 123.2 107.3 94.0
Exceptional transaction costs (117.0) -- --
------ ----- -----
298.7 361.4 373.6
====== ===== =====
Depreciation and amortization
North America 114.9 102.1 100.4
Europe and Australia 59.0 46.0 44.2
------ ----- -----
173.9 148.1 144.6
====== ===== =====
Profit on ordinary activities before interest
North America 292.5 252.2 279.8
Europe and Australia 124.4 107.3 87.3
Exceptional transaction costs (117.0) -- --
------ ----- -----
299.9 359.5 367.1
====== ===== =====
Which is stated after crediting/(charging):
Non-operating items
North America -- (1.9) 0.2
Europe and Australia 1.2 -- (6.7)
------ ----- -----
1.2 (1.9) (6.5)
====== ===== =====
Non-operating items for Europe and Australia include a $1.2m profit on a sale
of an investment (2001 $1.9m, 2000 $6.0m loss on disposal of vessels).
97
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Capital additions
North America 1,107.2 618.5 500.1
Europe and Australia 223.5 57.9 321.2
-------- -------- -------
1,330.7 676.4 821.3
-------- -------- -------
2002 2001
U.S.$m U.S.$m
Net operating assets excluding goodwill and ships under
construction
North America 2,606.6 2,599.0
Europe and Australia 1,728.7 902.0
-------- --------
4,335.3 3,501.0
-------- --------
2002 2001
U.S.$m U.S.$m
Restated
(note 1)
The net operating assets are reconciled to net assets as follows:
Net operating assets 4,335.3 3,501.0
Goodwill 127.1 112.9
Ships under construction 907.4 508.0
Group share of joint ventures' non operating assets 3.5 8.6
Net borrowings (2,471.9) (1,436.4)
Corporation tax and deferred tax (66.6) (43.7)
Dividends payable (20.8) (20.8)
-------- --------
Net assets 2,814.0 2,629.6
-------- --------
Total assets
North America 3,914.7 3,411.0
Europe and Australia 2,417.0 1,458.7
-------- --------
6,331.7 4,869.7
-------- --------
3 Operating costs
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Direct operating costs 1,576.6 1,584.1 1,558.0
Selling and administration expenses 477.6 357.5 348.2
Depreciation and amortization 173.9 148.1 144.6
-------- -------- -------
2,228.1 2,089.7 2,050.8
-------- -------- -------
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Operating costs include:
Advertising and promotion costs 145.8 149.4 139.4
Exceptional transaction costs 117.0 -- --
Operating lease costs:
Ships 20.9 18.6 13.3
Property 14.2 11.2 10.5
Other 3.3 3.3 2.9
Auditors' remuneration:
Audit 0.9 0.8 0.8
Stock exchange reporting 2.6 1.8 --
-------- -------- -------
3.5 2.6 0.8
Tax advice 3.1 3.5 5.1
Other non-audit fees 0.2 0.5 0.2
-------- -------- -------
Total fees paid to the auditors and their associates 6.8 6.6 6.1
-------- -------- -------
Of the $5.9m (2001 $5.8m, 2000 $5.3m) charged for non-audit services provided
by the Company's auditors $4.5m (2001 $3.8m, 2000 $0.1m) was for services in
the UK. The audit fee of the Company was $0.2m (2001 $0.2m, 2000 $0.2m).
98
Transaction costs of $117.0m consist of the $62.5m break-fee relating to the
Royal Caribbean proposed transaction together with $54.5m legal and
professional fees in connection with this transaction and the Proposed Carnival
transaction.
4 Net interest payable and similar items
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Interest payable on:
Bank loans and overdrafts (111.1) (98.9) (35.6)
Loans from P&O -- -- (39.7)
------ ----- -----
(111.1) (98.9) (75.3)
Interest capitalized 31.0 33.1 23.5
Interest receivable on other deposits 6.0 7.7 2.5
------ ----- -----
(74.1) (58.1) (49.3)
Joint ventures 0.1 0.1 0.2
------ ----- -----
(74.0) (58.0) (49.1)
------ ----- -----
Interest capitalized relates to tangible fixed assets under construction. The
capitalization rate is based on the weighted average of interest rates
applicable to the Group's borrowings (excluding loans for specific purposes)
during each year. The aggregate interest capitalized at each year end was:
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Ships 204.1 173.4 140.8
Properties 4.4 4.1 3.5
----- ----- -----
208.5 177.5 144.3
----- ----- -----
5 Taxation
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
The taxation (charge)/credit is made up as follows:
Current taxation:
UK Corporation tax (0.2) -- --
Overseas taxation (16.4) (110.8) (40.2)
----- ------ -----
(16.6) (110.8) (40.2)
Deferred taxation:
Origination/reversal of timing differences (0.5) 192.5 (17.2)
----- ------ -----
(17.1) 81.7 (57.4)
===== ====== =====
2002 2001 2000
U.S.$m U.S.$m U.S.$m
The current taxation charge is reconciled to the UK standard rate as Restated Restated
follows: (note 1) (note 1)
Profit on ordinary activities before tax 225.9 301.5 318.0
----- ------ -----
Notional tax charge at UK standard rate
(2002: 30.0%; 2001: 30.0%; 2000: 30.0%) (67.8) (90.5) (95.4)
Effect of overseas taxes at different rates 61.4 59.9 41.0
Permanent differences (17.1) (80.2) (2.7)
Effect of tonnage tax 6.9 -- --
Other -- -- 16.9
----- ------ -----
(16.6) (110.8) (40.2)
===== ====== =====
There was no charge or credit in respect of profits and losses on sale of ships
and other fixed assets. The effective tax rate for the Group is expected to
remain low following entry into the UK tonnage tax regime. The exceptional
transaction costs had no effect on the tax charge for the year.
99
6 Dividends
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Dividends paid, declared, proposed and accrued are as follows:
Equity share capital
First interim paid 3 cents per share (2001: 3 cents, 2000: nil) 20.8 20.8 --
Second interim paid 3 cents per share (2001: 3 cents, 2000: nil) 20.8 20.8 --
Third interim paid 3 cents per share (2001: 3 cents, 2000: nil) 20.8 20.8 --
Fourth interim proposed at 3 cents per share (2001: nil, 2000: nil) 20.8 -- --
Final proposed at nil cents per share (2001: 3 cents, 2000: 12 cents) -- 20.8 83.1
---- ---- ----
83.2 83.2 83.1
==== ==== ====
7 Earnings per ordinary share
2001 2000
Restated Restated
2002 (note 1) (note 1)
Weighted average number of shares (million)
Basic 692.4 691.5 684.2
Dilutive shares 3.2 3.3 --
----- ----- -----
Diluted 695.6 694.8 684.2
===== ===== =====
Basic Diluted Basic Diluted Basic Diluted
cents cents cents cents cents cents
per per per per per per
U.S.$m share share U.S.$m share share U.S.$m share share
Basic earnings 208.8 30.2 30.0 383.1 55.4 55.1 258.0 37.7 37.7
Exceptional transaction costs 117.0 16.9 16.8 -- -- -- -- -- --
Exceptional tax items -- -- -- (97.5) (14.1) (14.0) -- -- --
Adjusted earnings 325.8 47.1 46.8 285.6 41.3 41.1 258.0 37.7 37.7
The weighted average number of shares for the period up to October 23, 2000
represents the number of shares issued on demerger. The weighted average number
of shares has been adjusted for shares in the Company held by the employee
benefit trust for the satisfaction of incentive scheme awards that have not
vested unconditionally.
Each ADS represents an interest in four ordinary shares.
The dilutive shares relate to ordinary shares to be issued on the exercise of
employee share options.
Adjusted earnings per share reflects the elimination of exceptional transaction
costs of $117.0m in 2002 and exceptional tax items of $97.5m in 2001,
comprising a credit from the release of deferred tax on entry into the tonnage
tax regime of $192.5m and tax charges arising from internal corporate
restructuring of $95.0m.
8 Goodwill
U.S.$m
Cost
Cost at December 31, 2001 128.5
Exchange movements 20.9
-----
Cost at December 31, 2002 149.4
=====
Amortization
Amortization at December 31, 2001 (15.6)
Exchange movements (2.4)
Amortization charge for year (4.3)
-----
Amortization at December 31, 2002 (22.3)
=====
Net book value
At December 31, 2002 127.1
=====
At December 31, 2001 112.9
=====
100
$128.0m of goodwill costs in respect of AIDA is being amortized over 40 years
as the directors consider that 40 years represents the useful economic life of
that business. All other goodwill is amortized over 20 years.
9 Ships
Owned Leased Total
U.S.$m U.S.$m U.S.$m
Costs
Cost at December 31, 2001 4,739.0 -- 4,739.0
Exchange movements 222.8 -- 222.8
Additions 1,157.4 148.1 1,305.5
------- ----- -------
Cost at December 31, 2002 6,119.2 148.1 6,267.3
======= ===== =======
Depreciation
Depreciation at December 31, 2001 (700.6) -- (700.6)
Exchange movements (43.3) -- (43.3)
Charge for year (142.8) (0.6) (143.4)
------- ----- -------
Depreciation at December 31, 2002 (886.7) (0.6) (887.3)
======= ===== =======
Net book value
At December 31, 2002 5,232.5 147.5 5,380.0
======= ===== =======
At December 31, 2001 4,038.4 -- 4,038.4
======= ===== =======
Ships under construction included above totalled $907.4m (2001 $508.0m).
Included within ships under construction at December 31, 2002 is the final
payment in respect of Coral Princess which was delivered in December 2002, but
did not enter operational service until January 2003.
10 Properties and other fixed assets
Office
equipment,
plant and
Freehold motor
Properties vehicles Total
U.S.$m U.S.$m U.S.$m
Cost
Cost at December 31, 2001 123.7 214.7 338.4
Exchange movements -- 5.1 5.1
Additions 5.2 20.0 25.2
----- ------ ------
Cost at December 31, 2002 128.9 239.8 368.7
===== ====== ======
Depreciation
Depreciation at December 31, 2001 (5.9) (84.5) (90.4)
Exchange movements -- (2.7) (2.7)
Charge for the year (3.4) (22.8) (26.2)
----- ------ ------
Depreciation at December 31, 2002 (9.3) (110.0) (119.3)
===== ====== ======
Net book value
At December 31, 2002 119.6 129.8 249.4
===== ====== ======
At December 31, 2001 117.8 130.2 248.0
===== ====== ======
The book value of freehold land is $3.4m (2001 $3.4m), which is not depreciated.
101
11 Investments
Own
shares Joint Other
held ventures investments Total
U.S.$m U.S.$m U.S.$m U.S.$m
Cost or valuation at December 31, 2001 5.0 8.8 6.9 20.7
Exchange movements 0.5 - (0.4) 0.1
Disposals (1.1) - (1.9) (3.0)
---- --- ---- ----
Cost or valuation at December 31, 2002 4.4 8.8 4.6 17.8
---- --- ---- ----
Provision at December 31, 2001 (1.7) - - (1.7)
Exchange movements (0.2) - - (0.2)
Disposals 1.1 - - 1.1
Charge for year (0.7) - - (0.7)
---- --- ---- ----
Provision at December 31, 2002 (1.5) - - (1.5)
---- --- ---- ----
Net book value
At December 31, 2002 2.9 8.8 4.6 16.3
---- --- ---- ----
At December 31, 2001 3.3 8.8 6.9 19.0
==== === ==== ====
As at December 31, 2002 the P&O Princess Cruises Employee Benefit Trust held
1,540,483 (2001: 1,981,616) shares in P&O Princess Cruises, with an aggregate
nominal value of $1m. At December 31, 2002 the market value of these shares was
$10.7m (2001 $11.5m). If they had been sold at this value there would have been
no tax liability (2001 nil) on the capital gain arising from the sale.
The Ms Arkona was sold by the owner Ms Arkona GmbH & Co KG to Trans Ocean Tours
on January 30, 2002. A profit of $1.2m was made on this transaction.
The principal joint ventures are P&O Travel Limited (Hong Kong) and Joex
Limited. P&O Travel Limited (Hong Kong) is a travel agency incorporated in Hong
Kong in which P&O Princess Cruises had a 50% interest at December 31, 2002.
P&O Princess Cruises' share of turnover for the year ended December 31, 2002
and share of gross assets and gross liabilities as at December 31, 2002 of P&O
Travel Limited (Hong Kong) are as follows:
2002 2001
U.S.$m U.S.$m
Turnover 4.9 5.6
---- ----
Gross assets 6.8 6.7
Gross liabilities (3.0) (2.9)
---- ----
3.8 3.8
==== ====
Joex Limited (Joex) is a company incorporated in the Isle of Man, in which P&O
Princess Cruises had a 50% interest at December 31, 2002. Joex was incorporated
during 2001 and has not traded since incorporation. P&O Princess Cruises' share
of its gross assets and liabilities at December 31, 2002 were $5m and $nil
respectively. On October 25, 2002, the shareholders agreed to terminate the
joint venture with effect from January 1, 2003 at no cost to P&O Princess
Cruises and, on January 2, 2003, P&O Princess Cruises confirmed that the joint
venture had been terminated. Accordingly, the shareholders are proceeding with
the dissolution of Joex.
12 Stocks
2002 2001
U.S.$m U.S.$m
Raw materials and consumables 45.7 39.5
Goods for resale 41.7 34.8
---- ----
87.4 74.3
==== ====
102
13 Debtors
2002 2001
U.S.$m U.S.$m
Amounts recoverable within one year
Trade debtors 66.4 45.2
Other debtors 39.1 37.8
Prepayments and accrued income 183.5 165.1
----- -----
Total amounts recoverable within one year 289.0 248.1
===== =====
Amounts recoverable after more than one year
Other debtors 0.1 0.4
Prepayments and accrued income 20.3 8.2
----- -----
Total amounts recoverable after more than one year 20.4 8.6
----- -----
Total debtors 309.4 256.7
===== =====
14 Creditors
2002 2001
U.S.$m U.S.$m
Amounts falling due within one year
Overdrafts (14.5) (16.7)
Bank loans (98.0) (158.4)
Finance lease creditors (7.8) --
Trade creditors (184.2) (147.2)
Corporation tax (54.8) (32.4)
Other creditors (5.5) (3.8)
Accruals (134.4) (108.9)
Deferred income (467.2) (337.1)
Dividends payable (20.8) (20.8)
-------- --------
(987.2) (825.3)
======== ========
2002 2001
Amounts falling due after more than one year U.S.$m U.S.$m
Bank loans, finance lease creditors, loan notes and bonds:
Between one and five years
U.S. dollar bonds 2007 (302.7) --
Bank loans (790.9) (131.4)
Finance lease creditors (119.5) --
Over five years
U.S. dollar notes 2008 (107.8) (107.8)
U.S. dollar notes 2010 (91.6) (91.0)
U.S. dollar notes 2015 (69.8) (69.5)
U.S. dollar notes 2016 (41.9) (41.9)
U.S. dollar bonds 2007 -- (280.8)
U.S. dollar bonds 2027 (189.5) (189.4)
Sterling bond 2012 (317.6) (285.8)
Bank loans (482.4) (184.1)
Accruals and deferred income (3.1) (11.4)
-------- --------
(2,516.8) (1,393.1)
======== ========
Bank loans and overdrafts include amounts of $840.5m (2001 $368.6m) secured on
ships and other assets. Further details of interest rates on bank borrowings
are given in note 26. $1,118.6m principal value of notes and bonds (2001:
$1,086.8m) are unconditionally guaranteed by P&O Princess Cruises International
Limited. At the year end P&O Princess Cruises plc had no independent operations
and P&O Princess Cruises International Limited was the sole direct operating
subsidiary of P&O Princess Cruises plc.
103
The maturity of bank loans, loan notes, bonds, finance lease creditors and
overdrafts is as follows:
2002 2001
U.S.$m U.S.$m
Within one year (120.3) (175.1)
Between one and two years (72.9) (53.4)
Between two and five years (1,140.2) (78.0)
Between five and ten years (860.0) (616.8)
Over ten years (440.6) (633.5)
-------- --------
(2,634.0) (1,556.8)
======== ========
15 Provisions for liabilities and charges
Deferred
Taxation Total
U.S.$m Other U.S.$m
Restated U.S.$m Restated
(note 1) (note 1)
At December 31, 2001 -- (10.4) (10.4)
Prior year adjustment (note 1) (11.3) -- (11.3)
----- ----- -----
At December 31, 2001 (as restated) (11.3) (10.4) (21.7)
Exchange differences -- (1.8) (1.8)
Release -- 10.7 10.7
Charged to profit and loss (0.5) (0.4) (0.9)
----- ----- -----
At December 31, 2002 (11.8) (1.9) (13.7)
===== ===== =====
During 2001 P&O Princess Cruises elected to enter the UK tonnage tax regime
which eliminated future potential tax liabilities on its profits in the UK. The
regime includes provision whereby a proportion of capital allowances previously
claimed by the Group may be subject to tax in the event that a significant
number of vessels are sold and not replaced. This contingent liability
decreases over the first seven years following entry into tonnage tax to nil.
The contingent tax liability at December 31, 2002 was $186.3m (2001: $262.0m)
assuming all vessels on which capital allowances had been claimed were sold for
net book value and not replaced. No provision has been made as no liability is
expected to arise.
$10.7m of contingent consideration, payable in cash in relation to the purchase
of 49% of AIDA Cruises Limited in November 2000 has been released as the
condition requiring its payment did not arise. The total estimated amount
contingently payable is unchanged, but the whole of the remaining consideration
is payable in cash or shares at the Company's option, and therefore an
adjustment has been made to shares to be issued.
Deferred taxation comprises:
2002 2001
U.S.$m U.S.$m
Restated
(note 1)
Accelerated capital allowances 11.8 11.3
==== ====
Distributable reserves of overseas subsidiaries and joint ventures comprising
approximately $1,417.3m (2001: $1,197.5m) would be subject to tax if paid as
dividends. No deferred taxation is provided in respect of these.
104
16 Called up share capital
The authorized share capital is 750,000,000 ordinary shares of 50 U.S. cents
each, 49,998 preference shares of (Pounds)1 each and 2 subscriber shares of
(Pounds)1.
The allotted, called up and fully paid ordinary share capital is as follows:
No of Shares U.S.$m
At December 31, 2001 692,643,428 346.3
Shares issued 829,191 0.4
----------- -----
At December 31, 2002 693,472,619 346.7
=========== =====
During 2002, the Company issued 829,191 ordinary shares of 50 U.S. cents each
following the exercise of share options for total consideration of $3.9m.
The preference shares, which have been allotted but not issued, are entitled to
a cumulative fixed dividend of 8% per annum and are entitled to one vote per
share. The preference shares rank behind other classes of shares in relation to
the payment of capital on certain types of distributions of the Company. The
subscriber shares have no dividend rights nor voting rights nor any rights to
payment of capital upon a distribution of assets by the Company. The preference
shares and subscriber shares are unlisted.
Details of options over ordinary shares granted to employees are given in note
21. Details of contingent rights to shares in relation to the acquisition of
subsidiaries are given in note 17.
17 Reserves
Profit
Share and
premium Other Merger loss
account reserves reserve account Total
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
At December 31, 2001 0.2 82.4 910.3 1,301.5 2,294.4
Prior year adjustment (note 1) -- -- -- (11.3) (11.3)
--- ---- ----- ------- -------
At December 31, 2001 (as restated) 0.2 82.4 910.3 1,290.2 2,283.1
Exchange movements -- -- -- 44.2 44.2
Other -- 10.7 -- -- 10.7
Issue of shares 3.5 -- -- -- 3.5
Retained profit for the financial year -- -- -- 125.6 125.6
--- ---- ----- ------- -------
At December 31, 2002 3.7 93.1 910.3 1,460.0 2,467.1
=== ==== ===== ======= =======
Other reserves represent the difference between the market and nominal value of
shares issued as initial consideration of $35.6m together with the estimated
value of outstanding consideration ($57.5m) in respect of the purchase of 49%
of AIDA Cruises Limited in November 2000. The shares issued in respect of the
initial consideration have been accounted for in accordance with the merger
relief provisions of the Companies Act 1985. The outstanding consideration is
mainly dependent on the future results of the Seetours business and may be
payable between 2003 and 2006. The Company has the option to settle the
outstanding consideration in either cash or new P&O Princess Cruises plc
ordinary shares. The purchase agreement provides that in the event of a change
in control of P&O Princess Cruises plc payment of the outstanding consideration
can be accelerated by the vendor of AIDA Cruises Limited. In such an event, the
minimum amount payable would be approximately (Euro)59 million ($61.9 million),
payable in cash.
105
18 Equity minority interests
2002
U.S.$m
At December 31, 2001 0.2
Proportion of profit on ordinary activities after taxation --
---
At December 31, 2002 0.2
===
19 Notes to the consolidated cash flow statement
(a)Reconciliation of operating profit to net cash inflow from operating
activities
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Group operating profit 298.7 361.3 373.1
Depreciation and amortization 173.9 148.1 144.6
Increase in stocks (11.1) (11.6) (1.6)
(Increase)/decrease in debtors (31.5) 42.2 (40.8)
Increase/(decrease) in creditors and provisions 146.1 (33.0) 57.0
-------- -------- ------
Net cash inflow from operating activities 576.1 507.0 532.3
======== ======== ======
(b) Reconciliation of net cash flow to movement in net debt
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Increase/(decrease) in net cash in the year 55.4 (149.4) 192.4
Cash inflow from loans to and from P&O -- (3.7) (356.2)
Cash outflow/(inflow) from changes in short term borrowings 26.1 (50.0) (20.6)
Cash inflow from third party debt and lease financing (837.5) (279.2) (187.8)
-------- -------- ------
Change in net debt resulting from cash flows (756.0) (482.3) (372.2)
Inception of finance leases (129.9) -- --
Amortization of bond issue costs (1.9) (1.7) (0.2)
Exchange movements in net debt (147.7) 14.6 37.5
-------- -------- ------
Movement in net debt in the year (1,035.5) (469.4) (334.9)
Net debt at the beginning of the year (1,436.4) (967.0) (632.1)
-------- -------- ------
Net debt at the end of the year (2,471.9) (1,436.4) (967.0)
======== ======== ======
(c) Analysis of net debt
Other
At Cash non-cash Exchange At
Jan. 1, 2002 flow movements movements Dec. 31, 2002
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
Cash available on demand 120.4 53.2 -- (11.5) 162.1
Less: bank overdrafts (16.7) 2.2 -- -- (14.5)
-------- ------ ------ ------ --------
103.7 55.4 -- (11.5) 147.6
Short term debt (158.4) 26.1 48.7 (14.4) (98.0)
Medium and long term debt (1,381.7) (840.1) (50.6) (121.8) (2,394.2)
Finance leases -- 2.6 (129.9) -- (127.3)
-------- ------ ------ ------ --------
Net debt (1,436.4) (756.0) (131.8) (147.7) (2,471.9)
======== ====== ====== ====== ========
20 Acquisitions
There were no significant business acquisitions during 2002.
The business acquired during 2001 was Baste & Lange GmbH, a German procurement
company. Net assets of $0.2m were acquired for $1.7m in cash, giving rise to
goodwill of $1.5m with an estimated useful life of 20 years. All book values
approximated to fair value at acquisition.
106
21 Employees
2002 2001 2000
The average number of employees was as follows:
Shore staff 3,654 3,623 3,567
Sea staff 16,298 15,833 15,461
------ ------ ------
19,952 19,456 19,028
====== ====== ======
2002 2001 2000
U.S.$m U.S.$m U.S.$m
The aggregate payroll costs were:
Wages and salaries 307.5 279.1 258.0
Social security costs 12.1 11.2 12.2
Pension costs 12.1 9.8 9.7
------ ------ ------
331.7 300.1 279.9
====== ====== ======
Employee Option Schemes
Options under the P&O Princess Cruises Executive Share Option Plan (the "Option
Plan") are exercisable in a period normally beginning not earlier than three
years and ending no later than ten years from the date of the grant. Options
granted immediately after the demerger from P&O in October 2000 to replace
options over P&O deferred stock previously held by P&O Princess Cruises
employees are exercisable over the same period as the options replaced. The
exercise price is set at the closing market price on the day the option was
granted.
Options granted to P&O Princess Cruises employees under the Option Plan are as
set out below:
Weighted
average exercise
price per share Number of options
Shares ADS Shares ADS
Options outstanding at January 1, 2002 293p $17.14 6,551,662 952,717
Options granted during the year 408p $23.85 2,856,082 505,150
Options exercised during the year 292p $16.97 (613,523) (53,917)
Options lapsed or cancelled 292p -- (171,572) --
---- ------ --------- ---------
Options outstanding at December 31, 2002 318p $19.56 8,622,649 1,403,950
==== ====== ========= =========
Options exercisable at December 31, 2002 293p $16.97 1,038,955 54,874
==== ====== ========= =========
Under the proposed DLC transaction with Carnival Corporation, all the above
options would vest on completion and become exercisable and any performance
conditions would cease to apply (see note 29).
22 Pensions
P&O Princess Cruises is a contributing employer to various pension schemes,
including some multi-employer merchant navy industry schemes.
In the UK, P&O Princess Cruises operates it own defined benefit pension scheme,
the assets of which are managed on behalf of the trustee by independent fund
managers. This scheme is closed to new membership. As at March 31, 2001, the
date of the most recent formal actuarial valuation, the scheme had assets with
a market value of $60.9m, representing 102 percent of the benefits accrued to
members allowing for future increases in earnings. Approximately 70 percent of
the scheme's assets are invested in bonds and 30 percent in equities. The
principal valuation assumptions were as follows:
%
Rate of salary increases 4.0
Rate of pension increases 2.5
Discount rate 5.25
Expected return on assets 5.25
107
The Merchant Navy Ratings Pension Fund ("MNRPF") is a defined benefit
multi-employer scheme in which sea staff employed by companies within the P&O
Princess Cruises group have participated. The scheme has a significant funding
deficit and has been closed to further benefit accrual. Companies within the
P&O Princess Cruises group, along with other employers, are making payments
into the scheme under a non-binding Memorandum of Understanding to reduce the
deficit. Payments by P&O Princess Cruises' group companies to the scheme in
2002 totalled $2.0m, which represented 7 percent of the total payments made by
all employers. As at March 31, 2002, the date of the most recent formal
actuarial valuation, the scheme had assets with a market value of $814m,
representing 84 percent of the benefits accrued to members. Approximately 68
percent of the scheme's assets were invested in bonds, 25 percent in equities
and 7 percent in property. The valuation assumptions were as follows:
%
Rate of salary increases 4.0
Rate of pension increases (where increases apply) 2.5
Discount rate 5.8
Expected return on assets 5.8
The Merchant Navy Officers Pension Fund ("MNOPF") is a defined benefit
mufti-employer scheme in which officers employed by companies within the P&O
Princess Cruises group have participated and continue to participate. This
scheme is closed to new membership. The share of contributions being made to
the scheme by P&O Princess Cruises group companies (based on the year to
December 31, 2002) was approximately 7 percent. However, the extent of each
participating employer's liability for any deficit in the scheme is uncertain.
Accordingly, P&O Princess Cruises accounts for the scheme on a contributions
paid basis, as if it were a defined contribution scheme. The scheme is divided
into two sections -- the New Section and the Old Section. As at March 31, 2000,
the date of the most recent formal actuarial valuation, the New Section had
assets with a market value of $2,680m, representing approximately 100 percent
of the benefits accrued to members. The valuation assumptions were as follows:
%
Rate of salary increases 4.0
Rate of pension increases (where increased apply) 2.5
Discount rate 5.75
Expected return on assets 5.75
At the date of the valuation, approximately 77 percent of the New Section's
assets were invested in equities, 14 percent in bonds and 9 percent in property
and cash. As a result of this asset distribution, it is expected that the fall
in equity markets since March 2000 will have resulted in the New Section now
showing a significant funding deficit. The estimated current position is
discussed below with the additional information presented under FRS17. The Old
Section has been closed to benefit accrual since 1978. As at March 31, 2000,
the date of the most recent formal actuarial valuation, it had assets with a
market value of $2,233m representing approximately 111 percent of the benefits
accrued to members. The assets of the Old Section are substantially invested in
bonds. Contributions from P&O Princess Cruises group companies to the MNOPF
during the year to December 31, 2002 were U.S.$1.2m.
P&O Princess also operates a number of smaller defined benefit schemes in the
U.S. which are unfunded, other than assets in a Rabbi Trust held on the Group's
balance sheet, and makes contributions to various defined contribution schemes
in various jurisdictions.
The pension charges arising from the schemes described above were:
2002 2001 2000
U.S.$m U.S.$m U.S.$m
The P&O Princess Cruises Pension Scheme 5.5 4.3 4.0
Merchant Navy Pension funds 2.8 2.7 2.7
Overseas plans 3.8 2.8 3.0
---- --- ---
12.1 9.8 9.7
==== === ===
In 2000 the P&O Princess Cruises Pension Scheme figure includes $3.1m in
respect of payments to the P&O Pension Scheme prior to demerger in October
2000.
108
Differences between the amounts charged and the amounts paid by P&O Princess
Cruises are included in prepayments or creditors as appropriate. At December
31, 2002 total prepayments amounted to $6.3m (2001: $7.3m), and total creditors
amounted to $14.3m (2001: $13.1m), giving a net pension liability in the
balance sheet of $8.0m.
Additional information presented under FRS17 'Retirement Benefits'
Whilst the group continues to account for pension costs in accordance with
Statement of Standard Accounting Practice 24 'Accounting for Pension costs',
under FRS17 'Retirement Benefits' the following additional information has been
presented in respect of the P&O Princess Cruises Pension Scheme, P&O Princess
Cruises' share of the MNRPF and the U.S. defined benefit schemes. In accordance
with FRS17, the MNOPF is not included in this analysis as P&O Princess Cruises'
share of its underlying assets and liabilities cannot be identified with
certainty. However, some additional information on the overall funding position
of this scheme is provided.
The actuarial valuations of the P&O Princess Cruises schemes and P&O Princess
Cruises' share of the MNRPF were updated to December 31, 2002 and 2001 by P&O
Princess Cruises' qualified independent actuary. The assumptions used are best
estimates chosen from a range of possible actuarial assumptions which may not
necessarily be borne out in practice. Using weighted averages, these
assumptions for the UK and U.S. schemes together were:
2002 2001
% %
Rate of increase in salaries 4.1 4.1
Rate of increase in pensions (where increases apply) 2.5 2.5
Discount rate 5.2 5.6
Expected return on assets (only relevant for UK schemes) 5.1 5.5
The aggregated assets and liabilities in the schemes as of December 31, 2002
and 2001 were:
2002 2001
Expected Expected
rate of rate of
return return
U.S.$m % U.S.$m %
Equities 42.9 5.1 34.1 5.5
Bonds 93.8 5.1 86.9 5.5
------ --- ------ ---
Total market value of assets 136.7 5.1 121.0 5.5
Present value of the schemes' liabilities (178.0) (146.2)
------ ------
Net pension liability (41.3) (25.2)
====== ======
(this analysis excludes pension assets held in a Rabbi Trust of $4.8m)
The net pension liability of $41.3m (2001: $25.2m) represents pension
prepayments of $nil (2001: $7.3m) and pension liabilities of $41.3m (2001:
$32.5m). This compares with the net pension liability accounted for under SSAP
24 of $8.0m.
On full compliance with FRS17, the amounts that would have been charged to the
consolidated profit and loss account and consolidated statement of total
recognized gains and losses for these schemes for the year ended December 31,
2002 are set out below:
2002
U.S.$m
Analysis of amounts charged to operating profits:
Current service cost (7.3)
Past service costs -
-----
Total charged to operating profit (7.3)
-----
Analysis of amount credited to other finance income:
Interest on pension scheme liabilities (8.9)
Expected return on assets in the pension schemes 7.0
-----
Net charge to other finance income (1.9)
-----
The total profit and loss charge of $9.2m compares with $12.1m under SSAP 24
Analysis of amounts recognized in Statement of Recognized Gains and Losses ("STRGL"):
Loss on assets (11.4)
Experience gain on liabilities 9.4
Loss on change of assumptions (financial and demographic) (11.8)
-----
Total loss recognized in STRGL before adjustment for tax (13.8)
=====
109
2002
History of experience gains and losses
Loss on scheme assets $(11.4m)
As a % of scheme assets at end of year 8.3%
Experience gain on scheme liabilities $9.4m
As a % of scheme liabilities at end of year 5.3%
Total actuarial loss recognized in STRGL $(13.8m)
As a % of scheme liabilities at end of year 7.8%
2002
U.S.$m
Movement in net pension liability in the scheme during the year
Net pension liability at January 1, 2002 (25.2)
Contributions paid 6.1
Current service cost (7.3)
Other finance charge (1.9)
Actuarial loss (13.8)
Exchange 0.8
-------
Net pension liability at December 31, 2002 (41.3)
=======
It is estimated that the funding position of the MNOPF has changed
significantly since the valuation as at March 31, 2000 referred to above and
that the New Section is now in deficit. The Annual Report of the MNOPF for the
year ended March 31, 2002 showed that the market value of the assets of the New
Section at that date was $2,404m, of which 66 percent was invested in equities,
22 percent in bonds and 12 percent in property and cash. P&O Princess Cruises'
actuary has estimated the deficit in the New Section at December 31, 2002 based
on the estimated movement in assets since March 31, 2002 and in liabilities
since March 31, 2000 and applying a discount rate to the liabilities of 5.1% in
accordance with FRS17. As noted above, the extent of each employer's liability
with respect to the deficit in the fund is uncertain. Based on the share of
current contributions made to the scheme by the P&O Princess Cruises Group its
share of the estimated deficit would be approximately U.S.$85.0m although the
appropriate share of the deficit actually attributable to the P&O Princess
Cruises group is believed to be lower than this.
On full adoption of FRS17 'Retirement benefits', in future years the difference
between the fair value of the assets held in the Group's defined benefit
pension schemes and the value of the schemes' liabilities measured on an
actuarial basis, using the projected unit method, will be recognized in the
balance sheet as a pension scheme asset or liability, as appropriate, which
would have a consequential effect on reserves. The carrying value of any
resulting pension scheme asset would be restricted to the extent that the Group
is able to recover the surplus either through reduced future contributions or
refunds. The pension scheme asset or liability would be recognized net of any
related deferred tax. However, this is expected to be minimal due to the tax
structure of the group. Movements in the defined benefit pension scheme asset
or liability would be taken to the profit and loss account or directly to
reserves.
23 Related party transactions
Mr. Horst Rahe a non-executive director of the Company has an interest in a
deferred consideration arrangement relating to the Group's purchase of AIDA
Cruises Limited in November 2000. Amounts provided for as at December 31, 2002
in respect of this deferred consideration were $57.5m in aggregate (2001:
U.S.$57.0m) (see note 17).
In July 2002, P&O Princess Cruises International Limited, a subsidiary of the
Company, entered into, on an arms-length basis, a lease on an office property
in Germany with a company in which Horst Rahe, a director of the Company, has
an interest. The lease is for a term of 10 years, commencing in 2004, with
options to extend. The rent payable under the lease each year varies over the
term of the lease, within the range (Euro)350,000 to (Euro)500,000. These
figures are net of relevant regional government grants.
110
24 Commitments
Capital
2002 2001
U.S.$m U.S.$m
Contracted
Ships and Riverboats 1,790.0 2,721.6
Other -- 3.8
------- -------
1,790.0 2,725.4
======= =======
Capital commitments related to ships and riverboats include contract stage
payments, design and engineering fees and various owner supplied items but
exclude interest that will be capitalized.
As at December 31, 2002, the Group had future capital commitments in respect of
the five ocean cruise ships and two riverboats on order at that date of
$1,790.0m. Of the total commitment as at December 31, 2002, it is expected that
P&O Princess Cruises will incur $610.0m in 2003 and $1,180.0m in 2004.
Revenue
The minimum annual lease payments to which P&O Princess Cruises was committed
under non-cancelable operating leases were as follows:
Property Other Total Property Other Total
2002 2002 2002 2001 2001 2001
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
Within one year 10.2 12.4 22.6 9.5 21.4 30.9
Between one and two years 9.8 11.5 21.3 9.1 3.7 12.8
Between two and three years 9.8 11.8 21.6 8.9 0.4 9.3
Between three and four years 9.7 1.9 11.6 8.8 0.5 9.3
Between four and five years 9.7 -- 9.7 8.7 0.1 8.8
In more than five years 56.6 -- 56.6 59.4 -- 59.4
----- ---- ----- ----- ---- -----
105.8 37.6 143.4 104.4 26.1 130.5
===== ==== ===== ===== ==== =====
Future minimum annual lease payments due within one year are analysed as
follows:
Property Other Total Property Other Total
2002 2002 2002 2001 2001 2001
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
On leases expiring:
Within one year 0.4 0.4 0.8 0.3 8.7 9.0
Between one and five years 0.2 12.0 12.2 0.4 12.7 13.1
After five years 9.6 -- 9.6 8.8 -- 8.8
---- ---- ---- --- ---- ----
10.2 12.4 22.6 9.5 21.4 30.9
==== ==== ==== === ==== ====
In addition to the above, at December 31, 2002 we had future commitments to pay
for our usage of certain port facilities as follows:
U.S.$m
Within one year 6.4
Between one and five years 27.4
After five years 5.6
----
39.4
====
25 Contingent liabilities
P&O Princess Cruises has provided counter indemnities of $213.4m (2001:
$179.7m) relating to bonds provided by third parties in support of P&O Princess
Cruises' obligations arising in the normal course of business. Generally these
bonds are required by travel industry regulators in the various jurisdictions
in which P&O Princess Cruises operates.
111
An Italian subsidiary of P&O Princess Cruises made a claim for a tax allowance
for the 1995 financial year under the Italian Tremonti law, reducing taxable
profits by just over 250 billion Lire. Qualification for the allowance is
dependent on ownership of relevant assets. The subsidiary in question bare-boat
chartered a vessel it owned to a fellow subsidiary. In December 2001, the
Italian tax authorities submitted an assessment for tax of (Euro)70.7m ($74
million) with penalties of (Euro)70.7m ($74 million) on the grounds that the
subsidiary had finance leased, rather than chartered, the vessel and therefore
did not qualify for such an allowance. The Italian subsidiary has appealed
against the assessment and the outcome of court proceedings in the Low Tax
Court of Palermo is awaited. The P&O Princess Cruises board, which has been so
advised by its Italian advisers, believes that the relevant assets were owned
and not the subject of a finance lease and that the allowance is due.
Princess Cruises is party to a purported class action litigation relating to
alleged inappropriate assessing of passengers with certain port charges in
addition to their cruise fare. The plaintiffs have not claimed a specific
damage amount but settlement of this litigation had been agreed in principle
with the plaintiffs for coupons for future travel in amounts between $5 and $24
with a total face value of approximately $13.4 million. However, on January 17,
2002, a Los Angeles Superior Court Judge ruled that he would not consider the
class-wide settlement agreed by the parties on the grounds that he had
previously ruled that there was no appropriate class. As a result of this
ruling, the case remains pending. Notwithstanding this development, the P&O
Princess Cruises board does not believe that a material liability will arise
with respect to this case and no provision has been made in the accounts for
this contingency. However, if there is a settlement, there can be no guarantee
that it would be of an amount previously indicated.
In the normal course of business, various other claims and lawsuits have been
filed or are pending against P&O Princess Cruises. The majority of these claims
and lawsuits are covered by insurance. P&O Princess Cruises management believes
the outcome of any such suits, which are not covered by insurance, would not
have a material adverse effect on P&O Princess Cruises' financial statements.
26 Financial instruments
P&O Princess Cruises uses financial instruments to finance its operations. The
financial instruments held by P&O Princess Cruises include cash, overdrafts,
bonds and loans. Derivative financial instruments are used to manage the
currency and interest rate risks arising from its operations and its sources of
finance. The derivatives used for this purpose are principally currency swaps,
interest rate swaps and forward currency contracts.
The main financial risks to which P&O Princess Cruises is exposed are
summarized below. No transactions of a speculative nature are undertaken.
The accounting policies for financial instruments are described in note 1.
For the purpose of this note, other than currency disclosures, the only debtors
and creditors included are deferred consideration receivable or payable, loans,
bank overdrafts and short term borrowings, in accordance with FRS13.
Foreign currency risk
P&O Princess Cruises has international business operations. Its principal
operating currency is the U.S. dollar, but it also operates in a number of
other currencies, the most important of which are sterling and the euro. In
general, P&O Princess Cruises' profits and shareholders' funds benefit if
sterling or the euro are strong against the U.S. dollar. The U.S.
dollar/sterling and the U.S. dollar/euro exchange rates at the respective
period ends were:
Average
exchange rates
for periods Period end
ended exchange rates
December 31, 2002
U.S.$:(Pounds) 1.504 1.609
U.S.$:euro 0.941 1.049
December 31, 2001
U.S.$:(Pounds) 1.440 1.450
U.S.$:euro 0.894 0.897
112
Approximately 40% of P&O Princess Cruises' net operating assets are denominated
in non U.S. dollar currencies with the result that P&O Princess Cruises' U.S.
dollar consolidated balance sheet, and in particular shareholders' funds, can
be affected by currency movements. P&O Princess Cruises' partially mitigates
the effect of such movements by borrowing in the same currencies as those in
which the assets are denominated. An analysis of financial liabilities by
currency is shown below.
In addition, approximately 30% of P&O Princess Cruises' operating profit is
currently generated by businesses with functional currencies other than U.S.
dollars. The results of these businesses are translated into U.S. dollars at
average exchange rates for the purposes of consolidation. The impact of
currency movements on operating profit is mitigated partially by some interest
costs being incurred in non U.S. dollar currencies.
P&O Princess Cruises' businesses generally generate their turnover and incur
costs in their main functional currency. Exceptions to this include:
.. Princess Cruises generates some revenue in Canadian dollars and in sterling.
.. Princess Cruises incurs some costs in euros.
.. U.K., German and Australian businesses incur costs in U.S.$, including fuel
and some crew costs.
The following table shows P&O Princess Cruises' currency exposures that give
rise to the net currency gains and losses recognized in the profit and loss
account. Such exposures comprise the monetary assets and liabilities of P&O
Princess Cruises that are not denominated in the functional currency of the
operating unit concerned, excluding certain non U.S. dollar borrowings treated
as hedges of net investments in non U.S. dollar functional currency operations.
Net foreign currency monetary assets/(liabilities)
U.S. Dollar Sterling Euro Other Total
----------- -------- ------ ------ ------
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
Functional currency of Group operation:
U.S. dollars -- (26.4) (5.0) (20.5) (51.9)
Sterling -- -- (0.6) 0.7 0.1
Other 0.7 -- -- 2.2 2.9
----------- -------- ------ ------ ------
Total at December 31, 2002 0.7 (26.4) (5.6) (17.6) (48.9)
=========== ======== ====== ====== ======
Functional currency of Group operation:
U.S. dollars -- (0.9) (2.1) 5.7 2.7
Sterling (0.9) -- -- -- (0.9)
----------- -------- ------ ------ ------
Total at December 31, 2001 (0.9) (0.9) (2.1) 5.7 1.8
=========== ======== ====== ====== ======
Interest rate risk
The interest rate profile of the financial liabilities of P&O Princess Cruises
is set out in the table below:
Weighted Average
average time
interest over
Variable rate for which
rate Fixed rate fixed rate interest
financial financial financial rate is
Total liabilities liabilities liabilities fixed
------- ------- ------ ----------- ------
U.S.$m U.S.$m U.S.$m % months
Currency:
U.S. dollars 1,309.6 880.7 428.9 5.4 176.5
Sterling 759.9 291.1 468.8 7.2 93.3
Euro 564.5 514.5 50.0 4.6 28.0
------- ------- ------ --- ------
Total at December 31, 2002 2,634.0 1,686.3 947.7 6.3 127.5
======= ======= ====== === ======
Currency:
U.S. dollars 713.1 412.4 300.7 7.7 260.0
Sterling 753.4 293.9 459.5 7.2 103.0
Euro 90.3 90.3 - - -
------- ------- ------ --- ------
Total at December 31, 2001 1,556.8 796.6 760.2 7.4 165.1
======= ======= ====== === ======
113
The variable rate financial liabilities comprise bank borrowings and overdrafts
bearing interest at rates fixed in advance for periods ranging from one to six
months by reference to the applicable reference rate, primarily LIBOR for U.S.
dollar, sterling and euro borrowings.
The interest rate profile of the financial assets of P&O Princess Cruises is
set out in the table below:
Financial Weighted Average
assets average time
on which interest over
Variable no Fixed rate for which
rate interest rate fixed rate interest
financial is financial financial rate is
Total assets received assets assets fixed
U.S.$m U.S.$m U.S.$m U.S.$m % months
Currency:
U.S. dollars 54.9 35.5 19.4 -- -- --
Sterling 100.9 95.4 5.5 -- -- --
Euro 2.8 1.5 1.3 -- -- --
Other 8.1 7.6 0.5 -- -- --
----- ----- ---- --- --- ----
Total at December 31, 2002 166.7 140.0 26.7 -- -- --
===== ===== ==== === === ====
Currency:
U.S. dollars 16.0 1.5 14.5 -- -- --
Sterling 81.2 73.4 7.8 -- -- --
Euro 8.4 6.4 -- 2.0 6.0 48.0
Other 21.7 20.3 1.4 -- -- --
----- ----- ---- --- --- ----
Total at December 31, 2001 127.3 101.6 23.7 2.0 6.0 48.0
===== ===== ==== === === ====
The majority of variable rate financial assets comprise bank accounts bearing
interest at the applicable money market deposit rates. Fixed rate financial
assets include deferred consideration relating to the sale of fixed assets.
Liquidity risk
At December 31, 2002 P&O Princess Cruises had committed financing arranged of
$1,210m (2001: $1,657m) to fund the delivery payments on four of its five ocean
cruise ships on order, of which $475m relates to ship deliveries in 2003 and
$735m to ship deliveries in 2004. In addition, at December 31, 2002 it had $444
(2001: U.S.$605m) of undrawn committed bank facilities with a weighted average
life of five years and a further $162.1m (2001: $120.4m) of cash available for
general corporate purposes, including ship purchases.
Credit risk
Management does not consider there to be any significant concentration of
credit risk. Potential concentrations comprise principally cash and cash
equivalents and trade debtors. P&O Princess Cruises enters into derivative
transactions and maintains cash deposits with several major banks. Management
periodically reviews the credit rating of the institutions and believes that
any credit risk is minimal. Concentration of credit risk with respect to trade
debtors is limited due to the large number of debtors comprising P&O Princess
Cruises' customer base.
The immediate credit exposure of financial instruments is represented by those
financial instruments that have a positive fair value at December 31, 2002.
114
Fair values of financial assets and liabilities
A comparison by category of book value and fair value of P&O Princess Cruises'
financial assets and liabilities is as follows:
At December 31
2002 2001
Book Fair Book Fair
value value value value
U.S.$m U.S.$m U.S.$m U.S.$m
Primary financial instruments held or issued to finance P&O
Princess Cruise operations:
Notes and bonds (1,120.9) (1,177.2) (1,066.2) (957.0)
Other loans (1,498.6) (1,510.9) (473.9) (484.0)
Cash 162.1 162.1 120.4 120.4
Bank overdrafts (14.5) (14.5) (16.7) (16.7)
Other investments and
deferred consideration 4.6 4.6 6.9 6.9
Derivative financial instruments held or issued to hedge
currency exposure on expected future transactions:
Forward foreign currency contracts -- (16.7) -- (208.5)
Interest rate swaps -- 49.6 -- 13.6
-------- -------- -------- --------
(2,467.3) (2,503.0) (1,429.5) (1,525.3)
======== ======== ======== ========
The notional principal amount of derivative financial instruments held as
hedges against currency exposures on ship capital expenditure is $690.2m (2001:
$924.2m) in respect of forward foreign currency contracts and $798.3m (2001:
$741.8m) in respect of currency and interest rate swaps providing hedges
against currency and interest rate exposure on loans.
The fair value of notes and bonds is based on quoted market price or if these
are not available the quoted market price of comparable debt.
Other loans, which include short term borrowings and bank term loans, are
largely at variable interest rates and therefore the book value approximates to
the fair value.
The fair value of cash and bank overdrafts approximates to the book value due
to the short term maturity of the instruments.
The fair value of other investments and deferred consideration is based on the
estimated recoverable amount.
The fair value of derivative financial instruments are discounted to the net
present value using prevailing market rates and foreign currency rates at the
balance sheet date.
Hedging
When P&O Princess Cruises' businesses enter into capital expenditure or lease
commitments in currencies other than their main functional currency, these
commitments are normally hedged using forward contracts and currency swaps in
order to fix the cost when converted to the functional currency. The most
significant of P&O Princess Cruises' foreign currency commitments of this
nature are in respect of certain new build cruise ships under construction. The
periods of the forward contracts match the expected cash flows of the capital
commitments, usually between three and five years. Other cruise ships have been
ordered in currencies matching the main functional currencies in which these
ships will generate their revenue.
115
Gains and losses on instruments used for hedging are not recognized until the
exposure that is being hedged is itself recognized. Unrecognized gains and
losses on currency swaps, interest rate swaps and forward currency contracts
are as follows:
Net gains/
Gains (Losses) (losses)
U.S.$m U.S.$m U.S.$m
At January 1, 2002 18.1 (213.0) (194.9)
(Gains)/losses arising before January 1, 2002 that were
recognized during the year ended December 31, 2002 (1.5) 57.9 56.4
---- ------ ------
Gains/(losses) arising before January 1, 2002 that were not recognized
during the year ended December 31, 2002 16.6 (155.1) (138.5)
Gains/(losses) arising in the year that were not recognized during the year
ended December 31, 2002 62.7 108.7 171.4
---- ------ ------
Gains/(losses) at December 31, 2002 79.3 (46.4) 32.9
---- ------ ------
Of which:
Gains/(losses) expected to be recognized in less than one year 9.4 (43.9) (34.5)
Gains/(losses) expected to be recognized after more than one year 69.9 (2.5) 67.4
---- ------ ------
Gains/(losses) at December 31, 2002 79.3 (46.4) 32.9
---- ------ ------
Of which:
Gains/(losses) on contracted capital expenditure on ships 27.6 (42.7) (15.1)
Gains/(losses) on other hedges 51.7 (3.7) 48.0
---- ----- -----
Gains/(losses) at December 31, 2002 79.3 (46.4) 32.9
==== ===== =====
The underlying commitments, after taking these contracts into account, are
reflected within note 24.
27 Investment in subsidiaries
The principal operating subsidiaries at December 31, 2002 were:
Percentage of
Country of equity share
Incorporation/ capital owned at
Registration December 31, 2002 Business Description
P&O Princess Cruises International Ltd. England 100%+ Passenger Cruising
Alaska Hotel Properties LLC U.S.A. 100% Hotel Operations
Brittany Shipping Corporation Ltd. Bermuda 100% Shipowner
Corot Shipping Corporation (Sociedade
Unipessoal) Lda Portugal 100% Shipowner
CP Shipping Corporation Ltd Bermuda 100% Shipowner
Fairline Shipping Corporation Ltd Bermuda 100% Shipowner
Fairline Shipping International Corporation Ltd Bermuda 100% Shipowner
GP2 Ltd Bermuda 100% Shipowner
GP3 Ltd Bermuda 100% Shipowner
Princess Cruises (Shipowners) Ltd England 100% Passenger cruising
P&O Travel Ltd England 100% Travel agent
Princess Cruise Lines Ltd Bermuda 100% Passenger cruising
Princess Tours Ltd England 100% Shipower
Royal Hyway Tours Inc U.S.A. 100% Land tours
Sitmar International SRL Panama 100% Holding company
Tour Alaska LLC U.S.A. 100% Rail tours
+ Held directly by the Company.
116
28 Summary differences between UK and U.S. GAAP
Accounting principles
These financial statements have been prepared in accordance with UK GAAP, which
differs in certain significant respects from U.S. GAAP. A description of the
relevant accounting principles which differ materially is given below.
Treasury stock
Under UK GAAP, the Company's shares held by employee share trusts are included
at cost in fixed asset investments and are written down to the amount payable
by employees over the vesting period of the options. Under U.S. GAAP, such
shares are treated as treasury shares and are included in shareholders' equity.
Depreciation
Under UK GAAP, until December 31, 1999 certain freehold properties were not
depreciated. Under U.S. GAAP useful economic lives have been applied to these
properties and a depreciation expense recorded based on these lives.
Goodwill and contingent consideration
Under UK GAAP, if an acquirer can satisfy contingent consideration by the issue
of shares at its option this element of the consideration is not a liability as
there is no obligation to transfer future economic benefits. Consequently this
element of the purchase price is accounted for within shareholders' funds.
Under U.S. GAAP this consideration is not recognized until the consideration is
settled.
In June 2001 the Financial Accounting Standards Board ('FASB') issued Statement
of Financial Accounting Standards ('SFAS') No. 141-Business Combinations and
SFAS No. 142-Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations. SFAS
No. 141 specifies criteria that intangible assets acquired in a business
combination must meet to be recognized and reported separately from goodwill.
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142.
The Group adopted the provisions of SFAS No. 141 as at July 1, 2001 and SFAS
No. 142 as at January 1, 2002. Goodwill and intangible assets determined to
have an indefinite useful economic life are not amortized. Goodwill and
indefinite life intangible assets acquired in business combinations completed
before July 1, 2001 continued to be amortized through to December 31, 2001.
Amortization of such assets ceased on January 1, 2002 upon adoption of SFAS No.
142. Accordingly, goodwill amortization recognized under UK GAAP from January
1, 2002 has been reversed for the purposes of U.S. GAAP.
Upon adoption of SFAS No. 142 the Group was required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria SFAS No. 141 for recognition separate from
goodwill. The Group was also required to reassess the useful lives and residual
values of all intangibles acquired and to make any necessary amortization
period adjustments by the end of the first interim period after adoption. For
intangible assets identified as having indefinite useful economic lives, the
Group was required to test those intangible assets for impairment in accordance
with the provisions of SFAS No. 142 within the first interim period. Impairment
is measured as the excess carrying value over the fair value of an intangible
asset with an indefinite life. The results of this analysis did not require the
Group to recognize an impairment loss.
In connection with the SFAS No. 142 transitional goodwill impairment
evaluation, the Statement required the Group to perform an assessment of
whether there was an indication that goodwill is impaired as of date of
adoption. To accomplish this the Group was required to identify its reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of January 1, 2002. The Group was required to
determine the fair value of each reporting unit and compare it with the
117
carrying value of the reporting unit within six months of January 1, 2002. This
transitional impairment test upon the adoption of SFAS No. 142 did not result
in an impairment charge. The Group performed the annual impairment test in
December 2002 and determined that goodwill was not impaired.
Marketing and promotion costs
Under UK GAAP, marketing and promotion costs have been expensed over the period
of benefit, not exceeding one year from the end of the year the cost is
incurred. U.S. GAAP requires that these costs are expensed in the financial
year incurred.
Relocation costs
The Group had accrued expenses relating to the relocation of employees which
under UK GAAP are recognizable as liabilities. Under U.S. GAAP these costs may
not be recognized until incurred by the employees.
Employee share incentives
The executive schemes
Under UK GAAP the intrinsic value of shares or rights to acquire shares when
the rights are granted, less contributions by employees, is charged in arriving
at operating profit. If this forms part of a long term incentive scheme the
charge in the profit and loss account is spread over the period to which the
schemes' performance criteria relate, otherwise recognition occurs when shares
or rights are granted. Under U.S. GAAP, compensation expense is recognized for
the difference between the market price of the shares and the exercise price
for performance plans and variable plans. The amount of compensation expense is
adjusted each accounting period based on the value of shares for both types of
plan and also upon the estimated achievement of the performance criteria for
the performance plans, until the date at which the number of shares and the
exercise price are known.
SAYE scheme
When employed by P&O, certain employees of P&O Princess Cruises were eligible
to participate in the P&O save as you earn (''SAYE'') share option scheme. P&O
Princess Cruises does not operate a SAYE scheme. U.K. GAAP does not recognize
the cost of SAYE discounts in financial statements. U.S. GAAP requires the full
discount given to employees on the market price of shares provided as part of a
'non-compensatory plan' (such as the SAYE scheme) to be charged to the profit
and loss account when it is greater than that which would be reasonable in an
offer of shares to shareholders or others.
Pensions
Under UK GAAP, pension costs include the regular cost of providing the benefits
as a level percentage of current and expected future earnings of the employees
covered. Variations from the regular pension cost are spread on a systematic
basis over the estimated average remaining service lives of current employees
in the plans.
U.S. GAAP requires that the projected benefit obligation (pension liability) be
compared with the market value of the underlying plan assets, and the
difference may be adjusted to reflect any unrecognized obligations or assets in
determining the pension cost or credit for the period. The actuarial method and
assumptions used in determining the pension expense can be significantly
different from that computed under current UK GAAP. U.S. GAAP also requires the
actuarial valuation to be prepared as at a more recent date than UK GAAP.
During 2001 one of the multi-employer schemes in which the Group participates,
the MNRPF, closed its fund for future benefit accrual. Under UK GAAP, the Group
is recognizing this liability over the period in which the funding deficit is
being made good which approximates to expected remaining service lives of
employees in the scheme. Under U.S. GAAP, the Group has accounted for its share
of the scheme's net pension liability with an expense of $3.7m being recognized
in 2002 (2001: $15.1m).
118
Derivative instruments and hedging activities
Under UK GAAP, gains and losses on instruments used for hedging are not
recognized until the exposure that is being hedged is itself recognized. Under
U.S. GAAP, Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
''Accounting for Derivative Instruments and Hedging Activities'', as amended,
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives will either be
recognized in earnings as offsets to the changes in fair value of related
hedged items, or, for forecast transactions, deferred and recorded as a
component of other comprehensive income until the hedged transactions occur and
are recognized in earnings. The ineffective portion of a hedging derivative's
change in fair value is recognized immediately in earnings. This statement
became effective for P&O Princess Cruises on January 1, 2001, and a transition
adjustment of $9.0m was debited to reserves on implementation as the cumulative
effect of U.S. GAAP accounting policy change.
In accordance with SFAS 133, U.S. GAAP assets are increased by $103.3m and
liabilities by $114.9m at December 31, 2002 (2001: U.S. GAAP assets increased
by $214.3m and liabilities by $219.3m). Cash flow hedges of $3.3m have been
taken to other comprehensive income.
Taxes
Deferred Tax
Following the implementation of FRS19 'Deferred tax', under both UK and U.S.
GAAP deferred taxes are accounted for on all temporary differences. Deferred
tax can also arise in relation to the tax effect of the other U.S. GAAP
adjustments. During 2001, the Group elected to enter the UK tonnage tax regime,
as a result of which temporary timing differences in respect of fixed assets
within the scheme became permanent differences. The deferred tax liabilities in
respect of these assets have therefore been released under both UK and U.S.
GAAP.
Implementation of FRS 19 'Deferred Tax'
Following the implementation of FRS 19 "Deferred tax" as detailed in note 1,
the reconciliation of UK profit and shareholders' funds to U.S. GAAP has been
restated for 2001 and 2000. In 2001 the impact on the U.S. GAAP reconciliation
is a decrease in the ''Taxes'' U.S. GAAP adjustment to profit of $96.8m and an
increase of $11.3 in the ''Taxes'' U.S. GAAP adjustment to shareholders' funds.
In 2000, the effect is a reduction in the ''Taxes'' U.S. GAAP adjustment to
profit of $16.1m and a reduction in the ''Taxes'' U.S. GAAP adjustment to
shareholders' funds of $108.1m.
Other taxes
The Group incurred income tax in 2001 as a result of taxable gains on
intercompany transactions that were undertaken to maximize its tax efficiency.
Under U.K. GAAP, this was charged to the profit and loss account. Under U.S.
GAAP, income taxes paid on intercompany profits on assets remaining within the
Group must be deferred. This deferred charge is being amortized over 25 years.
Dividends
Under UK GAAP dividends are accounted for in the period to which they pertain,
which may be earlier than the date of declaration. Under U.S. GAAP dividends
are accounted for in the period in which they are declared.
Transaction Costs
In 2001, it was expected that the proposed dual listed company transaction with
Royal Caribbean Cruises Ltd would be accounted for under UK GAAP using merger
accounting principles with the costs of carrying out the combination being
expensed to the profit and loss account when the combined group came into
existence. When the P&O Princess Cruises Board withdrew its recommendation for
this proposed transaction in October 2002, these costs were expensed under UK
GAAP. Under U.S. GAAP it was intended that the proposed transaction would be
accounted for using the purchase method of accounting with P&O Princess Cruises
being treated as the acquiree. Accordingly, under U.S. GAAP the costs incurred
by P&O Princess Cruises in connection with the proposed combination were
expensed to the profit and loss account as incurred.
119
Assets and liabilities
Current assets under UK GAAP of U.S.$20.4m (2001: U.S.$8.6m) would be
reclassified as non current assets under U.S. GAAP.
Provisions for liabilities and charges under UK GAAP of U.S.$nil (2001:
U.S.$0.2m) would be reclassified as Creditors--amounts falling due within one
year under U.S. GAAP.
Deferred financing costs of US$17.6m included within Creditors: amounts falling
due after more than one year, under UK GAAP would be reclassified as "Other
assets" under U.S. GAAP.
The effects of these differing accounting principles are shown below:
Summary Group income statement
2002
UK 2002 2002 2001 2000
GAAP Adjustments U.S.GAAP U.S.GAAP U.S.GAAP
U.S.$m U.S.$m U.S.$m U.S.$m U.S.$m
Revenues 2,526.8 -- 2,526.8 2,451.0 2,423.9
Expenses
Operating (1,576.6) -- (1,576.6) (1,584.1) (1,558.0)
Marketing, selling and administrative (477.6) 5.5 (472.1) (381.5) (353.7)
Depreciation and amortization (173.9) 4.7 (169.2) (146.5) (143.9)
-------- ---- -------- -------- --------
(2,228.1) 10.2 (2,217.9) (2,112.1) (2,055.6)
-------- ---- -------- -------- --------
Operating income before income from
affiliated operations 298.7 10.2 308.9 338.9 368.3
Income from affiliated operations -- -- -- 0.1 0.7
-------- ---- -------- -------- --------
Operating income 298.7 10.2 308.9 339.0 369.0
-------- ---- -------- -------- --------
Non-operating income (expense)
Interest income 6.0 -- 6.0 7.7 2.5
Interest expense, net of capitalized interest (80.0) (3.3) (83.3) (61.8) (51.8)
Other income (expense) 1.2 -- 1.2 (1.8) (6.5)
Income tax (expense) credit (17.1) (2.8) (19.9) 151.2 (56.9)
Minority interest -- -- -- (0.1) (2.6)
-------- ---- -------- -------- --------
(89.9) (6.1) (96.0) 95.2 (115.3)
-------- ---- -------- -------- --------
Profit attributable to ordinary shareholders in
accordance with U.S. GAAP before
cumulative effect of accounting policy
change 208.8 4.1 212.9 434.2 253.7
Cumulative effect of accounting policy change
in respect of derivative instruments and
hedging activities -- -- -- (9.0) --
-------- ---- -------- -------- --------
Profit attributable to ordinary shareholders in
accordance with U.S. GAAP 208.8 4.1 212.9 425.2 253.7
======== ==== ======== ======== ========
120
Adjustments to profit attributable to ordinary shareholders
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
Profit attributable to ordinary shareholders in accordance with UK GAAP 208.8 383.1 258.0
U.S. GAAP adjustments
Depreciation 0.4 0.4 0.4
Goodwill and contingent consideration 4.3 1.2 0.3
Marketing and promotion costs (3.2) 5.2 (8.3)
Relocation costs (2.0) 2.0 -
Employee share incentives (i) 1.8 (5.1) 1.9
Pensions (ii) (3.0) (14.2) 0.9
Derivative instruments and hedging activities (3.3) 4.0 --
Tax effect of U.S. GAAP adjustments -- (3.9) 0.5
Taxes (2.8) 73.4 --
Transaction costs 11.9 (11.9) --
----- ----- -----
Profit attributable to ordinary shareholders in accordance with U.S. GAAP
before cumulative effect of accounting policy change 212.9 434.2 253.7
----- ----- -----
Cumulative effect of U.S. GAAP accounting policy change in respect of
derivative instruments and hedging activities -- (9.0) --
----- ----- -----
Profit attributable to ordinary shareholders in accordance with U.S. GAAP 212.9 425.2 253.7
----- ----- -----
Earnings per share
Basic earnings per share in accordance with U.S. GAAP (in cents)
before cumulative effect of accounting policy change 30.7 62.8 37.1
after cumulative effect of accounting policy change 30.7 61.5 37.1
Diluted earnings per share in accordance with U.S. GAAP (in cents)
before cumulative effect of accounting policy change 30.6 62.5 37.1
after cumulative effect of accounting policy change 30.6 61.2 37.1
----- ----- -----
Weighted average number of shares used in basic earnings per share
calculation (millions) 692.4 691.5 684.2
Weighted average number of shares used in diluted earnings per share
calculation (millions) 695.6 694.8 684.2
Goodwill and other intangible assets - adoption of SFAS No. 142
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Reported profit attributable to ordinary shareholders in accordance with
U.S. GAAP 212.9 425.2 253.7
Add back goodwill amortization -- 2.9 2.0
----- ----- -----
Adjusted profit attributable to ordinary shareholders in accordance with
U.S. GAAP 212.9 428.1 255.7
----- ----- -----
Basic earnings per share in accordance with U.S. GAAP (cents)
Reported basic earnings per share in accordance with U.S. GAAP 30.7 61.5 37.1
Add back goodwill amortization -- 0.4 0.3
----- ----- -----
Adjusted basic earnings per share in accordance with U.S. GAAP 30.7 61.9 37.4
----- ----- -----
Diluted earnings per share in accordance with U.S. GAAP (cents)
Reported diluted earnings per share in accordance with U.S. GAAP 30.6 61.2 37.1
Add back goodwill amortization -- 0.4 0.3
----- ----- -----
Adjusted diluted earnings per share in accordance with U.S. GAAP 30.6 61.6 37.4
----- ----- -----
121
Adjustments to shareholders' funds
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
Shareholders' funds in accordance with U.K. GAAP 2,813.8 2,629.4 2,355.5
U.S. GAAP adjustments
Treasury stock (2.9) (3.3) --
Depreciation (10.9) (11.3) (11.7)
Goodwill and contingent consideration (51.7) (45.3) (46.5)
Marketing and promotion costs (87.9) (84.7) (89.9)
Relocation costs -- 2.0 --
Pensions (ii) (15.3) (12.3) 1.9
Derivative instruments and hedging activities (11.6) (5.0) --
Tax effect of U.S. GAAP adjustments -- -- 3.9
Taxes (iii) 70.6 73.4 --
Dividends 20.8 20.8 83.1
Transaction Costs -- (11.9) --
------- ------- -------
Shareholders' funds in accordance with U.S. GAAP 2,724.9 2,551.8 2,296.3
======= ======= =======
The following table reconciles shareholders' funds under U.S. GAAP:
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Shareholders funds opening balance 2,551.8 2,296.3 2,006.8
Profit for year under U.S. GAAP 212.9 434.2 253.7
Add back share options as taken through reserves (1.8) 5.1 (1.2)
Treasury stock -- (3.3) --
Foreign exchange reserve movement 44.6 (26.2) (5.5)
Dividend (83.2) (145.5) --
Investment by P&O -- -- 1.2
New shares issued 3.9 0.2 41.3
Implementation of FAS 133 -- (9.0) --
FAS 133 cash flow hedge (3.3) -- --
------- ------- -------
Shareholders funds closing balance 2,724.9 2,551.8 2,296.3
======= ======= =======
(i) Employee share incentives
The profit and loss account charge/(credit) in respect of employee stock
compensation schemes was U.S.$0.7m in 2002 and nil in each of the two years
ended December 31, 2001 under U.K. GAAP, and U.S.$(1.1)m (2001: U.S.$5.1m,
2000: U.S.$(1.9)m) under U.S. GAAP.
P&O Princess Cruises has adopted the disclosures of SFAS No. 123, 'Accounting
for Stock-Based Compensation', but continues to measure its stock-based
compensation expense under U.S. GAAP in accordance with APB 25 and its related
interpretations. If P&O Princess Cruises had measured compensation costs for
the P&O Princess Cruises stock options that were granted to its employees in
2002, 2001 and 2000 under the fair value based method prescribed by SFAS 123,
the net profit would have been the illustrative amounts shown below.
