Registrant’s Telephone Number, Including Area Code: (949) 759-5900
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of “large
accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller Reporting Company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Costs in excess of billings on construction contracts
9,236
8,410
Premiums receivable
8,493
10,188
Reinsurance recoverable
660
1,148
Inventory
6,592
5,751
Deferred income taxes, net
1,244
1,262
Prepaid costs and other current assets
12,009
8,530
Total current assets
125,035
131,683
Property, vessels and equipment, net
220,804
219,793
Goodwill
9,181
9,181
Other intangibles, net
10,008
11,152
Other assets
4,474
4,680
Total assets
$
369,502
$
376,489
Liabilities:
Current liabilities:
Accounts payable
$
31,298
$
36,564
Passenger and participant deposits
61,002
47,067
Accrued expenses
14,663
16,175
Billings in excess of costs on construction contracts
14,418
13,108
Loss and loss adjustment expense reserves
5,089
6,674
Current
portion of long term debt
4,587
5,479
Total current liabilities
131,057
125,067
Long term debt, net of current portion and net of discount of $2,335 and
$2,479, respectively
159,604
161,584
Long term deferred tax liabilities
1,635
1,676
Long term passenger and participant deposits
305
35
Total liabilities
292,601
288,362
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued
—
—
Common stock, $.01 par value; 40,000,000 shares authorized; 10,891,067
and 10,888,655 shares issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
108
108
Additional paid-in capital
98,057
97,634
Accumulated deficit
(23,147
)
(11,170
)
Accumulated other comprehensive income
1,883
1,555
Total stockholders’ equity
76,901
88,127
Total liabilities and stockholders’ equity
$
369,502
$
376,489
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ambassadors International, Inc. (the “Company”) was founded in 1967 as a travel services
company incorporated in Washington and reincorporated in Delaware in 1995. The Company operates
through four wholly-owned subsidiaries: (i) Ambassadors, LLC (“Ambassadors”), which commenced
operations in 1996; (ii) Cypress Reinsurance, Ltd (“Cypress Re”), which commenced operations in
2004; (iii) Ambassadors Marine Group, LLC (“AMG”), which commenced operations in 2006; and (iv)
Ambassadors Cruise Group, LLC (“ACG”), which commenced operations in 2006. ACG formed a
wholly-owned subsidiary, Ambassadors International Cruise Group, LLC (“AICG”) which acquired
Windstar Sail Cruises Limited (“Windstar Cruises”) in April 2007.
The Company operates in the following four business segments: (i) cruise, which includes the
operations of ACG, (ii) marine, which includes the operations of AMG, (iii) travel and events,
which includes the operations of Ambassadors, and (iv) corporate and other, which consists of
general corporate assets (primarily cash and cash equivalents and investments), the operations
of Cypress Re and other activities which are not directly related to the Company’s cruise,
marine and travel and events operating segments.
The following further describes the operations of the Company’s business segments:
•
Cruise – This segment operates Majestic America Line and Windstar Cruises brands
within ACG. Majestic America Line is a domestic provider of overnight passenger cruises
along inland rivers and coastal waterways of North America. The Company acquired seven
U.S.-flagged cruise ships under the Majestic America Line brand, including the
223-passenger Empress of the North, the 142-passenger Queen of the West, the
436-passenger American Queen®, the 412-passenger Mississippi
Queen®, the 176-passenger Delta Queen®, the 48-passenger Contessa,
and the 150-passenger Columbia Queen. The Company acquired its U.S. cruise operations
through a series of acquisitions. In January 2006, ACG acquired American West Steamboat
Company, LLC (“American West”), a cruise company that offers cruises through Alaska’s
Inside Passage and on the Columbia and Snake rivers. In April 2006, the Company
acquired the cruise-related assets of Delta Queen Steamboat Company, Inc. (“Delta
Queen”). On April 2, 2007, ACG, through its wholly-owned subsidiary, AICG, acquired
Windstar Cruises, an international-flagged small ship cruise line that operates a
three-ship fleet that includes the 312-passenger Wind Surf, 148-passenger Wind Spirit,
and 148-passenger Wind Star.
The 2008 cruise schedule includes cruises through Alaska’s Inside Passage onboard the
Empress of the North, and on the Columbia and Snake Rivers onboard the Empress of the
North, Columbia Queen and Queen of the West. The Company also offers historical cruises
onboard the American Queen®, Delta Queen® and Mississippi
Queen® on many American rivers, including the Mississippi, Ohio, Tennessee,
Cumberland and Arkansas Rivers, with stops at many American historic cities, battle
grounds and estates, including New Orleans, Memphis and St. Louis. Each of the Company’s
cruises offers an onboard historian and naturalist and shore excursions to enhance
passengers’ understanding of the wildlife, history and cultures of the areas traveled. The
Company’s 2008 cruise schedule also includes destinations in the Greek Isles, Caribbean
Islands and Costa Rica and cruises on the Mediterranean, the Adriatic, and the Panama
Canal on one of the three Windstar Cruises ships.
•
Marine – This segment includes marina design, manufacturing and construction
services. The Company also offers marine operations, shipyard services, management and
consulting services to marina owners. The Company’s marine operations primarily consist
of Bellingham Marine Industries, Inc. (“Bellingham Marine”) acquired on July 21, 2006
and BellPort Group, Inc. (“BellPort”), acquired in February 2005. Bellingham Marine is
a global marina builder, providing design and construction services to marina owners
throughout the world. The Company’s marine business’ customer base is widespread and
geographically diverse, and includes corporations, government agencies and private
individuals. In February 2008, in order to further expand the Company’s shipyard
operations, BellPort purchased certain assets related to Anacapa Marine Services, a
shipyard business located in Channel Islands Harbor in Oxnard, California, for $0.4
million.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
•
Travel and Events – Operating under the Ambassadors, LLC brand, this segment
develops, markets, and manages meetings and incentive programs for a nationwide roster
of corporate clients utilizing incentive travel, merchandise award programs and
corporate meeting management services. It provides comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions and trade shows.
It also develops, markets, and distributes event portfolio management technology
solutions for corporations and large associations.
•
Corporate and Other – This segment consists of general corporate assets
(primarily cash and cash equivalents and investments), the operations of Cypress Re and
other activities which are not directly related to the Company’s cruise, marine or travel and
events segments. Cypress Re reinsures property and casualty risks written by licensed
United States insurers. The lines of business that are currently being reinsured include
commercial auto liability, commercial physical damage and workers’ compensation. These
risks are associated with members of highly selective affinity groups or associations.
Seasonality
The Company’s businesses are seasonal. Prior to 2006, the majority of the Company’s operating
results were recognized in the first and second quarters of each fiscal year, which corresponds
to the busy season for the Company’s travel and events services. As a result of the
acquisitions within the Company’s cruise segment and the size of its cruise operations in
relation to its overall operations, since 2006, a majority of the Company’s operating results
have been recognized in the second and third quarters of each fiscal year, which coincides with
the cruising season.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008 or any
other future periods.
The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements. Certain reclassifications have
been made to the 2007 condensed consolidated financial statements to conform to the 2008
presentation. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual report on Form 10-K for the year ended
December 31, 2007.
Fair Value Measurements
Effective January 1, 2008, the Company implemented the requirements of SFAS No. 157, Fair Value
Measurements (‘‘SFAS No. 157’’) for its financial assets and liabilities. SFAS No. 157 refines
the definition of fair value, expands disclosure requirements about fair value measurements and
establishes specific requirements as well as guidelines for a consistent framework to measure
fair value. SFAS No. 157 defines fair value as the price that would be received to sell an
asset, or paid to transfer a liability, in an orderly transaction between market participants.
Further, SFAS No. 157 requires the Company to maximize the use of observable market inputs,
minimize the use of unobservable market inputs and disclose in the form of an outlined
hierarchy the details of such fair value measurements.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to a
fair value measurement are considered to be observable or unobservable in a marketplace.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable
market data when available. These two types of inputs have created the following fair value
hierarchy:
•
Level 1 – quoted prices for identical instruments in active markets;
•
Level 2 – quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations in which significant inputs and significant value drivers are observable in
active markets; and
•
Level 3 – valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
The Company measures fair value using a set of standardized procedures that are outlined herein
for all financial assets and liabilities which are required to be measured at fair value. When
available, the Company utilizes quoted market prices from an independent third party source to
determine fair value and classifies such items in Level 1. In some instances where a market
price may be available, but in an inactive or over-the-counter market where significant
fluctuations in pricing could occur, the Company would consistently choose the dealer (market
maker) pricing estimate and classify the financial asset or liability in Level 2.
If quoted market prices or inputs are not available, fair value measurements are based upon
valuation models that utilize current market or independently sourced market inputs, such as
interest rates, option volatilities, credit spreads, etc. Items valued using such
internally-generated valuation techniques are classified according to the lowest level input
that is significant to the fair value measurement. As a result, a financial asset or liability
could be classified in either Level 2 or 3 even though there may be some significant inputs
that are readily observable. Internal models and techniques used by the Company include
discounted cash flow and Black-Scholes-Merton option valuation models.
The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated
financial position or results of operations.
On February 12, 2008, the FASB amended the implementation of SFAS No. 157 related to
non-financial assets and liabilities until fiscal periods beginning after November 15, 2008. As
a result, the Company has not applied the above fair value procedures to its goodwill and
long-lived asset impairment analyses during the current period. The Company believes that the
adoption of SFAS No. 157 for non-financial assets and liabilities will not have a material
impact on its consolidated financial position or results of operations upon implementation for
fiscal periods beginning after November 15, 2008.
