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 August 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 - 613,719,968 shares as of October 11, 1999.
CARNIVAL CORPORATION
I N D E X
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
August 31, 1999 and November 30, 1998 1
Consolidated Statements of Operations -
Nine and Three Months Ended August 31, 1999
and 1998 2
Consolidated Statements of Cash Flows -
Nine Months Ended August 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. 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 5. Other Information. 20
Item 6. Exhibits and Reports on Form 8-K. 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CARNIVAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $484,235 $137,273
Short-term investments 455,823 5,956
Accounts receivable, net 115,600 60,837
Consumable inventories, at average cost 79,151 75,449
Prepaid expenses and other 87,883 90,764
Total current assets 1,222,692 370,279
PROPERTY AND EQUIPMENT, NET 6,083,400 5,768,114
INVESTMENTS IN AND ADVANCES TO AFFILIATES 491,898 546,693
GOODWILL, LESS ACCUMULATED AMORTIZATION OF
$82,145 AND $72,255 402,443 437,464
OTHER ASSETS 27,168 56,773
$8,227,601 $7,179,323
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $33,667 $67,626
Accounts payable 189,562 168,546
Accrued liabilities 230,236 206,968
Customer deposits 716,804 638,383
Dividends payable 55,233 53,590
Total current liabilities 1,225,502 1,135,113
LONG-TERM DEBT 1,184,478 1,563,014
DEFERRED INCOME AND OTHER LONG-TERM LIABILITIES 75,420 63,036
COMMITMENTS AND CONTINGENCIES (Note 5)
MINORITY INTEREST 147,894 132,684
SHAREHOLDERS' EQUITY
Common Stock; $.01 par value; 960,000 shares
authorized; 613,699 and 595,448 shares
issued and outstanding 6,137 5,955
Paid-in-capital 1,629,614 880,488
Retained earnings 3,990,235 3,379,628
Other (31,679) 19,405
Total shareholders' equity 5,594,307 4,285,476
$8,227,601 $7,179,323
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES $2,713,555 $2,280,735 $1,169,148 $1,061,539
COSTS AND EXPENSES
Operating expenses 1,428,269 1,210,294 579,740 540,343
Selling and administrative 326,203 262,550 109,916 98,766
Depreciation and
amortization 179,899 146,689 63,084 57,423
1,934,371 1,619,533 752,740 696,532
OPERATING INCOME BEFORE
INCOME FROM AFFILIATED
OPERATIONS 779,184 661,202 416,408 365,007
INCOME FROM AFFILIATED
OPERATIONS, NET 3,677 808 10,776 13,842
OPERATING INCOME 782,861 662,010 427,184 378,849
NONOPERATING INCOME (EXPENSE)
Interest income 30,142 8,369 11,780 2,484
Interest expense, net of
capitalized interest (38,181) (43,512) (11,301) (18,777)
Other income, net 17,986 2,303 10,045 2,965
Income tax expense (5,617) (5,877) (13,262) (12,738)
Minority interest (10,995) (8,031) (9,353) (8,031)
(6,665) (46,748) (12,091) (34,097)
NET INCOME $776,196 $615,262 $415,093 $344,752
EARNINGS PER SHARE:
Basic $1.27 $1.03 $.68 $.58
Diluted $1.26 $1.03 $.67 $.58
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CARNIVAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION> Nine Months Ended August 31,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $776,196 $615,262
Adjustments
Depreciation and amortization 179,899 146,689
Dividends received in excess of income
from affiliated operations, net 11,410 12,865
Minority interest 10,995 8,031
Other 3,659 (13,787)
Changes in operating assets and liabilities,
excluding businesses acquired and consolidated
(Increase) decrease in:
Receivables (37,281) (12,406)
Consumable inventories (3,702) (2,614)
Prepaid expenses and other 2,829 (4,314)
Increase in:
Accounts payable 21,016 11,200
Accrued liabilities 23,079 51,021
Customer deposits 78,421 65,943
Net cash provided from operating
activities 1,066,521 877,890
INVESTING ACTIVITIES
(Increase) decrease in short-term
investments, net (443,620) 2,537
Additions to property and equipment, net (485,243) (808,151)