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Restated Restated
(note 1) (note 1)
Profit attributable to ordinary shareholders
As reported under U.S. GAAP 212.9 425.2 253.7
Pro forma under U.S. GAAP 208.5 421.6 250.2
The weighted average fair value of options granted to P&O Princess Cruises
employees was U.S.$2.84. Equivalent fair values in 2001 and 2000 in respect of
options over P&O Princess Cruises ordinary shares were U.S.$3.78 and U.S.$1.91
respectively.
These pro forma amounts may not be representative of the effect on pro forma
net income in future years, since the estimated fair value of stock options is
amortized over the vesting period and additional options may be granted in
future years.
122
The fair value of grants during the year have been estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions; expected dividend yields of 1.7% (2001: 3.0%, 2000: 2.5%);
expected volatility of 51.4% (2001: 72.5%, 2000: 42.0%); risk free interest
rates of 3.75% (2001: 5.0%, 2000: 5.8%) and expected option lives of up to six
years.
(ii)Pensions
For the purposes of U.S. GAAP, the pension costs of The P&O Pension Scheme and
of its successor, The P&O Princess Cruises Pension Scheme have been restated in
the following tables in accordance with the requirements of SFAS No. 87. The
changes in projected benefit obligations, plan assets and details of the funded
status of the plan, under SFAS No. 87 and SFAS No. 132 are as follows:
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Change in projected benefit obligation:
Benefit obligation at beginning of year 58.7 50.9 49.0
Service cost 5.0 4.9 4.8
Interest cost 3.3 2.8 2.7
Exchange 7.6 (1.8) (3.7)
Actuarial loss 5.5 1.9 (1.9)
---- ---- ----
Benefit obligation at end of year 80.1 58.7 50.9
==== ==== ====
Change in plan assets:
Fair value at beginning of year 66.1 58.4 49.4
Actual return on plan assets (1.7) 4.4 0.7
Group contribution 3.0 4.4 11.0
Participant contributions 1.0 1.1 1.0
Exchange 7.4 (2.2) (3.7)
---- ---- ----
Fair value of plan assets at end of year 75.8 66.1 58.4
==== ==== ====
Reconciliation of funded status:
Funded status of the plan (4.3) 7.4 7.5
Unamortized transition asset (0.1) (0.2) (0.3)
Unamortized actuarial net loss 14.4 2.5 1.8
---- ---- ----
Prepaid pension cost 10.0 9.7 9.0
==== ==== ====
Components of net periodic benefit cost
Service cost 6.0 4.9 4.8
Interest cost 3.3 2.8 2.7
Expected return on assets (3.8) (3.4) (3.4)
Members' contribution (1.0) (1.0) (0.9)
Net amortizations
Transition asset (0.1) (0.1) (0.1)
Actuarial loss 0.3 0.2 --
---- ---- ----
Net periodic benefit cost 4.7 3.4 3.1
==== ==== ====
Assumed discount rates and rates of increase in remuneration used in
calculating the projected benefit obligations together with long-term rates of
return on plan assets vary according to the economic conditions of the United
Kingdom, in which the plan is situated. The rates used for calculation of
period end benefit obligations and forecast benefit cost in the plan for SFAS
No. 132 purposes were as follows:
2002 2001 2000
% % %
Discount rate 5.1 5.5 5.8
Long-term rate of increase in remuneration 4.0 4.0 4.0
Expected long-term return on assets 5.1 5.5 6.8
123
P&O Princess Cruises has no material liabilities for post-retirement benefits
other than pensions.
(iii) Deferred taxes
The following table sets out the significant components of P&O Princess
Cruises' deferred tax liability determined on a U.S. GAAP basis:
2002 2001 2000
U.S.$m Restated Restated
U.S.$m U.S.$m
Deferred tax liabilities:
Accelerated capital allowances on fixed assets 7.2 6.7 203.8
---- ---- -----
Net deferred liability under U.S. GAAP 7.2 6.7 203.8
---- ---- -----
Net deferred tax liability under UK GAAP 11.8 11.3 203.8
---- ---- -----
Cash flow statements
The cash flow statements have been prepared in conformity with UK Financial
Reporting Standard 1 (Revised) 'Cash Flow Statements'. The principal
differences between these statements and cash flow statements presented in
accordance with SFAS No. 95 are as follows:
(a)Under UK GAAP net cash flow from operating activities is determined before
considering cash flows from (a) returns on investments and servicing of
finance (b) taxes paid and (c) dividends received from joint ventures. Under
U.S. GAAP, net cash flow from operating activities is determined after these
items.
(b)Under UK GAAP, capital expenditure is classified separately while under U.S.
GAAP, it is classified as an investing activity.
(c)Under UK GAAP movements in bank overdrafts are classified as movements in
cash while under U.S. GAAP they are classified as a financing activity.
(d)Under UK GAAP equity dividends paid to shareholders are classified
separately, under U.S. GAAP they are classified as a financing activity.
Set out below is a summary cash flow statement under U.S. GAAP:
2002 2001 2000
U.S.$m U.S.$m U.S.$m
Net cash inflow from operating activities 478.5 255.5 422.1
Net cash outflow from investing activities (1,153.4) (592.5) (795.5)
Net cash inflow from financing activities 728.1 204.0 564.8
Exchange translation effect on cash (11.5) 6.2 (7.4)
-------- ------ ------
Net increase/(decrease) in cash and cash equivalents under U.S. GAAP 41.7 (126.8) 184.0
Cash and cash equivalents at beginning of year 120.4 247.2 63.2
-------- ------ ------
Cash and cash equivalents at end of year 162.1 120.4 247.2
======== ====== ======
New U.S. Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143 - 'Accounting for Asset retirement obligations'. SFAS No. 143 requires the
Group to record the fair value of asset retirement obligations associated with
the retirement of tangible long-lived assets and the associated retirement
costs in the period in which it is incurred, if a reasonable estimate of fair
value can be made. SFAS No. 143 will be adopted by the Group in the 2003 fiscal
year. The Group has not yet determined the impact of adopting SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 provides for the rescission of several previously issued
accounting standards, new accounting guidance for the
124
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. SFAS No. 145
will be adopted beginning January 1, 2003, except for the provisions relating
to the amendment of SFAS No. 13, which was adopted for transactions occurring
subsequent to May 15, 2002. The impact of adopting SFAS No. 145 on the results
of operations and financial position of the Group remains to be evaluated.
In July 2002, the FASB issued SFAS No. 146 ('SFAS 146'), "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 nullifies Emerging
issues Task Force No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity should be recorded when it is
incurred and initial measurement be at fair value. The statement is effective
for exit or disposal activities that are initiated after December 31, 2002,
although earlier adoption is encouraged. The impact of adopting SFAS No. 146 on
the results of operations and financial position of the Group remains to be
evaluated.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, including indirect Guarantees of Indebtedness of Others" (FIN 45),
which addresses, among other things, the disclosure to be made by a guarantor
in its interim and annual financial statements about its obligations under
guarantees. The Interpretation also requires the recognition of a liability by
a guarantor at the inception of certain guarantees.
The Interpretation requires the guarantor to recognise a liability for the
non-contingent component of the guarantee, this is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
As noted above the company has adopted the disclosure requirements of the
Interpretation and will apply the recognition and measurement provisions for
all guarantees entered into or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure-an amendment of FASB statement No. 123".
SFAS 148 permits two additional transition methods for entities that adopt the
fair value based method of accounting for stock-based employee compensation.
The Statement also requires new disclosures about the ramp-up effect of
stock-based employee compensation on reported results. The Statement also
requires that those effects be disclosed more prominently by specifying the
form, content and location of those disclosures. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 5, 2002. The Company has not decided yet if it will adopt the
transition provisions of SFAS 148.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which interprets Accounting Research
Bulletin (ARB) No. 51, Consolidated Financial Statements. FIN 46 clarifies the
application of ARB No. 51 with respect to the consolidation of certain entities
(variable interest entities-"VIES") to which the usual condition for
consolidation described in ARB No. 51 does not apply because the controlling
financial interest in VIE's may be achieved through arrangements that do not
involve voting interests. In addition, FIN 46 requires the primary beneficiary
of VIE's and the holder of a significant variable interest in VIE's to disclose
certain information relating to their involvement with the VIE's. The
provisions of FIN 46 apply immediately to VIE's created after January 31, 2003,
and to VIE's in which an enterprise obtains an interest after that date. FIN 46
applies in the first fiscal year beginning after June 15, 2003, to VIE's in
which an enterprise holds reasonable interest that it acquired before February
1, 2003. The Group is currently evaluating the impact the adoption of FIN 46
will have on its financial statements.
29 Post balance sheet event
On 7 January 2003, the P&O Princess Cruises board approved the proposed DLC
transaction with Carnival Corporation and agreed to recommend to the P&O
Princess Cruises shareholders that they vote in favour of the resolution to
implement the DLC structure. In the early morning of 8 January 2003, Carnival
and P&O Princess signed the implementation agreement setting out the terms and
conditions for the implementation of the DLC structure. Completion of the DLC
transaction is conditional on certain events, including approval by the
shareholders of both P&O Princess Cruises and Carnival.
125
Directors' remuneration
Fees, Salaries and Bonuses
The remuneration of the directors, excluding pension benefits, is set out in
the following table. For the year ended 31 December 2000, the directors only
received remuneration from 23 October 2000, the date of demerger from P&O.
As part of their annual bonus, the Chairman and the other executive directors
of P&O Princess receive a share award which comprises shares to the value of
the amount shown in the table. In accordance with the terms of the deferred
bonus and co-investment matching plan, the share awards are subject to a
three-year retention period and are eligible for a corresponding matching award.
2002
Fees Salaries Cash bonus Share Award Benefits Total
$000 $000 $000 $000 $000 $000
Lord Sterling -- 497 186 186 11 880
Peter Ratcliffe -- 800 400 400 48 1,648
Nick Luff -- 406 152 152 26 736
Baroness Hogg 49 -- -- -- -- 49
Sir John Parker 78 -- -- -- -- 78
Peter Foy 156 -- -- -- -- 156
Horst Rahe 38 -- -- -- -- 38
--- ----- --- --- -- -----
321 1,703 738 738 85 3,585
=== ===== === === == =====
2001
Fees Salaries Cash bonus Share Award Benefits Total
$000 $000 $000 $000 $000 $000
Lord Sterling -- 476 68 68 7 619
Peter Ratcliffe -- 800 151 151 38 1,140
Nick Luff -- 389 55 55 27 526
Baroness Hogg 47 -- -- -- -- 47
Sir John Parker 36 -- -- -- -- 36
Peter Foy 80 -- -- -- -- 80
Horst Rahe 23 -- -- -- -- 23
--- ----- --- --- -- -----
186 1,665 274 274 72 2,471
=== ===== === === == =====
2000
Fees Salaries Cash bonus Share Award Benefits Total
$000 $000 $000 $000 $000 $000
Lord Sterling -- 95 -- 38 1 134
Peter Ratcliffe -- 150 -- 77 8 235
Nick Luff -- 78 -- 29 2 109
Baroness Hogg 12 -- -- -- -- 12
Sir John Parker 9 -- -- -- -- 9
Peter Foy 12 -- -- -- -- 12
Horst Rahe -- -- -- -- -- --
-- --- -- --- -- ---
33 323 -- 144 11 511
== === == === == ===
With the exception of amounts paid to Peter Ratcliffe, the remuneration of
directors was in sterling and has been converted into U.S. dollars at the
average rate for the relevant year.
P&O Princess retains a serviced apartment in London at an annual rent of
(Pounds)120,800 (2001: (Pounds)119,600). This is used by executives, including
Peter Ratcliffe, for accommodation while visiting London on business for P&O
Princess.
Pensions
The Chairman and the non-executive directors of P&O Princess do not receive any
pension benefits from the company.
126
Details of the retirement benefits of directors arising from their
participation in defined-benefit pension arrangements are set out below:
Year ended 31 December 2002
Transfer value
2002 increase of increase in
in accrued accrued
benefits benefits net of
Age at Accrued benefit excluding directors'
31 Dec 2002 at 31 Dec 2002 inflation contributions
$000 $000 $000
Peter Ratcliffe 54 492 10 123
Nick Luff 35 51 2 1
Year ended 31 December 2001
2001 increase
in accrued Directors'
benefits contributions
Age at Accrued benefit excluding paid in the
31 Dec 2001 at 31 Dec, 2001 inflation period
$000 $000 $000
Peter Ratcliffe 53 474 10 --
Nick Luff 34 46 4 6
Year ended 31 December 2000
2000 increase
in accrued Directors'
benefits contributions
Age at Accrued benefit excluding paid in the
31 Dec 2000 at 31 Dec 2000 inflation period
$000 $000 $000
Peter Ratcliffe 52 456 3 8
Nick Luff 33 44 -- 1
The accrued benefit is that pension which would be paid annually on retirement
at 60, the normal retirement age under the principal pension scheme of which
the directors are members, based on service to 31 December 2002.
The presentation of disclosure regarding directors' retirement benefits arising
from their participation in defined-benefit pension arrangements was changed in
2002 following implementation of the Directors' Remuneration Report Regulations
2002.
Peter Ratcliffe is also a member of a defined-contribution 401(k) plan and the
contribution payable by P&O Princess in respect of 2002 was $11,000 (2001,
$10,200; 2000 for two months only, $2,000).
P&O Princess also operates a funded unapproved retirement benefit scheme for
Nick Luff. This operates on a defined contribution basis and the total amount
payable by P&O Princess during 2002 was (Pounds)58,800 ($88,400) (2001,
(Pounds)63,600 ($91,600); 2000 for two months only, (Pounds)8,900 ($13,500)).
Early retirement
In the event of compulsory early retirement, or voluntary early retirement
after the age of 55, Peter Ratcliffe would receive a minimum pension of two
thirds of final salary. In the event of voluntary retirement before the age of
55, the minimum pension is reduced pro rata for actual service compared with
potential service to age 60. In the event of voluntary retirement after the age
of 50, Nick Luff would receive a pension determined according to actual
pensionable service, reduced to take account of payment prior to normal
retirement age. In the event of compulsory early retirement after the age of
53, no such reduction would be made.
Peter Ratcliffe's service in the Supplemental Plan commenced on 1 September
1986. As his service exceeds 15 years, the maximum pension will be payable on
retirement. However, there is an actuarial reduction if a pension is drawn
under the age of 55 following voluntary early retirement.
127
Death-in-service benefits
The schemes provide death-in-service benefits to Peter Ratcliffe and Nick Luff.
In the event of death before retirement, a lump sum is payable (of four times
basic salary or pensionable earnings, whichever is the higher, or, if
applicable, four times the earnings cap at the date of death) together with a
refund of the member's contributions. In addition, a spouse's or dependant's
pension is payable, equivalent to 66% of the pension (prior to commutation)
that would have been payable to the member had he continued in service until
normal retirement date. Children's pensions of 25% of the spouse's pension may
also be payable. As the death-in-service benefits provided Nick Luff are
restricted by Inland Revenue limits, and as Lord Sterling is not a member,
additional life assurance cover is purchased on their behalf.
Pensions are also provided in the event of the total incapacity or ill-health
of a member.
Directors' interest in shares
31 December 2002
Lord Sterling
P&O P&O
Ordinary LTIP LTIP Share Matching Share
shares Options Awards Awards Awards options Total
At 1 Jan 2002 1,021,019 192,216 157,667 7,549 165,703 367,814 1,911,968
Dividend adj. -- 4,509 2,283 377 -- -- 7,169
Disposals (31,804) -- -- -- -- -- (31,804)
Grant -- -- -- 11,497 60,782 -- 72,279
Lapse -- -- -- -- (75,633) -- (75,633)
Exercise 79,269 -- (79,269) -- -- -- --
--------- ------- ------- ------ ------- ------- ---------
At 31 Dec 2002 1,068,484 196,725 80,681 19,423 150,852 367,814 1,883,979
========= ======= ======= ====== ======= ======= =========
Peter Ratcliffe
P&O
Ordinary P&O LTIP LTIP Share Matching Share
shares Options Awards Awards Awards options Total
At 1 Jan 2002 2,500 210,946 171,384 59,604 221,594 282,700 948,728
Dividend adj -- 4,030 2,482 1,860 -- -- 8,372
Disposals (150,713) -- -- -- -- -- (150,713)
Grant -- -- -- 26,165 112,069 207,500 345,734
Lapse -- -- -- -- (82,211) -- (82,211)
Exercise 301,141 (214,976) (86,165) -- -- -- --
-------- -------- ------- ------ ------- ------- ---------
At 31 Dec 2002 152,928 -- 87,701 87,629 251,452 490,200 1,069,910
======== ======== ======= ====== ======= ======= =========
Nick Luff
P&O P&O
Ordinary LTIP LTIP Share Matching Share
shares Options Awards Awards Awards options Total
At 1 Jan 2002 31,451 -- 73,486 24,157 128,925 219,491 477,510
Dividend adj -- -- 1,064 730 -- -- 1,794
Purchases 2,000 -- -- -- -- -- 2,000
Disposals (14,823) -- -- -- -- -- (14,823)
Grant -- -- -- 9,394 49,599 112,586 171,579
Lapse -- -- -- -- (35,251) -- (35,251)
Exercise 36,946 -- (36,946) -- -- -- --
---------- -- ------- ------ ------- ------- -------
At 31 Dec 2002 55,574 -- 37,604 34,281 143,273 332,077 602,809
========== == ======= ====== ======= ======= =======
Baroness Hogg 6,240
Sir John Parker 10,000
Peter Foy 16,450
Horst Rahe 11,366,415
The ordinary shares for 2002 above include 33,888 shares, 42,952 shares and
45,274 shares, in the case of Lord Sterling, Peter Ratcliffe and Nicholas Luff
respectively, that have been designated as 'Invested Shares' for the purpose of
the deferred bonus and co-investment matching plan. As described below,
matching awards have been granted to each individual in respect of the ordinary
shares they have designated as Invested Shares.
128
P&O LTIP Options
P&O LTIP Options are options over ordinary shares granted on 24 October 2000 to
directors who, through arrangements put in place for the purposes of the
demerger from P&O, exchanged fully-vested awards previously granted under P&O
incentive schemes for such options. The options are exercisable on payment of
(Pounds)1 and will lapse on 27 March 2005. The market value of the shares at
the date of grant was (Pounds)2.92 per share. The number of shares to which P&O
LTIP Options relate increased during 2001 and 2002 due to shares allocated or
purchased by the trustee in lieu of dividends foregone.
P&O LTIP Awards
P&O LTIP Awards comprise two awards of ordinary shares granted on 24 October
2000 to directors who, through arrangements put in place for the purposes of
the demerger from P&O, exchanged awards granted under P&O incentive schemes for
which the retention period had not been completed for such awards. One half of
the shares comprising an individual's P&O LTIP Award represented a 2001 LTIP
Award and the other half represented a 2002 LTIP Award. The market value of the
shares at the date of grant was (Pounds)2.92 per share. Each of Lord Sterling,
Peter Ratcliffe and Nick Luff exercised their 2001 LTIP Awards on 4 March 2002.
The 2002 LTIP Awards are exercisable no earlier than the date on which P&O
Princess announces its results for the year ended 31 December 2003, the
retention period having been extended in line with the board's decision to
extend to three years the retention period of awards granted to directors under
the deferred bonus and co-investment matching plan. However, upon completion of
the DLC transaction, the 2002 LTIP Awards will vest and become exercisable.
Each award lapses three months after it becomes exercisable. The number of
shares to which P&O LTIP Awards relate increased during 2001 and 2002 due to
shares allocated by the trustee in lieu of dividends foregone. The P&O LTIP
Awards are eligible for matching awards in accordance with the rules of the
deferred bonus and co-investment matching plan.
Share Awards
Share Awards comprise awards of ordinary shares under the terms of the deferred
bonus and co-investment matching plan. Lord Sterling, Peter Ratcliffe and Nick
Luff were granted awards on 4 March 2002 in respect of their 2001 annual bonus.
The market value of the shares comprising these awards on the day of grant was
(Pounds)4.0775 per share. The share awards in respect of the annual bonus were
granted on 19 March 2001. The number of shares to which Share Awards relate
increased during 2001 and 2002 due to shares allocated by the Trustee in lieu
of dividends foregone. Share Awards are eligible for Matching Awards in
accordance with the rules of the deferred bonus and co-investment matching plan.
Share Awards are subject to a retention period of three years from grant. None
of the awards shown above is currently vested but, if and when the proposed DLC
transaction with Carnival Corporation is completed, the Share Awards will vest
and be released.
Matching Awards
Matching Awards are granted in respect of P&O LTIP Awards, Share Awards and
Invested Shares. Under the terms of the deferred bonus and co-investment
matching plan, the actual number of shares each director would normally receive
will depend on the extent to which the relevant performance conditions have
been satisfied at the relevant time. However, upon completing the DLC
transaction, the Matching Awards will be released to participants in full.
Matching Awards granted in respect of 2001 LTIP Awards lapsed as the relevant
performance criteria had not been achieved at the time the 2001 LTIP Awards
were exercised on 4 March 2002.
On 4 March 2002, Lord Sterling, Peter Ratcliffe and Nick Luff acquired 79,269
shares, 86,165 shares and 36,946 shares respectively through the exercise of
2001 LTIP Awards. A nominal consideration of (Pounds)1 per award was payable to
exercise each award and the value of the shares on exercise was (Pounds)4.115
per share. The value of the awards on exercise was therefore (Pounds)326,191
($490,591), (Pounds)354,568 ($533,270) and (Pounds)152,032 ($228,656)
respectively. The exercise of the awards gave rise to an income
129
tax charge which was financed by the sale, on the same date, of 31,804 shares,
43,213 shares and 14,823 shares by Lord Sterling, Peter Ratcliffe and Nick Luff
respectively at a price of (Pounds)4.115 pence per share. On 4 March 2002 Nick
Luff purchased 2,000 shares at a price of (Pounds)4.10 per share.
On 21 November 2002, Peter Ratcliffe acquired 214,976 shares through the
exercise of a P&O LTIP Option. A nominal consideration of (Pounds)1 was payable
to exercise the option and the value of the shares on exercise was
(Pounds)4.905 per share. The value of the option on exercise was therefore
(Pounds)1,054,456 ($1,585,902). The exercise of the option gave rise to an
income tax charge which was financed by the sale, on the same date, of 107,500
shares at a price of (Pounds)4.905 per share.
31 December 2001
P&O P&O
Ordinary LTIP LTIP Share Share
shares Options Awards Awards options Total
Lord Sterling 1,021,019 192,216 157,667 7,549 367,814 1,746,265
Peter Ratcliffe 2,500 210,946 171,384 59,604 282,700 727,134
Nick Luff 31,451 -- 73,486 24,157 219,491 348,585
Baroness Hogg 6,240 -- -- -- -- 6,240
Sir John Parker 10,000 -- -- -- -- 10,000
Peter Foy 16,450 -- -- -- -- 16,450
Horst Rahe 11,366,415 -- -- -- -- 11,366,415
========== ======= ======= ====== ======= ==========
31 December 2000
P&O P&O
Ordinary LTIP LTIP Share
shares Options Awards options Total
Lord Sterling 1,095,986 179,102 151,266 367,814 1,794,168
Peter Ratcliffe 2,500 196,553 164,422 282,700 646,175
Nick Luff 10,300 -- 70,502 219,491 300,293
Sir John Parker 10,000 -- -- -- 10,000
Peter Foy 16,450 -- -- -- 16,450
========= ======= ======= ======= =========
All of the ordinary shares for the year ended 31 December 2000, with the
exception of those held by Sir John Parker, were allotted to directors on 23
October 2000 as a consequence of their interests in P&O deferred stock at the
demerger record date. Sir John Parker purchased 10,000 shares at a price of
250.75 pence per share on 15 November 2000.
Lord Sterling and Nick Luff purchased 4,317 and 21,151 ordinary shares
respectively at a price of (Pounds)3.475 pence per share on 12 March 2001.
These shares have been designated invested shares in accordance with the rules
of the deferred bonus and co-investment matching plan and are eligible for
matching awards.
Baroness Hogg purchased 6,240 ordinary shares at a price of (Pounds)3.17 pence
per share on 27 April 2001.
On 20 October 2001, Lord Sterling ceased to be interested in 79,284 ordinary
shares owned by his daughter who attained the age of 18 years.
130
Share options
Further details of the share options granted to directors under the P&O
Princess Cruises Executive Share Option Plan are set out below.
Exercisable
At 31 Dec
2000 and Granted 31 Dec, Exercise
2001 3 Mar 2002 2002 price from to
Lord Sterling * 12,660 -- 12,660 292p 23 Oct 2000 14 Apr 2004
* 162,758 -- 162,758 292p 23 Oct 2000 22 Dec 2004
96,198 -- 96,198 292p 23 Oct 2003 23 Oct 2010
96,198 -- 96,198 $ 4.24 23 Oct 2003 23 Oct 2010
------- ------- -------
Total 367,814 -- 367,814
======= ======= =======
Peter Ratcliffe 282,700 -- 282,700 $ 4.24 23 Oct 2003 23 Oct 2010
-- 207,500 207,500 $ 5.78 3 Mar 2005 3 Mar 2012
------- ------- -------
Total 282,700 207,500 490,200
------- ------- -------
Nick Luff * 37,144 -- 37,144 292p 23 Oct 2000 22 Dec 2004
* 26,413 -- 26,413 292p 23 Oct 2000 24 Oct 2006
77,967 -- 77,967 292p 23 Oct 2003 23 Oct 2010
77,967 -- 77,967 $ 4.24 23 Oct 2003 23 Oct 2010
-- 56,293 56,293 407.75p 3 Mar 2005 3 Mar 2012
-- 56,293 56,293 $ 5.78 3 Mar 2005 3 Mar 2012
------- ------- -------
Total 219,491 112,586 332,077
======= ======= =======
Options marked (*) are replacement options, granted by P&O Princess in
accordance with its obligations under the agreements which governed the
demerger of P&O Princess from P&O in October 2000. Replacement options were
granted to replace options over P&O deferred stock held by participants in P&O
stock option schemes prior to the demerger which were exercised or released as
part of the demerger arrangements. The number of shares over which replacement
options were granted was determined by a formula which took into account the
exercise price of the original option. The period in which a replacement option
is exercisable is identical to that of the option it replaced. The exercise of
replacement options is not subject to performance conditions.
The other options shown above were granted as part of general grants of options
to a large number of executives. The exercise of such options by directors is
conditional upon the growth in P&O Princess' earnings per share over a period
of at least three years from grant exceeding the growth in an appropriate
recognised index of retail prices by at least 3% per annum.
Upon completion of the DLC transaction, all the above options will vest and
become exercisable and any performance conditions will cease to apply.
Value of shares
The value of P&O Princess' ordinary shares on 31 December 2001 was 400 pence
and on 31 December 2002 was 431 pence. The highest price reached by the shares
during 2002 was 520.5 pence (2001, 401.5p; 2000, 300p) and the lowest was 350
pence (2001, 180p; 2000, 245.5p).
131
P&O PRINCESS CRUISES PLC
CARNIVAL ACCOUNTING POLICIES RECONCILIATION
Unaudited summary of differences between P&O Princess' accounting policies
under U.S. GAAP and Carnival's accounting policies for each of the three years
ended 31 December 2002, 2001 and 2000
P&O Princess' accounting policies under U.S. GAAP differ in certain material
respects from Carnival's accounting policies.
The following is a summary of the material adjustments to attributable profit
(net income) and shareholders' funds which would have been required to adjust
for significant differences between P&O Princess' accounting policies under
U.S. GAAP and Carnival's accounting policies.
Reconciliations of profit attributable to ordinary shareholders for the years
ended 31 December
2002 2001 2000
Note U.S.$m U.S.$m U.S.$m
Profit attributable to ordinary shareholders in accordance with U.S.
GAAP and P&O Princess accounting policies 212.9 434.2 253.7
Carnival accounting policy adjustments
Cruise revenues and expenses A (2.9) (5.1) 13.4
Dry-docking B (5.2) 6.4 (7.5)
Marketing and promotion costs C 4.3 (1.4) 2.4
----- ----- -----
Profit attributable to ordinary shareholders in accordance with U.S.
GAAP and Carnival accounting policies 209.1 434.1 262.0
----- ----- -----
Earnings per share
Basic earnings per share in accordance with U.S. GAAP and
Carnival accounting policies (in cents) 30.2 62.8 38.3
Diluted earnings per share in accordance with U.S. GAAP and
Carnival accounting policies (in cents) 30.1 62.5 38.3
----- ----- -----
Weighted average number of shares used in basic earnings per
share calculation (millions) 692.4 691.5 684.2
Weighted average number of shares used in diluted earnings per
share calculation (millions) 695.6 694.8 684.2
Reconciliations of shareholders' funds at 31 December
2002 2001 2000
Note U.S.$m U.S.$m U.S.$m
Shareholders' funds in accordance with U.S. GAAP and P&O
Princess accounting policies 2,724.9 2,551.8 2,296.3
Carnival accounting policy adjustments
Cruise revenues and expenses A (12.0) (8.8) (3.7)
Dry-docking B (16.5) (10.4) (17.0)
Marketing and promotion costs C 18.9 18.1 19.1
------- ------- -------
Shareholders' funds in accordance with U.S. GAAP and Carnival
accounting policies 2,715.3 2,550.7 2,294.7
------- ------- -------
The differences in accounting treatment as a result of differences between P&O
Princess' accounting policies under U.S. GAAP and Carnival's accounting
policies are noted below.
(A) Cruise revenues and expenses
P&O Princess' accounting policy is to record deposits received on sales of
cruises as deferred income initially and recognise them, together with revenues
from shipboard activities and all associated direct costs of a voyage, on a pro
rata basis at the time of the voyage. Carnival's accounting policy is to
recognise these items upon completion of voyages for voyages with durations of
10 days or less, and on a pro rata basis for voyages in excess of 10 days.
132
(B) Drydocking
P&O Princess' accounting policy is to capitalise drydocking costs and expense
them on a straight-line basis to the date of the next scheduled drydock.
Carnival's accounting policy is to capitalise drydocking costs and expense them
generally over one year.
(C) Marketing and promotion costs
For U.S. GAAP, P&O Princess expenses all marketing and promotion costs as
incurred. Carnival expenses all such costs as incurred except costs which
result in tangible assets, such as brochures, which are treated as prepaid
expenses and charged to expense as consumed.
133
Report on unaudited reconciliations to Carnival accounting policies from KPMG
Audit Plc
The following is the text of a report on the reconciliations to Carnival
accounting policies for P&O Princess from KPMG Audit plc
[LOGO] KPMG
KPMG Audit Plc
8 Salisbury Square
London
EC4Y 8BB
United Kingdom
The Directors
P&O Princess Cruises plc
77 New Oxford Street
London WC1A 1PP
Salomon Brothers International Limited,
trading as Schroder Salomon Smith Barney
Citigroup Centre
33 Canada Square, Canary Wharf
London E14 5LB
17 March 2003
Dear Sirs
P&O Princess Cruises plc (the 'Company')
We report on the unaudited reconciliations of U.S. GAAP as applied by P&O
Princess to U.S. GAAP as applied by Carnival Corporation ('the Carnival
accounting policy reconciliations') for the following financial information of
the Company:
(i)audited consolidated profit attributable to shareholders for the three years
ended 31 December 2002; and
(ii)audited consolidated shareholders' funds as at 31 December 2000, 2001 and
2002.
The reconciliations, which have been prepared for illustrative purposes only,
are set out in Section 3, Part B of the circular to shareholders dated 17 March
2003.
Responsibility
It is the responsibility solely of the directors of the Company to prepare the
Carnival accounting policy reconciliations in accordance with paragraph 12.11
of the Listing Rules of the UK Listing Authority. It is our responsibility to
form an opinion, as required by the Listing Rules, on the reconciliations and
to report our opinion to you.
Basis of opinion
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board. Our work consisted
primarily of making enquiries of management of P&O Princess to establish the
accounting policies which were applied in the preparation of the financial
information.
We have considered the evidence supporting the reconciliations and discussed
the reconciliations with the directors of the Company.
Our work has not been carried out in accordance with auditing standards
generally accepted in the United States of America and accordingly should not
be relied upon as if it had been carried out in accordance with those standards.
134
Opinion
In our opinion the Carnival accounting reconciliations have been properly
compiled on the basis set out therein. Further, in our opinion, the adjustments
made are those appropriate for the purpose of presenting the financial
information (as adjusted) on a basis consistent in all material respects with
U.S. GAAP as applied by Carnival Corporation.
Yours faithfully
KPMG Audit Plc
135
SECTION 4
INFORMATION ON THE COMBINED GROUP
Part A. Description of the Combined Group
This description of the Combined Group assumes completion of the DLC
transaction. The DLC transaction is conditional on certain events, including
approval by the shareholders of both P&O Princess and Carnival.
The implementation of the DLC structure will involve a strategic combination of
the businesses of Carnival and P&O Princess. The two companies will have a
single senior executive management team and identical boards of directors, and
will be operated as if they were a single economic enterprise.
1. The Combined Group
The Combined Group will be the largest cruise vacation group in the world,
based on revenues, passengers carried and available capacity. It will have a
wide portfolio of complementary brands, both by geography and product offering,
and will include some of the best known cruise brands globally. The directors
of each of Carnival and P&O Princess believe that the combination will allow
the Combined Group to offer a wider range of vacation choices for its
passengers and will enhance its ability to attract passengers from land-based
vacations to cruise vacations.
As at 31 January 2003, the Combined Group would have had a combined fleet of 65
cruise ships offering 99,982 lower berths, with 18 additional cruise ships
having 42,260 lower berths scheduled to be added over the next three and a half
years. In addition, the Combined Group will be a leading provider of cruises to
all major cruise destinations outside the Far East. The Combined Group will
have one of the youngest and most modern fleets in the cruise industry, with an
average vessel age (weighted by lowest berths) of 7.5 years on 31 January 2003.
The Combined Group will also operate two private destination ports of call in
the Caribbean for the exclusive use of its passengers and two river boats in
Germany (and a further two on order at 31 January 2003), and will offer
land-based tour packages as part of its vacation product alternatives. Carnival
and P&O Princess together carried approximately 4.7 million passengers in
fiscal 2002.
On a pro forma basis in accordance with UK GAAP, the Combined Group would have
reported revenues of $6.9 billion and net income of $1.3 billion for the
financial year ended 31 December 2002 (P&O Princess' financial year end). On
the same basis, the Combined Group would have reported net assets of $12.1
billion as at 31 December 2002. On a pro forma basis in accordance with U.S.
GAAP, the Combined Group would have reported revenues of $6.9 billion and net
income of $1.3 billion for the fiscal year ended 30 November 2002 (Carnival's
fiscal year end) (in effect, the same periods as P&O Princess' but reflecting
Carnival's different year end). On the same basis, the Combined Group would
have reported shareholders' equity of $12.8 billion as at 30 November 2002.
These pro forma figures are extracted from the unaudited pro forma financial
information of the Combined Group set out in Part B of this Section 4.
2. Brands
The Combined Group will offer thirteen complementary brands with leading
positions in North America, the UK, Germany, Italy, France, Spain, Brazil,
Argentina and Australia. These brands operate itineraries in the following
regions: Alaska, Australia, Bahamas, Bermuda, Canada, the Caribbean, Europe,
the Hawaiian Islands, the Mexican Riviera, the Mediterranean, New England, the
Panama Canal, South America and other exotic destinations worldwide.
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The Combined Group's principal brands will include:
Carnival Cruise Lines
Princess Cruises
Holland America Line -- primarily marketed in North America
Cunard Line
Windstar Cruises
Seabourn Cruise Line
P&O Cruises (UK)
Swan Hellenic -- primarily marketed in the UK
Ocean Village
AIDA -- primarily marketed in Germany
A'ROSA
Costa Cruises -- primarily marketed in southern Europe and
Germany
P&O Cruises (Australia) -- primarily marketed in Australia
Both Carnival and P&O Princess have historically managed their brands on a
decentralised basis. The Combined Group intends to take a similar approach
while integrating certain back office activities and taking other steps to
achieve economies of scale and cost synergies.
3. Fleet
At 31 January 2003, Carnival and P&O Princess together operated a fleet of 65
cruise ships with an aggregate capacity of 99,982 lower berths. As at that date
Carnival and P&O Princess together had an additional 18 cruise ships on order,
with an aggregate capacity of 42,260 lower berths, scheduled for delivery
during the next three and a half years. In addition, the Combined Group will
operate two river boats on the Danube and at 31 January 2003 had two new river
boats on order representing a further 400 lower berths.
As at 31 January 2003, the fleet of the Combined Group (excluding river boats)
would have had an average vessel age (weighted by lower berths) of 7.5 years
and an average vessel size of approximately 1,540 lower berths. Based on the
existing fleet and announced additions and withdrawals, and excluding river
boats, the average vessel age (weighted by lower berths) of the Combined
Group's fleet will be 8.7 years at 30 November 2006 and its average vessel size
will have increased to approximately 1,720 lower berths.
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The table below summarises the Combined Group's fleet capacity measured in
lower berths by brand as at 31 January 2003 and the projected fleet capacity at
30 November 2006, taking into account existing cruise ships on order and
announced transfers and withdrawals. In accordance with industry practice,
capacity is based on two passengers occupying the lower berths in each cabin,
even though some cabins can accommodate more than two passengers.
Lower berths
Brands Capacity Vessel Announced Announced Projected
at 31 additions withdrawals/(4)/ transfers capacity at
January 30 November
2003 2006
Carnival Cruise Lines 38,348 11,046 -- -- 49,394
Princess Cruises 19,920 10,410 -- (3,600) 26,730
Holland America Line 14,494 7,392 -- -- 21,886
Cunard Line 2,458 4,588 -- -- 7,046
Windstar Cruises 604 -- -- -- 604
Seabourn Cruise Line 624 -- -- -- 624
P&O Cruises(UK) 7,170 -- -- 560/(3)/ 7,730
Swan Hellenic/(1)/ 360 676 (360) -- 676
Ocean Village/(2)/ -- 160 -- 1,450 1,610
Costa Cruises 10,754 7,554 -- -- 18,308
AIDA 2,460 1,270 -- -- 3,730
A'ROSA 1,590 -- -- 1,590 3,180
P&O Cruises (Australia) 1,200 -- -- -- 1,200
A'ROSA (River Cruises) 400 400 -- -- 800
------- ------ ---- ------ -------
Total 100,382 43,496 (360) -- 143,518
--------
(1)The charter for the 360-berth Minerva ends in April 2003. The ship will be
replaced by a new chartered ship, Minerva II, which was built in 2001 and
has 676 lower berths.
(2)Arcadia, which is currently sailing in the P&O Cruises (UK) fleet, is due to
be transferred to Ocean Village in the second quarter of 2003. Her refit
will result in the creation of an additional 160 lower berths.
(3)This figure reflects the net result of the transfer of Adonia, with 2,010
lower berths, from the Princess fleet to the P&O Cruises (UK) fleet in the
second quarter of 2003 and the redeployment of Arcadia, with 1,450 lower
berths, to the Ocean Village fleet in the second quarter of 2003.
(4)The Combined Group is expected to withdraw additional capacity from service
through 2006.
4. Strategy
Carnival and P&O Princess operate multi-brand strategies that are intended to
differentiate themselves from their competitors and provide products and
services appealing to the widest possible target audience across all major
segments of the vacation industry.
Having established the contemporary Carnival Cruise Lines brand in 1972,
Carnival entered the premium/luxury segment with the acquisition of Holland
America Line/Windstar Cruises in 1989. Carnival continued to acquire and build
brands and expand its geographic reach through the acquisition of the ultra
luxury Seabourn brand, the contemporary European brand Costa Cruises and the
premium/luxury British brand Cunard. These six brands are managed by four
distinct management groups which operate on a decentralised basis. Carnival has
found this decentralised management approach to be highly successful and
expects the Combined Group to be managed in a similar fashion.
Similarly, P&O Princess has established a multi-brand strategy targeting a wide
customer base. From established positions in the UK and Australian cruise
industries, P&O Princess improved its position in the North American cruise
industry in the 1970s and 1980s through the acquisitions of Princess Cruises
and Sitmar Cruises and in Germany through the acquisition in 1999 of a majority
stake in AIDA Cruises, one of the best known cruise brands in Germany. P&O
Princess acquired the remainder of AIDA Cruises in 2000 and commenced the
operation of a new German brand, A'ROSA, in 2002. In the UK, P&O Princess has
recently launched Ocean Village, a new brand for the contemporary segment.
The Combined Group will seek to be the leading global cruise vacation operator
with brands appealing to the widest target audience, focused on sourcing
passengers from developed vacation markets where cruising is one of the largest
and fastest growing vacation alternatives. Carnival and P&O
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Princess also expect to market certain of the Combined Group's brands to enter
into and expand developing vacation markets.
In pursuit of this strategy, the companies of the Combined Group will seek to:
Build on brand strengths
The Combined Group will have some of the most widely recognised cruise brands
in North America, Europe, South America (primarily Brazil and Argentina) and
Australia and will be a leading provider of cruise vacations to all of the key
cruise destinations outside the Far East, including Alaska, Australia, Bahamas,
Bermuda, Canada, the Caribbean, Europe, the Hawaiian Islands, the Mexican
Riviera, the Mediterranean, New England, the Panama Canal, South America and
other exotic destinations worldwide. Carnival and P&O Princess intend to
continue to grow the Combined Group's brands and broaden and develop the range
of destinations, itineraries, tours and vacation alternatives offered by the
Combined Group. The Combined Group intends to provide greater choice and
options for its passengers among these well-recognised brands in order to
continue to attract customers from the wider vacation market.
Increase global presence
It is expected that the brand offerings and diversified fleet of the Combined
Group will enable it to accelerate the entry of cruising into existing and new
geographical vacation markets.
Both Carnival and P&O Princess believe that there is a significant opportunity
to continue to build the Combined Group's presence in the relatively
underdeveloped cruise vacation industry within continental Europe. The Combined
Group will be one of the leading cruise vacation companies in the UK, Germany
and southern Europe, which are three of the largest vacation markets outside of
North America. In the UK, P&O Cruises and Cunard are two of the most recognised
cruise brands. AIDA is one of the best known cruise brands in Germany, and
Costa is one of the most widely recognised cruise brands in Europe.
Maximise growth through strategic deployment of its brands and fleet
The Combined Group expects to strategically deploy its diversified fleet in
order to increase its global reach and enter new and developing markets. Such
strategic deployment is expected to allow the Combined Group to appeal to the
largest target audience with brands, products and itineraries with the widest
appeal in a particular geographic region.
Carnival and P&O Princess have traditionally constructed purpose-built ships
for each of their brands, consistent with the passenger demographics and
product features of the particular brand. In addition, in order to take
advantage of the rapidly expanding demand in Europe for cruises, several
vessels have been transferred within the Carnival and P&O Princess groups over
the last several years. For example, Carnival's Tropicale was transferred to
Costa and now operates as the Costa Tropicale and Holland America's Westerdam
was transferred to Costa and now operates as the Costa Europa. P&O Princess has
successfully deployed vessels in order to build its brands in the UK and
Australia and to launch a new brand in Germany. For instance, in 2002 P&O
Princess transferred the Ocean Princess and the Crown Princess to the P&O
Cruises (UK) and A'ROSA brands in the UK and Germany, respectively, and intends
to transfer the Sea Princess to the P&O Cruises (UK) fleet in 2003. In 2000,
Princess Cruises' Sky Princess was redeployed to P&O Cruises (Australia) and
now operates as the Pacific Sky.
Carnival and P&O Princess expect the Combined Group to continue to explore
opportunities to utilise its vessels in such a manner consistent with providing
the overall best return for the Combined Group.
Realise cost savings
Carnival has consistently been one of the most efficient cruise operators in
the cruise vacation industry. Carnival believes it has been able to achieve
these efficiencies through its decentralised management approach, economies of
scale, highly experienced management team and the ability to disseminate best
practices across its operating companies. Since its demerger from The
Peninsular and Oriental Steam Navigation Company in October 2000, P&O Princess
has pursued a cost reduction programme aimed at bringing its cost structure
more into line with other major cruise operators. This programme enabled
underlying costs to be reduced by 13 per cent. per available berth day over two
years.
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Carnival and P&O Princess expect that the Combined Group will generate
significant cost savings, estimated to be at least $100 million on an
annualised basis, commencing in the first full financial year following
completion of the DLC transaction. Carnival and P&O Princess expect that these
cost savings will be generated principally through the dissemination of best
practices between the companies, economies of scale and the rationalisation of
certain shoreside operations. Carnival and P&O Princess expect that the
majority of cost savings will come from the following areas:
.. rationalising each of sourcing and logistics, tour operations, certain back
office functions and other offices and activities, such as sales and
support offices globally;
.. reducing selling, general and administrative costs from areas such as
insurance, rent and other administrative costs;
.. rationalising port activities;
.. rationalising information technology across the group; and
.. disseminating best practices across shipboard and shoreside operations.
One-time cash costs of achieving these cost savings are expected to be
approximately $30 million.
5. Industry background
Since 1970, cruising has been one of the fastest growing segments of the
vacation market. According to Cruise Lines International Association, or CLIA,
a leading industry trade group, in 1970 approximately 0.5 million North
American-sourced passengers took cruises of two consecutive nights or more.
CLIA estimates that this number reached approximately 7.4 million passengers in
2002, a compound annual growth rate of approximately 9 per cent. since 1970.
Outside North America, the principal sources of passengers for the industry are
the UK, Germany, Italy, France, Spain, South America and Australia. In all of
these areas, cruising represents a smaller proportion of the overall vacation
market than it does in North America but, based on industry data, is generally
experiencing higher growth rates.
Cruising offers a broad range of products to suit vacationing customers of many
ages, backgrounds and interests. Cruise brands can be broadly divided into the
contemporary, premium and luxury segments. The Combined Group will have
significant product offerings in each of these segments. The contemporary
segment is the largest segment and typically includes cruises that last seven
days or less, have a more casual ambience and are less expensive than premium
or luxury cruises. The premium segment is smaller than the contemporary segment
and typically includes cruises that last from seven to 14 days. Premium cruises
emphasise quality, comfort, style and more destination-focused itineraries and
the average pricing on these cruises is typically higher than those in the
contemporary segment. The luxury segment is the smallest segment and is
typically characterised by smaller vessel size, very high standards of
accommodation and service, generally with higher prices than the premium
segment. Notwithstanding these marketing segment classifications, there is
overlap and competition among cruise segments.
The Combined Group will provide cruise vacations in most of the largest
vacation markets in the world: North America, the UK, Germany and southern
Europe. A brief description of the principal vacation regions in which the
Combined Group intends to operate is as follows.
North America
The largest vacation market in the world is North America. According to CLIA,
approximately 7.4 million North American passengers took cruises for two
consecutive nights or more in 2002.
Estimates of North American-sourced cruise passengers and the number of lower
berths marketed in North America compiled by CLIA from 1997 to 2002 are as
follows:
Cruise
Calendar Year Passengers/(1)/
Sourced in Lower Berths
North Marketed in North
America America/(2)/
1997 5,051,000 118,000
1998 5,428,000 138,000
1999 5,894,000 149,000
2000 6,882,000 166,000
2001 6,906,000 176,000
2002 7,400,000 193,000
--------
(1)Based on passengers carried for at least two consecutive nights for the
calendar year (2002 estimates are preliminary).
(2)As of the end of the calendar year. These figures include some ships which
are marketed in North America and elsewhere.
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The principal itineraries visited by North American cruise passengers in 2002
were the Caribbean, Bahamas and Mexico. In addition, North American cruise
passengers visited Alaska, Europe, the Mediterranean, Bermuda, the Panama Canal
and other exotic locations, including South America, Africa, the South Pacific,
the Orient and India.
Based on the number of ships that are currently on order worldwide and
scheduled for delivery between 2003 and 2006, Carnival and P&O Princess expect
that the net capacity serving North American consumers will increase
significantly over the next several years. Projections compiled by CLIA
indicate that by the end of 2003, 2004 and 2005, North America will be served
by 187, 197 and 199 ships, respectively, having an aggregate passenger capacity
of approximately 213,000, 236,000 and 240,000 lower berths, respectively. These
figures include some ships that are expected to be marketed in North America
and elsewhere. CLIA's estimates of capacity do not include assumptions related
to unannounced ship withdrawals due to factors such as the age of ships or
changes in the location from where ships' passengers are predominantly sourced
and, accordingly, could indicate a higher percentage growth in North American
capacity than will actually occur. Nonetheless, Carnival expects that net
capacity serving North American-sourced cruise passengers will increase over
the next several years.
Europe
Carnival and P&O Princess estimate that Europe is one of the largest vacation
markets, but cruising in Europe has achieved a much lower penetration rate than
in North America. Carnival and P&O Princess estimate that approximately 2.3
million European-sourced passengers took cruise vacations in 2002 compared to
approximately 7.4 million North American-sourced passengers. However, from 1990
to 2002, the number of cruise passengers sourced from Europe has been growing
faster than the number of cruise passengers sourced from North America. From
1997 through 2001, the rate at which Europeans took a cruise grew at a compound
annual growth rate of 12 per cent. compared to an 8 per cent. growth rate with
respect to North Americans. With respect to the European countries from which
the most cruise passengers are sourced from 1997 through 2001 the compound
annual growth rate in cruise passengers was 10 per cent. in the UK, 14 per
cent. in France, 8 per cent. in Germany and 11 per cent. in Italy. Cruise
vacation companies are continuing to expand their offerings in Europe. For
example, more cruise vacations were marketed to European passengers in 2002
than in 2001. Carnival and P&O Princess expect that a number of new or existing
ships will be introduced into Europe over the next several years.
Carnival and P&O Princess also believe that Europe will represent a significant
area for the growth for the Combined Group because, among other things, the
vacation markets in Europe are large but the level of penetration of cruising
is low.
UK
The UK is one of the largest sources for cruise passengers in the world.
According to G.P. Wild (International) Limited, approximately 0.8 million UK
passengers took cruises in 2001. Cruising was relatively underdeveloped as a
vacation option for UK consumers until the mid-1990s, but since then there has
been strong growth in the number of cruise passengers sourced from the UK. The
number of UK cruise passengers increased by a compound annual growth rate of
approximately 10 per cent. between 1997 and 2001. The main destination for UK
cruise passengers is the Mediterranean. Other popular destinations for UK
cruise passengers include the Caribbean, the Atlantic Islands, including the
Canary Islands and the Azores, and Scandinavia. The Combined Group will have
two of the most widely recognised brands in the UK: P&O Cruises (UK) and Cunard.
Germany
Germany is one of the largest sources for cruise passengers in continental
Europe with approximately 0.4 million cruise passengers in 2001. Germany
exhibited a compound annual growth rate in the number of cruise passengers
carried of approximately 8 per cent. between 1997 and 2001. Carnival and P&O
Princess believe that German cruising is an underdeveloped region for the
cruise industry. The main destinations visited by German cruise passengers are
the Mediterranean and the Caribbean. Other popular destinations for German
cruise passengers include Scandinavia and the Atlantic Islands. The Combined
Group will have four brands marketed in Germany: AIDA, A'ROSA, Costa and Cunard.
141
Southern Europe
The main regions in southern Europe for sourcing cruise passengers are Italy,
France and Spain. Together, these countries generated approximately 0.7 million
cruise passengers in 2001. Cruising in Italy, France and Spain exhibited a
compound annual growth rate in the number of passengers carried of
approximately 15 per cent. between 1997 and 2001. Carnival and P&O Princess
believe that these regions are also relatively underdeveloped for the cruise
industry. The Combined Group intends to increase its penetration in southern
Europe through Costa Cruises, the largest and one of the most recognised cruise
brands marketed in Europe.
South America
Cruising has been marketed in South America for many years, although the region
remains in an early stage of development. Cruises from South America typically
occur during the southern hemisphere summer months of November through March,
and are primarily seven to nine days in duration. The Combined Group expects
its presence in this region will be primarily represented through the Costa
brand, which currently operates two vessels in this region, Costa Classica and
Costa Tropicale, offering approximately 2,324 lower berths.
Australia
Cruising in Australia is relatively small but well established. Carnival and
P&O Princess estimate that approximately 0.1 million Australians took cruise
vacations in 2001. The Combined Group expects to continue to serve this region
through the P&O Cruises (Australia) brand, which currently operates Pacific Sky
and, for a portion of the year, Pacific Princess in this region, and through
Cunard and Holland America, which market their world and other cruises in
Australia.
Characteristics of the cruise vacation industry
Strong growth
Cruise vacations have experienced significant growth in recent years. The
number of new cruise ships currently on order from shipyards indicates that the
growth in supply of cruise capacity is set to continue for a number of years.
As a result of this continuing growth in supply, continued growth in demand
across the industry, particularly in North America, will be required in order
to take up this increase in supply. Given the historical growth rate of
cruising and the relative low penetration levels in major vacation markets, the
Combined Group believes that there are significant areas for growth. However,
in order for demand to meet available capacity, for the past few years there
has been pressure on cruise pricing. See "Risk factors - Risks related to the
Combined Group's Businesses" in Part C of this Secton 4.
Wide appeal of cruising
Cruising appeals to a broad demographic range of passengers. Industry surveys
estimate that the principal passengers for cruising in North America (defined
as households with income of $40,000 or more headed by a person who is at least
25 years old) now comprise approximately 128 million people. About half of
these individuals have expressed an interest in a cruise as a vacation
alternative.
Relatively low penetration levels
North America has the highest cruising penetration rates per capita.
Nevertheless, CLIA estimates that only 15 per cent. of the U.S. population has
ever taken a cruise. In the UK, where there has been significant expansion in
the number of cruise passengers carried over the last five years, cruising
penetration levels per capita are only approximately three-fifths of those of
North America. In the principal vacation regions in continental Europe,
cruising penetration levels per capita are approximately one-fifth of those in
North America. Elsewhere in the world cruising is at an early stage of
development and has far lower penetration rates.
Satisfaction rates
Cruise passengers tend to rate their overall satisfaction with a cruise-based
vacation higher than comparable land-based hotel and resort vacations. In North
America, industry studies indicate that
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cruise passengers experience a high level of satisfaction with their cruise
product, with 69 per cent. of cruisers finding the value of the cruise vacation
experience to be as good as, or better than, the value of other vacations.
6. Competition
Carnival and P&O Princess compete, and the Combined Group will compete, both
with a wide array of land-based vacation alternatives and with other cruise
lines for consumers' disposable leisure time dollars.
The Combined Group will compete with land-based vacation alternatives
throughout the world, including, among others, resorts and hotels located in
Las Vegas, Nevada, Orlando, Florida, various Caribbean, Mexican, Bahamian and
Hawaiian Island destination resorts and numerous vacation destinations
throughout Europe and the rest of the world. Specifically, the Combined Group's
land-based competitors include, among many others, MyTravel, Club Mediterranee,
GoGo Tours, Fairfield Communities Vacation Ownership Club, First Choice,
Harrah's Entertainment, Hilton Hotels, Hyatt Hotels, Kuoni Travel, Mandalay
Resort Group, Disney, Universal Studios, Marriott International Resorts and the
Marriott Vacation Ownership Club, MGM Grand, Nouvelle Frontieres, Perillo
Tours, Ritz-Carlton Hotels, Saga Tours, Six Flags, Starwood Hotels and Resorts,
Sandals Resorts, Sun City Resorts, Thomas Cook, Trafalgar and companies in the
TUI group, as well as various other theme parks.
The Combined Group's primary cruise competitors in the contemporary and/or
premium cruise segments for North American-sourced passengers will be Royal
Caribbean, which owns Royal Caribbean International and Celebrity Cruises, Star
Cruises plc, which owns Norwegian Cruise Line and Orient Lines, and Disney
Cruise Line.
The Combined Group's primary cruise competitors for European-sourced passengers
will be MyTravel's Sun Cruises, Fred Olsen, Saga and Thomson in the UK;
Festival, Hapag-Lloyd, Peter Deilmann and Phoenix Reisen in Germany; and
Mediterranean Shipping Cruises, Royal Olympia Cruises, Louis Cruise Line and
Festival Cruises in southern Europe. The Combined Group will also compete for
passengers throughout Europe with Norwegian Cruise Line, Orient Lines, Royal
Caribbean International and Celebrity Cruises.
The Combined Group's primary competitors in the luxury cruise segment for its
Cunard, Seabourn and Windstar brands will include Crystal Cruises, Radisson
Seven Seas Cruise Line, and Silversea Cruises.
The Combined Group's brands also will compete with similar or overlapping
product offerings across all of the Combined Group's segments.
7. Employees
The Combined Group is expected to have approximately 11,400 full and
part-time/seasonal employees engaged in shoreside operations upon
implementation of the DLC structure. Carnival and P&O Princess will also
employ, in the aggregate, approximately 45,800 officers, crew and staff on its
combined fleet of 65 cruise ships and two river boats. A significant proportion
of employees that work in Carnival's and P&O Princess' ship, hotel, and motor
coach operations are unionised and/or are party to collective bargaining
agreements. Each of Carnival and P&O Princess consider its respective employee
and union relations generally to be good.
The Combined Group is expected to source its shipboard officers primarily from
Italy, Holland, the UK and Norway. The remaining crew positions are manned by
persons from around the world. The Combined Group is expected to utilise
various manning agencies in many countries and regions to help secure its
shipboard employees. Carnival and P&O Princess believe that employees of the
Combined Group will benefit from a larger operating platform and a business of
greater international size and scope. Carnival and P&O Princess do not expect
that there will be significant redundancies arising from the implementation of
the DLC structure. Carnival confirms that, following implementation of the DLC
structure, it will procure that the rights of all P&O Princess employees,
including pension rights, will be fully safeguarded.
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8. Board and management
Carnival and P&O Princess will be managed and operated as if they were a single
economic enterprise. Although each of Carnival and P&O Princess will continue
to exist as a separate company with its own board of directors and senior
executive management, the boards and senior executive management of each
company will be identical. In addition to their normal fiduciary duties to the
company and obligation to have regard to the interest of its shareholders the
directors of each company will be entitled to have regard to the interests of
the other company and its shareholders. Micky Arison, the Chairman and Chief
Executive Officer of Carnival, will be Chairman and Chief Executive Officer of
both Carnival and P&O Princess and Howard S. Frank, the Vice Chairman and Chief
Operating Officer of Carnival, will be the Vice Chairman and Chief Operating
Officer of both Carnival and P&O Princess. Peter Ratcliffe, P&O Princess' Chief
Executive Officer, will be an executive director of both Carnival and P&O
Princess. In addition, Gerald R. Cahill, the Chief Financial Officer and Chief
Accounting Officer of Carnival, will be the Chief Financial Officer and Chief
Accounting Officer of both Carnival and P&O Princess. The Combined Group
expects to take advantage of the best management practices across the two
companies. The headquarters of the Combined Group will be in Miami with a
corporate office in London.
Following completion of the DLC transaction, the directors of P&O Princess and
Carnival and their respective functions will be:
Name Function
---- --------
Micky Arison/(1)/ Chairman and Chief
Executive Officer
Howard S. Frank/(1)/ Vice-Chairman and Chief
Operating Officer
Robert Dickinson/(1)/ Executive Director
Pier Luigi Foschi/(3)/ Executive Director
A. Kirk Lanterman/(1)/ Executive Director
Peter Ratcliffe/(2)/ Executive Director
Ambassador Richard G.
Capen, Jr./(1)/ Non-Executive Director
Arnold W. Donald/(1)/ Non-Executive Director
Baroness Hogg/(2)/ Non-Executive Director
Modesto A. Maidique/(1)/ Non-Executive Director
Sir John Parker/(2)/ Non-Executive Director
Stuart Subotnick/(1)/ Non-Executive Director
Uzi Zucker/(1)/ Non-Executive Director
--------
(1)Existing Carnival director
(2)Existing P&O Princess director
(3)New Director
On completion of the DLC transaction, Stuart Subotnick will be designated as
the Senior Non-Executive Director. This is a newly-created position which the
non-executive directors as a body will select, on an annual basis, from one of
their number.
The directors of each of Carnival and P&O Princess following completion of the
DLC transaction will be:
Micky Arison, age 53, has been Chairman of the Carnival board of directors
since October 1990 and a director since June 1987. He has been Chief Executive
Officer of Carnival since 1979.
Howard S. Frank, age 61, has been Vice Chairman of the Carnival board of
directors since October 1993 and a director since April 1992. He was appointed
Chief Operating Officer of Carnival in January 1998. From July 1989 to January
1998, he was Chief Financial Officer and Chief Accounting Officer of Carnival.
From July 1975 through June 1989, he was a partner with Price Waterhouse.
Ambassador Richard G. Capen, Jr., age 68, has been a director of Carnival since
April 1994. He is currently a corporate director, author and business
consultant. From 1992 to 1993, Ambassador Capen served as United States
Ambassador to Spain. From 1989 to 1991, Ambassador Capen served as Vice
Chairman of Knight-Ridder, Inc. Ambassador Capen was the Chairman and Publisher
of the Miami Herald from 1983 to 1989. Ambassador Capen is a member of the
board of directors of the Economy Fund, Smallcap Fund and Fixed Income Funds of
The Capital Group.
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Robert H. Dickinson, age 60, has been a director of Carnival since June 1987.
Mr. Dickinson was Senior Vice President-Sales and Marketing of the Carnival
Cruise Lines division of Carnival ("CCL") from 1979 through May 1993. Since May
1993, Mr. Dickinson has served as President and Chief Operating Officer of CCL.
Arnold W. Donald, age 48, has been a director of Carnival since January 2001.
Since March 2000, Mr. Donald has been the Chairman and Chief Executive Officer
of Merisant Company, a manufacturer and marketer of tabletop sweetener
products, including the Equal(R) and Canderel(R) brands. From January 1998 to
March 2000 he was Senior Vice President of Monsanto Company, a company which
develops agricultural products and consumer goods, and President of its
nutrition and consumer sector. Prior to that he was President of Monsanto
Company's agricultural sector. He is a member of the board of directors of
Crown Cork & Seal Company, Inc., Belden, Inc., GenAmerica Insurance Company,
The Scotts Company and Oil-Dri Corporation.
Pier Luigi Foschi, age 56, has been Chief Executive Officer of Costa Crociere,
S.p.A. since October 1997 and Chairman of its board since January 2000. From
1974 to 1997, he held senior positions with OTIS, a world leader in the field
of elevators, which is a subsidiary of United Technologies Corporation, and
from 1990 to 1997 he was Executive Vice President of Otis's Asia-Pacific
operations.
Baroness Hogg, age 56, is a director of P&O Princess, Chairman of 3i Group Plc
and Frontier Economics, a non-executive director of GKN plc, a Governor of the
British Broadcasting Corporation and a member of the House of Lords Economic
Affairs Committee. Sarah Hogg was Head of the Prime Minister's Policy Unit,
with the rank of Second Permanent Secretary, from 1990-1995 and served as a
non-executive director of P&O between 1999 and October 2000. Sarah Hogg has
been a non-executive director of P&O Princess since the demerger in October
2000.
A. Kirk Lanterman, age 71, has been a director of Carnival since April 1992. He
has been Chairman of the Board, President and Chief Executive Officer of
Holland America Line Inc., formerly known as Holland America Line-Westours
Inc., ("HAL"), a subsidiary of Carnival, since August 1999. From March 1997 to
August 1999, he was Chairman of the Board and Chief Executive Officer of HAL.
From December 1989 to March 1997, he was President and Chief Executive Officer
of HAL. From 1983 to 1989, he was President and Chief Operating Officer of HAL.
From 1979 to 1983 he was President of Westours, Inc., which merged with Holland
America Line in 1983.
Modesto A. Maidique, age 62, has been a director since April 1994. He has been
President of Florida International University ("FIU") since 1986. Prior to
assuming the presidency of FIU, Dr. Maidique taught at the Massachusetts
Institute of Technology, Harvard University and Stanford University. Dr.
Maidique has also served as Vice President and General Manager of the
Semiconductor Division of Analog Devices, Inc. which he co-founded in 1969, as
President and Chief Executive Officer of Gerome Therapeutics Collaborative
Research, Inc., a genetics engineering firm, and as General Partner of
Hambrecht & Quist, a venture capital firm. Dr. Maidique is a director of
National Semiconductor, Inc.
Sir John Parker, age 60, is a director of P&O Princess and the non-executive
Chairman of National Grid Transco plc and RMC Group plc. He is non-executive
director of Brambles Industries plc and was formerly Chairman and Chief
Executive of Babcock International Group plc. He is a fellow of the Royal
Academy of Engineering and a past President of the Royal Institution of Naval
Architects. Sir John Parker has been a member of the General Committee of
Lloyds Register of Shipping since 1983 and Chairman of its Technical Committee
from 1993 until 2002. Sir John has been a non-executive director of P&O
Princess since the demerger in October 2000 and was appointed Deputy Chairman
in September 2002.
Peter Ratcliffe, age 55, has been Chief Executive Officer and a director of P&O
Princess since the demerger of P&O Princess from P&O in October 2000. He was
previously an executive director of P&O and head of its cruise division, having
served as President of Princess Cruises since 1993 and its Chief Operating
Officer since 1989. His early career was spent with P&O Containers Limited in
London and Sydney. Peter Ratcliffe served as the Chairman of the International
Council of Cruise Lines in 1997 and 1998.
145
Stuart Subotnick, age 60, has been a director since July 1987. Mr. Subotnick
has been a general partner and the Executive Vice President of Metromedia
Company since July 1986. He was a director of Metromedia Inc., a predecessor
company, from 1982 and its Executive Vice President from 1986. Prior to 1986,
Mr. Subotnick was Senior Vice President-Finance of Metromedia Inc. from October
1983 and a member of the Office of the President from 1982. He is a director of
Metromedia International Group, Inc., Metromedia Fiber Networks Inc. and Big
City Radio Inc.
Uzi Zucker, age 66, has been a director since July 1987. Mr. Zucker joined
Bear, Stearns & Co. in 1967 and was a Limited Partner until 1982 and has been a
General Partner since. Mr. Zucker has been a Senior Managing Director of Bear,
Stearns & Co. Inc. since 1985. He is a director of Alliance Tire Company Ltd.,
Cathay Investment Fund and Conair Corporation.
9. Dividends
Following completion of the DLC transaction, P&O Princess shareholders will
continue to receive dividends declared by P&O Princess and Carnival
shareholders will continue to receive dividends declared by Carnival. Dividends
in respect of both P&O Princess shares and Carnival shares declared after
completion of the DLC transaction will be paid at about the same time and in
equalised amounts in accordance with the equalisation ratio disregarding any
amounts required to be deducted or withheld in respect of taxes and the amount
of any applicable tax credits.
Carnival will continue to pay dividends in U.S. dollars. P&O Princess
shareholders will continue to have the option to elect to receive dividends in
U.S. dollars or pounds sterling in accordance with P&O Princess' existing
procedures.
It is intended that the first dividend to be paid by the Combined Group will be
declared in April 2003, with a record date in May 2003 and a payment date in
June 2003.
10. On-going reporting
It is expected that under U.S. GAAP the DLC transaction will be accounted for
using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 "Business Combinations". In accordance
with the purchase method of accounting, the P&O Princess U.S. GAAP accounting
policies will be conformed to Carnival's accounting policies upon completion of
the DLC transaction.
Following implementation of the DLC structure, P&O Princess will change its
financial year-end to 30 November so that it will be the same as Carnival's
current fiscal year-end. The Combined Group intends to publish combined
financial statements denominated in U.S. dollars and prepared in accordance
with U.S. GAAP. It is envisaged that these combined financial statements will
be included in a combined annual report. P&O Princess also expects to include
summary balance sheet information and summary income statement information
prepared in accordance with UK GAAP, without notes, in the annual report. P&O
Princess shareholders will be able to request an additional document containing
P&O Princess financial statements prepared in accordance with UK GAAP, which
together with the other published information would constitute the full annual
report and financial statements.
Carnival and P&O Princess will file periodic and current reports with the SEC
on a joint basis in accordance with the rules applicable to U.S. domestic
reporting companies. The financial statements presented in the periodic reports
will consist of combined financial statements of the Combined Group prepared in
accordance with U.S. GAAP.
11. Taxation
Taxation of the Combined Group
UK taxation
Following the DLC transaction, P&O Princess will continue to be tax resident in
the UK and should continue to qualify for the tonnage tax regime in respect of
its relevant shipping profits. Further information relating to the tonnage tax
regime is set out in Part A of Section 3.