The following table illustrates the Company’s fair value measurements of its financial assets
and liabilities as classified in the fair value hierarchy, associated unrealized and realized
gains and losses, as well as purchases, sales, issuances, settlements (net) or transfers out of
a Level 1 classification. Realized gains and losses are recorded in other income, net on the
Company’s consolidated statement of operations (in thousands):
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
Restricted Cash
The Company’s cruise passenger deposits are primarily received through credit card
transactions. At December 31, 2007, the Company had $17.1 million of restricted cash held by
banks in cash equivalents and a certificate of deposit in order to secure its processing of
passenger deposits through credit cards. The restricted amounts were negotiated between the
Company and the bank based on a percentage of the expected future volume of credit card
transactions within a standard twelve-month period. At March 31, 2008, the total amount of
restricted cash held by banks was $19.4 million.
On March 27, 2007, the Company amended its credit facility with a bank to reduce its revolving
line of credit from $20.0 million to $12.5 million and established a $12.5 million certificate
of deposit with the bank to secure its outstanding letters of credit. The certificate amount
was based on the Company’s current letters of credit then outstanding.
As of March 31, 2008 and December 31, 2007, the Company also had $0.6 million and $1.5 million,
respectively, included in restricted cash representing principal and interest payments made to
a depository account which was used to pay bondholders of certain of the Company’s vessel debt
in August 2008 as required under the loan agreement.
Revenue Recognition
The Company recognizes revenue in accordance with GAAP, including SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition,” and EITF 99-19, “Reporting Revenue Gross as a Principal Versus
Net as an Agent.”The Company recognizes revenue when persuasive evidence of an arrangement
exists, the service fee is fixed or determinable, collectibility is reasonably assured and
delivery has occurred.
Passenger Ticket Revenue and Onboard and Other Cruise Revenues
The Company records passenger ticket revenue net of applicable discounts and recognizes
passenger ticket revenue and related costs of revenue when the cruise is completed. The Company
generally receives from its customers a partially refundable deposit within one week of booking
a tour, with the balance typically remitted 60 days prior to the departure date. If customers
cancel their trip, the nonrefundable portion of their deposit is recognized as revenue on the
date of cancellation. Passenger revenue representing travel insurance purchased at the time of
reservation is recognized upon the completion of the cruise or passenger cancellation,
whichever is earlier and the Company’s obligation has been met. Onboard and other cruise
revenue consisting of beverage and souvenir sales and optional shore excursions are deferred
and recognized as revenue when the cruise is completed.
Marine Revenue
The Company recognizes revenue for marine and related services, and shipyard related revenue in
accordance with the American Institute of Certified Public Accountants Statement of Position
No. 81-1 “Accounting for Performance of Construction-Type and Production-Type Contracts.”
Revenues from fixed-price marine construction contracts are recognized on the
percentage-of-completion method, whereby a portion of the contract revenue, based on contract
costs incurred to date compared with total estimated costs at completion (based on Company’s
estimates), is recognized as revenue each period. Revenues from cost-plus contracts are
recognized on the basis of costs incurred, plus the fee earned. Estimates of fees earned are
based on negotiated fee amounts or management’s assessment of the fee amounts that are likely
to be earned. Each of these methods approximates percentage of completion revenue recognition
based on contract costs incurred to date compared with total estimated costs at completion.
The Company uses the completed contract method for shipyard related contracts for which
reasonably dependable estimates cannot be made.
On occasion, the Company or its customers may seek to modify a contract to accommodate a change
in the scope of the work, such as changes in specifications, method or manner of performance,
equipment, materials, or period of performance, or to account for customer-caused delays,
errors in specifications or design, contract terminations, or other causes of unanticipated
additional costs. Such change orders or claims are evaluated according to their
characteristics and the circumstances under which they occur, taking into consideration such
factors as the probability of recovery, the Company’s experience in negotiating change orders
and claims, and the adequacy of documentation
substantiating the costs of such change order or claim. Costs attributable to unpriced change
orders and claims are accounted for as costs of contract performance in the period in which the
costs are incurred, and revenue is recognized to the extent of costs incurred. Revenue in
excess of costs attributable to unpriced change orders is recorded when realization is assured
beyond a reasonable doubt, based on the Company’s experience with the customer or when a bona
fide pricing offer has been provided by the customer. Receivables related to unpriced change
orders and claims are not material.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
The Company follows these revenue recognition methods because reasonably dependable estimates
of the revenue, costs and profits applicable to various stages of a contract can generally be
made. Recognized revenues and profit are subject to revisions as the contract progresses to
completion. If the Company does not accurately estimate the resources required or the scope of
work to be performed, or does not manage its projects properly within the planned periods of
time, or satisfy its obligations under the contracts, then profit may be significantly and
negatively affected or losses on contracts may need to be recognized. On a regular basis, the
Company reviews contract performance, costs incurred, and estimated costs to complete.
Revisions to revenue and profit estimates are reflected in income in the period in which the
facts that give rise to the revisions become known. Provisions for anticipated losses on
contracts are reflected in income in the period in which the loss becomes known.
A contract may be regarded as substantially completed if remaining costs and potential risks
are insignificant in amount. The Company considers a contract to be substantially completed
upon delivery of the product, acceptance by the customer and compliance with contract
performance specifications.
The asset, “costs in excess of billings on construction contracts,” represents revenues
recognized in excess of amounts billed. The liability, “billings in excess of costs on
construction contracts,” represents billings in excess of revenues recognized.
Travel, Incentive and Event Related
The Company bills travel participants, mainly consisting of large corporations, in advance, of
which the cash received is recorded as a participant deposit. The Company pays for certain
direct program costs such as airfare, hotel and other program costs in advance of travel, which
are recorded as prepaid program costs. Travel revenue and related costs are recognized when
travel convenes and such revenue is classified as travel and incentive related. This revenue is
reported on a net basis, reflecting the net effect of gross billings to the client less any
direct program costs.
The Company recognizes revenue from hotel reservation, registration and related travel services
when the convention operates. Revenue from the sale of merchandise is recognized when the
merchandise is shipped, the service has been provided or when the redemption periods have
expired. The Company defers revenue from prepaid, certificate-based merchandise incentive
programs until the Company’s obligations are fulfilled or upon management’s estimates (based
upon historical trends) that it is remote that the certificate will be redeemed. These revenues
are reported on a net basis, reflecting the net effect of gross billings to the client less any
direct program or merchandise costs.
Net Insurance Premiums Earned
Insurance premiums are recognized as revenue over the period of the insurance contracts in
proportion to the amount of the insurance coverage provided. The insurance contracts are
typically twelve months in duration and are considered short-duration contracts. Unearned
premiums represent the unearned portion of the insurance contracts as of the balance sheet
date.
Ceded reinsurance premiums relate to reinsurance purchased (excess of loss and aggregate stop
loss) to mitigate potential losses from severe adverse loss development, both on a per accident
claim basis and in the aggregate. These ceded reinsurance transactions are recognized as a
reduction of premium revenue in the same manner in which the insurance contract is recognized
as premium revenue.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
Property, Vessels and Equipment
Property, vessels and equipment are stated at cost, net of accumulated depreciation. The
Company expenses the cost of maintenance and repairs that do not improve or extend the lives of
the respective assets when incurred. Major additions and betterments are capitalized. The
Company’s ships are capitalized and depreciated using the straight-line method
over the expected useful life ranging up to 30 years, net of a residual value that generally is
approximately 15%. Ship replacement parts are capitalized and depreciated upon being placed in
service. Office and shop equipment is capitalized and depreciated using the straight-line
method over the expected useful life of the equipment, ranging up to 10 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the expected
useful life of the improvement or the term of the related lease.
The Company performs reviews for the impairment of property, vessels and equipment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. When property, vessels and equipment are sold or retired, the Company removes the
related cost and accumulated depreciation from the accounts and recognizes any gain or loss in
the statement of operations. Judgments and estimates made related to property, vessels and
equipment are affected by factors such as economic conditions, changes in resale values and
changes in operating performance. This process requires the use of estimates and assumptions,
which are subject to a high degree of judgment. If these assumptions change in the future, the
Company may be required to record impairment charges for these assets.
Long-lived Assets including Intangible Assets
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least
annually or sooner whenever events or changes in circumstances indicate that they may be
impaired. The Company’s management evaluates recoverability using both subjective and objective
factors. Subjective factors include the evaluation of industry and product trends and the
Company’s strategic focus. Objective factors include management’s best estimates of projected
future earnings and cash flows. The Company uses a discounted cash flow model to estimate the
fair market value of each of its reporting units when it tests goodwill for impairment.
Assumptions used include growth rates for revenues and expenses, investment yields on deposits,
any future capital expenditure requirements and appropriate discount rates. The Company
established reporting units based on its current reporting structure. For purposes of testing
goodwill for impairment, goodwill was allocated to these reporting units to the extent it
related to each reporting unit. Intangible assets with finite lives are tested for impairment
using an undiscounted cash flow model. The Company amortizes intangible assets with finite
lives over their estimated useful lives and reviews them for impairment at least annually or
sooner whenever events or changes in circumstances indicate that they may be impaired. The
majority of the Company’s intangible assets were assigned lives based on contract values
associated with each intangible asset. The Company amortizes its acquired intangible assets
with finite lives over a period ranging from five to 20 years. No impairment charges were
recorded for the periods ended March 31, 2008 and 2007, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, which
requires an asset and liability approach that requires the recognition of deferred tax assets
and deferred tax liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be
realized.
