FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 1-9610
CARNIVAL CORPORATION
(Exact name of registrant as specified in its charter)
Republic of Panama 59-1562976
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3655 N.W. 87th Avenue, Miami, Florida 33178-2428
(Address of principal executive offices) (Zip code)
(305) 599-2600
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, $.01 par value - 613,368,768 shares as of July 9, 1999.
CARNIVAL CORPORATION
I N D E X
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
May 31, 1999 and November 30, 1998 1
Consolidated Statements of Operations -
Six and Three Months Ended May 31, 1999
and 1998 2
Consolidated Statements of Cash Flows -
Six Months Ended May 31, 1999
and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information. 23
Item 6. Exhibits and Reports on Form 8-K. 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
May 31, November 30,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 382,640 $ 137,273
Short-term investments 614,799 5,956
Accounts receivable, net 103,214 60,837
Consumable inventories, at average cost 81,035 75,449
Prepaid expenses and other 100,211 90,764
Total current assets 1,281,899 370,279
PROPERTY AND EQUIPMENT, NET 5,770,921 5,768,114
INVESTMENTS IN AND ADVANCES TO AFFILIATES 494,185 546,693
GOODWILL, LESS ACCUMULATED AMORTIZATION OF
$78,982 AND $72,255 406,708 437,464
OTHER ASSETS 45,595 56,773
$7,999,308 $7,179,323
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 33,667 $ 67,626
Accounts payable 180,115 168,546
Accrued liabilities 202,615 206,968
Customer deposits 822,719 638,383
Dividends payable 55,193 53,590
Total current liabilities 1,294,309 1,135,113
LONG-TERM DEBT 1,240,997 1,563,014
DEFERRED INCOME AND OTHER LONG-TERM LIABILITIES 82,791 63,036
COMMITMENTS AND CONTINGENCIES (Note 5)
MINORITY INTEREST 138,712 132,684
SHAREHOLDERS' EQUITY
Common Stock; $.01 par value; 960,000 shares
authorized; 613,257 and 595,448 shares
issued and outstanding 6,133 5,955
Paid-in-capital 1,620,848 880,488
Retained earnings 3,630,364 3,379,628
Other (14,846) 19,405
Total shareholders' equity 5,242,499 4,285,476
$7,999,308 $7,179,323
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six Months Three Months
Ended May 31, Ended May 31,
1999 1998 1999 1998
REVENUES $1,544,407 $1,219,196 $796,149 $661,358
COSTS AND EXPENSES
Operating expenses 848,529 669,951 432,426 362,356
Selling and administrative 216,287 163,784 105,517 84,950
Depreciation and
amortization 116,815 89,266 58,911 46,258
1,181,631 923,001 596,854 493,564
OPERATING INCOME BEFORE
LOSS FROM AFFILIATED
OPERATIONS 362,776 296,195 199,295 167,794
LOSS FROM AFFILIATED
OPERATIONS, NET (7,099) (13,034) (1,182) (2,353)
OPERATING INCOME 355,677 283,161 198,113 165,441
NONOPERATING INCOME (EXPENSE)
Interest income 18,362 5,885 11,475 2,148
Interest expense, net of
capitalized interest (26,880) (24,735) (13,490) (12,176)
Other income (expense), net 7,941 (662) 4,945 2,609
Income tax benefit 7,645 6,861 2,839 2,574
Minority interest (1,642) (540)
5,426 (12,651) 5,229 (4,845)
NET INCOME $ 361,103 $270,510 $203,342 $160,596
EARNINGS PER SHARE:
Basic $.59 $.45 $.33 $.27
Diluted $.59 $.45 $.33 $.27
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended May 31,
1999 1998
OPERATING ACTIVITIES
Net income $361,103 $270,510
Adjustments
Depreciation and amortization 116,815 89,266
Dividends received and loss from
affiliated operations, net 19,017 23,621
Minority interest 1,642
Other 2,225 7,047
Changes in operating assets and liabilities,
excluding businesses acquired and consolidated
Increase in:
Receivables (25,046) (4,291)
Consumable inventories (5,586) (4,690)
Prepaid expenses and other (9,482) (20,196)
Increase (decrease) in:
Accounts payable 11,569 38,109
Accrued liabilities (3,219) 2,321
Customer deposits 184,336 191,165
Net cash provided from operating
activities 653,374 592,862
INVESTING ACTIVITIES
(Increase) decrease in short-term
investments, net (608,278) 324
Additions to property and equipment, net (112,860) (702,184)
Acquisitions of consolidated subsidiaries, net 9,415 (246,097)
Other, net 34,797 42,038
Net cash used for investing activities (676,926) (905,919)
FINANCING ACTIVITIES
Proceeds from long-term debt 7,721 1,184,588
Principal payments of long-term debt (363,799) (801,841)
Dividends paid (108,764) (89,183)
Proceeds from issuance of Common Stock, net 733,882 4,098
Other (121) (3,994)
Net cash provided from
financing activities 268,919 293,668
Net increase (decrease) in cash and
cash equivalents 245,367 (19,389)
Cash and cash equivalents at beginning
of period 137,273 139,989
Cash and cash equivalents at end of period $382,640 $120,600
The accompanying notes are an integral part of these consolidated financial
statements.
CARNIVAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by Carnival
Corporation, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.