Acquisitions of consolidated subsidiaries, net 9,415 (247,549)
Other, net 35,794 71,283
Net cash used for investing activities (883,654) (981,880)
FINANCING ACTIVITIES
Proceeds from long-term debt 7,772 1,188,623
Principal payments of long-term debt (420,423) (974,082)
Dividends paid (163,946) (133,802)
Proceeds from issuance of Common Stock, net 740,817 12,563
Other (125) (4,174)
Net cash provided from
financing activities 164,095 89,128
Net increase (decrease) in cash and
cash equivalents 346,962 (14,862)
Cash and cash equivalents at beginning
of period 137,273 139,989
Cash and cash equivalents at end of period $484,235 $125,127
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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 August 31, 1999 and the
consolidated statements of operations for the nine and three months ended August
31, 1999 and 1998 and consolidated statements of cash flows for the nine months
ended August 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:
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
(in thousands)
<S> <C> <C>
Vessels $6,204,276 $5,754,218
Vessels under construction 485,045 526,529
6,689,321 6,280,747
Land, buildings and improvements 242,806 217,597
Transportation and other equipment 368,690 322,069
Total property and equipment 7,300,817 6,820,413
Less accumulated depreciation and
amortization (1,217,417) (1,052,299)
$6,083,400 $5,768,114
</TABLE>
Interest costs associated with the construction of property and equipment,
consisting primarily of vessels, are capitalized during the construction period
and amounted to $29.2 million and $23.6 million for the nine months ended August
31, 1999 and 1998, respectively, and $9.3 million and $7.6 million for the three
months ended August 31, 1999 and 1998, respectively.
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
(in thousands)
<S> <C> <C>
Commercial paper $ $368,710
Unsecured 5.65% Notes Due October 15, 2000 199,898 199,833
Unsecured 6.15% Notes Due April 15, 2008 199,551 199,512
Unsecured 6.65% Debentures due January 15, 2028 199,268 199,249
Notes payable bearing interest at rates ranging
from 5.1% to 8.0%, secured by vessels,
maturing through 2008 149,384 174,198
Unsecured 6.15% Notes Due October 1, 2003 124,972 124,967
Unsecured 7.20% Debentures Due October 1, 2023 124,885 124,881
Unsecured 7.7% Notes Due July 15, 2004 99,944 99,936
Unsecured 7.05% Notes Due May 15, 2005 99,886 99,871
Other loans payable 20,357 39,483
1,218,145 1,630,640
Less portion due within one year (33,667) (67,626)
$1,184,478 $1,563,014
</TABLE>
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 nine months ended August 31, 1999 and 1998, the Company declared
quarterly cash dividends of $.27 and $.225 per share, or an aggregate of $165.6
million and $133.9 million, respectively.
Carnival Corporation's Articles of Incorporation, as amended, authorize 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 August 31, 1999, no
Preferred Stock had been issued.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Capital Expenditures
A description of ships under contract for construction at August 31, 1999
is as follows (in millions, except passenger capacity data):
<TABLE>
<CAPTION>
Expected
Service Passenger Total
Vessel Date(1) Shipyard Capacity(2) Cost(3)
<S> <C> <C> <C> <C>
Carnival Cruise Lines
Carnival Victory 9/00 Fincantieri 2,758 $440
Carnival Spirit 4/01 Masa-Yards 2,112 375
Carnival Pride 1/02 Masa-Yards(4) 2,112 375
Carnival Conquest 12/02 Fincantieri 2,758 450
Carnival Glory 8/03 Fincantieri 2,758 450
Total Carnival Cruise Lines 12,498 2,090
Holland America Line
Volendam 11/99 Fincantieri(5) 1,440 300
Zaandam 4/00 Fincantieri(5) 1,440 300
Amsterdam 11/00 Fincantieri 1,380 300
Total Holland America Line 4,260 900
Total 16,758 $2,990
</TABLE>
(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) 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.