146
In order for the tonnage tax regime to apply to relevant shipping profits, it
is necessary, among other matters, that the strategic and commercial management
of P&O Princess vessels currently within the tonnage tax regime remain located
in the UK. P&O Princess believes that after implementation of the DLC
transaction, sufficient strategic and commercial management activities will
remain located in the UK to satisfy this test.
P&O Princess has been advised by its tax advisers that the DLC transaction
should not affect the application of the motive test exemption to the UK's
controlled foreign company rules, which currently applies to the non-UK
resident Princess Cruises brand vessel owning and operating subsidiaries.
U.S. taxation
Exemption under Section 883 of the Internal Revenue Code
In general, under Section 883, certain non-U.S. corporations are not subject to
U.S. federal income tax or branch profits tax on certain U.S. source income
derived from the international operation of a ship or ships. Carnival and many
of its ship-owning and operating subsidiaries are non-U.S. corporations that
are organised in foreign countries that the Internal Revenue Service has
recognised as having granted an equivalent exemption to U.S. corporations for
the purposes of Section 883 and that derive income from sources within the U.S.
In addition, certain companies within the P&O Princess group are organised in
foreign countries that the Internal Revenue Service has recognised as having
granted an equivalent exemption to U.S. corporations for the purposes of
Section 883 and which derive income from sources within the U.S.
A foreign corporation will qualify for the benefits of Section 883 if, in
relevant part, (i) the foreign country in which the foreign corporation is
organised grants an equivalent exemption to corporations organised in the U.S.
and (ii) either (a) more than 50 per cent. of the value of the corporation's
stock is owned, directly or indirectly, by individuals who are residents of
that country or of another foreign country that grants an equivalent exemption
to corporations organised in the U.S., referred to as the "stock ownership
test" (such individuals are referred to as "Qualified Shareholders") or (b) the
foreign corporation meets the publicly-traded test described below. In
addition, to the extent a foreign corporation's shares are owned by a direct or
indirect parent corporation which itself meets the publicly-traded test, then
in analysing the stock ownership test with respect to such subsidiary, stock
owned directly or indirectly by such parent corporation will be deemed owned by
individuals resident in the country of incorporation of such parent corporation.
A company whose shares are considered to be "primarily and regularly traded on
an established securities market" in the U.S., the UK or another qualifying
jurisdiction will meet the publicly-traded test (the "publicly-traded test").
Pursuant to recently revised proposed U.S. Treasury regulations issued under
Section 883, stock will be considered "primarily traded" on one or more
established securities markets if, with respect to each class of stock of the
particular corporation, the number of shares in each such class that are traded
during a taxable year on any such market exceeds the number of shares in each
such class traded during that year on any other established securities market.
Stock of a corporation will generally be considered "regularly traded" on one
or more established securities markets under the proposed regulations if (i)
one or more classes of stock of the corporation that, in the aggregate,
represent more than 50 per cent. of the total combined voting power of all
classes of stock of such corporation entitled to vote and of the total value of
the stock of such corporation are listed on such market; and (ii) with respect
to each class relied on to meet the more than 50 per cent. requirement in (i)
above, (x) trades in each such class are effected, other than in de minimis
quantities, on such market on at least 60 days during the taxable year, and (y)
the aggregate number of shares in each such class of the stock that are traded
on such market during the taxable year is at least 10 per cent. of the average
number of shares of the stock outstanding in that class during the taxable
year. A class of stock that otherwise meets the requirements outlined in the
preceding sentence is not treated as meeting such requirements for a taxable
year if, at any time during the taxable year, one or more persons who own,
actually or constructively, at least 5 per cent. of the vote and value of the
outstanding shares of the class of stock, own, in the aggregate, 50 per cent.
or more of the vote and value of the outstanding shares of the class of stock
(the "5 per cent. Override Rule"). However, the 5 per cent. Override Rule does
not apply (a) where the foreign corporation establishes that Qualified
Shareholders own sufficient shares of the closely-held block of stock to
preclude non-Qualified Shareholders of the closely-held block of stock from
owning 50 per cent. or more of the total value of
147
the class of stock for more than half of the taxable year; or (b) to certain
investment companies provided that no person owns, directly or through
attribution, both 5 per cent. or more of the value of the outstanding interests
in such investment company and 5 per cent. or more of the value of the shares
of the class of stock of the foreign corporation.
Carnival will continue to qualify as a publicly-traded foreign corporation for
these purposes after the DLC transaction and, consequently its foreign
subsidiaries that are organised in foreign jurisdictions that grant an
equivalent exemption will, subject to the discussion in the following
paragraph, continue to qualify for Section 883 benefits. P&O Princess believes
that it also should continue to qualify as a publicly-traded foreign
corporation for these purposes after the DLC transaction and, consequently,
that, if relevant, certain members of the P&O Princess group that are organised
in foreign jurisdictions that grant an equivalent exemption should, subject to
the discussion in the following paragraph, continue to qualify for Section 883
benefits.
It is possible that the Combined Group may be characterised for U.S. federal
income tax purposes as a partnership between Carnival and P&O Princess or,
conceivably, among their shareholders, notwithstanding the express intention of
the parties that the DLC structure shall not constitute a partnership or other
similar entity for any purpose. While either such characterisation could affect
the technical application of certain rules, neither should have a material
impact under Section 883 or applicable U.S. income tax treaties, as appropriate.
In addition, the DLC structure has a number of features, including the special
voting share and other features with respect to which there is limited or no
authority under the Internal Revenue Code or the applicable U.S. income tax
treaties. Although the Internal Revenue Service could take a different
position, Carnival and P&O Princess believe that the special voting share
structure is not inconsistent with the publicly-traded test of Section 883 and
that the DLC transaction should not adversely affect their respective
abilities, nor the abilities of their respective subsidiaries, to qualify for
the benefits of Section 883 or any applicable U.S. income tax treaties, as
appropriate.
Exemption under applicable U.S. income tax treaties
Article 8 of the UK-U.S. Income Tax Treaty provides substantially the same
exemption from tax for UK resident companies for U.S. source shipping income as
Section 883. P&O Princess and its UK resident subsidiaries should continue to
qualify for such benefits after the DLC transaction has been completed.
Although the UK-U.S. Income Tax Treaty has been renegotiated and signed (though
it still has not entered into force as it is pending ratification by the U.S.),
the provisions of Article 8, as renegotiated, are essentially the same as the
provisions in the existing treaty. Unlike the current treaty, however, the
pending UK-U.S. Income Tax Treaty contains a Limitation on Benefits article
that requires one of certain alternative tests to be satisfied in order for a
party to be eligible for benefits under the treaty. P&O Princess believes that
it and its UK resident subsidiaries should satisfy the Limitation on Benefits
article if, and as of when, the pending treaty comes into force. The pending
treaty also contains other limitations that would deny the availability of
treaty benefits for income earned through certain entities. While these other
limitations would apply to income earned through certain P&O Princess entities,
P&O Princess believes, based on its current circumstances, that it will be able
to reorganise by, for example, moving the affected operations into a UK entity
or one formed in another equivalent exemption jurisdiction, such that the
relevant U.S.-source shipping income should qualify for an exemption from U.S.
federal income tax, either under the pending treaty or pursuant to Section 883.
In addition, certain members of the Combined Group may rely on other U.S.
income tax treaties for similar exemptions from U.S. taxation on U.S. source
shipping income. Carnival and P&O Princess do not believe that the DLC
transaction will affect the ability of these corporations to continue to
qualify for such treaty benefits.
There is, however, no authority that directly addresses the impact of a dual
listed company arrangement or the availability of benefits under Section 883 or
any applicable U.S. income tax treaty, and consequently, the matters discussed
above are not entirely free from doubt.
Taxation in the absence of an exemption under Section 883 or any applicable
U.S. income tax treaty
Shipping income that is attributable to transportation of passengers which
begins or ends in the U.S. is considered to be 50 per cent. derived from U.S.
sources. Shipping income that is attributable to transportation of passengers
which begins and ends in foreign countries is considered 100 per cent.
148
derived from foreign sources and not subject to U.S. federal income tax.
Shipping income that is attributable to the transportation of passengers which
begins and ends in the U.S. without stopping at an intermediate foreign port is
considered to be 100 per cent. derived from U.S. sources.
The legislative history of the transportation income source rules suggests that
a cruise that begins and ends in a U.S. port, but that calls on more than one
foreign port, will derive U.S. source income only from the first and last legs
of the cruise. Because there are no regulations or other IRS interpretations of
these rules, the applicability of the transportation income source rules in the
aforesaid manner is not free from doubt.
In the event that Carnival or P&O Princess or any of their respective
subsidiaries were to fail, in part or in whole, to meet the requirements of
Section 883 of the Internal Revenue Code or Article 8 of the UK-U.S. Income Tax
Treaty or other applicable U.S. income tax treaty, as appropriate, then the
non-exempt U.S.-source shipping income of any such corporation would be subject
to either the four per cent of gross income tax regime of Section 887 of the
Internal Revenue Code (the "four per cent. tax regime") or the net income and
branch profits tax regimes of Section 882 and Section 884 of the Internal
Revenue Code (collectively, the "net tax regime").
The net tax regime is only applicable where the relevant foreign corporation
has (or is considered to have) a fixed place of business in the U.S. that is
involved in the earning of U.S.-source shipping income and substantially all of
this shipping income is attributable to regularly scheduled transportation.
Under the net tax regime, U.S. source shipping income, net of applicable
deductions, would be subject to a corporate tax of up to 35 per cent. and the
net after-tax income would be potentially subject to a further branch tax of 30
per cent. In addition, interest paid by the corporations (if any) would
generally be subject to a 30 per cent. branch interest tax.
Under the four per cent. tax regime, which should be the tax regime applicable
to vessel owning subsidiaries, the U.S.-source shipping income of each of the
vessel owning subsidiaries would be subject to a four per cent. tax imposed on
a gross basis (without benefit of deductions). Under the four per cent. tax
regime, the maximum effective rate of tax on the gross shipping income of these
subsidiaries attributable to transportation that either begins or ends in the
U.S. would not exceed 2 per cent.
German and Australian taxation
P&O Princess' German and Australian branches' tax position should not be
affected by the DLC transaction. The majority of their profits should continue
to be exempt from local tax by virtue of the UK/Germany and UK/Australia double
tax treaties - see Part A of Section 3 above.
Equalisation payments
Carnival and P&O Princess do not anticipate that any material amounts of
equalisation payments are likely to be made between them in accordance with the
Equalisation and Governance Agreement for the foreseeable future. However, if
it becomes necessary to make equalisation payments, any such payments received
in the UK are likely to be taxable. Further, the treatment from a U.S. federal
income tax perspective of such equalisation payments is not without doubt. The
payment is to be grossed up in respect of any tax thereon. On the basis that
payments will not be material, any tax cost should not be significant.
Taxation of shareholders
UK tax
General information on the application of current UK tax law and Inland Revenue
practice applicable to UK P&O Princess shareholders in respect of the DLC
transaction and the P&O Princess share reorganisation is set out in paragraph 5
of Section 8. For further information on the UK tax consequences of the Partial
Share Offer please refer to the Partial Share Offer document.
Holders of P&O Princess shares and P&O Princess ADSs should consult their
independent professional advisers in the light of their particular
circumstances as to the UK tax consequences of the DLC transaction, the P&O
Princess share reorganisation and the Partial Share Offer as well as to the
effect of any state, local or applicable foreign tax law.
149
U.S. federal income taxation
General information on the application of current U.S. federal income tax laws
applicable to (i) U.S. P&O Princess shareholders in respect of the DLC
transaction and the P&O Princess share reorganisation is set out in paragraph 6
of Section 8 and (ii) U.S. Carnival shareholders in respect of the DLC
transaction is set out in paragraph 9 of Part A of Section 2. For further
information on the U.S. tax consequences of the Partial Share Offer, please
refer to the Partial Share Offer document.
Holders of P&O Princess shares and P&O Princess ADSs should consult their
independent professional advisers in the light of their particular
circumstances as to the U.S. federal income tax consequences of the DLC
transaction, the P&O Princess share reorganisation and the Partial Share Offer,
as well as to the effect of any state, local or applicable foreign tax law.
12. Trading and prospects
Carnival
Since the start of the calendar year, booking volumes have been less than
expected. Year to date booking volumes for 2003 are approximately equal to last
year's levels, but have not increased commensurate with the increase in
Carnival's 2003 capacity. Carnival believes bookings in 2003 continue to be
impacted by the uncertain economic environment and concerns regarding a war
with Iraq compounded by security alerts issued by various national governments.
These factors have caused Carnival to reduce cruise pricing to stimulate
incremental demand for the first and second quarters.
For its recently completed first quarter, Carnival expects net revenue yields
to be approximately equal to last year's levels. The current environment for
travel continues to have the most significant effect on Carnival's second
quarter 2003 bookings. The uncertainty regarding a possible war with Iraq is
causing further deterioration in pricing for the second quarter beyond that
indicated in Carnival's last guidance. As the booking pattern has moved much
closer to sailing and because of the uncertainty regarding the geopolitical
situation, Carnival is not able to give specific guidance for second quarter
net revenue yields, other than, it expects them to be less than last year. The
commencement of a war with Iraq would likely have a further negative impact on
second quarter net revenue yields.
With respect to costs, Carnival continues to expect cost per available berth
day in the first quarter, excluding air costs and commissions, to be up
approximately 6-8 per cent. as compared to last year's levels. For the second
quarter, Carnival continues to expect cost per available berth day to be up
approximately 10-12 per cent. as compared to last year's levels. As previously
disclosed, Carnival's higher cost per available berth day in the first half is
as a result of the frontloading of advertising costs, as well as, higher
insurance, environmental, and security cost.
Carnival is still expected to record non-operating income of approximately
$0.03 per share for insurance recoveries in the first quarter of 2003.
For the second half of 2003, booking volumes remain ahead of last year's levels
but not commensurate with the increase in capacity expected for the second half
of the year. Prices on these bookings remain slightly below that of the prior
year. As a result of the close-in booking pattern and the uncertain
geopolitical environment, it is too early to give net revenue yield guidance
for the remainder of 2003. Commencement of a war with Iraq, subject to the
duration of such a war, would likely have a negative impact on net revenue
yields for the second half of 2003. Excluding the possible impact of higher
fuel costs, operating cost per available berth day in the second half of 2003
is expected to be down slightly as compared to the prior year.
P&O Princess
As reported with the results for the fourth quarter results on 6 February 2003,
the booking environment since the start of the year has not been as strong as
normal for the time of year. The P&O Princess board believes that this is a
reflection of the current geopolitical and economic uncertainties.
In response to demand trends from North American passengers, Grand Princess,
one of the two Princess ships originally scheduled to sail in the Mediterranean
this summer, has been redeployed. She will now stay in the Caribbean for the
whole year. In addition, Princess' capacity in Alaska this summer has been
reduced by the cancellation of a number of cruises due to the delivery date for
the new ship, Island Princess, being delayed.
150
Despite relatively low booking volumes in recent weeks, the proportion of
capacity for 2003 as a whole for Princess remains in line with the position a
year ago, with average achieved yields ahead. Cumulative bookings in the UK and
Germany are ahead of the position a year ago, but not by as much as the
increase in capacity that P&O Princess has in these markets in 2003. On a
combined basis, yields in these two markets are below the cumulative position
this time last year, mainly as a result of a change in mix of business,
including the introduction of the lower priced Ocean Village brand, but yields
are benefiting from favourable exchange rates when converted to P&O Princess'
reporting currency of US dollars.
Higher fuel prices and exchange movements are increasing unit costs, offset by
underlying unit cost savings.
The Combined Group
The directors of each of Carnival and P&O Princess believe that the long term
prospects for the Combined Group will be enhanced considerably by entering into
the DLC transaction. The Combined Group will have the brands and the fleet to
enable it to maximise the potential offered by growth in the worldwide cruise
vacation industry. Furthermore, the Combined Group will benefit from the
synergies arising from the combination. In addition, the Combined Group will
have substantial financial flexibility, with strong operating cash flow, low
leverage and a strong balance sheet. This financial profile means that, as well
as having the upside potential from the combination, shareholders in the
Combined Group also benefit from downside protection.
151
Part B. Unaudited pro forma financial information of the Combined Group
1.Unaudited pro forma financial information of the Combined Group in accordance
with UK GAAP
Introduction
The following unaudited pro forma financial information reflects the proposed
DLC transaction, after giving effect to the pro forma adjustments described in
the accompanying notes.
The unaudited pro forma financial information has been prepared based upon the
accounting policies of P&O Princess under UK GAAP. It is expected that under
the accounting policies of P&O Princess under UK GAAP the DLC transaction would
be accounted for using acquisition accounting principles, with P&O Princess as
acquiree. The business combination adjustments include provisional estimates of
the fair value of the identifiable assets and liabilities acquired. On
completion of the DLC transaction, adjustments will be made to these
provisional estimates to reflect their estimated fair values at that time.
The unaudited pro forma profit and loss account for the year ended 31 December
2002 has been prepared as if the DLC transaction had occurred on 1 January
2002. The unaudited pro forma net asset statement as at 31 December 2002 has
been prepared as if the DLC transaction had occurred on that date. The
historical financial information for Carnival used in the unaudited pro forma
financial information of the Combined Group is as at and for the year ended
30 November 2002.
The following unaudited pro forma financial information:
.. has been included for illustrative purposes only and, because of its nature,
may not give a true picture of the results and the financial position of the
Combined Group;
.. does not purport to represent what the combined results of operations
actually would have been if the DLC transaction had occurred on 1 January
2002 or what those results will be for any future periods. The pro forma
adjustments are based upon currently available information;
.. does not reflect the results of business operations or trading since 31
December 2002 for P&O Princess and 30 November 2002 for Carnival; and
.. has not been adjusted to reflect any net transaction benefits referred to in
other sections of this document.
152
Unaudited Pro Forma Profit and Loss Account
For the year ended 31 December 2002
Adjustments
--------------------
Business Pro forma
P&O combination Combined
Princess Carnival adjustments Group
UK GAAP UK GAAP/(1)/ UK GAAP UK GAAP
-------- ----------- ----------- ---------
U.S. $m U.S. $m U.S. $m U.S. $m
Turnover 2,526.8 4,374.3 6,901.1
Direct operating costs (1,576.6) (2,313.7) (3,890.3)
Selling and administrative expenses (477.6) (614.9) 117.0/(g)/ (971.8)
3.7/(e)/
Depreciation and amortisation (173.9) (381.8) 4.3/(f)/ (551.4)
Impairment charge -- (28.5) (28.5)
-------- --------- ----- ---------
Operating costs (2,228.1) (3,338.9) 125.0 (5,442.0)
-------- --------- ----- ---------
Operating profit 298.7 1,035.4 125.0 1,459.1
Profit on disposal of fixed assets 1.2 -- 1.2
Profit on sale of businesses -- 4.2 4.2
-------- --------- ----- ---------
Profit on ordinary activities before interest 299.9 1,039.6 125.0 1,464.5
Net interest and similar items (74.0) (78.6) (1.5)/(c)/ (154.1)
-------- --------- ----- ---------
Profit on ordinary activities before taxation 225.9 961.0 123.5 1,310.4
Taxation (17.1) 56.6 39.5
-------- --------- ----- ---------
Profit on ordinary activities after taxation 208.8 1,017.6 123.5 1,349.9
Equity minority interests -- -- --
-------- --------- ----- ---------
Profit for the financial period attributable to
shareholders 208.8 1,017.6 123.5 1,349.9
Ordinary dividends (83.2) (246.4) (329.6)
-------- --------- ----- ---------
Retained profit for the financial period 125.6 771.2 123.5 1,020.3
======== ========= ===== =========
Earnings per share/(j)/
Basic earnings per share (U.S.$) 1.69
Diluted earnings per share (U.S.$) 1.69
--------
(1)Carnival information is for the year ended 30 November 2002.
All profits and losses arise from continuing activities.
See accompanying notes to unaudited pro forma financial information of the
Combined Group in accordance with UK GAAP.
153
Unaudited Pro Forma Net Asset Statement
As at 31 December 2002
Adjustments
-------------------
Business Pro forma
P&O combination Combined
Princess Carnival adjustments Group
UK GAAP UK GAAP/(1)/ UK GAAP UK GAAP
-------- ----------- ----------- ---------
U.S. $m U.S. $m U.S. $m U.S. $m
Fixed assets
Intangible assets 127.1 662.3 (127.1)/(f)/
1,966.4/(a)/ 2,628.7
Tangible assets:
Ships 5,380.0 9,638.3 15,018.3
Properties and other fixed assets 249.4 477.1 726.5
-------- -------- ------- --------
5,629.4 10,115.4 15,744.8
Investments 16.3 -- 16.3
-------- -------- ------- --------
5,772.8 10,777.7 1,839.3 18,389.8
Current assets
Stocks 87.4 89.2 176.6
Debtors due in less than one year 289.0 425.2 70.1/(h)/ 784.3
Debtors due in greater than one year 20.4 313.3 13.9/(h)/ 317.4
(30.2)/(a-ii)/
Cash at bank and in hand 162.1 1,753.8 1,915.9
-------- -------- ------- --------
558.9 2,581.5 53.8 3,194.2
-------- -------- ------- --------
Creditors: amounts falling due within one
year (987.2) (1,597.1) (29.0)/(g)/ (2,643.1)
(29.8)/(a-ii)/
-------- -------- ------- --------
Net current (liabilities)/assets (428.3) 984.4 (5.0) 551.1
-------- -------- ------- --------
Total assets less current liabilities 5,344.5 11,762.1 1,834.3 18,940.9
Creditors: amounts falling due after one
year (2,516.8) (4,218.1) (1.4)/(c)/ (6,736.3)
Provisions for liabilities and charges (13.7) -- (104.0)/(d)/ (134.4)
(16.7)/(b)/
-------- -------- ------- --------
Net assets 2,814.0 7,544.0 1,712.2/(i)/ 12,070.2
======== ======== ======= ========
--------
(1)Carnival information is as at 30 November 2002.
See accompanying notes to unaudited pro forma financial information of the
Combined Group in accordance with UK GAAP.
154
Notes to the unaudited pro forma financial information of the Combined Group in
accordance with UK GAAP:
1. Basis of preparation
The unaudited pro forma financial information has been prepared on the basis
that the DLC transaction will be accounted for using acquisition accounting
principles under UK GAAP with P&O Princess as the acquiree. The pro forma
financial information is based upon the UK GAAP accounting policies of P&O
Princess.
The historical financial information in relation to P&O Princess as at and for
the year ended 31 December 2002 has been extracted without material adjustment
from the financial information on P&O Princess set out in Part B of Section 3.
The historical financial information in relation to Carnival as at and for the
year ended 30 November 2002 has been derived from the financial information on
Carnival set out in Part B of Section 2 after making certain adjustments. The
adjustments, which are set out in note 2, relate to the conversion of such
information on Carnival's accounting policies under U.S. GAAP to P&O Princess'
accounting policies under UK GAAP.
2. Conversion of Carnival's financial information to UK GAAP
This note provides details of adjustments required to convert Carnival's
previously reported financial information as at and for the year ended 30
November 2002 that was prepared in accordance with Carnival's accounting
policies under U.S. GAAP to information in accordance with P&O Princess'
accounting policies under UK GAAP. A description of the adjustments is set out
in Part B of Section 2.
(a) Profit and loss accounts
Year ended
30 November 2002
---------------------------------
Carnival
using P&O
Princess'
Carnival accounting
U.S. policies
GAAP Adjustments UK GAAP
-------- ----------- -----------
U.S. $m U.S. $m U.S. $m
Turnover 4,368.3 6.0 4,374.3
Direct operating costs (2,311.9) (1.8) (2,313.7)
Selling and administration expenses (612.0) (2.9) (614.9)
Depreciation and amortisation (382.3) 0.5 (381.8)
Impairment charge (20.0) (8.5) (28.5)
-------- ------- -----------
Operating costs (3,326.2) (12.7) (3,338.9)
-------- ------- -----------
Operating profit 1,042.1 (6.7) 1,035.4
Profit on disposal of businesses -- 4.2 4.2
Other (expense)/income, net (4.2) 4.2 --
-------- ------- -----------
Profit on ordinary activities before interest 1,037.9 1.7 1,039.6
Net interest and similar items (78.6) -- (78.6)
-------- ------- -----------
Profit on ordinary activities before taxation 959.3 1.7 961.0
Taxation 56.6 -- 56.6
-------- ------- -----------
Profit on ordinary activities after taxation 1,015.9 1.7 1,017.6
Ordinary dividends (246.4) -- (246.4)
-------- ------- -----------
Retained profit for the financial period 769.5 1.7 771.2
======== ======= ===========
Included in the adjustments are reclassifications, which have been made to the
statement of operations included in Part B of Section 2 in order to present
such information in the UK GAAP profit and loss account format above. The most
significant of these reclassifications is that under U.S. GAAP other
nonoperating (expense)/income is shown below operating profit, whereas under UK
GAAP it is shown in the respective income or expense line.
155
(b) Net assets
As at 30 November 2002
Carnival
using P&O
Princess'
accounting
Carnival policies
U.S. UK
GAAP Adjustments GAAP
-------- ----------- ----------
U.S. $m U.S. $m U.S. $m
Fixed assets
Intangible assets 681.1 (18.8) 662.3
Tangible assets:
Ships 9,638.3 -- 9,638.3
Properties and other fixed assets 477.1 -- 477.1
-------- -------- --------
10,115.4 -- 10,115.4
Fair value of hedged firm commitments 109.1 (109.1) --
-------- -------- --------
10,905.6 (127.9) 10,777.7
Current assets
Stocks 91.3 (2.1) 89.2
Debtors due in less than one year 256.7 168.5 425.2
Debtors due in greater than one year 297.2 16.1 313.3
Cash at bank and in hand 705.7 1,048.1 1,753.8
Fair value of hedged firm commitments 78.4 (78.4) --
-------- -------- --------
1,429.3 1,152.2 2,581.5
Creditors: amounts falling due within one year (1,540.0) (57.1) (1,597.1)
Fair value of derivative contracts (79.8) 79.8 --
-------- -------- --------
Net current (liabilities)/assets (190.5) 1,174.9 984.4
-------- -------- --------
Total assets less current liabilities 10,715.1 1,047.0 11,762.1
Creditors: amounts falling due after one year (3,182.8) (1,035.3) (4,218.1)
Fair value of derivative contracts (114.4) 114.4 --
-------- -------- --------
Net assets 7,417.9 126.1 7,544.0
======== ======== ========
Reclassifications have been made to the balance sheet included in Part B of
Section 2 in order to present such information in the UK GAAP format above. The
most significant of these reclassifications are:
.. Cash at bank and in hand includes amounts classified as short-term
investments for U.S. GAAP purposes.
.. Cash at bank and in hand includes $1.05 billion of restricted cash and
creditors: amounts falling due after one year includes $1.05 billion of
finance leases. Under U.S. GAAP, the restricted cash is considered to have
extinguished the finance lease liabilities.
.. Debtors due in less than one year includes amounts classified as trade and
other receivables and prepaid and other expenses for U.S. GAAP purposes.
.. Debtors due in greater than one year includes amounts classified as
long-term other assets for U.S. GAAP purposes.
.. Creditors: amounts falling due within one year includes amounts classified
as current portion of long-term debt, accounts payable, accrued liabilities,
dividends payable and customer deposits for U.S. GAAP purposes.
.. Creditors: amounts falling due after one year includes amounts classified as
long-term debt and other long-term liabilities for U.S. GAAP purposes.
156
3. Business combination adjustments
(a)Purchase consideration and related goodwill and intangible assets are as
follows:
U.S. $m Notes
Purchase consideration 4,526.2 (i)
Costs of acquisition 60.0 (ii)
--------
Total purchase consideration 4,586.2
Less fair value of net assets acquired (2,619.8) (iii)
--------
Excess of purchase consideration over net assets acquired 1,966.4 (iv)
========
(i)The purchase consideration is based upon the market price of Carnival's
shares and the proposed share reorganisation of 3.3289 existing P&O
Princess shares for one new P&O Princess share, including P&O Princess
stock options which will vest in full on completion of the DLC
transaction. Under UK GAAP the market price of Carnival's shares is
measured on the date the DLC transaction occurs. A Carnival share price
of $21.29 has been used for the purposes of this pro forma presentation
and an estimated number of P&O Princess shares in issue of 212.6
million, after adjusting for the share reorganisation. For every $1.00
increase or decrease in the Carnival share price, the purchase
consideration will increase or decrease by approximately $212.6 million.
(ii)Represents Carnival's estimated direct costs of carrying out the
proposed DLC transaction, including costs relating to the registration
of Carnival shares pursuant to the Partial Share Offer, of which $30.2
million has been incurred by Carnival and is included in debtors due in
greater than one year. An adjustment has been made to remove this $30.2
million from debtors falling due after one year as it will be included
in the purchase consideration upon completion of the DLC transaction. Of
the total $60.0 million of acquisition costs $29.8 million had not been
incurred as of 31 December 2002 and, accordingly, an adjustment has been
made to increase Creditors: amounts falling due within one year for this
amount.
(iii)Based upon provisional estimates of the fair value of the identifiable
assets acquired and liabilities assumed given current information. On
completion of the DLC transaction, adjustments will be made to these
provisional estimates to reflect their estimated fair values at that
time. Carnival and P&O Princess expect to have independent appraisals
performed to assist them in establishing the fair values of P&O
Princess' ships and intangible assets. No assurance can be given that
the provisional fair value estimates included in this pro forma
financial information will not be materially changed as a result of
these valuations. Fair value adjustments are detailed in the notes and
table below.
P&O Fair value Pro forma
Princess adjustments fair value
UK GAAP UK GAAP UK GAAP
P&O Princess fair value of net assets acquired -------- ----------- ----------
US $m US $m US $m
Fixed assets
Intangible assets 127.1 (127.1)/(f)/ --
Tangible assets:
Ships 5,380.0 5,380.0
Properties and other fixed assets 249.4 249.4
-------- ------ --------
5,629.4 5,629.4
Investments 16.3 16.3
-------- ------ --------
5,772.8 (127.1) 5,645.7
Current assets:
Stocks 87.4 87.4
Debtors due in less than one year 289.0 70.1/(h)/ 359.1
Debtors due in greater than one year 20.4 13.9/(h)/ 34.3
Cash at bank and in hand 162.1 162.1
-------- ------ --------
558.9 84.0 642.9
-------- ------ --------
Creditors: amounts falling due within one year (987.2) (29.0)/(g)/ (1,016.2)
-------- ------ --------
Net current (liabilities)/assets (428.3) 55.0 (373.3)
-------- ------ --------
Total assets less current liabilities 5,344.5 (72.1) 5,272.4
Creditors: amounts falling due after one year (2,516.8) (1.4)/(c)/ (2,518.2)
Provision for liabilities and charges (13.7) (104.0)/(d)/ (134.4)
(16.7)/(b)/
-------- ------ --------
Net assets 2,814.0 (194.2) 2,619.8
======== ====== ========
(iv)The excess of purchase consideration over net assets acquired is
primarily estimated to represent the value attributed to P&O Princess'
goodwill. The useful economic life of the
157
goodwill arising on this transaction is expected to be indefinite and,
therefore, no adjustment for amortisation has been recorded.
(b)A provision of $16.7 million has been made in respect of foreign exchange
hedge commitments for ship build contracts. This adjustment primarily
relates to ships which were ordered, and hedged, at a time when the Euro
exchange rate was different, and hence, these ships could be ordered today
at a Euro price that would convert to a different U.S. dollar cost at
current exchange rates.
Otherwise the book value, including prepaid dry dock costs, and fair value
of ships in use and under construction are provisionally estimated to be the
same in all material respects. However, Carnival and P&O Princess intend to
have an appraisal of all the P&O Princess ships, so it is possible that the
fair value of some of P&O Princess' ships could be less than or greater than
their carrying value.
(c)An adjustment of $1.4 million has been made to the book value of P&O
Princess' fixed interest rate long-term debt to reflect current interest
rates, without giving effect to any possible change in credit ratings. The
fair value of this debt is based upon quoted market prices at the balance
sheet date, or the discounted present value of future amounts payable on the
debt. The fair value adjustment is amortised over the remaining term of the
debt as applicable, which results in a pro forma increase of $1.5 million in
interest expense for the year ended 31 December 2002.
(d)A $104.0 million adjustment has been made to record the fair value of P&O
Princess pension plan liabilities, within provisions for liabilities and
charges. This primarily relates to the Merchant Navy Officers Pensions Fund,
calculated based, among other things, upon P&O Princess' current share of
total employer contributions.
(e)On completion of the DLC transaction all awards and options granted under
the P&O Princess employee share incentive plans will vest in full. An
adjustment has been made to reverse the P&O Princess employee share
incentive and matching awards charge of $3.7 million for the year ended 31
December 2002.
(f)An adjustment has been made to eliminate $127.1 million of P&O Princess'
historical goodwill relating to prior business acquisitions. The goodwill
amortisation charge in the year ended 31 December 2002 of $4.3 million in
respect of that goodwill has been reversed.
(g)P&O Princess expects to incur and expense approximately $146.0 million of
costs related to its terminated Royal Caribbean transaction and the
completion of the DLC transaction with Carnival, including costs incurred to
register P&O Princess ordinary shares with the U.S. Securities and Exchange
Commission. Under UK GAAP, $117.0 million was expensed in the year ended 31
December 2002. As noted in the introduction, the pro forma financial
information has been prepared on acquisition accounting principles with P&O
Princess as the acquiree. As acquiree P&O Princess will have charged to its
profit and loss account all its transaction costs relating to the DLC
transaction prior to completion of the transaction. The Combined Group pro
forma profit and loss account has been prepared as if the DLC transaction
had occurred on 1 January 2002, in which case none of P&O Princess'
transaction costs would have appeared in the Combined Group profit and loss
account for the year ended 31 December 2002. Accordingly, an adjustment has
been made to reverse the $117.0 million of transaction costs incurred by P&O
Princess in 2002. Of the total $146.0 million of P&O Princess' costs, $29.0
million has not been incurred as at 31 December 2002 and an adjustment has
been made to increase Creditors: amounts falling due within one year for
this amount.
(h)An adjustment of $84.0 million ($70.1 million in current debtors and $13.9
million in debtors due after one year) has been made to record the fair
value of P&O Princess' contractual commitments to receive probable and
estimable liquidated damages and business interruption insurance proceeds
related to the delayed delivery of the Diamond Princess. This ship was
initially scheduled for delivery in May 2003, but has been delayed as a
result of a fire in October 2002.
(i)The net assets adjustment represents the net equity increase due to the
application of business combination adjustments, as detailed below:
US$m Notes
Excess of purchase consideration over net assets acquired 1966.4 3(a)
Reduction in P&O Princess' shareholders' funds for fair value adjustments (194.2) 3(a-iii)
Costs of acquisition (60.0) 3(a-ii)
-------
Net assets adjustment 1,712.2
=======
158
(j)Earnings per share
The pro forma weighted average number of shares has been calculated as if
the DLC transaction had occurred on 1 January 2002 and after adjusting for
the proposed P&O Princess share reorganisation of 3.3289 existing P&O
Princess shares for one new P&O Princess share.
Based upon the weighted average number of shares outstanding of 706.6
million, including 14.2 million of share options which will vest upon
completion of the DLC transaction (706.6 million diluted), or 212.3 million
(212.3 million diluted) after the proposed P&O Princess share
reorganisation, for P&O Princess for the year ended 31 December 2002 and
586.6 million (588.1 million diluted) for Carnival for the year ended 30
November 2002, the pro forma weighted average number of shares for the
Combined Group is calculated as 798.9 million (800.4 million diluted).
The pro forma earnings per share amounts have been calculated using the pro
forma weighted average number of shares, calculated as described above, and
the pro forma earnings for the Combined Group. Pro forma earnings represent
the profit for the financial period.
(k)Certain restructuring and integration expenses may be recorded subsequent to
the completion of the DLC transaction. The amount of these charges has not
yet been determined, although they have been preliminarily estimated to be
approximately $30 million, as they will be the subject of a detailed plan of
restructuring and integration to be completed subsequent to the completion
of the DLC transaction. No adjustment has been made for these expenses in
the pro forma financial information.
4. Summary of differences between UK and U.S. GAAP
The pro forma financial information has been prepared in accordance with P&O
Princess' accounting policies under UK GAAP which differ in certain respects
from U.S. GAAP and Carnival's accounting policies. The following is a summary
of the material adjustments to profit attributable to shareholders and net
assets which would have been required to adjust for significant differences
between UK GAAP and U.S. GAAP relevant to the Combined Group and other
differences in accounting policies.
Business Pro Forma
P&O combination Combined
Reconciliation of pro forma profit attributable to Princess Carnival adjustments Group
shareholders for the year ended 31 December 2002 -------- -------- ----------- ---------
U.S. $m U.S. $m U.S. $m U.S. $m
Attributable profit under UK GAAP 208.8 1,017.6 123.5 1,349.9
U.S. GAAP adjustments
Depreciation 0.4 0.4
Goodwill and contingent consideration 4.3 (4.3) --
Marketing and promotion costs (3.2) 1.7 (1.5)
Relocation costs (2.0) (2.0)
Employee share incentives 1.8 (1.8) --
Pensions (3.0) (3.0)
Derivative instruments and hedging activities (3.3) (3.3)
Taxes (2.8) 2.8 --
Transaction costs 11.9 (11.9) --
----- ------- ----- -------
Profit attributable to shareholders under U.S. GAAP as
applied by P&O Princess 212.9 1,019.3 108.3 1,340.5
Other accounting policy adjustments
Cruise revenues and expenses (2.9) 1.0 (1.9)
Drydocking (5.2) (4.4) (9.6)
Marketing and promotion costs 4.3 4.3
----- ------- ----- -------
Profit attributable to shareholders under U.S. GAAP and
Carnival's accounting policies 209.1 1,015.9 108.3 1,333.3
===== ======= ===== =======
159
Business Pro forma
P&O combination Combined
Reconciliation of pro forma net assets at Princess Carnival adjustments Group
31December 2002 -------- -------- ----------- ---------
U.S. $m U.S. $m U.S. $m U.S. $m
Net assets under UK GAAP 2,814.0 7,544.0 1,712.2 12,070.2
U.S. GAAP adjustments
Treasury stock (2.9) (2.9)
Depreciation (10.9) (10.9)
Goodwill and contingent consideration (51.7) 1,009.7 958.0
Marketing and promotion costs (87.9) (135.9) (223.8)
Pensions (15.3) (14.7) 19.0 (11.0)
Derivative instruments and hedging activities (11.6) (8.1) (19.7)
Taxes 70.6 (66.0) 4.6
Dividends 20.8 61.6 82.4
Unrealised gain on marketable securities -- 1.9 1.9
Other fair value adjustments -- (9.6) (9.6)
------- ------- ------- --------
Net assets under U.S. GAAP as applied by P&O Princess 2,725.1 7,448.8 2,665.3 12,839.2
Other accounting policy adjustments
Cruise revenues and expenses (12.0) (7.5) (19.5)
Drydocking (16.5) (23.4) (39.9)
Marketing and promotion costs 18.9 18.9
------- ------- ------- --------
Net assets under U.S. GAAP and Carnival's accounting
policies 2,715.5 7,417.9 2,665.3 12,798.7
======= ======= ======= ========
Differences between UK GAAP and U.S. GAAP as applied by P&O Princess which have
a significant effect on the Combined Group are set out in Part B of Section 3.
Other differences between P&O Princess' and Carnival's accounting policies and
details of the business combination adjustments are described in this Part B of
Section 4.
160
2.Unaudited pro forma financial information of the Combined Group in accordance
with U.S. GAAP
Introduction
The following unaudited pro forma financial information reflects the proposed
DLC transaction, after giving effect to the pro forma adjustments described in
the accompanying notes. The unaudited pro forma financial information has been
prepared from, and you should read it in conjunction with, the historical
consolidated financial statements, including the related notes, of Carnival and
P&O Princess contained in Sections 2 and 3 of this document.
The unaudited pro forma financial information has been prepared in accordance
with U.S. GAAP and in accordance with Carnival's accounting policies under U.S.
GAAP. U.S. GAAP differs in certain respects from UK GAAP, and Carnival's
accounting policies under U.S. GAAP differ in certain respects from P&O
Princess' accounting policies under UK GAAP and U.S. GAAP. The notes to the
financial statements included in P&O Princess' financial statements in Section
3 Part B for the year ended 31 December 2002 describe the principal differences
between U.S. GAAP and UK GAAP as they relate to P&O Princess.
It is expected that under U.S. GAAP the DLC transaction will be accounted for
using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 "Business Combinations". The business
combination adjustments include provisional estimates of the fair value of the
identifiable assets and liabilities acquired. On completion of the DLC
transaction, adjustments will be made to these provisional estimates to reflect
their estimated fair value at that time. In accordance with the purchase method
of accounting, the P&O Princess U.S. GAAP accounting policies will be conformed
to Carnival's accounting policies upon completion of the DLC transaction.
The unaudited pro forma statement of operations for the year ended 30 November
2002 has been prepared as if the DLC transaction had occurred on 1 December
2001. The unaudited pro forma balance sheet as of 30 November 2002 has been
prepared as if the DLC transaction had occurred on that date. The historical
financial information for P&O Princess used in the unaudited pro forma
financial information of the combined group is as at and for the year ended 31
December 2002.
The following unaudited pro forma financial information:
.. has been included for illustrative purposes only and, because of its
nature, may not give a true picture of the results and the financial
position of the Combined Group;
.. does not purport to represent what the combined results of operations
actually would have been if the DLC transaction had occurred on 1 December
2001 or what those results will be for any future periods. The pro forma
adjustments are based upon currently available information;
.. does not reflect the results of business operations or trading since 30
November 2002 for Carnival and 31 December 2002 for P&O Princess; and
.. has not been adjusted to reflect any net transaction benefits referred to
in other sections of this document.
161
Unaudited Pro Forma Statement of Operations
For the Year Ended 30 November 2002
(U.S. dollars in millions, except per share data)
Adjustments
---------------------------------------
Pro forma
Carnival Accounting Business Combined
(U.S. P&O Princess policy combination Group
GAAP) (U.S. GAAP) /(1)/ adjustments adjustments (U.S. GAAP)
-------- ---------------- ----------- ----------- -----------
Revenues 4,368.3 2,526.8 (3.9)/(a)/ 6,891.2
Costs and expenses
Operating (2,311.9) (1,576.6) (5.2)/(b)/ (3,892.7)
1.0/(a)/
Selling and administrative (612.0) (472.1) 4.3/(c)/ 105.1/(k)/ (972.8)
1.9/(i)/
Depreciation and amortisation (382.3) (169.2) (551.5)
Impairment charge (20.0) -- (20.0)
-------- -------- ---- ----- --------
(3,326.2) (2,217.9) 0.1 107.0 (5,437.0)
-------- -------- ---- ----- --------
Operating income 1,042.1 308.9 (3.8) 107.0 1,454.2
Nonoperating (expense) income
Net interest expense (78.6) (77.3) (1.5)/(f)/ (157.4)
Other (expense) income, net (4.2) 1.2 (3.0)
-------- -------- ---- ----- --------
(82.8) (76.1) (1.5) (160.4)
-------- -------- ---- ----- --------
Income before income taxes 959.3 232.8 (3.8) 105.5 1,293.8
Income tax benefit (expense) 56.6 (19.9) 2.8/(g)/ 39.5
-------- -------- ---- ----- --------
Net income 1,015.9 212.9 (3.8) 108.3 1,333.3
======== ======== ==== ===== ========
Earnings per share/(n)/
Basic (U.S.$) 1.73 1.67
Diluted (U.S.$) 1.73 1.67
--------
(1)P&O Princess information is for the year ended 31 December 2002.
See accompanying notes to unaudited pro forma financial information of the
Combined Group in accordance with U.S. GAAP.
162
Unaudited Pro Forma Balance Sheet
As of 30 November 2002
(U.S. dollars and shares in millions)
Adjustments
-----------------------------------------------
Pro forma
Carnival Accounting Business Combined
(U.S. P&O Princess policy combination Group
GAAP) (U.S. GAAP) /(1)/ adjustments adjustments (U.S. GAAP)
-------- ---------------- ----------- ----------- -----------
Assets
Current assets
Cash and cash equivalents 666.7 162.1 828.8
Short-term investments 39.0 -- 39.0
Accounts receivable, net 108.3 125.9 3.4/(a)/ 237.6
Inventories 91.3 87.4 178.7
Prepaid expenses and other 148.3 165.3 18.9/(c)/ (66.0)/(g)/ 320.1
(16.5)/(b)/ 70.1/(l)/
Fair value of derivative contracts -- 7.3 7.3
Fair value of hedged firm
commitments 78.4 41.4 (41.4)/(e)/ 78.4
-------- ------- ------- ---------- --------
Total current assets 1,132.0 589.4 5.8 (37.3) 1,689.9
Property and Equipment, Net 10,115.4 5,618.5 15,733.9
Goodwill and Intangible Assets, 681.1 75.4 2,924.4/(d)/ 3,605.5
Net (75.4)/(j)/
Other Assets 297.2 31.0 (17.6)/(f)/ 294.3
13.9/(l)/
(30.2)/(d-ii)/
Fair Value of Hedged Firm
Commitments 109.1 -- 109.1
Fair Value of derivative contracts -- 54.6 54.6
-------- ------- ------- ---------- --------
12,334.8 6,368.9 5.8 2,777.8 21,487.3
======== ======= ======= ========== ========
Liabilities and Shareholders'
Equity
Current liabilities
Current portion of long-term debt 148.6 127.0 275.6
Accounts payable 268.7 184.2 452.9
Accrued liabilities 29.0/(k)/ 543.8
290.4 194.7 (0.1)/(a)/ 29.8/(d-ii)/
Customer deposits 770.6 467.2 15.5/(a)/ 1,253.3
Dividends payable 61.6 -- 61.6
Fair value of derivative contracts 79.8 45.6 125.4
Fair value of hedged firm
commitments -- 1.5 (1.5)/(e)/ --
-------- ------- ------- ---------- --------
Total current liabilities 1,619.7 1,020.2 15.4 57.3 2,712.6
Long-term Debt 3,012.0 2,569.7 (5.0)/(f)/ 5,576.7
Deferred income and Other
Long-Term Liabilities 170.8 28.1 85.0/(h)/ 283.9
Fair Value of Derivative
Contracts 114.4 1.0 115.4
Fair Value of Hedged Firm
Commitments -- 24.8 (24.8)/(e)/ --
Shareholders' Equity 7,417.9 2,725.1 (9.6)/(d-iii)/ 2,665.3/(m)/ 12,798.7
Common stock; 960 shares, 750
shares and 1,185 shares
authorized; 586.8 shares, 693.5
shares and 799.4 shares issued
and outstanding for Carnival,
P&O Princess and Pro Forma
Combined Group, respectively
-------- ------- ------- ---------- --------
12,334.8 6,368.9 5.8 2,777.8 21,487.3
======== ======= ======= ========== ========
--------
(1)P&O Princess information is as of 31 December 2002.
See accompanying notes to unaudited pro forma financial information of the
Combined Group in accordance with U.S. GAAP.
163
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP
1. Basis of Presentation
The unaudited pro forma financial information has been prepared on the basis
that the DLC transaction will be accounted for using the purchase method of
accounting under U.S. GAAP with Carnival as the acquirer. The pro forma
financial information is based upon the U.S. GAAP accounting policies of
Carnival.
The historical financial information in relation to Carnival as at and for the
year ended 30 November 2002 has been derived from the financial information on
Carnival that is included in Section 2 Part B.
The historical financial information in relation to P&O Princess as at and for
the year ended 31 December 2002 has been derived from the financial information
on P&O Princess that is included in Section 3 Part B after making certain
adjustments. The adjustments, which are set out in note 2, relate to the
conversion of such information on P&O Princess' accounting policies under UK
GAAP to P&O Princess' accounting policies under U.S. GAAP.
2. Conversion of P&O Princess' financial information to U.S. GAAP
This note provides details of adjustments required to convert P&O Princess'
previously reported financial information as at and for the year ended 31
December 2002 that was prepared in accordance with P&O Princess' accounting
policies under UK GAAP to information in accordance with U.S. GAAP. Further
details of the adjustments are set out in P&O Princess' financial statements
for the year ended 31 December 2002 included in Section 3 Part B.
(i) Profit and loss accounts
For the year ended 31 December 2002
P&O Princess U.S. GAAP P&O Princess
UK GAAP adjustments U.S. GAAP
- ------------ ----------- ------------
(U.S. dollars in millions)
Revenues 2,526.8 -- 2,526.8
Costs and expenses
Operating (1,576.6) -- (1,576.6)
Selling and administrative (477.6) 5.5 (472.1)
Depreciation and amortisation (173.9) 4.7 (169.2)
-------- ---- --------
(2,228.1) 10.2 (2,217.9)
-------- ---- --------
Operating income 298.7 10.2 308.9
Nonoperating (expense) income
Net interest expense (74.0) (3.3) (77.3)
Other income 1.2 -- 1.2
-------- ---- --------
(72.8) (3.3) (76.1)
-------- ---- --------
Income before income taxes 225.9 6.9 232.8
Income tax expense (17.1) (2.8) (19.9)
-------- ---- --------
Net income 208.8 4.1 212.9
======== ==== ========
164
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP--(Continued)
(ii) Net assets
As of 31 December 2002
P&O Princess U.S. GAAP P&O Princess
UK GAAP adjustments U.S. GAAP
- ------------ ----------- ------------
(U.S. dollars in millions)
Assets
Current assets
Cash and cash equivalents 162.1 -- 162.1
Accounts receivable, net 125.9 -- 125.9
Inventories 87.4 -- 87.4
Prepaid expenses and other 183.5 (18.2) 165.3
Fair value of derivative contracts -- 7.3 7.3
Fair value of hedged firm commitments -- 41.4 41.4
------- ----- -------
Total current assets 558.9 30.5 589.4
Property and Equipment, Net 5,629.4 (10.9) 5,618.5
Goodwill and Intangible Assets, Net 127.1 (51.7) 75.4
Other Assets 16.3 14.7 31.0
Fair value of derivative contracts -- 54.6 54.6
------- ----- -------
6,331.7 37.2 6,368.9
======= ===== =======
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt 120.3 6.7 127.0
Accounts payable 184.2 -- 184.2
Accrued liabilities 215.5 (20.8) 194.7
Customer deposits 467.2 -- 467.2
Fair value of derivative contracts -- 45.6 45.6
Fair value of hedged firm commitments -- 1.5 1.5
------- ----- -------
Total current liabilities 987.2 33.0 1,020.2
Long-Term Debt 2,516.8 52.9 2,569.7
Deferred Income and Other Long-Term Liabilities 13.7 14.4 28.1
Fair Value of Derivative Contracts -- 1.0 1.0
Fair Value of Hedged Firm Commitments -- 24.8 24.8
Shareholders' Equity 2,814.0 (88.9) 2,725.1
------- ----- -------
6,331.7 37.2 6,368.9
======= ===== =======
3. Accounting policy adjustments
The pro forma financial information has been prepared in accordance with the
accounting policies of Carnival under U.S. GAAP, which differ in certain
respects from the U.S. GAAP accounting policies of P&O Princess as noted below.
Upon completion of the DLC transaction, Carnival and P&O Princess will perform
a detailed review of their accounting policies and financial statement
classifications. As a result of this detailed review, it may become necessary
to make certain reclassifications to the Combined Group's financial statements
to conform the P&O Princess financial statements to the Carnival accounting
policies and classifications. Although Carnival and P&O Princess do not expect
that this detailed review will result in material changes to accounting
policies or classifications other than as noted below, no such assurance can be
given at this time.
(a) Cruise revenues and expenses
P&O Princess' accounting policy is initially to record deposits received on
sales of cruises as deferred income and recognise them, together with
revenues from onboard activities and all associated direct costs of a
voyage, on a pro rata basis at the time of the voyage. Carnival's
accounting policy is to recognise these items generally upon completion of
voyages with durations of ten days or less and on a pro rata basis for
voyages in excess of ten days. For the year ended
165
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP--(Continued)
and as of 30 November 2002 adjustments of $(2.9) million (affecting
revenues by $(3.9) million and operating expenses by $1.0 million) and
$(12.0) million (affecting accounts receivable by $(3.4) million, accrued
liabilities by $(0.1) million and customer deposits by $15.5 million),
respectively, have been made to conform P&O Princess' policy to Carnival's
policy.
(b) Dry-docking
P&O Princess' accounting policy is to capitalise dry-docking costs and
amortise them to operating expense using the straight-line method through
the date of the next scheduled dry-dock, which typically is over two to
three years. Carnival's dry-dock accounting policy is the same as P&O
Princess' except that the capitalised dry-dock costs are amortised to
expense generally over one year. For the year ended and as of 30 November
2002 and adjustments of $(5.2) million and $(16.5) million, respectively,
have been made to conform P&O Princess' policy to Carnival's policy.
(c) Marketing and promotion costs
P&O Princess' accounting policy under U.S. GAAP is to expense all marketing
and promotion costs as incurred. Carnival expenses all such costs as
incurred except for brochures and media production costs, which are
recorded as prepaid expenses and charged to expense as the brochures are
consumed or upon the first airing of the advertisement, respectively. For
the year ended and as of 30 November 2002 adjustments of $4.3 million and
$18.9 million, respectively, have been made to conform P&O Princess' policy
to Carnival's policy.
4. Business combination adjustments
(d) Purchase consideration and related goodwill and intangible assets are as
follows:
(U.S.$m) Notes
-------- -----
Purchase consideration 5,380.8 (i)
Costs of acquisition 60.0 (ii)
--------
Total purchase consideration 5,440.8
Less fair value of net assets acquired (2,516.4) (iii)
--------
Excess of purchase consideration over net assets acquired 2,924.4 (iv)
========
--------
(i)The purchase consideration is expected to be based upon the average of the
quoted closing market price of Carnival's shares beginning two days before
and ending two days after 8 January 2003, the date its DLC transaction offer
announcement was agreed to by the P&O Princess board. In addition, the
number of P&O Princess shares is adjusted for the proposed share
reorganisation of 3.3289 existing P&O Princess shares for one new P&O
Princess share, including P&O Princess stock options which will vest in full
on completion of the DLC transaction. A Carnival share price of $25.31 has
been used for purposes of this pro forma presentation and an estimated
number of P&O Princess shares in issue of 212.6 million after adjusting for
the share reorganisation.
(ii)Represents Carnival's estimated direct costs of carrying out the proposed
DLC transaction, including costs related to the registration of Carnival
shares pursuant to the Partial Share Offer, of which $30.2 million has been
incurred by Carnival and is included in other assets. An adjustment has
been made to remove this $30.2 million from other assets as it will be
included in the purchase consideration upon completion of the DLC
transaction. Of the total $60.0 million of acquisition costs $29.8 million
had not been incurred as of 30 November 2002 and, accordingly, an
adjustment has been made to increase accrued liabilities for this amount.
(iii)Based upon preliminary estimates of the fair value of the identifiable
assets acquired and liabilities assumed given current information. On
completion of the DLC transaction, adjustments will be made to these
preliminary estimates to reflect their estimated fair values at that time.
Carnival and P&O Princess expect to have independent appraisals performed
to assist them in establishing the fair values of P&O Princess' ships and
amortisable and non-amortisable intangible assets. However, based on the
information currently available, it is not expected that the amount of
separately identifiable amortisable intangible assets will be material to
the Combined Group's financial statements. No assurance can be given that
the preliminary fair value estimates included in this pro forma financial
information will not be materially changed as a result of these
valuations. Fair value adjustments are detailed in the notes and table
below.
166
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP--(Continued)
P&O Princess fair value of net assets acquired
Accounting
P&O policy Pro
Princess adjustments Fair value forma
(US GAAP) (Note 3) adjustments fair value
--------- ----------- ----------- ----------
US $m US $m US $m US $m
Assets
Current assets
Cash and cash equivalents 162.1 162.1
Accounts receivable, net 125.9 3.4/(a)/ 129.3
Inventories 87.4 87.4
Prepaid expenses and other 165.3 18.9/(c)/ 70.1/(l)/ 171.8
(16.5)/(b)/ (66.0)/(e)/
Fair value of derivative contracts 7.3 7.3
Fair value of hedged firm commitments 41.4 (41.4)/(e)/ --
------- ----- ------ -------
Total current assets 589.4 5.8 (37.3) 557.9
------- ----- ------ -------
Property and equipment, net 5,618.5 5,618.5
Goodwill and intangible assets, net 75.4 (75.4)/(j)/ --
Other assets 31.0 (17.6)/(f)/ 27.3
13.9/(l)/
Fair value of derivative contracts 54.6 54.6
------- ----- ------ -------
6,368.9 5.8 (116.4) 6,258.3
======= ===== ====== =======
Liabilities and shareholders' equity
Current liabilities
Current portion of long term debt 127.0 127.0
Accounts payable 184.2 184.2
Accrued liabilities 194.7 (0.1)/(a)/ 29.0/(k)/ 223.6
Customer deposits 467.2 15.5/(a)/ 482.7
Fair value of derivative contracts 45.6 45.6
Fair value of hedged firm commitments 1.5 (1.5)/(e)/ --
------- ----- ------ -------
Total current liabilities 1,020.2 15.4 27.5 1,063.1
------- ----- ------ -------
Long term debt 2,569.7 (5.0)/(f)/ 2,564.7
Other long term liabilities 28.1 85.0/(h)/ 113.1
Fair value of derivative contracts 1.0 -- -- 1.0
Fair value of hedged firm commitments 24.8 -- (24.8)/(e)/ --
Shareholders' equity 2,725.1 (9.6)/(/*/)/ (199.1)/(/**/)/ 2,516.4
------- ----- ------ -------
6,368.9 5.8 (116.4) 6,258.3
======= ===== ====== =======
--------
(*)Represents the net shareholders' equity decrease due to accounting policy
adjustments.
(**)Represents the net shareholders' equity decrease due to fair value
adjustments.
(iv)The excess of purchase consideration over net assets acquired is primarily
estimated to include the value attributed to P&O Princess' trademarks,
brand names and goodwill. Carnival and P&O Princess believe that these
trademarks and brand names have indefinite lives and, accordingly, based on
SFAS No. 142, "Goodwill and Other Intangible Assets", no adjustment for pro
forma amortisation is required. It is not possible at this time to
reasonably estimate the separate amounts attributable to identifiable
intangible assets or goodwill since the measurement of these assets
requires the expertise of an independent appraiser, who will not be engaged
until after the completion of the DLC transaction. Accordingly, the entire
amount of the excess of the purchase consideration has currently been
allocated to goodwill, but is expected to be allocated between goodwill and
other identifiable intangible assets such as brand names and trademarks,
subsequent to the completion of the DLC transaction based primarily on the
appraiser's valuation. However, since it is expected that the material
intangibles that will be identified and valued will have indefinite lives,
no material impact on the pro forma statement of operations is expected as
a result of this presentation on the Combined Group's balance sheet, as
neither goodwill nor these indefinite lived intangibles are allowed to be
amortised.
(e) A net adjustment of $15.1 million has been made against the fair value of
hedged firm commitments. These adjustments relate to contractual
commitments for ships which were ordered, and hedged, at a time when the
euro exchange rate was different, and hence, these contracts could be
replaced today at a euro price that would convert to a different U.S.
dollar cost at current exchange rates.
Otherwise, the book value, including prepaid dry-dock costs, and fair value
of ships in use and under construction are preliminarily estimated to be
the same in all material respects. However, Carnival intends to have an
appraisal of all the P&O Princess ships, so it is possible that the fair
value of some of P&O Princess' ships could be less than or greater than
their carrying value.
167
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP--(Continued)
(f) An adjustment of $5.0 million has been made to the book value of P&O
Princess fixed interest rate long-term debt to reflect current interest
rates, without giving effect to any possible changes in credit ratings. The
fair value of this debt is based upon quoted market prices or the
discounted present value of future amounts payable on the debt. The fair
value adjustment is amortised over the remaining term of the debt as
applicable, which results in a pro forma increase of $1.5 million in
interest expense for 2002. In addition, an adjustment has been made to
write-off the book value of P&O Princess' historical deferred financing
costs of $17.6 million related to its existing borrowings, as such costs
have been considered in determining the fair value of P&O Princess' debt.
(g) An adjustment of $66.0 million has been made to the book value of other tax
assets to reflect recoverable value to the Combined Group and to reverse
$2.8 million P&O Princess' related tax expense.
(h) An adjustment of $85.0 million has been made to record the fair value of
P&O Princess' pension plan liabilities. This relates to the Merchant Navy
Officers Pension Fund and is calculated based on, among other things, P&O
Princess' current share of total employer contributions.
(i) On completion of the DLC transaction all awards and options granted under
the P&O Princess employee share incentive plans will vest in full. An
adjustment has been made to reverse the P&O Princess employee share
incentive and matching award charge of $1.9 million for the year ended 30
November 2002.
(j) An adjustment has been made to eliminate $75.4 million of P&O Princess'
historical goodwill related to prior business acquisitions.
(k) P&O Princess expects to incur and expense approximately $146.0 million of
costs related to its terminated Royal Caribbean transaction and the
completion of the DLC transaction with Carnival, including costs incurred
to register P&O Princess ordinary shares with the U.S. Securities and
Exchange Commission. Under U.S. GAAP, $11.9 million was expensed in the
year ended December 31, 2001, and $105.1 million was expensed in 2002. An
adjustment has been made to reverse this $105.1 million in the pro forma
statement of operations for 2002 since Carnival and P&O Princess believe
that the Royal Caribbean and Carnival costs are non-recurring charges
directly attributable in all material respects to the DLC transaction. Of
the total $146.0 million of P&O Princess' costs, $29.0 million has not been
incurred as at December 31, 2002 and an adjustment has been made to
increase accrued liabilities for this amount.
(l) An adjustment of $84.0 million ($70.1 million current and $13.9 million
long term) has been made to record the fair value of P&O Princess'
contractual commitments to receive probable and estimable liquidated
damages and business interruption insurance proceeds related to the delayed
delivery of the Diamond Princess. This ship was initially scheduled for
delivery in May 2003, but has been delayed as a result of a fire in October
2002.
(m) The shareholders' equity adjustment of $2,665.3 million represents the net
equity increase due to the application of business combination adjustments,
as detailed below:
US$m Notes
- ------- ----------
Excess of purchase consideration over net assets acquired 2,924.4 4/(d)/
Reduction in P&O Princess shareholders' funds for fair value adjustments (199.1) 4/(d-iii)/
Costs of acquisition (60.0) 4/(d-ii)/
-------
Shareholders' equity adjustment 2,665.3
-------
(n) The pro forma weighted average number of shares has been calculated as if
the DLC transaction had occurred on 1 December 2001 and after adjusting for
the proposed P&O Princess share reorganisation of 3.3289 existing P&O
Princess shares for one new P&O Princess share.
168
Notes to the unaudited pro forma financial information of the Combined
Group in accordance with U.S. GAAP--(Continued)
Based upon the weighted average number of shares outstanding of 706.6
million, including 14.2 million of share options which all vest upon
completion of the DLC transaction. (706.6 million diluted), or 212.3
million (212.3 million diluted) after the proposed P&O Princess share
reorganisation, for P&O Princess and 586.6 million (588.1 million diluted)
for Carnival for the years ended 31 December 2002 and 30 November 2002,
respectively, the pro forma weighted average number of shares for the
Combined Group is calculated as 798.9 million (800.4 million diluted).
The pro forma earnings per share amounts have been calculated using the pro
forma weighted average number of shares, calculated as described above, and
the pro forma earnings for the Combined Group.
(o) Certainrestructuring and integration expenses may be recorded subsequent
to the completion of the DLC transaction. The amount of these
charges has not yet been determined, although they have been
preliminarily estimated to be approximately $30 million, as they
will be the subject of a detailed plan of restructuring and
integration to be completed subsequent to the consummation of the
DLC transaction. A portion of these charges may subsequently be
determined to be part of the purchase consideration. These charges
are not reflected in the unaudited pro forma financial information
because they are not expected to have a continuing impact on the
combined results.
169
Report on pro forma financial information from KPMG Audit Plc
The following is the text of a report on the pro forma financial information of
the Combined Group from KPMG Audit Plc:
[LOGO] KPMG
KPMG Audit Plc
8 Salisbury Square
London
EC4Y 8BB
United Kingdom
The Directors
P&O Princess Cruises plc
77 New Oxford Street
London WC1A 1PP
Salomon Brothers International Limited, trading as
Schroder Salomon Smith Barney
Citigroup Centre
33 Canada Square, Canary Wharf
London E14 5LB
17 March 2003
Dear Sirs
P&O Princess Cruises plc (the "Company")
We report on the pro forma financial information set out in Section 4, Part B
of the circular dated 17 March 2003, which has been prepared, for illustrative
purposes only, to provide information about how the transaction might have
affected the financial information presented.
Responsibilities
It is the responsibility solely of the directors and proposed directors of the
Company to prepare the pro forma financial information in accordance with
paragraph 12.29 of the Listing Rules.
It is our responsibility to form an opinion, as required by the Listing Rules
of the UK Listing Authority, on the pro forma financial information and to
report our opinion to you. We do not accept any responsibility for any reports
previously given by us on any financial information used in the compilation of
the pro forma financial information beyond that owed to those to whom those
reports were addressed by us at the dates of their issue.
Basis of opinion
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards and Bulletin 1998/8 "Reporting on pro forma financial
information pursuant to the Listing Rules" issued by the Auditing Practices
Board. Our work, which involved no independent examination of the underlying
financial information, consisted primarily of comparing the unadjusted
financial information with the source documents, considering the evidence
supporting the adjustments and discussing the pro forma financial information
with the directors and proposed directors of the Company.
Our work has not been carried out in accordance with auditing standards
generally accepted in the United States of America and accordingly should not
be relied upon as if it had been carried out in accordance with those standards.
170
Opinion
In our opinion:
.. the unaudited pro forma financial information of the Combined Group in
accordance with UK GAAP has been properly compiled on the basis set out
therein;
.. such basis is consistent with the accounting policies of the Company;
.. the adjustments therein are appropriate for the purposes of the pro forma
financial information as disclosed pursuant to paragraph 12.29 of the
Listing Rules of the UK Listing Authority; and
.. the reconciliations to U.S. GAAP and Carnival accounting policies of the
pro forma financial information have been properly compiled on the basis
stated and are appropriate for presenting the effect on profit attributable
to shareholders and net assets applying U.S. GAAP and these policies for
the periods and as at the date stated.
Yours faithfully
KPMG Audit Plc
171
Part C. Risk factors
In addition to the other information contained in this document, P&O Princess
shareholders should consider the following risk factors before deciding how to
vote on the DLC transaction.
Risks relating to the DLC transaction
Benefits from the DLC structure may not be achieved to the extent or within the
time period currently expected, which could eliminate, reduce and/or delay the
improvements in cost savings and operational efficiencies expected to be
generated by the DLC structure
Following completion of the DLC transaction, P&O Princess and Carnival will be
managed as if they were a single economic enterprise. Carnival and P&O Princess
expect the combination under the DLC structure will enable them to achieve cost
savings through synergies as well as enhanced operational efficiencies.
However, the companies may encounter substantial difficulties during this
process that could eliminate, reduce and/or delay the realisation of the cost
savings and synergies that they currently expect. Among other things, these
difficulties could include:
.. loss of key employees;
.. inconsistent and/or incompatible business practices, operating procedures,
information systems, financial controls and procedures, cultures and
compensation structures between Carnival and P&O Princess;
.. unexpected integration issues and higher than expected integration costs;
and
.. the diversion of management's attention from day-to-day business as a
result of the need to deal with integration issues.
As a result of these difficulties, the actual cost savings and synergies
generated by the DLC structure may be less, and may take longer to realise,
than the companies currently expect.
The structure of the DLC transaction involves risks not associated with the
more common ways of combining the operations of two companies and these risks
may have an adverse effect on the economic performance of the companies and/or
their respective share prices
The DLC structure is a relatively uncommon way of combining the operations and
management of two companies and it involves different issues and risks than
those associated with the other more common ways of effecting such a
combination. In the DLC transaction, the combination will be effected primarily
by means of contracts between the two companies and not by operation of a
statute or court order. The legal effect of these contractual rights may be
different than the legal effect of a merger or amalgamation under statute or
court order and there may be difficulties in enforcing these contractual
rights. In addition, the contracts will be enforceable only by the companies
and not directly by their shareholders. Nevertheless, shareholders of either
company might challenge the validity of the contracts or their lack of standing
to enforce rights under these contracts, and courts may interpret or enforce
these contracts in a manner inconsistent with the express provisions and
intentions of Carnival and P&O Princess expressed in such contracts. In
addition, shareholders of other companies might successfully challenge other
dual listed company structures and establish legal precedents that could
increase the risk of a successful challenge to the DLC transaction. The
Combined Group will maintain two separate public companies and comply with both
Panamanian corporate law and English company and securities laws and different
regulatory and stock exchange requirements in the UK and the U.S. This is
likely to require more administrative time and cost than is currently the case
for each company, which may have an adverse effect on the Combined Group's
operating efficiency.