The accompanying consolidated balance sheet at May 31, 1999 and the
consolidated statements of operations for the six and three months ended May
31, 1999 and 1998 and consolidated statements of cash flows for the six months
ended May 31, 1999 and 1998 are unaudited and, in the opinion of management,
contain all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation. The operations of Carnival Corporation and
its consolidated subsidiaries (referred to collectively as the "Company") and
its affiliates are seasonal and results for interim periods are not necessarily
indicative of the results for the entire year. Certain amounts in prior periods
have been reclassified to conform with the current period's presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
May 31, November 30,
1999 1998
(in thousands)
Vessels $5,770,648 $5,754,218
Vessels under construction 572,866 526,529
6,343,514 6,280,747
Land, buildings and improvements 236,554 217,597
Transportation and other equipment 348,710 322,069
Total property and equipment 6,928,778 6,820,413
Less accumulated depreciation and
amortization (1,157,857) (1,052,299)
$5,770,921 $5,768,114
Interest costs associated with the construction of property and equipment,
consisting primarily of vessels, are capitalized during the construction period
and amounted to $19.9 million and $16.0 million for the six months ended May
31, 1999 and 1998, respectively, and $9.5 million and $9.6 million for the
three months ended May 31, 1999 and 1998, respectively.
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
May 31, November 30,
1999 1998
(in thousands)
Commercial paper $ 54,209 $ 368,710
Unsecured 5.65% Notes Due October 15, 2000 199,876 199,833
Unsecured 6.15% Notes Due April 15, 2008 199,538 199,512
Unsecured 6.65% Debentures due January 15, 2028 199,261 199,249
Notes payable bearing interest at rates ranging
from 5.1% to 8.0%, secured by vessels,
maturing through 2009 151,524 174,198
Unsecured 6.15% Notes Due October 1, 2003 124,970 124,967
Unsecured 7.20% Debentures Due October 1, 2023 124,883 124,881
Unsecured 7.7% Notes Due July 15, 2004 99,941 99,936
Unsecured 7.05% Notes Due May 15, 2005 99,881 99,871
Other loans payable 20,581 39,483
1,274,664 1,630,640
Less portion due within one year (33,667) (67,626)
$1,240,997 $1,563,014
NOTE 4 - SHAREHOLDERS' EQUITY
In December 1998, Carnival Corporation issued 17 million shares of its
Common Stock in a public offering and received net proceeds of approximately
$725 million.
During the six months ended May 31, 1999 and 1998, the Company declared
quarterly cash dividends aggregating $.18 and $.15 per share aggregating $110.4
million and $89.2 million, respectively.
Carnival Corporation's Articles of Incorporation, as amended, authorizes
the Board of Directors, at its discretion, to issue up to 40 million shares of
Preferred Stock. The Preferred Stock is issuable in series which may vary as to
certain rights and preferences and has a $.01 par value. At May 31, 1999, no
Preferred Stock had been issued.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Capital Expenditures
A description of ships under contract for construction at May 31, 1999 is
as follows (in millions, except passenger capacity data):
Expected
Service Passenger Total
Vessel Date(1) Shipyard Capacity(2) Cost(3)
Carnival Cruise Lines
Carnival Triumph 7/99 Fincantieri(4) 2,758 $ 420
Carnival Victory 8/00 Fincantieri 2,758 440
Carnival Spirit 4/01 Masa-Yards 2,112 375
Carnival Pride 1/02 Masa-Yards(5) 2,112 375
Carnival Conquest 12/02 Fincantieri 2,758 450
Carnival Glory 8/03 Fincantieri 2,758 450
Total Carnival Cruise Lines 15,256 2,510
Holland America Line
Volendam 11/99 Fincantieri(4) 1,440 300
Zaandam 3/00 Fincantieri(4) 1,440 300
Amsterdam 11/00 Fincantieri 1,380 300
Total Holland America Line 4,260 900
Total 19,516 $3,410
(1) The expected service date is the date the vessel is expected to begin
revenue generating activities.
(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 four passengers.
(3) Estimated total cost of the completed vessel includes the contract price
with the shipyard, design and engineering fees, capitalized interest, various
owner supplied items and construction oversight costs.
(4) These construction contracts are denominated in Italian Lira and have
been fixed into U.S. dollars through the utilization of forward foreign
currency contracts.
(5) This construction contract is denominated in German Deutsche Marks
and has been fixed into U.S. dollars through the utilization of forward foreign
currency contracts.
In connection with the vessels under construction, the Company has paid
$573 million through May 31, 1999 and anticipates paying approximately $940
million during the twelve month period ending May 31, 2000 and approximately
$1.9 billion thereafter.
Litigation
Several actions (collectively the "Passenger Complaints") have been filed
against Carnival Cruise Lines ("Carnival") and one action has been filed
against Holland America Westours on behalf of purported classes of persons who
paid port charges to Carnival or Holland America Line ("Holland America"),
alleging that statements made in advertising and promotional materials
concerning port charges were false and misleading. The Passenger Complaints
allege violations of the various state consumer protection acts and claims of
fraud, conversion, breach of fiduciary duties and unjust enrichment. Plaintiffs
seek compensatory damages or, alternatively, refunds of portions of port
charges paid, attorneys' fees, costs, prejudgment interest, punitive damages
and injunctive and declaratory relief. The actions against Carnival are in
various stages of progress and are proceeding.