(5) These construction contracts are denominated in Italian Lira and have 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
$485 million through August 31, 1999 and anticipates paying approximately $1.0
billion during the twelve month period ending August 31, 2000 and approximately
$1.5 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 six and eighteen months 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, 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 August 31, 1999, total approximately
$350 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:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
1999 1998 1999 1998
(in thousands)
<S> <C> <C> <C> <C>
Net income $776,196 $615,262 $415,093 $344,752
Foreign currency translation
adjustment (42,636) 4,247 (12,640) 5,153
Changes in securities valuation
allowance (3,081) 219 (3,088) 106
Total comprehensive income $730,479 $619,728 $399,365 $350,011
</TABLE>
NOTE 7 - EARNINGS PER SHARE
Earnings per share have been computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
BASIC:
Net income $776,196 $615,262 $415,093 $344,752
Average common shares
outstanding 611,874 594,908 613,457 595,234
Earnings per share $ 1.27 $ 1.03 $ .68 $ .58
DILUTED:
Net income $776,196 $615,262 $415,093 $344,752
Average common shares
outstanding 611,874 594,908 613,457 595,234
Effect of dilutive
securities - shares
issuable under
various stock plans 3,617 3,482 3,458 3,606
Average common shares
outstanding
assuming dilution 615,491 598,390 616,915 598,840
Earnings per share $ 1.26 $ 1.03 $ 0.67 $ .58
</TABLE>
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 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:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
1999 1998 1999 1998
(in thousands, except selected statistical information)
<S> <C> <C> <C> <C>
REVENUES:
Cruise $2,516,624 $2,090,667 $1,010,445 $ 908,606
Tour 253,737 248,630 207,613 203,177
Intersegment revenues (56,806) (58,562) (48,910) (50,244)
$2,713,555 $2,280,735 $1,169,148 $1,061,539
OPERATING EXPENSES:
Cruise $1,283,929 $1,067,089 $ 473,033 $ 433,263
Tour 201,146 201,767 155,617 157,324
Intersegment expenses (56,806) (58,562) (48,910) (50,244)
$1,428,269 $1,210,294 $ 579,740 $ 540,343
OPERATING INCOME:
Cruise $ 773,303 $ 655,733 $ 384,957 $ 335,889
Tour 15,666 14,116 35,150 31,329
Corporate, including income
from affiliates, net (6,108) (7,839) 7,077 11,631
$ 782,861 $ 662,010 $ 427,184 $ 378,849
SELECTED STATISTICAL INFORMATION:
Passengers carried 1,748,000 1,522,000 690,000 599,000
Passenger cruise days (1) 11,115,000 9,662,000 4,140,000 3,731,000
Occupancy percentage (2) 104.5% 107.8% 112.3% 111.5%
</TABLE>
(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.
(2) The Company acquired a majority interest in Cunard Line Limited on May 28,
1998. Since that date, Cunard's revenues and operating results have been
included in the Company's operating results. Cunard's ships generally
sail with lower occupancy percentages than the Company's other brands.
Operations data expressed as a percentage of total revenues for the periods
indicated is as follows:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES 100% 100% 100% 100%
COSTS AND EXPENSES:
Operating expenses 53 53 50 51
Selling and administrative 12 12 9 9
Depreciation and amortization 6 6 5 6
OPERATING INCOME BEFORE
INCOME FROM AFFILIATED
OPERATIONS 29 29 36 34
INCOME FROM AFFILIATED
OPERATIONS, NET - - 1 1
OPERATING INCOME 29 29 37 35
NONOPERATING EXPENSE - (2) (1) (3)
NET INCOME 29% 27% 36% 32%
</TABLE>
Fixed costs, including depreciation, fuel, insurance, crew costs and most
shoreside 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 12.8% in the fourth
quarter of fiscal 1999 as compared to the same period of fiscal 1998. This
increase is primarily a result of the introduction into service of Carnival's
Paradise and the Carnival Triumph in late November 1998 and July 1999,
respectively.
