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Author: FoolishCop Big gold star, 5000 posts Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46840  
Subject: CCL: Employee Stock Options - Part I Date: 1/4/2004 11:37 AM
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I wanted to take a look at how Carnival used or abused stock options, and what effect that might have on the company's performance. Interestingly, the form on which option grants are disclosed, a DEF-14A, was not filed for 2003, though there had been such forms filed previously each year going all the way back to 1995, generally in March of the year.

In 2002, however, according to its 10-K, Carnival could grant as many as 40 million option shares, though no one person could receive more than 2 million shares.

After reviewing Carnival's ESO grants, it does not appear that the company is an overt abuser. In 2001, stock options represented just 0.4% of all the shares outstanding; in 2002, that had jumped to 2.2%, still not an unreasonable amount, though it's reaching the limits. I've seen Fool articles suggesting that "abuse" would begin somewhere north of 3%.

What I noted with the 2002 figures is there were two separate grants, one given in January and the other given in October.

All Figures in 000's
2001 2000
---- ----
Shares Outstanding 586,202 599,663
Options Granted 13,169 2,857
ESO % of Shares 2.2% 0.5%

To determine the number of options granted, I went to http://edgarscan.pwcglobal.com/servlets/edgarscan and typed in "Carnival" and chose "Carnival Corp" from the list. The site then gave me a complete list of every form filed by the company, going back to 1995. Using the DEF-14A, I found the stock options table where it told me that CEO Micky Arinson had been granted 240,000 shares, representing 3.65% of the January options, and 120,000 shares representing 1.82% of the October options.

To determine the approximate total number of options issued in 2001, I divided the shares by their percentage of the total (240,000 / 0.0365) to arrive at 6.575 million for the January grant and 6.593 million for the October grant (120,000 / 0.0182), for a total of 13.169 million.

Determining their percentage of the shares simply required me to divided the option shares by the total shares outstanding. If the diluted and basic shares had not been the same, I would have used the basic number since the diluted figure represents an estimate. I then performed the same math for 2000.

According to those same tables, the exercise price for the 2001 shares was $29.8125, and $43.5625 for the 2000 shares. The impact of the unrecorded option expense on Net Income for the two years would have been $392.6 million and $124.5 million respectively. This would have had a significant effect on earnings per share as seen in the table below:

All Figures in 000s
Reported Net Income: $926,200 $965,458
Adjusted Net Income: $533,600 $840,958

Reported EPS: $1.73 $1.58
Adjusted EPS: $0.91 $1.40
Difference: 47% 11%

According to Carnival, however, in a section of its 2002 10-K entitled "Stock-Based Compensation," they used the "intrinsic value method" for calculating the costs of options, pursuant to SFAS 123. Using those calculations, would have valued the shares at $12.67 and $13.31, respectively, for the years 2001 and 2000. It would have reduced Net Income only to $904 million in 2001 (for an EPS of $1.54, or 11% dilution) and would not have materially affected the results for 2000.

As the basis for my calculations, I referred to a series of "Fool on the Hill" articles from 1999 by Warren Gump and a Matt Richey FOTH article from 2002. It's quite likely I lost something in the translation, so I hope you'll pick it apart and let me know where I can improve it.

In Part II, I mimic what Chin did with PAYX to see what would occur.

Rich
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