Holland America Westours has entered into a settlement agreement for the
one Passenger Complaint filed against it. The settlement agreement was approved
by the court on September 28, 1998. Five members of the settlement class
appealed the court's approval of the settlement. Holland America Westours has
settled with four of the five members. The appeal of one member of the
settlement class is likely to take between one and two years to be resolved.
Unless the appeal is successful, Holland America will issue travel vouchers
with a face value of $10-$50 depending on specified criteria, to certain of its
passengers who are U.S. residents and who sailed between April 1992 and April
1996, and will pay a portion of the plaintiffs' legal fees. The amount and
timing of the travel vouchers to be redeemed and the effects of the travel
voucher redemption on revenues is not reasonably determinable. Accordingly, the
Company has not established a liability for the travel voucher portion of the
settlements and will account for the redemption of the vouchers as a reduction
of future revenues. In 1998 the Company established a liability for the
estimated distribution costs of the settlement notices and plaintiffs' legal
costs.
Several complaints were filed against Carnival and/or Holland America
Westours (collectively the "Travel Agent Complaints") on behalf of purported
classes of travel agencies who had booked a cruise with Carnival or Holland
America, claiming that advertising practices regarding port charges resulted in
an improper commission bypass. These actions, filed in California, Alabama,
Washington and Florida, allege violations of state consumer protection laws,
claims of breach of contract, negligent misrepresentation, unjust enrichment,
unlawful business practices and common law fraud, and they seek unspecified
compensatory damages (or alternatively, the payment of usual and customary
commissions on port charges paid by passengers in excess of certain charges
levied by government authorities), an accounting, attorneys' fees and costs,
punitive damages and injunctive relief. These actions are in various stages of
progress and are proceeding.
It is not now possible to determine the ultimate outcome of the pending
Passenger and Travel Agent Complaints. Management believes it has meritorious
defenses to the claims. Management understands that purported class actions
similar to the Passenger and Travel Agent Complaints have been filed against
several other cruise lines.
In the normal course of business, various other claims and lawsuits have
been filed or are pending against the Company. The majority of these claims and
lawsuits are covered by insurance. Management believes the outcome of any such
suits, which are not covered by insurance would not have a material adverse
effect on the Company's financial condition or results of operations.
Ship Lease Transactions
During August and December 1998, the Company entered into lease out and
lease back transactions with respect to two of its vessels. The Company has
effectively guaranteed certain obligations or provided letters of credit to
participants in the transactions which, at May 31, 1999, total approximately
$339 million. Only in the remote event of nonperformance by certain major
financial institutions, which have long-term credit ratings of AAA, would the
Company be required to make any payments under these guarantees. After
approximately 18 years, the Company has the right to exercise purchase options
that would terminate these transactions. As a result of these transactions, the
Company received approximately $44 million (net) which is recorded as deferred
income on the balance sheets and is being amortized to nonoperating income over
approximately 18 years.
NOTE 6 - COMPREHENSIVE INCOME
Effective December 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for the reporting and disclosure of comprehensive
income and its components. Comprehensive income is a measure that reflects all
changes in shareholders' equity, except those resulting from transactions with
shareholders. Comprehensive income for the periods indicated is as follows:
Six months Three months
Ended May 31, Ended May,31
1999 1998 1999 1998
(in thousands)
Net income $361,103 $270,510 $203,342 $160,596
Foreign currency translation
adjustment (29,996) (906) (22,828) (3,383)
Changes in securities
valuation allowance 7 113 8 42
Total comprehensive income $331,114 $269,717 $180,522 $157,255
NOTE 7 - EARNINGS PER SHARE
Earnings per share have been computed as follows (in thousands, except per
share data):
Six Months Three Months
Ended May 31, Ended May 31,
1999 1998 1999 1998
BASIC:
Net income $361,103 $270,510 $203,342 $160,596
Average common shares
outstanding 611,074 594,744 613,161 594,857
Earnings per share $ .59 $ .45 $ .33 $ .27
DILUTED:
Net income $361,103 $270,510 $203,342 $160,596
Effect on net income of
assumed purchase of
minority interest 1,642 540
Net income available
assuming dilution $362,745 $270,510 $203,882 $160,596
Average common shares
outstanding 611,074 594,744 613,161 594,857
Effect of dilutive
securities:
Additional shares
issuable upon:
Assumed exercise
of Cunard Line
Limited's minority
shareholders
purchase option 5,152 5,152
Various stock plans 3,760 3,404 3,621 3,663
Average common shares
outstanding
assuming dilution 619,986 598,148 621,934 598,520
Earnings per share $ .59 $ .45 $ .33 $ .27
On April 13, 1998, the Board of Directors approved a two-for-one split of
the Company's Common Stock. The additional shares were distributed on June 12,
1998 to shareholders of record on May 29, 1998. All share and per share data
presented herein have been retroactively restated to give effect to this stock
split.
NOTE 8 - RECENT PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Pursuant to
SFAS No. 133, changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. SFAS No. 133, as amended is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (December 1, 2000
for the Company). The Company has not yet determined the impact that the
adoption of SFAS No. 133 will have, but does not currently expect the adoption
to have a material impact on its results of operations or cash flows.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Certain statements under this caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Part II. OTHER INFORMATION, ITEM 5 (a) Forward-
Looking Statements".
General
The Company earns its cruise revenues primarily from (i) the sale of
passenger tickets, which includes accommodations, meals, and most shipboard
activities, (ii) the sale of air transportation to and from the cruise ships
and (iii) the sale of goods and services on board its cruise ships, such as
casino gaming, bar sales, gift shop sales and other related services. The
Company also derives revenues from the tour and related operations of Holland
America Westours.