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, net of the impact of the tentative sale in
October 2000 of Holland America's Nieuw Amsterdam, is expected to approximate
12.3% and 9.5%, 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 1999 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, but with a greater impact on the fourth quarter
than the third quarter. As a result of the cessation of hostilities and other
developments, management currently estimates that the impact on its business
will be slightly below the low end of this range.
In September 1999, the Carnival ship Tropicale had a small engine room
fire which resulted in no injuries to any guests or crew. The Company has
cancelled six voyages of the Tropicale while the vessel undergoes repairs. Three
of these cruises will be operated by Carnival's Imagination, which will postpone
its scheduled October 1999 drydock until January 2000. In September 1999, the
Company announced that management estimated that the one-time negative impact of
the above described events on the Company's 1999 fourth quarter earnings will be
approximately one cent per share.
Nine Months Ended August 31, 1999 ("1999") Compared
To Nine Months Ended August 31, 1998 ("1998")
Revenues
The increase in total revenues of $432.8 million, or 19.0%, was almost
entirely due to an increase in cruise revenues. The cruise revenue increase
resulted from an increase of approximately 18.7% in passenger capacity and a
5.4% increase in total revenue per passenger cruise day, offset by a 3.7%
decrease in occupancy rates. The increase in passenger capacity resulted from
the acquisition and consolidation of Cunard Line Limited in late May 1998, which
increased capacity by 7.8%, and the balance of the increase resulted from the
introduction into service of Carnival's Elation and Paradise in March and
November 1998, respectively, and the Carnival Triumph in July 1999, as well as
Windstar Cruises' ("Windstar") Wind Surf in May 1998. Both the increase in
revenue per passenger cruise day and the decrease in occupancy rates was
primarily due to Cunard Line Limited's higher revenue per passenger cruise day
and lower occupancy rates than the Company's other brands.
Cost and Expenses
Operating expenses increased $218.0 million, or 18%. Cruise operating costs
increased by $216.8 million, or 20.3% in 1999 primarily as a result of increases
in passenger capacity. Cruise operating costs as a percentage of cruise revenues
was 51.0% in both 1999 and 1998.
Selling and administrative expenses increased $63.7 million, or 24.2%.
Selling and administrative expenses increased primarily as a result of increases
in advertising and payroll and related costs. Selling and administrative
expenses as a percentage of revenues were 12.0% and 11.5% in 1999 and 1998,
respectively.
Cunard Line Limited's cruise operating costs and selling and administrative
expenses as a percentage of revenues are higher than the Company's other brands.
Accordingly, the expense ratios indicated above have increased due to the
inclusion of Cunard Line Limited's expenses since the third quarter of 1998.
Depreciation and amortization increased by $33.2 million, or 22.6%, to
$179.9 million in 1999 from $146.7 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 $3.7 million of income from affiliated
operations as compared with $.8 million of income in 1998. The Company's portion
of Airtours' losses increased $4.7 million to $9.2 million in 1999. The Company
recorded income of $12.6 million and $9.0 million during 1999 and 1998,
respectively, related to its interest in Il Ponte. The affiliated operations for
1998 include seasonal losses for the first half of 1998 from Seabourn.
Nonoperating Income (Expense)
Interest income increased $21.8 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).
Gross interest expense (excluding capitalized interest) increased slightly
to $67.4 million from $67.1 million primarily as a result of higher average
outstanding debt balances from the acquisition and consolidation of Cunard and
Seabourn as well as investments in new vessel projects, offset by lower average
borrowing rates. Capitalized interest increased $5.6 million during 1999 as
compared with 1998 due primarily to higher levels of investments in ship
construction projects.
Other income in 1999 of $18.0 million primarily relates to compensation
received from the shipyard related to the late deliveries of the Volendam and
Carnival Triumph, net of certain related expenses, and the Company's collection
of insurance proceeds. Additionally, other income includes a $9 million expense
for the writedown of the Company's investment in Wyndham International stock,
offset by approximately $9 million of non-recurring gains, both recorded in the
third quarter of 1999.
