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 February 28, 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 - 613,174,060 shares as of April 9, 1999.
CARNIVAL CORPORATION I N D E X Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - February 28, 1999 and November 30, 1998 Consolidated Statements of Operations - Three Months Ended February 28, 1999 and February 28, 1998 Consolidated Statements of Cash Flows - Three Months Ended February 28, 1999 and February 28, 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Part II. OTHER INFORMATION Item 1. Legal Proceedings. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K.
PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CARNIVAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except par value) <TABLE> <CAPTION> February 28, November 30, 1999 1998 <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 574,254 $ 137,273 Short-term investments 216,993 5,956 Accounts receivable, net 72,947 60,837 Consumable inventories, at average cost 77,626 75,449 Prepaid expenses and other 94,968 90,764 Total current assets 1,036,788 370,279 PROPERTY AND EQUIPMENT, NET 5,764,498 5,768,114 INVESTMENTS IN AND ADVANCES TO AFFILIATES 534,413 546,693 GOODWILL, LESS ACCUMULATED AMORTIZATION OF $75,548 AND $72,255 434,171 437,464 OTHER ASSETS 60,615 56,773 $7,830,485 $7,179,323 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 66,702 $ 67,626 Accounts payable 156,612 168,546 Accrued liabilities 203,886 206,968 Customer deposits 655,944 638,383 Dividends payable 55,174 53,590 Total current liabilities 1,138,318 1,135,113 LONG-TERM DEBT 1,355,569 1,563,014 DEFERRED INCOME AND OTHER LONG-TERM LIABILITIES 88,910 63,036 COMMITMENTS AND CONTINGENCIES (Note 5) MINORITY INTEREST 133,786 132,684 SHAREHOLDERS' EQUITY Common Stock; $.01 par value; 960,000 shares authorized; 613,045 and 595,448 shares issued and outstanding 6,130 5,955 Paid-in-capital 1,617,781 880,488 Retained earnings 3,482,215 3,379,628 Other 7,776 19,405 Total shareholders' equity 5,113,902 4,285,476 $7,830,485 $7,179,323 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended February 28, 1999 1998 <S> <C> <C> REVENUES $748,258 $557,838 COSTS AND EXPENSES Operating expenses 416,103 307,595 Selling and administrative 110,770 78,834 Depreciation and amortization 57,904 43,008 584,777 429,437 OPERATING INCOME BEFORE LOSS FROM AFFILIATED OPERATIONS 163,481 128,401 LOSS FROM AFFILIATED OPERATIONS, NET (5,917) (10,681) OPERATING INCOME 157,564 117,720 NONOPERATING INCOME (EXPENSE) Interest income 6,887 3,737 Interest expense, net of capitalized interest (13,390) (12,559) Other income (expense), net 2,996 (3,271) Income tax benefit 4,806 4,287 Minority interest (1,102) - 197 (7,806) NET INCOME $157,761 $109,914 EARNINGS PER SHARE: Basic $.26 $.18 Diluted $.26 $.18 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
CARNIVAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> Three Months Ended February 28, 1999 1998 <S> <C> <C> OPERATING ACTIVITIES Net income $157,761 $109,914 Adjustments Depreciation and amortization 57,904 43,008 Dividends received and loss from affiliated operations, net 5,917 21,231 Minority interest 1,102 Other 2,172 5,083 Changes in operating assets and liabilities Increase in: Receivables (12,333) (5,143) Consumable inventories (2,177) (1,056) Prepaid expenses and other (4,222) (11,639) Increase (decrease) in: Accounts payable (11,934) (7,308) Accrued liabilities (2,958) (2,320) Customer deposits 17,561 62,393 Net cash provided from operating activities 208,793 214,163 INVESTING ACTIVITIES (Increase) decrease in short-term investments, net (210,686) 20 Additions to property and equipment, net (50,977) (361,739) Other, net 21,167 74 Net cash used for investing activities (240,496) (361,645) FINANCING ACTIVITIES Proceeds from long-term debt 5,861 313,158 Principal payments of long-term debt (214,282) (147,407) Proceeds from issuance of Common Stock, net 730,812 2,385 Dividends paid (53,590) (44,578) Other (117) (1,993) Net cash provided from financing activities 468,684 121,565 Net increase (decrease) in cash and cash equivalents 436,981 (25,917) Cash and cash equivalents at beginning of period 137,273 139,989 Cash and cash equivalents at end of period $574,254 $114,072 </TABLE> 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 February 28, 1999 and the consolidated statements of operations for the three months ended February 28, 1999 and 1998 and consolidated statements of cash flows for the three months ended February 28, 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 February 28, November 30, 1999 1998 (in thousands) <S> <C> <C> Vessels $5,761,324 $5,754,218 Vessels under construction 543,448 526,529 6,304,772 6,280,747 Land, buildings and improvements 222,775 217,597 Transportation and other equipment 342,024 322,069 Total property and equipment 6,869,571 6,820,413 Less accumulated depreciation and amortization (1,105,073) (1,052,299) $5,764,498 $5,768,114 </TABLE> During the three months ended February 28, 1999 and 1998, interest costs of $10.4 million and $6.4 million, respectively, were capitalized.