The shares of Carnival and P&O Princess may not trade in line with the
equalisation ratio
The economic interests of the shares of Carnival and P&O Princess will be
contractually aligned in accordance with the equalisation ratio. However,
because the shares of the two companies will remain outstanding, will not be
exchangeable for each other at the option of the shareholder and will primarily
trade in separate markets with different characteristics and in different
currencies, the relative market prices of the shares of P&O Princess and
Carnival may not exactly reflect the equalisation ratio. P&O Princess shares
could trade at a discount to the Carnival shares because P&O Princess shares
will represent between 21 and 26 per cent. of the equity of the Combined Group.
172
Courts may interpret or enforce the contracts and other instruments that effect
the DLC structure in a manner inconsistent with the express provisions and
intentions of Carnival and P&O Princess
Various provisions of the Equalisation and Governance Agreement, the companies'
articles and the cross guarantees are intended to ensure that, as far as
practicable, the shareholders of the Combined Group are treated equitably in
the event of insolvency of either or both companies and in accordance with the
equalisation ratio, regardless of where the assets of the Combined Group
reside. Courts may interpret or enforce these contracts in a manner
inconsistent with the express provisions and intentions of Carnival and P&O
Princess expressed in such contracts. For instance, a bankruptcy court may not
choose to follow the Combined Group's contractual way of allocating liabilities
and assets. Therefore, were assets transferred between the two companies, a
court, faced with the liquidation or dissolution of either company, may not
adhere to the equalisation ratio and the rights of shareholders of the company
from which assets were transferred may be adversely affected.
Economic returns on shares of Carnival and P&O Princess will be dependent upon
the economic performance of the Combined Group and the inability of one company
to pay dividends may limit or prevent the payment of dividends by the other
Upon implementation of the DLC structure, the dividends paid on shares of
Carnival and P&O Princess will depend primarily on the economic performance of
the assets of both companies of the Combined Group. Therefore, the past
performance of P&O Princess shares and Carnival shares may not reflect the
future performance of these shares. Additionally, if one company is unable to
pay dividends on its shares, the other company must make such payments to the
other and/or scale back its dividend in order to equalise the distributions in
accordance with the equalisation ratio. After taking into consideration the
actions necessary to equalise such distributions, both companies may be limited
in their ability, or unable, to pay dividends.
The liquidity and market value of P&O Princess shares could decrease following
the DLC transaction and the Partial Share Offer, and this could affect the
inclusion of P&O Princess shares in the FTSE series of indices or their full
weighting
As a result of the DLC transaction, P&O Princess shares will account for
approximately 26 per cent. of the total outstanding equity of the Combined
Group. To the extent P&O Princess shares are exchanged for Carnival shares
under the Partial Share Offer this percentage would be further reduced to not
less than 21 per cent. of the total outstanding equity of the Combined Group.
Any such exchange would reduce the liquidity of the market for P&O Princess
shares below its level immediately prior to the DLC transaction. In addition,
the liquidity of the market for P&O Princess shares would also be further
reduced by any future repurchases or buy-back of P&O Princess shares by
Carnival or P&O Princess. Reductions in liquidity could adversely affect the
market value of the P&O Princess shares.
The liquidity of the market for the P&O Princess shares would also be adversely
affected if they became no longer eligible for inclusion in the FTSE series of
indices, including the FTSE 100 index. Based on the thresholds currently
required to remain in the FTSE 100, this could occur if the aggregate market
value of the outstanding P&O Princess shares falls significantly compared to
the other constituents of the index. In addition, in order to maintain its full
weighting in the FTSE indices, including the FTSE 100, a minimum percentage of
P&O Princess shares must qualify as free float as determined by FTSE
International. Purchases of P&O Princess shares by Carnival, for example, would
reduce the free float. Failure to be included and/or to receive full weighting
in the FTSE indices could significantly reduce the demand for, and therefore
the liquidity of, P&O Princess shares and lead to significant sales of P&O
Princess shares. These could adversely affect the market value of P&O Princess
shares.
Changes under the Internal Revenue Code, the applicable U.S. income tax
treaties, and the uncertainty of the DLC structure under the Internal Revenue
Code may adversely affect the U.S. federal income taxation of the U.S. source
shipping income of the Combined Group
Carnival and P&O Princess believe that substantially all of the U.S. source
shipping income of each respective company and its subsidiaries qualifies for
exemption from U.S. federal income tax, either under:
.. Section 883 of the Internal Revenue Code;
173
.. as appropriate in the case of P&O Princess and its UK resident
subsidiaries, under the U.S.-UK Income Tax Treaty; or
.. other applicable U.S. income tax treaties,
and should continue to so qualify after completion of the DLC transaction.
There is, however, no existing U.S. federal income tax authority that directly
addresses the tax consequences of implementation of a dual listed company
structure such as the DLC structure for purposes of Section 883 or any other
provision of the Internal Revenue Code or any income tax treaty and,
consequently, the matters discussed above are not free from doubt. See
paragraph 11 of Part A of Section 4 under the heading "U.S. taxation".
To date no final U.S. Treasury regulations or other definitive interpretations
of the relevant portions of Section 883 have been promulgated, although
regulations have been proposed. Any such final regulations or official
interpretations could differ materially from Carnival's and P&O Princess'
interpretation of this Internal Revenue Code provision and, even in the absence
of differing regulations or official interpretations, the Internal Revenue
Service might successfully challenge either or both Carnival's and P&O
Princess' interpretation. In addition, the provisions of Section 883 are
subject to change at any time by legislation. Moreover, changes could occur in
the future with respect to the trading volume or trading frequency of Carnival
shares and/or P&O Princess shares on their respective exchanges or with respect
to the identity, residence, or holdings of Carnival's and/or P&O Princess'
direct or indirect shareholders that could affect the eligibility of Carnival
and its subsidiaries and/or certain members of the P&O Princess group otherwise
eligible for the benefits of Section 883 to qualify for the benefits of the
Section 883 exemption. Accordingly, it is possible that Carnival and its
ship-owning or operating subsidiaries and/or the members of the P&O Princess
group whose tax exemption is based on Section 883 may lose this exemption. If
any such corporation were not entitled to the benefit of Section 883, it would
be subject to U.S. federal income taxation on a portion of its income, which
would reduce the net income of such corporation.
As noted above, P&O Princess believes that substantially all of the U.S. source
shipping income of P&O Princess and its UK resident subsidiaries qualifies for
exemption from U.S. federal income tax under the U.S.-UK Income Tax Treaty. The
U.S.-UK Income Tax Treaty has been renegotiated and signed but is pending
ratification by the U.S. P&O Princess believes that substantially all of the
U.S. source shipping income of the companies referred to above should qualify
for exemption from U.S. federal income tax under such treaty if, and as of
when, the pending treaty comes into force. In addition, certain companies of
the Combined Group may rely on other U.S. income tax treaties for similar
exemptions from U.S. taxation on U.S. source shipping income. Neither Carnival
nor P&O Princess believe that the DLC transaction will affect the ability of
these corporations to continue to qualify for such treaty benefits. There is,
however, no authority that directly addresses the effect, if any, of DLC
arrangements on the availability of benefits under any applicable U.S. income
tax treaty and, consequently, the matter is not free from doubt.
These treaties may be abrogated by either applicable country, replaced or
modified with new agreements that treat shipping income differently than under
the agreements currently in force. If any of the corporations discussed in the
paragraph above that currently qualify for exemption from U.S. source shipping
income under any applicable U.S. income tax treaty do not qualify for benefits
under the existing treaties or the existing treaties are abrogated, replaced or
materially modified in a manner adverse to the interests of any such
corporation and, with respect to U.S. federal income tax only, such corporation
does not qualify for Section 883 exemption, such corporation may be subject to
U.S. federal income taxation on a portion of its income, which would reduce the
net income of any such corporation.
After the DLC transaction is completed, P&O Princess shares could be subject to
a mandatory exchange into Carnival shares and this would adversely affect
holders to the extent they are required, or prefer, to hold UK shares
In certain limited circumstances following implementation of the DLC structure,
P&O Princess shares, other than those held by Carnival, may be subject to a
mandatory exchange for Carnival shares at the then prevailing equalisation
ratio. These circumstances include:
.. a change in tax law that has a material adverse impact on the DLC structure
which cannot be avoided by other commercially reasonable means; and
.. the illegality or unenforceability of all or a substantial part of the DLC
documents.
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In both cases, board action is required and in the case of a change in tax law,
shareholder approval is also required. Upon a mandatory exchange, P&O Princess
shareholders would no longer hold their investment in the Combined Group in the
form of P&O Princess shares listed on the London Stock Exchange and included in
the FTSE series of indices, but would instead hold their investment in the form
of Carnival shares listed on the NYSE. The exchange by UK P&O Princess
shareholders of P&O Princess shares for Carnival shares following mandatory
exchange should not constitute a taxable disposal for the purposes of UK
taxation on chargeable gains. However, the exchange would adversely affect the
holders to the extent they are required, or prefer to hold shares in a UK
company with its primary listing on the London Stock Exchange. Additionally,
for UK resident or ordinary resident shareholders dividends paid on Carnival
shares are taxed differently than dividends paid on P&O Princess shares and
this difference in tax treatment may adversely affect certain P&O Princess
shareholders subject to a mandatory exchange.
Under current law, depending on the facts and circumstances at the particular
time, the mandatory exchange may or may not be a taxable transaction for U.S.
federal income tax purposes for U.S. P&O Princess shareholders.
A small group of shareholders will collectively own approximately 35 per cent.
of the total combined voting power of the outstanding shares of the Combined
Group and may be able to effectively control the outcome of shareholder voting
A group of shareholders, comprising certain members of the Arison family,
including Micky Arison, and trusts established for their benefit, that
currently beneficially owns approximately 47 per cent. of the voting power of
Carnival, will own shares entitled to constitute a quorum at shareholder
meetings and to cast approximately 35 per cent. of the total combined voting
power of the outstanding shares of the Combined Group. Depending upon the
nature and extent of the shareholder vote, this group of shareholders may have
the power to effectively control, or at least to influence substantially, the
outcome of shareholder votes and, therefore, the corporate actions requiring
such votes.
Following completion of the DLC transaction, fewer shares of P&O Princess will
be required to approve resolutions at P&O Princess shareholder meetings than
would otherwise be the case because:
.. P&O Princess shares acquired by Carnival in the Partial Share Offer
(potentially up to 20 per cent. of its outstanding shares) or otherwise
generally will not have voting rights; and
.. votes at P&O Princess shareholder meetings generally will be carried out
based on the percentage of shares voting, rather than based on the number
of shares outstanding.
Provisions in the Carnival and P&O Princess constitutional documents may
prevent or discourage takeovers and business combinations that shareholders in
the Combined Group might consider in their best interests
Carnival's articles and by-laws and P&O Princess' articles contain provisions
that may delay, defer, prevent or render more difficult a takeover attempt that
shareholders in the Combined Group might consider to be in their best
interests. For instance, these provisions may prevent shareholders in the
Combined Group from receiving a premium to the market price of Carnival shares
and/or P&O Princess shares offered by a bidder in a takeover context. Even in
the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of Carnival shares or P&O Princess
shares if they are viewed as discouraging takeover attempts in the future.
Specifically, Carnival's articles of incorporation contain provisions that
prevent third parties, other than the Arison family and related entities, from
acquiring beneficial ownership of more than 4.9 per cent. of the outstanding
Carnival shares without the consent of the Carnival board of directors and
provide for the lapse of rights, and sale, of any shares acquired in excess of
that limit. In addition, the Carnival and P&O Princess constitutional documents
contain provisions that would apply some of the anti-takeover protections
provided by the Takeover Code to both companies. No third party, other than the
Arison family and related entities, may acquire additional shares or voting
control over shares in either company, if such person would then be able to
cast 30 per cent. or more of the votes which could be cast on a joint
electorate action, without making an equivalent offer for the other company.
The combined effect of these provisions may preclude third parties from seeking
to acquire a controlling
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interest in either company in transactions that shareholders might consider to
be in their best interests and may prevent them from receiving a premium above
market price for their shares. These provisions may only be amended by both
sets of shareholders, voting separately as a class, in a class rights action.
Risks relating to the Combined Group's businesses
The Combined Group may lose business to competitors throughout the vacation
market
The Combined Group will operate in the vacation market and cruising is one of
many alternatives for people choosing a vacation. The Combined Group will
therefore risk losing business not only to other cruise lines, but also to
other vacation operators that provide other leisure options including hotels,
resorts and package holidays and tours.
The Combined Group will face significant competition from other cruise lines,
both on the basis of cruise pricing and also in terms of the nature of ships
and services it will offer to cruise passengers. The Combined Group's principal
competitors within the cruise vacation industry will include:
.. Royal Caribbean, which owns Royal Caribbean International and Celebrity
Cruises;
.. Norwegian Cruise Line and Orient Lines;
.. Disney Cruise Line;
.. MyTravel's Sun Cruises, Thomson, Saga and Fred Olsen in the UK;
.. Festival Cruises, Hapag-Lloyd, Peter Deilmann and Phoenix Reisen in Germany;
.. Festival Cruises, Mediterranean Shipping Cruises, Royal Olympia Cruises and
Louis Cruise Line in southern Europe;
.. Crystal Cruises;
.. Radisson Seven Seas Cruise Line; and
.. Silversea Cruises.
The Combined Group will also compete with land-based vacation alternatives
throughout the world, including, among others, resorts and hotels located in
Las Vegas, Nevada, Orlando, Florida, various Caribbean, Mexican, Bahamian and
Hawaiian Island destination resorts and numerous vacation destinations
throughout Europe and the rest of the world.
In the event that the Combined Group does not compete effectively with other
vacation alternatives and cruise companies, its market share could decrease and
its results of operations and financial condition could be adversely affected.
Overcapacity within the cruise and competing land-based vacation industry could
have a negative impact on net revenue yields, increase operating costs, result
in ship asset impairments and could adversely affect profitability
Cruising capacity has grown in recent years and Carnival and P&O Princess
expect it to continue to increase over the next three and a half years as all
of the major cruise vacation companies are expected to introduce new ships. In
order to utilise new capacity, the cruise vacation industry will need to
increase its share of the overall vacation market. The overall vacation market
is also facing increases in land-based vacation capacity, which also will
impact the Combined Group. Failure of the cruise vacation industry to increase
its share of the overall vacation market could have a negative impact on the
Combined Group's net revenue yields. Should net revenue yields be negatively
impacted, the Combined Group's results of operations and financial condition
could be adversely affected, including the impairment of the value of its ship
assets. In addition, increased cruise capacity could impact the Combined
Group's ability to retain and attract qualified crew at competitive costs and,
therefore, increase the Combined Group's shipboard employee costs.
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The international political and economic climate and other world events
affecting safety and security could adversely affect the demand for cruises and
could harm the Combined Group's future sales and profitability
Demand for cruises and other vacation options has been and is expected to
continue to be affected by the public's attitude towards the safety of travel,
the international political climate and the political climate of destination
countries. Events such as the terrorist attacks in the U.S. on September 11,
2001 and the threat of additional attacks, the outbreak of hostilities or war,
including the possibility of military action against Iraq, and national
government travel advisories, or concerns that such hostilities or war might
break out, together with the resulting political instability and concerns over
safety and security aspects of travelling, have had a significant adverse
impact on demand and pricing in the travel and vacation industry and may
continue to do so in the future. Demand for cruises is also likely to be
increasingly dependent on the underlying economic strength of the countries
from which cruise companies source their passengers. Economic or political
changes that reduce disposable income or consumer confidence in the countries
from which the Combined Group will source its passengers may affect demand for
vacations, including cruise vacations, which are a discretionary purchase.
Decreases in demand could lead to price discounting which, in turn, could
reduce the profitability of its business.
The debt rating of the Combined Group may be downgraded from Carnival's current
rating, and for this or other reasons the Combined Group may not be able to
obtain financing on terms that are favourable or consistent with its
expectations
Access to financing for the Combined Group will depend on, among other things,
the maintenance of strong long-term credit ratings. Carnival's debt is
currently rated "A" by Standard & Poor's, "A2" by Moody's Investor Services and
"A" by FitchRatings. P&O Princess' debt is currently rated "BBB" by Standard &
Poor's, "Baa3" by Moody's and "BBB+" by FitchRatings. As a result of the DLC
transaction, the debt rating of the Combined Group may be downgraded from
Carnival's current ratings, although it is expected to remain a strong
investment grade rating.
Carnival and P&O Princess believe their current external sources of liquidity,
including committed financings, and cash on hand, together with forecasted cash
flows from future operations, will be sufficient to fund most or all of the
capital projects, debt service requirements, dividend payments and working
capital needs of the Combined Group.
The forecasted cash flow from future operations for the Combined Group, as well
as the credit ratings of each of Carnival and P&O Princess, may be adversely
affected by various factors, including, but not limited to, declines in
customer demand, increased competition, overcapacity, the deterioration in
general economic and business conditions, terrorist attacks, ship incidents,
adverse publicity and increases in fuel prices, as well as other factors noted
under these "Risk factors" and the "Cautionary note concerning factors that may
effect future results" section of this document. To the extent that the
Combined Group is required, or chooses, to fund future cash requirements,
including future shipbuilding commitments, from sources other than cash flow
from operations, cash on hand and current external sources of liquidity, the
Combined Group will have to secure such financing from banks or through the
offering of debt and/or equity securities in the public or private markets.
The future operating cash flow of the Combined Group may not be sufficient to
fund future obligations, and the Combined Group may not be able to obtain
additional financing, if necessary, at a cost that meets its expectations.
Accordingly, the financial results of the Combined Group could be adversely
affected.
If P&O Princess loses eligibility for inclusion in the FTSE 100 or Carnival is
removed from the S&P 500, it may become more difficult for either company to
access the equity capital markets
Carnival's shares will remain listed on the NYSE and are expected to continue
to be included in the S&P 500. P&O Princess' shares will remain listed on the
London Stock Exchange and are expected to remain eligible for inclusion in the
FTSE series of indices and are expected to continue to be included with full
weighting in the FTSE 100. If P&O Princess loses eligibility for inclusion in
the FTSE 100 or Carnival is removed from the S&P 500, it may become more
difficult for either company to access the equity capital markets.
177
Conducting business internationally can result in increased costs
The Combined Group will operate the businesses of Carnival and P&O Princess
internationally and plans to continue to develop its international presence.
Operating internationally exposes the Combined Group to a number of risks
including:
.. currency fluctuations;
.. interest rate movements;
.. the imposition of trade barriers and restrictions on repatriation of
earnings;
.. political risks;
.. risk of increases in duties, taxes and governmental royalties; and
.. changes in laws and policies affecting cruising, vacation or maritime
businesses or the governing operations of foreign-based companies.
If the Combined Group is unable to address these risks adequately, its results
of operations and financial condition could be adversely affected.
Accidents and other incidents at sea or adverse publicity concerning the cruise
industry or the Combined Group could affect the Combined Group's reputation and
harm its future sales and profitability
The operation of cruise ships involves the risk of accidents, illnesses,
mechanical failures and other incidents at sea, which may bring into question
passenger safety, health, security and vacation satisfaction and thereby
adversely affect future industry performance. Incidents involving passenger
cruise ships could occur and could adversely affect future sales and
profitability. In addition, adverse publicity concerning the vacation industry
in general or the cruise industry or the Combined Group in particular could
impact demand and, consequently, have an adverse impact on the Combined Group's
profitability.
Operating, financing and tax costs are subject to many economic and political
factors that are beyond the Combined Group's control, which could result in
increases in operating and financing costs
Some of the Combined Group's operating costs, including fuel, food, insurance
and security costs, are subject to increases because of market forces and
economic or political instability beyond the Combined Group's control. In
addition, interest rates and the Combined Group's ability to secure debt or
equity financing, including in order to finance the purchase of new ships, are
dependent on many economic and political factors. Actions by U.S. and non-U.S.
taxing jurisdictions, could also cause an increase in the Combined Group's
costs. Increases in operating, financing and tax costs could adversely affect
the Combined Group's results because the Combined Group may not be able to
recover these increased costs through price increases of its cruise vacations.
Environmental legislation and regulations could affect operations and increase
operating costs
Some environmental groups have lobbied for more stringent regulation of cruise
ships. Some groups have also generated negative publicity about the cruise
industry and its environmental impact. The U.S. Environmental Protection Agency
is considering new laws and rules to manage cruise ship waste. Alaskan
authorities are currently investigating an incident that occurred in August
2002 on board 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 U.S. Attorney's office in Alaska. If the
investigation results in charges being brought, sanctions could include a
prohibition of operations in Alaska's Glacier Bay National Park and Preserve
for a period of time.
In addition, pursuant to a settlement with the U.S. government in April 2002,
Carnival pled guilty to certain environmental violations. Carnival was
sentenced under a plea agreement pursuant to which it paid fines in fiscal 2002
totalling $18 million to the U.S. government and other parties. Carnival
accrued for these fines in fiscal 2001. Carnival was also placed on probation
for a term of five years. Under the terms of the probation, any future
violation of environmental laws by Carnival may be deemed a
178
violation of probation. In addition, Carnival was required as a special term of
probation to develop, implement and enforce a worldwide environmental
compliance programme. Carnival is in the process of implementing the
environmental compliance programme and expects to incur approximately $10
million in additional annual environmental compliance costs in 2003 and yearly
thereafter as a result of the programme. If the DLC transaction is approved,
the terms of the environmental compliance programme will become applicable to
P&O Princess resulting in higher environmental compliance costs for P&O
Princess.
The Combined Group's costs of complying with current and future environmental
laws and regulations or liabilities arising from past or future releases of, or
exposure to, hazardous substances or to vessel discharges, could increase the
cost of compliance or otherwise materially adversely affect the Combined
Group's business, results of operations or financial condition.
New regulations of health, safety and security issues could increase operating
costs and adversely affect net income
Carnival and P&O Princess are subject to various international, national, state
and local health, safety and security laws, regulations and treaties. IMO,
which operates under the United Nations, has adopted safety standards as part
of the SOLAS Convention, which is applicable to all of Carnival's and P&O
Princess' ships. Generally SOLAS establishes vessel design, structural
features, materials, construction and life saving equipment requirements to
improve passenger safety and security.
In addition, ships that call on U.S. ports are subject to inspection by the
U.S. Coast Guard for compliance with the SOLAS Convention and by the U.S.
Public Health Service for sanitary standards. Carnival's and P&O Princess'
ships are also subject to similar inspections pursuant to the laws and
regulations of various other countries such ships visit. Finally, the U.S.
Congress recently enacted the Maritime Transportation Security Act of 2002
which implements a number of security measures at U.S. ports, including
measures that relate to foreign flagged vessels calling at U.S. ports.
Carnival and P&O Princess believe that health, safety and security issues will
continue to be areas of focus by relevant government authorities both in the
U.S. and abroad. Resulting legislation or regulations, or changes in existing
legislation or regulations, could impact the Combined Group's operations and
would likely subject the Combined Group to increasing compliance costs in the
future.
Delays in ship construction and problems encountered at shipyards could reduce
the Combined Group's profitability
The construction of cruise ships is a complex process and involves risks
similar to those encountered in other sophisticated construction projects,
including delays in completion and delivery. In addition, industrial actions
and insolvency or financial problems of the shipyards building the Combined
Group's ships could also delay or prevent the delivery of its ships under
construction. These events could adversely affect the Combined Group's
profitability. However, the impact from a delay in delivery could be mitigated
by contractual provisions and refund guarantees obtained by the Combined Group.
In addition, Carnival and P&O Princess have entered into forward foreign
currency contracts to fix the cost in U.S. dollars of certain of Carnival's and
P&O Princess' foreign currency denominated shipbuilding contracts. If any of
the shipyards are unable to perform under the related contract, the foreign
currency forward contracts related to that shipyard's shipbuilding contracts
would still have to be honoured. This might require Carnival or P&O Princess to
realise a loss on an existing contract without having the ability to have an
offsetting gain on its foreign currency denominated shipbuilding contract, thus
adversely affecting the financial results of the Combined Group.
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SECTION 5
THE DLC STRUCTURE
Part A. Background to the DLC proposal
In the past, both P&O Princess and Carnival have sought to identify, explore
and, where appropriate, implement strategies to develop and broaden their
cruise product offerings. The senior management of each company has regularly
reviewed with its board of directors the strategic objectives of its company
and the possible means of achieving those objectives. Both management teams
have regularly updated their boards on the changing structure and dynamics of
the cruise industry and the overall vacation market.
In the summer of 2001, Mr. Peter Ratcliffe, Chief Executive Officer of P&O
Princess, met with Mr. Richard Fain, Chairman and Chief Executive Officer of
Royal Caribbean. During these meetings, the possibility of a business
combination between P&O Princess and Royal Caribbean was discussed. In
subsequent meetings, senior executives of the two companies discussed the
changes and developments in their respective companies, and in the cruise
industry generally, particularly in light of the events of September 11, 2001
and their effect on the global vacation market, and continued to explore a
business combination of the two companies.
On 24 September 2001, during the early stages of the discussions between P&O
Princess and Royal Caribbean, Mr. Howard Frank, Vice Chairman and Chief
Operating Officer of Carnival, made a telephone call to Mr. Ratcliffe in which
he inquired whether P&O Princess would be interested in pursuing discussions
towards a business combination with Carnival. Given that P&O Princess' share
price was at or near its all time low at the time of the call, P&O Princess did
not follow up on this call.
On 20 November 2001, P&O Princess and Royal Caribbean announced that they had
entered into agreements to implement a dual listed company transaction. Those
agreements, which were not publicly available at that time, included
non-solicitation provisions restricting P&O Princess and Royal Caribbean from
entering into discussions with third parties except in specified circumstances
involving a third party's offer determined by the relevant board to be a
Superior Proposal as explained below. The dual listed company transaction
provided for a combination of equals in which P&O Princess shareholders would
have held approximately 50.7 per cent. of the equity in a dual listed company
structure that was substantially similar to the DLC transaction.
On 13 December 2001, following the announcement of the Royal Caribbean
transaction, Carnival submitted a detailed private proposal to the P&O Princess
board regarding an offer to acquire P&O Princess. The offer was for 200 pence
in cash and 0.1361 Carnival shares per P&O Princess share. Based on the prior
business day's closing price for Carnival shares of $26.55 per share and an
exchange rate of $1:(Pounds)0.692, the Carnival shares were valued at 250
pence, valuing the offer at 450 pence per P&O Princess share. In preparation
for its decision to launch a counter bid for P&O Princess, Carnival had
performed financial analyses to identify the maximum amount it would be willing
to pay to acquire P&O Princess. These analyses were based on public information
and Carnival's own internal estimates, and included discounted cash flow
analyses and assessments of the financial effects of the transaction. However,
this offer and each of Carnival's subsequent offers were ultimately based on an
assessment of what price would be acceptable to the P&O Princess board and the
P&O Princess shareholders.
Carnival also proposed as part of this proposal the possibility of effecting a
combination via alternative structures, including a dual listed company
structure. The P&O Princess board carefully considered Carnival's proposal with
Sullivan & Cromwell LLP and Freshfields Bruckhaus Deringer, its legal advisers,
and Schroder Salomon Smith Barney, its financial adviser, and, at its meeting
on 15 December 2001, the P&O Princess board determined that Carnival's proposal
was not more favourable from a financial point of view to P&O Princess'
shareholders than the transaction with Royal Caribbean and was not reasonably
likely to be consummated (that is, it was not a "Superior Proposal" as defined
under P&O Princess' agreement with Royal Caribbean). In particular, the P&O
Princess board believed that Carnival's proposal would result in P&O Princess
shareholders receiving shares that would not be included in the FTSE indices,
and consequently a significant proportion of P&O Princess shareholders,
particularly UK institutional shareholders, would be unable or unwilling to
hold such shares. As a result of this, the board believed that the proposed
Carnival transaction would
180
deprive such P&O Princess shareholders of the ability to retain an investment
in the cruise industry and to share in the potential benefits of combining with
Carnival, making it less financially favourable than the Royal Caribbean
transaction in which all P&O Princess shareholders were expected to be able to
share in the upside potential expected to be generated by that transaction.
Further, the board believed that Carnival's proposal did not represent an
irrevocable commitment to make and maintain an offer because it was subject to
a number of pre-conditions, including financing and regulatory approvals. The
board also believed that Carnival's proposal faced greater regulatory risk in
the U.S. and Europe.
On 16 December 2001, P&O Princess announced that its board had concluded that
the Royal Caribbean transaction was the more attractive alternative for P&O
Princess shareholders, because it believed that Carnival's pre-conditional cash
and share proposal was less favourable financially to P&O Princess shareholders
and would face greater execution risk than the Royal Caribbean transaction. In
response to P&O Princess' rejection of its proposal, Carnival publicly
announced a pre-conditional offer for all of the issued share capital of P&O
Princess on the same terms as its 13 December proposal.
On 19 December 2001, P&O Princess announced that, in light of Carnival's offer
and in order to give its shareholders time to consider fully their
alternatives, it would hold an extraordinary general meeting to vote on the
Royal Caribbean transaction on 14 February 2002.
Carnival announced on 24 December 2001 that it had made the necessary U.S.
antitrust filings in relation to its offer for P&O Princess.
On 27 December 2001, P&O Princess posted its circular to its shareholders with
respect to the Royal Caribbean transaction and made its implementation
agreement and Joint Venture Agreement with Royal Caribbean publicly available,
including the non-solicitation provisions described above.
On 6 January 2002, Carnival sent a letter to the P&O Princess board requesting
a meeting with P&O Princess to discuss Carnival's offer and seeking clarity on
a number of issues in connection with the Royal Caribbean transaction,
including further details regarding termination of the Joint Venture Agreement.
P&O Princess responded by letter on 8 January 2002. In its response, P&O
Princess referred Carnival to the publicly available agreements between P&O
Princess and Royal Caribbean and informed Carnival that those agreements
prevented P&O Princess from discussing any acquisition proposal with Carnival
that was not a Superior Proposal and that its board continued to believe that
Carnival's proposal was neither financially superior to the Royal Caribbean
transaction nor deliverable. Consequently, P&O Princess declined Carnival's
request for a meeting.
Mr. Ratcliffe publicly clarified on 10 January 2002 that P&O Princess could
unilaterally terminate the Joint Venture Agreement with Royal Caribbean in
January 2003 at no cost as long as no change of control of P&O Princess had
been completed prior to the termination date. On 10 January 2002, Carnival sent
another letter to the P&O Princess board asking it for further clarification of
this statement.
On 17 January 2002, Carnival indicated in a letter to P&O Princess that
Carnival would, subject to certain conditions, be willing to increase its
pre-conditional offer to 250 pence in cash and 0.1380 Carnival shares for each
P&O Princess share. Based on the prior business day's closing price for
Carnival shares of $26.06 per share and an exchange rate of $1:(Pounds)0.695,
the Carnival shares were valued at 250 pence, valuing the offer at 500 pence
per P&O Princess share. After reviewing Carnival's new proposal in detail with
its advisers, the P&O Princess board reaffirmed its view that Carnival's
revised proposal was not a Superior Proposal and that, accordingly, P&O
Princess continued to be unable to meet with Carnival to discuss its proposal
without breaching its contractual obligations to Royal Caribbean.
On 30 January 2002, Carnival announced a revised pre-conditional offer of
0.2684 Carnival shares for each P&O Princess share, valuing each P&O Princess
share at 515 pence per share (based on the prior business day's closing price
for Carnival shares of $27.05 per share and an exchange rate of
$1:(Pounds)0.709). The revised offer included a partial cash alternative of 250
pence for each P&O Princess share, pre-conditional on financing being arranged
on terms satisfactory to Carnival by no later than the date of posting of the
offer document.
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On 31 January 2002, Carnival wrote to P&O Princess shareholders urging them to
vote to adjourn the extraordinary general meeting scheduled for 14 February
2002. Carnival suggested this adjournment in order to postpone the vote on the
Royal Caribbean transaction until the various antitrust authorities could rule
on both transactions.
The P&O Princess board carefully reviewed Carnival's revised offer with its
legal and financial advisers and, at its meeting on 3 February 2002, determined
that Carnival's revised offer, as revised, was not a Superior Proposal on both
value and deliverability grounds. P&O Princess publicly announced its board's
conclusions on 4 February 2002 and, under its contractual obligations to Royal
Caribbean, remained unable to meet with Carnival. Carnival responded by
restating its commitment to proceed with its revised offer and to obtain the
necessary regulatory approvals in the U.S. and Europe.
On 7 February 2002, Carnival announced the terms of a further increased offer
of 0.3004 Carnival shares for each P&O Princess share, valuing each P&O
Princess share at 550 pence per share (based on the prior business day's
closing price for Carnival shares of $25.86 per share and an exchange rate of
$1:(Pounds)0.708), and again raised the possibility of alternative structures,
including a dual listed company structure. Carnival's increased offer was
pre-conditional only on the receipt of regulatory approval. The increased offer
included a partial cash alternative of 250 pence for each P&O Princess share,
pre-conditional on the availability of financing on terms satisfactory to
Carnival.
The P&O Princess board carefully reviewed the increased offer with its legal
and financial advisers and, at its meeting on 8 February 2002, the P&O Princess
board determined that it was not a Superior Proposal. On 8 February 2002, P&O
Princess announced that it continued to recommend that its shareholders approve
the dual listed company transaction with Royal Caribbean. While the P&O
Princess board acknowledged the improvement of Carnival's increased offer in
terms of value, it noted that it remained concerned about the structure and
deliverability of the Carnival transaction.
P&O Princess convened its extraordinary general meeting with respect to the
Royal Caribbean transaction on 14 February 2002. Before resolutions to approve
the Royal Caribbean transaction were voted upon, P&O Princess shareholders
proposed and passed a resolution to adjourn the meeting. The Chairman of P&O
Princess then announced that the meeting would be adjourned for an indefinite
period.
On 27 February 2002, Carnival announced that it had formally notified its
proposed combination with P&O Princess to the European Commission for review
under the EC Merger Regulation. The European Commission cleared the proposed
combination on 24 July 2002.
On 24 September 2002, prior to the U.S. Federal Trade Commission closing its
investigation into both transactions, the P&O Princess board met to consider
the relative merits of the Royal Caribbean transaction and Carnival's proposal
in light of currently available information. At that meeting, representatives
of Schroder Salomon Smith Barney, P&O Princess' financial adviser, advised the
board that it believed that, based on the valuation and share price analyses
discussed with the board at that meeting, Carnival's prior proposal to enter
into a dual listed company transaction with P&O Princess on the same financial
terms as Carnival's latest share exchange proposal was more favourable to P&O
Princess' shareholders from a financial point of view than the transaction with
Royal Caribbean.
On 4 October 2002, the U.S. Federal Trade Commission voted not to oppose
Carnival's acquisition of P&O Princess or the Royal Caribbean transaction. As a
result, the only pre-condition to Carnival's increased offer was satisfied.
Following the U.S. Federal Trade Commission announcement, P&O Princess
re-examined Carnival's increased offer, including Carnival's prior proposal to
enter into a dual listed company transaction with P&O Princess as an
alternative to the share exchange offer. After consulting with its financial
and legal advisers and considering the analyses discussed with its financial
adviser on 24 September 2002, at a meeting on 4 October 2002 the P&O Princess
board determined that Carnival's dual listed company proposal was more
favourable from a financial point of view to P&O Princess' shareholders than
the transaction with Royal Caribbean and was reasonably likely to be
consummated given that all regulatory clearances had been obtained. On 4
October 2002, P&O Princess announced that its board had determined Carnival's
dual listed company proposal to be a Superior Proposal and that it was willing
and able under its agreement with Royal Caribbean to enter into talks with
Carnival to discuss this proposal.
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On 11 October 2002, executives of Carnival and P&O Princess met together with
their respective advisers to discuss a combination of their companies through a
dual listed company structure. Discussions also focused on a partial share
offer to be launched in conjunction with seeking shareholder approval for the
dual listed company structure that would permit P&O Princess shareholders who
wished to exchange some of their P&O Princess shares for Carnival shares to do
so. On the same date, Carnival and P&O Princess entered into a confidentiality
agreement that contemplated the exchange of confidential information between
them.
Executives of Carnival and P&O Princess and their respective advisers continued
to meet throughout the weeks of 14 October and 21 October 2002. During this
time, the boards of directors of Carnival and P&O Princess each held meetings,
at which their respective management teams and advisers provided updates on the
discussions to date and on the strategic implications and possible benefits and
risks of the dual listed company transaction involving the two companies.
On 24 October 2002, Carnival issued a press release announcing its
pre-conditional offer to enter into the DLC transaction based on the form of
agreements and instruments that it had negotiated with P&O Princess. In order
for P&O Princess to be able to accept this offer, its board had to withdraw its
recommendation of the Royal Caribbean transaction within 48 hours of Carnival's
announcement and not subsequently reinstate such recommendation, the Royal
Caribbean transaction had to be voted down by P&O Princess shareholders or
otherwise abandoned, the Joint Venture Agreement had to terminate at no cost
(other than the break fee under its implementation agreement with Royal
Caribbean), the P&O Princess board of directors had to approve and recommend
the DLC transaction by 10 January 2003, and P&O Princess had to enter into the
negotiated form of the offer and implementation agreement by 10 January 2003.
The DLC proposal included the Partial Share Offer for up to, in aggregate, a
maximum of 20 per cent. of the issued share capital of P&O Princess. The making
of the Partial Share Offer, including the establishment of the 20 per cent.
limit, was the subject of negotiation between the parties, and was designed to
allow those P&O Princess shareholders who would prefer to participate in the
Combined Group through holding Carnival shares an opportunity to do so, while
at the same time maintaining the liquidity and market value of the P&O Princess
shares.
On 25 October 2002, the P&O Princess board held a meeting to consider the
announcement of the DLC proposal and decided to withdraw its recommendation of
the Royal Caribbean dual listed company transaction. Subsequent to that
meeting, P&O Princess announced that its board welcomed Carnival's announcement
of its dual listed company proposal and had determined that the DLC proposal
would be financially superior for P&O Princess shareholders compared with the
Royal Caribbean dual listed company transaction. It also announced that its
board had withdrawn its recommendation of the Royal Caribbean dual listed
company transaction.
P&O Princess also entered into an agreement with Royal Caribbean on 25 October
2002 which terminated the implementation agreement with Royal Caribbean
immediately, terminated the Joint Venture Agreement on 1 January 2003 as long
as no change of control of P&O Princess occurred prior to this date, and
provided mutual releases from liabilities arising under the two agreements.
Pursuant to the agreement, P&O Princess paid Royal Caribbean $62.5 million as a
break fee under its implementation agreement with Royal Caribbean. The P&O
Princess board announced that it would formally consider satisfaction of the
remaining pre-conditions to the DLC proposal, including entry into an offer and
implementation agreement with Carnival, in early January 2003.
On 29 October 2002, Lord Sterling of Plaistow, Chairman of P&O Princess, sent a
letter to P&O Princess shareholders informing them of the announcement of the
DLC proposal, the withdrawal of the P&O Princess board's recommendation of the
Royal Caribbean transaction and the subsequent arrangements with Royal
Caribbean for, among other things, the termination of existing agreements
between them. Lord Sterling also informed P&O Princess shareholders that he no
longer intended to reconvene the adjourned extraordinary general meeting
convened on 14 February 2002 to approve the dual listed company combination
with Royal Caribbean.
On 2 January 2003, P&O Princess announced that the Joint Venture Agreement had
been terminated, and Carnival issued a press release acknowledging and
welcoming the termination of the Joint Venture Agreement.
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On 7 January 2003, the P&O Princess board approved the DLC transaction and
agreed to recommend to the P&O Princess shareholders that they vote in favour
of the resolution to implement the DLC structure. Later that day, the senior
executive management teams of P&O Princess and Carnival and their respective
advisers finalised the agreements and documentation to implement the DLC
structure. In the early morning of 8 January 2003, Carnival and P&O Princess
signed the Implementation Agreement. P&O Princess then issued a press release
announcing that its board had agreed and recommended the DLC transaction and
that P&O Princess had signed the Implementation Agreement. Carnival issued a
press release announcing the execution of the Implementation Agreement,
acknowledging P&O Princess' announcement of its board's recommendation and
setting forth its offer to enter into the DLC transaction based on the
Implementation Agreement and related agreements and instruments and terms of
the Partial Share Offer.
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Part B. Details of the DLC structure
1. Introduction
On 8 January 2003, P&O Princess and Carnival entered into the Implementation
Agreement under which, subject to certain conditions which are described in
paragraph 1 of Section 6 of this document, they agreed to implement the DLC
structure. Upon entering into the Implementation Agreement and the board of P&O
Princess recommending the DLC proposal, all of the pre-conditions to Carnival's
DLC proposal were satisfied.
The following is a simplified illustration of the Combined Group after
implementation of the DLC structure.
[FLOW CHART]
(1)Further details of the special voting shares and how they will be held are
set out in paragraph 3.5.5 of Section 6 of this document.
(2)Further details of the equalisation and voting arrangements are set out in
paragraph 4 below and paragraph 3 of Section 6 of this document.
(3)Further details of the cross guarantees are set out in paragraph 2.6 below.
(4)Further details of the cross shareholding are set out in paragraph 8 below.
(5)Trust shares of beneficial interest in the P&O Princess Special Voting Trust
will be distributed by way of a dividend to Carnival shareholders.
(6)Carnival shares will be paired with trust shares issued by the P&O Princess
Special Voting Trust.
This Part B summarises the key features of the DLC structure, the
Implementation Agreement and the contractual arrangements which will govern the
DLC structure following implementation of the DLC transaction. Further
information on the DLC Agreements is set out in Section 6. See paragraph 16 of
Section 8 for information on the availability of these documents for inspection.
2. Key features of the DLC structure
2.1 Common economic interests; separate entities and listings
Through the DLC structure Carnival and P&O Princess will be managed and
operated as if they were a single economic enterprise. The two companies will
pursue a common set of business objectives established by the identical boards
and single management team, who will evaluate these strategies
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and other operational decisions from the perspective of all shareholders. The
boards of Carnival and P&O Princess will be identical and the Combined Group
will be managed by a single senior executive management team.
Although they will be operated as if they were a single economic enterprise,
P&O Princess and Carnival will remain separate companies with separate stock
exchange listings and index participations. P&O Princess will continue to have
a primary listing on the London Stock Exchange and is expected to remain
eligible for full participation in the FTSE series of indices, including the
FTSE 100. Carnival will continue to have a primary listing on the NYSE and is
expected to retain its existing index participations, including its
participation in the S&P 500.
2.2 No transfer of assets
The implementation of the DLC structure will not involve the transfer of any
assets between P&O Princess and Carnival. Following the implementation of the
DLC structure, management of the Combined Group will determine whether assets
will be owned by Carnival or P&O Princess as is most efficient and appropriate
under the then prevailing circumstances. The Combined Group will comprise all
of the assets held by P&O Princess and Carnival immediately prior to completion
of the DLC transaction.
2.3 Holdings of P&O Princess and Carnival shareholders
Existing P&O Princess shareholders will continue to hold their shares in P&O
Princess and/or may exchange their P&O Princess shares for Carnival shares in
the Partial Share Offer. Existing Carnival shareholders will continue to hold
their shares in Carnival. P&O Princess shareholders will continue to receive
dividends from P&O Princess and Carnival shareholders will continue to receive
dividends from Carnival. However, P&O Princess shareholders and Carnival
shareholders will effectively have an economic interest in the Combined Group
as a whole as a result of the arrangements described in this Part B of Section
5.
2.4 Identical boards and single senior executive management
Carnival and P&O Princess will be managed and operated as if they were a single
economic enterprise. As Carnival and P&O Princess will remain separate
corporate entities, each will continue to have its own board of directors, but
the boards and senior executive management of each company will be identical.
No person may be a member of the P&O Princess board without also being a member
of the Carnival board, and vice versa. Following completion of the DLC
transaction, the directors of P&O Princess and Carnival will be the individuals
set forth in paragraph 8 of Part A of Section 4. In addition to their normal
fiduciary duties to the company and the obligation to have regard to the
interests of its shareholders, the directors of each company will be entitled
to have regard to the interests of the other company and its shareholders.
Micky Arison, currently the Chairman and Chief Executive Officer of Carnival,
will be the Chairman and Chief Executive Officer of both Carnival and P&O
Princess, Howard S. Frank, currently the Vice-Chairman and Chief Operating
Officer of Carnival, will be the Vice-Chairman and Chief Operating Officer of
both Carnival and P&O Princess and Gerald R. Cahill, the Chief Financial
Officer and Chief Accounting Officer of Carnival, will be the Chief Financial
Officer and Chief Accounting Officer of both Carnival and P&O Princess. The
headquarters of the Combined Group will be in Miami, with a corporate office in
London.
Resolutions relating to the appointment, removal and re-election of directors
after completion will be considered as a joint electorate action and voted upon
by the shareholders of each company, effectively voting together as a single
decision-making body in accordance with the equalisation ratio (see paragraph
2.5 below).
Carnival and P&O Princess comply with, and the Combined Group will comply with,
the applicable corporate governance requirements of the U.S. Sarbanes-Oxley Act
of 2002 and of the rules of the NYSE. These are the corporate governance rules
applicable to U.S. public companies. P&O Princess will also continue to comply
with the rules of the UK Listing Authority (including certain annual disclosure
requirements regarding compliance with the Combined Code, appended to those
rules) and the London Stock Exchange. It is expected that P&O Princess will,
upon completion of the DLC transaction, not comply with the recommendation of
the Combined Code to have a separate chairman and chief executive officer.
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2.5 Voting arrangements
Under the terms of the DLC Agreements, the Carnival articles and by-laws and
the P&O Princess memorandum and articles will be amended to provide for special
voting arrangements to be implemented so that in most cases the shareholders of
both companies effectively vote together as a single decision-making body on
matters requiring the approval of shareholders of either company, known as
joint electorate actions. The voting interests represented by an individual
share in one company relative to the voting interests of an individual share in
the other company will be determined by reference to the equalisation ratio.
Accordingly, following the P&O Princess share reorganisation, one P&O Princess
share will have voting rights equivalent to those of one Carnival share. For
more information about joint electorate actions, see paragraph 3.5.2 of Section
6.
Certain actions in which the shareholders of each company may have divergent
interests, including amendments to provisions designed to preserve the dual
listed company structure of the Combined Group, will be subject to the separate
approvals of both Carnival shareholders and P&O Princess shareholders, each
voting separately as a class. Such actions are referred to as class rights
actions. These actions include, among others, transactions primarily designed
to amend or unwind the DLC structure, adjustments to the equalisation ratio not
in accordance with the Equalisation and Governance Agreement, and amendments to
a number of tax-related provisions in Carnival's articles of incorporation. For
more information about class rights actions, see paragraph 3.5.3 of Section 6.
The voting arrangements will be implemented by entrenching them in the
constitutional documents of the two companies and through the Equalisation and
Governance Agreement and rights attaching to specially created special voting
shares to be issued by each of P&O Princess and Carnival.
Under the constitutional documents of each company, shares held by one company
in the other will have no voting rights unless such company holds 90 per cent.
or more of such class of shares in issue or outstanding of that company.
2.6 Cross guarantees
Upon completion of the DLC transaction, P&O Princess and Carnival will each
execute a Deed of Guarantee for the purpose of guaranteeing contractual
monetary amounts owed to creditors by the other company incurred on or after
the implementation of the DLC structure. Future creditors of Carnival and P&O
Princess entitled to the benefit of the Deeds of Guarantee will, to the extent
possible, be placed in the same position as if the relevant debt were also owed
by the other company.
For more information about the Deeds of Guarantee, see paragraph 7 of Section 6.
2.7 Buy-backs and issuances of shares
Subject to applicable law, each of Carnival and P&O Princess may purchase
shares in the other and acquire its own shares. However, under the terms of the
DLC Agreements, unless approved as a class rights action, neither Carnival nor
P&O Princess may Buy-Back P&O Princess shares in the two-year period following
the date on which the DLC structure is implemented. After expiration of the
initial two-year period, for each of the subsequent three years neither
Carnival nor P&O Princess may Buy-Back P&O Princess shares in excess of 5 per
cent. per year of the issued P&O Princess shares (calculated as at the first
day in such annual period). Thereafter, there will be no restriction in the DLC
Agreements on the number of P&O Princess shares which may be the subject of a
buy-back. There will be no restrictions in the DLC Agreements on the number of
Carnival shares that may be the subject of Buy-Backs.
Additionally, neither Carnival nor P&O Princess may issue any shares to the
other company or any of its subsidiaries, except on a pre-emptive basis to all
shareholders, in the two-year period following the date on which the DLC
structure is implemented. After expiration of the initial two-year period, for
each of the subsequent three years neither Carnival nor P&O Princess may issue
shares to the other company or any of that company's subsidiaries, except on a
pre-emptive basis to all shareholders, in excess of 5 per cent. per year of the
issued or outstanding shares (calculated as at the first day in such annual
period). Thereafter, there will be no restriction in the DLC Agreements on the
issuance of shares to the other company or any of that company's subsidiaries.
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These restrictions may be varied by a class rights action (see paragraph 3.5.3
of Section 6). For further details, in relation to these provisions, see
paragraph 3.2 of Section 6 below.
3. DLC principles
The Equalisation and Governance Agreement, which will be the contractual
relationship between Carnival and P&O Princess that governs the treatment of
the two companies as if they were a single economic enterprise following
implementation of the DLC structure, embodies the following DLC principles:
(a) Carnival and P&O Princess will operate as if they were a single economic
enterprise, through boards of directors which comprise the same individuals
and a single senior executive management (based on the DLC equalisation
principles described in paragraph 4 below);
(b) the directors of Carnival and P&O Princess will be entitled to have regard
to the interests of both groups of shareholders and both companies of the
Combined Group;
(c) the capital of the Combined Group will be deployed and managed in the most
effective way for the benefit of the shareholders of the Combined Group;
(d) voting on matters to be considered by the Combined Group's shareholders
will be undertaken in accordance with the P&O Princess articles, the
Carnival articles and by-laws and the SVE Voting Deed (see paragraph 6 of
Section 6); and
(e) no person will be permitted to obtain control over Carnival or P&O Princess
without making a comparable takeover offer for the other company. Subject
to compliance with these provisions, a person, together with any concert
party, may (a) acquire, or acquire voting rights over, 30 per cent. or more
of the combined votes which could be cast on a joint electorate action (see
paragraph 3.5.2 of Section 6); or (b) if such person already holds not less
than 30 per cent., but not more than 50 per cent., of the combined votes
which could be cast as a joint electorate action, acquire voting rights
over any shares which increase the percentage of votes which such person(s)
could cast on a joint electorate action. See paragraph 6 below for a more
detailed description of the takeover provisions.
4. Equalisation of voting and economic rights
4.1 DLC equalisation principles
In order to effect the relative rights of Carnival shares and P&O Princess
shares, the Combined Group will be operated under the following DLC
equalisation principles:
(a) the equalisation ratio will effectively govern the proportion in which
distributions of income and capital are made to the holders of Carnival
shares relative to the holders of P&O Princess shares (and vice versa) and
the relative voting rights of the holders of Carnival shares and the
holders of P&O Princess shares on joint electorate actions. Immediately
after completion of the DLC transaction and the P&O Princess share
reorganisation, a holder of one Carnival share will effectively have the
same:
(i) right to distributions of income and capital; and
(ii) rights as to voting in relation to joint electorate actions,
as the holder of one P&O Princess share;
(b) issuances of or transactions affecting the share capital of Carnival or P&O
Princess will be implemented in a way which will not give rise to a
materially different financial effect as between the interests of the
holders of Carnival shares and the interests of the holders of P&O Princess
shares. Subject to paragraph 4.2 below, if any such issue or transaction
involves any of the following:
(i) a rights issue of shares at less than market value;
(ii) except as provided in (i) above, an offer of any securities, or a grant
of any options, warrants or other rights to subscribe for, purchase or
sell any securities, to shareholders by way of rights;
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(iii) non-cash distributions to shareholders and share repurchases involving
an offer made to all or substantially all of the shareholders of a
company to repurchase their shares at a premium to market value;
(iv) a consolidation or subdivision of shares; or
(v) an issue of shares to shareholders for no consideration or solely by way
of capitalisation of profits or reserves,
then an automatic adjustment to the equalisation ratio will occur as
prescribed in the Equalisation and Governance Agreement, unless the Carnival
board of directors and P&O Princess board of directors, in their sole
discretion, undertake:
(i) a Matching Action (as defined in the Definitions section of this
document); or
(ii) an alternative to such automatic adjustment that has been approved as
such by a class rights action (see paragraph 3.5.3 of Section 6).
Any adjustments to the equalisation ratio will be communicated to
shareholders through an announcement made via a Regulatory Information
Service.
The Carnival board and P&O Princess board will be under no obligation to
undertake any such Matching Action or to seek approval of an alternative as
a class rights action;
(c) if any issue or transaction referred to in paragraph (b) above is not
covered by an automatic adjustment to the equalisation ratio, then no
automatic adjustment to the equalisation ratio will occur, but the Carnival
board and P&O Princess board shall have the right (in their sole
discretion), but not the obligation, to undertake a Matching Action, or to
seek approval of an adjustment to the equalisation ratio as a class rights
action.
4.2 Circumstances not requiring adjustment to the equalisation ratio
No adjustment to the equalisation ratio will be required in respect of:
(a) scrip dividends or dividend reinvestments at market price;
(b) issuances of P&O Princess shares or Carnival shares or securities
convertible into, or exercisable or exchangeable for, such shares pursuant
to employee share plans;
(c) issuances of Carnival shares under the Carnival convertible securities;
(d) issuances of shares or securities convertible into, or exercisable or
exchangeable for, such shares other than to all or substantially all
shareholders of either company (including for acquisitions);
(e) abuy-back or repurchase of any shares:
(i) in the market by means of an offer not open to all or substantially all
shareholders of either company or in compliance with Rule 10b-18 under
the Exchange Act;
(ii) at or below market value;
(iii) by either company pursuant to the provisions in such company's
constitutional documents referred to in paragraph 6 below; or
(iv) pro rata to the shareholders of the Combined Group at the same effective
premium to the market price (taking into account the equalisation ratio);
(f) Matching Actions;
(g) the issue of an equalisation share by either company to the other (see
paragraph 5.3 below); and
(h) any purchase, cancellation or reduction of disenfranchised shares.
5. Distributions
5.1 Currency for dividends
Carnival will declare its dividends and other distributions in U.S. dollars and
will continue to pay its dividends in U.S. dollars. P&O Princess will continue
to declare its dividends in U.S. dollars and make payment in pounds sterling,
except to shareholders who elect to receive their dividends in U.S. dollars.
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5.2 Matching cash dividends and other cash distributions
If one company proposes to pay a cash dividend or other cash distribution to
its shareholders, then the other company must pay a matching cash dividend or
other cash distribution of an equivalent amount per share to its shareholders
in accordance with the equalisation ratio (before deduction of any amounts in
respect of tax required to be deducted or withheld and excluding the amounts of
any tax credits or other tax benefits).
5.3 Inability to pay matching cash dividends and other cash distributions
If either company is unable to make a cash dividend or other cash distribution
which is equivalent (in accordance with the equalisation ratio and, if
relevant, having regard to an appropriate exchange rate agreed by the boards of
directors of each of Carnival and P&O Princess) to that being made or paid by
the other company, then the other company must either make an equalisation
payment which, after payment of any tax liability associated with such payment
by both parties, enables that party to make or pay an equivalent distribution
or scale back the amount of the cash dividend or other cash distribution it
makes or pays accordingly, so that their respective cash dividends or other
cash distributions are equivalent distributions.
The Carnival board and P&O Princess board may agree that either company should
issue an equalisation share to the other to assist with the tax treatment of
payments between the two companies. If the company which will receive an
equalisation payment has had issued to it an equalisation share, then the other
company may (subject to taxation or other concerns) make the equalisation
payment as a dividend payment on that equalisation share.
5.4 Timing of cash dividends or other cash distributions
All dividends or distributions of cash (whether of an income or capital nature)
will be announced and made or paid by the companies as closely in time as
possible.
6. Takeover regulation of the Combined Group
6.1 Background
Carnival and P&O Princess will remain separately listed companies and will
remain subject to any takeover laws and rules applicable in their jurisdiction
of organisation, subject to provisions in the Carnival articles and the P&O
Princess articles, which are intended to have the effect of:
(a) recognising the substantive effect of the DLC transaction that (i) the two
companies should be regarded as a combined enterprise that will be managed
by a single senior executive management team and (ii) the two companies
will have aligned economic interests and will pursue common objectives; and
(b) respecting the acquisition limits under the Takeover Code where (a) a
person(s) acquires, or acquires voting rights over, 30 per cent. or more of
the combined votes which could be cast on a joint electorate action, or (b)
any person(s) that already holds not less than 30 per cent., but not more
than 50 per cent., of the combined votes which could be cast on a joint
electorate action acquires, or acquires voting rights over, any shares
which increase the percentage of votes which such person(s) could cast on a
joint electorate action.
The UK Takeover Panel has confirmed that, on the basis of information available
to it, upon completion of the DLC transaction, neither P&O Princess nor
Carnival will be a company to which the Takeover Code applies. The Takeover
Code provides a number of protections for shareholders, particularly in
relation to mandatory offers where a person or group of persons acting in
concert acquires in excess of 30 per cent. of the voting rights of a company.
Provisions will be included in the constitutional documents of Carnival and P&O
Princess in order to replicate certain of the protections provided by the
Takeover Code. To the extent that any person, or group of persons acting in
concert, acquires shares in the Combined Group such that the resulting
shareholding exceeds one of the current limits in Rule 9 of the Takeover Code,
such shares will be disenfranchised (that is, the owner of those shares would
cease to have any economic or voting rights in those shares) unless an offer
for all shares in the Combined Group at a price equivalent to that applicable
to the acquisition has been made. A Buy-Back by Carnival or P&O Princess of its
own shares would not trigger these provisions.
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There are certain exceptions to these provisions in the case of Micky Arison,
other members of the Arison family and trusts for their benefit, which together
will hold approximately 35 per cent. of the equity of the Combined Group. Under
the DLC Agreements, the Arison family and trusts for their benefit may acquire
shares in the Combined Group without triggering these provisions, as long as
their aggregate holdings do not increase by more than 1 per cent. of the voting
power of the Combined Group in any period of 12 consecutive months, subject to
their combined holdings not exceeding 40 per cent. of the voting power of the
Combined Group at any time. These parties may acquire additional shares or
voting power above those special limits if they comply with the offer
requirement described above.
The Carnival articles also contain provisions that prevent third parties, other
than the Arison family and trusts for their benefit, from acquiring beneficial
ownership of more than 4.9 per cent. of the outstanding Carnival shares without
the consent of the Carnival board of directors and provide for the lapse of
rights, and sale, of any shares acquired in excess of that limit. The combined
effect of these provisions precludes a third party from acquiring control of a
controlling interest in the Combined Group.
These provisions may only be amended by both sets of shareholders, voting
separately as a class, in a class rights action.
6.2 Control threshold
Under the P&O Princess articles and the Carnival articles, there will be a
limit which effectively prevents a person (together with any concert parties)
from (a) acquiring, or acquiring voting control over, 30 per cent. or more of
the combined votes which could be cast on a joint electorate action or (b) if
such person(s) already holds not less than 30 per cent., but not more than 50
per cent., of the combined votes which would be cast on a joint electorate
action, acquiring, or acquiring voting control over, any shares which increase
the percentage of votes which such person(s) could cast on a joint electorate
action, except as described below.
6.3 Equivalent opportunities
If a person (together with any concert parties) exceeds either of the limits
described in paragraph 6.2 above then, under the Carnival articles and the P&O
Princess articles, that person will lose all rights attached to such shares as
described in paragraph 6.4 below unless that person makes, or announces a
binding intention to make, equivalent offers for both companies of the Combined
Group within 10 days of exceeding either limit and such offers are made to both
Carnival shareholders and P&O Princess shareholders within 28 days of making
such an announcement. In summary, the equivalent offers (and any increase or
extension thereof) must:
(a) be made to all holders of Carnival shares and P&O Princess shares at or
about the same time;
(b) comply with all applicable laws and rules which would govern an offer for
the Carnival shares and which would govern an offer for the P&O Princess
shares; and
(c) be determined by the P&O Princess board and Carnival board to be equivalent
with respect to consideration (including taking into account any existing
share price disparity), terms and conditions of offer, information with
respect to such offer and time to consider the offer for both the Carnival
shareholders and the P&O Princess shareholders, both in relation to an
initial offer and any increase or extensions.
Due to the variety of takeover procedures and structuring mechanisms for such a
transaction and the different takeover regimes applicable to both companies the
concept of equivalence cannot be defined prescriptively. It is expected that
the boards of the Combined Group, considering applicable rules and regulations
promulgated under the Exchange Act and, where if relevant, in consultation with
the UK Takeover Panel (see paragraph 6.1 above), will determine whether the
offers are equivalent. In any event, such determination would be made on a
case-by-case basis.
Each group of shareholders will be provided equivalent treatment and
opportunities and therefore will be entitled to make its own decision as to
whether the relevant offer is accepted. The completion of such transaction
would require both offers to become unconditional.
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6.4 Breach of limits
Under the Carnival articles and the P&O Princess articles, if a person exceeds
the applicable limit described in paragraph 6.2 above without making an
equivalent offer for all Carnival shares and P&O Princess shares, then, under
the Carnival articles and the P&O Princess articles such excess shares, as
defined in paragraph 4.2 of Section 7, will be transferred to a trustee to be
held in trust for a charitable organisation. Such transfer may be effected by
the relevant board of the company concerned. The person who originally
beneficially owned those shares in breach of the prescribed ownership limit
will lose rights to income and any voting rights on those shares. The trustee
may then be required by the relevant board to transfer such shares to another
person, including (subject to applicable law and regulation) the relevant
company. A more detailed description of those powers is described in paragraph
4 of Section 7.
Similar provisions will also be included in the Carnival articles, relating to
any breach of the 4.9 per cent. beneficial ownership limit on shares in that
company.
6.5 Exclusions to the ownership threshold
The provisions and restrictions described in paragraphs 6.3 and 6.4 above will
not apply to:
(a) any Buy-Back;
(b) any acquisition of shares if the restrictions are prohibited by applicable
law and regulations;
(c) any acquisition by members of the Arison family and trusts for their
benefit provided their holdings do not increase by more than 1 per cent. of
the voting power of the Combined Group in any period of 12 consecutive
months, subject to their combined shareholdings not exceeding 40 per cent.
of the voting power of the Combined Group. Any transfers of shares among
members of the Arison family and trusts for their benefit are also not
subject to the provisions and restrictions described in paragraphs 6.2 and
6.3 above; and
(d) any acquisition pursuant to a mandatory exchange (as described in paragraph
7 below).
6.6 Combined effect of the takeover provisions
The application of other UK takeovers laws and rules will depend upon the
circumstances prevailing at the time. In particular, while the UK Takeover
Panel has confirmed, on the basis of information available to it, that upon
completion of the DLC transaction neither P&O Princess nor Carnival will be a
company to which the Takeover Code applies, circumstances may change and the
Takeover Code may apply in the future. Such a determination is currently
entirely within the discretion of the UK Takeover Panel.
7. Mandatory exchange
In certain limited circumstances (described in (a) or (b) below) following
implementation of the DLC structure, P&O Princess shares may be subject to a
mandatory exchange for Carnival shares at the then prevailing equalisation
ratio. Upon a mandatory exchange, P&O Princess shareholders would no longer
hold their investment in the Combined Group in the form of P&O Princess shares
listed on the London Stock Exchange and included in the FTSE series of indices,
but would instead hold their investment in the form of Carnival shares listed
on the NYSE. A mandatory exchange would occur:
(a) If there is a change in applicable tax laws, rules or regulations or their
application or interpretation, and, based on a legal opinion and after
using commercially reasonable efforts to explore available alternatives,
and the P&O Princess board shall have reasonably determined that:
(i) the change is reasonably likely to have a material adverse effect on the
Combined Group being considered as a single enterprise;
(ii) it is reasonably likely that the material adverse effect would be
eliminated or substantially reduced by a mandatory exchange; and
(iii) the material adverse effect could not be substantially eliminated by any
commercially reasonable alternative to a mandatory exchange,
and the mandatory exchange is approved by two-thirds of the shareholders of
P&O Princess and Carnival voting on a joint electorate action; or
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(b) If:
(i) there is a change in the applicable non-tax laws, rules or regulations
or their application or interpretation, as a result of which the P&O
Princess board has reasonably determined and having received a legal
opinion, that it is reasonably likely that all or a substantial portion
of the DLC documents are unlawful, illegal or unenforceable; or
(ii) a court or other governmental entity has issued a ruling, judgement,
decree or order, which has been appealed to the extent the P&O Princess
board deems reasonably appropriate, holding that all or a substantial
portion of the DLC documents are unlawful, illegal or unenforceable,
and the P&O Princess board, based on a legal opinion and after using
commercially reasonable efforts to explore the available alternatives to the
mandatory exchange, has reasonably determined that:
. the legal basis for the illegality or unenforceability would be
eliminated by a mandatory exchange;
. the illegality or unenforceability could not be eliminated by amendments
to the DLC documents that would not materially and adversely affect the
rights of the shareholders of P&O Princess and Carnival, taken together
or in relation to each other; and
. the change in law or the ruling, judgment, decree or order is reasonably
likely to be enforced in a way that will have a material adverse effect
on the Combined Group,
andthe P&O Princess board decides to effect the mandatory exchange.
Carnival will execute the Carnival Corporation Deed for the benefit of P&O
Princess shareholders on the date of completion in respect of its
obligations to effect a mandatory exchange under the P&O Princess articles
on the basis described above. The Carnival Corporation Deed will
automatically terminate in the following circumstances:
(i)termination of the Equalisation and Governance Agreement (see
paragraph 3.3 of Section 6);
(ii)completion of a mandatory exchange;
(iii)a resolution is passed for the liquidation of the whole or
substantially the whole of P&O Princess; or
(iv)the mandatory exchange provisions in the P&O Princess articles are
properly deleted.
8. Cross shareholding
Any P&O Princess shares owned by Carnival, including those acquired in
connection with the Partial Share Offer, will have the same rights as other P&O
Princess shares except that:
(a)Carnival will not be able to vote those shares at any general meeting or
class meeting unless Carnival holds at least 90 per cent. of all P&O
Princess shares in issue; and
(b)Carnival will not participate in any equivalent liquidation payment
described in paragraph 3.7.1 of Section 6.
As a holder of P&O Princess shares, Carnival will be entitled to receive any
dividends or other cash distributions paid or made on such shares (see
paragraph 5 above).
Similar restrictions will apply to any Carnival shares owned by P&O Princess.
See paragraph 3.2 of Section 6 in relation to restrictions on the ability of
either company to Buy-Back and/or issue its shares to the other company.
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SECTION 6
SUMMARY OF THE AGREEMENTS RELATING TO THE DLC STRUCTURE
1. Implementation of the DLC structure
1.1 The Implementation Agreement
The Implementation Agreement sets out the terms and conditions under which
Carnival and P&O Princess have agreed to implement the DLC structure. The
Implementation Agreement was entered into by Carnival and P&O Princess on 8
January 2003.
Under the Implementation Agreement, Carnival and P&O Princess have agreed,
amongst other things:
(a)to use their respective reasonable best efforts to take all steps necessary
or desirable to implement the DLC structure;
(b)on satisfaction or waiver of the conditions precedent to completion of the
DLC transaction:
(i)to enter into the Equalisation and Governance Agreement, the SVE Special
Voting Deed and the Deeds of Guarantee;
(ii)to effect the amendments to their respective constitutional documents
necessary to implement the DLC structure (as described in Section 7 in
the case of P&O Princess, and paragraph 4 below in the case of Carnival);
(iii)to issue their respective special voting shares; and
(iv)to appoint, and procure the resignations of, such persons as are
necessary to ensure that the board of directors of each company
comprises the same persons;
(c)subject to certain exceptions, not to approach or entertain, solicit or
facilitate an approach from a third party with respect to an acquisition
proposal for all or a significant portion of the assets or voting power of
its company; and
(d)to pay a break fee of $49.4 million (representing 1 per cent. of P&O
Princess' market capitalisation at the close of business on 7 January 2003)
to the other company if the Implementation Agreement is terminated in
certain circumstances.
