Carnival Cruises 2003 Annual Report Download - page 24

21Carnival Corporation & plc
granted leave to intervene in the Festival Action and
intend to contest such action vigorously. A successful
third party challenge of an unconditional Commission
clearance decision would be unprecedented, and based
on a review of the law and the factual circumstances
of the DLC transaction, as well as the Commission’s
approval decision in relation to the DLC transaction,
we believe that the Festival Action will not have a
material adverse effect on the companies or the DLC
transaction. However, the ultimate outcome of this
matter cannot be determined at this time.
In 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 cov-
ered by insurance and, accordingly, the maximum amount
of our liability is typically limited to our self-insurance
retention levels. However, the ultimate outcome of these
claims and lawsuits which are not covered by insurance
cannot be determined at this time.
Contingent Obligations
At November 30, 2003, we had contingent obliga-
tions totaling $1.08 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 obliga-
tions. Accordingly, these obligations were considered
extinguished, and neither funds nor the contingent obli-
gations have been included on our balance sheets. We
would only be required to make any payments under
these contingent obligations in the remote event of
nonperformance by these financial institutions, all of
which have long-term credit ratings of AAA or AA. In
addition, we obtained a direct guarantee from another
AAA rated financial institution for $298 million of the
above noted contingent obligations, thereby further
reducing the already remote exposure to this portion
of the contingent obligations. If the major financial insti-
tutions’ 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 insti-
tutions. If Carnival Corporation’s credit rating falls below
BBB, we would be required to provide a standby letter
of credit for $90 million, or alternatively provide mort-
gages in the aggregate amount of $90 million on two
of Carnival Corporation’s ships.
In the unlikely event that we were to terminate the
three lease agreements early or default on our obliga-
tions, we would, as of November 30, 2003 have to
pay a total of $168 million in stipulated damages. As of
November 30, 2003, $177 million of standby letters of
credit have been issued by a major financial institution
in order to provide further security for the payment of
these contingent stipulated damages. In 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. Between 2017 and 2022, we have the right to
exercise options that would terminate these transac-
tions at no cost to us. As a result of these three trans-
actions, we have $40 million and $43 million of deferred
income recorded on our balance sheets as of November
30, 2003 and 2002, respectively, which is being amor-
tized to nonoperating income through 2022.
Other Contingent Obligations
Some of the debt agreements that we enter into
include indemnification provisions that obligate us to
make payments to the counterparty if certain events
occur. These contingencies generally relate to changes
in taxes, changes in laws that increase lender capital
costs and other similar costs. The indemnification clauses
are often standard contractual terms and were entered
into in the normal course of business. There are no
stated or notional amounts included in the indemnifica-
tion clauses and we are not able to estimate the maxi-
mum potential amount of future payments, if any, under
these indemnification clauses. We have not been required
to make any payments under such indemnification clauses
in the past and, under current circumstances, we do
not believe a request for indemnification is probable.
Note 10—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 Holland
America Tours and Princess Tours and the items listed
in the regulations under Section 883 that the Internal
Revenue Service does not consider to be incidental to
ship operations discussed in the following paragraph,
is exempt from U.S. federal income taxes. If we were
found not to qualify for exemption pursuant to applica-
ble income tax treaties or under the Internal Revenue