NOTE 3 - LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <Caption February 28, November 30, 1999 1998 (in thousands) <S> <C> <C> Commercial paper $ 161,309 $ 368,710 Unsecured 5.65% Notes Due October 15, 2000 199,855 199,833 Unsecured 6.15% Notes Due April 15, 2008 199,525 199,512 Unsecured 6.65% Debentures due January 15, 2028 199,255 199,249 Notes payable bearing interest at rates ranging from 5.1% to 8.0%, secured by vessels, maturing through 2009 172,058 174,198 Unsecured 6.15% Notes Due October 1, 2003 124,968 124,967 Unsecured 7.20% Debentures Due October 1, 2023 124,882 124,881 Unsecured 7.7% Notes Due July 15, 2004 99,939 99,936 Unsecured 7.05% Notes Due May 15, 2005 99,876 99,871 Other loans payable 40,604 39,483 1,422,271 1,630,640 Less portion due within one year (66,702) (67,626) $1,355,569 $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. A portion of the proceeds from the offering was used to repay $153 million of outstanding commercial paper and the remainder has been invested in cash equivalents and short-term investments. Carnival Corporation's Certificate 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 February 28, 1999, no Preferred Stock had been issued. During the three months ended February 28, 1999 and 1998, the Company declared a quarterly cash dividend of $.09 and $.075 per share aggregating $55,174 and $44,608, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES Capital Expenditures A description of ships under contract for construction at February 28, 1999 is as follows (in millions, except passenger capacity data): <TABLE> <CAPTION> Expected Estimated Remaining Service Passenger Total Cost to be Vessel Date(1) Shipyard Capacity(2) Cost(3) Paid <S> <C> <C> <C> <C> <C> Carnival Cruise Lines Carnival Triumph 7/99 Fincantieri(4) 2,758 $ 410 $ 294 Carnival Victory 8/00 Fincantieri 2,758 440 433 Carnival Spirit 4/01 Masa-Yards 2,100 375 356 Carnival Conquest 12/02 Fincantieri 2,758 450 429 Carnival Glory 8/03 Fincantieri 2,758 450 429 Total Carnival Cruise Lines 13,132 2,125 1,941 Holland America Line Volendam 8/99 Fincantieri(4) 1,440 300 238 Zaandam 3/00 Fincantieri(4) 1,440 300 255 Amsterdam 11/00 Fincantieri 1,380 300 51 Total Holland America Line 4,260 900 544 Total 17,392 $3,025 $2,485 </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 is the total cost of the completed vessel and includes the contract price with the shipyard, design and engineering fees, estimated 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. In connection with the vessels under construction, the Company has paid $540 million through February 28, 1999 and anticipates paying approximately $890 million during the twelve month period ending February 29, 2000 and approximately $1.6 billion thereafter. Litigation Several actions (collectively the "Passenger Complaints") have been filed against Carnival Cruise Lines ("Carnival") or 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. These actions 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 have appealed the court's approval of the settlement. The appeal 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 February 28, 1999, total approximately $327 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 - EARNINGS PER SHARE Earnings per share have been computed as follows (in thousands, except per share data): <TABLE> <CAPTION> Three Months Ended February 28, 1999 1998 <S> <C> <C> BASIC: Net income $157,761 $109,914 Average common shares outstanding 608,940 594,734 Earnings per share $ .26 $ .18 DILUTED: Net income $157,761 $109,914 Effect on net income of assumed purchase of minority interest 1,102 Net income available assuming dilution $158,863 $109,914 Average common shares outstanding 608,940 594,734 Effect of dilutive securities: Additional shares issuable upon: Assumed exercise of Cunard Line Limited's minority shareholders purchase option 5,439 Various stock plans 3,881 3,078 Average common shares outstanding assuming dilution 618,260 597,812 Earnings per share $ .26 $ .18 </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 7 - 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. For the Company, comprehensive income includes net income and foreign currency translation adjustments and changes in the value of equity securities that have not been included in net income. For the three months ended February 28, 1999 and 1998, comprehensive income was $150.6 million and $112.5 million, respectively. NOTE 8 - ACQUISITION 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, for $500 million, adjusted for a working capital deficiency and debt assumed. The Company is accounting for the acquisition using the purchase accounting method. 