Drydocking
The Company capitalizes drydocking costs as incurred and amortizes such costs over the period
to the next scheduled drydock. The Company believes that the deferral method provides a better
matching of revenues and expenses. Drydocking costs are included in prepaid and other current
assets and in long term assets in the accompanying balance sheet and are amortized over the
cruising season between scheduled drydockings. As of March 31, 2008, the Company had
approximately $3.4 million in unamortized drydock costs that related to the 2008 season and
beyond, of which, approximately $2.6 million is included in prepaid costs and other current
assets and approximately $0.8 million is included in other long term assets in the accompanying
balance sheet and will be amortized over the period to the next scheduled drydock.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
Accounting for Stock Options
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share Based Payment” (“SFAS No.
123R”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and amends SFAS No. 95, “Statement of Cash
Flows.” Generally, the fair value approach in SFAS No. 123R is similar to the fair value
approach described in SFAS No. 123. In 2005, the Company used the Black-Scholes-Merton formula
to estimate the fair value of stock options granted to employees. The Company adopted SFAS No. 123R, using the modified-prospective method, beginning January 1, 2006. Based on the terms of
the Company’s plans, the Company was not required to record a cumulative effect related to its
plans. The Company also elected to continue to estimate the fair value of stock options using
the Black-Scholes-Merton formula.
The following table details the stock-based compensation costs included in general and
administrative expense (in thousands):
As of March 31, 2008, total unrecognized compensation cost related to nonvested stock-based
compensation arrangements granted under the stock option plans expected for the remainder of
2008 and in future years through 2011, respectively, were approximately $0.5 million and $0.4
million. This expected cost does not include the impact of any future stock-based compensation
awards. During the quarter ended March 31, 2008 and 2007, there were no grants of stock
options or restricted stock.
Dividends Declared
On September 2, 2003, the Company’s board of directors authorized a new dividend policy of
paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly
basis. The Company and its board of directors intend to continually review the dividend policy
to ensure compliance with capital requirements, regulatory limitations, the Company’s financial
position and other conditions which may affect the Company’s desire or ability to pay dividends
in the future. Subsequent to the dividend declared in May 2007, the Company’s board of
directors did not approve any additional dividends for 2007 or for the first quarter of 2008.
The following dividends were declared in 2007 on the dates indicated (in thousands):
The FASB issued a FSP APB14-a, an interpretation of APB Opinion No. 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants.” The proposed FSP would require
an issuer of convertible debt instruments commonly referred to as Instruments B and C from EITF
Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” and
any other convertible instruments that allow for settlement in any combination of cash and
shares at the issuer’s option to separately account for the liability and equity components of
the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The
proposed effective date for the FSP is for fiscal years beginning after December 15, 2008 and
does not permit early application. However, the proposed transition guidance requires
retrospective application to all periods presented, and does not grandfather existing
instruments. The Company has not yet completed its evaluation of the potential impact of
adopting this proposed FSP, if issued in final form but anticipates a material increase to
interest expense beginning in 2009 when it adopts the FSP in its final form.
In December 2007, the FASB issued SFAS No. 141 (R) “Business Combinations.” SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. The
Company is evaluating SFAS No. 141(R) and has not yet determined the impact the adoption will
have on its consolidated financial statements.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an Amendment of Accounting Research
Bulletin No. 51.” SFAS No. 160
changes the accounting and reporting for minority interests, which will be recharacterized as
non-controlling interests and classified as a component of equity. SFAS No. 160 is effective
on a prospective basis for business combinations that occur in fiscal years beginning after
December 15, 2008. The Company anticipates the adoption of SFAS No. 160 will not have a
material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities-an Amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced
disclosures about an entity’s derivative and hedging activities, specifically how derivative
and hedging activities affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161
encourages, but does not require, comparative disclosures for earlier periods at initial
adoption. The Company anticipates the adoption of SFAS No. 161 will not have a material impact
on its consolidated financial statements.
2.
Business Acquisitions and Investments
BellPort has a 50% ownership interest in Deer Harbor WI, LLC (“DHWI”). DHWI owns a marina
facility in Deer Harbor, Orcas Island, Washington. The Company recorded its proportional share
of its losses from DHWI of approximately $41,000 and $51,000 for the three months ended March31, 2008 and March 31, 2007, respectively, which are included in other income, net. As of March31, 2008 and December 31, 2007, BellPort had a note receivable from DHWI for approximately $1.9
million and $1.9 million, respectively, that is classified in other assets in the accompanying
balance sheet. The note is secured by a deed of trust on property and bears interest at a
variable rate equal to the London Interbank Offered Rate plus 2.75% per year, adjusted
annually. As of December 31, 2007, the interest rate was 8.06%. All unpaid principal and
accrued and unpaid interest is due no later than November 30, 2011. The Company accounts for
its investment in DHWI on the equity method. At March 31, 2008 and December 31, 2007, the
other investments represented $1.4 million and $1.4 million, respectively.
In order to expand its cruise offerings to include international cruise offerings, on April 2,2007, the Company, through its wholly-owned subsidiary AICG, completed its acquisition of all
of the issued and outstanding shares of Windstar Cruises from HAL Antillen N.V., a unit of Carnival Corporation, plc. Under the terms of the purchase agreement, the
Company paid approximately $11.3 million in cash, $60 million in seller financing and assumed
approximately $28.5 million in liabilities. The $60 million in seller financing was payable
over ten years at 7% and was collateralized by each of the three Windstar Cruises’ ships.
The Windstar Cruises purchase price was approximately $72.1 million. The following table
summarizes the components of the Windstar Cruises purchase price (in thousands):
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted
for under the purchase method of accounting. The estimates of fair value of the assets acquired
and liabilities assumed are based on management’s estimates. The following table summarizes the
final estimated fair value of net assets acquired (in thousands):
Cash and cash equivalents
$
1,137
Accounts receivable
5
Prepaid and other current assets
811
Inventory
965
Vessels and equipment
90,825
Intangible assets
7,282
Total assets acquired
101,025
Passenger deposits
(22,966
)
Accounts payable and accrued and other expenses
(5,995
)
Long term debt
(60,000
)
Total liabilities assumed
(88,961
)
Net assets acquired
$
12,064
On April 18, 2007, the Company paid off $60 million in seller financing and accrued interest of
$0.1 million using proceeds from its convertible senior notes offering discussed in Note 6
“Long term obligations.”
The following unaudited pro forma information presents the Company’s summarized results of
operations for the three months ended March 31, 2007 as if the acquisition of Windstar Cruises
had occurred as of January 1, 2007 instead of April 2, 2007 (in thousands, except per share
data):
Pro Forma
Windstar
Pro Forma
As Reported
Cruises
Combined
Revenues
$
32,864
$
17,463
$
50,327
Net (loss) income
$
(8,562
)
$
1,080
$
(7,482
)
Loss per share – basic
$
(0.77
)
$
(0.67
)
Loss per share – diluted
$
(0.77
)
$
(0.67
)
3.
Reinsurance
In December 2003, the Company formed Cypress Re and registered it as a Class 3 Reinsurer
pursuant to Section 4 of the Bermuda Monetary Authority Act to carry on business in that
capacity subject to the provisions of that Act.
The Company reinsures property and casualty risks written by licensed United States insurers
through Cypress Re. The lines of business that are being reinsured include commercial auto
liability, commercial physical damage and workers’ compensation. These risks are associated
with members of highly selective affinity groups or associations. Members whose risk is
reinsured under a program must meet certain loss control program qualifications. A member of a
group must pass certain pre-qualification criteria that are part of the underwriting review by
a third party.
The assumed reinsurance transactions are typically reinsured through a quota share agreement in
which Cypress Re agrees to accept a certain fixed percentage of premiums written from the
ceding company and in general assumes the same percentage of purchased reinsurance, direct
acquisition costs and ultimate incurred claims.
Cypress Re retains the first layer of risk on a per policy basis, which ranges from $250,000 to
$500,000 and the third party reinsurer (through excess of loss reinsurance) retains the next
layer up to the policy limits of $1.0 million. Cypress Re retains losses up to the aggregate
reinsurance limit, which varies with each quota share reinsurance agreement and the third party
reinsurer then pays losses in excess of Cypress Re’s aggregate reinsurance limit up to $5.0
million. Cypress Re is responsible for any additional losses in excess of the aggregate
reinsurance limit.
In 2004, the Company transferred its investment interest in two insurance programs to Cypress
Re. On March 29, 2004, Cypress Re entered into a reinsurance agreement that incorporated the
terms and conditions of the above interest of these programs. The quota share reinsurance
agreement covered a retroactive period from July 1, 2002 through March29, 2004, as well as a prospective period from March 29, 2004 to June 30, 2004. The reinsurance
agreement meets the requirements of SFAS No. 113, “Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts” and has both prospective and retroactive elements.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
During 2004, Cypress Re entered into additional quota share reinsurance agreements. These
reinsurance agreements represent participation in selective property and casualty programs. The
reinsurance agreements meet the requirements of SFAS No. 113. One of the quota share
reinsurance agreements covers a retroactive period from January 1, 2003 through May 31, 2004
and a prospective period from June 1, 2004 through December 31, 2004. The other agreements
contain only prospective components.
Accounting for prospective reinsurance transactions results in premiums and related acquisition
costs being recognized over the remaining period of the insurance contracts reinsured. As of March 31, 2008, there were no balances in unearned premium
reserves, deferred policy acquisition costs or ceded prepaid reinsurance premiums.