If the Implementation Agreement is terminated, Carnival will make the share
exchange offer of 7 February 2002, unless the termination has been as a result
of: (i) P&O Princess shareholders voting against the resolution required to
implement the DLC transaction at the P&O Princess EGM; or (ii) a condition of
the Implementation Agreement being invoked which Carnival notifies the Panel it
would invoke in relation to the conditions to its share exchange offer, such
invocation requiring the consent of the Panel in accordance with Note 2 to Rule
13 of the Takeover Code. In particular, Carnival will proceed with its share
exchange offer of 7 February 2002 where the Implementation Agreement has been
terminated by Carnival as a result of the P&O Princess board withdrawing or
adversely modifying its recommendation of the DLC transaction or because a
competing proposal is announced.
1.2 Conditions precedent
The obligations of Carnival and P&O Princess to complete the DLC structure
pursuant to the Implementation Agreement are subject to the satisfaction or
waiver of a number of conditions precedent.
If any condition precedent to completion of the Implementation Agreement is not
satisfied (or waived) by the relevant party on or before 30 September 2003,
either Carnival or P&O Princess may (as long as that company is not in breach
of the Implementation Agreement and subject to the approval of the UK Takeover
Panel) terminate the Implementation Agreement, and the DLC transaction will not
proceed.
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The following conditions precedent to the obligations of both companies to
complete the DLC transaction remain to be satisfied as at 12 March 2003 (being
the latest practicable date prior to publication of this document):
(1) Shareholder approvals
(a)The passing, at the P&O Princess EGM, of the resolution required to
implement the DLC structure by the vote of not less than three-quarters of
the votes attaching to P&O Princess shares that are voted in person or by
proxy at that meeting; and
(b)The approval, at the Carnival Special Meeting, of the resolutions required
to implement the DLC structure, by the vote of a simple majority of the
outstanding Carnival shares entitled to vote thereon.
(2) No change in law or order restricting the DLC transaction
The absence of action, or threatened action, by any governmental entity of
competent jurisdiction that restrains, enjoins or otherwise prohibits the
completion or performance of, or materially adversely affects, the DLC
transaction.
(3) Effectiveness of each company's new constitutional documents
(a)The P&O Princess memorandum and articles having become effective; and
(b)the Carnival articles and by-laws having become effective.
(4) The Partial Share Offer
The Partial Share Offer having become unconditional (except for the condition
regarding completion of the DLC transaction).
(5) NYSE Listing
The NYSE having approved the listing on the NYSE of either the trust shares of
beneficial interest or the P&O Princess special voting share, subject in either
case only to official notice of issuance.
P&O Princess' obligation to complete the DLC transaction is also subject to the
satisfaction or waiver of the following conditions precedent:
(1) Representations and warranties and covenants of Carnival
The representations and warranties of Carnival set out in the Implementation
Agreement, as qualified therein by applicable materiality thresholds, being
true and correct as of the date of the Implementation Agreement and as of the
effective time of completion, and Carnival having performed in all material
respects its obligations under the Implementation Agreement, and P&O Princess
having received an officer's certificate of Carnival to such effect.
(2) Carnival third party consents
Carnival having obtained all third party consents or approvals necessary to
complete the DLC transaction, other than those that would not have a material
adverse effect on the transactions contemplated by the Implementation Agreement.
(3) Carnival special voting share
Carnival having issued the Carnival special voting share to the Carnival
Special Voting Entity.
(4) DLC documents
Each of the DLC documents having been executed and delivered by the parties
thereto (other than P&O Princess) in the form agreed by the parties pursuant to
the Implementation Agreement.
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Carnival's obligation to complete the DLC transaction is also subject to the
satisfaction or waiver of the following conditions precedent to completion of
the Implementation Agreement:
(1) Representations and warranties and covenants of P&O Princess
The representations and warranties of P&O Princess set forth in the
Implementation Agreement, as qualified therein by applicable materiality
thresholds, being true and correct as of the date of the Implementation
Agreement and as of the effective time of completion, and P&O Princess having
performed in all material respects its obligations under the Implementation
Agreement, and Carnival having received an officer's certificate of P&O
Princess to such effect.
(2) P&O Princess third party consents
P&O Princess having obtained all third party consents or approvals necessary to
complete the DLC transaction, other than those that would not have a material
adverse effect on the transactions contemplated by the Implementation Agreement.
(3) P&O Princess special voting share
P&O Princess having issued the P&O Princess special voting share to Carnival.
(4) DLC documents
Each of the DLC documents having been executed and delivered by the parties
thereto (other than Carnival) in the form agreed by the parties pursuant to the
Implementation Agreement.
1.3 Date for completion
Completion of the DLC transaction will take effect not later than the third
business day after the date on which all of the conditions precedent to
completion of the Implementation Agreement (other than those required to be
satisfied at completion) are satisfied (or waived), or on such other date as
Carnival and P&O Princess agree.
1.4 Other key provisions
In addition to the provisions set out in paragraph 1 of this Section 6, other
key provisions of the Implementation Agreement include:
(a) Conduct of business:
Each of P&O Princess and Carnival have undertaken customary covenants that
place restrictions on it and its subsidiaries until the completion of the DLC
transaction. In general, the P&O Princess group and the Carnival group are
required to conduct their respective businesses in the usual, regular and
ordinary course and to use their reasonable best efforts to preserve materially
intact their business organisations and present lines of business, to maintain
commercially reasonable insurance, to maintain their material rights and
franchises and preserve their existing material relationships with third
parties. P&O Princess and Carnival may, nevertheless, undertake the following
actions: internal reorganisations that are not reasonably likely to have a
material adverse effect on the company undertaking such reorganisation; the
purchase, sale or charter of any vessels or amendment to or termination of
existing ship-build contracts; making other acquisitions or investments for
consideration, when offset against any divestments, not to exceed $500 million
in the aggregate; and making any divestments the net proceeds of which do not
exceed $500 million. P&O Princess and Carnival have also agreed to various
specific restrictions that are substantially reciprocal relating to the conduct
of their respective businesses. These restrictions relate to, among other
things, amendments to constitutional documents, issuances of shares, changes in
capitalisation, payment of dividends, incurrence of indebtedness and the
entering into of non-competition agreements.
The parties have also agreed to adjust the equalisation ratio in the manner
provided in the Equalisation and Governance Agreement for all actions occurring
prior to the effective time of the DLC transaction that would require an
automatic adjustment if such agreement were in force during such period, except
that there will be no adjustments for regular dividends declared prior to the
effective time. Accordingly,
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it is possible, although not expected, that the equalisation ratio could alter
between the date of this document and the date of the P&O Princess EGM. If this
does occur, an announcement will be made by P&O Princess via a Regulatory
Information Service.
(b) Information and co-operation
The Implementation Agreement contains mutual covenants relating to cooperation
and consultation with respect to necessary filings with governmental entities,
access to information of the other party and public announcements with respect
to the transactions contemplated by the Implementation Agreement.
(c) Shareholder meetings
The Implementation Agreement contains mutual covenants relating to the
preparation of this document and the Carnival proxy statement relating to the
DLC transaction and the holding of the P&O Princess EGM and the Carnival
Special Meeting as soon as possible to obtain shareholder approval of the
transactions contemplated by the Implementation Agreement.
(d) Corporate governance
Following the DLC transaction, the board of directors of each of P&O Princess
and Carnival will consist of the 13 directors set forth below:
Name Function
---- --------
Micky Arison/(1)/ Chairman and Chief
Executive Officer
Howard S. Frank/(1)/ Vice-Chairman and Chief
Operating Officer
Robert Dickinson/(1)/ Executive Director
Pier Luigi Foschi/(3)/ Executive Director
A. Kirk Lanterman/(1)/ Executive Director
Peter Ratcliffe/(2)/ Executive Director
Ambassador Richard G.
Capen, Jr./(1)/ Non-Executive Director
Arnold W. Donald/(1)/ Non-Executive Director
Baroness Hogg/(2)/ Non-Executive Director
Modesto A. Maidique/(1)/ Non-Executive Director
Sir John Parker/(2)/ Non-Executive Director
Stuart Subotnick/(1)/ Non-Executive Director
Uzi Zucker/(1)/ Non-Executive Director
--------
(1)Existing Carnival director
(2)Existing P&O Princess director
(3)New director
On completion of the DLC transaction, Stuart Subotnick will be designated as
the Senior Non-Executive Director. This is a newly-created position which the
non-executive directors as a body will select, on an annual basis, from one of
their number.
(e) Declaration and payment of dividends
P&O Princess and Carnival have agreed that, until the DLC transaction is
completed, each company will only pay regular quarterly dividends. The parties
have agreed to coordinate declaration of dividends so that neither company's
shareholders will receive two dividends, or fail to receive one dividend, in
respect of the quarter in which the DLC transaction is completed.
(f) Representations and warranties
The Implementation Agreement contains substantially reciprocal representations
and warranties of P&O Princess and Carnival relating to their respective
businesses that are customary in business combination transactions. Certain
representations and warranties are qualified by a material adverse effect
standard, which for purposes of the Implementation Agreement, means a material
adverse effect on (i) the financial condition, results of operations, assets or
business of the relevant party and its
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subsidiaries; (ii) the ability of the relevant party to perform its obligations
under the Implementation Agreement; or (iii) the completion of the DLC
transaction or implementation of the transactions contemplated by the
Implementation Agreement. With the exception of the representation regarding
corporate authority and approval of the transactions contemplated by the
Implementation Agreement, the representations in the Implementation Agreement
do not survive termination of the Implementation Agreement or the completion of
the DLC transaction.
(g) Directors' indemnification
P&O Princess has agreed to indemnify the directors of Carnival in relation to
any personal liability arising from information provided (or which should have
been provided) by P&O Princess in connection with certain public documents to
be published by Carnival relating to the DLC proposal. Similarly, Carnival has
agreed to indemnify P&O Princess directors on a similar basis in connection
with certain public documents to be published by P&O Princess relating to the
DLC proposal.
(h) Partial Share Offer
The Implementation Agreement contains certain provisions agreed by the parties
relating to the making, terms and conduct of the Partial Share Offer. The
Partial Share Offer is described in detail in the Partial Share Offer document.
(i) Termination
The Implementation Agreement may be terminated, and the DLC transaction
abandoned, before the DLC transaction is scheduled to be completed if the P&O
Princess board and Carnival board mutually agree to do so. In addition, the
Implementation Agreement may be terminated, and the DLC transaction abandoned
by action of either the P&O Princess board and Carnival board, as applicable,
if:
(1)the DLC transaction is not completed by 30 September 2003;
(2)any governmental authority of competent jurisdiction shall have issued a
final, non-appealable order permanently restraining, enjoining or otherwise
prohibiting the completion of the DLC transaction or materially adversely
affecting the DLC transaction;
(3)the shareholders of either party fail to approve the DLC transaction at the
relevant shareholders' meeting called for the purpose of considering and
voting upon the DLC transaction and other transactions necessary to complete
the DLC transaction;
(4)the board of directors of the other party, at any time prior to the
shareholders' meetings, withdraws or adversely modifies its approval or
recommendation of the DLC transaction or shall have resolved to take such
action, or shall have failed to reconfirm such approval or recommendation at
the request of the other party;
(5)the board of directors of the other party has recommended a superior
acquisition proposal to its shareholders; or
(6)the other party materially breaches any representation, warranty, covenant
or agreement contained in the Implementation Agreement that causes the
failure of certain conditions to closing and such breach cannot be or has
not been cured prior to termination.
Neither party may terminate the Implementation Agreement, however, if that
party has breached in any material respect its obligations under the
Implementation Agreement and such breach contributed to the failure of the DLC
transaction to be completed.
(j) Effect of termination
If the Implementation Agreement is terminated, it will become void and there
will be no liability on the part of P&O Princess or Carnival, except that:
(1)termination will not relieve a breaching party from liability for any breach
of the Implementation Agreement; and
(2)termination will not relieve a terminating party from its obligation to pay,
if applicable, the break fee to the other party as described below.
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P&O Princess will be obligated to pay Carnival a break fee of $49.4 million
(representing 1 per cent. of P&O Princess' market capitalisation at the close
of business on 7 January 2003) if the Implementation Agreement is terminated:
(1)by either P&O Princess or Carnival as a result of P&O Princess failing to
obtain shareholder approval of the DLC transaction and, at the time of such
failure, an acquisition proposal existed with respect to P&O Princess; or
(2)by Carnival due to:
(a)the P&O Princess board withdrawing or adversely modifying, or resolving
to withdraw or adversely modify, its approval or recommendation of the
DLC transaction or failing to reconfirm such approval or recommendation;
(b)the P&O Princess board recommending a superior acquisition proposal to
its shareholders; or
(c)P&O Princess having breached the exclusivity covenants described in
paragraph (k) below,
and a third party acquisition proposal with respect to P&O Princess is
completed within 18 months of the date of the Implementation Agreement.
Carnival will be obligated to pay P&O Princess a break fee of $49.4 million
(representing 1 per cent. of P&O Princess' market capitalisation at the close
of business on 7 January 2003) if the Implementation Agreement is terminated:
(1)by either Carnival or P&O Princess as a result of Carnival failing to obtain
shareholder approval of the DLC transaction and at the time of such failure,
an acquisition proposal existed with respect to Carnival; or
(2)by P&O Princess due to:
(a)the Carnival board withdrawing or adversely modifying, or resolving to
withdraw or adversely modify, its approval or recommendation of the
Implementation Agreement and the DLC transaction, or failing to
reconfirm such approval or recommendation;
(b)the Carnival board recommending a superior acquisition proposal to its
shareholders; or
(c)Carnival having breached the exclusivity covenants described in
paragraph (k) below,
and a third party acquisition proposal with respect to Carnival is completed
within 18 months of the date of the Implementation Agreement.
(k) Exclusivity until completion of the DLC transaction or termination of the
Implementation Agreement
P&O Princess and Carnival have also agreed that they and their respective
subsidiaries will not, and they will use their reasonable best efforts to cause
their respective representatives and subsidiaries' representatives not to,
directly or indirectly, initiate, solicit, encourage or otherwise facilitate
any inquiries or any proposal or offer relating to a merger, acquisition or
other business combination transaction involving the acquisition of 15 per
cent. or more of the assets or equity securities of P&O Princess or Carnival or
their respective subsidiaries. P&O Princess and Carnival have also agreed not
to have any discussions with or provide any confidential information to any
person relating to an acquisition proposal or otherwise facilitate any effort
or attempt to make an acquisition proposal, except as described below. If a
bona fide unsolicited written acquisition proposal is made to P&O Princess or
Carnival, that party can negotiate and furnish information in connection with
such proposal and recommend such proposal to its shareholders if (i) its board
of directors determines in good faith after consultation with outside legal
counsel that such action is required by its fiduciary duties, and (ii) the
proposal is on terms which the board of directors determines, after
consultation with its financial advisers and after giving the other party 10
business days to respond to such proposal, is more favourable from a financial
point of view to its shareholders than the DLC transaction, is reasonably
likely to be completed, and which relates to at least a majority of the assets
or voting power of the applicable company. P&O Princess and Carnival have
agreed that they will immediately advise each other following the receipt of
any acquisition proposal.
(l) Governing law
The Implementation Agreement is governed by New York law.
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2. Contractual relationship between Carnival and P&O Princess after the DLC
transaction
Following implementation of the DLC structure, the DLC Agreements, including:
(a)the Equalisation and Governance Agreement;
(b)the SVE Special Voting Deed;
(c)the Carnival Deed of Guarantee; and
(d)the P&O Princess Deed of Guarantee,
together with the Carnival articles and by-laws and the P&O Princess articles,
will govern the ongoing relationship of Carnival and P&O Princess and the
operation of the Combined Group.
The DLC Agreements will be entered into on completion of the DLC transaction in
the form negotiated by Carnival and P&O Princess.
The shareholders of Carnival and P&O Princess will not be parties to or have
any proprietary rights under the Equalisation and Governance Agreement, the SVE
Special Voting Deed, the Carnival Deed of Guarantee or the P&O Princess Deed of
Guarantee, other than through enforcement by the company in which such
shareholders hold shares.
3. The Equalisation and Governance Agreement
The Equalisation and Governance Agreement will be entered into by Carnival and
P&O Princess on completion of the DLC transaction and will be the primary
agreement governing the ongoing relationship of Carnival and P&O Princess as
dual listed companies operating as if they were a single economic enterprise in
the Combined Group.
3.1 Regulation of the DLC structure
Among other things, the Equalisation and Governance Agreement regulates the
following aspects of the DLC structure in accordance with the DLC principles:
(a)equalisation of economic interests between the shareholders of Carnival and
P&O Princess (see paragraph 4.1 of Part B of Section 5 for further details);
(b)the circumstances under which Matching Actions may be carried out (see
paragraph 4.1 of Part B of Section 5 for further details);
(c)the circumstances under which the equalisation ratio may be adjusted,
whether automatically or by action of the boards (see paragraph 4.2 of Part
B of Section 5 for further details);
(d)the scope of, and procedure in relation to, joint electorate actions (see
paragraph 3.5.2 below for further details);
(e)the scope of, and procedure in relation to, class rights actions (see
paragraph 3.5.3 below for further details);
(f)the mechanics for maintaining the economic returns available to a P&O
Princess shareholder relative to a Carnival shareholder in accordance with
the then prevailing equalisation ratio in the event of liquidation of one or
both companies (see paragraph 3.7 below for further details); and
(g)the issuance of the equalisation shares (see paragraph 5.3 of Part B of
Section 5 for further details).
3.2 Restrictions on buy-backs and issuances of shares by P&O Princess and
Carnival
During the first two years after the date of the Equalisation and Governance
Agreement neither company will be able to:
(a)purchase any P&O Princess shares (except those P&O Princess shares acquired
by Carnival pursuant to the Partial Share Offer); nor
(b)issue any shares (or other shares carrying voting rights or securities
convertible into shares carrying voting rights) to any member of the P&O
Princess group and/or the Carnival group (other
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than as part of pre-emptive issue to all shareholders of either Carnival or
P&O Princess or the issue of an equalisation share).
The restrictions referred to above will apply from the second anniversary until
the fifth anniversary of the date of the Equalisation and Governance Agreement
except that Carnival will be permitted to purchase up to 5 per cent. of the
issued P&O Princess shares (and other shares carrying voting rights) during
each 12 month period commencing after the second anniversary of the date of the
Equalisation and Governance Agreement and each company shall be entitled to
issue shares, up to an aggregate of five per cent. of its outstanding or issue
share capital (or other shares carrying voting rights or securities convertible
into shares carrying voting rights), to any member of the P&O Princess group
and/or the Carnival group during each 12 month period commencing after the
second anniversary of the date of the Equalisation and Governance Agreement.
All such restrictions lapse on the fifth anniversary of the date of the
Equalisation and Governance Agreement.
3.3 Termination of the Equalisation and Governance Agreement
The Equalisation and Governance Agreement may be terminated:
(a)if either Carnival or P&O Princess has become a wholly-owned subsidiary of
the other (including as a result of the mandatory exchange described in
paragraph 7 of Part B of Section 5);
(b)by mutual agreement of Carnival and P&O Princess and approved as a class
rights action; or
(c)after all liquidation obligations (described in paragraph 3.7 below) have
been satisfied.
In any other circumstances of termination of the DLC structure, the Carnival
board and P&O Princess board will use their reasonable endeavours to agree a
termination proposal to be put to their shareholders which those boards
consider to be equitable to both the holders of Carnival shares and the holders
of P&O Princess shares, at the equalisation ratio then in effect and using a
currency exchange rate agreed by the parties (or, failing which, an exchange
rate determined by an independent accounting firm). If the Carnival board and
P&O Princess board cannot agree on the proposal to be put to their respective
shareholders then each board will appoint an independent accounting firm to
establish the value of its company as of the proposed date of termination. The
two accounting firms will use the same principles of valuation. If the
accounting firms fail to agree on each other's valuation for the other company,
then a third independent accounting firm shall be appointed to finally
determine the values of both companies. If the agreed/determined respective
values of each company on a per share basis (using the applicable exchange
rate) are not in a proportion that reflects the equalisation ratio at the
proposed date of termination, then a balancing payment, or other equivalent
action agreed by the companies, will be made by one company to the other as
appropriate as will ensure that, after payment of any tax liability by either
company in respect of such balancing payment (or other action), such values are
in a proportion that reflects the equalisation ratio.
3.4 Relationship to P&O Princess memorandum and articles and Carnival articles
and by-laws
In the event of any conflict between the Equalisation and Governance Agreement,
on the one hand, and either the P&O Princess memorandum and articles or the
Carnival articles and by-laws, on the other hand, the parties will use their
best endeavours to ensure that any required amendment to the P&O Princess
memorandum and articles or the Carnival articles and by-laws, as is
appropriate, is proposed at general meetings of P&O Princess and/or Carnival in
order to conform the relevant constitutional document with the provisions of
the Equalisation and Governance Agreement.
3.5 Shareholder voting rights
3.5.1 Categories of shareholder decisions
There will be three categories of matters or actions requiring shareholder
decisions:
(a)Joint electorate actions (described in paragraph 3.5.2 below);
(b)Class rights actions (described in paragraph 3.5.3 below); and
(c)Procedural resolutions (described in paragraph 3.5.4 below).
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3.5.2 Joint electorate actions
The shareholders of Carnival and of P&O Princess will vote together as a joint
electorate on all matters (except those specifically designated as class rights
actions or which are procedural resolutions described in paragraphs 3.5.3 and
3.5.4 below, respectively). The special voting procedure in respect of joint
electorate actions is described in more detail below.
Such joint electorate actions will, if put to shareholders, include but not be
limited to:
(a)the appointment, removal or re-election of any director of Carnival and P&O
Princess, or either of them;
(b)to the extent such receipt or adoption is required by applicable laws or
regulations, the receipt or adoption of the financial statements of Carnival
or of P&O Princess, or both of them, or accounts prepared on a combined
basis, other than any accounts in respect of the periods ended prior to the
completion of the DLC transaction;
(c)a change of name by Carnival or P&O Princess, or both of them; or
(d)the appointment or removal of the auditors of Carnival or of P&O Princess,
or both of them.
In addition, the implementation of a mandatory exchange due to a change in tax
law, rule or regulation, described in paragraph 7(a) of Part B of Section 5,
must be approved as a joint electorate action by not less than two-thirds of
the shareholders.
Voting procedures for joint electorate actions
Joint electorate actions must be submitted to both Carnival and P&O Princess
for approval by shareholders voting at separate meetings but acting as a joint
electorate. Parallel shareholders' meetings will be held on the same date or as
close together in time as practicable.
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Voting procedures for joint electorate actions
The Carnival Meeting
At the Carnival shareholders' meeting, voting will be on a poll (i.e. by
tabulation of individual votes rather than by a show of hands) which will
remain open for sufficient time to allow the parallel P&O Princess
shareholders' meeting to be held (if it has not already occurred) and for the
votes attaching to the Carnival special voting share to be ascertained and cast
on the poll.
On the poll:
.. each outstanding issued Carnival share will have one vote; and
.. the Carnival Special Voting Entity, as holder of the Carnival special
voting share, will have such number of votes as were validly cast on the
equivalent resolution at the parallel P&O Princess shareholders' meeting,
as adjusted by the equalisation ratio in effect at the time of the meeting
and rounded up to the nearest whole number.
.. Under the SVE Special Voting Deed, the Carnival Special Voting Entity will
be obliged to cast these votes for and against the relevant resolution in
the same proportion as the votes cast for and against the equivalent
resolution by P&O Princess shareholders on the poll at the parallel P&O
Princess shareholders' meeting.
The P&O Princess Meeting
At the corresponding P&O Princess shareholders' meeting, voting will be on a
poll which will remain open for sufficient time to allow the parallel Carnival
shareholders' meeting to be held (if it has not already occurred) and for the
votes attaching to the P&O Princess special voting share to be ascertained and
cast on the poll.
On the poll:
.. each issued P&O Princess share will have one vote; and
.. the P&O Princess Trustee, as holder of the P&O Princess special voting
share, will have such number of votes as were validly cast on the
equivalent resolution at the parallel Carnival shareholders' meeting, as
adjusted by the equalisation ratio in effect at the time of the meeting and
rounded up to the nearest whole number.
.. Under the SVE Special Voting Deed, the P&O Princess Trustee will be obliged
to cast these votes for and against the relevant resolution in the same
proportion as the votes cast for and against the equivalent resolution by
Carnival shareholders on the poll at the parallel Carnival shareholders'
meeting.
Through this mechanism the votes at the Carnival meeting will be reflected at
the parallel P&O Princess meeting.
Through this mechanism the votes at the P&O Princess meeting will be reflected
at the parallel Carnival meeting.
The results of the joint electorate action will be announced after both polls
have closed. If for any reason a parallel shareholder meeting of Carnival or
P&O Princess does not take place then the resolution to approve a joint
electorate action will not be passed.
Voting threshold for joint electorate actions
A joint electorate action will be taken to have been approved if it is approved
by:
(a)a simple majority of the votes cast (or other majority if required by
applicable law and regulations or the Carnival articles and by-laws) by the
holders of Carnival shares and the holder of the Carnival special voting
share, voting as a single class at a meeting at which a quorum was present
and acting; and
(b)a simple majority of the votes cast passing an ordinary resolution (or
special resolution if required by applicable law and regulations or the P&O
Princess articles) of the holders of P&O Princess shares and the holder of
the P&O Princess special voting share voting as a single class at a meeting
at which a quorum was present and acting.
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In addition, a minimum of one-third of the total votes available to be voted by
the combined shareholders must be cast on each resolution for it to be
effective. Formal abstentions by a shareholder on a resolution will be counted
as having been "cast" for this purpose.
3.5.3 Class rights actions
Class rights actions are solely those matters specified below or designated as
such by both the Carnival board and the P&O Princess board. They are expected
to be matters on which the shareholders of Carnival and P&O Princess may have
divergent interests. Such actions require the approval of the shareholders of
each company voting as separate classes.
Matters which will require approval as a class rights action are as follows:
(a)the voluntary liquidation, dissolution or winding up (or equivalent) of
either Carnival or P&O Princess for which shareholder approval is required
(other than as part of a voluntary liquidation, dissolution or winding up
(or equivalent) of both companies at or around the same time with the
purpose or effect of no longer continuing the operation of the business of
the companies as a combined going concern and not as part of a scheme, plan,
transaction or series of related transactions the primary purpose or effect
of which is to reconstitute all or a substantial part of such businesses is
one or more successor entities).
(b)the sale, lease, exchange or other disposition of all or substantially all
of the assets of Carnival and/or P&O Princess (other than in a bona fide
commercial transaction undertaken for a valid business purpose in which such
company receives consideration with a fair market value reasonably
equivalent to the assets disposed of and not as part of a scheme, plan,
transaction or series of related transactions the primary purpose or effect
of which is to collapse or unify the DLC structure);
(c)any adjustment to the Carnival equivalent number (as defined in the
Equalisation and Governance Agreement) or the equalisation ratio otherwise
than in accordance with the Equalisation and Governance Agreement;
(d)any amendment, removal or alteration of the effect of any entrenched
provision in the Carnival articles and by-laws or the P&O Princess articles
designed to preserve the DLC structure (see paragraphs 4 and 5 below);
(e)any amendment or termination of the Equalisation and Governance Agreement,
the SVE Special Voting Deed, the P&O Princess Deed of Guarantee or the
Carnival Deed of Guarantee (except where otherwise specifically provided for
in such agreement);
(f)any amendment to, removal or alteration of the effect of certain tax related
provisions of the Carnival articles that would cause, or at the time of
implementation would be likely to cause a mandatory exchange (as described
in paragraph 7 of Part B of Section 5); and
(g)anything which the Carnival board and P&O Princess board agree (either in a
particular case or generally) should be approved as a class rights action.
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Voting procedures for class rights actions
The Carnival Meeting The P&O Princess Meeting
The Carnival shareholders' meeting will be held The P&O shareholders' meeting will be held as
as close in time to the parallel P&O Princess close in time to the parallel Carnival
shareholders' meeting as is practicable. Voting shareholders' meeting as is practicable. Voting
will be on a poll with each outstanding issued will be on a poll with each issued P&O Princess
Carnival share having one vote per share. share having one vote per share.
The Carnival Special Voting Entity, as holder of The P&O Princess Trustee, as holder of the
the Carnival special voting share, will only vote if P&O Princess special voting share, will only vote
the proposed action has not been approved at if the proposed action has not been approved at
the parallel P&O Princess shareholders' meeting the parallel Carnival shareholders' meeting at
at the close of the poll of shareholders at that the close of the poll of shareholders at that
meeting. In that event, the Carnival special meeting. In that event, the P&O Princess special
voting share will carry such number of votes voting share will carry such number of votes
representing the largest whole percentage that representing the largest whole percentage that
is less than the percentage of the number of is less than the percentage of the number of
votes that would be necessary to defeat the votes that would be necessary to defeat the
resolution at the Carnival shareholders' meeting resolution at the P&O Princess shareholders'
if the total votes capable of being cast by all meeting if the total number of votes capable of
outstanding Carnival shares (and other Carnival being cast by all issued P&O Princess shares
shares able to vote) were cast in favour of the (and other P&O Princess shares able to vote)
resolution. In most cases, this will be 49% (for a were cast in favour of the resolution. In most
majority vote, 49% is the largest whole cases, this will be 49% (for a majority vote, 49%
percentage that is less than the 50% needed to is the largest whole percentage that is less than
defeat the resolution). As a result, in the case of the 50% needed to defeat the resolution). As a
a majority vote, the Carnival special voting share result, in the case of a majority vote, the P&O
will represent a number of votes equal to 98% of Princess special voting share will represent a
the votes capable of being cast by all Carnival number of votes equal to 98% of the votes
shares (excluding the votes represented by the capable of being cast by all P&O Princess
Carnival special voting share). Therefore, shares (excluding the votes represented by the
assuming holders of approximately 2% or more P&O Princess special voting share). Therefore,
of the Carnival shares do not cast votes on such assuming holders of approximately 2% or more
class rights action, it will fail. If the P&O Princess of P&O Princess shares do not cast votes on
shareholders approve the proposed action, the such class rights action, it will fail. If the Carnival
Carnival special voting share will not represent shareholders approve the proposed action, the
any votes. P&O Princess special voting share will not
represent any votes.
The results of a class rights action will be announced after both polls have
closed. If for any reason a parallel shareholder meeting of P&O Princess or
Carnival does not take place then the resolution to approve a class rights
action will not be passed.
Voting threshold for class rights actions
A class rights action will require the approval at each meeting of a majority
of those voting in person or by proxy unless, in relation to the relevant
company, a higher or different majority or a different mechanism to establish
if the resolution has been passed is required by applicable law and
regulations, or by the P&O Princess articles or the Carnival articles and/or
by-laws, respectively. For example, pursuant to Panamanian law, a resolution to
amend an entrenched provision in the Carnival articles would need to be
approved by a majority of the outstanding Carnival shares entitled to vote
thereon. This differs from the normal voting procedure in the United Kingdom,
which normally requires a requisite majority of those shareholders voting in
person or by proxy.
In addition, under current UK law, a resolution to effect a class rights action
referred to in paragraphs 3.5.3(a), (b), or (d) above would need the approval
of at least three-quarters of the votes of those shareholders voting in person
or by proxy.
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3.5.4 Procedural resolutions
Procedural resolutions are resolutions on procedural or technical matters not
constituting joint electorate actions or class rights actions and which will be
voted on by the relevant company's shareholders voting separately. The relevant
special voting share will have no vote on such resolutions. Procedural
resolutions will include, among other things:
.. resolutions to close discussions with respect to a matter and putting that
matter to a vote;
.. resolutions to withhold a matter from being put to a vote;
.. resolutions to permit or exclude certain persons from attending a meeting;
.. resolutions to proceed with matters and the order in which such matters
will be addressed; and
.. resolutions to adjourn debate or meetings, in each case provided such
resolution does not adversely affect the other company or its shareholders
in any material respect.
The chairman of the meeting will determine whether a resolution is a resolution
on a procedural or technical matter.
3.5.5 The P&O Princess Trustee and the Carnival Special Voting Entity
The Carnival Special Voting Entity (which will hold the Carnival special voting
share to be voted at the Carnival shareholders' meetings, in order to give
effect to the outcome of votes at the parallel P&O Princess shareholders'
meetings for purposes of joint electorate actions and class right actions) is a
company whose share capital will be held legally and beneficially by the
Carnival SVE Owner. The Carnival SVE Owner will be The Law Debenture Trust
Corporation p.l.c., an independent trustee company incorporated in England and
Wales. The P&O Princess Trustee (which will hold the P&O Princess special
voting share to be voted at the P&O Princess shareholders' meetings, in order
to give effect to the outcome of votes at the parallel Carnival shareholders'
meetings for purposes of joint electorate actions and class rights actions)
will be a trust established under the laws of the Cayman Islands. The Carnival
Special Voting Entity will be present by a corporate representative or by proxy
at any Carnival shareholder meeting at which a resolution relating to a joint
electorate action and/or class rights action is to be considered. The P&O
Princess Trustee will be present by a representative or by proxy at any P&O
Princess general meeting at which a resolution relating to a joint electorate
action and/or a class rights action is to be considered.
(1)Rights of special voting share
On completion of the DLC transaction, Carnival will issue the Carnival special
voting share to the Carnival Special Voting Entity, which will only carry the
following rights as set out in the Carnival articles and by-laws:
(i)on joint electorate actions, its votes are to be cast as described in
paragraph 3.5.2 above;
(ii)on class rights actions, its votes are to be cast as described in paragraph
3.5.3 above;
(iii)on joint electorate actions it will also carry any formal abstentions by
the shareholders; and
(iv)such share will only be transferable in the circumstances described in
paragraph 3.5.5(3) below.
The Carnival special voting share will have no rights to income or capital and
no voting rights except as described above.
On completion of the DLC transaction, the P&O Princess special voting share
will be transferred to the P&O Princess Trustee. The P&O Princess special
voting share will have rights corresponding to those set out above of the
Carnival special voting share. Trust shares of beneficial interest in the P&O
Princess Special Voting Trust will be transferred to Carnival. Immediately
following this transfer, Carnival will distribute the trust shares of
beneficial interest in the P&O Princess Special Voting Trust by way of dividend
to Carnival shareholders of record at the close of business on the day on which
the DLC transaction completes. No separate certificates will be issued to
represent these trust shares of beneficial interest which will be paired with
and evidenced by certificates representing Carnival shares.
Following completion of the DLC transaction, Carnival shares will trade in
units consisting of one Carnival share and one trust share of beneficial
interest in the P&O Princess Special Voting Trust. The trust shares of
beneficial interest in the P&O Princess Special Voting Trust will entitle
Carnival shareholders to receive any distributions made by the P&O Princess
Special Voting Trust. As the sole purpose of the P&O Princess Special Voting
Trust relates to the holding of the P&O Princess special voting share, it is
not expected to make any distributions.
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The P&O Princess special voting share will have the right to a return at par on
liquidation ranking behind the P&O Princess shares.
(2)Exercise of voting rights
The SVE Special Voting Deed will regulate the manner in which the Carnival
Special Voting Entity and the P&O Princess Trustee will exercise the votes
attaching to the Carnival special voting share and the P&O Princess special
voting share, respectively.
The SVE Special Voting Deed is summarised in paragraph 6 of this Section 6.
(3) Transferof the special voting shares/removal of the P&O Princess Trustee
Other than in respect of a transfer of the Carnival special voting share
described below, the Carnival Special Voting Entity will be prohibited from
dealing with the Carnival special voting share or with any interest in or right
attaching to the Carnival special voting share, unless such dealing has been
approved by the Carnival board and P&O Princess board in their sole and
absolute discretion and the transferee has agreed to be bound by the applicable
SVE Special Voting Deed. The trustee of the P&O Princess Special Voting Trust
will be prohibited from dealing with the P&O Princess special voting share
except to the extent expressly permitted in its trust arrangements agreed with
Carnival. The Carnival board and P&O Princess board can require the Carnival
Special Voting Entity to transfer the special voting shares to a new person
nominated by the boards if the Equalisation and Governance Agreement or the SVE
Special Voting Deed terminates. In addition, Carnival can require the P&O
Princess Trustee to resign or, failing such resignation, remove the P&O
Princess Trustee and appoint a successor trustee.
(4) Remunerationof Carnival Special Voting Entity and P&O Princess Trustee
It has been agreed that P&O Princess will pay the Carnival Special Voting
Entity fees and expenses incurred in the performance of its obligations under
the DLC structure and that Carnival will pay the P&O Princess Trustee fees and
expenses incurred in the performance of its obligations under the DLC structure.
3.6 Discretionary matters
The Carnival board and P&O Princess board may:
(a)decide to seek approval from shareholders for any matter that would not
otherwise require such approval;
(b)require any joint electorate action to instead be approved as a class rights
action; or
(c)specify a higher majority vote than the majority that would otherwise be
required by applicable laws and regulations.
3.7 Liquidation
Under the Equalisation and Governance Agreement, the Carnival articles and the
P&O Princess articles, the provisions described below will apply on the
insolvency of either or both companies. These provisions are intended to ensure
that, as far as practicable, the shareholders of the Combined Group are treated
equitably in the event of insolvency of either or both companies and in
accordance with the equalisation ratio.
3.7.1 One or both companies insolvent
If either or both of Carnival and/or P&O Princess goes into liquidation,
Carnival and P&O Princess will make and receive such payments or take such
other actions required to ensure that the holders of shares of each company
would, had each entity gone into liquidation on the same date, be entitled to
receive a distribution which is equivalent on a per share basis in accordance
with the equalisation ratio then in effect, based on the prevailing U.S.
dollar/pound sterling exchange rate (or such other exchange rate agreed by the
P&O Princess board and Carnival board (or the liquidators of the relevant
companies)) and ignoring any tax on, or tax benefit of, any shareholder. To
establish the amount
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payable, each company will determine the amount of assets (if any) it will have
available for distribution on the date of liquidation (or notional date of
liquidation) to shareholders after payment of all its debts and other financial
obligations including any tax costs associated with such payment and any
payments due on any preference shares. To the extent one company has greater
net assets so that any liquidation distribution to its shareholders would not
be equivalent on a per share basis (in accordance with the equalisation ratio
then in effect based on the applicable exchange rate, but ignoring any tax on,
or tax benefit of, a shareholder) to the amount that could be paid by the other
company, the first company will pay or make a balancing payment (or take other
balancing action described in paragraph 3.7.2 below) in such amount as will
ensure that, after payment of any tax liability in respect of the balancing
payment or other action by the companies, both companies make equivalent
liquidation payments; provided always that neither company need make a
balancing payment if it would result in no holders of Carnival shares or P&O
Princess shares being entitled to receive any distribution of property or cash
whatsoever.
3.7.2 Balancing action
In giving effect to the principle regarding a liquidation of Carnival and/or
P&O Princess described in paragraph 3.7.1 above, Carnival and P&O Princess will
take such action as may be required to give effect to that principle, which may
include:
(a)making a payment (of cash or in specie) to the other company;
(b)issuing shares (which may include the equalisation share) to the other
company or to holders of shares of the other company and making any
distribution or return on such shares; or
(c)taking any other action that Carnival and P&O Princess consider appropriate
to give effect to that principle.
Any action other than a payment of cash by one company to the other shall
require the prior approval of the boards of both companies.
3.8 Combination
In any combination of Carnival and P&O Princess into a single, non-DLC
structure, the consideration to be received by the shareholders of the two
companies will be calculated by reference to the equalisation ratio then in
effect.
3.9 Governing Law
The Equalisation and Governance Agreement will be governed by Isle of Man law.
4. Proposed Carnival articles and by-laws
On completion, Carnival will adopt the Carnival articles and by-laws. The
changes to be incorporated in the Carnival articles and Carnival by-laws will
largely mirror the changes made to the proposed P&O Princess articles which are
described below. The Carnival articles and by-laws will also entrench similar
provisions designed to preserve the DLC structure.
5. Proposed new memorandum and articles of P&O Princess
On completion, P&O Princess will amend its memorandum of association and adopt
new articles of association. In addition to creating new classes of shares to
provide for the special voting share described in paragraph 3.5.5 of this
Section 6 and the equalisation share described in paragraph 1 of Section 7
below, the P&O Princess articles will entrench certain significant provisions
of the DLC structure, including the scope of, and voting rights and procedures
in relation to, joint electorate actions and class rights actions, the rights
attaching to the P&O Princess special voting share, the obligations in the
event of liquidation of either party and the restrictions on persons assuming
control of P&O Princess.
6. SVE Special Voting Deed
The SVE Voting Deed will be executed by Carnival, P&O Princess, the Carnival
Special Voting Entity (as holder of the Carnival special voting share), the P&O
Princess Trustee (as holder of the P&O Princess special voting share) and the
Carnival SVE Owner as legal and beneficial owner of the Carnival Special Voting
Entity.
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6.1 Voting procedures in connection with the Carnival Special Voting Entity
and the P&O Princess Trustee
Among other things, the SVE Special Voting Deed sets out the following:
(a)Notification obligations: The obligations of Carnival and P&O Princess,
respectively, to notify the Carnival Special Voting Entity and the P&O
Princess Trustee:
(i)of the votes cast by holders of Carnival shares and P&O Princess shares
at shareholder meetings; and
(ii)in the case of class rights actions, whether or not any resolution in
relation to a class rights action was passed by the required majority of
holders of Carnival shares or P&O Princess shares and the number of
votes attached to the relevant special voting share;
(b)Voting obligations: The obligations of the Carnival Special Voting Entity
and the P&O Princess Trustee to attend meetings and to vote its special
voting share in accordance with the Carnival articles and by-laws or the P&O
Princess articles (as the case may be) and the SVE Special Voting Deed;
(c)Restrictions on transfer of special voting share: Restrictions on the
ability of the Carnival Special Voting Entity and the P&O Princess Trustee
to transfer or encumber in any way (other than under the trust arrangements,
including the creation and distribution of the trust shares of beneficial
interest in the P&O Princess Special Voting Trust described above in
paragraph 3.5.5(1)) the special voting shares or interests in or rights
attaching to such shares unless approved by Carnival and P&O Princess;
(d)Provision of information: The obligations of Carnival and P&O Princess to
provide each of the Carnival Special Voting Entity and the P&O Princess
Trustee with such information as it reasonably requires (other than
information which is of a price-sensitive nature and not generally
available) for the purpose of exercising the powers and discretion vested in
it, and discharging its duties, under the SVE Special Voting Deed;
(e)Confidentiality: The obligation of the Carnival Special Voting Entity and
the P&O Princess Trustee to maintain the confidentiality of such information
provided to it;
(f)Remuneration of the Carnival Special Voting Entity and the P&O Princess
Trustee: The remuneration, which shall be agreed between the parties from
time to time, and expenses payable to the Carnival Special Voting Entity and
the P&O Princess Trustee;
(g)Exclusion of responsibilities: that the Carnival Special Voting Entity and
the P&O Princess Trustee shall not be responsible:
(i)in respect of actions taken by them on the opinion or advice of or on
information obtained from any lawyer, valuer, banker, accountant,
registrars or transfer agent of Carnival or P&O Princess or other expert;
(ii)in circumstances where they have acted upon or have implemented or given
effect to any resolution purporting to have been passed as a resolution
of shareholders; and
(iii)in respect of them having accepted or acted or relied upon notices given
to them by Carnival or P&O Princess;
(h)Indemnity: Subject to certain exceptions, such as fraud, negligence or
wilful default, the Carnival Special Voting Entity and the P&O Princess
Trustee (and their directors, officers, employees, and other agents) will be
indemnified against all liabilities or expenses incurred by them in the
execution of their respective obligations under the SVE Special Voting Deed;
(i)Restriction on activities: Prohibitions on the Carnival Special Voting
Entity and the P&O Princess Trustee carrying out any activities other than
those necessary or expedient to perform their respective obligations under
the SVE Special Voting Deed or the Carnival articles and by-laws and/or P&O
Princess memorandum and articles; and
(j)Directors: The requirement that the directors of the Carnival Special Voting
Entity be appointed by the Carnival SVE Owner but that such directors cannot
be employees or directors of the P&O Princess group or the Carnival group.
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6.2 Amendments
The SVE Special Voting Deed may be amended by all the parties to it agreeing in
writing.
The Special Voting Entities and the Carnival SVE Owner are generally required
to concur with Carnival and P&O Princess in amending the SVE Special Voting
Deed in relation to:
(i)formal or technical amendments which Carnival and P&O Princess certify
do not materially prejudice the interests of shareholders;
(ii)amendments necessary to correct manifest errors or inconsistencies
between the SVE Special Voting Deed and the Equalisation and Governance
Agreement; and
(iii)amendments approved by both groups of shareholders as a class rights
action.
6.3 Termination
The SVE Special Voting Deed will terminate if the Equalisation and Governance
Agreement is terminated or if a resolution to terminate the SVE Special Voting
Deed is approved by the shareholders of the Combined Group as a class rights
action. Upon termination of the SVE Special Voting Deed or if Carnival so
decides, the Carnival Special Voting Entity will transfer its special voting
share to a person notified to it in writing by the board. In addition, Carnival
can require the Carnival Special Voting Entity to transfer the special voting
share to a new person (nominated by the Carnival board) if it wants to replace
the trustee company owning the shares in the Carnival Special Voting Entity.
6.4 Governing Law
The SVE Special Voting Deed will be governed by Isle of Man law.
7. The Deeds of Guarantee
On completion, Carnival and P&O Princess will each enter into a Deed of
Guarantee on the terms specified below.
7.1 P&O Princess Deed of Guarantee
Under the Implementation Agreement, P&O Princess has agreed with Carnival to
execute the P&O Princess Deed of Guarantee on completion of the DLC transaction
in respect of:
(a)any contractual monetary obligations owed to creditors of Carnival incurred
on or after completion;
(b)any contractual monetary obligations of other persons, referred to as
principal debtors, which are guaranteed by Carnival and are incurred on or
after completion; and
(c)any other obligation of any kind which may be agreed between the Carnival
board and the P&O Princess board.
Pursuant to the P&O Princess Deed of Guarantee, P&O Princess will guarantee the
payment by Carnival of such obligations and will undertake to pay on demand any
amounts due and in respect of such obligations if for any reason Carnival does
not make payment in respect of such obligations on their due date.
Subject to paragraph 7.1(c) above the obligations to be covered by the P&O
Princess Deed of Guarantee exclude the following obligations incurred by
Carnival or by any principal debtor:
(i)any non-monetary obligations;
(ii)obligations to the extent covered by the terms of any policy of
insurance of which Carnival (or the principal debtor) has the benefit
and which is in full force and effect;
(iii)any obligation explicitly guaranteed in writing by P&O Princess
otherwise than under the P&O Princess Deed of Guarantee or for which P&O
Princess agrees in writing to act as co-obligor or co-issuer;
(iv)any obligation incurred under an arrangement which explicitly provides
that the obligation is not to be guaranteed by P&O Princess;
(iv)obligations owed to P&O Princess or to any of its subsidiaries or
subsidiary undertakings or to any subsidiary or subsidiary undertaking
of Carnival;
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(v)obligations of Carnival under or in connection with any guarantee by
Carnival of any obligation of P&O Princess or any subsidiary of P&O
Princess;
(vi)obligations excluded from the scope of the P&O Princess Deed of
Guarantee (see below);
(vii)under any instrument or agreement existing on or prior to the date of
the guarantee; and
(viii)obligations of Carnival under a guarantee, or of any principal debtor
guaranteed by that guarantee, to the extent that the guaranteed
obligation is not a contractual monetary obligation or is of a type
excluded as referred to above.
Beneficiaries of the P&O Princess Deed of Guarantee may make demand upon P&O
Princess provided that any such beneficiary has first served a written demand
on Carnival and (to the extent, if any, that the terms of the relevant
obligation require such recourse) recourse first being had to any other person
or security.
The P&O Princess Deed of Guarantee will automatically terminate if the
Equalisation and Governance Agreement terminates or ceases to have effect or if
the Carnival Deed of Guarantee has terminated or ceased to have effect. P&O
Princess may also terminate the P&O Princess Deed of Guarantee with the consent
of Carnival (or without Carnival's consent where Carnival is in liquidation) by
the giving of three month's notice. No termination of the P&O Princess Deed of
Guarantee will be effective with respect to any existing obligation subject to
the guarantee (that is, an obligation incurred before, or arising out of any
credit or similar facility available for use at, the time at which the
termination becomes effective).
P&O Princess may, with the agreement of Carnival, at any time exclude
obligations of a particular type, or a particular obligation or obligations,
incurred after a specified future time from the scope of the P&O Princess Deed
of Guarantee. The future time must, in the case of obligations of a particular
type, be at least three months after the date on which notice of the relevant
exclusion is given or, in the case of a particular obligation, at least five
business days after the date on which notice is given.
P&O Princess may also amend the P&O Princess Deed of Guarantee, at any time and
in any way, with effect from the time of such amendment or such future time as
it determines. Any such amendment shall require the prior agreement of
Carnival, except where Carnival is in liquidation. No amendment will be
effective in respect of existing obligations, as referred to above.
P&O Princess may agree in writing with Carnival at any time that any other
obligation of any kind, including existing indebtedness of Carnival and P&O
Princess, be treated as an obligation under the P&O Princess Deed of Guarantee.
Any notice to be given to creditors generally will be given by way of an
advertisement in one UK and one U.S. newspaper (usually the Financial Times and
the Wall Street Journal).
7.2 Carnival Deed of Guarantee
Carnival has agreed with P&O Princess to execute a reciprocal guarantee for the
benefit of certain creditors of P&O Princess on parallel terms to those
described in paragraph 7.1 above on completion of the DLC transaction.
7.3 Governing Law
The Deeds of Guarantee will be governed by Isle of Man law.
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SECTION 7
SUMMARY OF THE PROPOSED CHANGES TO THE
P&O PRINCESS MEMORANDUM AND ARTICLES
The new P&O Princess memorandum and articles
In order to implement the DLC structure, P&O Princess will, subject to the
approval of the P&O Princess shareholders, amend its current memorandum of
association and adopt new articles of association.
Copies of the existing and proposed memorandum and articles of association may
be inspected at the place indicated in paragraph 16 of Section 8 and at the
Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P
3EE for at least 15 minutes prior to, and during, the P&O Princess EGM.
The following is a summary of the principal changes from the existing
memorandum and articles of association contained in the new P&O Princess
memorandum and articles. All changes will, if approved, take effect on
completion of the DLC transaction.
P&O Princess memorandum
The P&O Princess memorandum will include a new provision in the objects clause
giving P&O Princess express power to operate and give effect to the
Equalisation and Governance Agreement, SVE Special Voting Deed and the P&O
Princess Deed of Guarantee.
P&O Princess articles
1. New classes of share
The P&O Princess articles will provide for the creation and issue of two new
classes of shares - a P&O Princess special voting share and an equalisation
share.
The rights attaching to the P&O Princess special voting share are set out in
paragraph 2.1 below.
The rights attaching to the equalisation share will be prescribed under the new
P&O Princess articles as follows:
(a)the equalisation share shall carry such rights to dividends as are expressly
declared or paid on the equalisation share for the purposes of assisting or
enabling the making of any payment to Carnival as described in paragraph 5.3
of Part B of Section 5;
(b)the nominal value of the equalisation share will be (Pounds)1 (article 16).
It will have a right only to payment of the amount paid up or credited as
being paid up on such share on the winding up of P&O Princess ranking behind
the holders of all other classes of shares (article 22);
(c)the equalisation share will not entitle its holder to receive notice of,
attend or vote at, any general meeting; and
(d)the P&O Princess board shall refuse to register the transfer of the
equalisation share unless the transfer is to a member of the Carnival group
or a trustee for the benefit of one or more members of the Carnival group
(article 76).
2. Voting
The new constitution will incorporate provisions to implement the special
voting structure which will allow the shareholders of Carnival and of P&O
Princess effectively to vote together as a joint electorate on joint electorate
actions, as described in paragraph 3.5.2 of Section 6 above. In summary, the
new provisions are as follows:
2.1 P&O Princess special voting share
The nominal value of the P&O Princess special voting share will be (Pounds)1.00
(article 16). It will carry no rights to a dividend but will have a right to
payment of the amount paid up or credited as being paid up on such share on the
winding up of P&O Princess, ranking behind the P&O Princess shares and P&O
Princess' redeemable preference shares, but ahead of the equalisation share
(article 20). The P&O Princess board shall refuse to register any transfer of
the P&O Princess special voting share unless the
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transfer has been approved in accordance with, and the transferee complies
with, the SVE Special Voting Deed (article 76).
2.2 Joint electorate actions and class rights actions
The P&O Princess articles will designate which matters are joint electorate
actions (article 126) and which are class rights actions (articles 124 and
127). These are described in paragraphs 3.5.2 and 3.5.3 of Section 6,
respectively.
2.3 Voting Rights of P&O Princess special voting share
Under the P&O Princess articles, the voting rights attaching to the P&O
Princess special voting share will be as follows:
(i)on a resolution in respect of a joint electorate action: the number of votes
validly cast (both for or against and formally abstained) by holders of
Carnival shares on the equivalent resolution at the parallel Carnival
shareholders' meeting (as adjusted by the equalisation ratio) (article 129)
shall be cast on a poll in respect of the relevant resolution. For a joint
electorate action to be approved, a minimum of one-third of the total votes
available to be voted by the P&O Princess shareholders and the P&O Princess
special voting share must be voted on that resolution;
(ii)on a resolution in respect of a class rights action: if the equivalent
resolution has been approved by the requisite majority of the holders of
Carnival shares at the parallel Carnival shareholders' meeting, the P&O
Princess special voting share shall have no votes at the P&O Princess
general meeting considering the equivalent resolution as a class rights
action. If the equivalent resolution has not been approved by the requisite
majority of the holders of Carnival shares at the parallel Carnival
shareholders' meeting, the P&O Princess special voting share shall have
such number of votes representing the largest whole percentage that is less
than the percentage of the number of votes that would be necessary to
defeat the resolution to approve the class rights action at the P&O
Princess general meeting considering the equivalent resolution as a class
rights action if the total votes capable of being cast by the total issued
P&O Princess shares (and any other P&O Princess shares carrying voting
rights) were cast in favour of such resolution (article 125); and
(iii)on a resolution of a procedural or technical nature put to a P&O Princess
general meeting the P&O Princess special voting share shall not be
entitled to vote (article 131).
The prescribed manner in which the above voting rights are to be exercised is
set out in the SVE Special Voting Deed , as described in paragraph 6 of Section
6.
2.4 Procedures for conduct of general meetings
Provisions will be included in the new P&O Princess articles to provide that on
those resolutions on which the holder of the P&O Princess special voting share
is entitled to vote (joint electorate actions and class rights actions), voting
must be taken on a poll and the poll must remain open for sufficient time to
enable the vote to be taken at the parallel Carnival shareholders' meeting.
When the result of the Carnival shareholders' vote at that meeting is known,
the holder of the P&O Princess special voting share can then vote (if it is so
entitled to vote, see paragraph 2.3(ii) above) at the P&O Princess
shareholders' meeting in the manner required (articles 132, 133 and 147). Other
resolutions on procedural or technical matters may be taken on a show of hands
unless a poll is demanded, but the P&O Princess special voting share will have
no vote on such matters.
At least three shareholders must be present in person or by proxy at any P&O
Princess general meeting (article 111) and where a joint electorate action or a
class rights action is to be considered at the general meeting, one of those
shareholders must be the holder of the P&O Princess special voting share
(article 112).
Formal abstentions will be counted as votes cast for the purposes of assessing
whether a quorum is present (article 113).
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3. Directors and management
3.1 Directors' authority to carry into effect the Equalisation and Governance
Agreement
The P&O Princess articles will authorise and require the P&O Princess directors
to carry into effect the Equalisation and Governance Agreement, the SVE Special
Voting Deed and the P&O Princess Deed of Guarantee together with any agreements
or arrangements contemplated by those agreements and will provide that nothing
done by the directors in good faith pursuant to such authority and obligations
will constitute a breach of their fiduciary duties to P&O Princess or to the
P&O Princess shareholders (article 194). The P&O Princess articles will also
provide that the P&O Princess directors shall, in addition to their duties to
P&O Princess, be entitled to have regard to the interests of the shareholders
of both companies of the Combined Group and to the interests of Carnival, as if
P&O Princess and Carnival were a single legal entity (article 194(a)). P&O
Princess directors are authorised to provide Carnival and any officer employee
or agent of Carnival any information relating to P&O Princess (article 194 (b)).
3.2 Appointment and removal of directors
The P&O Princess articles will include provisions relating to the appointment
and removal of directors to reflect the fact that boards of P&O Princess and
Carnival will comprise the same individuals.
These changes include the following:
(a)No person shall be a P&O Princess director unless he is also a Carnival
director (article 174).The appointment/resignation of a person as a P&O
Princess director will only take effect at the same time as the
appointment/resignation as a Carnival director.
(b)The provisions regarding the removal of directors has been aligned with the
Carnival articles and by-laws. A director of P&O Princess will be removed as
a director if he ceases to a director by virtue of the Companies Act or the
P&O Princess articles or he becomes prohibited by applicable law from being
a director (article 195); he resigns from office or his term expires and he
is not re-elected (article 179); he ceases to be a director of Carnival
(article 174); or such removal is duly approved as a joint electorate action
(article 126).
3.3 Proceedings of directors
The P&O Princess articles will contain various new and amended provisions
concerning the proceedings of directors in order to ensure that the P&O
Princess articles conform with the Carnival articles and by-laws.
These changes include the following:
(a)The quorum necessary for the transaction of business of the board shall be a
majority of the directors. An alternate director shall be counted for
determining a quorum both in his capacity as a director and in his capacity
as an alternate director (article 209).
(b)A majority of the board may delegate any of its powers to any committee
consisting of two or more directors. A committee of the board shall be
quorate if at least a majority of the directors appointed to that committee
are present (article 191).
(c)The Chairman shall not have a second or casting vote on any matter being
considered by the board.
(d)A meeting of the directors may be called by the Chairman or by any two
directors of P&O Princess (article 208).
(e)The P&O Princess board may, by agreement with the Carnival board (i) decide
to seek the approval of the shareholders (or any class of shareholders) of
either or both of P&O Princess and Carnival for any matter that would not
otherwise require such approval, (ii) require any joint electorate action to
be approved as a class rights action, and/or (iii) specify a higher majority
vote than the required majority that would otherwise be required for any
shareholder vote (article 189).
(f)The minimum and maximum number of P&O Princess directors has increased to
three and twenty five, respectively (article 170).
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(g)The ability for P&O Princess directors to vote on certain contracts in which
they are interested has been extended to include similar contracts entered
into with Carnival (article 215).
4. Takeover restrictions
4.1 The shareholding limit
The P&O Princess articles will provide that a shareholding limit will be
triggered (a) if any person(s) acquires, or acquires voting control over, 30
per cent. or more of the combined votes which could be cast on a joint
electorate action or (b) if such person(s) already holds not less than 30 per
cent. but not more than 50 per cent. of the combined votes which could be cast
on a joint electorate action and subsequently acquires, or acquires voting
control over, additional shares which increase that person(s) percentage of
votes which could be cast on a joint electorate action in any 12 month period,
referred to as the "Combined Group Takeover Code Limit".
4.2 Determination of excess shares
P&O Princess shares in excess of the Combined Group Takeover Code Limit will be
automatically designated as "excess shares" if:
(i)the relevant person only holds P&O Princess shares; or
(ii)where the relevant person holds both P&O Princess shares and Carnival
shares, such person has a greater number of votes represented by its
holding of P&O Princess shares, or otherwise if its holding of P&O Princess
shares would, on a stand-alone basis, trigger the Combined Group Takeover
Code Limit.
Where two or more persons acting in concert hold, or have voting control of,
shares that are automatically designated as excess shares as described above,
such number of excess shares shall be pro-rated as between such persons'
holdings of shares in the company being designated as excess shares.
4.3 Consequences of a trigger of the Combined Group Takeover Code Limit
The following applies to excess shares if the Combined Group Takeover Code
limit is triggered:
(a)such excess shares shall be transferred by (or on behalf of) the owner of
the excess shares immediately prior to them being automatically designated
as excess shares ("Excess Share Owner") to a trustee, which will hold those
shares on trust for the benefit of a charitable organisation;
(b)any dividends or other distributions declared, paid or made shall be made or
paid to the relevant trustee which in turn shall pay them over to the
charitable organisation;
(c)upon a liquidation of P&O Princess, the Excess Share Owner shall receive,
for each excess share, the liquidation proceeds for such share less any
costs or expenses incurred in respect of the holding of such shares by the
company, the trustee or the charitable organisation;
(d)the Excess Share Owner will lose all rights to vote on the excess shares.
The trustee shall be entitled (but not required) to vote the excess shares
on behalf of the charitable organisation on any matters;
(e)if directed by the board, the trustee shall transfer the excess shares to a
person or persons whose ownership of such shares shall not trigger the
Combined Group Takeover Code Limit within 180 days after the later of (x)
the date of trigger of the Combined Group Takeover Code Limit and (y) the
date the board determines that the Combined Group Takeover Code Limit has
been triggered. The Excess Share Owner shall receive the proceeds of such
transfer less any costs or expenses incurred in respect of the holding or
sale of such shares by the company, the trustee or the charitable
organisation; and
(f)for a period of 90 days after the date of (x) the date of trigger of the
Combined Group Takeover Code Limit and (y) the date the board determines
that the Combined Group Takeover Code Limit has been triggered, the company
may instead, subject to applicable laws and regulations, purchase the excess
shares itself. The Excess Share Owner shall receive the market price
(calculated by the board using an average price on any five business days
prior to the purchase)
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less any costs or expenses incurred in respect of the holding or sale of
such shares by the company, the trustee or the charitable organisation.
The board of P&O Princess shall, in its absolute discretion, interpret these
takeover restrictions, as it sees fit and shall have the authority to exercise
all rights and powers described in these takeover restrictions.
Any person whose acquisition of shares results in the Combined Group Takeover
Code Limit being triggered is obliged to give written notice to P&O Princess
immediately on such event, together with such other information as P&O Princess
may require in order to determine whether or not (and to what extent) any of
such shares have been automatically designated as excess shares. Failing
receipt of such notice if this fact is established by P&O Princess, it will
inform the relevant person accordingly (although failure to so notify will in
no way invalidate any of these takeover provisions). P&O Princess can then
require the relevant person to provide such other information it requires in
order to determine if any shares have automatically been designated as excess
shares.
All actions, calculations, interpretations and determinations which are done or
made by the board in good faith and pursuant to and in accordance with the
takeover provisions in the P&O Princess articles shall be final, conclusive and
binding on all other parties. No director shall be liable for any act or
omission pursuant to the takeover provisions in the P&O Princess articles if
such action was taken in good faith.
4.4 Equivalent offers
A person(s) will not be deemed to have triggered the Combined Group Takeover
Code Limit if equivalent offers have been made, or a binding announcement to
make equivalent offers is made with 10 days of triggering a Combined Group Code
Takeover Code Limit and equivalent offers are made within 28 days of such
announcement, for the shares of P&O Princess and Carnival, and such offers have
not been withdrawn, abandoned or terminated. However, the shareholdings of such
person shall automatically be designated as excess shares, on the earlier of
(i) a withdrawal, abandonment or termination of such offers other than in
accordance with its terms, or (ii) any amendment, modification or supplement to
the terms of such offers such that the offers would no longer be equivalent or
in accordance with the P&O Princess articles.
4.5 Exclusions
These takeover restrictions will not apply to the following:
(a)any Buy-Back;
(b)if the restrictions are prohibited by applicable law and regulations;
(c)any acquisition by the Arison family and trusts for their benefit provided
their holdings do not increase by more than 1 per cent. of the voting power
of the Combined Group in any period of twelve consecutive months, subject to
their combined shareholdings not exceeding 40 per cent. of the voting power
of the Combined Group. Any transfers of shares among the Arison family
trusts for their benefit are also not subject to the provisions and
restrictions described in paragraphs 4.1 and 4.4 above; and
(d)any acquisition pursuant to a mandatory exchange (described in paragraph 8
below).
Similar provisions will be incorporated into the Carnival articles.
The effect of these control provisions is described in paragraph 6 of Part C of
Section 5 above (together with a description of provisions in the Carnival
articles which would effectively block anybody (other than members of the
Arison family and trusts for their benefit) acquiring over 4.9 per cent.
beneficial ownership of Carnival shares). The relevant articles containing
these takeover restrictions are articles 277-287.
5. Mechanisms for equalisation of distributions and on liquidation
5.1New provisions relating to equalisation of cash dividends and other cash
distributions are to be introduced in the P&O Princess articles to reflect
the provisions of the Equalisation and Governance Agreement described in
paragraph 4 of Part B of Section 5 (articles 234-237).
216
5.2New provisions applicable to the winding up of P&O Princess are to be
introduced in the P&O Princess articles to reflect the provisions of the
Equalisation and Governance Agreement described in paragraph 3.7 of Section
6 (articles 272-276).
6. Entrenchment
Certain significant provisions of the DLC structure are to be entrenched in the
P&O Princess articles by providing that they will be prohibited from being
altered except by the passing of a resolution as a class rights action of both
companies. The entrenching article in the P&O Princess articles will itself be
entrenched in the same way. The corresponding provisions in the Carnival
articles and by-laws will be similarly entrenched.
The entrenched provisions include provisions relating to:
(a)the scope of, and voting rights and procedures in relation to, joint
electorate actions;
(b)the scope of, and voting rights and procedures in relation to, class rights
actions;
(c)the rights attaching to the P&O Princess special voting share;
(d)the mechanisms for equalisation on liquidation;
(e)the appointment and vacation of office of directors;
(f)cash dividends and other cash distributions; and
(g)the shareholding limits referred to in paragraph 4 above.
7. Borrowing powers of the board
The articles within the current P&O Princess articles of association which
require the directors to restrict the aggregate net borrowings of the P&O
Princess group to an amount less than a multiple of combined share capital and
reserves (as adjusted in accordance with the article) will be deleted, so as to
conform the new P&O Princess articles with the position under the current
articles of incorporation of Carnival which contain no such restriction.
Subject to the provisions of applicable law, the directors may exercise all the
powers of P&O Princess to borrow money, and to mortgage or charge its
undertaking, property, assets (both present and future) and uncalled capital or
any part or parts thereof and to issue debentures and other securities, whether
outright or as collateral security for any debt, liability or obligation of P&O
Princess or any third party. The limitations which previously applied to P&O
Princess will no longer apply.
8. Mandatory exchange offer
The P&O Princess articles will provide that in certain limited circumstances
(described in (a) or (b) below), P&O Princess shares (other than those held by
Carnival) may be subject to a mandatory exchange for Carnival shares at the
then prevailing equalisation ratio. A mandatory exchange will occur:
(a)if there is a change in applicable tax laws, rules or regulations or their
application or interpretation, and, based on a legal opinion and after using
commercially reasonable efforts to explore available alternatives, and the
P&O Princess board shall have reasonably determined that:
(i)the change is reasonably likely to have a material adverse effect on the
Combined Group considered as a single enterprise;
(ii)it is reasonably likely that the material adverse effect would be
eliminated or substantially reduced by a mandatory exchange; and
(iii)the material adverse effect could not be substantially eliminated by any
commercially reasonable alternative to a mandatory exchange,
and the mandatory exchange is approved by two-thirds of the shareholders of
P&O Princess and Carnival (voting on a joint electorate action).
217
(b)If:
(i)there is a change in the applicable non-tax laws, rules or regulations
or their application or interpretation, as a result of which the P&O
Princess board has reasonably determined and having received a legal
opinion, that it is reasonably likely that all or a substantial portion
of the DLC documents are unlawful, illegal or unenforceable; or
(ii)a court or other governmental entity has issued a ruling, judgement,
decree or order, which has been appealed to the extent the P&O Princess
board deems reasonably appropriate, holding that all or a substantial
portion of the DLC documents are unlawful, illegal or unenforceable,
and the P&O Princess board, based on a legal opinion and after using
commercially reasonable efforts to explore the available alternatives to the
mandatory exchange, has reasonably determined that:
. the legal basis for the illegality or unenforceability would be
eliminated by a mandatory exchange;
. the illegality or unenforceability could not be eliminated by amendments
to the DLC documents that would not materially and adversely affect the
rights of the shareholders of P&O Princess and Carnival, taken together
or in relation to each other; and
. the change in law or the ruling, judgment, decree or order is reasonably
likely to be enforced in a way that will have a material adverse effect
on the Combined Group,
and the P&O Princess board decides to effect a mandatory exchange.