Minority interest was $11.0 million in 1999 compared to $8.0 million in
1998 which represents the minority shareholders' interest in Cunard Line
Limited's net income.
Three Months Ended August 31, 1999 Compared
To Three Months Ended August 31, 1998
Revenues
The increase in total revenues of $107.6 million, or 10.1%, was almost
entirely due to an increase in cruise revenues. The cruise revenue increase
resulted from an increase of approximately 10.3% in passenger capacity and
slight increases of .7% in occupancy rates and .3% in total revenue per
passenger cruise day. Passenger capacity increased due primarily to the
introduction into service of Carnival's Paradise in November 1998 and the
Carnival Triumph in July 1999 and the MS Ecstasy being in service throughout the
1999 third quarter versus being out of service for six weeks during the 1998
third quarter.
Cost and Expenses
Operating expenses increased $39.4 million, or 7.3%. Cruise operating costs
increased by $39.8 million, or 9.2% in the third quarter of 1999, primarily as a
result of increases in passenger capacity. Cruise operating costs as a
percentage of cruise revenues were 46.8% and 47.7% in the third quarter of 1999
and 1998, respectively.
Selling and administrative expenses increased $11.1 million, or 11.3%.
Selling and administrative expenses increased primarily as a result of increases
in advertising and payroll and related costs. Selling and administrative
expenses as a percentage of revenues were 9.4% and 9.3% in the third quarter of
1999 and 1998, respectively.
Depreciation and amortization increased by $5.7 million, or 9.9% to $63.1
million in the third quarter of 1999 from $57.4 million in the third quarter of
1998 primarily due to the additional depreciation associated with the increase
in the size of the fleet.
Affiliated Operations
During the third quarter of 1999, the Company recorded $10.8 million of
income from affiliated operations as compared with $13.8 million of income in
the comparable 1998 period. The Company's portion of Airtours' income decreased
$1.8 million to $5.0 million in the third quarter of 1999. The Company recorded
income of $5.4 million and $6.6 million during the third quarter of 1999 and
1998, respectively, related to its interest in Il Ponte.
Nonoperating Income (Expense)
Interest income increased $9.3 million in the third 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).
Gross interest expense (excluding capitalized interest) decreased $5.8
million in the third quarter of 1999 primarily as a result of lower average
outstanding debt balances. Capitalized interest increased $1.7 million due to
higher levels of investments in ship construction projects during the third
quarter of fiscal 1999 as compared with the third quarter of 1998.
Other income in the third quarter of 1999 of $10.0 million primarily
relates to the compensation received from the shipyard related to the delayed
deliveries of the Volendam and Carnival Triumph, net of certain related
expenses. See the Nonoperating Income (Expense) discussion for the nine month
period for additional information.
Minority interest was $9.4 million in the third quarter of 1999 compared to
$8.0 million in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
The Company's business provided $1.07 billion of net cash from operations
during the nine months ended August 31, 1999, an increase of 21.5% 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 nine months ended August 31, 1999, the Company made net
expenditures of approximately $485.2 million on capital projects, of which
$376.2 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 nine months ended August 31, 1999, the Company had net
repayments of $368.7 million under its commercial paper programs. Additionally,
the Company made scheduled principal payments totaling $47.1 million pursuant to
various notes payable. Finally, the Company paid quarterly cash dividends
aggregating $163.9 million in the nine months ended August 31, 1999.
Future Commitments
The Company has contracts for the delivery of eight new vessels over the
next four years. The Company will pay approximately $1 billion during the twelve
months ending August 31, 2000 relating to the construction and delivery of these
new ships and approximately $1.5 billion thereafter.
In addition to these ship construction contracts, the Company is also in
various stages of negotiation with shipbuilding yards for additional ships. No
assurance can be given that these negotiations will result in additional ship
construction contracts, however, if they do, the Company's total investment in
new ships, including those currently under contract, could be in excess of $6
billion through 2003.