Accounting for retroactive reinsurance transactions results in the reinsurer reimbursing the
ceding company for liabilities incurred as a result of past insurable events covered by the
underlying policies reinsured. Loss and loss adjustment expenses are initially recorded at the
estimated ultimate payout amount and any gain from any such transaction is deferred and
amortized into income. Loss and loss adjustment expense reserves are adjusted for changes in
the estimated ultimate payout and the original deferred gain is recalculated and reamortized to
the balance that would have existed had the changes in estimated ultimate payout been available
at the inception of the transaction, resulting in a corresponding charge or credit to income in
the period that the changes in estimated ultimate payout are made. As of March 31, 2008, the
deferred gain on retroactive reinsurance was fully amortized and Cypress Re recognized in
income $11,000 of the previously deferred gain on March 31, 2007.
As of March 31, 2008, premiums receivable, reinsurance recoverable and loss and loss adjustment
expense reserves of $1.2 million, $0.2 million and $1.6 million, respectively, related to
retroactive reinsurance were recorded on the Company’s balance sheet. The March 31, 2008 loss
and loss adjustment expense reserves balance includes $1.3 million for incurred but not
reported claims.
Cypress Re retrocedes risk to the ceding company under specific excess and aggregate loss
treaties. Cypress Re remains obligated for amounts ceded in the event that the reinsurer does
not meet its obligations.
Premiums receivable at March 31, 2008 consists of funds held in trust by the ceding company of
approximately $8.1 million and deferred and not yet due premiums from the ceding company of
approximately $0.4 million. The funds held in trust primarily consist of high grade corporate
bonds, government bonds and money market funds.
As of March 31, 2008, reinsurance recoverable and prepaid reinsurance premiums of $0.7 million
and zero, respectively, relate to a single reinsurer. Cypress Re’s exposure to credit loss in
the event of non-payment or non-performance is limited to these amounts.
The effect of reinsurance on premiums written and earned for the three months ended March 31,2008 was as follows (in thousands):
As of March 31, 2008, the Company had issued approximately $10.7 million in letters of credit
related to property and casualty insurance programs that expire at various dates through 2008.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
4.
Inventory
The Company maintains inventory of marine construction materials, fuel, supplies, souvenirs and
food and beverage products. Inventories are stated at the lower of cost or market, using
standard costs, which approximates the first-in, first-out method. The components of inventory
as of March 31, 2008 and December 31, 2007 were as follows (in thousands):
Loans secured by ship mortgages at
fixed rates varying from 2.3% to 6.5%
due through July 2028
$
67,628
$
69,743
Secured note payable to bank at a fixed
interest rate of 8.245%, due May 2010
1,642
1,656
Amounts outstanding under $2.1 million
secured line of credit with an
Australian bank
—
877
Loans outstanding with New Zealand banks
40
50
3.75% Convertible Senior Notes, net of
unamortized discount and offering costs
of $2,335 and $2,479, respectively
94,665
94,521
Equipment leases
216
217
164,191
167,063
Less: current portion
4,587
5,479
Non-current portion
$
159,604
$
161,584
At March 31, 2008 and December 31, 2007, the Company’s cash-secured revolving credit facility
with a bank in the amount of $12.5 million and $12.5 million respectively, had no balances
outstanding at the end of each of the respective periods.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
Loans Secured by Ship Mortgages
In conjunction with ACG’s acquisition of American West, the Company assumed $41.5 million in
fixed-rate, 4.63% debt payable through 2028 and guaranteed by the United States Government
through the United States Maritime Administration (“MARAD”) under Title XI, Merchant Marine
Act, 1936, as amended, and is secured by a First Preferred Ship Mortgage on the Empress of the
North. Annual principal payments of $1.8 million plus accrued interest are required through
July 18, 2028.
In conjunction with ACG’s acquisition of the cruise-related assets of Delta Queen, the Company
assumed $35.0 million of fixed-rate, 6.5% debt payable through 2020 and guaranteed by MARAD
under Title XI, Merchant Marine Act, 1936, as amended, and secured by a First Preferred Ship
Mortgage on the American Queen®. Semi-annual principal payments accumulating to $2.4
million annually plus accrued interest are required through June 2020.
Bellingham Marine Debt
Bellingham Marine has a note payable to a bank with a balance of $1.6 million at March 31,2008, secured by property, payable in monthly installments of $16,000 including interest at a
fixed rate of 8.245%, subject to certain limitations and various financial covenants, due May10, 2010. As of March 31, 2008, the Company was in compliance with the financial covenants.
Bellingham Marine’s international operations have a $2.1 million line of credit for its
Australian subsidiary with National Australia Bank Limited. Interest is payable monthly at an
annual adjustable rate that is adjusted quarterly and is collateralized by substantially all of
the subsidiary’s assets, including any uncalled or unpaid capital. The interest rate at March31, 2008 was 8.1%. As of March 31, 2008, the balance on the line of credit was zero.
Bellingham Marine’s New Zealand operations have two bank loans at an average interest rate of
11.3% and outstanding amounts totaling $40,000. In addition, the international operations have
equipment leases with balances of $216,000 and $217,000 at March 31, 2008 and December 31,2007, respectively, secured by the respective equipment payable in monthly installments
aggregating $3,200, including interest, through July 2012.
3.75% Convertible Senior Notes
On April 3, 2007, the Company closed the sale of $97.0 million of 3.75% Convertible Senior
Notes due 2027 (“Notes”) to Thomas Weisel Partners LLC (“Initial Purchaser”), in a private
offering, pursuant to a purchase agreement dated March 28, 2007. A portion of the proceeds from
the sale of the Notes was used to retire the $60 million in seller financing incurred in
connection with the acquisition of Windstar Cruises as discussed in Note 2 “Business
Acquisitions and Investments.” The remaining proceeds were to be used for general corporate
purposes and future growth of the Company.
The Notes are convertible into shares of the Company’s common stock at an initial conversion
rate of 17.8763 shares per $1,000 principal amount of the Notes (which is equivalent to an
initial conversion price of approximately $55.94 per share), subject to adjustment upon the
occurrence of certain events. Interest on the Notes is payable semi-annually in arrears on
April 15 and on October 15 in each year, commencing October 15, 2007. The Company may redeem
the Notes in whole or in part after April 15, 2012. After April 20, 2010 and prior to April 15,2012, the Company may redeem all or a portion of the Notes only if the price of the Company’s
common stock reaches certain thresholds for a specified period of time. Holders of the Notes
may require the Company to purchase all or a portion of the Notes, in cash, on April 15, 2012,
April 15, 2017 and April 15, 2022 or upon the occurrence of specified fundamental changes (as
defined in the purchase agreement dated March 28, 2007). If a holder elects to convert Notes in
connection with a specified fundamental change that occurs prior to April 15, 2012, the Company
will in certain circumstances increase the conversion rate by a specified number of additional
shares.
In connection with the issuance of the Notes, the Initial Purchaser withheld $2.9 million in
fees from the proceeds of the offering which amount is classified as debt discount and
amortized over a five-year period, the earliest term when the note holders have an option to
require the Company to redeem the Notes. The Company also incurred debt offering costs of $0.5
million. Both the debt discount and debt offering costs are being amortized over the five-year
period using the effective interest rate method. The unamortized debt discount is included as a
component of long-term debt. The unamortized offering costs are included as a component of
prepaid costs and other current assets or other assets, respectively, depending on whether the
unamortized balance is of a short-term or long-term nature.
Change in unrealized gain on foreign currency translation
327
244
Change in unrealized gain (loss) on available-for-sale
securities, net of income tax expense of $0 and $32
—
58
$
(11,650
)
$
(8,260
)
8.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is computed by dividing net income (loss) by the weighted
average common shares outstanding. Diluted EPS includes the effect of any potential shares
outstanding, which for the Company consists of dilutive stock options and shares issuable under
convertible notes (“Notes). The dilutive effect of stock options is calculated using the
treasury stock method with an offset from expected proceeds upon exercise of the stock options
and unrecognized compensation expense. The dilutive effect of the Notes is calculated by adding
back interest expense and amortization offering costs, net of taxes, which would not have been
incurred assuming conversion. Diluted EPS for the three months ended March 31, 2008 and 2007
does not include the dilutive effect of stock options and conversion of the Notes into the
Company’s common shares since their inclusion would be anti-dilutive.
In January 2007, the Company realigned its business segments into the following four business
segments: (i) cruise, which includes the operations of ACG; (ii) marine, which includes the
operations of AMG; (iii) travel and events, which includes the operations of Ambassadors; and
(iv) corporate and other, which consists of general corporate assets (primarily cash and cash
equivalents and investments), the insurance operations of Cypress Re and other activities that
are not directly related to the Company’s cruise, marine and travel and events operating
segments.
Summary of business segment information is as follows (in thousands):
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
10.
Income Taxes
The Company recorded an income tax benefit of $0.1 million for the three months ended March 31,2008, compared to $5.7 million for the three months ended March 31, 2007. The Company
continues to record a full valuation allowance on its domestic deferred tax assets.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of multiple state and foreign jurisdictions. With a few exceptions, the Company is no longer
subject to U.S. federal income tax examinations for years before 2004; state and local income
tax examinations before 2003; and foreign income tax examinations before 2003.
The Company is not currently under Internal Revenue Service, state, local or foreign
jurisdiction tax examinations.
During the three months ended March 31, 2008, the Company recognized approximately $6,000 in
potential interest and penalties associated with uncertain tax positions. The Company does not
expect any significant increases or decreases to its unrecognized tax benefits within 12 months
of this reporting date.
11.