The relevant articles containing these mandatory exchange provisions are
articles 289-292.
Carnival will execute a deed for the benefit of P&O Princess shareholders on
the date of completion in respect of its obligations to effect a mandatory
exchange under the P&O Princess articles on the basis described above. It shall
automatically terminate in the following circumstances:
(a)termination of the Equalisation and Governance Agreement (see paragraph 3.3
of Section 6 above);
(b)completion of a mandatory exchange (described in this paragraph);
(c)a resolution is passed for the liquidation of the whole or substantially the
whole of P&O Princess; or
(d)the mandatory exchange provisions in the P&O Princess articles are properly
deleted.
9. Cross shareholding
The Princess articles will provide that any P&O Princess shares owned by
Carnival, including those acquired in connection with the Partial Share Offer,
will have the same rights as other P&O Princess shares except that:
(a)Carnival will not be able to vote those shares at any general meeting or
class meeting (unless Carnival is interested in at least 90 per cent. of all
P&O Princess shares); and
(b)Carnival will not participate in any equivalent liquidation payment
described in paragraph 3.7.1 of Section 6 above (article 21A).
10. Miscellaneous
Certain other miscellaneous updating and conforming changes are being made to
P&O Princess' current articles of association, including:
(a)certain changes to the redeemable preference shares (including that no
dividend will accrue where such shares are not in issue (article 37), such
shares will rank behind holders of P&O Princess shares but ahead of the
holders of any other classes of P&O Princess shares on a distribution of
assets/ return of capital (article 39) and making such shares non-voting
(article 41));
(b)a provision that if any shares are held in uncertificated form, P&O Princess
can give notification that the uncertificated share should be
re-certificated (article 29);
(c)the removal of the provisions relating to when share rights are deemed to be
varied (for example, such as on a reduction of the capital paid up on a
share or class of share) or not to be varied;
218
(d)the removal of the requirement to identify items of "Special Business" in a
notice of general meeting sent to shareholders;
(e)a provision that an adjournment of a general meeting need not occur unless a
quorum is not present within five minutes or such longer time, not exceeding
sixty minutes, as the Chairman may decide to wait (article 114);
(f)an increase of the cap on the ordinary remuneration of non-executive
directors from (Pounds)250,000 to (Pounds)1,000,000 (article 196);
(g)a provision that P&O Princess will have the ability to purchase directors'
indemnity insurance for directors of Carnival (article 205);
(h)the indemnity (in the current articles of association of P&O Princess) by
P&O Princess in respect of directors and officers of P&O Princess shall be
extended to include directors and officers of Carnival (article 288);
(i)fractions will be rounded up to the nearest cent or pence on a return of
capital to a holder of any P&O Princess share (article 18);
(j)any valid proxy in respect of a meeting which is postponed will remain valid
in respect of that meeting unless expressly provided otherwise (article
107c);
(k)the Chairman's powers to adjourn a meeting have been slightly extended to
allow an adjournment where any amendment to a substantive resolution has
been approved at the meeting (article 117a) or, where notice is received of
any adjournment of the parallel special meeting of Carnival (article 117e).
In determining whether to adjourn, the Chairman shall also have regard to
the impact of any adjournment on the parallel Carnival meeting (if any)
(article 118);
(l)any separate class meeting of the holder of the P&O Princess special voting
share/ equalisation share shall take effect by written resolution (article
123);
(m)the provision in relation to poll votes has been amended so that the poll
may close at different times for different classes of shareholder or for
different shareholders of the same class entitled to vote on the relevant
resolution (article 139). Furthermore a member entitled to more than one
vote on a poll need not use all his votes in the same way, whether voting by
person or proxy (article 143). The Chairman now has the power to give a
final and conclusive determination on any dispute (article 144);
(n)the obligation to give notice at any general meeting of directors who
attained the age of 70 or more has been removed (article 180);
(o)every director or other officer of P&O Princess or of Carnival shall be
indemnified out of the assets of P&O Princess against any liability incurred
by him to the fullest extent permitted under law (article 288);
(p)the directors may now serve a disclosure notice as an alternative to the
section 212 notice requesting any information which the company is entitled
to seek pursuant to Part VI of the Companies Act and any information
necessary to determine whether any P&O Princess shares are excess shares of
the type described in paragraph 4.2 above. There is also an obligation to
notify P&O Princess in writing as soon as possible following any event which
would cause that person to disclose such interest in shares pursuant to Part
VI of the Companies Act (article 160);
(q)to enable users of the CREST system to appoint a proxy or to give an
instruction to proxy via the CREST system (articles 161-167);
(r)to amend the rights attaching to the redeemable preference shares of
(Pounds)1 each to enable the holder of those shares to require P&O Princess
to (subject to the Companies Act) redeem them within three months of giving
such notice (this is discussed further in paragraph 4(b)(ii) of Section 8);
and
(s)to require the P&O Princess special voting share to be registered on an
overseas branch register of P&O Princess (article 224).
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SECTION 8
ADDITIONAL INFORMATION
1. Responsibility
The directors of P&O Princess, whose names are set out in paragraph 2(a)(ii)
below, accept responsibility for the information contained in this document.
In relation to the information contained in this document which relates to
Carnival, the directors of Carnival, whose names are set out in paragraph
2(b)(ii) below, also accept responsibility for such information.
In relation to the information contained in this document which relates to
the Combined Group, the Proposed P&O Princess directors whose names are set
out in paragraph 2(a)(iii) below, also accept responsibility for such
information.
To the best of the knowledge and belief of the directors of P&O Princess,
the Proposed P&O Princess and the Carnival directors (who have taken all
reasonable care to ensure that such is the case) the information contained
in this document for which they take responsibility is in accordance with
the facts and does not omit anything likely to affect the import of such
information. The information relating to the P&O Princess group contained in
this document has been provided by P&O Princess and the information relating
to the Carnival group contained in this document has been provided by
Carnival.
2. Registered Offices, Directors and Executive Officers
(a) P&O Princess
(i)P&O Princess was incorporated and registered in England and Wales under the
Companies Act as a public limited company under the name P&O Princess
Cruises plc on 19 July 2000 with registered number 4039524. The registered
office address of P&O Princess is at 77 New Oxford Street, London WC1A 1PP,
UK.
(ii)The directors of P&O Princess and their respective functions are:
Name Function
---- --------
The Rt. Hon. The Lord Sterling of Plaistow, GCVO CBE Chairman
Sir John Parker Deputy Chairman
Peter Gervis Ratcliffe Chief Executive Officer
Nicholas Lawrence Luff Chief Financial Officer
Peter Foy Non-Executive director
Baroness Hogg Non-Executive director
Horst Rahe Non-Executive director
(iii)Following completion of the DLC transaction, the directors of P&O Princess
and their respective functions will be:
Name Function
---- --------
Micky Mier Arison Chairman and Chief Executive
Officer
Howard Steven Frank Vice-Chairman and Chief
Operating Officer
Robert Hugh Dickinson Executive Director
Pier Luigi Foschi Executive Director
Alton Kirk Lanterman Executive Director
Peter Gervis Ratcliffe Executive Director
Ambassador Richard G. Capen, Jr. Non-Executive Director
Arnold Wayne Donald Non-Executive Director
Baroness Hogg Non-Executive Director
Modesto Alex Maidique Non-Executive Director
Sir John Parker Non-Executive Director
Stuart Subotnick Non-Executive Director
Uzi Zucker Non-Executive Director
220
(b) Carnival
(i)Carnival was incorporated under the laws of the Republic of Panama in
November 1974 and the Carnival shares are listed on the NYSE. The principal
executive office of Carnival is at 3655 N.W. 87th Avenue, Miami, Florida
33178-2428, U.S.A. The registered office of Carnival is c/o Marcela de
Perez, 10 Elvira Mendez Street, Interseco Building, 8th Floor, Post Office
Box 7440, Panama 5, Republic of Panama.
(ii)There are 14 members of Carnival's board of directors. All directors serve
until the next annual meeting and until their successors are elected. The
directors of Carnival and their respective functions are:
Name Function
---- --------
Micky Mier Arison Chairman and Chief Executive Officer
Howard Steven Frank Vice Chairman and Chief Operating Officer
Shari Arison Director
Maks Leo Birnbach Director
Ambassador Richard G. Capen, Jr. Director
Robert Hugh Dickinson Director; President and Chief Operating Officer
of CCL
Arnold Wayne Donald Director
James Michael Dubin Director
Alton Kirk Lanterman Director; Chairman of the board of directors,
President, and Chief Executive Officer of Holland
America Line Inc. and director of Holland
America Line Inc.
Modesto Alex Maidique Director
Stuart Subotnick Director
Sherwood Manuel Weiser Director
Meshulam Zonis Director
Uzi Zucker Director
(iii)Following completion of the DLC transaction, the directors of Carnival and
their respective functions will be:
Name Function
---- --------
Micky Mier Arison Chairman and Chief
Executive Officer
Howard Steven Frank Vice-Chairman and Chief
Operating Officer
Robert Hugh Dickinson Executive Director
Pier Luigi Foschi Executive Director
Alton Kirk Lanterman Executive Director
Peter Gervis Ratcliffe Executive Director
Ambassador Richard G.
Capen, Jr. Non-Executive Director
Arnold Wayne Donald Non-Executive Director
Baroness Hogg Non-Executive Director
Modesto Alex Maidique Non-Executive Director
Sir John Parker Non-Executive Director
Stuart Subotnick Non-Executive Director
Uzi Zucker Non-Executive Director
3. Market Quotations
(a)The following table sets out the closing middle market quotations for P&O
Princess shares as derived from the London Stock Exchange Daily Official
List, the closing price per P&O Princess ADS as reported on the NYSE
Composite Transactions Tape and the closing stock price of Carnival shares
as reported on the NYSE Composite Transactions Tape, in each case for the
first dealing day in each of the six months immediately prior to the date of
this document, for 14
221
December 2001 (being the last dealing day prior to the commencement of the
offer period) and for 12 March 2003 (being the latest practicable date prior
to the publication of this document):
P&O P&O
Princess Princess Carnival
share ADS share
Date price (p) price ($) price ($)
14 December 2001 360.0 21.04 27.30
1 October 2002 436.0 28.70 25.11
1 November 2002 473.5 30.30 27.09
2 December 2002 499.0 30.95 27.66
2 January 2003/(1)/ 436.0 28.12 25.63
3 February 2003 401.0 26.90 24.20
3 March 2003 401.5 25.11 22.51
12 March 2003 343.25 22.68 20.75
--------
(1)1 January 2003 was a public holiday in both the UK and the United States
The following table sets out the high and low sales prices for P&O Princess
shares on the London Stock Exchange, the principal market on which such shares
are traded, for each quarter during the past two years:
P&O Princess
Share Price (p)
High Low
Quarter 1 2001 380.5 274.0
Quarter 2 2001 371.0 261.0
Quarter 3 2001 397.0 180.0
Quarter 4 2001 401.5 200.0
Quarter 1 2002 485.0 386.0
Quarter 2 2002 484.0 396.3
Quarter 3 2002 463.8 350.0
Quarter 4 2002 520.5 424.0
4. Shareholdings and Dealings
(a) Definitions and references
For the purposes of this Paragraph 4 of Section 8:
(1)"associate" means:
(aa)the subsidiaries, fellow subsidiaries and associated companies of
Carnival or, as the case may be, P&O Princess, and companies of which
any such subsidiaries or associated companies are associated companies;
(bb)banks, financial and other professional advisers (including
stockbrokers) to Carnival or, as the case may be, P&O Princess or any
company covered in (aa) above, including persons controlling,
controlled by or under the same control as such banks, financial or
other professional advisers;
(cc)the directors of Carnival or, as the case may be, P&O Princess, and
the directors of any company covered in (aa) above (together in each
case with their close relatives and related trusts); and
(dd)the pension funds of Carnival or, as the case may be, P&O Princess, or
any company covered in (aa) above;
(2)References to "bank" do not apply to a bank whose sole relationship with
Carnival or P&O Princess or a company covered in (1)(aa) above is the
provision of normal commercial banking services or activities in connection
with the offer such as handling acceptances and other registration work;
(3)Ownership or control of 20 per cent. or more of the equity share capital of
a company is regarded as the test of associated company status and "control"
means a holding or aggregated holdings, of shares carrying 30 per cent. or
more of the voting rights attributable to the share capital of a
222
company which are currently exercisable at a general meeting, irrespective
of whether the holding or holdings give(s) de facto control;
(4)"Carnival disclosure period" means the period commencing on 16 December 2000
(being the date twelve months prior to the commencement of the offer period)
in respect of Carnival's initial pre-conditional offer and ending on
10 March 2003 (being the latest practicable date prior to the publication of
this document);
(5)"P&O Princess disclosure period" means the period commencing on 16 December
2001 in respect of Carnival's initial pre-conditional offer and ending on
10 March 2003 (being the latest practicable date prior to the publication of
this document); and
(6)"relevant securities" means Carnival shares or, as the case may be, P&O
Princess shares and P&O Princess ADSs and any other securities of Carnival
or, as the case may be, P&O Princess convertible or exchangeable into, or
rights to subscribe for, or options (including traded options) in respect
of, or derivatives referenced to, such securities.
(b)Interests and dealings in relevant securities of P&O Princess
(i)The following aggregation of dealings for value in relevant securities of
P&O Princess by persons presumed to be acting in concert with Carnival have
taken place during the Carnival disclosure period:
Merrill Lynch Pierce, Fenner & Smith Incorporated
P&O Princess shares
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ((Pounds)) Paid ((Pounds)) (Volume) Received ((Pounds)) Received ((Pounds))
16 December 2000 to 15 March 2001 2,787 5.13 3.80 2,787 5.13 3.82
16 March 2001 to 15 June 2001 2,818 4.50 3.90 22,976 4.74 4.00
16 June 2001 to 15 September 2001 -- -- -- 1,063 5.40 5.40
16 September 2001 to 15 October 2001 -- -- -- -- -- --
16 October 2001 to 15 November 2001 34 4.00 4.00 -- -- --
16 November 2001 to 15 December 2001 -- -- -- 37 5.30 5.30
16 December 2001 to 10 March 2003 -- -- -- -- -- --
P&O Princess ADRs
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ((Pounds)) Paid ((Pounds)) (Volume) Received ((Pounds)) Received ((Pounds))
16 December 2000 to 15 March 2001 -- -- -- -- -- --
16 March 2001 to 15 June 2001 -- -- -- -- -- --
16 June 2001 to 15 September 2001 -- -- -- -- -- --
16 September 2001 to 15 October 2001 89,000 14.06 13.34 -- -- --
16 October 2001 to 15 November 2001 12,500 13.60 11.60 57,500 13.20 11.60
16 November 2001 to 15 December 2001 -- -- -- -- -- --
16 December 2001 to 10 March 2003 21,000 24.45 24.45 21,000 24.40 22.65
(ii)As at 12 March 2003 (being the latest practicable date prior to the
publication of this document), the interests (all of which are beneficial)
of the directors of P&O Princess and their immediate families in the share
capital of P&O Princess, which have been notified by each director of P&O
Princess to P&O Princess pursuant to Section 324 or Section 328 of the
Companies Act, or which are required to be entered in the register
maintained under Section 325 of the Companies Act or which are interests of
a connected person of a director of P&O Princess which would, if the
connected person were a director of P&O Princess, be required to be
notified to P&O Princess pursuant to Sections 324 or 328 of the Companies
Act or be entered in the register pursuant to
223
Section 325 of the Companies Act, and the existence of which is known to, or
could with reasonable diligence be ascertained by, that director, were as
follows:
% of
P&O P&O P&O issued
Princess LTIP LTIP Share Matching Share share
shares Options Awards Awards Awards options Total capital/(1)/
Lord Sterling 1,068,484 196,725 80,681 19,423 150,852 367,814 1,883,979 0.27%
Peter Ratcliffe 152,928 87,701 87,629 251,452 490,200 1,069,910 0.15%
Nicholas Luff 55,574 37,604 34,281 143,273 332,077 602,809 0.09%
Baroness Hogg 6,240 6,240 0.00%
Sir John Parker 10,000 10,000 0.00%
Peter Foy 16,450 16,450 0.00%
Horst Rahe/(2)/ 11,366,415 11,366,415 1.63%
--------
(1)The percentage figures are rounded to two decimal places and do not include
shares described as "Share Options" above which will be satisfied by the
issue of new shares but does include all other shares, options and awards
held by each Director above which will be satisfied by shares already in
issue.
(2)On 18 December 2002, Deutsche Seereederei GmbH ("DS"), a company wholly
owned by Horst Rahe and his family entered into a Share Sale Agreement (the
"Agreement") with Commerzbank AG ("Commerzbank") in respect of the
11,366,415 ordinary shares of P&O Princess owned by DS (the "Shares") which
comprise Mr Rahe's entire interest in the ordinary shares of P&O Princess.
The Agreement will result in DS disposing of its interest in the Shares on
23 June 2003, or earlier if it so elects, but until then, through DS, Mr
Rahe retains full economic interest in the Shares. Under the Agreement, on
18 December 2002, DS transferred the Shares to Commerzbank for
(Pounds)50,580,547 (U.S.$76,073,143)((Pounds)4.45 per share). At the same
time, DS entered into a total return swap agreement with Commerzbank under
which the Shares will be valued on 23 June 2003, or earlier, if DS so elects
(the "Valuation Date"). To the extent that the valuation of the Shares on
the Valuation Date (the "Final Price") exceeds (Pounds)4.478 per share (the
"Initial Price"), Commerzbank will pay the difference to DS. Conversely, if
the Final Price is less than the Initial Price, DS will pay the difference
to Commerzbank. Any dividends receivable in respect of the Shares prior to
the Valuation Date will be for the benefit of DS.
The P&O Princess shares above include 33,888 shares, 42,952 shares and 45,274
shares in the case of Lord Sterling, Peter Ratcliffe and Nicholas Luff,
respectively, that have been designated as "Invested Shares" for the purpose of
the P&O Princess Cruises Deferred Bonus and Co-Investment Matching Plan. As
described below, matching awards have been granted to each individual in
respect of the shares they have designated as Invested Shares.
The options described as "P&O LTIP Options" above are options over P&O Princess
shares which were granted on 24 October 2000 to the directors of P&O Princess
who, through arrangements put in place for the purposes of the demerger of the
cruises business of the The Peninsular and Oriental Steam Navigation Company in
October 2000 to form P&O Princess (the "Demerger"), exchanged fully- vested
awards previously granted under incentive schemes of The Peninsular and
Oriental Steam Navigation Company for such options. The options are exercisable
on payment of (Pounds)1 and will lapse on 27 March 2005.
The awards described as "P&O LTIP Awards" above comprise awards of P&O Princess
shares which were granted on 24 October 2000 to the directors of P&O Princess
who, through arrangements put in place for the purposes of the Demerger,
exchanged awards granted under incentive schemes of The Peninsular and Oriental
Steam Navigation Company for which the retention period had not been completed
for such awards. The P&O LTIP Awards may be exercised no earlier than the date
on which P&O Princess announces its results for the year ended 31 December 2003
and will lapse three months after they become exercisable.
The awards described as "Share Awards" above comprise awards of P&O Princess
shares granted under the terms of the P&O Princess Cruises Deferred Bonus and
Co-Investment Matching Plan. P&O Princess announced in June 2002 that, to
comply with the Combined Code, the retention period for its Share Awards would
be increased from two years to three years.
Matching awards under the terms of the P&O Princess Cruises Deferred Bonus and
Co-Investment Matching Plan have been awarded in respect of the P&O LTIP
Awards, the Share Awards and Invested Shares. The maximum number of P&O
Princess shares that an individual may receive through the exercise of a
matching award is 100 per cent. of the shares comprising the related P&O LTIP
Award or Share Award or 100 per cent. of the shares comprising the related
Invested Shares grossed up by the participant's marginal rate of income tax,
but matching awards may only be exercised to the extent determined by the
performance conditions set out in the P&O Princess Cruises Deferred Bonus and
Co-Investment Matching Plan.
224
The P&O Princess board has considered the DLC transaction in the context of the
Share Awards and Matching awards granted under the P&O Princess Cruises
Deferred Bonus and Co-Investment Matching Plan and has concluded that it is
appropriate for these awards to vest in full upon completion of the DLC
transaction and has amended the rules of the Plan accordingly. Therefore, all
P&O Princess shares comprised in such awards will be released to the relevant
participants on completion.
As potential beneficiaries of the P&O Princess Cruises Employee Benefit Trust,
Lord Sterling, Peter Ratcliffe and Nicholas Luff are deemed to be interested in
1,540,483 P&O Princess shares held by the trustee, The Royal Bank of Scotland
Trust Company (Jersey) Limited.
Nicholas Luff also holds one (Pounds)1 non-voting subscriber share in P&O
Princess. In addition, 49,998 preference shares of (Pounds)1 each in P&O
Princess were allotted (but not issued) to him on 22 September 2000 (the
"Preference Shares"). These shares were allotted in connection with the
formation of P&O Princess in preparation for the Demerger. It is envisaged that
following completion of the DLC transaction, P&O Princess will request that
Nicholas Luff pays the amount due under an undertaking that he gave to P&O
Princess on 22 September 2000 to pay in part for the Preference Shares (for
(Pounds)12,500 plus interest).
The rights attaching to the Preference Shares will be amended in the new
Articles of Association, which P&O Princess is proposing be adopted in its
Notice of Meeting, so that the holder of those shares can require that his
shares be redeemed in full by P&O Princess (for the amount paid up plus any
accrued dividends) within three months of giving such notice.
In addition, P&O Princess will also increase its authorised sterling share
capital, by approximately 100 per cent., to enable a further 50,000 Preference
Shares to be issued (and give the directors of P&O Princess up to 5 years to
allot such additional Preference Shares). It is envisaged that these additional
Preference Shares would be allotted to another shareholder shortly after
completion of the DLC transaction in connection with any redemption of the
Preference Shares held by Nicholas Luff so that P&O Princess would not, at any
point in time, cease to comply with UK company law requirements for at least
(Pounds)50,000 of its share capital to be allotted, at least a quarter of which
must be fully paid up.
The awards described as "Share Options" above comprise executive share options
granted under the terms of the P&O Princess Cruises Executive Share Option Plan
for no consideration, details of which are as follows:
P&O
Princess
Share
Options
Exercise Exercisable
price from to
Lord Sterling 12,660* 292p Oct 23, 2000 Apr 14, 2004
162,758* 292p Oct 23, 2000 Dec 22, 2004
96,198 292p Oct 23, 2003 Oct 23, 2010
96,198 $4.24 Oct 23, 2003 Oct 23, 2010
-------
Total 367,814
=======
Peter Ratcliffe 282,700 $4.24 Oct 23, 2003 Oct 23, 2010
207,500 $5.78 Mar 3, 2005 Mar 3, 2012
-------
Total 490,200
=======
Nicholas Luff 37,144* 292p Oct 23, 2000 Dec 22, 2004
26,413* 292p Oct 23, 2000 Oct 24, 2006
77,967 292p Oct 23, 2003 Oct 23, 2010
77,967 $4.24 Oct 23, 2003 Oct 23, 2010
56,293 407.75p Mar 3, 2005 Mar 3, 2012
56,293 $5.78 Mar 3, 2005 Mar 3, 2012
-------
Total 332,077
=======
Options marked (*) are replacement options, granted by P&O Princess in
accordance with its obligations as part of the Demerger. Replacement options
were granted to replace options over P&O deferred stock held by participants in
The Peninsular and Oriental Steam Navigation Company stock option schemes prior
to the Demerger which were exercised or released as part of the Demerger
225
arrangements. The period in which a replacement option is exercisable is
identical to that of the option it replaced. The exercise of replacement
options is not subject to performance conditions.
The P&O Princess board has considered the DLC transaction in the context of
options granted under the P&O Princess Cruises Executive Share Option Plan and
has concluded that it is appropriate for these options to vest and become
exercisable in full immediately upon completion of the DLC transaction in
accordance with the rules of the Plan.
Save as set out above, as at the close of business on 10 March 2003 (being the
latest practicable date prior to the publication of this document), no P&O
Princess director nor any person connected with a P&O Princess director as
aforesaid has, or is expected to have, any interest in the share capital of P&O
Princess or any of its subsidiaries.
Save as otherwise disclosed in paragraph 4(b)(ii) of this Section in relation
to Horst Rahe, no director of P&O Princess has or has had any direct or
indirect interest in any transactions which are or were unusual in their nature
or conditions or are or were significant to the business of the P&O Princess
group and which were effected by any member of the P&O Princess group in the
current or immediately preceding financial year or which were effected during
an earlier financial year and which remain in any respect outstanding or
unperformed.
As at 12 March 2003 (being the last practicable date prior to publication of
this document) Kirk Lanterman, a director of Carnival, beneficially owned 16
P&O Princess shares. On 9 October 2002, Kirk Lanterman sold 9,984 P&O Princess
shares at a price of (Pounds)4.32 per share.
(iii)The following share options are held by directors or employees of P&O
Princess and were issued for no consideration:
Outstanding options over P&O Princess shares
Options outstanding
Weighted
average Number of
Number remaining options
Exercise price outstanding life exercisable
292p 5,235,848 6.8 years 1,024,281
304p 15,466 8.2 years --
362p 45,899 7.1 years 11,931
407.75p 2,582,259 9.0 years --
418.5p 10,030 9.5 years --
$4.24 456,865 7.7 years --
$5.78 263,793 9.0 years --
--------- ---------
8,610,160 7.6 years 1,036,212
========= =========
Outstanding options over P&O Princess ADSs
Options outstanding
Weighted
average Number of
Number remaining options
Exercise price outstanding life exercisable
$16.97 824,450 7.4 years 54,874
$17.51 9,450 8.2 years --
$20.48 45,775 8.3 years --
$23.85 495,650 9.0 years --
--------- ------
1,375,325 8.0 years 54,874
========= ======
226
(iv)The following dealings for value in relevant securities of P&O Princess
(including the exercise of options under any P&O Princess share scheme)
have taken place during the P&O Princess disclosure period by the directors
of P&O Princess and members of their immediate families and related trusts:
Acquisition Disposal
Acquisition of options of
Director Date Description of shares or awards shares Price
Lord Sterling 1 October 2001 Dividend 10,106 nil
adjustment to LTIP
Awards
4 March 2002 Dividend 1,973 nil
adjustment to LTIP
Awards
4 March 2002 Exercise of 2001 79,269 (Pounds)1 in total
LTIP Award
4 March 2002 Grant of Share 11,497 nil
Award
4 March 2002 Sale of shares 31,804 (Pounds)4.115 per
share
Peter Ratcliffe 1 October 2001 Dividend 13,170 nil
adjustment to
LTIP Awards
3 March 2002 Grant of share 207,500 nil
options
4 March 2002 Dividend 2,440 nil
adjustment to LTIP
Awards
4 March 2002 Exercise of 2001 86,165 (Pounds)1 in total
LTIP Award
4 March 2002 Grant of Share 26,165 nil
Award
4 March 2002 Sale of shares 43,213 (Pounds)4.115 per
share
21 November 2002 Exercised LTIP 214,976 (Pounds)4.909 per
Award share
21 November 2002 Sale of shares 107,500 (Pounds)4.909 per
share
Nicholas Luff 1 October 2001 Dividend 1,896 nil
adjustment to LTIP
Awards
3 March 2002 Grant of share 112,586 nil
options
4 March 2002 Dividend 539 nil
adjustment to LTIP
Awards
4 March 2002 Exercise of 2001 36,946 (Pounds)1 in total
LTIP Award
4 March 2002 Grant of Share 9,394 nil
Award
4 March 2002 Sale of shares 14,823 (Pounds)4.115 per
share
4 March 2002 Purchase of 2,000 (Pounds)4.10 per
shares share
(v) As at the close of business on 10 March 2003 (being the latest practicable
date prior to the publication of this document), the following persons
owned or controlled the following relevant securities of P&O Princess:
Number of
Name shares
P&O Princess advisers' holdings
Pershing Securities Ltd 1,767,700
Pershing Ltd 58,999
CSFB International 8,045
CSFB Equities Ltd 22,282,974
227
Number of
Name shares
Salomon Smith Barney Citi Asset Management/(1)/ 38,317
Salomon Smith Barney Citi Fund LLC/(1)/ 89,129
Salomon Brothers AG/(1)/ 183,453
Salomon Brothers AG/(1)/ -183,453
SB Asset Management/(1)/ 6,812
Salomon Brothers KAG/(1)/ 194,758
Salomon Brothers Asset Management Ltd/(1)/ 200,050
Citibank NA Including Citigroup Asset Management London/(1)/ 275,807
Citibank International Plc Including Citigroup Asset Management
London/(1)/ 17,414
Citibank 17,414
--------
/(1)/Salomon Smith Barney Citi Asset Management, Salomon Smith Barney Citi Fund
LLC, Salomon Brothers AG, SB Asset Management, Salomon Brothers KAG,
Salomon Brothers Asset Management Ltd and Citibank International Plc
Including Citigroup Asset Management London are held by Citigroup or an
entity controlled by or under the same control as Citigroup.
(vi)The following persons have dealt for value in relevant securities of P&O
Princess during the P&O Princess disclosure period:
Aggregate Highest/(3)/ Lowest Aggregate Highest Lowest
Buys Price Price Sales Price Price
Name (Volume) Paid (Pounds) Paid (Pounds) (Volume) Received (Pounds) Received (Pounds)
P&O Princess' advisers'
dealings/(1)/
CSFB (Europe) Ltd 4,113,889 3.93 3.90 11,938 4.66 4.66
Pershing Securities Ltd 26,576,445 5.20 2.60 34,123,006 5.24 1.91
Pershing Ltd 11,823,410 5.20 3.40 7,566,258 5.23 2.71
Tribeca Management LLC/(4)/ 25,000 28.04 28.04 25,000 28.30 28.03
--------
(1)A full list of all dealings during this period is available for inspection
as set out in paragraph 16 of this Section.
(2)Pershing Limited, Pershing Securities Limited and Credit Suisse First Boston
(Europe) Limited, are all controlled by or under the same control as Credit
Suisse First Boston.
(3)The statistics for highest price and lowest price paid exclude dealings in
P&O Princess ADSs.
(4)Tribeca Management LLC is controlled by Salomon Brothers Holdings Company
Inc. The dealings related to P&O Princess ADSs.
228
(viii)The aggregated dealings set out in paragraph of 4(b)(vi) above include
the following significant dealings:
Nature of Number of
Name Date Transaction shares Price
CSFB (Europe) Ltd 19/02/2002 Bought 4,100,000 3.90
Pershing Ltd 27/06/2002 Bought 857,840 4.00
Pershing Ltd 23/04/2002 Bought 656,035 4.36
Pershing Ltd 15/10/2002 Bought 600,000 4.42
Pershing Ltd 19/12/2002 Sold 532,745 4.41
Pershing Ltd 02/05/2002 Sold 508,882 4.79
Pershing Ltd 23/04/2002 Sold 500,480 4.36
Pershing Ltd 30/05/2002 Bought 500,000 4.40
Pershing Ltd 27/06/2002 Sold 500,000 4.00
Pershing Ltd 19/12/2002 Bought 466,000 4.41
Pershing Securities Ltd 02/10/2002 Sold 4,005,641 4.39
Pershing Securities Ltd 10/09/2002 Sold 3,197,159 4.04
Pershing Securities Ltd 02/10/2002 Bought 2,539,551 4.39
Pershing Securities Ltd 04/09/2002 Sold 2,063,778 4.03
Pershing Securities Ltd 21/06/2002 Bought 1,699,407 4.23
Pershing Securities Ltd 10/09/2002 Bought 1,662,841 4.04
Pershing Securities Ltd 04/09/2002 Bought 1,500,240 4.03
Pershing Securities Ltd 21/06/2002 Sold 1,284,500 4.23
Pershing Securities Ltd 09/09/2002 Sold 1,174,214 4.00
Pershing Securities Ltd 16/01/2002 Bought 1,107,105 4.08
Pershing Securities Ltd 15/01/2002 Sold 1,106,214 4.03
Pershing Securities Ltd 25/06/2002 Bought 1,063,598 4.22
Pershing Securities Ltd 04/04/2002 Bought 1,018,975 4.56
Pershing Securities Ltd 11/09/2002 Sold 850,000 4.24
Pershing Securities Ltd 06/06/2002 Bought 800,000 4.26
Pershing Securities Ltd 08/03/2002 Bought 746,310 4.34
Pershing Securities Ltd 11/09/2002 Sold 730,000 4.25
Pershing Securities Ltd 04/04/2002 Sold 654,910 4.56
Pershing Securities Ltd 21/06/2002 Bought 620,473 4.24
Pershing Securities Ltd 16/01/2002 Sold 601,176 4.08
Pershing Securities Ltd 09/09/2002 Bought 587,107 4.00
Pershing Securities Ltd 24/06/2002 Bought 586,809 4.22
Pershing Securities Ltd 18/01/2002 Bought 553,508 4.15
Pershing Securities Ltd 18/01/2002 Sold 509,890 4.15
Pershing Securities Ltd 08/03/2002 Sold 502,000 4.34
Pershing Securities Ltd 30/01/2003 Bought 480,559 4.00
Pershing Securities Ltd 24/06/2002 Sold 476,543 4.22
Tribeca Management LLC 12/09/2002 Bought 25,000 $28.04
Tribeca Management LLC 17/09/2002 Sold 20,000 $28.03
Tribeca Management LLC 17/09/2002 Sold 3,700 $28.28
Tribeca Management LLC 17/09/2002 Sold 1,300 $28.30
--------
(1)Tribeca Management LLC is controlled by Salomon Brothers Holding Company
Inc. The dealings related to P&O Princess ADSs.
229
(vii)As at the close of business of 10 March 2003 (being the latest practicable
date prior to publication of this document) P&O Princess had been notified
that the following parties were interested directly or indirectly in the
share capital of P&O Princess:
% of share
% of issued capital of the
Number of P&O Princess Combined
Name P&O Princess shares share capital Group/(1)/
Deutsche Bank AG 92,304,582 13.3% 3.5%
Henderson Global Investors Limited 30,241,014 4.4% 1.1%
Lehman Brothers International 26,860,465 3.9% 1.0%
Legal & General Investment Management Limited 26,794,356 3.9% 1.0%
Barclays Global Investors Limited 25,453,611 3.7% 1.0%
Baillie Gifford & Co. 23,391,058 3.4% 0.9%
Cater Allen International Limited 23,108,336 3.3% 0.9%
M&G Investment Management Limited 22,503,634 3.2% 0.9%
Credit Suisse First Boston Equities Limited 21,549,151 3.1% 0.8%
--------
(1)Assumes no shareholders take up the Partial Share Offer or own any Carnival
shares.
Save as disclosed above, so far as is known to the directors of P&O Princess,
there is no person who is directly or indirectly interested in 3 per cent. or
more of the share capital of P&O Princess.
(c) Interests and dealings in relevant securities of Carnival
(i) As at the close of business on 11 March 2003 (being the last practicable
date prior to the publication of this document), the share ownership of (1)
all persons known by Carnival to be the beneficial owners of 5 per cent. or
more of the 586,972,729 shares of common stock outstanding as of 11 March
2003, (2) the Chief Executive Officer and the four most highly compensated
officers of Carnival, (3) each other director of Carnival and (4) all
directors and executive officers as a group is set out below.
Micky Arison, the Chairman of the Board and Chief Executive Officer of
Carnival, other members of the Arison family and trusts for their benefit
(collectively, the "Carnival Major Shareholders"), beneficially own shares
representing approximately 47 per cent. of the voting power of Carnival's
common stock and have informed Carnival that they intend to cause all such
shares to be voted in favour of the proposals to be considered at the
Carnival Special Meeting. The table begins with ownership of the Carnival
Major Shareholders. See footnote (2) to the table for a description of the
group comprised of members of the Arison family and other persons and
entities affiliated with them is set out below.
The number of shares beneficially owned by each entity, person, director or
executive officer is determined under rules of the SEC, and the information
is not necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares as to which the
individual has the sole or shares voting power or investment power and also
any shares which the individual has the right to acquire as of 10 May 2003
(60 days after the record date of 11 March 2003) through the exercise of any
stock option or other right.
230
Beneficial Ownership Table
Amount and Nature of Percent of
Name and Address of Beneficial Owners or Identity of Group/(1)/ Stock Beneficial Ownership Common
Micky Arison 224,010,503/(2)(3)/ 38.1%
Shari Arison 7,353,908/(2)(4)/ *
c/o Israel Arison Foundation
Marcaz Golda Centre
23 Shaul Hamelech Blvd.
Tel Aviv, Israel 64367
James M. Dubin 142,111,562/(2)(16)/ 24.2%
c/o Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
MA 1994 B Shares, L.P. 106,114,284/(2)(5)/ 18.1%
MA 1994 B Shares, Inc. 106,114,284/(2)(5)/ 18.1%
MA 1997 Holdings, L.P. 6,102,187/(2)(6)/ 1.0%
MA 1997 Holdings, Inc. 6,102,187/(2)(6)/ 1.0%
JMD Delaware, Inc. as Trustee 6,102,187/(2)(6)/ 1.0%
for the Micky Arison 1997 Holdings Trust
The Royal Bank of Scotland Trust Company (Jersey) Limited 46,145,830/(2)(7)/ 7.9%
as Trustee of the Ted Arison 1992 Irrevocable Trust for Lin No. 2
P.O. Box 298, St. Helier
Jersey, Channel Islands
Cititrust (Jersey) Limited 76,787,525/(2)(7)/ 13.1%
as Trustee for the Ted Arison
1994 Irrevocable Trust For Shari No. 1
P.O. Box 728, 38 Esplanade, St. Helier
Jersey, Channel Islands JE4 8ZT
JMD Protector 122,933,355/(2)(7)/ 20.9%
c/o Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
JMD Delaware, Inc. as Trustee for the Continued 2,124,560/(2)/ *
Trust for Micky Arison
JMD Delaware, Inc. as Trustee for the Continued 3,759,010/(2)/ *
Trust for Shari Arison Dorsman
JMD Delaware, Inc. as Trustee for the Continued 4,759,010/(2)/ *
Trust for Michael Arison
JMD Delaware, Inc. as Trustee for the Marilyn B. 1,432,440/(2)(8)/ *
Arison Irrevocable Delaware Trust
JMD Delaware, Inc. as Trustee for the Michael 1,000,000/(2)/ *
Arison 1999 Irrevocable Delaware Trust
MBA I, L.L.C. 1,432,440/(2)(8)/ *
TAMMS Investment Company Limited Partnership 3,653,168/(2)/ *
TAMMS Management Corporation 3,653,168/(2)/ *
231
Amount and Nature of Percent of
Name and Address of Beneficial Owners or Identity of Group/(1)/ Stock Beneficial Ownership Common
The Ted Arison Family Foundation U.S.A, Inc. 2,250,000/(2)/ *
3655 N.W. 87 Avenue
Miami, Florida 33178
Robert H. Dickinson 524,384/(9)/ *
Pier Luigi Foschi 50,000/(10)/ *
Howard S. Frank 1,073,606/(11)/ *
A. Kirk Lanterman 170,595/(12)/ *
c/o Holland America Line
300 Elliott Avenue West
Seattle, Washington 98119
Maks L. Birnbach 33,600/(13)/ *
c/o Fullcut Manufacturers, Inc.
555 Fifth Avenue, 19th Floor
New York, New York 10128
Ambassador Richard G. Capen, Jr. 40,202/(14)/ *
6077 San Elijo
Rancho Santa Fe, California 92067
Arnold W. Donald 4,200/(15)/ *
c/o Merisant Company
1 North Brentwood Blvd. Suite 510
Clayton, Missouri 63105
Modesto A. Maidique 22,400/(17)/ *
Florida International University Office of the President
University Park Campus
107/th/ Ave and S.W. 8/th/ Street
Miami, Florida 33199
Stuart Subotnick 62,400/(18)/ *
c/o Metromedia Company
810 7/th/ Avenue, 29/th/ Floor
New York, New York 10019
Sherwood M. Weiser 14,400/(19)/ *
c/o The Continental Companies, LLC
3250 Mary Street Coconut Grove, Florida 33133
Meshulam Zonis 631,470/(20)/ *
1 Island Place
380 NE 207/th/ Street
Apartment 2802
North Miami Beach, Florida 32180
Uzi Zucker 62,400/(21)/ *
c/o Bear, Stearns & Co. Inc.
383 Madison Avenue
New York, New York 10179
All directors and executive 234,661,927/(22)/ 39.8%
officers as a group (22 persons)
--------
* Less than one percent.
(1) The address of each natural person named, unless otherwise noted, is 3655
N.W. 87 Avenue, Miami, Florida 33178-2428. The address of all other
entities, unless otherwise noted, is 1201 North Market Street, Wilmington,
Delaware 19899.
232
(2) Micky Arison, Shari Arison and the other Arison family entities named that
own shares of common stock have filed a joint statement on Schedule 13D
with respect to the shares of common stock held by such persons. TAMMS
Investment Company Limited Partnership ("TAMMS") owns 3,653,168 shares of
common stock. TAMMS' general partner is TAMMS Management Corporation
("TAMMS Corp."), which is wholly-owned by MBA I, L.L.C. ("MBA I") and
Marilyn B. Arison. TAMMS' limited partners are various trusts established
for the benefit of certain members of Micky Arison's family, including
Shari Arison and Marilyn Arison (the "Family Trusts"). By virtue of the
limited partnership agreement of TAMMS, TAMMS Corp. may also be deemed to
beneficially own such 3,653,168 shares of common stock. By virtue of its
interests in TAMMS, JMD Delaware, Inc., as trustee of certain of the Family
Trusts, may be deemed to beneficially own the portion of the 3,653,168
shares of common stock held by TAMMS which corresponds to its partnership
interest in TAMMS. Such amounts are included in the number of shares set
forth next to its name in the table above. Because of his position as
President of TAMMS Corp., Micky Arison may be deemed to beneficially own
the 3,653,168 shares of common stock owned by TAMMS; however, Micky Arison
disclaims beneficial ownership of all such shares which are beneficially
owned by TAMMS. Accordingly, Micky Arison has not reported beneficial
ownership of any of the shares owned by TAMMS.
(3) Includes (i) 408,000 shares of common stock issuable to Micky Arison upon
his exercise of stock options granted to him in May 1995, January 1998,
1999, 2000 and 2001, and October 2001, (ii) 6,102,187 shares of common
stock held by the MA 1997 Holdings, L.P., (iii) 106,114,284 shares of
common stock held by the MA 1994 B Shares, L.P., (iv) 93,847,639 shares of
common stock held by the Ted Arison 1992 Irrevocable Trust for Lin No. 2,
Ted Arison 1994 Irrevocable Trust For Shari No. 1 and the Michael Arison
1999 Irrevocable Delaware Trust by virtue of the authority granted to Micky
Arison under the last will of Ted Arison, and (v) 17,538,393 shares of
common stock held by The 1997 Irrevocable Trust for Micky Arison, all of
which may be deemed to be beneficially owned by Micky Arison.
(4) Under the terms governing the Shari Arison Irrevocable Guernsey Trust,
Shari Arison has the sole right to vote and direct the sale of the
4,000,000 shares of common stock held directly by such trust and the
1,102,708 shares of common stock held by TAMMS which corresponds to such
trust's respective ownership interest in TAMMS. Includes 2,250,000 shares
owned by The Ted Arison Family Foundation U.S.A, Inc. (the "Foundation").
Because Shari Arison is Chairman and President of the Foundation, she may
be deemed to beneficially own the common stock held by the Foundation. Also
includes 1,200 shares of common stock owned by Shari Arison's children.
Shari Arison disclaims beneficial ownership of the shares owned by the
Foundation and her children.
(5) MA 1994 B Shares, L.P. ("MA 1994, L.P.") owns 106,114,284 shares of common
stock. The general partner of MA 1994, L.P. is MA 1994 B Shares, Inc. ("MA
1994, Inc."), which is wholly-owned by the Micky Arison 1994 "B" Trust, a
trust established for the benefit of Micky Arison and his heirs (the "B
Trust"). The sole limited partner of MA 1994, L.P. is the B Trust. Under
the terms of the instrument governing the B Trust, Micky Arison has the
sole right to vote and direct the sale of the common stock indirectly held
by the B Trust. By virtue of the limited partnership agreement of MA 1994,
L.P., MA 1994, Inc. may be deemed to beneficially own all such 106,114,284
shares of common stock. By virtue of Micky Arison's interest in the B Trust
and the B Trust's interest in MA 1994, L.P., Micky Arison may be deemed to
beneficially own all such 106,114,284 shares of common stock. The trustee
of the B Trust is JMD Delaware, Inc., a corporation wholly-owned by James
M. Dubin.
(6) MA 1997 Holdings, L.P. ("MA 1997, L.P.") owns 6,102,187 shares of common
stock. The general partner of MA 1997, L.P. is MA 1997 Holdings, Inc. ("MA
1997, Inc."), which is wholly-owned by the Micky Arison 1997 Holdings
Trust, a trust established for the benefit of Micky Arison and his heirs
(the "MA 1997 Trust"). The sole limited partner of MA 1997, L.P. is the MA
1997 Trust. By virtue of the limited partnership agreement of MA 1997,
L.P., MA 1997, Inc. may be deemed to beneficially own all of such 6,102,187
shares of common stock. By virtue of the MA 1997 Trust's interest in MA
1997, L.P., the MA 1997 Trust may be deemed to beneficially own all such
6,102,187 shares of common stock. Under the terms of the instrument
governing the MA 1997 Trust, Micky Arison has the sole right to vote the
common stock indirectly held by the MA 1997 Trust. The trustee of the MA
1997 Trust is JMD Delaware, Inc., a corporation wholly-owned by James M.
Dubin.
(7) JMD Protector, Inc., a Delaware corporation, is the protector of the Ted
Arison 1994 Irrevocable Trust for Shari No. 1 and the Ted Arison 1992
Irrevocable Trust for Lin No. 2 and has certain voting and dispositive
rights with respect to the common stock held by such trusts.
(8) MBA I owns 400,000 shares of common stock and a limited partnership
interest in TAMMS (See Note 2 above). MBA I may be deemed to own 1,032,440
shares of common stock held by TAMMS which corresponds to its respective
partnership interest in TAMMS and TAMMS Corp. The Marilyn B. Arison
Irrevocable Delaware Trust (the "Irrevocable Trust") owns a controlling
interest in MBA I; therefore, the Irrevocable Trust may be deemed to
beneficially own all such 1,432,440 shares of common stock.
(9) Includes 278,400 shares of common stock issuable to Mr. Dickinson upon
exercise of stock options granted to him in August 1997, 1998, 1999, 2000
and 2001 and January and October 2001. Also includes 244,551 shares of
common stock owned by Dickinson Enterprises Limited Partnership (the
"Dickinson Partnership"). The general partner of the Dickinson Partnership
is Dickinson Enterprises, Inc., which is wholly owned by a revocable trust
established for the benefit of Mr. Dickinson and his heirs (the "Dickinson
Trust"). Under the terms of the instrument governing the Dickinson Trust,
Mr. Dickinson has the sole right to vote and direct the sale of the common
stock indirectly held by the Dickinson Trust.
(10)Includes 30,000 shares of common stock issuable to Mr. Foschi upon his
exercise of stock options granted to him in January and October 2001.
(11)Includes (i) 740,000 shares of common stock issuable to Mr. Frank upon his
exercise of stock options granted to him in May 1995, January 1998, 1999,
2000 and 2001 and October 2001, (ii) 9,600 shares of common stock owned by
Mr. Frank's wife as to which he disclaims beneficial ownership, and (iii)
4,002 shares of common stock owned by the Jackson S. Woolworth Irrevocable
Trust and the Cassidy B. Woolworth Trust (Mr. Frank is trustee), as to
which Mr. Frank disclaims beneficial ownership.
233
(12)Includes 8,000 shares of common stock held by the Helen K. Lanterman Trust
(Mr. Lanterman is trustee).
(13)Includes 8,500 shares of common stock owned by Trust Under Will of Norman
Salit (Mr. Birnbach is trustee), and 1,000 shares of common stock owned by
Fullcut Manufacturers, Inc. Employee Pension Fund (Mr. Birnbach is the
trustee of such fund), as to which he disclaims beneficial ownership. Also
includes 2,400 shares of common stock issuable to Mr. Birnbach upon his
exercise of stock options granted to him in April and October 2001.
(14)Includes 22,400 shares of common stock issuable to Ambassador Capen upon
his exercise of stock options granted to him in April 1999 and April and
October 2001. Also includes 17,000 shares owned by the Capen Trust, of
which Mr. Capen is co-trustee. Also includes 802 shares of common stock
owned by Ambassador Capen's wife as to which he disclaims beneficial
ownership.
(15)Includes 2,400 shares of common stock issuable to Mr. Donald upon his
exercise of stock options granted to him in April and October 2001. Also
includes 1,800 shares owned by The Arnold and Hazel Donald Charitable Trust
(Mr. Donald is trustee).
(16)By virtue of being the sole shareholder of JMD Delaware, Inc. and JMD
Protector, Inc., Mr. Dubin may be deemed to own the aggregate of
142,110,562 shares of common stock beneficially owned by such entities, as
to which he disclaims beneficial ownership.
(17)Includes 22,400 shares of common stock issuable to Dr. Maidique upon his
exercise of stock options granted to him in April 1999 and 2001 and October
2001.
(18)Includes 2,400 shares of common stock issuable to Mr. Subotnick upon his
exercise of stock options granted to him in April and October 2001.
(19)Includes 2,400 shares of common stock issuable to Mr. Weiser upon his
exercise of stock options granted to him in April and October 2001. Also
includes 4,000 shares of common stock owned by Mr. Weiser's wife as to
which he disclaims beneficial ownership.
(20)Includes 98,400 shares of common stock issuable to Mr. Zonis upon his
exercise of stock options granted to him in January 1998, 1999 and 2000 and
April and October 2001.
(21)Includes 2,400 shares of common stock issuable to Mr. Zucker upon his
exercise of stock options granted to him in April and October 2001.
(22)Includes an aggregate of 2,024,694 shares of common stock issuable to
directors and executive officers upon their exercise of previously granted
stock options.
234
Options
Owner Options Options Options Options Expiry Option
granted outstanding vested exercisable date price
$
Arison Micky 2,000,000 0 2,000,000 0 30/05/2005 11.250000
Arison Micky 120,000 120,000 120,000 120,000 12/01/2008 26.406250
Arison Micky 120,000 120,000 96,000 96,000 11/01/2009 45.375000
Arison Micky 120,000 120,000 72,000 72,000 26/01/2010 43.562500
Arison Micky 240,000 240,000 96,000 96,000 08/01/2011 29.812500
Arison Micky 120,000 120,000 24,000 24,000 08/10/2011 22.570000
Arison Micky 120,000 120,000 0 0 02/12/2012 27.875000
Total M Arison 2,840,000 840,000 2,408,000 408,000
Birnbach Maks 20,000 0 20,000 0 13/07/2010 20.375000
Birnbach Maks 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Birnbach Maks 6,000 6,000 1,200 1,200 8/10/2011 22.570000
Birnbach Maks 6,000 6,000 0 0 2/12/2012 27.875000
Total M. Birnbach 38,000 18,000 22,400 2,400
Capen Richard 20,000 20,000 20,000 20,000 19/04/2009 46.875000
Capen Richard 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Capen Richard 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Capen Richard 6,000 6,000 0 0 02/12/2012 27.875000
Total R. Capen 38,000 38,000 22,400 22,400
Dickinson Robert H. 80,000 80,000 80,000 80,000 01/08/2007 21.187500
Dickinson Robert H. 80,000 80,000 64,000 64,000 01/08/2008 37.937500
Dickinson Robert H. 64,000 64,000 38,400 38,400 01/08/2009 45.875000
Dickinson Robert H. 80,000 80,000 32,000 32,000 01/08/2010 18.906250
Dickinson Robert H. 80,000 80,000 32,000 32,000 08/01/2011 29.812500
Dickinson Robert H. 80,000 80,000 16,000 16,000 01/08/2011 33.035000
Dickinson Robert H. 80,000 80,000 16,000 16,000 08/10/2011 22.570000
Total R. Dickinson 544,000 544,000 278,400 278,400
Donald Arnold W. 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Donald Arnold W. 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Donald Arnold W. 6,000 6,000 0 0 02/12/2012 27.875000
Total A. Donald 18,000 18,000 2,400 2,400
Frank Howard S. 800,000 400,000 800,000 400,000 30/05/2005 11.250000
Frank Howard S. 100,000 100,000 80,000 80,000 12/01/2008 26.406250
Frank Howard S. 100,000 100,000 80,000 80,000 11/01/2009 45.375000
Frank Howard S. 100,000 100,000 60,000 60,000 26/01/2010 43.562500
Frank Howard S. 200,000 200,000 80,000 80,000 08/01/2011 29.812500
Frank Howard S. 100,000 100,000 20,000 80,000 08/10/2011 22.570000
Frank Howard S. 100,000 100,000 0 0 02/12/2012 27.875000
235
Owner Options Options Options Options Expiry Option
granted outstanding vested exercisable date price
$
Total H. Frank 1,500,000 1,100,000 1,140,000 740,000
Maidique Modesto A. 20,000 20,000 20,000 20,000 19/04/2009 46.875000
Maidique Modesto A. 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Maidique Modesto A. 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Maidique Modesto A. 6,000 6,000 0 0 02/12/2012 27.875000
Total M. Maidique 38,000 38,000 22,400 22,400
Subotnick Stuart 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Subotnick Stuart 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Subotnick Stuart 6,000 6,000 0 0 02/12/2012 27.875000
Total S. Subotnick 18,000 18,000 2,400 2,400
Weiser Sherwood 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Weiser Sherwood 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Weiser Sherwood 6,000 6,000 0 0 02/12/2012 22.875000
Total S. Weiser 18,000 18,000 2,400 2,400
Zonis Meshulam 40,000 40,000 40,000 40,000 12/01/2008 26.406250
Zonis Meshulam 40,000 40,000 32,000 32,000 11/01/2009 45.375000
Zonis Meshulam 40,000 40,000 24,000 24,000 26/01/2010 43.562500
Zonis Meshulam 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Zonis Meshulam 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Zonis Meshulam 6,000 6,000 0 0 02/12/2012 27.875000
Total M. Zonis 138,000 138,000 98,400 98,400
Zucker Uzi 6,000 6,000 1,200 1,200 17/04/2011 25.915000
Zucker Uzi 6,000 6,000 1,200 1,200 08/10/2011 22.570000
Zucker Uzi 6,000 6,000 0 0 02/12/2012 27.875000
Total U. Zucker 18,000 18,000 2,400 2,400
236
(ii)The following dealings for value in relevant securities of Carnival by the
directors of Carnival, their immediate families and related trusts have
taken place during the Carnival disclosure period:
Number of Price per
Date Party Transaction Carnival shares share ($)
21/12/2000 MA 1994 B shares LP Gift 2,000,000
29/12/2000 Dickinson Robert H. Employee stock 768.1593 19.5270
purchase plan ("ESPP")
08/01/2001 Arison Micky Grant under the 1993 60,000 N/A
Restricted Stock Plan
09/01/2001 Arison Micky Transfer (gift) 60,000 N/A
09/01/2001 MA 1997 Holdings, LP Acquisition (gift) 60,000 N/A
24/05/2001 Arison Micky Purchase 2,000,000 11.25
24/05/2001 Arison Micky Sale 760,521 29.5850
17/09/2001 Birnback Maks as Purchase 500 19.50
trustee for the estate
under the will of Norman
Salit
25/01/2001 Dickinson Enterprises Gift 11,650 N/A
Limited Partnership
("DELP")
16/02/2001 DELP Sale 10,000 32.2500
16/02/2001 DELP Sale 11,600 32.3500
16/02/2001 DELP Sale 8,400 32.4000
03/04/2001 DELP Receipt of gift 997 N/A
01/08/2001 DELP Grant under the 1993 40,000 N/A
Stock Plan
24/01/2001 DELP Sale 8,875
15/03/2001 Dickinson Robert H. ESPP/(1)/ 6.6725 27.7870
03/04/2001 Dickinson Robert H. Sale 997.0000
14/06/2001 Dickinson Robert H. ESPP/(1)/ 3.0792 26.4450
14/09/2001 Dickinson Robert H. ESPP/(1)/ 4.5616 17.9210
17/12/2001 Dickinson Robert H. ESPP/(1)/ 3.0844 26.6600
28/12/2001 Dickinson Robert H. ESPP 623.9601 24.0400
07/05/2001 Donald Arnold W. Purchase 1,800 27.81
08/01/2001 Frank Howard Grant under the 1993 50,000 N/A
Stock Plan
15/01/2001 Frank Howard S. Gift 100 N/A
15/03/2001 Frank Howard S. ESPP(/1)/ 11.9353 27.787
14/06/2001 Frank Howard S. ESPP/(1)/ 12.5884 26.445
29/06/2001 Frank Howard S. ESPP 603.8939 24.8388
14/09/2001 Frank Howard S. ESPP/(1)/ 22.1874 17.9210
17/12/2001 Frank Howard S. ESPP/(1)/ 15.0023 26.660
15/03/2001 Lanterman A. Kirk ESPP/(1)/ 8.3124 27.787
14/06/2001 Lanterman A. Kirk ESPP/(1)/ 8.7673 26.445
14/09/2001 Lanterman A. Kirk ESPP/(1)/ 12.9884 17.921
17/12/2001 Lanterman A. Kirk ESPP/(1)/ 8.7824 26.660
16/04/2001 Maidique Modesto A. Sale 1,000 27.60
15/03/2001 Zonis Meshulam ESPP/(1)/ 6.8952 27.7870
14/06/2001 Zonis Meshulam ESPP/(1)/ 7.2728 26.4450
14/09/2001 Zonis Meshulam ESPP/(1)/ 20.7743 17.9210
17/12/2001 Zonis Meshulam ESPP/(1)/ 7.2851 26.6600
14/01/2002 Arison Micky Grant under the 1993 60,000 N/A
Restricted Stock Plan
14/01/2002 Arison Micky Transferred to MA 60,000 N/A
1997 Holdings, L.P.
14/01/2002 MA 1997 Holdings,L.P Grant under the 1993 60,000 N/A
Restricted Stock Plan
237
Number of Price per
Date Party Transaction Carnival shares share ($)
14/01/2002 Frank Howard Grant under the 1993 50,000 N/A
Restricted Stock Plan
08/03/2002 DELP Transfer (gift) 14.540 N/A
11/03/2002 DELP Transfer (gift) 10,500 N/A
15/03/2002 Frank Howard ESPP/(1)/ 12.5006 32.121
15/03/2002 Dickinson Robert ESPP/(1)/ 4.6097 32.121
15/03/2002 Zonis Meshulam ESPP/(1)/ 6.0704 32.121
24/04/2002 DELP Sale 49,895 32.82
24/04/2002 Birnbach Maks Sale 14,200 32.30
24/04/2002 Birnbach Maks Sale 5,800 32.25
23/05/2002 Frank Howard Transfer (gift) 700 N/A
23/05/2002 Frank Howard Transfer (gift) 2,000 N/A
14/06/2002 Frank Howard ESPP/(1)/ 13.8341 29.120
14/06/2002 Dickinson Robert ESPP/(1)/ 5.1013 29.120
14/06/2002 Zonis Meshulam ESPP/(1)/ 6.7177 29.120
28/06/2002 Frank Howard ESPP 637.2133 23.54
28/06/2002 Continued Trust for Acquired from 24,973 N/A
Micky Arison Exchange Fund
01/08/2002 Dickinson Robert Grant under the 1993 40,000 N/A
Restricted Stock Plan
01/08/2002 Dickinson Robert Transferred to DELP 40,000 N/A
01/08/2002 DELP Grant under the 1993 40,000 N/A
Restricted Stock Plan
16/09/2002 Ames Richard ESPP/(1)/ 5.7213 25.15
16/09/2002 Frank Howard ESPP/(1)/ 18.736 25.15
16/09/2002 Dickinson Robert ESPP/(1)/ 5.928 25.15
16/09/2002 Zonis Meshulam ESPP/(1)/ 7.8064 25.15
17/12/2002 Frank Howard ESPP/(1)/ 18.2339 25.950
17/12/2002 Dickinson Robert ESPP/(1)/ 5.7692 25.950
17/12/2002 Zonis Meshulam ESPP/(1)/ 7.5973 25.950
17/12/2002 Lanterman A.Kirk ESPP/(1)/ 11.7476 25.950
--------
(1)Acquired pursuant to a dividend investment feature of the ESPP.
(iii)At the close of business on 10 March 2003 (being the latest practicable
date prior to the publication of this document), persons presumed to be
acting in concert with Carnival, owned or controlled the following
relevant securities of Carnival:
Name Number of
Carnival shares
Merrill Lynch Pierce, Fenner & Smith Incorporated (8,532)
Merrill Lynch International 19,803
UBS Limited (433,974)
UBS Warburg LLC 105,660
UBS PaineWebber Inc. 95,748
(iv)The following dealings for value in relevant securities of Carnival by
persons presumed to be acting in concert with Carnival have taken place
during the Carnival disclosure period:
Merrill Lynch Pierce, Fenner & Smith Incorporated
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ($) Paid ($) (Volume) Received ($) Received ($)
16 December 2000 to 15 March 2001 623,206 34.34 24.06 856,717 34.56 24.15
16 March 2001 to 15 June 2001 2,005,341 29.85 24.53 1,757,911 29.52 24.33
16 June 2001 to 15 September 2001 483,311 33.50 26.29 708,708 33.70 26.31
16 September 2001 to 15 October 2001 714,921 23.70 17.50 599,341 23.89 18.00
16 October 2001 to 15 November 2001 576,031 25.41 19.85 701,699 25.25 19.81
16 November 2001 to 15 December 2001 95,581 27.19 25.55 341,848 27.77 25.07
16 December 2001 to 10 March 2003 41,263 32.15 26.91 148,443 32.11 25.70
238
Merrill Lynch International
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ($) Paid ($) (Volume) Received ($) Received ($)
16 December 2000 to 15 March 2001 501,500 32.65 30.81 500,000 31.63 31.63
16 March 2001 to 15 June 2001 -- -- -- 235,866 29.11 25.90
16 June 2001 to 15 September 2001 200,000 28.10 28.10 -- -- --
16 September 2001 to 15 October 2001 -- -- -- 8,000 22.20 22.20
16 October 2001 to 15 November 2001 -- -- -- 1,934 23.94 23.94
16 November 2001 to 15 December 2001 -- -- -- -- -- --
16 December 2001 to 10 March 2003 133,453 31.00 26.00 133,949 32.37 28.00
UBS Limited
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ($) Paid ($) (Volume) Received ($) Received ($)
16 December 2000 to 15 March 2001 5,350,475 34.40 25.94 5,365,580 34.40 26.50
16 March 2001 to 15 June 2001 2,171,560 29.60 24.33 2,017,942 29.60 24.33
16 June 2001 to 15 September 2001 1,776,961 32.30 27.00 1,757,176 32.30 27.00
16 September 2001 to 15 October 2001 1,734,632 23.20 12.70 1,728,532 23.30 12.70
16 October 2001 to 15 November 2001 646,052 21.85 20.43 1,654,397 22.65 20.43
16 November 2001 to 15 December 2001 100,948 26.58 25.14 105,748 26.58 22.65
16 December 2001 to 10 March 2003 8,108,029 37.50 14.79 8,278,885 37.50 14.79
UBS Warburg LLC
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ($) Paid ($) (Volume) Received ($) Received ($)
16 December 2000 to 15 March 2001 52,843 33.09 27.14 33,730 31.19 28.27
16 March 2001 to 15 June 2001 580,875 29.58 25.44 555,813 29.63 25.19
16 June 2001 to 15 September 2001 1,421,343 33.40 26.43 1,408,772 33.43 26.44
16 September 2001 to 15 October 2001 696,917 23.44 17.76 706,441 23.44 17.79
16 October 2001 to 15 November 2001 838,423 25.35 19.95 850,994 25.33 20.04
16 November 2001 to 15 December 2001 678,935 27.54 25.12 678,079 27.51 25.06
16 December 2001 to 10 March 2003 3,480,938 32.69 21.24 3,620,906 33.63 21.20
UBS PaineWebber Inc.
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sells Price Price
Period (Volume) Paid ($) Paid ($) (Volume) Received ($) Received ($)
16 December 2000 to 15 March 2001 36,689 34.63 24.06 190,910 34.47 24.00
16 March 2001 to 15 June 2001 14,633 29.78 25.28 46,667 29.73 23.60
16 June 2001 to 15 September 2001 3,544 33.51 26.21 41,791 33.60 26.28
16 September 2001 to 15 October 2001 1,150 22.77 20.06 12,717 23.35 17.00
16 October 2001 to 15 November 2001 3,890 25.43 19.90 5,273 25.11 19.82
16 November 2001 to 15 December 2001 3,136 27.69 25.41 6,874 27.19 25.08
16 December 2001 to 10 March 2003 4,028 33.27 26.38 78,549 33.24 21.30
(v)As at the close of business on 10 March 2003 (being the latest practicable
date prior to the publication of this document), the following persons owned
or controlled the following relevant securities of Carnival:
239
Number of
Name Carnival shares
P&O Princess advisers' holdings
CSFB LLC, New York/(1)/ 405,215
CSFB International/(1)/ 18,325
Citicorp Funding/(2)/ -7,200
Smith Barney Inc Proprietary/(2)/ 15,587
Smith Barney Inc Proprietary/(2)/ -1,280
Smith Barney Inc Managed/(2)/ 230,685
Salomon Smith Barney Citi Asset Management/(2)/ 265,511
Smith Barney Inc Asset Management/(2)/ 4,369,531
Smith Barney Inc Asset Management/(2)/ -160
Salomon Smith Barney Citi Asset Management/(2)/ 6,370
Smith Barney Inc CMD/(2)/ 36,012
Salomon Smith Barney Citi Fund LLC/(2)/ 2,945,785
Salomon Smith Barney Citi Fund LLC/(2)/ -58,784
Tribeca Management/(2)/ -179,700
Travellers Bank and Trust/(2)/ 90,500
Smith Barney Inc UIT Bony/(2)/ 91,687
Travellers Investment Management/(2)/ 132,309
SB Asset Management/(2)/ 168
Salomon Brothers International Limited/(2)/ 40,000
Salomon Brothers Asset Management Ltd/(2)/ 28,482
Citibank NA Including Citigroup Asset Management
London/(2)/ 10,584
Citibank International Plc Including Citigroup Asset
Management London/(2)/ 421,206
Other Overseas Investment Corporations/(2)/ 337,201
Citibank Switzerland/(2)/ 13,106
Citibank Chanel Islands/(2)/ 2,214
--------
/(1)/CSFB LLC, New York and CSFB International are controlled by or under the
same control as Credit Suisse First Boston.
/(2)/The holdings recorded under Citicorp Funding, Smith Barney Inc
Proprietary, Smith Barney Inc Managed, Salomon Smith Barney Citi Asset
Management, Smith Barney Inc Asset Management, Smith Barney Inc CMD,
Salomon Smith Barney Citi Fund LLC, Tribeca Management, Travellers Bank and
Trust, Smith Barney Inc UIT Bony, Travellers Investment Management, SB
Asset Management, Salomon Brothers International Limited, Salomon Brothers
Asset Management Ltd, Citibank NA Including Citigroup Asset Management
London, Citibank International Plc Including Citigroup Asset Management
London, Citibank Switzerland, Citibank Chanel Islands and Other Overseas
Investment Corporations are held by Citigroup or an entity controlled by or
under the same control as Citigroup.
(vi)The following persons have dealt for value in relevant securities of
Carnival during the P&O Princess disclosure period:
Aggregate Highest Lowest Aggregate Highest Lowest
Buys Price Price Sales Price Price
Name (Volume) Paid $ Paid $ (Volume) Received $ Received $
P&O Princess' advisers' dealings/(1)/
CSFB (Europe) Limited/(2)/ 6,675,008 33.97 21.38 5,966,093 33.98 16.20
CSFB New York/(2)/ 29,320,620 34.62 17.43 31,837,620 34.61 17.43
CSFB LLC, New York/(2)/ 4,347,132 25.44 21.15 4,434,249 25.44 21.15
CSFB International/(2)/ 1,261131 34.45 20.00 1,197,964 33.00 27.13
Salomon Smith Barney Inc./(3)/ 15,534,909 34.58 21.19 15,382,032 34.58 21.17
--------
(1)A full list of all dealings during this period is available for inspection
as set out in paragraph 16 of this Section.