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. Commencing on May 28, 1998, the financial results of Cunard Line Limited have been included in the Company's consolidated financial statements. Prior to May 28, 1998, the Company's 50% interest in Seabourn was accounted for using the equity method. Had the above transactions occurred on December 1, 1997, the Company's unaudited consolidated revenues for the three months ended February 28, 1998 would have been approximately $664 million. The impact on the Company's three months ended February 28, 1998 unaudited net income and earnings per share would have been immaterial. NOTE 9 - 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. 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 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (December 1, 1999 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 ship 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> Three Months Ended February 28, 1999 1998 (in thousands, except selected statistical information) <S> <C> <C> REVENUES: Cruise $741,076 $550,977 Tour 7,504 7,039 Intersegment revenues (322) (178) $748,258 $557,838 OPERATING EXPENSES: Cruise $407,066 $298,770 Tour 9,359 9,003 Intersegment expenses (322) (178) $416,103 $307,595 OPERATING INCOME: Cruise $180,434 $142,424 Tour (11,898) (10,521) Loss from affiliates, net, and corporate expenses (10,972) (14,183) $157,564 $117,720 SELECTED STATISTICAL INFORMATION: Passengers carried 517,000 427,000 Passenger cruise days (1) 3,505,000 2,827,000 Occupancy percentage 100.9% 105.9% (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. </TABLE> Operations data expressed as a percentage of total revenues for the periods indicated is as follows: <TABLE> <CAPTION> Three Months Ended February 28, 1999 1998 <S> <C> <C> REVENUES 100% 100% COSTS AND EXPENSES: Operating expenses 55 55 Selling and administrative 15 14 Depreciation and amortization 8 8 OPERATING INCOME BEFORE LOSS FROM AFFILIATED OPERATIONS 22 23 LOSS FROM AFFILIATED OPERATIONS, NET (1) (2) OPERATING INCOME 21 21 NONOPERATING EXPENSE - (1) NET INCOME 21% 20% </TABLE> 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, excluding the impact of the acquisition and consolidation of Cunard and Seabourn, is expected to approximate 6.5%, 12.1% and 19.1% in the second, 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, the expected introduction into service of the Carnival Triumph in July 1999 and Holland America's Volendam in August 1999 and the introduction into service of Windstar Cruises ("Windstar") Wind Surf in May 1998. Including the impact of Cunard and Seabourn, average passenger capacity is expected to increase 17.8%, 10.7% and 16.1% in the second, third and fourth quarters of fiscal 1999, respectively, as compared to the same periods of fiscal 1998. The acquisition and consolidation of Cunard and Seabourn is not expected to materially affect the Company's consolidated net income in 1999. The year over year percentage increase in average passenger capacity, excluding the impact of Cunard and Seabourn, resulting from the delivery of vessels currently under contract for construction for the fiscal years 2000 and 2001 is expected to approximate 12.9% and 11.9%, respectively. Including the impact of Cunard and Seabourn, the year over year increase in average passenger capacity for fiscal 2000 and 2001 is expected to approximate 11.7% and 10.9%, respectively. The Company and Airtours plc ("Airtours"), a publicly traded leisure travel company in which the Company holds a 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 Yugoslavia, the Company is currently experiencing a slow down in its cruise booking patterns on its Eastern Mediterranean cruise itineraries and, to a lesser extent, also for its Western Mediterranean cruise itineraries. As a consequence of the conflict, the Company has changed the itineraries of certain of its Eastern Mediterranean cruises. Due to the uncertainties surrounding the current situation, management is unable to determine the possible impact of these events on the Company's results of operations for fiscal 1999. The Company has approximately 5% of its consolidated fiscal 1999 passenger capacity scheduled to operate in either the Eastern or Western Mediterranean. Additionally, the Company's unconsolidated affiliate, Costa also has itineraries scheduled for the Eastern and Western Mediterranean. Management believes that any effects of this unusual and infrequent event on the Company's operations will be temporary and should not result in any