At August 31, 1999, the Company had $1.2 billion of long-term debt of which
$33.7 million is due during the twelve months ended August 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 August 31, 1999, the Company had approximately $940 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 August 31,
1999, the Company had approximately $1.2 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.
Substantially all 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 other critical shoreside software and
hardware applications have been completed, except for vendor upgrades of
purchased software which are estimated to be completed by October 31, 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 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
substantially completed. Most internally developed shipboard information systems
have been remediated, tested and implemented. Modifications required as a result
of testing any non-compliant systems has delayed full implementation 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 continues to enhance its 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 October 31, 1999 and continued refinements are expected to occur
throughout the remainder of the year.
Costs
The Company estimates aggregate expenditures of approximately $17 million to
address Year 2000 issues. These aggregate expenditures include $9 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 August 31, 1999 was
approximately $13.7 million, of which $6.8 million has been charged to expense
and $6.9 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 Quarterly Reports on Form 10-
Q for the quarters ended February 28 and May 31, 1999 (the "Quarterly Form 10-
Q's"). The following are material subsequent developments in such cases.
In the action filed against Carnival in Tennessee in 1997 by Brent
Mezzacasa and others, on behalf of a purported nationwide class, the Tennessee
Supreme Court has denied plaintiff's application for leave to appeal the
dismissal of this case to that court.
Several actions collectively referred to as the "Travel Agent Complaints"
were previously reported in the 1998 Form 10-K and the Quarterly Form 10-Q's 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
trial court has provided further definition of the certified class, limiting it
first as to time (only 1996) and secondly as to members (only travel agencies
that were affiliated with GEM, a travel consortium). The trial court has also
refused repeated efforts by the plaintiffs to reopen discovery. The plaintiffs
have requested the State Court of Appeals to grant discretionary review of the
trial court's rulings.
For a description of other pending litigation, see the 1998 Form 10-K, the
Quarterly Form 10-Q's, and Note 5 in Part I of this Form 10-Q.
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
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:October 14, 1999 BY/s/ Howard S. Frank
Howard S. Frank
Vice Chairman of the Board of
Directors and Chief
Operating Officer
Date:October 14, 1999 BY/s/ Gerald R. Cahill
Gerald R. Cahill
Senior Vice President-Finance
and Chief Financial and
Accounting Officer
EXHIBIT 12
CARNIVAL CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
1999 1998
<S> <C> <C>
Net income $776,196 $615,262
Income tax expense 5,617 5,877
Income before income tax expense 781,813 621,139
Adjustment to Earnings:
Minority interest 10,995 8,031
Dividends received in
excess of income from
affiliates 11,410 12,865
Earnings as adjusted 804,218 642,035
Fixed Charges:
Interest expense 38,181 43,512
Interest portion of rent
expense (1) 2,277 2,636
Capitalized interest 29,204 23,586
Total fixed charges 69,662 69,734
Fixed charges not
affecting earnings:
Capitalized interest (29,204) (23,586)
Earnings before fixed
charges $844,676 $688,183
Ratio of earnings to fixed charges 12.1x 9.9x
</TABLE>
(1) Represents one-third of rent expense, which management believes
to be representative of the interest portion of rent expense.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 484,235
<SECURITIES> 455,823
<RECEIVABLES> 115,600
<ALLOWANCES> 0
<INVENTORY> 79,151
<CURRENT-ASSETS> 1,222,692
<PP&E> 7,300,817
<DEPRECIATION> 1,217,417
<TOTAL-ASSETS> 8,227,601
<CURRENT-LIABILITIES> 1,225,502
<BONDS> 1,184,478
<COMMON> 6,137
0
0
<OTHER-SE> 5,588,170
<TOTAL-LIABILITY-AND-EQUITY> 8,227,601
<SALES> 0
<TOTAL-REVENUES> 2,713,555
<CGS> 0
<TOTAL-COSTS> 1,428,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,181
<INCOME-PRETAX> 792,808
<INCOME-TAX> (5,617)
<INCOME-CONTINUING> 776,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 776,196
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.26
</TABLE>