Selected segment and statistical information for the periods indicated is
as follows:
Six Months Three Months
Ended May 31, Ended May 31,
1999 1998 1999 1998
(in thousands, except selected statistical information)
REVENUES:
Cruise $1,506,179 $1,182,061 $765,103 $631,084
Tour 46,124 45,453 38,620 38,414
Intersegment revenues (7,896) (8,318) (7,574) (8,140)
$1,544,407 $1,219,196 $796,149 $661,358
OPERATING EXPENSES:
Cruise $ 810,896 $ 633,826 $403,830 $335,056
Tour 45,529 44,443 36,170 35,440
Intersegment expenses (7,896) (8,318) (7,574) (8,140)
$ 848,529 $ 669,951 $432,426 $362,356
OPERATING INCOME:
Cruise $ 388,346 $ 319,844 $207,912 $177,420
Tour (19,484) (17,213) (7,586) (6,692)
Corporate, including loss
from affiliates, net (13,185) (19,470) (2,213) (5,287)
$ 355,677 $ 283,161 $198,113 $165,441
SELECTED STATISTICAL INFORMATION:
Passengers carried 1,058,000 923,000 541,000 497,000
Passenger cruise days (1) 6,975,000 5,931,000 3,470,000 3,104,000
Occupancy percentage 100.4% 105.6% 99.9% 105.4%
(1) A passenger cruise day is one passenger sailing for a period of one day.
For example, one passenger sailing on a one week cruise is seven passenger
cruise days.
Operations data expressed as a percentage of total revenues for the
periods indicated is as follows:
Six Months Three Months
Ended May 31, Ended May 31,
1999 1998 1999 1998
REVENUES 100% 100% 100% 100%
COSTS AND EXPENSES:
Operating expenses 55 55 54 55
Selling and administrative 14 14 13 13
Depreciation and amortization 8 7 8 7
OPERATING INCOME BEFORE
LOSS FROM AFFILIATED
OPERATIONS 23 24 25 25
LOSS FROM AFFILIATED
OPERATIONS, NET - (1) - -
OPERATING INCOME 23 23 25 25
NONOPERATING INCOME (EXPENSE) - (1) 1 (1)
NET INCOME 23% 22% 26% 24%
Fixed costs, including depreciation, fuel, insurance and crew costs,
represent more than one-third of the Company's operating expenses and do not
change significantly in relation to changes in passenger loads and aggregate
passenger ticket revenue.
The Company's cruise and tour operations experience varying degrees of
seasonality. The Company's revenue from the sale of passenger tickets for its
cruise operations is moderately seasonal. Historically, demand for cruises has
been greater during the summer months. The Company's tour revenues are
extremely seasonal with a majority of tour revenues generated during the late
spring and summer months in conjunction with the Alaska cruise season.
The year over year percentage increase in average passenger capacity for
the Company's cruise brands is expected to approximate 9.8% and 12.8% in the
third and fourth quarters of fiscal 1999, respectively, as compared to the same
periods of fiscal 1998. These increases are primarily a result of the
introduction into service of Carnival's Paradise in late November 1998 and the
expected introduction into service of the Carnival Triumph in July 1999 and
Holland America's Volendam in November 1999.
The year over year percentage increase in average passenger capacity
resulting from the delivery of vessels currently under contract for
construction for the fiscal years 2000 and 2001 is expected to approximate
13.0% and 10.8%, respectively.
On May 28, 1998, the Company and a group of investors acquired the
operating assets of Cunard, a cruise company operating five luxury cruise
ships. Simultaneous with the acquisition, Seabourn Cruise Line Limited
("Seabourn"), a luxury cruise line in which the Company owned a 50% interest,
was combined with Cunard. The Company owns approximately 68% of the combined
entity, which is named Cunard Line Limited.
The Company and Airtours plc ("Airtours"), a publicly traded leisure
travel company in which the Company holds an approximate 26% interest, each own
a 50% interest in Il Ponte S.p.A. ("Il Ponte"), the parent company of Costa
Crociere, S.p.A. ("Costa"), an Italian cruise company. The Company records its
interest in Airtours and Il Ponte using the equity method of accounting and
records its portion of Airtours' and Il Ponte's consolidated operating results
on a two-month lag basis. Demand for Airtours' and Costa's products is seasonal
due to the nature of the European leisure travel industry and European cruise
season. Typically, Airtours' and Costa's quarters ending June 30 and September
30 experience higher demand, with demand in the quarter ending September 30
being the highest.
As a result of the recent military conflict in the Balkans, in April 1999
the Company announced that it had experienced a slowdown in booking patterns
for its Mediterranean cruise itineraries and had changed the itineraries of
certain of its Mediterranean cruises. The Company also stated that management
estimated that the Balkan conflict could have a six to eight cents per share
negative impact on its 1999 earnings per share, split between the third and
fourth quarters of fiscal 1999. As a result of the cessation of hostilities and
other developments, management currently believes that the impact on its
business could be at or slightly below the low end of this range.
