Carnival Cruises 2007 Annual Report Download - page 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24 | CARNIVAL CORPORATION & PLC
NOTE 12—BENEFIT PLANS
Stock Incentive Plans
We issue our share-based compensation awards under the
Carnival Corporation and Carnival plc stock plans, which have
an aggregate of 38.6 million shares available for future grant
at November 30, 2007. These plans allow us to issue stock
options, restricted stock awards and restricted stock units
(collectively “incentive awards”). Incentive awards are primarily
granted to management level employees and members of our
Board of Directors. The plans are administered by a committee
of our independent directors (the “Committee”), that deter-
mines who is eligible to participate, the number of shares for
which incentive awards are to be granted and the amounts
that may be exercised within a specified term. These plans
allow us to fulfill our incentive award obligations using shares
purchased in the open market, or with unissued or treasury
shares. Certain incentive awards provide for accelerated vest-
ing if we have a change in control, as defined.
Effective December 1, 2005 we adopted the provisions of
SFAS No. 123(R), which required us to measure and recog-
nize compensation expense for all share-based compensation
awards. The total share-based compensation expense was
$64 million and $68 million for fiscal 2007 and 2006, of
which $57 million and $60 million has been included in the
Consolidated Statements of Operations as selling, general
and administrative expenses and $7 million and $8 million as
cruise payroll expenses, respectively.
In fiscal 2005, we did not recognize compensation expense
for the issuance of stock options with an exercise price equal
to or greater than the market price of the underlying shares
at the date of grant. Had we elected to charge earnings for
the estimated fair value of stock options in fiscal 2005, our
fiscal 2005 pro forma net income and pro forma earnings per
share would have been as follows (in millions, except per
share amounts):
Net income, as reported ............................. $ 2,253
Share-based compensation expense included in
net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Total share-based compensation expense determined
under the fair value-based method for all awards(a) ...... (86)
Pro forma net income for basic earnings per share ........ 2,179
Interest on dilutive convertible notes ................... 47
Pro forma net income for diluted earnings per share . . . . . . $ 2,226
Earnings per share
Basic
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.80
Pro forma ..................................... $ 2.70
Diluted
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.70
Pro forma ..................................... $ 2.62
(a) This amount includes the expensing of stock options made to retirement-
eligible employees over the expected vesting period of the option and
accounting for the impact of forfeitures as they occur.
As permitted by SFAS No. 123 and SFAS No. 123(R), the
fair values of options were estimated using the Black-Scholes
option-pricing model. The Black-Scholes weighted-average
values and assumptions were as follows:
Years Ended November 30,
2007 2006 2005
Fair value of options at the
dates of grant . . . . . . . . . . . . . . . . . $11.76 $12.25 $12.99
Risk-free interest rate(a) ............ 4.9% 4.5% 4.1%
Expected dividend yield . . . . . . . . . . . 3.3% 2.6% 1.9%
Expected volatility(b) . . . . . . . . . . . . . . 29.3% 29.2% 27.0%
Expected option life (in years)(c) ..... 5.00 4.75 4.74
(a) The risk-free interest rate is based on U.S. Treasury zero-coupon issues
with a remaining term equal to the expected option life assumed at the date
of grant.
(b) The expected volatility is based on a weighting of the implied volatilities
derived from our exchange traded options and convertible notes and the
historical volatility of our common stock.
(c) The average expected life was based on the contractual term of the option
and expected employee exercise behavior. Based on our assessment of
employee groupings and observable behaviors, we determined that a single
grouping is appropriate.