long term adverse effects. Three Months Ended February 28, 1999 ("1999") Compared To Three Months Ended February 28, 1998 ("1998") Revenues The increase in total revenues of $190.4 million, or 34.1%, was almost entirely due to an increase in cruise revenues. Approximately $104.5 million of the increase is due to the acquisition and consolidation of Cunard and Seabourn and $85.6 million is 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 16.9% in passenger capacity and a .5% increase in total revenue per passenger cruise day, offset slightly by a 1.6% decrease in occupancy rates. Passenger capacity increased due primarily to the addition of the new vessels previously discussed and Carnival's Elation in March 1998. Cost and Expenses Operating expenses increased $108.5 million, or 35.3%. Cruise operating costs increased by $108.3 million, or 36.2% in 1999. Approximately $72.4 million of the cruise operating costs increase is due to the acquisition and consolidation of Cunard and Seabourn. Excluding Cunard and Seabourn, cruise operating costs as a percentage of cruise revenues were 52.6% and 54.2% in 1999 and 1998, respectively. Cruise operating costs, excluding Cunard and Seabourn, increased $35.9 million primarily as a result of increases in passenger capacity, partially offset by lower fuel costs. Selling and administrative expenses increased $31.9 million, or 40.5%, of which $19.9 million, or 25.2%, was due to the acquisition and consolidation of Cunard and Seabourn. Excluding Cunard and Seabourn, selling and administrative expenses as a percentage of revenues were 14.1% in 1999 and 1998. Selling and administrative expenses, excluding Cunard and Seabourn, increased primarily as a result of increases in advertising and payroll and related costs. Depreciation and amortization increased by $14.9 million, or 34.6%, to $57.9 million in 1999 from $43.0 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 $5.9 million of losses from affiliated operations as compared with $10.7 million of losses in 1998. The Company's portion of Airtours' losses increased $.4 million to $8.5 million in 1999. The Company recorded income (losses) of $2.6 million and $(.9) million during 1999 and 1998, respectively, related to its interest in Il Ponte. The affiliated operations for 1998 includes Seabourn. Nonoperating Income (Expense) Gross interest expense (excluding capitalized interest) increased $4.8 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 $4.0 million due primarily to higher levels of investments in ship construction projects during 1999 as compared with 1998. Interest income increased $3.2 million in 1999 primarily as a result of higher average investment balances 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 $3 million primarily relates to the Company's collection of insurance proceeds compared to other expenses in 1998 of $3.3 million primarily related to the accrual of certain litigation costs. Minority interest was $1.1 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 $208.8 million of net cash from operations during fiscal 1999, a decrease of 2.5% compared to 1998. The decrease was primarily due to changes in cash payments and receipts relating to operating assets and liabilities substantially offset by 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 1999, the Company made net expenditures of approximately $51.0 million on capital projects, of which $17.5 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 1999, the Company had net repayments of $207.4 million under its commercial paper programs, including $153 million funded from the proceeds of its Common Stock offering. Additionally, the Company paid quarterly cash dividends of $53.6 million in 1999. Future Commitments The Company has contracts for the delivery of eight new vessels over the next five years. The Company will pay approximately $890 million during the twelve months ending February 29, 2000 relating to the construction and delivery of these new ships and approximately $1.6 billion thereafter. In addition to these ship construction contracts, the Company has options to construct two additional vessels for Carnival for expected service in 2002, if the options are 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 two options for Carnival will be exercised, the negotiations for the Holland America vessel will be successful or that the new Cunard shipbuilding project will be continued. At February 28, 1999, the Company had $1.42 billion of long- term debt of which $66.7 million is due during the twelve months ended February 29, 2000. See Notes 3 and 5 in the accompanying financial statements for more information regarding the Company's debts and commitments. Funding Sources At February 28, 1999, the Company had approximately $791.2 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 February 28, 1999, the Company had approximately $1.07 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 their respective companies. 