Six Months Ended May 31, 1999 ("1999") Compared
To Six Months Ended May 31, 1998 ("1998")
Revenues
The increase in total revenues of $325.2 million, or 26.7%, was almost
entirely due to an increase in cruise revenues. Approximately $197 million of
the increase was due to the acquisition and consolidation of Cunard and
Seabourn and $127 million was due to increased cruise revenues from Carnival,
Holland America and Windstar. The increase from Carnival, Holland America and
Windstar resulted from an increase of approximately 11.5% in passenger capacity
and a .8% increase in total revenue per passenger cruise day, offset slightly
by a 1.5% decrease in occupancy rates. Passenger capacity increased due
primarily to the introduction into service of Carnival's Paradise in November
1998, the Elation in March 1998 and Windstar Cruises' ("Windstar") Wind Surf in
May 1998. In addition, the .8% increase in total revenue per passenger cruise
day is net of a 1.7% decrease due to a reduction in the number of passengers
electing to use the Company's air program. When a passenger elects to purchase
his/her own air transportation, rather than use the Company's air program, both
the Company's cruise revenues and operating expenses decrease by approximately
the same amount.
Cost and Expenses
Operating expenses increased $178.6 million, or 26.7%. Cruise operating
costs increased by $177.1 million, or 27.9% in 1999. Approximately $135.7
million of the cruise operating costs increase was due to the acquisition and
consolidation of Cunard and Seabourn. Cruise operating costs, excluding Cunard
and Seabourn, increased $41.3 million primarily as a result of increases in
passenger capacity, partially offset by lower airfare and other costs.
Excluding Cunard and Seabourn, cruise operating costs as a percentage of cruise
revenues were 51.6% and 53.6% in 1999 and 1998, respectively.
Selling and administrative expenses increased $52.5 million, or 32.1%, of
which $38.4 million, or 23.4%, was due to the acquisition and consolidation of
Cunard and Seabourn. Selling and administrative expenses, excluding Cunard and
Seabourn, increased primarily as a result of increases in advertising and
payroll and related costs. Excluding Cunard and Seabourn, selling and
administrative expenses as a percentage of revenues were 13.2% and 13.4% in
1999 and 1998, respectively.
Depreciation and amortization increased by $27.5 million, or 30.9%, to
$116.8 million in 1999 from $89.3 million in 1998 primarily due to the
additional depreciation associated with the increase in the size of the fleet
and the acquisition and consolidation of Cunard and Seabourn.
Affiliated Operations
During 1999, the Company recorded $7.1 million of losses from affiliated
operations as compared with $13.0 million of losses in 1998. The Company's
portion of Airtours' losses increased $2.9 million to $14.2 million in 1999.
The Company recorded income of $7.2 million and $2.3 million during 1999 and
1998, respectively, related to its interest in Il Ponte. The affiliated
operations for 1998 include Seabourn.
Nonoperating Income (Expense)
Gross interest expense (excluding capitalized interest) increased $6.1
million in 1999 primarily as a result of higher average debt balances arising
from the acquisition and consolidation of Cunard and Seabourn as well as
investments in new vessel projects. Capitalized interest increased $3.9 million
during 1999 as compared with 1998 due primarily to higher levels of investments
in ship construction projects.
Interest income increased $12.5 million in 1999 as a result of higher
average investment balances primarily resulting from the investment of proceeds
received by the Company upon the sale of its Common Stock in December 1998 (see
Note 4 in the accompanying financial statements).
Other income in 1999 of $7.9 million primarily relates to the Company's
collection of insurance proceeds.
Minority interest was $1.6 million which represents the minority
shareholders' interest in Cunard Line Limited's net income.
Three Months Ended May 31, 1999 Compared
To Three Months Ended May 31, 1998
Revenues
The increase in total revenues of $134.8 million, or 20.4%, was almost
entirely due to an increase in cruise revenues. Approximately $92.6 million of
the increase was due to the acquisition and consolidation of Cunard and
Seabourn and $41.4 million was due to increased cruise revenues from Carnival,
Holland America and Windstar. The increase from Carnival, Holland America and
Windstar resulted from an increase of approximately 6.6% in passenger capacity
and a 1.4% increase in total revenue per passenger cruise day, offset slightly
by a 1.4% decrease in occupancy rates. Passenger capacity increased due
primarily to the introduction into service of Carnival's Paradise in November
1998. In addition, the 1.4% increase in total revenue per passenger cruise day
is net of a 1.6% decrease due to a reduction in the number of passengers
electing to use the Company's air program.
Cost and Expenses
Operating expenses increased $70.1 million, or 19.3%. Cruise operating
costs increased by $68.8 million, or 20.5% in the second quarter of 1999.
Approximately $63.3 million of the cruise operating costs increase was due to
the acquisition and consolidation of Cunard and Seabourn. Cruise operating
costs, excluding Cunard and Seabourn, increased $5.5 million primarily as a
result of increases in passenger capacity, partially offset by lower airfare
and other costs. Excluding Cunard and Seabourn, cruise operating costs as a
percentage of cruise revenues were 50.6% and 53.1% in the second quarter of
1999 and 1998, respectively.
Selling and administrative expenses increased $20.6 million, or 24.2%, of
which $18.5 million, or 21.8%, was due to the acquisition and consolidation of
Cunard and Seabourn. Selling and administrative expenses, excluding Cunard and
Seabourn, increased primarily as a result of increases in advertising and
payroll and related costs. Excluding Cunard and Seabourn, selling and
administrative expenses as a percentage of revenues were 12.4% and 12.8% in the
second quarter of 1999 and 1998, respectively.