Commitments and Contingencies
The Office of the Attorney General for the State of Florida is conducting a review of the
Company’s fuel supplement that it implemented in the fourth quarter of 2007 on its Majestic
America Line and Windstar Cruises brands. The Attorney General is conducting an investigation
to determine whether there is or has been a violation of state or federal anti-trust laws in
connection with the fuel supplements set by the Company and other cruise line operators. The
Company is cooperating with the Attorney General’s office in connection with this review and
investigation and is not able, at this time, to estimate the impact of this review and
investigation on the Company.
On February 26, 2008, the Company and several of its subsidiaries were named in a complaint by
David Giersdorf, the former President of ACG in the Superior Court of Washington for King
County. Mr. Giersdorf has alleged he was improperly terminated and has claimed damages which
appear to be in excess of $70.0 million. Mr. Giersdorf’s claims, based on verbal agreements,
include the following: (i) he left a tenured position with Holland America Line (“HAL”), which
well-positioned him to be the President of HAL earning a multi-million dollar annual salary
until retirement; (ii) he was denied the opportunity to vest in 87,500 option shares and 30,000
restricted stock grants, which should be valued at a $47 per share stock price; (iii) his
assistance in acquiring Windstar and his work in the transition of its vendors and employees
entitles him to approximately $54.0 million; (iv) he is owed compensation for future
acquisitions; and (v) he is owed sums for reputation and emotional damage. The Company believes
all of Mr. Giersdorf’s claims lack merit and will defend them vigorously, but is not able at
this time to estimate the outcome of this proceeding.
12.
Impairment or Disposal of Long-Lived Assets
Since 1968, Congress has granted the Delta Queen® eight consecutive exemptions from
the Safety at Sea Act requirement because of fire prevention and safety enhancements made to
the ship and the historic status of the Delta Queen®. The current exemption has been
extended to November 1, 2008. The Company’s ability to operate the Delta Queen® was
dependent upon retaining the current Congressional exemption and obtaining additional
exemptions subsequent to 2008. In July 2007, the Company was made aware that the Congressional
exemption would not be extended beyond 2008 and announced 2008 as the farewell season for the
Delta Queen®. The Company reviewed the remaining vessel value of the Delta
Queen® for impairment. Management evaluated the recoverability using both subjective
and objective factors. Subjective factors included the evaluation of industry and product
trends and the Company’s strategic focus. Objective factors included management’s best
estimates of projected future earnings and cash flows. The Company used a discounted cash flow
model using assumptions including expected revenues and expenses, investment yields on
deposits, any future capital expenditure requirements and appropriate discount rates. Based on
the analysis performed, the Company believes that the remaining vessel value on the Delta
Queen® is recoverable and no impairment charge has been recorded as of March 31,2008.
The Company has decided not to operate the 48-passenger Contessa in 2008 and anticipates
selling the vessel in the near future. The Company believes that the remaining vessel value
on the Contessa is recoverable and no impairment charge has been recorded as of March 31, 2008.
Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
13.
Subsequent Events
Queen of the West
In April 2008, a small fire occurred in the engine room of the Queen of the West, while the
vessel was cruising between The Dalles and John Day Locks in Oregon. The fire was quickly
extinguished with no injuries to guests. The Columbia Queen was brought into service in April,
which was earlier than originally scheduled in order to accommodate guests while the Queen of
the West was undergoing repairs. The incident sailing and one additional sailing were
cancelled. Future impacted sailings have not been determined at this
time and will be contingent on the completion of the vessel repairs.
The Company expects to incur costs related to relocating passengers and crew, vessel repair
costs and refund passenger deposits. In addition, the Company lost revenue as a result of the
cancellations of the two sailings. The Company is in the process of
seeking insurance related recoveries with respect to this incident.
Majestic America Line
On April 29, 2008, the Company announced that it plans to sell its Majestic America Line
division. The Company is planning to operate the 2008 season of Majestic America Line while
conducting the exit of the business in an orderly and effective manner.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in
conjunction with the condensed consolidated financial statements and notes thereto included
elsewhere in this quarterly report. This discussion contains forward-looking statements that are
subject to known and unknown risks, uncertainties and other factors that may cause our actual
results to differ materially from those expressed or implied by such forward-looking statements.
These risks, uncertainties and other factors include, among others, those identified under
“Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this quarterly report and
in our annual report on Form 10-K for the year ended December 31, 2007.
We are a cruise, marine and travel and events company. Our cruise operations include U.S.-flagged
cruise ships that sail along the inland rivers and coastal waterways of North America and
international-flagged ships that sail to destinations in the Caribbean, Europe, the Americas and
the Greek Isles.
Through our marine business, we are a global provider of marina design, manufacturing and
construction services. Our marine business also offers marine operations, management and consulting
services to marina owners.
Through our travel and events business, we provide event services to corporations, associations and
trade show companies. In addition, we develop, market and manage performance improvement programs
utilizing travel incentives and merchandise awards designed to achieve specific corporate
objectives, including achieving sales goals, improving productivity and attracting and retaining
qualified employees. Our clients include Fortune 1000 companies and other large and small
businesses.
We also reinsure property and casualty risks written by licensed U.S. insurers. The lines of
business that are currently being reinsured include commercial auto liability, commercial physical
damage and workers’ compensation. These risks are associated with members of highly selective
affinity groups or associations.
In 2006 and 2007, we completed several major acquisitions in the cruise and marine segments. In
2007, we successfully completed the integration of the marine acquisitions, as well the Windstar
Cruises acquisition. The integration of the domestic cruise operations proved to be more
challenging than anticipated.
On April 29, 2008, we
announced our plans to sell Majestic America Line. We are planning to operate the 2008
season of Majestic America Line while conducting the exit of the business in an
orderly and effective manner.
In 2008, we are focused on improving our business performance and have identified three major areas
for improvement as follows:
•
Improve our marketing and pricing strategy by creating a multi-channel marketing
approach that embraces the travel agent community, opens up international markets, caters
to charter and incentive business and pursues a strong group support for our unique
offerings;
•
Reduce our selling expenses by focusing our sales force and targeting our direct mail
campaigns, which enable us to scale our campaign to a level more appropriate for a company
of our size;
•
Improve our operational execution by partnering with V.Ships to reduce costs while
enhancing the onboard guest experience.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (“GAAP”). The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and costs and expenses during the
period. We evaluate our estimates and judgments, including those that affect our most critical
accounting policies, on an ongoing basis. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under the circumstances,
within the framework of current accounting literature.
Our businesses are seasonal. Historically, we have recognized the majority of our operating results
in the first and second quarters of each fiscal year. As a result of our cruise-related
acquisitions and the size of our cruise operations, the majority of our operating results will be
recognized in the second and third three-month periods of our fiscal year which coincides with our
cruising season. Our annual results would be adversely affected if our revenue were to be
substantially below seasonal norms during the second and third quarters of our fiscal year.
The following is a list of the accounting policies that we believe require the most significant
judgments and estimates, and that could potentially result in materially different results under
different assumptions or conditions.
Revenue Recognition
We recognize revenues The Company recognizes revenue in accordance with GAAP, including SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition,” and EITF 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent.”The Company recognizes revenue when persuasive evidence of an
arrangement exists, the service fee is fixed or determinable, collectibility is reasonably assured
and delivery has occurred. We recognize revenue when persuasive evidence of an arrangement exists,
the service fee is fixed or determinable, collectibility is reasonably assured and delivery has
occurred.
Passenger Ticket Revenue and Onboard and Other Cruise Revenues
We record passenger ticket revenue net of applicable discounts. We recognize passenger ticket
revenue and related costs of revenue when the cruise is completed. We generally receive from our
customers a partially refundable deposit within one week of booking a tour, with the balance
typically remitted 60 days prior to the departure date. If customers cancel their trip, the
nonrefundable portion of their deposit is recognized as revenue on the date of cancellation.
Passenger revenue representing travel insurance purchased at the time of reservation is recognized
upon the completion of the cruise or passenger cancellation, whichever is earlier and our
obligation has been met. Onboard and other cruise revenue consisting of beverage and souvenir sales
and optional shore excursions are deferred and recognized as revenue when the cruise is completed.
Marine Revenue
We recognize revenue for marine and related services and shipyard related revenues in accordance
with the American Institute of Certified Public Accountants Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Production-Type Contracts.”Contract costs
include direct labor, materials, subcontractors and other direct costs, plus estimated indirect
costs such as equipment rental, repairs and depreciation and overhead. General and administrative
costs are expensed as incurred.
We recognize revenues on fixed price marine construction contracts using the percentage of
completion method, whereby a portion of the contract revenue, based on contract costs incurred to
date compared with total estimated costs at completion (based on our estimates), is recognized as
revenue each period. Revenues on cost-plus contracts are recognized on the basis of costs incurred,
plus the estimated fee earned. Estimates of fees earned are based on negotiated fee amounts or our
assessment of the fee amounts that are likely to be earned. Each of these methods approximate
percentage of completion revenue recognition based on contract costs incurred to date compared with
total estimated costs at completion. We use the completed-contract method for shipyard related
contracts for which reasonably dependable estimates cannot be made.
On occasion, we or our customers may seek to modify a contract to accommodate a change in the scope
of the work, such as changes in specifications, method or manner of performance, equipment,
materials, or period of performance, or to account for customer-caused delays, errors in
specifications or design, contract terminations, or other causes of unanticipated additional costs.