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 substantially 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 other critical shoreside software and hardware applications, including purchased software, are estimated to be completed by July 1999. However, 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 substantially completed for all building facilities and shipboard equipment systems. A risk assessment has been substantially completed and is expected to be finalized by May 1999. 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 the end of the third calendar quarter of 1999. Internally developed shipboard information systems have been remediated and are expected to be tested and fully implemented on ships by mid 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. Prior to mid 1999, the Company expects to implement 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 is in the process of preparing its contingency plans which will include the identification of its most reasonably likely worst case scenarios. Currently, the most reasonably likely sources of risk to the Company include (1) the 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) the disruption of travel agency and other sales distribution systems; and (3) the 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 is in the process of preparing its contingency plans to identify and determine how to handle its most reasonably likely worst case scenarios. Preliminary contingency plans are currently being drafted. Comprehensive contingency plans are estimated to be complete by mid 1999. 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 $9 million of costs that are being charged to expense and $7 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 February 28, 1999 was approximately $9 million, of which $5 million has been charged to expense and $4 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.
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"). 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, the court denied the plaintiffs' motion for class certification on March 8, 1999. Several actions collectively referred to as the "Travel Agent Complaints" were previously reported in the 1998 Form 10-K 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 denied both parties requests for reconsideration of the summary judgment rulings. Holland America Westours has asked the Court of Appeals to take discretionary review of the court's orders regarding summary judgment and class certification. The Court of Appeals will not decide whether to take review until at least May 1999. For a description of other pending litigation, see the 1998 Form 10-K 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; pricing policies followed by competitors of the Company; 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 10.1 HAL Antillen N.V. and Subsidiaries Key Management Incentive Plan. 10.2 Note Extension and Satisfaction Agreement, dated February 17, 1999, between Carnival Corporation, Sherwood Weiser and others. 10.3 Stock Purchase Agreement, dated February 17, 1999, between Carnival Corporation, Sherwood Weiser and others. 10.4 Shareholders' Agreement, dated June 30, 1998, between Carnival Corporation, Sherwood Weiser and others. 12 Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. On December 17, 1998, the Company filed a Current Report on Form 8-K related to its December 17, 1998 press release announcing the results of operations for the fiscal year ended November 30, 1998.
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: April 12, 1999 BY/s/ Howard S. Frank Howard S. Frank Vice Chairman of the Board of Directors and Chief Operating Officer Date: April 12, 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 10.1 HAL Antillen N.V. and Subsidiaries Key Management Incentive Plan. 10.2 Note Extension and Satisfaction Agreement, dated February 17, 1999, between Carnival Corporation, Sherwood Weiser and others. 10.3 Stock Purchase Agreement, dated February 17, 1999, between Carnival Corporation, Sherwood Weiser and others. 10.4 Shareholders' Agreement, dated June 30, 1998, between Carnival Corporation, Sherwood Weiser and others. 12 Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule (for SEC use only).