Depreciation and amortization increased by $12.7 million, or 27.4%, to
$58.9 million in the second quarter of 1999 from $46.3 million in the second
quarter of 1998 primarily due to the additional depreciation associated with
the increase in the size of the fleet and the acquisition and consolidation of
Cunard and Seabourn.
Affiliated Operations
During the second quarter of 1999, the Company recorded $1.2 million of
losses from affiliated operations as compared with $2.4 million of losses in
the comparable 1998 period. The Company's portion of Airtours' losses increased
$2.5 million to $5.7 million in the second quarter of 1999. The Company
recorded income of $4.6 million and $3.3 million during the second quarter of
1999 and 1998, respectively, related to its interest in Il Ponte. The
affiliated operations for the second quarter of 1998 include Seabourn.
Nonoperating Income (Expense)
Gross interest expense (excluding capitalized interest) increased $1.2
million in the second quarter of 1999 primarily as a result of higher average
debt balances arising from the acquisition and consolidation of Cunard and
Seabourn as well as investments in new vessel projects.
Interest income increased $9.3 million in the second quarter of 1999 as a
result of higher average investment balances primarily resulting from the
investment of proceeds received by the Company upon the sale of its Common
Stock in December 1998 (see Note 4 in the accompanying financial statements).
Other income in the second quarter of 1999 of $4.9 million primarily
relates to the Company's collection of insurance proceeds compared to other
income in the comparable 1998 period of $2.6 million primarily related to the
settlement of certain notes receivable and an estimated insurance recovery.
Minority interest was $.5 million which represents the minority
shareholders' interest in Cunard Line Limited's net income.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
The Company's business provided $653.4 million of net cash from
operations during the six months ended May 31, 1999, an increase of 10.2%
compared to the same period in 1998. The increase was primarily due to higher
net income.
In December 1998, the Company issued 17 million shares of its Common
Stock and received net proceeds of approximately $725 million. The Company
issued this stock concurrent with the addition of the Company's Common Stock to
the S&P 500 Composite Index.
Uses of Cash
During the first half of fiscal 1999, the Company made net expenditures of
approximately $112.9 million on capital projects, of which $47.8 million was
spent in connection with its ongoing shipbuilding program. The nonshipbuilding
capital expenditures consisted primarily of computer equipment, vessel
refurbishments, tour assets and other equipment.
During the first half of fiscal 1999, the Company had net repayments of
$314.5 million under its commercial paper programs. Additionally, the Company
made scheduled principal payments totaling $44.7 million pursuant to various
notes payable. Finally, the Company paid quarterly cash dividends aggregating
$108.8 million in the first half of fiscal 1999.
Future Commitments
The Company has contracts for the delivery of nine new vessels over the
next four years. The Company will pay approximately $940 million during the
twelve months ending May 31, 2000 relating to the construction and delivery of
these new ships and approximately $1.9 billion thereafter.
In addition to these ship construction contracts, the Company has an
option to construct one additional vessel for expected service in 2002, if the
option is exercised. The Company is also in negotiations with several
shipbuilding yards for a new class of vessel for Holland America and is in the
initial planning phase of a new ocean liner for Cunard. No assurance can be
given that the option will be exercised, that the negotiations for the Holland
America vessels will be successful or that the new Cunard shipbuilding project
will be continued. In the event that all these orders are placed and the
option is exercised, the Company's planned shipbuilding program, including
ships currently under contract, would amount to a total investment of
approximately $5.7 billion through 2003.
At May 31, 1999, the Company had $1.27 billion of long-term debt of which
$33.7 million is due during the twelve months ended May 31, 2000. See Notes 3
and 5 in the accompanying financial statements for more information regarding
the Company's debts and commitments.
Funding Sources
At May 31, 1999, the Company had approximately $997 million in cash, cash
equivalents and short-term investments. These funds along with cash from
operations are expected to be the Company's principal source of capital to fund
its debt service requirements and ship construction costs. Additionally, the
Company may also fund a portion of these cash requirements from borrowings
under its revolving credit facilities or commercial paper programs. At May 31,
1999, the Company had approximately $1.18 billion available for borrowing under
its revolving credit facilities.
To the extent that the Company is required to or chooses to fund future
cash requirements from sources other than as discussed above, management
believes that it will be able to secure such financing from banks or through
the offering of debt and/or equity securities in the public or private markets.
OTHER MATTER
Year 2000
The Year 2000 computer issue is primarily the result of computer programs
using a two digit format, as opposed to four digits, to indicate the year. Such
programs will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors and a disruption in the
operation of such systems.
State of Readiness
The Company has established internally staffed project teams to address
Year 2000 issues. Each team has implemented a plan that focuses on Year 2000
compliance efforts for information technology ("IT") and non-IT systems for
each consolidated subsidiary. The systems include (1) information systems
software and hardware (e.g. reservations, accounting and associated systems,
personal computers and software and various end-user developed applications)
and (2) building facilities and shipboard equipment (e.g. shipboard navigation,
control, safety, power generation and distribution systems, operating systems
and shipbuilding and communication systems).
The Company's Year 2000 plan addresses the Year 2000 issues in multiple
phases, including: (1) inventory of the Company's systems, equipment and
suppliers that may be vulnerable to Year 2000 issues; (2) assessment of
inventoried items to determine risks associated with their failure to be Year
2000 compliant; (3) testing of systems and/or components to determine if Year
2000 compliant, both prior and/or subsequent to remediation; (4) remediation
and implementation of systems; and (5) contingency planning to assess
reasonably likely worst case scenarios.