(2)CSFB (Europe) Limited, CSFB, New York, CSFB LLC and CSFB International are
controlled by or under the same control as Credit Suisse First Boston.
(3)The dealings recorded under Salomon Smith Barney Inc. were effected by
Salomon Smith Barney Inc. or an entity controlled by or under the same
control as Salomon Smith Barney Inc.
(vii)The aggregated dealings set out in paragragh 4(c)(vi) above include the
following significant dealings:
240
Name Date Nature of Transaction Number of shares Price ($)
CSFB (Europe) Ltd 28/10/2002 Bought 1,652,200 27.05
CSFB (Europe) Ltd 26/03/2002 Sold 507,100 33.00
CSFB (Europe) Ltd 28/10/2002 Sold 413,050 27.12
CSFB (Europe) Ltd 11/06/2002 Bought 400,000 31.00
CSFB (Europe) Ltd 09/01/2003 Sold 255,150 25.11
CSFB (Europe) Ltd 30/10/2002 Bought 250,000 26.69
CSFB (Europe) Ltd 28/10/2002 Sold 240,320 27.00
CSFB (Europe) Ltd 30/10/2002 Sold 230,000 26.70
CSFB (Europe) Ltd 03/01/2003 Sold 212,900 25.63
CSFB (Europe) Ltd 15/11/2002 Bought 210,400 28.99
CSFB (Europe) Ltd 01/11/2002 Sold 209,624 16.75
CSFB (Europe) Ltd 09/01/2003 Bought 202,000 25.10
CSFB (Europe) Ltd 07/01/2003 Bought 183,219 26.05
CSFB (Europe) Ltd 27/01/2003 Sold 167,675 24.50
CSFB (Europe) Ltd 28/01/2003 Bought 167,675 24.20
CSFB (Europe) Ltd 28/10/2002 Sold 150,200 26.98
CSFB (Europe) Ltd 19/06/2002 Bought 142,143 29.06
CSFB (Europe) Ltd 04/12/2002 Bought 141,550 26.90
CSFB (Europe) Ltd 19/06/2002 Bought 139,085 29.50
CSFB (Europe) Ltd 19/06/2002 Sold 139,085 29.00
CSFB (Europe) Ltd 13/01/2003 Bought 130,000 24.95
CSFB (Europe) Ltd 06/11/2002 Bought 128,400 29.06
CSFB (Europe) Ltd 24/06/2002 Bought 128,170 30.00
CSFB (Europe) Ltd 28/10/2002 Sold 120,160 26.95
CSFB (Europe) Ltd 01/11/2002 Bought 120,160 26.25
CSFB (Europe) Ltd 06/11/2002 Bought 120,150 28.80
CSFB (Europe) Ltd 21/02/2003 Bought 120,000 23.63
CSFB (Europe) Ltd 01/07/2002 Sold 110,000 27.68
CSFB (Europe) Ltd 01/11/2002 Bought 104,812 26.16
CSFB (Europe) Ltd 01/11/2002 Sold 104,812 26.16
CSFB (Europe) Ltd 28/10/2002 Bought 97,630 27.30
CSFB (Europe) Ltd 04/11/2002 Sold 94,112 28.00
CSFB (Europe) Ltd 01/11/2002 Sold 94,112 27.00
CSFB (Europe) Ltd 12/11/2002 Sold 90,000 29.00
CSFB (Europe) Ltd 31/01/2003 Bought 90,000 23.58
CSFB (Europe) Ltd 12/03/2002 Sold 80,000 31.08
CSFB (Europe) Ltd 08/03/2002 Sold 80,000 30.90
CSFB (Europe) Ltd 20/11/2002 Bought 75,150 27.16
CSFB (Europe) Ltd 08/01/2003 Sold 75,100 25.29
CSFB (Europe) Ltd 05/11/2002 Bought 75,000 28.64
CSFB (Europe) Ltd 26/06/2002 Sold 70,661 27.86
CSFB (Europe) Ltd 02/12/2002 Sold 70,300 28.05
CSFB (Europe) Ltd 05/06/2002 Sold 68,575 29.40
CSFB (Europe) Ltd 05/02/2003 Bought 67,560 23.42
CSFB (Europe) Ltd 13/02/2003 Sold 62,200 22.85
CSFB (Europe) Ltd 14/01/2003 Bought 60,702 24.90
CSFB (Europe) Ltd 28/10/2002 Sold 60,080 27.25
CSFB (Europe) Ltd 28/10/2002 Sold 60,080 27.16
CSFB (Europe) Ltd 06/11/2002 Sold 60,080 18.45
CSFB (Europe) Ltd 16/12/2002 Bought 60,070 26.08
CSFB (Europe) Ltd 16/12/2002 Sold 60,060 26.00
CSFB (Europe) Ltd 26/04/2002 Sold 60,000 32.45
CSFB (Europe) Ltd 28/11/2002 Bought 57,839 27.33
CSFB (Europe) Ltd 30/10/2002 Bought 57,833 26.74
CSFB (Europe) Ltd 10/01/2003 Sold 57,500 24.91
CSFB (Europe) Ltd 25/03/2002 Sold 57,000 32.97
CSFB (Europe) Ltd 08/04/2002 Bought 56,300 32.00
CSFB (Europe) Ltd 05/11/2002 Bought 55,748 28.47
241
Name Date Nature of Transaction Number of shares Price ($)
CSFB (Europe) Ltd 01/05/2002 Sold 55,298 33.98
CSFB (Europe) Ltd 01/05/2002 Bought 55,298 33.97
CSFB (Europe) Ltd 08/11/2002 Sold 54,758 30.00
CSFB (Europe) Ltd 10/10/2002 Bought 54,072 23.06
CSFB (Europe) Ltd 10/10/2002 Sold 54,072 23.04
CSFB (Europe) Ltd 02/01/2002 Bought 52,753 27.44
CSFB (Europe) Ltd 02/01/2002 Sold 52,753 27.40
CSFB (Europe) Ltd 13/08/2002 Sold 50,000 24.89
CSFB (Europe) Ltd 14/08/2002 Sold 50,000 24.55
CSFB Corp, New York 16/01/2002 Sold 1,237,100 26.07
CSFB Corp, New York 25/10/2002 Bought 1,135,512 26.40
CSFB Corp, New York 25/10/2002 Sold 1,135,512 26.40
CSFB Corp, New York 28/02/2002 Sold 676,700 27.52
CSFB Corp, New York 15/01/2002 Bought 500,000 25.76
CSFB Corp, New York 16/01/2002 Sold 487,200 26.10
CSFB Corp, New York 22/10/2002 Sold 451,400 25.37
CSFB Corp, New York 22/10/2002 Bought 450,800 25.37
CSFB Corp, New York 28/10/2002 Bought 413,050 27.12
CSFB Corp, New York 28/10/2002 Sold 413,050 27.12
CSFB Corp, New York 07/03/2002 Sold 384,200 30.21
CSFB Corp, New York 22/01/2002 Bought 375,200 25.63
CSFB Corp, New York 19/03/2002 Bought 369,300 32.81
CSFB Corp, New York 20/06/2002 Sold 367,564 29.44
CSFB Corp, New York 20/06/2002 Bought 341,564 29.44
CSFB Corp, New York 15/07/2002 Bought 341,564 27.13
CSFB Corp, New York 15/07/2002 Sold 341,564 27.13
CSFB Corp, New York 12/04/2002 Bought 316,000 32.50
CSFB Corp, New York 12/04/2002 Sold 310,200 32.50
CSFB Corp, New York 09/07/2002 Bought 284,960 28.05
CSFB Corp, New York 08/01/2002 Bought 275,000 27.89
CSFB Corp, New York 08/01/2002 Sold 275,000 27.89
CSFB Corp, New York 07/10/2002 Bought 274,000 23.68
CSFB Corp, New York 22/03/2002 Bought 272,000 32.48
CSFB Corp, New York 18/12/2001 Sold 268,800 26.91
CSFB Corp, New York 07/10/2002 Bought 261,374 22.96
CSFB Corp, New York 07/10/2002 Sold 261,274 22.96
CSFB Corp, New York 21/03/2002 Bought 250,100 32.12
CSFB Corp, New York 28/02/2002 Sold 242,100 27.57
CSFB Corp, New York 01/03/2002 Sold 236,300 27.83
CSFB Corp, New York 30/10/2002 Sold 230,500 26.69
CSFB Corp, New York 28/10/2002 Bought 225,000 27.26
CSFB Corp, New York 15/11/2002 Sold 220,000 28.99
CSFB Corp, New York 11/09/2002 Bought 215,000 25.56
CSFB Corp, New York 13/05/2002 Sold 211,950 31.64
CSFB Corp, New York 10/07/2002 Bought 208,230 26.70
CSFB Corp, New York 11/07/2002 Bought 207,230 27.02
CSFB Corp, New York 23/01/2002 Sold 206,500 25.61
CSFB Corp, New York 15/07/2002 Sold 200,000 26.12
CSFB Corp, New York 17/06/2002 Sold 189,500 29.07
CSFB Corp, New York 18/01/2002 Bought 188,900 26.49
CSFB Corp, New York 24/09/2002 Bought 187,562 24.83
CSFB Corp, New York 28/10/2002 Sold 185,200 27.25
CSFB Corp, New York 16/01/2002 Sold 181,000 26.05
CSFB Corp, New York 19/04/2002 Bought 180,000 20.00
CSFB Corp, New York 19/04/2002 Sold 180,000 20.00
CSFB Corp, New York 14/01/2002 Sold 177,900 26.20
CSFB Corp, New York 19/12/2001 Sold 175,300 26.90
CSFB Corp, New York 23/01/2002 Sold 170,000 25.69
242
Name Date Nature of Transaction Number of shares Price ($)
CSFB Corp, New York 18/12/2001 Bought 169,900 26.91
CSFB Corp, New York 20/12/2001 Sold 169,800 27.61
CSFB Corp, New York 15/07/2002 Bought 166,700 25.67
CSFB Corp, New York 12/07/2002 Bought 165,982 27.13
CSFB Corp, New York 16/04/2002 Sold 151,189 32.54
CSFB Corp, New York 12/07/2002 Sold 150,402 27.13
CSFB Corp, New York 13/05/2002 Sold 150,000 31.79
CSFB Corp, New York 15/01/2002 Sold 150,000 25.75
CSFB Corp, New York 11/07/2002 Sold 149,390 27.02
CSFB Corp, New York 09/07/2002 Sold 147,480 27.88
CSFB Corp, New York 28/06/2002 Sold 144,900 27.91
CSFB Corp, New York 10/07/2002 Sold 143,580 26.70
CSFB Corp, New York 25/11/2002 Bought 143,400 28.41
CSFB Corp, New York 19/06/2002 Sold 140,285 29.50
CSFB Corp, New York 28/02/2002 Bought 139,500 27.58
CSFB Corp, New York 19/06/2002 Bought 139,185 29.50
CSFB Corp, New York 07/10/2002 Sold 135,000 23.68
CSFB Corp, New York 09/01/2002 Bought 130,200 26.96
CSFB Corp, New York 06/11/2002 Bought 128,500 29.05
CSFB Corp, New York 03/01/2003 Bought 125,000 25.99
CSFB Corp, New York 13/03/2002 Bought 120,200 30.67
CSFB Corp, New York 13/03/2002 Sold 120,100 30.67
CSFB Corp, New York 08/02/2002 Sold 107,600 26.06
CSFB Corp, New York 23/01/2002 Sold 107,550 25.68
CSFB Corp, New York 18/12/2001 Bought 105,900 26.90
CSFB Corp, New York 07/05/2002 Sold 105,000 32.36
CSFB Corp, New York 14/01/2002 Bought 105,000 26.17
CSFB Corp, New York 01/11/2002 Bought 104,812 26.16
CSFB Corp, New York 01/11/2002 Bought 104,812 26.16
CSFB Corp, New York 01/11/2002 Sold 104,812 26.16
CSFB Corp, New York 01/11/2002 Sold 104,812 26.16
CSFB Corp, New York 03/12/2002 Sold 104,800 26.74
CSFB Corp, New York 21/03/2002 Sold 104,000 32.00
CSFB Corp, New York 11/09/2002 Sold 103,100 25.50
CSFB Corp, New York 28/06/2002 Bought 102,113 27.90
CSFB Corp, New York 31/05/2002 Bought 100,900 30.75
CSFB Corp, New York 15/01/2002 Sold 100,100 26.00
CSFB Corp, New York 11/04/2002 Bought 100,000 32.47
CSFB Corp, New York 10/05/2002 Sold 100,000 31.12
CSFB Corp, New York 25/01/2002 Sold 100,000 27.27
CSFB Corp, New York 14/01/2002 Sold 100,000 26.15
CSFB Corp, New York 15/01/2002 Sold 100,000 25.85
CSFB Corp, New York 13/01/2003 Bought 100,000 25.00
CSFB Corp, New York 14/08/2002 Bought 99,700 24.29
CSFB Corp, New York 22/03/2002 Sold 97,000 32.41
CSFB Corp, New York 22/01/2002 Sold 96,300 25.60
CSFB Corp, New York 10/01/2003 Sold 93,100 24.91
CSFB Corp, New York 15/05/2002 Bought 92,740 32.62
CSFB Corp, New York 01/03/2002 Bought 92,400 27.83
CSFB Corp, New York 14/03/2002 Sold 91,600 30.91
CSFB Corp, New York 15/03/2002 Sold 90,000 32.70
CSFB Corp, New York 14/03/2002 Bought 90,000 30.91
CSFB Corp, New York 21/06/2002 Bought 86,274 28.20
CSFB Corp, New York 15/01/2002 Sold 86,000 25.50
CSFB Corp, New York 11/09/2002 Sold 85,930 25.60
CSFB Corp, New York 04/09/2002 Bought 85,000 23.40
CSFB Corp, New York 21/12/2001 Sold 82,181 27.64
243
Name Date Nature of Transaction Number of shares Price ($)
CSFB Corp, New York 20/12/2002 Sold 80,700 24.95
CSFB Corp, New York 08/08/2002 Sold 80,350 25.29
CSFB Corp, New York 07/03/2002 Bought 80,000 30.00
CSFB Corp, New York 17/12/2001 Bought 80,000 26.70
CSFB Corp, New York 11/11/2002 Bought 79,300 28.59
CSFB Corp, New York 21/12/2001 Bought 78,881 27.64
CSFB Corp, New York 10/01/2003 Sold 77,100 25.00
CSFB Corp, New York 10/09/2002 Sold 77,000 25.04
CSFB Corp, New York 02/01/2002 Sold 76,200 27.39
CSFB Corp, New York 20/12/2001 Bought 75,900 27.50
CSFB Corp, New York 08/10/2002 Bought 75,250 23.27
CSFB Corp, New York 17/10/2002 Sold 75,200 24.24
CSFB Corp, New York 28/06/2002 Bought 74,839 27.69
CSFB Corp, New York 15/11/2002 Bought 74,400 29.42
CSFB Corp, New York 15/01/2003 Sold 73,258 24.95
CSFB Corp, New York 28/06/2002 Sold 71,587 27.69
CSFB Corp, New York 01/05/2002 Bought 71,100 34.10
CSFB Corp, New York 13/11/2002 Sold 70,700 28.80
CSFB Corp, New York 14/01/2003 Sold 69,300 24.90
CSFB Corp, New York 23/12/2002 Sold 69,200 25.00
CSFB Corp, New York 18/01/2002 Bought 68,100 20.00
CSFB Corp, New York 18/01/2002 Sold 68,100 20.00
CSFB Corp, New York 07/03/2002 Bought 67,200 30.40
CSFB Corp, New York 07/03/2002 Bought 66,600 30.28
CSFB Corp, New York 04/03/2002 Bought 66,600 28.53
CSFB Corp, New York 20/12/2002 Bought 65,700 24.98
CSFB Corp, New York 19/04/2002 Bought 65,000 32.50
CSFB Corp, New York 19/04/2002 Sold 65,000 32.50
CSFB Corp, New York 07/03/2002 Sold 65,000 30.00
CSFB Corp, New York 20/12/2002 Sold 65,000 25.48
CSFB Corp, New York 22/03/2002 Sold 64,800 32.40
CSFB Corp, New York 17/06/2002 Bought 64,800 29.15
CSFB Corp, New York 10/01/2003 Bought 64,800 25.00
CSFB Corp, New York 18/12/2001 Bought 64,600 26.97
CSFB Corp, New York 18/01/2002 Sold 64,400 26.60
CSFB Corp, New York 14/01/2003 Sold 63,731 24.99
CSFB Corp, New York 15/03/2002 Bought 63,200 32.70
CSFB Corp, New York 05/09/2002 Bought 62,900 23.46
CSFB Corp, New York 18/12/2001 Bought 62,300 27.22
CSFB Corp, New York 17/06/2002 Bought 60,500 29.10
CSFB Corp, New York 08/11/2002 Sold 60,380 29.14
CSFB Corp, New York 14/11/2002 Sold 60,125 29.17
CSFB Corp, New York 28/10/2002 Sold 60,000 26.70
CSFB Corp, New York 29/10/2002 Sold 60,000 26.70
CSFB Corp, New York 22/01/2002 Sold 58,140 25.70
CSFB Corp, New York 14/01/2003 Bought 58,000 24.91
CSFB Corp, New York 19/04/2002 Sold 57,940 32.13
CSFB Corp, New York 21/06/2002 Bought 57,200 29.01
CSFB Corp, New York 25/03/2002 Bought 57,000 32.97
CSFB Corp, New York 01/05/2002 Bought 56,651 33.79
CSFB Corp, New York 19/04/2002 Bought 56,640 32.13
CSFB Corp, New York 31/05/2002 Sold 56,458 30.40
CSFB Corp, New York 01/05/2002 Sold 55,298 33.97
CSFB Corp, New York 30/10/2002 Bought 55,200 26.76
CSFB Corp, New York 02/01/2002 Sold 53,953 27.40
CSFB Corp, New York 04/11/2002 Bought 53,900 28.68
CSFB Corp, New York 04/11/2002 Sold 53,900 28.68
CSFB Corp, New York 14/01/2003 Bought 53,900 24.90
CSFB Corp, New York 06/11/2002 Sold 53,700 28.77
244
Name Date Nature of Transaction Number of shares Price ($)
CSFB Corp, New York 09/07/2002 Sold 53,200 28.24
CSFB Corp, New York 20/12/2002 Bought 53,117 25.48
CSFB Corp, New York 09/07/2002 Bought 51,900 27.88
CSFB Corp, New York 20/09/2002 Bought 51,700 24.50
CSFB Corp, New York 02/08/2002 Bought 51,400 24.30
CSFB Corp, New York 04/01/2002 Bought 51,000 28.06
CSFB Corp, New York 18/12/2001 Sold 51,000 26.90
CSFB Corp, New York 15/10/2002 Sold 50,500 24.43
CSFB Corp, New York 15/11/2002 Sold 50,200 28.92
CSFB Corp, New York 14/01/2003 Bought 50,200 25.00
CSFB Corp, New York 25/10/2002 Bought 50,100 26.20
CSFB Corp, New York 16/04/2002 Bought 50,000 32.70
CSFB Corp, New York 23/05/2002 Sold 50,000 30.88
CSFB Corp, New York 10/01/2002 Sold 50,000 27.21
CSFB Corp, New York 15/07/2002 Sold 50,000 25.51
CSFB Corp, New York 02/01/2003 Bought 50,000 25.23
CSFB Corp, New York 13/08/2002 Bought 50,000 24.89
CSFB Corp, New York 04/10/2002 Bought 49,800 24.16
CSFB Corp, New York 04/10/2002 Sold 49,800 24.16
CSFB Corp, New York 09/10/2002 Sold 49,450 23.00
CSFB Corp, New York 25/09/2002 Bought 49,318 24.50
CSFB Corp, New York 21/05/2002 Bought 49,000 32.39
CSFB Corp, New York 12/08/2002 Sold 49,000 24.80
CSFB Corp, New York 20/09/2002 Sold 49,000 24.75
CSFB Corp, New York 14/03/2002 Bought 48,840 30.90
CSFB Corp, New York 25/09/2002 Sold 48,713 24.50
CSFB Corp, New York 19/03/2002 Sold 48,700 32.76
CSFB Corp, New York 20/11/2002 Bought 48,500 27.62
CSFB Corp, New York 20/11/2002 Sold 48,500 27.62
CSFB Corp, New York 07/11/2002 Sold 48,440 28.82
CSFB Corp, New York 14/02/2002 Sold 48,430 26.42
CSFB Corp, New York 21/10/2002 Bought 48,000 25.31
CSFB Corp, New York 14/05/2002 Bought 47,750 32.35
CSFB Corp, New York 09/10/2002 Bought 47,350 23.00
CSFB Corp, New York 13/05/2002 Bought 47,200 31.86
CSFB International 26/03/2002 Sold 507,100 33.00
CSFB International 20/06/2002 Bought 341,564 29.44
CSFB International 15/07/2002 Sold 341,564 27.13
CSFB International 11/07/2002 Bought 143,480 27.00
CSFB International 10/07/2002 Bought 143,480 26.68
CSFB International 09/07/2002 Bought 142,480 28.21
CSFB International 09/07/2002 Bought 142,480 27.86
CSFB International 26/07/2002 Bought 102,200 25.26
CSFB International 07/05/2002 Sold 70,000 32.66
CSFB LLC, New York 23/01/2003 Bought 135,600 24.43
CSFB LLC, New York 22/01/2003 Bought 125,800 24.51
CSFB LLC, New York 05/03/2003 Sold 123,600 21.52
CSFB LLC, New York 29/01/2003 Bought 120,770 23.55
CSFB LLC, New York 29/01/2003 Sold 109,170 23.55
CSFB LLC, New York 13/02/2003 Sold 100,000 22.06
CSFB LLC, New York 04/03/2003 Sold 94,000 22.02
CSFB LLC, New York 05/03/2003 Bought 91,000 21.47
CSFB LLC, New York 03/03/2003 Bought 88,470 22.55
CSFB LLC, New York 03/03/2003 Sold 86,250 22.55
CSFB LLC, New York 24/01/2003 Bought 86,000 24.28
CSFB LLC, New York 05/03/2003 Sold 84,400 21.47
CSFB LLC, New York 30/01/2003 Sold 83,500 23.85
CSFB LLC, New York 12/02/2003 Bought 79,700 22.72
245
Name Date Nature of Transaction Number of shares Price ($)
CSFB LLC, New York 12/02/2003 Sold 79,700 22.72
CSFB LLC, New York 26/02/2003 Bought 77,686 22.55
CSFB LLC, New York 26/02/2003 Sold 77,686 22.55
CSFB LLC, New York 03/03/2003 Sold 75,500 22.94
CSFB LLC, New York 13/02/2003 Bought 75,100 22.05
CSFB LLC, New York 03/03/2003 Bought 74,800 22.94
CSFB LLC, New York 28/01/2002 Bought 73,900 23.99
CSFB LLC, New York 25/02/2003 Bought 73,700 22.89
CSFB LLC, New York 27/01/2003 Bought 72,500 24.18
CSFB LLC, New York 27/02/2003 Bought 71,577 22.05
CSFB LLC, New York 27/02/2003 Sold 71,277 22.05
CSFB LLC, New York 14/02/2003 Bought 63,100 23.18
CSFB LLC, New York 10/02/2003 Sold 58,000 22.77
CSFB LLC, New York 14/02/2003 Sold 57,900 23.30
CSFB LLC, New York 23/01/2003 Sold 57,169 24.42
CSFB LLC, New York 19/02/2003 Sold 57,000 23.19
CSFB LLC, New York 30/01/2003 Bought 56,500 23.85
CSFB LLC, New York 21/01/2003 Sold 49,450 24.97
CSFB LLC, New York 28/01/2002 Sold 49,200 23.98
CSFB LLC, New York 21/02/2003 Bought 49,099 23.66
CSFB LLC, New York 20/02/2003 Bought 48,700 23.78
CSFB LLC, New York 20/02/2003 Sold 48,500 23.78
CSFB LLC, New York 19/02/2003 Sold 47,100 23.23
Salomon Smith Barney Inc 29/11/2001 Bought 240,000 $25.10
Salomon Smith Barney Inc 01/01/2002 Sold 99,000 26.97
Salomon Smith Barney Inc 05/02/2002 Sold 71,000 26.16
Salomon Smith Barney Inc 13/02/2002 Sold 200,000 26.19
Salomon Smith Barney Inc 15/02/2002 Sold 90,000 25.60
Salomon Smith Barney Inc 20/02/2002 Bought 608,000 25.51
Salomon Smith Barney Inc 25/02/2002 Sold 80,100 26.01
Salomon Smith Barney Inc 05/03/2002 Sold 51,620 29.00
Salomon Smith Barney Inc 06/03/2002 Sold 75,300 29.72
Salomon Smith Barney Inc 06/03/2002 Bought 223,700 29.56
Salomon Smith Barney Inc 02/01/2000 Sold 65,000 30.74
Salomon Smith Barney Inc 10/04/2002 Bought 203,400 32.84
Salomon Smith Barney Inc 11/04/2002 Bought 179,600 32.70
Salomon Smith Barney Inc 12/04/2002 Bought 224,600 32.49
Salomon Smith Barney Inc 12/04/2002 Bought 75,000 32.51
Salomon Smith Barney Inc 15/04/2002 Bought 89,800 32.49
Salomon Smith Barney Inc 16/04/2002 Bought 206,400 32.61
Salomon Smith Barney Inc 17/04/2002 Sold 110,000 32.43
Salomon Smith Barney Inc 17/04/2002 Bought 197,600 32.39
Salomon Smith Barney Inc 18/04/2002 Bought 55,000 31.95
Salomon Smith Barney Inc 24/04/2002 Sold 210,000 32.61
Salomon Smith Barney Inc 25/04/2002 Bought 84,900 32.36
Salomon Smith Barney Inc 30/04/2002 Sold 228,000 33.01
Salomon Smith Barney Inc 30/04/2002 Sold 552,100 33.01
Salomon Smith Barney Inc 30/04/2002 Sold 219,900 33.01
Salomon Smith Barney Inc 30/04/2002 Bought 200,000 32.80
Salomon Smith Barney Inc 01/05/2002 Sold 119,600 33.96
Salomon Smith Barney Inc 01/05/2002 Sold 289,900 33.96
Salomon Smith Barney Inc 01/05/2002 Sold 115,500 33.96
Salomon Smith Barney Inc 02/05/2002 Sold 54,400 33.83
Salomon Smith Barney Inc 08/05/2002 Sold 56,400 32.02
Salomon Smith Barney Inc 09/05/2002 Bought 208,300 31.90
Salomon Smith Barney Inc 21/05/2002 Bought 62,000 32.10
Salomon Smith Barney Inc 04/06/2002 Bought 150,000 29.50
Salomon Smith Barney Inc 07/06/2002 Bought 100,000 29.42
246
Name Date Nature of Transaction Number of shares Price ($)
Salomon Smith Barney Inc 19/06/2002 Bought 58,000 29.40
Salomon Smith Barney Inc 24/06/2002 Bought 125,000 28.42
Salomon Smith Barney Inc 26/06/2002 Sold 61,100 27.57
Salomon Smith Barney Inc 03/07/2002 Sold 63,100 27.02
Salomon Smith Barney Inc 03/07/2002 Sold 61,200 27.02
Salomon Smith Barney Inc 15/07/2002 Bought 58,894 26.15
Salomon Smith Barney Inc 15/07/2002 Bought 51,700 26.15
Salomon Smith Barney Inc 16/07/2002 Sold 108,000 26.65
Salomon Smith Barney Inc 22/07/2002 Bought 83,600 24.29
Salomon Smith Barney Inc 23/07/2002 Sold 180,300 23.94
Salomon Smith Barney Inc 24/07/2002 Sold 180,400 23.73
Salomon Smith Barney Inc 05/08/2002 Sold 68,640 23.70
Salomon Smith Barney Inc 05/08/2002 Bought 68,640 23.70
Salomon Smith Barney Inc 05/08/2002 Bought 52,820 24.97
Salomon Smith Barney Inc 14/08/2002 Sold 79,700 24.30
Salomon Smith Barney Inc 14/08/2002 Bought 99,700 24.29
Salomon Smith Barney Inc 21/08/2002 Bought 51,910 25.93
Salomon Smith Barney Inc 29/08/2002 Bought 100,000 24.50
Salomon Smith Barney Inc 04/09/2002 Bought 97,850 23.64
Salomon Smith Barney Inc 06/09/2002 Sold 77,800 23.93
Salomon Smith Barney Inc 06/09/2002 Bought 77,800 23.93
Salomon Smith Barney Inc 06/09/2002 Bought 77,800 23.93
Salomon Smith Barney Inc 09/02/2002 Bought 263,606 23.87
Salomon Smith Barney Inc 10/09/2002 Bought 53,845 24.87
Salomon Smith Barney Inc 10/09/2002 Bought 290,000 25.15
Salomon Smith Barney Inc 16/09/2002 Sold 185,708 24.86
Salomon Smith Barney Inc 16/09/2002 Bought 174,805 24.87
Salomon Smith Barney Inc 17/09/2002 Sold 181,283 24.86
Salomon Smith Barney Inc 17/09/2002 Sold 58,500 25.43
Salomon Smith Barney Inc 17/09/2002 Sold 60,000 25.48
Salomon Smith Barney Inc 19/09/2002 Bought 233,400 23.76
Salomon Smith Barney Inc 20/09/2002 Sold 100,000 24.82
Salomon Smith Barney Inc 20/09/2002 Bought 75,000 25.20
Salomon Smith Barney Inc 24/09/2002 Bought 90,000 24.94
Salomon Smith Barney Inc 25/09/2002 Sold 166,300 24.50
Salomon Smith Barney Inc 26/09/2002 Sold 197,400 25.23
Salomon Smith Barney Inc 26/09/2002 Sold 66,100 25.30
Salomon Smith Barney Inc 29/09/2002 Sold 393,800 25.63
Salomon Smith Barney Inc 07/10/2002 Sold 175,800 23.15
Salomon Smith Barney Inc 07/10/2002 Bought 225,000 23.15
Salomon Smith Barney Inc 08/10/2002 Sold 52,000 23.03
Salomon Smith Barney Inc 08/10/2002 Bought 100,350 23.36
Salomon Smith Barney Inc 22/10/2002 Bought 80,000 25.14
Salomon Smith Barney Inc 24/10/2002 Bought 241,700 25.52
Salomon Smith Barney Inc 24/10/2002 Bought 100,000 25.66
Salomon Smith Barney Inc 28/10/2002 Bought 293,000 27.10
Salomon Smith Barney Inc 31/10/2002 Bought 59,813 26.27
Salomon Smith Barney Inc 06/11/2002 Sold 107,200 29.33
Salomon Smith Barney Inc 14/01/2002 Bought 60,000 29.25
Salomon Smith Barney Inc 15/11/2002 Bought 142,800 28.90
Salomon Smith Barney Inc 15/11/2002 Bought 52,500 28.98
Salomon Smith Barney Inc 18/11/2002 Bought 75,000 28.78
Salomon Smith Barney Inc 20/11/2002 Sold 75,000 27.62
Salomon Smith Barney Inc 20/11/2002 Sold 153,200 27.82
Salomon Smith Barney Inc 20/11/2002 Bought 75,000 27.62
Salomon Smith Barney Inc 20/11/2002 Bought 75,000 27.62
Salomon Smith Barney Inc 21/11/2002 Bought 56,970 28.20
Salomon Smith Barney Inc 27/11/2002 Sold 110,300 28.15
247
Name Date Nature of Transaction Number of shares Price ($)
Salomon Smith Barney Inc 27/11/2002 Bought 78,800 28.03
Salomon Smith Barney Inc 29/11/2002 Sold 78,100 28.13
Salomon Smith Barney Inc 02/12/2002 Sold 64,000 27.89
Salomon Smith Barney Inc 03/12/2002 Bought 75,000 26.55
Salomon Smith Barney Inc 11/12/2002 Sold 52,000 26.33
Salomon Smith Barney Inc 12/12/2002 Sold 100,000 26.36
Salomon Smith Barney Inc 13/12/2002 Sold 72,048 26.06
Salomon Smith Barney Inc 18/12/2002 Sold 53,300 26.29
Salomon Smith Barney Inc 18/12/2002 Sold 53,300 26.29
Salomon Smith Barney Inc 18/12/2002 Sold 53,400 26.29
Salomon Smith Barney Inc 19/12/2002 Bought 75,000 25.76
Salomon Smith Barney Inc 20/12/2002 Bought 52,000 25.48
Salomon Smith Barney Inc 08/01/2003 Sold 96,000 25.27
Salomon Smith Barney Inc 08/01/2003 Bought 97,700 25.13
Salomon Smith Barney Inc 08/01/2003 Bought 65,300 25.19
Salomon Smith Barney Inc 08/01/2003 Bought 109,700 25.19
Salomon Smith Barney Inc 13/01/2003 Sold 100,600 24.90
Salomon Smith Barney Inc 28/01/2003 Sold 58,400 24.07
Salomon Smith Barney Inc 10/02/2003 Sold 642,415 22.83
Salomon Smith Barney Inc 10/02/2003 Bought 64,000 22.56
Salomon Smith Barney Inc 11/02/2003 Sold 56,249 22.90
Salomon Smith Barney Inc 21/02/2003 Bought 75,000 23.78
Salomon Smith Barney Inc 24/02/2003 Sold 77,869 23.23
Salomon Smith Barney Inc 05/03/2003 Sold 147,346 21.43
Salomon Smith Barney Inc 06/03/2003 Sold 57,100 21.37
Salomon Smith Barney Inc 06/03/2003 Sold 71,400 21.37
Tribeca Management LLC 12/09/2002 Sold 30,000 $24.61
(d) General
(i)Except as disclosed in this paragraph 4 of this Section neither Carnival
nor any director of Carnival, nor the immediate families or related
trusts, nor any person acting in concert with Carnival owned,
controlled, (or in the case of directors and their immediate families)
was interested, directly or indirectly, in any relevant securities on 11
March 2003 (being the latest practicable date prior to the publication
of this document), nor has any such person dealt for value in relevant
securities during the Carnival disclosure period.
(ii)Neither Carnival nor any person acting in concert with Carnival, nor so
far as the directors of Carnival are aware any associate of Carnival has
any arrangement (including indemnity or option arrangements), agreement
or understanding, formal or informal, of whatever nature, with any
person relating to relevant securities which may be an inducement to
deal or refrain from dealing.
(iii)Except as disclosed in this paragraph 4 of this Section neither P&O
Princess nor any director of P&O Princess, nor the immediate families or
related trusts, nor any subsidiary of P&O Princess, nor any pension fund
of P&O Princess or of any such subsidiary of P&O Princess, nor any bank,
financial or other professional adviser (including stockbrokers) to P&O
Princess (as defined in paragraph 4(a)(i) above), nor any person
controlling, controlled by, or under the same control as, any such bank,
financial or other professional adviser (other than exempt
market-makers), nor any discretionary fund manager (other than an exempt
fund manager) connected with P&O Princess, owned or controlled (or in
the case of directors and their immediate families) was interested,
directly or indirectly, in any relevant securities on 10 March 2003
(being the latest practicable date prior to the publication of this
document), nor has any such person dealt for value in relevant
securities during the P&O Princess disclosure period.
(iv) Neither P&O Princess nor any associate (as defined in paragraph 4(a)(i)
above) of P&O Princess so far as the directors of P&O Princess are
aware, nor any associate (as defined in the Takeover Code and not in
paragraph 4(a)(i) above) of P&O Princess has any arrangement (including
indemnity or option arrangements), agreement or understanding, formal or
informal, of whatever nature, with any person relating to relevant
securities which may be an inducement to deal or refrain from dealing.
248
(v) As at the close of business on 11 March 2003 (being the latest
practicable date prior to the publication of this document), other than
as disclosed in paragraph 4 of this Section, no persons owned or
controlled Carnival shares such that they have a potential indirect
interest of 5 per cent. or more of the equity capital of P&O Princess.
5. UK taxation
The following paragraphs are intended as a general guide only and are based on
current legislation and current Inland Revenue practice. They summarise the
position of P&O Princess shareholders who (unless the position of non-UK
resident P&O Princess shareholders is expressly referred to) are resident or
ordinarily resident in the UK for tax purposes and who hold their P&O Princess
shares as an investment.
Holders of P&O Princess shares and P&O Princess ADSs should consult their
independent professional advisers in the light of their particular
circumstances as to the UK tax consequences of the DLC transaction, the P&O
Princess share reorganisation and the Partial Share Offer as well as to the
effect of any state, local or applicable foreign tax law.
(a) Tax consequences for UK P&O Princess shareholders as a result of the DLC
transaction
The DLC transaction will not give rise to a taxable disposal of shares for UK
shareholders who do not accept the Partial Share Offer. UK P&O Princess
Shareholders who do not accept the Partial Share Offer will continue to hold
their P&O Princess shares and will be taxed on dividends payable in respect of
their P&O Princess shares in the same way as they were taxed on such dividends
before the implementation of the DLC transaction. For further information on
the tax consequences of the Partial Share Offer please refer to the Partial
Share Offer document.
(b) Taxation of the P&O Princess share reorganisation
The P&O Princess share reorganisation will not give rise to a taxable disposal
of P&O Princess shares for UK P&O Princess shareholders. Instead, for UK tax
purposes, the existing P&O Princess shares and the reorganised P&O Princess
shares will be treated as the same asset, acquired when the existing P&O
Princess shares were acquired. Where a P&O Princess shareholder becomes
entitled to a small cash payment in relation to fractional entitlements arising
as a result of the P&O Princess share reorganisation, this will not be treated
as a disposal or part disposal for UK taxation purposes. Instead, the amount of
the small cash payment will be deducted from the base cost of the reorganised
P&O Princess shares.
(c) Stamp duty and stamp duty reserve tax (SDRT)
No stamp duty or SDRT will be payable by P&O Princess shareholders in respect
of the completion of the DLC transaction or the P&O Princess share
reorganisation (including any cash payments in respect of fractional
entitlements).
(d) Non-residents
The tax treatment of non-UK resident P&O Princess shareholders may differ from
that described in paragraphs 5(a)-(c) above. Persons who are not resident in
the United Kingdom should consult their own tax advisers concerning their tax
liabilities (in the United Kingdom and any other jurisdiction).
6. U.S. federal income tax considerations
The following is a discussion of the material U.S. federal income tax
consequences which, in the opinion of KPMG LLP, are generally applicable to a
U.S. holder of P&O Princess shares or P&O Princess ADSs (collectively referred
to as "U.S. P&O Princess shareholders") with respect to the DLC transaction and
the P&O Princess share reorganisation. This discussion is based upon existing
U.S. federal income tax law, including the Internal Revenue Code,
administrative pronouncements, judicial decisions and Treasury Regulations, as
in effect as of the date hereof, all of which are subject to change, possibly
with retroactive effect. This discussion assumes that each of the P&O Princess
shares and P&O Princess ADSs has been held as a capital asset as defined in
Section 1221 of the Internal Revenue Code in the hands of the U.S. holder at
all relevant times. This discussion assumes that neither Carnival nor P&O
Princess is a "controlled foreign corporation," "foreign personal holding
company" or "passive foreign investment company" ("PFIC") for U.S. federal
income tax purposes. This
249
discussion does not address state, local or foreign tax consequences to U.S.
holders, nor does this discussion address all the tax consequences that may be
relevant to a U.S. holder in light of such holder's particular circumstances or
to U.S. holders subject to special rules, including certain financial
institutions, regulated investment companies, insurance companies, dealers in
securities, tax-exempt organisations, persons who hold P&O Princess shares or
P&O Princess ADSs as part of a position in a "straddle" or "appreciated
financial position" or as part of a "hedging" or "conversion" transaction,
persons that own or have owned, actually or constructively, 10 per cent. or
more of the P&O Princess shares and P&O Princess ADSs, persons who acquired
their P&O Princess shares or P&O Princess ADSs through the exercise or
cancellation of employee stock options or otherwise as compensation for
services, and U.S. holders whose functional currency is not the U.S. dollar.
This discussion assumes that no holder of P&O Princess shares or P&O Princess
ADSs will hold (including existing holdings, and after applying certain
attribution rules) more than 5 per cent. of P&O Princess shares or P&O Princess
ADSs, by vote or value. This discussion does not address U.S. tax
considerations that may apply to P&O Princess shareholders that are not U.S.
holders.
Carnival and P&O Princess have not sought and will not seek a ruling from the
Internal Revenue Service with respect to the U.S. federal income tax
consequences described below and, as a result, there can be no assurance that
the Internal Revenue Service will agree with, or that a court will uphold, any
of the conclusions set forth herein.
(a) The DLC transaction
Although there is no U.S. federal income tax authority addressing the tax
consequences of a DLC transaction, the DLC transactions should not give rise to
taxable income or gain for U.S. P&O Princess shareholders for U.S. federal
income tax purposes. However, the Internal Revenue Service may assert that U.S.
P&O Princess shareholders received taxable income as a result of the various
voting and equalisation provisions necessary to implement the DLC transaction.
The P&O Princess directors believe that such voting and other rights, if any,
received by shareholders are expected to have only nominal value and,
therefore, the receipt of such rights, by U.S. P&O Princess shareholders would
only result in a nominal amount of income. It is possible, however, that the
Internal Revenue Service may disagree with this conclusion.
U.S. P&O Princess shareholders will be taxed on dividends received in respect
of their P&O Princess shares or P&O Princess ADSs after completion of the DLC
transaction on the same basis as they were prior to the DLC transaction.
(b) The P&O Princess share reorganisation
The P&O Princess share reorganisation should not give rise to taxable income or
gain to U.S. P&O Princess shareholders for U.S. federal income tax purposes
except with respect to the gain, if any, recognised by a U.S. P&O Princess
shareholder on the disposition of fractional shares. A U.S. P&O Princess
shareholder will recognise gain or loss for U.S. federal income tax purposes in
an amount equal to the difference between the cash received and the
shareholder's adjusted tax basis in its P&O Princess shares or ADSs allocable
to the fractional share, as applicable. Generally, such gain will be capital in
nature, and will be long-term capital gain or loss if, on the date of the
consummation of the P&O Princess share reorganisation, the P&O Princess shares
were held for more than one year. Gain or loss, if any realised by a U.S. P&O
Princess shareholder generally will be treated as U.S. source. For U.S. federal
income tax purposes, a U.S. P&O Princess Shareholder's adjusted tax basis in
its P&O Princess shares or P&O Princess ADSs received as part of the P&O
Princess share reorganisation will be equal to its adjusted basis in its former
P&O Princess shares or P&O Princess ADSs, as the case maybe.
7. Material contracts
Carnival
(a) The following contracts (not being contracts entered into in the ordinary
course of business) are or may be material contracts that have been entered
into by Carnival or its subsidiaries since 16 December 1999; or, have been
entered into by Carnival or its subsidiaries at any time and contain any
provision under which Carnival or any of its subsidiaries has any obligation or
entitlement which is or may be material to Carnival as at the date of this
document.
250
(i) Carnival: Acquisition of Costa Crociere S.p.A.
A sale and purchase agreement dated 28 August 2000 entered into by and
among Carnival, Carnival Investments (UK) Ltd, HAL Buitenland BV
("HAL"), Airtours plc ("Airtours") and White Horse Holdings BV ("White
Horse"). Pursuant to this agreement, HAL (a wholly owned subsidiary of
Carnival) purchased from White Horse (a wholly owned subsidiary of
Airtours) 50 per cent. of the issued shares in IL Ponte S.r.l., now
known as Costa Holdings S.r.l. ("Costa Holdings") for a consideration
equal to (Pounds)350,000,000. This agreement contains certain warranties
and indemnities which are customary in a transaction of this nature. The
sale was completed on 29 September 2000. Costa Holdings holds 99 per
cent. of the issued shares in Costa Crociere S.p.A. ("Costa"). As a
result of this agreement, Carnival currently indirectly owns 99 per
cent. of the issued share capital of Costa.
(ii) Costa Finance S.A. (Euro)300 million guaranteed notes issue
On March 2001 Costa Finance S.A. (the "Issuer") issued (Euro)300,000,000
5.50 per cent. guaranteed notes due 2006 (the "Notes"). The Notes are in
bearer form and serially numbered in denominations of (Euro)1,000,
(Euro)10,000 and (Euro)100,000 each with coupons attached. The Notes and
coupons rank pari passu with all other outstanding unsecured and
unsubordinated obligations of the Issuer. The Notes bear interest from
(and including) 22 March 2001 at a rate of 5.50 per cent. per annum.
Interest is payable annually in arrears on 22 March of each year.
Payments of interest due on an interest payment date are paid against
presentation and surrender of the relevant coupon. Payments of principal
will be made against presentation and surrender of the Note. The Notes
will be redeemed at their principal amount on 22 March 2006. However,
the Issuer may, at its option redeem the Notes in whole (but not in
part) at any time at their principal amount plus accrued interest, in
the event of certain tax changes. Upon the occurrence of certain events
of defaults, customary for a transaction of its nature, the holder of a
Note is entitled to give notice to the Issuer that the Note is
immediately repayable at its principal amount together with interest
accrued to the date of payment. The Notes are guaranteed by Carnival
under a guarantee dated 22 March 2001 (the "Guarantee"). In particular,
Carnival has unconditionally and irrevocably guaranteed payment of
principal and interest in respect of the Notes. Any obligations under
the Guarantee will rank pari passu with all other outstanding unsecured
and unsubordinated obligations of Carnival. The Agency Agreement entered
into on 22 March 2001 by and among the Issuer and BNP Paribas Luxembourg
S.A. contains provisions for convening meetings of the holders of the
Notes to consider matters affecting their interests. Under the Agency
Agreement BNP Paribas as fiscal agent may agree, without the consent of
the holders of the Notes or couponholders, to any modification of the
conditions of the Notes or the Agency Agreement in a manner which is not
materially prejudicial to their interests.
(iii)Carnival: $600 million 2 per cent. convertible senior debentures
In April 2001 Carnival issued $600 million of unsecured 2 per cent.
debentures due 2021. The terms of the notes are set out in an indenture
dated as of 25 April 2001. The notes are convertible into 15.3 million
Carnival shares at a conversion price of $39.14 per Carnival share,
subject to adjustment, during any fiscal quarter for which the closing
price of a Carnival share is greater than $43.05 for 20 out of the last
30 trading days of the preceding fiscal quarter. This condition was not
met during the periods ended on 30 November 2002. Upon conversion of the
debentures Carnival may choose to deliver, in lieu of Carnival shares,
cash or a combination of cash and Carnival shares with a total value
equal to the value of the Carnival shares otherwise deliverable.
Subsequent to 15 April 2008, Carnival may redeem the debentures for cash
at their face value plus any unpaid accrued interest. In addition, at
the option of the debenture holders, on any 15 April of 2005, 2008, and
2011, Carnival may be required to repurchase any outstanding debentures
at their face value plus any unpaid accrued interest. If such option is
exercised by the holders, Carnival may choose to pay the purchase price
in cash, Carnival shares or a combination of cash and Carnival shares.
(iv)Carnival Investment (UK) Ltd.: Sale of Airtours shares
A placing agreement dated 22 May 2001 entered into by and among Carnival
Investment (UK) Ltd ("Carnival Investments"), UBS Warburg and Deutsche
Bank AG London. Pursuant to this agreement UBS Warburg and Deutsche Bank
AG London (together the "Placing Agents") agreed to effect a placing of
the ordinary shares held by Carnival Investments in Airtours PLC
251
(which were equal to approximately 25 per cent. of the share capital of
the latter). The transaction was executed through an accelerated book
building by the Placing Agents and completed on 1 June 2001. The shares
were priced at (Pounds)2.84 each and resulted in gross proceeds to
Carnival of approximately (Pounds)350,000,000. The agreement contains
customary representations and warranties for a transaction of its
nature. The agreement also contains a general indemnity under which
Carnival Investments agreed to defend, indemnify and hold harmless the
Placing Agents from and against all losses and costs directly or
indirectly arising as a result of or in relation to any
misrepresentation in or breach of any of the warranties given by it in
or pursuant to the agreement.
(v)Costa Crociere S.p.A. (Euro)257,500,000 revolving credit facility
An agreement dated 3 May 2001 between (1) San Paolo IMI S.p.A. as a
lender and representative of a syndicate of banks, and (2) Costa
Crociere S.p.A. as the borrower, whereby the lenders have made available
to the borrower a revolving credit facility of (Euro)257,500,500 for
general corporate purposes (the "RCF"). The RCF is available for five
years from the date of entering into the agreement. The floating rate of
interest payable on advances under the RCF is equal to the aggregate of
a specified margin of 0.525 percentage points and the EURIBOR rate. The
RCF contains representations and financial covenants in the form of net
debt to equity ratio and debt service cover ratio. At 30 November 2002,
Costa was in compliance with all of its financial covenants and
(Euro)146,500,000 was available under this facility. The RCF is governed
by Italian law and certain articles of the Italian Civil Code apply,
including provisions relating to events of default.
(vi)Carnival: $1.4 billion revolving credit facility
An agreement dated 26 June 2001 among (1) Carnival Corporation as the
borrower and guarantor, (2) the Chase Manhattan Bank as agent, (3) Bank
of America N.A. as syndication agent, (4) JP Morgan Securities Inc as
joint lead arranger, (5) Banc of America Securities LLC as joint lead
arranger, (6) BNP Paribas, Citibank N.A. and UBM-Unicredit Banca
Mobiliare as co-documentation agents, and (7) the banks listed as
lenders ("Banks"), whereby the Banks made available to Carnival and any
additional borrowers designated by the Borrower a multicurrency
revolving credit agreement of up to U.S. $1,400,000,000 due June 2006
(the "RCA"). The interest payable under the loans made available
pursuant to the terms of the RCA is calculated by reference to the
following (i) a specified margin defined in the RCA as the margin
specified by the lender in any competitive bid to make such loan as may
be requested by Carnival Corporation from time to time, plus the British
Bankers' Association Interest Settlement Rates for deposits with
comparable maturity, or (ii) various benchmark rates, or (iii) a fixed
rate defined in the RCA as the rate specified by the lender in any
competitive bid to make such loan as may by requested by Carnival
Corporation from time to time. The RCA contains representations,
warranties and undertakings and events of default which are customary
for a loan agreement of this size and nature. Undertakings include a
restriction on the creation of security and a restriction of disposals.
The RCA also contains financial covenants in the form of total debt to
total capital ratio, a consolidated cash flow threshold and limitations
on the amount of secured indebtedness. At 30 November 2002, Carnival was
in compliance with all of its financial covenants and $1.35 billion was
available under this facility. Carnival's commercial paper programme is
supported by this facility. Accordingly, any funds outstanding under
Carnival's commercial paper programme reduces the aggregate amount
available under this facility.
(vii)Carnival: $1,051,175,000 Liquid Yield Option Notes(TM)
In October 2001, Carnival received net proceeds of approximately
$490,000,000 from the issuance of zero-coupon unsecured convertible
notes. The terms of the notes are set out in an indenture dated as of 24
October 2001. The notes have a yield to maturity of 3.75 per cent and
are convertible commencing on March 1 2001 into approximately 17.4
million Carnival shares, based on 16.5964 shares for each $1,000 of
outstanding notes and accrued interest. The conversion feature is
contingent upon the market price of the Carnival shares reaching certain
targeted levels, subject to adjustment. These targeted levels commence
at a low of $31.94 per share in fiscal 2002 and increase to $65.92 per
share in fiscal 2021. Subsequent to 23 October 2008, Carnival may redeem
the notes, or any portion thereof, at their accrued values. In addition,
on 24 October of 2006, 2008, 2011 or 2016 the note holders may exercise
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their put options which would require Carnival to repurchase all, or a
portion of, the outstanding notes at their accreted value. If such put
option is exercised by the holders, Carnival may choose to settle the
put option in cash, Carnival shares or a combination of cash and
Carnival shares. Upon a change in control of Carnival occurring at any
time on or after 24 October 2008, Noteholders may require Carnival to
purchase all or a portion of such Noteholder's notes for cash at a price
equal to 100 per cent. of the issue price of the notes to be purchased
plus accrued original issue discount to, but excluding, the date of
purchase.
(viii)Implementation Agreement
See paragraph 1.1 of Section 6 of this document
Save as disclosed above no contracts have been entered into by Carnival
or any of its subsidiaries otherwise than in the ordinary course of
business since 16 December 1999 which are or may be material or has
entered into any contract (other than in the ordinary course of
business) at any time which is or may be material and contains an
obligation or entitlement which is material to the Carnival group at the
date of this document.
P&O Princess
(b)Save as disclosed in this paragraph 7, there are no contracts which have
been entered into by a member of the P&O Princess group, not being contracts
entered into in the ordinary course of business, (i) within the two years
immediately preceding the publication of this document and within the two
years prior to 16 December 2001 which are or may be material; or (ii) which
contain any provisions under which any member of the P&O Princess group has
any obligation or entitlement which is or may be material to the P&O
Princess group at the date of this document.
(i)P&O Travel Limited (Hong Kong) joint venture
(A) Joint venture agreement
Pursuant to a joint venture agreement between The Peninsular and
Oriental Steam Navigation Company ("P&OSNCo"), P&O Netherlands BV,
P&O Travel Ltd (a subsidiary within the P&O Princess group), and
Kuoni Travel Holdings Ltd ("Kuoni") dated 30 April 1997 the parties
established the P&O Travel Limited (Hong Kong) joint venture in which
Kuoni and P&O Netherlands B.V. each hold 50 per cent. of the share
capital. In September 2000, Kuoni's consent was obtained to the
transfer of the shares held by P&O Netherlands BV to P&O Cruises BV
(formerly Bullas Investments B.V.), a subsidiary of P&O Princess.
POPCIL replaced P&OSNCo as a party on 28 September 2000.
The joint venture agreement contains provisions as to the business,
management, governance and dividend policy of P&O Travel Limited. The
agreement also contains certain covenants including funding support
to P&O Travel Limited by both shareholders and restrictions on the
parties competing with P&O Travel Limited in most countries in the
Far East and South East Asia.
(B) Trade mark licence agreement
Pursuant to a trade mark licence agreement between P&OSNCo and P&O
Travel Limited dated 30 April 1997, P&O Travel Limited was granted an
exclusive non-transferable license to use the "P&O" name and the P&O
flag (and certain other marks) in connection with P&O Travel
Limited's business and that of certain of its subsidiaries (generally
corporate, leisure and cruise-related travel agency businesses) in
certain Asian territories. P&O Travel Limited was also granted a
non-exclusive license to use these marks in Australia and Canada.
These licenses are perpetual unless terminated and are not assignable
without P&OSNCo consent. In respect of the Asian territories P&OSNCo
is not permitted to license or, without Kuoni's prior written
consent, use the marks or any confusingly similar marks in a
competing business. Certain rights for P&OSNCo to use the marks are,
however, reserved to P&OSNCo notwithstanding the exclusive nature of
the license and its non-compete provision.
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(ii)Agreement relating to the sale and purchase of Seetours Business
Seetours is a party to a sale and purchase agreement dated 7 April 2000
("Seetours Acquisition Agreement") under which it acquired the business
relating to the operation and marketing of the cruise vessel Arkona, the
business relating to certain river cruise vessels, a general sales
agency business and a 9.8 per cent. stake in the entity which owned the
cruise vessel Arkona (together the "Seetours Business") from Arkona
Touristik GmbH, Seetours International GmbH Co. KG and Deutsche
Seetouristik GmbH (which corporate entities have all been succeeded by
Deutsche Seereederei GmbH by operation of law) ("DS"). As part of the
acquisition, Silsub Limited, a wholly-owned subsidiary of Seetours, also
acquired a 50 per cent. ownership interest in the general partner of the
entity which owned the cruise vessel Arkona.
The agreement contains customary representations and warranties for a
transaction of its nature. The agreement contains a general indemnity
clause under which each party shall defend, indemnify and hold harmless
the other party from and against all losses and costs directly or
indirectly arising out of or resulting from any breach of any of the
obligations, covenants, representations or warranties of that party or
made by that party in or pursuant to this agreement. A tax indemnity is
also given by DS in favour of Seetours International Limited or POPCIL
and any of its subsidiaries. Claims under this agreement (including the
tax indemnity) are limited to DM 10 million. Claims for breach of
representation or warranties had to be made within 18 months of
completion of this agreement. There is no time limit for the making of
claims under the tax indemnity.
(iii)Trade mark licence
On 22 September 2000 P&OSNCo and POPCIL entered into a trade mark
licence for no consideration whereby P&O granted to POPCIL (with a right
to sub-licence to certain group companies) a perpetual, worldwide,
royalty-free license to use "P&O" in its corporate name, in specified
domain names, and the P&O motif (the P&O flag when used with the
initials P&O) and P&O flag trade marks and other associated logos
insofar as they relate to cruising.
The licence is exclusive with respect to providing cruises. The licence
contains provisions to protect the distinctiveness and value of these
trade marks, and arrangements exist to ensure P&O Princess' right to use
the marks continues in the event of insolvency of P&OSNCo. The licence
is not terminable on change of control of P&OSNCo or P&O Princess.
(iv)Aida Cruises Sale and Purchase Agreement
On 25 September 2000, P&O Princess (substituted for P&OSNCo on 23
October 2000), POPCIL (substituted for ACL Limited on 31 October 2001)
and Arkona Touristik GmbH (which has since been succeeded by Deutsche
Seereederei GmbH by operation of law) ("DS") entered into a sale and
purchase agreement under which POPCIL acquired the 49 per cent.
shareholding in Aida Cruises Limited ("Aida Cruises") not already held
by POPCIL from DS ("Aida Cruises Purchase Agreement").
The consideration for this acquisition was as follows:
(1)On 28 November 2000 P&O Princess issued 11,366,415 P&O Princess
shares to DS; and
(2)At any time during the period from 30 September 2002 to 30 September
2005 DS is entitled, by serving at least three months' notice on
POPCIL, to require an additional payment based on earnings before
interest and tax of the combined businesses of Aida Cruises and
Seetours International Limited ("Seetours"), a wholly-owned
subsidiary of P&O Princess, (the "Business") for the twelve-month
period ending on the last day of that notice. The additional payment
is payable in cash or, at POPCIL's option after consultation with DS,
by POPCIL procuring the allotment of such number of P&O Princess
shares as is derived by dividing the earn-out payment by the average
of the DM trading prices of the P&O Princess shares during the 20
trading days preceding the actual date of determination of the
earn-out payment. The maximum amount of the earn-out payment is DM400
million.
In addition, there was a potential additional payment to be made on or
before 2 January 2003 based on the average of the trading prices of the
P&O Princess shares during the 40 trading days preceding 30 November
2002. However, the average trading price of the P&O Princess shares
during this period has resulted in no payment being made.
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Mr. Horst Rahe, one of the non-executive directors of P&O Princess, has
a beneficial interest in the P&O Princess shares issued under
sub-paragraph (1) above.
Under the agreement Mr. Horst Rahe was appointed chairman of the
Business.
The Aida Cruises Purchase Agreement provides that if there is a change
of control or liquidation of P&O Princess, then DS is entitled to
accelerate the payment of the total outstanding balance of the
consideration referred to in sub-paragraph (2) above by serving notice
on POPCIL. DS is also entitled to accelerate such payment in the event
that P&O Princess or POPCIL materially breaches the non-compete or
non-solicitation restrictions or the obligation to obtain DS's prior
consent for various actions relating to the Business. A change of
control (or material breach of the non-compete/non-solicitation
provisions) would result in the payment referred to in (2) above being
at least the Euro equivalent of DM115 million. Completion of the DLC
transaction will trigger the right to such payment. Since P&O Princess
entered into the Implementation Agreement DS has confirmed to P&O
Princess that it will exercise this right. Accordingly, P&O Princess
will pay (Euro)58,798,566 to DS shortly after completion of the DLC
transaction, and the sale and purchase agreement will then terminate.
The agreement sets out various matters relating to the Business for
which POPCIL must first obtain the consent of DS and, for matters
relating to the termination and replacement of key executives of the
Business, Mr. Rahe. It also contains mutual non-compete and
non-solicitation restrictions. However, there are exceptions to these
restrictions including a preservation of the rights of DS and Mr. Rahe's
group of companies to carry on general sales agent activities for the
sale of certain products in Germany. In addition, DS is entitled to
assign any or all of its rights and obligations under the agreement to
any of Mr. Rahe's group of companies without the consent of the other
parties.
There are some limited restrictions on the use of the trademarks "AIDA"
and "Seetours". In addition, DS has a right of first refusal to buy any
of these trademarks if POPCIL proposes to sell them to a third party
otherwise than as part of a trade sale. All the restrictions referred to
in this paragraph continue to apply until all the consideration due
under the terms of the agreement has been paid to DS, except for the
non-compete and non-solicitation restrictions which, in the case of DS
only, last until two years after all such consideration has been paid to
DS.
Under the agreement, POPCIL undertakes to procure the redeployment of
two of the P&O Princess group's vessels into the Business, one in 2002
(A'ROSA BLU, ex Crown Princess) and one in 2004 (Regal Princess) (both
vessels are designated for the A'ROSA brand). In addition, the parties
have agreed that the Business will order two river cruise vessels for
delivery in 2002. Thereafter, unless otherwise agreed by the parties,
the Business will order a further five vessels between 2003 and 2005.
The cost of a river cruise vessel is expected to be approximately DM30
million. On 4 November 2001, the parties signed an amending agreement
whereby it was agreed that no order would be made for the fourth vessel,
due for delivery in April 2003, and that the fleet plan would be amended
accordingly.
P&O Princess has guaranteed the due and punctual performance by POPCIL
of its obligations under the agreement, including its obligation to pay
the consideration due under the agreement.
(v) Demerger Agreement
An agreement was entered into on 25 September 2000 between P&OSNCo and
P&O Princess to effect the Demerger and govern the relationship between
the P&O group and the P&O Princess group after Demerger ("Demerger
Agreement").
Under the Demerger Agreement, both groups are permitted access to each
other's records for a period of six years following the Demerger.
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Where one group member is a party to an agreement or arrangement but a
member of the other group derives a benefit from that agreement or
arrangement that other group member will ensure that any relevant
liabilities under that agreement or arrangement are fully discharged,
and will indemnify the group member (who is party to the agreement or
arrangement) for any losses incurred by it. Both groups will broadly
also be responsible for any liabilities associated with its business
owned or operated (including employees employed by that business)
following the Demerger, or any business, asset or liability which would
have been owned or operated by it following Demerger had it not been
disposed of prior to the Demerger (including for P&O Princess, passenger
shipping activities (excluding ferries)), and will indemnify the other
group for any losses it incurs in relation to liabilities it has not
assumed responsibility for.
Certain liabilities were identified as not being entirely attributable
to either group and will generally be shared on an equitable basis.
These were any liabilities incurred in relation to indemnities given to
certain professionals in connection with work carried out as part of the
Demerger, any liability incurred in connection with the long term U.S.
dollar denominated debt exchange offers and any liability incurred in
relation to the reorganisation of the cruises.
Certain terms and restrictions apply in relation to claims made under
the aforementioned indemnities, including: where a potential claim
arises as a result of an action of a third party, a duty to mitigate
loss, restrictions on the ability to claim where loss arises from an
unreasonable action or omission of a party following Demerger and or the
ability to claim for a loss where there is an allowance, reserve or
provision for such loss in relevant accounting statements of the
claiming group. With effect from 23 October 2001, no indemnity claim may
be commenced by either party unless the aggregate of indemnity claims is
for an amount in excess of (Pounds)500,000.
There is provision to ensure that where one group holds assets which
should have been transferred to the other group (prior to the Demerger),
the relevant party will take certain reasonable steps to ensure such
assets are transferred to the relevant group. If the assets appear on
the relevant party's books, they are transferred to it at no cost,
otherwise they are transferred at book value.
There are mutual non-compete provisions whereby P&OSNCo must not, for a
period of three years, carry on a cruises business, and P&O Princess
must not, for a period of three years, carry on logistics (including
ferry) activities.
Both groups must keep certain information on the other group
confidential, subject to certain exemptions (for instance if disclosure
is required by law).
The parties must seek to resolve any dispute under the Demerger
Agreement by negotiation, failing which the Managing Director of P&OSNCo
and the Chief Executive Officer of P&O Princess will attempt to resolve
the dispute. If neither process is successful it will be subject to
arbitration in London.
P&OSNCo agreed that employees of the P&O Princess group, former staff
and pensioners, shall at P&OSNCo's cost, be entitled to receive the same
concessions on travel on ferries operated by the P&O Group (and P&O
Stena Line) as the P&OSNCo Group shall make available to its employees
from time to time. P&O Princess agreed that employees, former staff and
pensioners of the P&OSNCo Group shall, at P&O Princess' cost, be
entitled to receive certain concessions on P&O Princess group's cruises.
The Demerger Agreement provides for the allocation, between P&OSNCo and
P&O Princess, of certain tax costs, including those arising in respect
of or in consequence of the Reorganisation and the Demerger.
Arrangements were also agreed in relation to (among other matters) the
surrender of UK group relief and advance corporation tax between
companies which were members of the same group prior to the Demerger.
The Demerger Agreement also provides for certain administrative
requirements to be complied with relating to tax matters. A separate
U.S. tax indemnity apportions U.S. income taxes among certain U.S.
subsidiaries of the P&OSNCo Group and P&O Princess group for periods
before such entities were separated from the same group under the
Reorganisation.
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(vi)Depositary Agreement
In connection with the Demerger Agreement as described at paragraph
7(b)(v) of above, P&OSNCo invited the holders of its 7.30% existing
notes due 2007 and its 7.875% existing debentures due 2027 to exchange
their existing notes and existing debentures for respectively, the 7.30%
notes due 2007 and the 7.875% debentures due 2027 (together "the
Securities") of P&O Princess (the "Exchange Offers"). Pursuant to a
depositary agreement dated 23 October 2000 ("Depositary Agreement")
entered into between P&O Princess, the Bank of New York, Brussels Office
("the custodian") as custodian for and on behalf of The Bank of New
York, New York Offices ("the Book-entry Depositary"), P&O Princess
initially issued the Securities in the form of two or more global
securities that were deposited with the Book-entry Depositary.
P&O Princess has agreed to pay interest and principal with respect to
the global securities to the Book-entry Depositary as physical holder of
the global securities and has agreed to indemnify the Book-entry
Depositary and the custodian against certain liabilities incurred by it
under the Depositary Agreement.
The Depositary Agreement will terminate upon the issuance of certified
securities to all holders of book-entry Securities. In the event that
either the Book-entry Depositary or custodian resign, is removed or
becomes incapable of acting, P&O Princess may appoint a successor within
90 days. If at the end of 90 days no successor has been appointed, the
Depositary Agreement may be terminated. Neither the Book-entry
Depositary nor the custodian have any obligation or liability other than
to use good faith and reasonable care in the performance of their duties.
(vii)Registration Rights Agreement
On 23 October 2000 P&O Princess entered into an agreement (the
"Registration Rights Agreement") pursuant to which P&O Princess agreed,
subject to certain conditions, to file and to cause to become effective
a registration statement relating to an exchange offer for the
Securities (described in paragraph 7 (b)(vi) above), or, in lieu
thereof, to file and cause to become effective a resale shelf
registration for the Securities. In the event that the exchange
registration statement or shelf registration statement is not filed or
is not declared effective, or if the Exchange Offers (described in
paragraph 7 (b)(vi) above) are not consummated within the time periods
set out in the Registration Rights Agreement, P&O Princess will be
required to pay liquidated damages to the holders of the Securities for
the period until P&O Princess satisfies its registration obligations
with respect to the Securities. These liquidated damages are the sole
remedy available to holders of the Securities if P&O Princess does not
satisfy these registration obligations.
POPCIL (previously known as P&O Cruises Limited), a direct wholly-owned
subsidiary of P&O Princess, has unconditionally and irrevocably
guaranteed the due and punctual payment of the principal and interest on
the Securities (and the payment of additional amounts including but not
limited to any present or future taxes, duties assessments or
governmental charges imposed or levied by any political or taxing
authority in the UK) in relation to P&O Princess' obligations under the
Depositary Agreement described in 7 (b)(vi) above and the Registration
Rights Agreement (the "Guarantee"). The obligations of POPCIL are
limited to the maximum amount which will result in its obligations under
the Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under applicable law. The Guarantee will be an unsecured
obligation and will rank equally in right of payment with other
unsecured and unsubordinated indebtedness of POPCIL.