Such change orders or claims are evaluated according to their characteristics and the circumstances
under which they occur, taking into consideration such factors as the probability of recovery, our
experience in negotiating change orders and claims, and the adequacy of documentation
substantiating the costs of such change order or claim. Costs attributable to unpriced change
orders and claims are accounted for as costs of contract performance in the period in which the
costs are incurred, and revenue is recognized to the extent of costs incurred. Revenue in excess of
costs attributable to unpriced change orders is recorded when realization is assured beyond a
reasonable doubt, based on our experience with the customer or when a bona fide pricing offer has
been provided by the customer. Receivables related to unpriced change orders and claims are not
material.
We follow these revenue recognition methods because reasonably dependable estimates of the revenue,
costs and profits applicable to various stages of a contract can generally be made. Recognized
revenues and profit are subject to revisions as the contract progresses to completion. If we do not
accurately estimate the resources required or the scope of work to be performed, or do not manage
our projects properly within the planned periods of time, or satisfy our obligations under the
contracts, then profit may be significantly and negatively affected or losses on contracts may need
to be recognized. We review contract performance, costs incurred, and estimated costs to complete
on a regular basis. Revisions to revenue and profit estimates are reflected in income in the period
in which the facts that give rise to the revisions become known. Provisions for anticipated losses
on contracts are reflected in income in the period in which the loss becomes known.
A contract may be regarded as substantially completed if remaining costs and potential risks are
insignificant in amount. We consider a contract to be substantially completed upon delivery of the
product, acceptance by the customer and compliance with contract performance specifications.
The asset, “costs plus earnings in excess of billings on construction contracts,” represents
revenues recognized in excess of amounts billed. The liability, “billings in excess of costs plus
earnings on construction contracts,” represents billings in excess of revenues recognized.
Travel, Incentive and Event Related
We bill travel participants, mainly consisting of large corporations, in advance, of which the cash
received is recorded as a participant deposit. We pay for certain direct program costs such as
airfare, hotel and other program costs in advance of travel, which are recorded as prepaid program
costs. We recognize travel revenue and related costs when travel convenes and classify such revenue
as travel and incentive related. This revenue is reported on a net basis, reflecting the net effect
of gross billings to the client less any direct program costs.
We recognize revenue from hotel reservation, registration and related travel services when the
convention operates. We recognize revenue from the sale of merchandise when the merchandise is
shipped, the service has been provided or when the redemption periods have expired. We defer
revenue from pre-paid, certificate-based merchandise incentive programs until our obligations are
fulfilled or upon management’s estimates (based upon historical trends) that it is remote that the
certificate will be redeemed. We report these revenues on a net basis, reflecting the net effect of
gross billings to the client less any direct program or merchandise costs.
Net Insurance Premiums Earned
Insurance premiums are recognized as revenue over the period of the insurance contracts in
proportion to the amount of the insurance coverage provided. The insurance contracts are typically
twelve months in duration and are considered short-duration contracts. Unearned premiums represent
the unearned portion of the insurance contracts as of the balance sheet date.
Ceded reinsurance premiums relate to reinsurance purchased (excess of loss and aggregate stop loss)
to mitigate potential losses from severe adverse loss development, both on a per accident claim
basis and in the aggregate. These ceded reinsurance transactions are recognized as a reduction of
premium revenue in the same manner in which the insurance contract is recognized as premium
revenue.
Property, Vessels and Equipment
Property, vessels and equipment are stated at cost, net of accumulated depreciation. We expense as
incurred the cost of maintenance and repairs that do not improve or extend the lives of the
respective assets. We capitalize major additions and betterments. Our ships are capitalized and
depreciated using the straight-line method over the expected useful life ranging up to 30 years,
net of a residual value that generally is approximately 15%. Ship replacement parts are capitalized
and depreciated upon being placed in service. Office and shop equipment is capitalized and
depreciated using the straight-line method over the expected useful life of the equipment, ranging
up to 10 years. We amortize leasehold improvements using the straight-line method over the lesser
of the expected useful life of the improvement or the term of the related lease.
We perform reviews for the impairment of property, vessels and equipment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. When
property and equipment are sold or retired, we remove the related cost and accumulated depreciation
from the accounts and recognize any gain or loss in the statement of operations. Judgments and
estimates made related to property and equipment are affected by factors such as economic
conditions, changes in resale values and changes in operating performance. This process requires
the use of estimates and assumptions, which are subject to a high degree of judgment. If these
assumptions change in the future, we may be required to record impairment charges for these assets.
Drydocking
We capitalize drydocking costs as incurred and amortize such costs over the period to the next
scheduled drydock. We believe that the deferral method provides a better matching of revenues and
expenses. Drydocking costs are included in prepaid and other current
assets and in long term assets
in the accompanying balance sheet and are amortized over the cruising season between scheduled dry
dockings.
We test goodwill and intangible assets with indefinite useful lives for impairment at least
annually or sooner whenever events or changes in circumstances indicate that they may be impaired.
Management evaluates recoverability using both subjective and objective factors. Subjective factors
include the evaluation of industry and product trends and our strategic focus. Objective factors
include management’s best estimates of projected future earnings and cash flows. We use a
discounted cash flow model to estimate the fair market value of each of our reporting units and
indefinite lived intangibles when performing our impairment tests. Assumptions used include growth
rates for revenues and expenses, investment yields on deposits, any future capital expenditure
requirements and appropriate discount rates. We established reporting units based on our current
reporting structure. For purposes of testing goodwill for impairment, we allocated goodwill to
these reporting units to the extent it related to each reporting unit. We amortize intangible
assets with definite lives over their estimated useful lives and review them for impairment at
least annually or sooner whenever events or changes in circumstances indicate that they may be
impaired. The majority of our intangible assets were assigned lives based on contract values
associated with each intangible asset. We amortize our acquired intangible assets with definite
lives over periods ranging from five to 20 years depending on the contract term where applicable.
Reserve for Loss and Loss Adjustment Expenses
The
liability for losses and loss adjustment expenses includes an amount determined from loss
reports and individual cases and an amount for losses incurred but not reported. Such liabilities
are based on estimates and, while we believe that the amount is adequate, the ultimate liability
may be in excess of or less than the amounts provided. Anticipated deductible recoveries from
insureds are recorded as reinsurance recoverables at the time the liability for unpaid claims is
established. Other recoveries on unsettled claims, such as salvage and subrogation, are estimated
by management and adjusted upon collection.
Reinsurance
In the normal course of our reinsurance business, we seek to reduce the loss that may arise from
catastrophes or other events that cause unfavorable underwriting results by reinsuring certain
levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the reinsured policy.
With respect to retroactive reinsurance contracts, the amount by which the liabilities associated
with the reinsured policies exceed the amounts paid is amortized to income over the estimated
remaining settlement period. We account for the effects of subsequent changes in estimated or
actual cash flows by adjusting the previously deferred amount to the balance that would have
existed had the revised estimate been available at the inception of the reinsurance transaction,
with a corresponding charge or credit to income.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS
No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS
No. 95, “Statement of Cash Flows.” Generally, the fair value approach in SFAS No. 123R is similar
to the fair value approach described in SFAS No. 123. In 2005, we used the Black-Scholes-Merton
formula to estimate the fair value of stock options granted to employees. We adopted SFAS No. 123R,
using the modified-prospective method, beginning January 1, 2006. Based on the terms of our plans,
we did not have a cumulative effect of accounting change related to our plans. We also elected to
continue to estimate the fair value of stock options using the Black-Scholes-Merton formula.
Using the Black-Scholes-Merton formula to estimate the fair value of stock-based compensation
requires the input of subjective assumptions. These assumptions include estimating the length of
time employees will retain their vested stock options before exercising them, risk free interest
rates, our dividend yield and the volatility of our common stock price over the expected term.
Changes in the subjective assumptions can materially affect the estimate of fair value of
stock-based compensation and consequently, the related amount recognized on our consolidated
statements of operations.
On November 10, 2005 the FASB issued FSP SFAS No. 123R-3, “Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards.” We have elected to adopt the alternative
transition method provided in SFAS No. 123R-3 for calculating the tax effects of stock-based
compensation pursuant to SFAS No. 123R. The alternative transition method
includes simplified methods to establish the beginning balance of the additional paid-in capital
pool (“APIC Pool”) related to the tax effects of employee stock-based compensation expense, and to
determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the
tax effects of employee stock-based compensation awards that were outstanding at our adoption of
SFAS No. 123R. In addition, in accordance with SFAS No. 123R, SFAS No. 109, “Accounting for Income
Taxes,” and EITF Topic D-32, “Intraperiod Tax Allocation of the Tax Effect of Pretax Income from
Continuing Operations,” we have elected to recognize excess income tax benefits from stock option
exercises in additional paid-in capital only if an incremental income tax benefit would be realized
after considering all other tax attributes presently available to us. We measure the tax benefit
associated with excess tax deductions related to stock-based compensation expense by multiplying
the excess tax deductions by the statutory tax rates.
Income Taxes
We account for income taxes in accordance with the provisions of SFAS No. 109, which requires an
asset and liability approach that requires the recognition of deferred tax assets and deferred tax
liabilities for the expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Statistical Terminology and Information for Cruise Operations
Available Passenger Cruise Days (“APCD”)
APCD’s are our measurement of capacity and represent double occupancy per cabin multiplied by the
number of cruise days for the period.
Occupancy
Occupancy, in accordance with the cruise vacation industry practice, is calculated by dividing
Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more
passengers occupied some cabins.
Passenger Cruise Days
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the
number of days in their respective cruises.
