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