(viii)P&O Princess issue of Notes due 2012
(A)Subscription Agreement
Pursuant to a subscription agreement dated 20 June 2001 between P&O
Princess, P&O Princess Cruises International Limited (the "Guarantor"),
Barclays Bank PLC and HSBC Bank plc (together the "Joint Lead
Managers"), P&O Princess agreed to issue on 25 June 2001 the
(Pounds)200,000,000 7.125 per cent. Notes due 2012 (the "Notes") to the
Joint Lead Managers at a subscription price of 98.589 per cent. of the
principal amount of the Notes and the Guarantor agreed to guarantee all
payments to be made by P&O Princess in respect of the Notes. The
combined management, underwriting and selling commission was 0.425 per
cent. of the principal amount of the Notes.
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The subscription agreement contains various representations and
warranties (customary for this type of agreement) from P&O Princess and
the Guarantor to the Joint Lead Managers, from the Guarantor to the
Joint Lead Managers and from the Joint Lead Managers to P&O Princess and
the Guarantor. In addition, P&O Princess and the Guarantor have agreed
to indemnify the Joint Lead Managers and any of their affiliates for any
losses incurred due to any misleading statements in and omissions from
the offering circular, dated 20 June 2001, prepared by P&O Princess in
connection with the listing of the Notes on the London Stock Exchange.
Claims for breach of any of the representations and warranties or made
pursuant to the indemnities are not subject to any maximum cap on
liability or to any time limit for making such a claim.
(B)Trust Deed
The Notes were constituted pursuant to a trust deed dated 25 June 2001
between P&O Princess, the Guarantor and HSBC Trustee (C.I.) Limited (the
"Trustee").
In addition to setting out P&O Princess' payment obligations to the
Trustee under the terms of the Notes, the trust deed also sets out the
mechanics of the issue of the original Notes and the issue of further
notes, which shall, upon issue, be consolidated with the original Notes.
The Guarantor has guaranteed to the Trustee due and punctual payment of
the principal of and premium (if any) and interest on the securities and
of any other amounts payable by P&O Princess.
(C)Agency Agreement
Pursuant to an agency agreement dated 25 June 2001 between P&O Princess,
the Guarantor, the Trustee and HSBC Bank plc and Dexia Banque
Internationale a Luxembourg S.A. (together the "Paying Agents"), P&O
Princess, the Guarantor and the Trustee appointed the Paying Agents in
respect of the payment of the amounts due under the Notes. On behalf of
P&O Princess, the Paying Agents shall make the payments of the principal
and/or interest due under the Notes to the relevant persons as they fall
due. No later than 12.00 p.m. on the date upon which any payment of
principal and/or interest under the Notes becomes due, P&O Princess
shall transfer to the Paying Agents an amount equal to that as is
customary for the settlement of similar transactions, as determined by
HSBC Bank plc, for the purpose of paying that principal and/or interest.
The agency agreement provides that P&O Princess or, failing P&O
Princess, the Guarantor shall indemnify the Paying Agents and their
affiliates for any losses incurred by any of them in connection with
their appointment or the exercise of their powers and duties under the
agreement, other than any losses incurred due to the wilful default,
negligence or bad faith of any affiliate of a Paying Agent or due to any
breach of the agreement by a Paying Agent.
The Paying Agents have agreed to indemnify P&O Princess and the
Guarantor for any losses incurred due to the wilful default, negligence
or bad faith of any affiliate of a Paying Agent or due to any breach of
the agreement by a Paying Agent.
Claims made for breach of either of the indemnities specified above are
not subject to any maximum cap on liability or to any time limit for
making such a claim.
(ix) Carnival major stockholders' Voting Deed Polls
General. As an inducement to P&O Princess to enter into the
Implementation Agreement, Micky Arison other members of the Arison
family and trusts for their benefit entered into deed poll undertakings
for the benefit of P&O Princess dated 24 October 2002 (each, a "Voting
Deed Poll") committing to vote their Carnival shares in favour of the
resolutions required to implement the DLC proposal at the Carnival
shareholders' meeting. In addition to Mr. Arison, JMD Delaware, Inc. and
JMD Protector, Inc. (collectively with Mr. Arison, the "Carnival Major
Shareholders") entered into a Voting Deed Poll. As of the date of the
Voting Deed Polls, the Carnival Major Shareholders committed to vote
approximately 47 per cent. of the outstanding Carnival shares in favour
of the DLC transaction at the Carnival Special Meeting.
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Voting. Pursuant to the Voting Deed Polls, the Carnival Major
Shareholders have agreed to vote the Carnival shares owned or
subsequently acquired by them, which shares represent, the aggregate,
approximately 47 per cent. of the total outstanding Carnival shares (i)
in favour of the adoption and approval of the Implementation Agreement
and the transactions contemplated thereby and (ii) against the approval
of any action or agreement or any transaction that would (x) compete
with, impede, interfere with or discourage the DLC transaction or
inhibit the timely completion thereof, or (y) result in a breach in any
material respect of any covenant, representation or warranty or any
other obligation of Carnival under the Implementation Agreement and
(iii) against any merger, consolidation, business combination, dual
listed company transaction, reorganisation, recapitalisation,
liquidation or sale or transfer of any material assets of or involving
Carnival or any of its significant subsidiaries (except for the DLC
transaction).
Transfer Restrictions. The Voting Deed Polls restrict the Carnival Major
Shareholders from disposing of any of the Carnival shares owned or
subsequently acquired by them except for:
(1)dispositions of Carnival shares pledged under existing pledge
agreements and disposed pursuant to a foreclosure or similar
proceeding under such agreement, up to an aggregate, amongst all of
the Carnival Major Shareholders, of 23 million Carnival shares;
(2)dispositions of Carnival shares not pledged under existing pledge
agreements up to an aggregate, amongst all of the Carnival Major
Shareholders, of 7 million Carnival shares; and
(3)dispositions to persons who agree in writing to be bound by the terms
and conditions of the Voting Deed Polls.
Termination. Each Voting Deed Poll terminates upon the earliest to occur
of (1) the approval of the DLC transaction by the Carnival shareholders,
(2) the termination of the Implementation Agreement, (3) Carnival's
withdrawal of the DLC proposal on or prior to 10 January 2003 as a
result of the pre-conditions to such proposal not having been satisfied
or waived prior to that date or (4) Carnival's withdrawal of the DLC
proposal on or prior to 10 January 2003 as a result of (a) a competing
proposal, (b) the P&O Princess board having recommended a competing
offer to the DLC proposal or (c) the P&O Princess board having announced
that it did not intend to recommend the DLC proposal.
Other Provisions. The Voting Deed Polls includes provisions restricting
the Carnival Major shareholders from, amongst other things entering into
any voting trust or other agreement or arrangement with respect to the
voting of any of their Carnival shares other than existing agreements or
arrangements or any agreements entered into with P&O Princess.
In addition, each of the Carnival Major Shareholders agreed that neither
it nor any entity controlled by it nor any of their respective officers,
directors, employees, investment bankers, attorneys, accountants,
consultants, financial advisers, agents or other representatives of the
Carnival Major Shareholders, directly or indirectly, would:
(1)initiate, solicit, encourage or otherwise facilitate the submission
of any acquisition proposal for Carnival; or
(2)engage in any discussions or negotiations regarding, or furnish to
any person any confidential information with respect to, or take any
other action to facilitate any inquiries or the making of any
proposal that constitutes an acquisition proposal for Carnival.
(x)Termination Agreement with Royal Caribbean
P&O Princess, Royal Caribbean and Joex Limited entered into an agreement
dated 25 October 2002 to, among other things, terminate the existing
agreements between or among them relating to the Royal Caribbean DLC
transaction. The agreement provides for (i) the termination of the
implementation agreement, dated as of 19 November 2001, between P&O
Princess and Royal Caribbean (the "Royal IA") and the payment by P&O
Princess to Royal Caribbean of the $62.5 million break fee contemplated
by the Royal IA, (ii) P&O Princess and Royal Caribbean granting each
other mutual releases from any liability relating, directly or
indirectly, to the Royal IA, (iii) the termination of the Joint Venture
Agreement among P&O
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Princess, Royal Caribbean and Joex on 1 January 2003, as long as no
change of control of either P&O Princess or Royal Caribbean occurred
prior to that date, and the winding up of Joex, (iv) P&O Princess, Royal
Caribbean and Joex granting each other mutual releases from any
liability relating, directly or indirectly, to the Joint Venture
Agreement, with the releases being effective immediately and remaining
in effect unless a change in control of either P&O Princess or Royal
Caribbean occurred prior to 1 January 2003 or the board of directors of
either P&O Princess or Royal Caribbean approved a change of control
transaction prior to 1 January 2003. The agreement also acknowledged the
termination of the voting agreement, dated as of 3 December 2001, among
P&O Princess, A. Wilhelmsen AS and Cruise Associates (the "Voting
Agreement") as a result of the termination of the Royal IA and P&O
Princess released A. Wilhelmsen AS and Cruise Associates from any
liability relating, directly or indirectly, to the Voting Agreement. In
addition, P&O Princess agreed to not enter into any agreement prior to 1
January 2003 that would prevent or restrict the ability of P&O Princess
to discuss or negotiate a business combination with Royal Caribbean or
enter into or recommend such a transaction with Royal Caribbean, and to
provide Royal Caribbean with copies of all business, operating and
financial information provided to Carnival prior to 1 January 2003.
(xi)Implementation agreement
See paragraph 1.1 of Section 6 of this document.
8. Directors' service contracts
(a)P&O Princess
Except as disclosed in this paragraph 8 there are no other service contracts
(as defined under the UK Listing Authority's listing rules as being a
service contract with a notice or contract period of one year or more or
with provisions for pre-determining compensation on termination of an amount
which equals or exceeds one year's salary and benefits in kind) between any
P&O Princess director or any of the persons listed in paragraph 2(a)(iii)
above and P&O Princess or any of its subsidiaries and no such contract has
been entered into or amended within 6 months of the date of this document.
The expected changes to the emoluments of those P&O Princess directors who
will continue to be directors of P&O Princess after the DLC transaction
completes are described below in this paragraph 8.
Each of the directors of P&O Princess named below has a directors' service
contract with the P&O Princess group providing for the relevant remuneration
and benefits described below:
P&O Princess Basic Position Employing Date of Agreement
Director annual Company
salary
Lord Sterling (Pounds)330,450 Chairman P&O 25 September 2000
Princess
Peter Ratcliffe $832,000 Chief Executive Officer P&O 25 September 2000
Princess
Nicholas Luff (Pounds)295,000 Chief Financial Officer P&O 25 September 2000
Princess
With effect from 1 January 2003, Peter Ratcliffe's basic annual salary was
increased from $800,000 and Nicholas Luff's was increased from
(Pounds)270,000.
Lord Sterling is also Chairman of P&OSNCo and divides his time equally
between his roles as Chairman of P&O Princess and P&OSNCo. Lord Sterling was
due to retire as Chairman of P&O Princess on 23 October 2002 but agreed to
continue his service until P&O Princess concluded its proposed transactions
with either Carnival or Royal Caribbean. He will therefore retire from the
P&O Princess board and, due notice having been given, his service contract
will expire on completion of the DLC transaction.
260
Peter Ratcliffe and Nick Luff each have service contracts with P&O Princess
which came into effect on 23 October 2000 and which may be terminated by P&O
Princess on 12 months' notice. In the case of early termination of their
contracts by P&O Princess without cause, these contracts provide for
payments in lieu of notice equivalent to 12 months' base salary, benefits
and a bonus equivalent to that paid in respect of the year preceding the
year in which employment terminates. If the proposed DLC transaction with
Carnival is completed, Nick Luff's service contract will be terminated by
P&O Princess on this basis with a payment in lieu of notice of
(Pounds)583,250. Peter Ratcliffe is currently negotiating certain changes to
his service contract which are expected to come into effect on completion of
the DLC transaction. The total value of his salary and potential bonus
package will remain broadly unchanged at around $2 million per annum. Under
the revised contract, it is expected that this will consist of a base salary
of $1.1 million plus a potential cash bonus of $450,000 and a potential
bonus of $450,000 paid in shares. There will be no matching potential
against the share element of the bonus. This compares with current base
salary of $832,000 plus potential cash bonus of $416,000, potential share
award of $416,000, and potential related matching award also of $416,000.
The main components of current remuneration for executive directors and,
where relevant, the performance criteria on which they are based, are set
out below. In agreeing the level of base salaries and the annual performance
bonus, the Remuneration Committee takes into consideration the total
remuneration available to executives and has the discretion to vary
individual elements of the remuneration package.
Base salary
Base salaries are set at levels competitive with pay for directors and
executives based in similar locations and holding equivalent positions in
comparable companies.
Benefits in kind
These principally comprise car benefits, life assurance and membership of
the P&O Princess group's healthcare insurance schemes. The level of benefits
provided to executive directors is consistent with that provided by other
major companies. These benefits do not form part of pensionable earnings.
Annual bonus
The annual bonus earned in any year is dependent on the extent to which
performance targets are achieved. Targets for directors, which are common to
each director and approved by the Remuneration Committee, are based on the
P&O Princess group's earnings per share, as the committee is of the view
that this is the most appropriate measure of the performance of the
executive directors. The targets, which are set at the beginning of the
relevant year based on group budgets, are designed to take account of the
anticipated trading environment. For example, in 2002, the targets took
account of the difficult trading conditions faced by the P&O Princess group
in the aftermath of the terrorist incidents on 11 September 2001. The
maximum annual bonus that can be earned by directors is 75 per cent. of base
salary (100 per cent. in the case of the Chief Executive Officer). Subject
to the discretion of the Remuneration Committee, half of the bonus is paid
in cash with the balance awarded in shares as a share award for the purpose
of the deferred bonus and co-investment matching plan, as described below.
Long-term incentive plans
DEFERRED BONUS AND CO-INVESTMENT MATCHING PLAN
The deferred bonus and co-investment matching plan provides participants
with the opportunity to receive matching awards of shares depending upon the
performance of P&O Princess over a specified retention period. Share awards
granted to participants are automatically invested in the plan and, in
addition, participants may choose to invest all or part of their post-tax
cash bonus, or funds from their own resources, into the plan (invested
shares) subject to an overall limit on the amount invested in the plan in
any one year of 75 per cent. of base salary (100 per cent. in the case of
the Chief Executive Officer). An award of shares equivalent to the total of
a participant's share award and gross value of invested shares is granted to
a participant (a matching award).
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The extent to which a new matching award may be exercised is based on the
growth in earnings per share of P&O Princess over the three-year retention
period as disclosed in the audited financial statements. If P&O Princess
achieves earnings per share growth of 15 per cent. over this period,
participants will be entitled to exercise 25 per cent. of their matching
award. If earnings per share growth is 50 per cent., the entire matching
award may be exercised. For growth between 15 per cent. and 50 per cent.,
the extent to which a matching award may be exercised is determined on a
straight-line basis between these points. Generally, the matching award may
only be exercised if the share award and invested shares are retained
throughout the retention period. The remuneration committee, which regularly
reviews these performance thresholds, believes that they provide
appropriately stretching targets taking account of P&O Princess, its
competitors and the nature of the industry in which it operates. Retention
periods of awards granted under the plan were two years long but, in June
2002 on the recommendation of the Remuneration Committee, the board agreed
that all future awards would have retention periods of three years. In
addition, the retention period of existing awards held by executive
directors was extended to three years. The Remuneration Committee did not
consider it appropriate to adjust the performance targets for existing
awards following extension of the retention periods. Consequently, the
thresholds at which participants will be able to exercise between 25 per
cent. and 100 per cent. of existing matching awards remain the achievement
by P&O Princess of earnings per share growth of between 10 per cent. and 40
per cent. respectively over the relevant performance period. However, if the
proposed DLC transaction with Carnival is completed, all matching awards
granted prior to 2003 and outstanding at completion will be immediately
exercisable in full.
EXECUTIVE SHARE OPTION PLAN
Options at market value at the date of grant are granted to eligible
employees based on guidelines approved by the Remuneration Committee. These
guidelines govern the total number of options which may be granted and the
frequency of awards and ensure that the progression to maximum awards is
within individual and overall limits authorised by shareholders, so phasing
grants of options to executives over a number of years.
Options granted to directors may not be exercised unless the growth in P&O
Princess' earnings per share over a period of at least three years from
grant, as disclosed in the audited financial statements, exceeds the growth
in an appropriate recognised index of retail prices by an average of at
least 3 per cent. per annum. The Remuneration Committee, which regularly
reviews performance criteria, believes targets based on earnings per share
growth to be the most suitable in assessing performance of the executive
directors and considers this target to be appropriate in the context of the
aims of the board's remuneration policy. Options granted to other executives
are not subject to any performance condition. If the proposed DLC
transaction with Carnival is completed, all share options outstanding at
completion will vest and any performance conditions will cease to apply.
To ensure appropriate phasing of grants of share options, the value of
shares under option granted to directors and certain other senior executives
in any year is normally limited to 150 per cent. of base salary. Lower
limits apply to other executives. The Remuneration Committee reserves the
right to vary these limits if it determines that exceptional circumstances
exist.
Lord Sterling receives no pension benefits in respect of his service with
P&O Princess except for the provision of life assurance, his service
contract with P&O Princess does not entitle him to receive any other
benefits.
Peter Ratcliffe is a member of the P&O Princess Cruises Pension Scheme in
the UK. He accrues pension rights under this scheme at a rate of up to
1/45th of final salary for each year of service. For this purpose, final
salary is the basic salary received in the final 12 months of service. When
in payment the pension will be increased each year in line with the increase
in the UK Retail Prices Index, up to a maximum of 5 per cent. Normal
retirement age is 60. On death, a spouse's or dependant's pension equal to
two thirds of the member's pension is paid. In the event of early voluntary
retirement before the age of 55, a pension is paid equal to two-thirds of
final salary, reduced pro rata for actual service compared with potential
service to age 60. In the event of compulsory early retirement, or voluntary
early retirement after the age of 55, a pension is paid equal to two-thirds
of final salary.
262
Peter Ratcliffe is also a member of the Princess Cruises Supplemental
Executive Retirement Plan in the United States (the "Supplemental Plan").
This Supplemental Plan provides pension benefits to supplement benefits
received from certain other plans, including benefits from the P&O Princess
Cruises Pension Scheme described below. The overall effect of these plans,
including the Supplemental Plan, is to provide, on retirement, a pension of
65 per cent. of final salary, subject to having completed 15 years service.
For this purpose, final salary is the average basic salary for the five
years immediately preceding retirement and Peter Ratcliffe's service
commenced on 1 September 1986. For service of less than 15 years, the
pension is reduced pro rata, and there is an actuarial reduction if pension
is drawn under the age of 55 following voluntary early retirement. The
normal retirement age is 60. The pension is payable in full to the member
or, on his death, to his spouse. Benefits from the P&O Princess Cruises
Pension Scheme can exceed those resulting from the overall figures under the
Supplemental Plan in which case no further amounts are paid under the
Supplemental Plan.
Nicholas Luff is a member of the P&O Princess Cruises Pension Scheme. The
benefits that he can receive from the scheme are restricted by an earnings
cap which is currently (Pounds)97,200. He accrues pension rights under the
scheme at a rate of 1/82nd of the earnings cap for each year of service. The
same provisions as for Peter Ratcliffe apply in respect of increases in
pensions, retirement age and spouse's or dependant's pension. In addition to
the benefits from the P&O Princess Cruises Pension Scheme, a funded
unapproved retirement benefit scheme has been established for Nicholas Luff.
This scheme operates on a defined contribution basis. P&O Princess makes
annual contributions to this scheme of 25 per cent. of basic salary, less 9
per cent. of the earnings cap. Princess or by P&O Princess giving 12 months'
notice.
The non-executive directors of P&O Princess are Sir John Parker, Baroness
Hogg, Peter Foy and Horst Rahe. Non-executive directors do not have service
contracts, but instead have a letter or agreement setting out the terms and
conditions of their appointment. Each of the non-executive directors has
been appointed for an initial term of five years, although the appointment
may be terminated by either the director or P&O Princess giving 12 months'
notice. In addition, the appointments are subject to the provisions of P&O
Princess' articles of association.
The fees payable to each non-executive director, and the date on which their
appointment commenced, are summarised below:
Commencement of
Annual Fee Appointment
Sir John Parker - until 25 September 2002 (Pounds) 25,000 18 September 2000
- from 26 September 2002................ (Pounds)130,000
Baroness Hogg............................ (Pounds) 32,500 18 September 2000
Peter Foy - until 25 September 2002/(1)/. (Pounds)130,000 18 September 2000
- from 26 September 2002................ (Pounds) 32,500
Horst Rahe............................... (Pounds) 25,000 16 May 2001
--------
(1)Peter Foy's annual fee increased from (Pounds)32,500 to (Pounds)130,000 on 4
October 2001 in respect of his appointment as deputy chairman.
Non-executive directors receive a basic fee of (Pounds)25,000 and an
additional fee of (Pounds)7,500 per annum if they serve as chairman of any
board committees. From 4 October 2001 until 26 September 2002, Peter Foy
received fees at a total annual rate of (Pounds)130,000, representing fees
payable as a non-executive director and as deputy chairman. Following his
decision to step down from the position of deputy chairman on that date, the
fee payable to him was reduced accordingly and Sir John Parker, who took up
the appointment, received fees at the rate of (Pounds)105,000 per annum in
addition to fees payable as a non-executive director. If the proposed DLC
transaction with Carnival is completed, Baroness Hogg's and Sir John
Parker's remuneration will be brought into line with Carnival's fee
arrangements with its non-executive directors, described in (b)(ii) of this
paragraph 8.
If the proposed DLC transaction with Carnival is completed, Sir John
Parker's appointment as deputy chairman of the board will terminate
automatically, without any notice having to be given, and the appointments
of Peter Foy and Horst Rahe as non-executive directors will be terminated by
the Company with payments of (Pounds)32,500 and (Pounds)25,000, respectively.
The non-executive directors do not receive any pension benefits from the
company.
263
(b)Carnival
Except as disclosed in this paragraph 8 there are no other service contracts
(as defined under the UK Listing Authority's listing rules as being a
service contract with a notice or contract period of one year or more or
with provisions for predetermining compensation or termination or amount
which equals or exceeds one year's salary and benefits in kind) between any
Carnival director or any of the persons listed in paragraph 2(b)(iii) above
and Carnival or any of its subsidiaries and no such contract has been
entered into or amended within 6 months of the date of this document. There
are expected to be no changes to the emoluments of those Carnival directors
who will continue to be directors of Carnival after the DLC transaction
completes.
Each of the following directors of Carnival named below who will continue to
be directors of Carnival following the implementation of the DLC structure
or, in the case of Pier Foschi, who is an executive officer and will become
a director, was entitled to the relevant remuneration and benefits described
below, in respect of the financial year ended 30 November 2002:
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer and its four other most highly
compensated executive officers for each of the years ended 30 November 2002,
2001 and 2002.
(i)Executive Officers
Annual Compensation Long Term Compensation Awards
Other Number of
Annual Restricted Securities All
Compen- Stock Underlying Other
Name and Principal Position Year Salary($) Bonus($) sation($)/(1)/ Awards($)/(2)/ Options(#)/(3)/ Compensation($)
Micky Arison 2002 $501,000 $1,675,000 -- $1,549,500 120,000 --
Chairman, CEO 2001 501,000 1,675,000 $72,000 1,570,200 120,000 --
and Director 2000 501,000 1,450,000 51,500 1,785,000 240,000 --
Howard S. Frank 2002 409,000 1,645,000 -- 1,291,250 100,000 --
Vice Chairman, COO 2001 408,000 1,645,000 1,308,500 100,000 --
and Director 2000 412,000 1,430,000 1,487,500 200,000 --
Robert H. Dickinson 2002 411,000 1,264,300/(4)/ -- 1,028,000 -- --
President and COO of 2001 410,000 1,327,300/(4)/ 1,312,500 160,000 --
CCL and Director 2000 411,000 1,126,500/(4)/ 757,500 160,000 --
A. Kirk Lanterman 2002 214,000 2,425,000/(5)/ -- -- -- 15,700/(6)/
Chairman and CEO of 2001 214,000 3,223,000/(5)/ -- -- 13,600/(6)/
HAL-Westours Inc. 2000 214,000 3,597,000/(5)/ -- -- 17,000/(6)/
and Director
Pier L. Foschi /(7)/ 2002 769,000 472,600/(8)/ -- -- 50,000 --
Chairman and CEO of 2001 573,000 890,000/(8)/ -- 50,000 --
Costa Crociere S.p.A. 2000 561,000 912,000/(8)/ -- 50,000 --
--------
(1)Represents the fair market value of personal use of corporate aircraft.
For the other named executive officers listed in the table, personal
benefits for each executive officer did not exceed the lesser of
$50,000 or 10% of such executive officer's total annual salary and
bonus for the years ended 30 November 2001 and 2000, respectively.
(2)Represents the value, based on the closing market price of the common
stock on the New York Stock Exchange on the date of grant. As of 29
November 2002, Messrs. Arison, Frank and Dickinson owned 300,000
shares, 250,000 shares and 200,000 shares of restricted common stock,
respectively. Neither Mr. Lanterman nor Mr. Foschi owned any shares of
restricted common stock. At 29 November 2002, based on the closing
price of the common stock on such date of $28.05, such restricted
shares of common stock owned by Messrs. Arison, Frank and Dickinson had
a value of $8,415,000, $7,012,500 and $5,610,000, respectively. The
restricted shares of common stock held by such executive officers have
the same rights with respect to dividends and other distributions as
all other outstanding shares of our common stock.
(3)No stock appreciation rights were granted to any of the named executive
officers. With the exception of Mr. Dickinson, Carnival typically
grants options to executive officers during the first quarter of each
year in recognition of services rendered for the preceding fiscal year.
As a result, the options shown in the table above as granted to Messrs.
Arison and Frank for fiscal 2000, one-half of the options granted to
Mr. Dickinson for fiscal 2000 and the options granted to Mr. Foschi for
fiscal 2000 were actually granted during the first quarter of the
following year, but were deemed earned for services rendered in the
fiscal year indicated. However, for fiscal 2001 Carnival made the
annual grants to Messrs. Arison, Frank and Foschi in October 2001
instead of the first quarter of 2002 for services rendered in fiscal
2001. Mr. Dickinson's options are granted in August of each year
pursuant to his Executive Long-Term Compensation Agreement described
below. During fiscal 2001, Mr. Dickinson received 80,000 options in
October 2001 in lieu of receiving his annual grant in August 2002.
(4)Represents payments to Mr. Dickinson pursuant to the 1994 Carnival
Cruise Lines Key Management Incentive Plan (the "CCL Plan") which
allows key management employees of CCL to participate in an incentive
award pool. For fiscal 2002, the incentive pool was 1.48% of (i) the
consolidated net income of CCL ("CCL Net Income") for the year ended 30
November 2002, minus (ii) $188,355,000. For fiscal 2001,the incentive
pool was 1.60% of (i) CCL
264
Net Income for the year ended 30 November 2001, minus (ii)
$188,355,000. For fiscal 2000, the incentive award pool was 1.64% of
(i) CCL Net Income for the year ended 30 November 2000, minus (ii)
$188,355,000.
(5)Represents amounts payable to Mr. Lanterman under an arrangement
pursuant to which he receives a bonus based on a specified percentage
of the consolidated net income of HAL Antillen N.V., a subsidiary of
Carnival.
(6)Represents amounts paid on behalf of Mr. Lanterman pursuant to the
Holland America Line Inc. Profit Sharing Plan (the "Profit Sharing
Plan") and the Holland America Line Inc. Employee Savings Plan (the
"Savings Plan"). The amounts paid or accrued to Mr. Lanterman under the
Profit Sharing Plan in fiscal 2002, 2001 and 2000 were $12,000, $10,200
and $13,600 respectively. The employer contributions made on behalf of
Mr. Lanterman under the Savings Plan for fiscal 2002, 2001 and 2000
were $3,700, $3,400 and $3,400 respectively. The Profit Sharing Plan
and the Savings Plan are generally available to all employees of HALW.
(7)Mr. Foschi's compensation was payable in Italian lira in fiscal 2000
and 2001 and in euro in fiscal 2002. His compensation has been
translated to U.S. dollars at the average exchange rate of the dollar
for each fiscal year.
(8)Represents amounts payable to Mr. Foschi under an agreement pursuant to
which he receives a bonus contingent upon the net income of Costa
Crociere S.p.A., a subsidiary of Carnival ("Costa Crociere"), reaching
certain predetermined levels. Prior to Carnival's acquisition of the
remaining 50% of Costa Crociere it did not own in September 2000,
Carnival owned 50% of Costa Crociere.
(ii) Non-executivedirectors
Reason for remuneration Richard Capen Arnold Donald Modesto Maidique Stuart Subotnick Uzi Zucker
Annual director retainer $38,000 $38,000 $38,000 $38,000 $38,000
Board meeting attendance fees 8,000 8,000 8,000 8,000 8,000
Committee meeting attendance fees 13,000 11,000 9,000 15,000 15,000
------- ------- ------- ------- -------
Total Remuneration in 2002 $59,000 $57,000 $55,000 $61,000 $61,000
======= ======= ======= ======= =======
Annual director retainer $38,000 $38,000 $38,000 $38,000 $38,000
Board meeting attendance fees 8,000 8,000 6,000 2,000 8,000
Committee meeting attendance fees 6,000 4,500 4,000 5,000 8,000
------- ------- ------- ------- -------
Total Remuneration in 2001 $52,000 $50,500 $48,000 $45,000 $54,000
======= ======= ======= ======= =======
Annual director retainer $38,000 -- $38,000 $38,000 $38,000
Board meeting attendance fees 8,000 -- 6,000 6,000 8,000
Committee meeting attendance fees 6,000 -- 4,000 7,000 8,000
------- ------- ------- ------- -------
Total Remuneration in 2000 $52,000 $ -- $48,000 $51,000 $54,000
======= ======= ======= ======= =======
The following table details Carnival's arrangements with its non-executive
directors, as of 7 January 2003:
Board Member Audit Committee Other Committees
Chair Member Chair Member
Annual Retainer $40,000 $10,000 $5,000 $5,000 $2,500
Attendance Fee
Meeting in Person 5,000 2,500 2,500 2,000 2,000
By Phone 2,000 1,000 1,000 1,000 1,000
Pursuant to the terms of a letter agreement dated 28 May 2002 (the
"Agreement"), governed by Italian law, Mr. Foschi's appointment as Chairman
and Managing director of Costa Crociere S.p.A. ("Costa") was effective from
1 May 2002 until the date of approval by the shareholders meeting of Costa's
financial statements for the fiscal year ending on 30 November 2004.
If the Agreement is terminated for reasons other than for cause, or, for
breach of certain terms of the Agreement, or, if Mr. Foschi is incapacitated
for a period exceeding 12 months in any 24 consecutive calendar months, then
he is entitled to a contractual sum. If the Agreement is terminated in such
a way, within 18 months of 1 May 2002, then Mr. Foschi is entitled to three
times his annual fee and bonus for Costa's last fiscal year. If the
Agreement is terminated in such a way after 18 months of May 2002, then Mr.
Foschi is entitled to one and a half times his annual fee and bonus for
Costa's last fiscal year. If the Agreement is terminated by Mr. Foschi as a
result of a direct or indirect change of control of Costa, without him
entering into an alternative contractual arrangement with Costa or the new
controlling group, he is entitled to receive three times his annual fee and
bonus for Costa's last fiscal year. If Mr. Foschi resigns from the office of
director for cause prior to the expiration of the term of the agreement, he
is entitled to receive 50 per cent. of his annual fee and bonus for Costa's
last fiscal year.
In summary, Mr. Foschi's annual fee and bonus consists of: (i) (Euro)657,000
compensation (gross of the applicable withholding tax and social security
contributions); (ii) a further (Euro)115,000 as specific
265
compensation for the non-competition provisions in the Agreement; and (iii)
a performance related bonus consisting of a base bonus of (Euro)440,000
together with an additional percentage of that base amount represented by
the percentage increase in the adjusted consolidated net income for Costa,
in comparison to the previous year, subject to a limit of a cumulative 15
per cent. per year on a compounded basis. Both (i) and (ii) may be increased
at the discretion of the board of directors of Costa. Under the terms of the
Agreement Mr. Foschi is also entitled to the use of a company car (all
maintenance, fuel and insurance costs will be borne by Costa), to insurance
policies covering the risk of death, illness and permanent disability, and
to accommodation in Genoa or nearby in accordance with terms to be agreed
between him and Costa.
Pursuant to the terms of a retirement and consulting agreement between
Carnival and A. Kirk Lanterman, governed by Washington state law, dated 5
November 2002 (the "Retirement and Consulting Agreement") and in
consideration for past services and for future consulting services, Mr.
Lanterman is entitled to receive annual compensation of U.S.$1,842,324 for a
period of fifteen years following the date of his retirement from Carnival
and various of its wholly owned subsidiaries related to the Holland America
Line business (the "Companies"). In the event of Mr. Lanterman's death prior
to his retirement from Carnival or prior to the fifteenth anniversary of the
date of his retirement from the Companies, the unpaid balance of his total
compensation, namely U.S.$27,634,860, shall be paid to his estate within 30
days of his death. Under the Retirement and Consulting Agreement, Mr.
Lanterman agrees to perform consulting services for the Companies, on their
specific request, on such dates, for such time and at such locations as
shall be agreeable to Mr. Lanterman, for not more than five hours in any
calendar month (without Mr. Lanterman's consent). Carnival and various of
its wholly owned subsidiaries related to the Holland America Line business
will reimburse him for any out-of-pocket expenses incurred by him in the
performance of such services.
9. Litigation
(a)P&O Princess
Except as set out in this paragraph 9(a), there are no, nor have there been
any, legal or arbitration proceedings (including any proceedings which are
pending or threatened of which P&O Princess is aware) which may have, or may
have had during the previous 12 months, a significant effect on the
financial position of the P&O Princess group.
An Italian subsidiary of P&O Princess made a claim for a tax allowance for
the 1995 financial year under the Italian Tremonti law, reducing taxable
profits by just over 250 billion Lire. Qualification for the allowance is
dependent on ownership of relevant assets. The subsidiary in question
bare-boat chartered a vessel it owned to a fellow subsidiary. In December
2001, the Italian tax authorities submitted an assessment for tax of
(Euro)70.7 million (U.S.$74 million) with penalties of (Euro)70.7 million
(U.S.$74 million) on the grounds that the subsidiary had finance leased
rather than chartered the vessel and therefore did not qualify for such an
allowance. The Italian subsidiary has appealed against the assessment and
the outcome of court proceedings in the Low Tax Court of Palermo is awaited.
The P&O Princess board, who has been so advised by its Italian advisers,
believes that the relevant assets were owned and not subject of a finance
lease and that the allowance is due.
Princess Cruises is a party to a purported class action litigation relating
to alleged inappropriate assessing of passengers with certain port charges
in addition to their cruise fare. The plaintiffs have not claimed a specific
damage amount but settlement of this litigation had been agreed in principle
with the plaintiffs for coupons for future travel in amounts between $5 and
$24 with a total face value of approximately $13.4 million. However, on 17
January 2002, a Los Angeles Superior Court Judge ruled that he would not
consider the class-wide settlement agreed by the parties on the grounds that
he had previously ruled that there was no appropriate class. Plaintiffs
appealed the ruling and the Court of Appeal upheld the ruling in Princess'
favour. Plaintiffs then petitioned for rehearing, which was denied. As a
result of this ruling, the case should be returned to the trial court for
resolution as a non-class action case. At this point, the P&O Princess board
does not believe that a material liability will arise with respect to this
case and no provision has been made in the accounts for this contingency.
However, if there is a settlement, there can be no guarantee that it would
be of an amount previously indicated.
In the normal course of business, various other claims and lawsuits have
been filed or are pending against P&O Princess. The majority of these claims
and lawsuits are covered by insurance. P&O
266
Princess management believes the outcome of any such suits which are not
covered by insurance, would not have a material adverse effect on P&O
Princess' financial statements.
(b)Carnival
Save as set out in this paragraph 9(b), there are no, nor have there been
any, legal or arbitration proceedings (including any proceedings which are
pending or threatened of which P&O Princess is aware) which may have, or
have had during the previous 12 months, a significant effect on the
financial position of the Carnival group.
Several actions (collectively, the "ADA Complaints") have been filed against
Costa, Cunard and Holland America Tours alleging that they violated the
Americans with Disabilities Act by failing to make certain cruise ships
accessible to individuals with disabilities. The plaintiffs seek injunctive
relief to require modifications to certain vessels to increase accessibility
for disabled passengers, and fees and costs. Costa and the plaintiffs have
agreed to settle this action pursuant to an agreement that Costa will make
certain modifications to four of its ships with an option to include other
ships in the settlement agreement. This agreement is subject to court
approval. The plaintiffs in the Cunard ADA Complaint have agreed to dismiss
the complaint without prejudice pending settlement negotiations which are
ongoing. Holland America Tours is in ongoing settlement negotiations with
the plaintiffs.
Three actions filed on 4 March 2002, 15 April 2002 and 14 May 2002,
respectively (collectively, the "Facsimile Complaints"), were filed against
Carnival on behalf of purported classes of persons who received unsolicited
advertisements via facsimile, alleging that Carnival and other defendants
distributed unsolicited advertisements via facsimile in contravention of the
U.S. Telephone Consumer Protective Act. The actions relate to facsimiles
received on 6 August 2001, during the period of two years prior to 15 April
2002 and during the period from 1 January 1997. The plaintiffs seek to
enjoin the sending of unsolicited facsimile advertisements and statutory
damages. Such damages are generally assessed, in such cases, to be $500 for
each unsolicited fax (the fines may be trebled in cases involving willful
and knowing violations). However, the plaintiffs have not alleged the number
of facsimiles sent and received in any of the pleadings. Accordingly, it is
not possible to calculate the total value of these actions. The class has
not been certified in any proceedings and the actions are currently in the
initial stages of discovery. The advertisements referred to in the Facsimile
Complaints were not sent by Carnival, but rather were distributed by a
professional faxing company at the behest of travel agencies that referenced
a CCL product. Carnival does not advertise directly to the travelling public
through the use of facsimile transmission.
The ultimate outcomes of the pending ADA and Facsimile Complaints cannot be
determined at this time. Carnival believes that it has meritorious defences
to these claims and, accordingly, Carnival intends to vigorously defend
against these actions.
Several actions filed in the U.S. District Court for the Southern District
of Florida against Carnival and four of its executive officers on behalf of
a purported class of persons who purchased Carnival shares were consolidated
into one action in Florida (the "Stock Purchaser Complaint"). The plaintiffs
have claimed that statements Carnival made in public filings violated
federal securities laws and seek unspecified compensatory damages and
attorney and expert fees and costs. On 12 September 2002, a magistrate judge
recommended that Carnival's motion to dismiss the Stock Purchaser Complaint
be granted and that the plaintiffs' amended complaint be dismissed without
prejudice. The magistrate judge found that the amended complaint failed
properly to allege a cause of action under the securities laws. However,
because it was dismissed without prejudice, the plaintiffs may file a new
amended complaint.
On 16 January 2003, the parties executed a memorandum of understanding,
which is an agreement in principle to settle the Stock Purchaser Complaint.
The settlement is subject to the parties preparing a formal stipulation of
settlement, performing confirmatory discovery and obtaining judicial
approval. The memorandum of understanding requires certification of a
temporary settlement class consisting of all persons who purchased
Carnival's common stock between 28 July 1998 and 28 February 2000. The
settlement amount agreed to is $3.4 million, of which a substantial portion
will be covered by insurance and which includes plaintiffs' attorneys fees.
Allocations of the settlement monies amongst the class members is to be
determined by the
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plaintiffs' counsel. Currently, no date has been set for the hearing
confirming the settlement and the parties are finalising the stipulation of
settlement and discovery schedule.
In February 2001, Holland America Line-U.S.A, Inc. ("HAL-USA"), Carnival's
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 17 August 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 these 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.
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 (Euro)79
million denominated contract for the conversion and lengthening of the ship.
Costa has also given notice of termination of the contact. 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 favour 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 Carnival's business, various other claims and
lawsuits have been filed or are pending against it. Most of these claims and
lawsuits are covered by insurance. Carnival believes the ultimate outcome of
any such actions, which are not covered by insurance, are not expected to
have a material adverse effect on its financial statements.
10.Related party transactions
Transactions by Horst Rahe
On 18 December 2002, Deutsche Seereederei GmbH ("DS"), a company
wholly-owned by Mr Horst Rahe and his family, entered into a share sale
agreement (the "Agreement") with Commerzbank AG ("Commerzbank") for German
tax-planning purposes. The Agreement is in respect of the 11,366,415
ordinary shares of P&O Princess owned by DS (the "Relevant Shares") which
comprise 1.64 per cent. of the total of, and the whole of Mr Rahe's interest
in, the issued share capital of P&O Princess. It will result in DS disposing
of its interest in the Relevant Shares on 23 June 2003, or earlier if it so
elects, but until then, through DS, Mr Rahe retains full economic interest
in the Relevant Shares.
Under the Agreement, on 18 December 2002, DS transferred the Relevant Shares
to Commerzbank for (Pounds)50,580,547 ((Pounds)4.45 per share). At the same
time, DS entered into a total return swap agreement with Commerzbank under
which the Relevant Shares will be valued on 23 June 2003 or earlier, if DS
so elects (the "Valuation Date"). To the extent that the valuation of the
Relevant Shares on the Valuation Date (the "Final Price") exceeds
(Pounds)4.478 per share (the "Initial Price"), Commerzbank will pay the
difference to DS. Conversely, if the Final Price is less than the Initial
Price, DS will pay the difference to Commerzbank. Any dividends receivable
in respect of the Relevant Shares prior to the Valuation Date will be for
the benefit of DS.
Under the total return swap agreement, the Valuation Date will not be
earlier than the P&O Princess EGM. Furthermore, Commerzbank has irrevocably
agreed with P&O Princess that at the P&O Princess EGM it will exercise the
votes attaching to the Relevant Shares it then holds in accordance with the
P&O Princess board's recommendation to shareholders.
In a related transaction on 18 December 2002, DS assigned its right to
receive deferred consideration from POPCIL, in respect of the purchase by
POPCIL of Aida Cruises Limited pursuant to a sale and purchase agreement
dated 25 September 2000, to Paradies Touristik AG ("PT"). PT is a Swiss
company also wholly-owned by Mr Rahe and his family.
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Further, in July 2002 POPCIL entered into, on an arms-length basis, a lease
on an office property in Germany with a company in which Horst Rahe has an
interest. The lease is for a term of ten years, commencing in 2004, with
options to extend. The rent payable under the lease each year varies over
the term of the lease, within the range (Euro)350,000 to (Euro)500,000.
These figures are net of relevant regional government grants.
11.Working capital
The current directors of P&O Princess and the proposed directors of P&O
Princess who will assume their position upon completion of the DLC
transaction are each of the opinion that, taking into account existing bank
and other facilities, the working capital available to the Combined Group is
sufficient for the Combined Group's present requirements, that is, for at
least 12 months following the date of this document.
12.Significant change
(a)Carnival
Except as disclosed under the heading "Trading and Prospects" in Section 4,
there has been no significant change in the financial or trading position of
Carnival which has occurred since 30 November 2002, the date to which
Carnival's latest audited accounts were prepared.
(b)P&O Princess
Except as disclosed under the heading "Trading and Prospects" in Section 4,
there has been no significant change in the financial or trading position of
P&O Princess which has occurred since 31 December 2002, the date to which
P&O Princess' latest audited accounts were prepared.
13.Transaction costs
Carnival expects to incur costs, charges and expenses relating to the DLC
transaction and the Partial Share Offer of approximately $60 million. P&O
Princess expects to incur costs, charges and expenses relating to the DLC
transaction and the Partial Share Offer, including costs relating to the
previously proposed DLC combination with Royal Caribbean, of approximately
$83.5 million. In addition, P&O Princess has paid a fee of $62.5 million to
Royal Caribbean relating to the termination of the implementation agreement
relating to the previously proposed DLC combination with Royal Caribbean.
14.Consents
(a)Each of Merrill Lynch and UBS Warburg has given and has not withdrawn its
written consent to the issue of this document with the inclusion of and the
references to its name in the form and context in which they appear.
(b)Each of Schroder Salomon Smith Barney and Credit Suisse First Boston has
given and has not withdrawn its written consent to the issue of this
document with the inclusion of and the references to its name in the form
and context in which they appear.
(c)PricewaterhouseCoopers LLP has given and not withdrawn its written consent
to the inclusion in this document of its report on Part B of Section 2 and
the references to its name in the form and context in which they appear.
(d)KPMG Audit Plc has given and has not withdrawn its written consent to the
inclusion in this document of its reports in Part B of Section 3 and Part B
of Section 4 and the references to its name in the form and context in which
they appear.
15.Miscellaneous
(a)No agreement, arrangement or understanding (including any compensation
arrangement) exists between Carnival or any party acting in concert with
Carnival and any of the directors, recent directors, shareholders or recent
shareholders of P&O Princess which has any connection with, or dependence
on, or which is conditional upon the outcome of the Partial Share Offer.
(b)There is no agreement, arrangement or understanding whereby the beneficial
ownership of any of the P&O Princess shares or ADSs to be acquired pursuant
to the Partial Share Offer will be transferred to any person, but Carnival
reserves the right to transfer any such shares or ADSs to any member of the
Carnival group.
269
(c)The total emoluments receivable by the directors of Carnival will not be
varied as a direct result of the implementation of the DLC proposal.
(d)Neither the payment of interest on, nor the repayment of, nor the security
for, any liability (contingent or otherwise) of Carnival will depend on any
significant extent on the business of P&O Princess.
(e)Unless otherwise stated, share prices for Carnival and P&O Princess are
taken from Bloomberg.
(f)The (Pounds):$ exchange rates for various dates are taken from Bloomberg.
(g)The DLC "look through" value is based upon the Carnival closing price on 12
March 2003 of $20.75 and the 693,605,328 P&O Princess shares in issue at 12
March 2003 (the last practicable date prior to publication of this document)
as per P&O Princess' filed forms 88(2) with the Registrar of Companies.
(h)The holdings of the equity in the Combined Group are based on 586,969,154
Carnival ordinary shares, par value $0.01, in issue as per the Annual Report
of Carnival dated 30 November 2002 and the 693,605,328 P&O Princess shares
in issue as at 12 March 2003 (the last practicable date prior to publication
of this document) as per P&O Princess' filed forms 88(2) with the Registrar
of Companies.
(i)References to Carnival's credit ratings are based upon FitchRatings, 29
October 2002, Moody's Investor Services, 14 November 2002, and Standard &
Poor's Ratingsdirect, 25 October 2002.
(j)References to P&O Princess' credit ratings are based upon FitchRatings,
November 2002, Moody's Investor Services, 29 July 2002, and Standard &
Poor's Ratingsdirect, 25 October 2002.
16.Documents available for inspection
Copies of the following documents will be available for inspection at the
offices of Freshfields Bruckhaus Deringer 65 Fleet Street London EC4Y 1HS
during usual business hours on any weekday (Saturdays and public holiday
excepted) until the date of completion of the DLC transaction:
(i) the existing and proposed articles of incorporation and by-laws of Carnival;
(ii)the existing and proposed memorandum and articles of association of P&O
Princess;
(iii)the audited consolidated accounts of Carnival for the financial years
ended 30 November 2000, 30 November 2001 and 30 November 2002;
(iv)the audited consolidated accounts of P&O Princess for the years ended 31
December 2000, 31 December 2001 and 31 December 2002;
(v) the directors service contracts referred to in paragraph 8 of this Section
8;
(vi)the material contracts referred to in paragraph 7 of this Section 8;
(vii)the listing particulars issued by P&O Princess dated 26 September 2000;
(viii)the material contracts referred to in the P&O Princess circular dated 27
December 2001 published in connection with a proposed combination with
Royal Caribbean, and not otherwise summarised in this document, namely,
the Implementation Agreement (described in section 7 of that Circular),
the Joint Venture Agreement and the Royal Caribbean Major Stockholders'
Voting Agreement and Proxies, none of which are now relevant following
the Termination Agreement described in paragraph 7(b)(x) of this Section
8;
(ix)copies of the reports from KPMG Audit Plc and PricewaterhouseCoopers LLP
set out in Part B of Section 3 and Part B of Section 4, and Part B of
Section 2, respectively, of this document;
(x) the written consents referred to in paragraph 14 of this Section 8;
(xi)the Carnival Deed of Guarantee in draft form referred to in paragraph 7.2
of Section 6 of this document;
(xii)the P&O Princess Deed of Guarantee in draft form referred to in paragraph
7.1 of Section 6 of this document;
(xiii)the Equalisation and Governance Agreement in draft form referred to in
paragraph 3 of Section 6 of this document;
270
(xiv)the SVE Special Voting Deed in draft form referred to in paragraph 6 of
Section 6 of this document;
(xv)the Carnival Corporation Deed in draft form referred to in paragraph 7 of
Section 6 of this document;
(xvi)full lists of the aggregated dealings set out in paragraph 4 of this
Section 8;
(xvii)Carnival proxy statement/prospectus dated 17 March 2003;
(xviii)Partial Share Offer document dated 17 March 2003; and
(xix)this document.
17 March 2003
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DEFINITIONS
The following definitions apply throughout this document unless the context
requires otherwise:
"Buy-Back" a purchase by Carnival of P&O Princess shares, a
purchase by P&O Princess of Carnival shares, a
purchase by P&O Princess of its own shares or a
reduction by P&O Princess of its issued share capital
"Carnival" Carnival Corporation
"Carnival articles" the articles of incorporation of Carnival as amended by
the resolution set out in the Carnival proxy statement
relating to the DLC transaction and to be proposed at
the Carnival Special Meeting
"Carnival by-laws" the by-laws of Carnival as amended by the resolution
set out in the Carnival proxy statement relating to the
DLC transaction and to be proposed at the Carnival
Special Meeting
"Carnival convertible securities" the $600,000,000 2 per cent. Convertible Senior
Debentures due 2021 and the $1,051,175,000 Liquid
Yield Option Notes(TM) due 2021 (zero coupon - senior), in
each case issued by Carnival
"Carnival Corporation Deed" the deed to be executed by Carnival in favour of P&O
Princess shareholders described in paragraph 7 of Part
B of Section 5
"Carnival Deed of Guarantee" the deed of guarantee to be executed by Carnival
pursuant to the terms of the Implementation Agreement
"Carnival equalisation share" a share which may be issued by Carnival to a member
of the P&O Princess group and which is described in
paragraph 5.3 of Part C of Section 5
"Carnival group" Carnival, its subsidiaries and its subsidiary undertakings
"Carnival shares" shares of common stock of Carnival with a par value of
$0.01 per share
"Carnival Special Meeting" the special meeting of Carnival shareholders to be held
on 14 April 2003
"Carnival Special Voting Entity" the holder of the Carnival special voting share
"Carnival special voting share" the special voting share with a par value of U.S. $0.01 in
the capital of Carnival
"Carnival SVE Owner" The Law Debenture Trust Corporation p.l.c.
"certificated" or "in certificated form" a share or other security which is not in uncertificated
form (that is, not in CREST)
''class rights actions'' actions in respect of which holders of P&O Princess
shares and Carnival shares may have divergent
interests and which are listed in paragraph 3.5.3 of
Section 6
"CLIA" Cruise Lines International Association
272
"Combined Group" the P&O Princess group and the Carnival group after the
DLC structure has been implemented
"Companies Act" the UK Companies Act 1985, as amended
"competing proposal" the announcement by a third party of a firm intention
(whether or not subject to a pre-condition) to make an
offer, in accordance with the Takeover Code, for P&O
Princess (including a proposal for a dual listed company
with P&O Princess) which offer, in Carnival's reasonable
opinion, acting in good faith and after consultation with
its financial advisers, the nature of such advice having
been communicated to P&O Princess, is likely to be
more attractive to P&O Princess shareholders than the
DLC proposal
''DLC Agreements'' the Equalisation and Governance Agreement to be
entered into between P&O Princess and Carnival
pursuant to the Implementation Agreement, the SVE
Special Voting Deed, the Carnival Deed of Guarantee
and the P&O Princess Deed of Guarantee
"DLC principles" the principles agreed by Carnival and P&O Princess for
the implementation, management and operation of the
DLC structure, and which are described in Part B of
Section 5
"DLC proposal" Carnival's proposal to form a dual listed company
structure with P&O Princess and to make the Partial
Share Offer
"DLC structure" the dual listed company structure created by the DLC
documents
"DLC transaction" the proposed combination of P&O Princess and Carnival
under a dual listed company structure in the terms
described in this document
"EC" the European Commission
"EC Merger Regulation" Council Regulation (EEC) No 4064/89 of 21 December
1989 on the control of concentrations between
undertakings, as amended by Council Regulation (EC)
No 1310/97 of 30 July 1997
"equalisation ratio" the ratio of (i) one P&O Princess share to (ii) that
number of Carnival shares that has the same right to
distributions of income and capital and voting rights as
one P&O Princess share
"equalisation share" the P&O Princess equalisation share or the Carnival
equalisation share (as the context may require)
"Exchange Act" the U.S. Securities Exchange Act of 1934, as amended
"Implementation Agreement" the offer and implementation agreement entered into
between P&O Princess and Carnival on 8 January 2003
setting out the terms and conditions for the
implementation of the DLC structure and the Partial
Share Offer
"Internal Revenue Code" the U.S. Internal Revenue Code of 1986, as amended
"joint electorate actions" actions in respect of which holders of P&O Princess
shares and Carnival shares effectively vote as a unified
constituency and which are listed in paragraph 3.5.2 of
Section 6
273
"Joint Venture Agreement" the agreement entered into by P&O Princess, Royal
Caribbean and JOEX Limited on 19 November 2001
terminated by the termination agreement described in
paragraph 7 of Section 8
"London Stock Exchange" London Stock Exchange plc
"Matching Action" an offer or action which having regard to (i) the then
existing equalisation ratio; (ii) the timing of the offer or
action; and (iii) any other relevant circumstances, is in
the reasonable opinion of the boards of Carnival and
P&O Princess financially equivalent (but not necessarily
identical) in respect of, on the one hand holders of
Carnival shares, and on the other hand holders of P&O
Princess shares, and does not materially disadvantage
either company's shareholders
"Merrill Lynch" Merrill Lynch International
"Notice of Meeting" the notice of the P&O Princess EGM
"NYSE" the New York Stock Exchange, Inc.
"Official List" the list maintained by the UK Listing Authority pursuant
to Part VI of the Financial Services and Markets Act
2000
"Panel" the Panel on Takeovers and Mergers
"Partial Share Offer" the partial share offer by Carnival to acquire up to 20 per
cent. of P&O Princess' share capital on the terms and
conditions set out in the Partial Share Offer document
"P&O Princess" P&O Princess Cruises plc
"P&O Princess ADRs" American Depositary Receipts evidencing title to one or
more P&O Princess ADSs
"P&O Princess ADSs" American Depositary Shares, each such share
representing four underlying P&O Princess shares
"P&O Princess articles" the articles of association of P&O Princess as amended
by the resolution set out in the notice of P&O Princess
EGM relating to the DLC transaction and to be proposed
at the P&O Princess EGM
"P&O Princess Deed of Guarantee" the deed of guarantee to be executed by P&O Princess
pursuant to the terms of the Implementation Agreement
"P&O Princess EGM" the extraordinary general meeting of the P&O Princess
shareholders to be held on 16 April 2003
"P&O Princess Employee Share Incentive the P&O Princess Deferred Bonus and Co-investment
Plans" Matching Plan, and the P&O Princess Executive Share
Option Plan
"P&O Princess equalisation share" a share which may be issued by P&O Princess to a
member of the Carnival group and which is described in
paragraph 5.3 of Part B of Section 5
"P&O Princess group" P&O Princess, its subsidiaries and its subsidiary
undertakings
"P&O Princess memorandum" the memorandum of association of P&O Princess as
amended by the resolution set out in the Notice of
Meeting relating to the DLC transaction and to be
proposed at the P&O Princess EGM
"P&O Princess memorandum and the P&O Princess memorandum and the P&O Princess
articles" articles
274
"P&O Princess share reorganisation" the proposed share reorganisation of P&O Princess
shares to be voted upon by P&O Princess shareholders
at the P&O Princess EGM, which will consolidate each
3.3289 existing P&O Princess shares of $0.50 into one
reorganised P&O Princess share of $1.66
"P&O Princess shares" prior to the implementation of the DLC transaction, the
existing unconditionally allotted or issued and fully paid
ordinary shares of $0.50 each in the capital of P&O
Princess (including those represented by P&O Princess
ADSs but not, for avoidance of doubt, such P&O
Princess ADSs) and any further such shares which are
unconditionally allotted or issued and fully paid before
completion of the DLC transaction (or such earlier
date(s) as Carnival may, subject to the Takeover Code,
determine), including any such shares so unconditionally
allotted or issued pursuant to the exercise of options
granted under the P&O Princess employee share
incentive plans and, after the implementation of the DLC
transaction, the unconditionally allotted or issued and
fully paid ordinary shares of U.S. $1.66 each in the
capital of P&O Princess
"P&O Princess special voting share" the special voting share of (Pounds)1.00 in the capital of P&O
Princess
"P&O Princess Special Voting Trust" a trust formed under the P&O Princess Special Voting
Trust Agreement
"P&O Princess Special Voting Trust a voting trust agreement between Carnival and the P&O
Agreement" Princess Trustee
"P&O Princess Trustee" The Law Debenture Trust Corporation (Cayman) Limited,
being the holder of the P&O Princess special voting
share
"POPCIL" P&O Princess Cruises International Limited, being a
direct wholly owned subsidiary of P&O Princess
"P&OSNCO" The Peninsular and Oriental Steam Navigation Company
"Regulations" the Uncertificated Securities Regulations 2001
(SI No. 2001/3755)
"Regulatory Information Service" the Company Announcements Office and/or RNS and/or
any other channel recognised, from time to time, as a
channel for the dissemination of regulatory information by
listed companies under the Listing Rules of the UK
Listing Authority
"Royal Caribbean" Royal Caribbean Cruises Ltd.
"Schroder Salomon Smith Barney" Salomon Brothers International Limited trading as
Schroder Salomon Smith Barney. Schroder is a
trademark of Schroder Holdings plc and is used under
licence by Salomon Brothers International Limited
"Securities Act" the U.S. Securities Act of 1933, as amended
"special voting share" the special voting shares to be issued by each of P&O
Princess and Carnival to enable P&O Princess
shareholders and Carnival shareholders to vote on a
combined basis at meetings of both companies
"SVE Special Voting Deed" the deed described in paragraph 6 of Section 6;
"subsidiary", "subsidiary undertaking" shall be construed in accordance with the Companies Act
"Takeover Code" the UK City Code on Takeovers and Mergers
275
"UBS Warburg" UBS AG, acting through its business group UBS
Warburg or, where appropriate, its subsidiary, UBS
Limited
"UK GAAP" generally accepted accounting principles in the UK
"UK Listing Authority" or "UKLA" the Financial Services Authority as the competent
authority for listing in the United Kingdom under Part VI
of the Financial Services and Markets Act 2000
"UK P&O Princess Shareholder" a holder of P&O Princess shares or P&O Princess ADSs
who is resident or ordinarily resident in the UK for tax
purposes
"UK Receiving Agent" Computershare Investor Services PLC
"uncertificated" or "in uncertificated a share or other security title to which is recorded on the
form" relevant register of the share or security concerned as
being held in uncertificated form in CREST and title to
which, by virtue of the Regulations, may be transferred
by means of CREST
"U.S. holder" a holder of P&O Princess shares who or that is for U.S.
federal income tax purposes (i) a citizen or individual
resident of the U.S., (ii) a corporation or other entity
taxable as a corporation organised under the laws of the
U.S. or any political subdivision thereof (including the
States and the District of Columbia), (iii) an estate or
trust defined in Section 7701(a)(30) of the U.S. Internal
Revenue Code of 1986, as amended, or (iv) any other
person that is subject to U.S. federal income tax on its
worldwide income
"U.S. Exchange Agent" Computershare Trust Company of New York
"U.S. GAAP" generally accepted accounting principles in the U.S.
"U.S. person" a U.S. person as defined in Regulation S under the
Securities Act
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P&O PRINCESS CRUISES PLC
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an EXTRAORDINARY GENERAL MEETING of P&O Princess
Cruises plc (the Company) will be held at Queen Elizabeth II Conference Centre,
Broad Sanctuary, Westminster, London SW1P 3EE on 16 April 2003 at 10:00 a.m.
for the purpose of considering and, if thought fit, passing the following
resolution as a SPECIAL RESOLUTION:
THAT
(a)the proposal to implement and operate the dual listed company structure
between the Company and Carnival Corporation (Carnival), as agreed in an
implementation agreement dated as of 8 January 2003 and entered into between
the Company and Carnival (the Implementation Agreement) and as described in
the circular to the Company's shareholders dated 17 March 2003 (the
Circular), be approved including (without limitation):
(i)the execution by the Company of the Equalisation and Governance
Agreement (as defined in the Circular) between the Company and Carnival;
(ii)the execution by the Company of the SVE Special Voting Deed (as defined
in the Circular) between the Company, Carnival, the Carnival Special
Voting Entity (as defined in the Circular), the P&O Princess Trustee (as
defined in the Circular) as holder of the P&O Princess Special Voting
Share (as defined in the Circular) and the Carnival SVE Owner (as
defined in the Circular) as legal and beneficial owner of the Carnival
Special Voting Entity (as defined in the Circular); and
(iii)the execution by the Company of the P&O Princess Deed of Guarantee (as
defined in the Circular),
in each case substantially in the form submitted to the meeting and signed
by the Chairman for the purpose of identification, subject to such non
material modifications, variations, waivers, amendments and revisions to
such documents as any of the Directors of the Company in his or her absolute
discretion thinks fit;
(b)subject to and with effect from 10:00 p.m. (London time) on the day on which
the Partial Share Offer (as defined in the Circular) becomes or is declared
unconditional (the Record Date):
(i)all issued ordinary shares of U.S.$0.50 in the capital of the Company
(P&O Princess Shares) held by each holder of such ordinary shares on the
Record Date be consolidated into one unclassified share and shall
immediately thereafter be subdivided, so far as possible, into new
ordinary shares of U.S.$1.66 in the capital of the Company (New P&O
Princess Shares) and, as to any excess, one unclassified share
representing the remaining nominal amount in such holding;
(ii)any unclassified shares remaining after the consolidation and
subdivision referred to in paragraph (b)(i) of this resolution be
consolidated into one unclassified share and shall immediately
thereafter be subdivided, so far as possible, into New P&O Princess
Shares and, as to any excess, into one deferred share (Deferred Share)
with a nominal amount equal to such excess, having the rights and being
subject to the provisions set out in paragraph (b)(iii) of this
resolution, and so that the Directors of the Company shall be authorised
in accordance with the new Articles of Association of the Company
referred to in paragraph (d) of this resolution to sell such New P&O
Princess Shares and to distribute the net proceeds of sale in due
proportion (rounded down to the nearest penny) among those members who
would otherwise be entitled to the fractional entitlements;
(iii)the Deferred Share referred to in paragraph (b)(ii) of this resolution
be held by such person as the Directors of the Company may determine.
The Deferred Share shall (1) not entitle the holder thereof to receive
any dividend or other distribution; (2) not entitle the holder to
receive notice of or to attend or vote at any general meeting of the
Company; (3) in the event of a return of assets on the winding up of the
Company or otherwise, entitle the holder thereof to receive the nominal
amount in respect of the Deferred Share pari passu with the holders of
the New P&O Princess Shares. The Deferred Share shall confer no further
rights to participate in the assets of the Company. The holder shall be
entitled to make a gift of such Deferred Share to the Company at any
time. On the making of such gift, the holder shall be bound to surrender
to the Company the certificate for the Deferred Share in order that the
same may be cancelled; and
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(iv)all of the authorised but unissued ordinary shares of U.S.$0.50 in the
capital of the Company be consolidated into one unclassified share and
immediately thereafter subdivided into New P&O Princess Shares and, as
to any excess, one unclassified share, which shall thereupon be
cancelled from the authorised share capital;
(c)subject to and with effect from the Partial Share Offer becoming or being
declared unconditional (Closing), the authorised share capital of the
Company be increased by the creation of:
(i)one special voting share of (Pounds)1.00 in the capital of the Company
(described in the Articles of Association referred to in paragraph (d)
of this resolution as the P&O Princess Special Voting Share);
(ii)one equalisation share of (Pounds)1.00 in the capital of the Company
(described in the Articles of Association referred to in paragraph (d)
of this resolution as the Equalisation Share); and
(iii)a further 50,000 redeemable preference shares of (Pounds)1.00 each in
the capital of the Company (Redeemable Preference Shares),
each having the rights set out in the Articles of Association of the Company
proposed to be adopted pursuant to paragraph (d) of this resolution;
(d)subject to and with effect from Closing, the new Articles of Association of
the Company in the form of the print produced to the meeting (marked "A")
and signed by the Chairman for the purpose of identification be adopted as
the Articles of Association of the Company in substitution for and to the
exclusion of the existing Articles of Association of the Company;
(e)subject to and with effect from Closing, a new clause 4.1 be inserted in the
Memorandum of Association of the Company in the form of the print produced
to the meeting (marked "B") and signed by the Chairman for the purpose of
identification and the existing clauses 4(a) to (t) be renumbered as clauses
4.2.1 to 4.2.20;
(f)subject to and with effect from Closing, the Directors of the Company be
generally and unconditionally authorised pursuant to and in accordance with
Section 80 of the Companies Act 1985 for a period of five years from the
date of this resolution to allot the P&O Princess Special Voting Share
created by paragraph (c)(i) of this resolution to the P&O Princess Trustee
(as defined in the Circular);
(g)subject to and with effect from Closing, the Directors of the Company be
generally and unconditionally authorised pursuant to and in accordance with
Section 80 of the Companies Act 1985 for a period of five years from the
date of this resolution to allot the Equalisation Share created pursuant to
paragraph (c)(ii) of this resolution;
(h)subject to and with effect from Closing, the Directors of the Company be
generally and unconditionally authorised pursuant to and in accordance with
Section 80 of the Companies Act 1985 for a period of five years from the
date of this resolution to allot the Redeemable Preference Shares created
pursuant to paragraph (c)(iii) of this resolution;
(i)by the authorities granted under paragraphs (f), (g) and (h) of this
resolution, the Directors of the Company may during the relevant period make
offers or agreements which would or might require the allotment of the P&O
Princess Special Voting Share, the Equalisation Share or the Redeemable
Preference Shares after the expiry of such period; and
(j)subject to and with effect from Closing, the name of the Company be changed
to "Carnival plc".
Date: 17 March 2003
By order of the Board
Simon Pearce
Secretary
Registered office:
77 New Oxford Street
London WC1A 1PP
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Notes:
(1)Only persons entered in the register of members of the Company at 11.00 p.m.
on 14 April 2003 or on the day which is two days prior to the date of any
adjournment of the meeting shall (if otherwise entitled to do so) be
entitled to attend and vote at the meeting or any such adjournment. This is
in accordance with Regulation 41(1) of the Uncertificated Securities
Regulations 2001.
(2)A member entitled to attend and vote at the meeting may appoint one or more
proxies to attend and, on a poll, vote instead of him/her. A proxy need not
be a member of the Company. A form of proxy is enclosed. The appointment of
a proxy will not prevent a shareholder of the Company from subsequently
attending and voting at the meeting in person.
(3)To be valid for the meeting, a duly completed and signed form of proxy
(together with any power of attorney or authority under which it is signed
or a certified copy of such power or authority) should be deposited (whether
delivered personally or by post) at the offices of the Company's registrars,
Computershare Investor Services PLC, The Pavilions, Bridgwater Road,
Bristol, BS13 8FB. Alternatively, a proxy appointment may be submitted via
the internet in accordance with the instructions set out on the form of
proxy. Forms of proxy must be delivered and internet appointments must be
submitted by no later than 48 hours before the time for which the meeting is
convened or, in the case of a poll taken otherwise than at or on the same
day as the meeting, 48 hours before for the date for taking the poll.
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