Selected cruise operations statistical information is as follows:
Total revenue for the three months ended March 31, 2008 was $56.8 million, compared to $32.9
million for the three months ended March 31, 2007. For the quarter ended March 31, 2008, the
increase in revenue was primarily related to increases within our cruise and marine operations. Our
cruise revenue increased $18.6 million primarily due to the $19.4 million in revenue from Windstar
Cruises which was acquired in April 2007. Our marine revenues increased $5.9 million due to
increased sales in our marina operations at Bellingham Marine that we acquired in July 2006. Our
travel, incentive and events related revenue increased $0.2 primarily due to an increase in program
volume. These increases were partially offset by a decrease of $0.6 million in premiums earned on
existing insurance programs as a result of not entering into new programs in 2008.
Cruise operating expenses were $20.6 million for the three months ended March 31, 2008 compared to
$7.0 million for the three months ended March 31, 2007. The increase in cruise operating expenses
is due to the addition of $14.1 million associated with Windstar Cruises which was
acquired in April 2007.
Cost of Marine Revenue
Cost of marine revenue was $22.5 million for the three months ended March 31, 2008 compared to
$19.4 million for the three months ended March 31, 2007. As a percentage of marine revenue, cost of
marine revenue decreased to 76.8% during the three months ended March 31, 2008 from 82.8% during
the three months ended March 31, 2007.
Selling and Tour Promotion Expenses
Selling and tour promotion expenses decreased to $6.4 million for the three months ended March 31,2008 from $6.5 million for the three months ended March 31, 2007. As a percentage of total revenue,
selling and tour promotion decreased to 11.3% during the three months ended March 31, 2008 from
19.9% during the three months ended March 31, 2007.
General and Administrative Expenses
General and administrative expenses were $15.0 million for the three months ended March 31, 2008
compared to $11.3 million for the three months ended March 31, 2007. The increase is primarily due
to $2.0 million in higher general and administrative expenses incurred by the marine group and $1.4
million incurred by Windstar Cruises acquired in April 2007. As a percentage of total revenues,
general and administrative expenses decreased to 26.4% for the three months ended March 31, 2008
from 34.4% for the three months ended March 31, 2007.
Depreciation and Amortization
Depreciation and amortization expenses were $3.5 million for the three months ended March 31, 2008
compared to $1.6 million for the three months ended March 31, 2007. The increase is related to the
additional depreciation expense during the three months ended March 31, 2008 due to the increase in
property, vessels and equipment, predominantly consisting of vessels acquired as a result of the
Windstar Cruises acquisition.
Loss and Loss Adjustment Expenses, Insurance Acquisition Costs and Other Operating Expenses
Loss and loss adjustment expenses, insurance acquisition costs and other operating expenses were
$0.1 million for the three months ended March 31, 2008, compared to $0.7 million for the three
months ended March 31, 2007. The decrease is related to the decrease in net insurance premiums
earned in 2008 compared to 2007.
Operating Loss
We recorded an operating loss of $11.3 million for the three months ended March 31, 2008, compared
to $13.7 million for the three months ended March 31, 2007. The change is the result of the changes
described above.
Other Income (Expense)
Other expense for the three months ended March 31, 2008 was $0.8 million, compared to $0.6 million
for the three months ended March 31, 2007. The increase in other expense was mainly the result of
approximately $1.1 million of interest expense on our convertible notes issued in
April 2007, partially offset by insurance recoveries of $0.6 million for the Queen of the West
and the Empress of the North related to incidents
in 2006 and 2007, respectively, and $0.2 million in recovery from a marine group
contract that was written off in 2007.
We recorded an income tax
benefit of $0.1 million for the three months ended March 31, 2008, compared to
a tax benefit of $5.7 million for the three months ended March 31, 2007. In
accordance with SFAS No. 109, during the fourth quarter of 2007 we established a full
valuation allowance on our domestic deferred tax assets. As a result of the valuation
allowance, no tax benefit was provided for the three months ended March 31, 2008 for
our consolidated domestic losses.
The Company will continue to
assess its valuation allowance in future periods based on the provisions within
SFAS No. 109. Future tax provision and benefits recorded will be affected by the
presence of the valuation allowance.
Net Loss
Net loss for the three months ended March 31, 2008 was $12.0 million, compared to $8.6 million for
the comparable period in 2007. The change is the result of the changes described above.
Liquidity and Capital Resources
In making an assessment of our liquidity, we believe that the items in our financial statements
that are most relevant are our cash and cash equivalents and cash generated from our operating and
financing activities.
Net cash provided by operating activities for the three months ended March 31, 2008 was
approximately $3.5 million, compared to $8.5 million for the three months ended March 31, 2007. The
change in net cash primarily relates to timing
differences in the collection of current assets and the payment of
current liabilities, an increase in net loss and a decrease in
accounts payable and accrued expenses and passenger deposits. This decrease was partially
offset by an increase in the non-cash charges during the period and
an increase in accounts and other receivables.
Net cash used in investing activities
for the three months ended March 31, 2008 was $5.6 million
compared to cash provided by investing activities of $12.0 million for three months ended March 31, 2007. The change is primarily due to a
decrease in proceeds from sale of securities, offset by a decrease in restricted cash funding as a
result of higher holdbacks by our credit card processors, and expenditures for purchase of
property, vessels and equipment. In April 2008, we received notification that our credit card
processor intends to increase our restricted cash by an additional
$5 million which raised the target level of restricted cash for Majestic America Line to $20 million. The exact timing of
removal of this restriction and return of this restricted cash is under discussions with the credit
card processor. A failure or a significant delay in removing the restrictions and returning this
restricted cash could significantly impact our operations.
As of March 31, 2008, we have incurred significant capital expenditures and cost for improvements
to and maintenance of our ships, and we anticipate that these expenditures and costs will not
materially change during the remainder of 2008. We do not have any material commitments for capital
expenditures in our marine, travel and events or insurance businesses in 2008.
On January 13, 2006, ACG acquired American West. Under the terms of the agreement, ACG acquired the
membership interests of American West for one dollar, repaid debt of approximately $4.3 million and
assumed approximately $41.5 million in fixed-rate, 4.63% debt payable through 2028 and guaranteed
by the United States Maritime Administration. In addition, the transaction consideration consisted
of 250,000 shares of our restricted common stock, which is subject to forfeiture to us if certain
future financial targets are not met during the four years following the close of the transaction.
On April 25, 2006, ACG acquired the cruise-related assets and liabilities of Delta Queen for $1.8
million in cash, the assumption of passenger deposits and the assumption of approximately $35.0
million of fixed-rate, 6.50% debt payable through 2020 and guaranteed by the United States Maritime
Administration. In addition, the transaction included contingent consideration of 100,000 shares of
our common stock, to be granted to Delta Queen Steamboat Company, Inc. if certain future financial
targets are met in any of the three years following the close of the transaction. No shares related
to the contingent consideration were issued in 2006, 2007 or the three months ended March 31, 2008.
On February 13, 2006, BellPort purchased certain assets related to the Newport Harbor Shipyard for
$0.5 million. Concurrent with the asset purchase, BellPort entered into a long term agreement to
lease and operate the shipyard facility beginning April 1, 2006 and ending March 31, 2011.
In July 2006, we acquired Bellingham Marine through the acquisition by our Ambassadors Marine Group
LLC subsidiary of 100% of the outstanding stock of Nishida Tekko America Corporation from its
parent company, Nishida Tekko Corporation. In addition, Ambassadors Marine Group and Nishida Tekko
Corporation entered into an option agreement pursuant to which Nishida Tekko Corporation was
granted a five year option to acquire 49% of the outstanding stock of Nishida Tekko America
Corporation for $3.4 million plus 7% simple interest. The effect of the option exercise would give
Nishida Tekko Corporation an approximate 25% interest in Bellingham Marine.
In April 2007, we consummated our acquisition of Windstar cruises for a total consideration of
$72.1 million of which $12.1 million was paid in cash and $60.0 million in seller financing.
On April 2, 2007, ACG, through its wholly-owned subsidiary, AICG acquired Windstar Cruises for
$11.3 million in cash, $60 million in seller financing and assumed approximately $28.5 million in
liabilities. The $60 million in seller financing was subsequently paid off on April 17, 2007, with
the proceeds from the convertible note offering by which we had raised $97.0 million in April 2007.
The 3.75% senior convertible notes are due on April 15, 2027. Interest on the notes is payable
semi-annually in arrears on April 15 and October 15 in each year, commencing October 15, 2007. The
notes are convertible into shares of Ambassadors’ common stock, par value $0.01 per share, at an
initial conversion rate of 17.8763 shares per $1,000 principal amount of the notes (which is
equivalent to an initial conversion price of approximately $55.94 per share), subject to adjustment
upon the occurrence of certain events. We may redeem the notes in whole or in part after April 15,2012. We may also redeem all or a portion of the notes after April 20, 2010 and prior to April 15,2012, only if the price of our common stock reaches certain thresholds for a specified period of
time. Holders of the notes may require us to purchase all or a portion of the notes, in cash, on
April 15, 2012, April 15, 2017 and April 15, 2022 or upon the occurrence of specified fundamental
changes as defined in the purchase agreement dated March 28, 2007. If a holder elects to convert
notes in connection with a specified fundamental change that occurs prior to April 15, 2012, we
will in certain circumstances increase the conversion rate by a specified number of additional
shares.
On April 29, 2008, we
announced our plans to sell Majestic America Line. We are planning to operate the 2008
season of Majestic America Line while conducting the exit of the business in an orderly
and effective manner. Several credible parties have expressed a sincere interest in
acquiring some or all the assets of Majestic America Line and building upon the efforts
and investments we have made in delivering unique cruise experiences that celebrate
American history, culture and our magnificent waterways.