Inventories have been completed for all Company shoreside software
applications, hardware and operating systems. A risk assessment was then
prepared based on feedback from the Company's respective business units. Most
of the Company's critical internally developed software systems have been
successfully remediated and tested. All of the Company's reservations systems
have been remediated, tested and are in production. Remediation and integration
testing of all critical shoreside software and hardware applications are
estimated to be completed by August 31, 1999, except for vendor upgrades of
purchased software which are estimated to be completed by September 30, 1999.
Ongoing certification testing of remediated systems that corroborates prior
test results and corroborates integration of remediated items with related
hardware and operating systems will occur throughout 1999.
Inventories have been completed for all building facilities and shipboard
equipment systems. A risk assessment has also been substantially completed for
these systems. In certain cases, the Company has retained third party
consultants to analyze the shipboard hardware and embedded system inventories
and assist the Company in testing, remediation and implementation of these
applications. This process is expected to be completed by September 30, 1999.
Most internally developed shipboard information systems have been remediated,
tested and implemented. Modifications required as a result of testing the
remaining systems have delayed full implementation on the ships until October
31, 1999.
The Company is tracking the Year 2000 compliance status of its material
vendors and suppliers via the Company's own internal vendor compliance effort.
Year 2000 correspondence was sent to critical vendors and suppliers, with
continued follow up for those who failed to respond. All vendor responses are
currently being evaluated to assess any possible risk to or effect on the
Company's operations. The Company has implemented additional procedures for
assessing the Year 2000 compliance status of its most critical vendors and will
modify its contingency plans accordingly.
Risks of Company's Year 2000 Issues
The Company continues to enhance its contingency plans, including the
identification of its most reasonably likely worst case scenarios. Currently,
the most likely sources of risk to the Company include (1) disruption of
transportation channels relevant to the Company's operations, including ports
and transportation vendors (airlines) as a result of a general failure of
support systems and necessary infrastructure; (2) disruption of travel agency
and other sales distribution systems; and (3) inability of principal product
suppliers to be Year 2000 ready, which could result in delays in deliveries
from such suppliers.
Based on its current assessment efforts, the Company does not believe that
Year 2000 issues will have a material adverse effect on its financial condition
or results of operations. However, the Company's Year 2000 issues and any
potential business interruptions, costs, damages or losses related thereto, are
dependent, to a significant degree, upon the Year 2000 compliance of third
parties, both domestic and international, such as government agencies, vendors
and suppliers. Consequently, the Company is unable to determine at this time
whether Year 2000 failures will materially affect the Company. The Company
believes that its compliance efforts have and will reduce the impact on the
Company of any such failures.
Contingency Plans
The Company has prepared preliminary contingency plans to identify and
determine how to minimize the impact of its most reasonably likely worst case
scenarios. The objective of the contingency plans is to establish procedures
for the continuity of the Company's core business processes in the event of any
Year 2000 problems. Comprehensive contingency plans are expected to be
substantially completed by September 30, 1999 and continued refinements are
expected to occur throughout the remainder of the year.
Costs
The Company does not expect that the costs associated with its Year 2000
efforts will be material. The Company estimates aggregate expenditures of
approximately $16 million to address Year 2000 issues. These aggregate
expenditures include $8 million of costs that are being charged to expense and
$8 million of costs, related to the accelerated replacement of non-compliant
systems due to Year 2000 issues, which will be capitalized. The total amount
expended through May 31, 1999 was approximately $10.4 million, of which $6.1
million has been charged to expense and $4.3 million has been capitalized.
These costs do not include costs incurred by the Company as a result of the
failure of any third parties, including suppliers, to become Year 2000
compliant or costs to implement any contingency plans.
The above disclosures are Year 2000 Readiness Disclosures pursuant to the
Year 2000 Information and Disclosure Act.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
Several actions collectively referred to as the "Passenger Complaints"
were previously reported in the Company's Annual Report on Form 10-K for the
year ended November 30, 1998 (the "1998 Form 10-K")and its Quarterly Report on
Form 10-Q for the quarter ended February 28, 1999 (the "First Quarter 1999 Form
10-Q"). The following are material subsequent developments in such cases.
In the action filed against Carnival in Florida in 1996 by Michelle
Hackbarth, Larry Katz, Michelle A. Sutton, Pedro Rene Mier, and others, on
behalf of purported nationwide classes, plaintiffs have appealed the court's
denial of their motion for class certification. In addition, plaintiffs have
filed a motion to enforce a purported oral settlement agreement they allege
that they reached with Carnival and Carnival opposes this motion. After the
parties take mutual discovery the court will hold a hearing on plaintiffs'
motion.
In the action filed against Carnival in Tennessee in 1997 by Brent
Mezzacasa and others, on behalf of a purported nationwide class, the Tennessee
Court of Appeals has affirmed the trial court's order dismissing the action on
the grounds of inconvenient forum. Plaintiffs have sought leave to appeal the
case further to the Tennessee Supreme Court, which has discretionary review.
In the action filed against Holland America Westours in the Superior Court
in King County, Washington, by Francine Pickett and others on behalf of a
purported nationwide class, Holland America Westours has settled with four of
the five members of the settlement class who appealed the court's approval of
the settlement. One member of the settlement class continues to appeal the
court's approval of the settlement.
Several actions collectively referred to as the "Travel Agent Complaints"
were previously reported in the 1998 Form 10-K and the First Quarter 1999 Form
10-Q and the following are the material subsequent developments in such cases.