We are currently seeking
financing in which we can leverage the assets of Windstar Cruises. If we are successful
in both the sale of Majestic America Line and the financing of Windstar Cruises, we
will once again be in a position to allocate capital. We see investment opportunities
in both international small ship cruising and in our marine segment. In addition to
investing into these businesses, we want to be in the position which allows us the
opportunity to repurchase our stock if it remains at its current prices and also have
the ability to purchase our convertible bonds if they continue to trade at a significant
discount.
Net cash used by financing activities for three months ended March 31, 2008 was $2.5 million,
compared to $2.7 million for the three months ended March 31, 2007. Activity for the three months ended March 31, 2008 included $2.6
million in payments on long term debt compared to $1.7 million during the three months ended March31, 2007. Net cash used by financing
activity during the three months ended March 31, 2007 also included $1.1 million of cash dividends
totaling $0.10 per common share.
On September 2, 2003, the Company’s board of directors authorized a new dividend policy of paying
stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. We
and our board of directors intend to continually review the dividend policy to ensure compliance
with capital requirements, regulatory limitations, our financial position and other conditions
which may affect our desire or ability to pay dividends in the future. Subsequent to the dividend
declared in May 2007, our board of directors did not approve any additional dividends for 2007 or
for the first quarter of 2008.
The following dividends were declared in 2007 on the dates indicated (in thousands):
In the ordinary course of business we may from time to time be required to enter into letters of
credit related to our insurance programs and for our travel related programs with airlines, travel
providers and travel reporting agencies. As of March 31, 2008, we had outstanding approximately
$10.7 million in letters of credit related to property and casualty insurance programs which are
scheduled to expire at various dates through 2008. As of March 31, 2008, we had outstanding
approximately $0.9 million in letters of credit related to cruise business operations which expire
in 2008. As of March 31, 2008, we had outstanding approximately $0.1 million in letters of credit
related to travel and event business operations that expire at various dates through 2008.
Under Bermuda regulations, Cypress Re is required to maintain a surplus of 20% of gross written
premiums or 10% of loss and loss adjustment expense reserves or a minimum statutory capital and
surplus required for a Class 3 Company of $1.0 million, whichever is greater. As of March 31, 2008,
Cypress Re had $4.1 million of contributed capital from us, which is in excess of the required
statutory capital, and surplus of $1.0 million. In April 2008, we reduced our capital by $3.3
million based on authority from Bermuda.
In November 1998, our board of directors authorized the repurchase of up to an aggregate of $20.0
million of our common stock in the open market or through private transactions. In August 2006, our
board of directors authorized an additional $10.0 million for the repurchase of our common stock in
the open market or through private tractions, providing for an aggregate of $30.0 million. This
repurchase program is ongoing and as of March 31, 2008, we had repurchased 1,102,650 shares for
approximately $14.0 million. No shares were repurchased during the three months ended March 31,2008 and 2007. We do not believe that any future repurchases will have a significant impact on our
liquidity.
We believe that cash, cash equivalents, available-for-sale securities and cash flows from
operations will be sufficient to meet our anticipated operating cash needs for at least the next
twelve months. We continue to pursue further acquisitions of related travel and performance
improvement, service and other businesses, although no assurance can be given that definitive
agreements for any acquisition will be entered into or, if they are entered into, that any
acquisition will be consummated on terms favorable to us. We could use cash and financing sources
discussed herein, or financing sources that subsequently become available, to fund additional
acquisitions or investments. In addition, we may consider issuing additional debt or equity
securities in the future to fund potential acquisitions or investments, to refinance existing debt,
or for general corporate purposes. If a material acquisition or investment is completed, our
operating results and financial condition could change materially in future periods. However, no
assurance can be given that additional funds will be available on satisfactory terms, or at all, to
fund such activities.
Trends and Uncertainties
The results of operations and financial position of our business may be affected by a number of
trends or uncertainties that have, or that we reasonably expect could have, a material effect on
income from continuing operations, cash flows and financial position. Such trends and uncertainties
include the repercussions of the war in Iraq or terrorist acts, our acquisition of or investment in
complementary businesses and significant changes in estimates for potential claims or other general
estimates related to our reinsurance business. We will also, from time to time, consider the
acquisition of or investment in businesses, services and technologies that might affect our
liquidity requirements.
Statements contained in this quarterly report on Form 10-Q that are not historical in nature are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. A forward-looking statement may contain words such as “expect,”“anticipate,”“outlook,”“could,”“target,”“project,”“intend,”“plan,”“believe,”“seek,”“estimate,”“should,”“may,”“assume,”“continue,” and variations of such words and similar expressions. These statements are
not guarantees of future performance and involve certain risks, uncertainties, and assumptions that
are difficult to predict. We caution you that actual outcomes and results may differ materially
from what is expressed, implied, or forecast by our forward looking statements. We have based our
forward-looking statements on our management’s beliefs and assumptions based on information
available to our management at the time the statements are made. Such risks and uncertainties
include, among others:
•
our ability to effectively and efficiently operate our cruise operations;
•
our ability to effectively and expeditiously divest Majestic
America Line;
•
customer cancellation rates;
•
competitive conditions in the industries in which we operate;
•
marketing expenses;
•
extreme weather conditions;
•
timing of and costs related to acquisitions;
•
the impact of new laws and regulations affecting our business;
•
negative incidents involving cruise ships, including those involving the health
and safety of passengers;
•
cruise ship maintenance problems and emergency ship repairs;
•
reduced consumer demand for vacations and cruise vacations;
•
changes in fuel, food, payroll, insurance and security costs;
•
the availability of raw materials;
•
our ability to enter into profitable marina construction contracts;
•
changes in relationships with certain travel providers;
•
changes in vacation industry capacity;
•
the mix of programs and events, program destinations and event locations;
•
the introduction and acceptance of new programs and program and event
enhancements by us and our competitors;
•
other economic and geo-political factors and other considerations affecting the
travel industry;
•
changes in United States maritime tax laws;
•
potential claims related to our reinsurance business; and
•
the potentially volatile nature of the reinsurance business.
The information contained in this document is not a complete description of our business or the
risks associated with an investment in our common stock. Before deciding to buy or maintain a
position in our common stock, you should carefully review and consider the various disclosures we
made in this report, and in our other materials filed with the Securities and Exchange Commission
that discuss our business in greater detail and that disclose various risks, uncertainties and
other factors that may affect our business, results of operations or financial condition. In
particular, you should review our annual report on Form 10-K for the year ended December 31, 2007,
filed with the Securities and Exchange Commission and the “Risk Factors” we included in that
report.
Any of the factors described above could cause our financial results, including our net income or
loss or growth in net income or loss to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate substantially.
We disclaim any obligation to publicly update any forward-looking statements, whether as a result
of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in financial market conditions in the normal course of business due to
our use of certain financial instruments. Market risk generally represents the risk that losses may
occur in the values of financial instruments as a result of movements in interest rates and equity
prices.
There have been no material changes in the reported market risks or the overall credit risk of our
portfolio since December 31, 2007. See further discussion of these market risks and related
financial instruments in our annual report on Form 10-K for the year ended December 31, 2007.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission
rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our disclosure controls and procedures are
designed to provide a reasonable level of assurance of reaching our desired disclosure control
objectives. Also, we have investments in certain unconsolidated entities. As we do not control or
manage these entities, our disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those we maintain with respect to our consolidated
subsidiaries.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation,
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the quarter covered by this report. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended March 31, 2008 that have materially affected or are
reasonably likely to materially affect, our internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
The Office of the Attorney General for the State of Florida is conducting a review of our fuel
supplement that we implemented in the fourth quarter of 2007 on our Majestic America Line and
Windstar Cruises brands. The Attorney General is conducting an investigation to determine whether
there is or has been a violation of state or federal anti-trust laws in connection with the setting
by us and other cruise line operators of our respective fuel supplements. We are cooperating with
the Attorney General’s office in connection with this review and investigation. We are not able at
this time to estimate the impact of this review and investigation on us.
On February 26, 2008, we and several of our subsidiaries were named in a complaint by David
Giersdorf, the former President of ACG in the Superior Court of Washington for King County. Mr.
Giersdorf has alleged he was improperly terminated and has claimed damages which appear to be in
excess of $70.0 million. Mr. Giersdorf’s claims, based on verbal agreements, include the
following: (i) he left a tenured position with Holland America Line (“HAL”), which well-positioned
him to be the President of HAL earning a multi-million dollar annual salary until retirement; (ii)
he was denied the opportunity to vest in 87,500 option shares and 30,000 restricted stock grants,
which should be valued at a $47 per share stock price; (iii) his assistance in acquiring Windstar
and his work in the transition of its vendors and employees entitles him to approximately $54.0
million; (iv) he is owed compensation for future acquisitions; and (v) he is owed sums for
reputation and emotional damage. We believe all of Mr. Giersdorf’s claims lack merit and will
defend them vigorously, but are not able at this time to estimate the outcome of this proceeding.
Item 1A. Risk Factors.
Item 1A of Part I of our Form 10-K for the year ended December 31, 2007, summarizes various
material risks that investors should carefully consider before deciding to buy or maintain an
investment in our securities. Any of those risks, if they actually occur, would likely harm our
business, financial condition and results of operations and could cause the trading price of our
common stock to decline. There are no material changes to the risk factors set forth in the
above-referenced report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (1)
31.2
Certification of Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
32.2
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (1)
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.
Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (1)
31.2
Certification of Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
32.2
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (1)
(1)
Attached hereto.
33
Dates Referenced Herein and Documents Incorporated by Reference