In the action filed against Holland America Westours in Washington in
September 1997 by N.G.L. Travel Associates, on behalf of a purported nationwide
class of travel agencies who booked cruises with Holland America Westours, the
Court of Appeals refused to accept Holland America Westours' petition for
discretionary review of the class certification and denial of summary judgment
decisions. Consequently, the matter is back before the trial court to consider
various discovery motions as well as provide specifics as to the certified
class.
For a description of other pending litigation, see the 1998 Form 10-K, the
First Quarter 1999 Form 10-Q, and Note 5 in Part I of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on April 19,
1999 (the "Annual Meeting"). Holders of Common Stock were entitled to elect
sixteen directors. On all matters which came before the Annual Meeting, holders
of Common Stock were entitled to one vote for each share held. Proxies for
512,225,356 of the 612,944,684 shares of Common Stock entitled to vote were
received in connection with the Annual Meeting.
The following table sets forth the names of the sixteen persons elected at
the Annual Meeting to serve as directors until the next annual meeting of
shareholders of the Company and the number of votes cast for, against or
withheld with respect to each person.
NAME OF DIRECTOR FOR AGAINST WITHHELD
Micky Arison 508,122,258 -0- 4,103,098
Shari Arison 508,140,481 -0- 4,084,875
Maks L. Birnbach 508,244,481 -0- 3,980,875
Atle Brynestad 508,119,153 -0- 4,106,203
Richard G. Capen, Jr. 508,349,667 -0- 3,875,689
David Crossland 508,133,353 -0- 4,092,003
Robert H. Dickinson 508,128,970 -0- 4,096,386
James M. Dubin 508,138,340 -0- 4,087,016
Howard S. Frank 508,126,821 -0- 4,098,535
A. Kirk Lanterman 507,928,900 -0- 4,296,456
Modesto A. Maidique 508,365,885 -0- 3,859,471
William S. Ruben 508,251,028 -0- 3,974,328
Stuart S. Subotnick 506,842,374 -0- 5,382,982
Sherwood M. Weiser 508,375,098 -0- 3,850,258
Meshulam Zonis 505,158,911 -0- 7,066,445
Uzi Zucker 508,244,384 -0- 3,980,972
The following table sets forth certain additional matters which were
submitted to the shareholders for approval at the Annual Meeting and the
tabulation of the votes with respect to each such matter.
MATTER FOR AGAINST WITHHELD
Approval of an amendment
to the Company's Second Amended
and Restated Articles of
Incorporation to increase the
maximum size of the Board of
Directors from 15 to 17 members: 510,171,636 1,116,360 937,360
Approval of Pricewaterhouse-
Coopers as independent auditors
for the Company for the fiscal
year ending November 30, 1999 511,393,247 52,755 779,354
Item 5. Other Information.
(a) FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q and in the future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an authorized
executive officer constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performances or achievements of the Company
to be materially different from any future results, performances or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions which may impact levels of disposable income of consumers and
pricing and passenger yields for the Company's cruise products; consumer demand
for cruises, including the effects on consumer demand of armed conflicts or
political instability; increases in cruise industry capacity; changes in tax
laws and regulations; the ability of the Company to implement its shipbuilding
program and to expand its business outside the North American market where it
has less experience; delivery of new vessels on schedule and at the contracted
price; weather patterns; unscheduled ship repairs and drydocking; incidents
involving cruise vessels at sea; computer program Year 2000 compliance; and
changes in laws and regulations applicable to the Company.
ITEM 6. Exhibits And Reports On Form 8-K.
(a) Exhibits
3.1 Amendment to Second Amended and Restated Articles of Incorporation of
the Company.
10.1 Atle Brynestad Indemnification Agreement.
10.2 1994 Carnival Cruise Lines Key Management Incentive Plan as amended on
April 12,1999.
10.3 Subscription Agreement, dated May 27, 1998, between Carnival
Corporation, Seabourn Cruise Line Limited, CG Cruise Invest AS and
others.
10.4 Recapitalization Agreement, dated May 27, 1998, between Carnival
Corporation, Seabourn Cruise Line Limited and CG Holding AS.
10.5 1993 Outside Directors' Stock Option Plan as amended on April 6, 1998.
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARNIVAL CORPORATION
Date: July 13, 1999 BY/s/ Howard S. Frank
Howard S. Frank
Vice Chairman of the Board of
Directors and Chief
Operating Officer
Date: July 13, 1999 BY/s/ Gerald R. Cahill
Gerald R. Cahill
Senior Vice President-Finance
and Chief Financial and
Accounting Officer
INDEX TO EXHIBITS
Page No. in
Sequential
Numbering
System
Exhibits
3.1 Amendment to Second Amended and Restated Articles of
Incorporation of the Company.
10.1 Atle Brynestad Indemnification Agreement.
10.2 1994 Carnival Cruise Lines Key Management Incentive Plan as
amended on April 12, 1999.
10.3 Subscription Agreement, dated May 27, 1998, between Carnival
Corporation, Seabourn Cruise Line Limited, CG Cruise Invest AS
and others.
10.4 Recapitalization Agreement, dated May 27, 1998, between
Carnival Corporation, Seabourn Cruise Line Limited and CG Holding
AS.
10.5 1993 Outside Directors' Stock Option Plan as amended on April
6, 1998.
12 Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule (for SEC use only).