(Exact Name of Registrant as Specified in Its Charter)
Delaware
91-1688605
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
2101 4th Avenue, suite 210 Seattle, Washington98121
(Address of Principal Executive Offices)
Registrant’s Telephone Number, Including Area Code: (206) 292-9606
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o 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 o
Non-accelerated filer o
Smaller Reporting Company þ
(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
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Description of the Company and Basis of Presentation
Ambassadors International, Inc. (the “Company”) has implemented its previously announced business
strategy of focusing on the international cruise operations of its subsidiary, Windstar Sail
Cruises Limited (“Windstar Cruises”). Windstar Cruises maintains a fleet of three
internationally-flagged luxury yachts that provide travel and cruise opportunities to explore
hidden harbors and secluded coves of treasured destinations with sailings in the Caribbean, Europe,
the Americas and the Greek Isles. During the three months ended March 31, 2010, Windstar Cruises
was the only operating division of the Company.
As of March 31, 2010, the Company has four remaining Majestic America Line vessels from an original
fleet of seven. The four vessels, moored on the Columbia and Mississippi rivers, are not operating
and are currently being marketed for sale or disposal, although there can be no assurances that we
will be able to locate qualified buyers or dispose of the vessels in
a timely manner. The Delta
Queen®is currently leased
under a bareboat charter agreement under which the lessee is operating a
fixed location hotel on the ship in Tennessee. In January 2010,
we pledged one of the vessels, the
Columbia Queen, as collateral with a credit card processer rather than placing additional cash
deposits with the institution for the purpose of accepting credit card deposits from our customers
for passenger ticket revenues. As of March 31, 2010 and December 31, 2009, two of the four
vessels of the Majestic America Line qualified for
“held-for-sale” classification. See Note 10.
Discontinued Operations
During 2009, the Company completed
the wind-down of operations or disposition of previously
operated business segments or divisions, including the marine group, the reinsurance business and
the travel and events business. Accordingly, the results of operations of these business segments
are reported as discontinued operations in the accompanying condensed consolidated financial
statements. See Note 2.
Liquidity
As of March 31, 2010the Company held cash and cash equivalents and restricted cash of $15.7
million and had a working capital deficit of $1.3 million.
In 2009, the Company restructured
a significant portion of its Convertible Notes in an Exchange
Offer resulting in a reduction in the principal obligation of the Convertible Notes. In March 2010,
the Company obtained a $15.0 million Credit Facility to be used to fund drydock costs as well as
working capital and other corporate purposes of the Company and its subsidiaries. In addition to
reducing outstanding indebtedness and obtaining the Credit Facility, the Company has restructured
its core business activities so as to allow it to dedicate liquidity resources to the operations
and growth of Windstar Cruises.
In 2010, as in other years,
the Company will incur capital expenditures and costs required in the
maintenance of the Windstar Cruise vessels. In 2010, planned capital expenditures and drydock
projects are expected to be approximately $7.0 million. In April of 2010, the Company completed
the scheduled drydock for the Wind Sprit. The Company incurred
expenditures of $4.1 million on
refurbishments. The cash required to fund these expenditures has been advanced under the Credit
Facility and is reflected as restricted cash in the accompanying financial statements. A scheduled
drydock for the Wind Star is planned in November 2010 where the Company expects to incur $2.5
million in refurbishments. The cash required to fund the November project will be provided by the
Credit Facility.
The Company anticipates that operating cash flows, financing cash flows, and investing cash flows
projected for 2010, cash and cash equivalents of $3.0 million at March 31, 2010, and the remaining
funds available under the Credit Facility will be sufficient to fund ongoing operations through
2010. Business improvement initiatives and other actions are expected to improve operating income
and cash flow results. However, the timing and extent of success for these strategies cannot be
predicted with any level of certainty. If the Company is unable to meet cash flow projections in
2010, it may need to seek additional sources of funding. If the pricing or terms for any new
financing do not meet expectations, the Company may be required to choose between completion of the
financing on such unfavorable terms or not completing the financing. If sources of
capital are unavailable, or are available only on a limited basis or under unacceptable terms, then
the Company could be required to substantially reduce operating, marketing, general and
administrative costs related to our continuing operations.
Substantially all of our long-term indebtedness is scheduled to mature or may need to be repaid
during 2012. We do not expect that our cash flows from operations will generate sufficient funds
to enable us to repay or repurchase this indebtedness when we are required to do so in 2012.
Accordingly, our ability to satisfy these obligations will depend upon our ability to refinance
this indebtedness or to obtain additional funds through borrowings, sales of debt or equity
securities, asset sales or other transactions.
Seasonality
The Company’s business is seasonal. Cruise-related revenues are recognized at the completion of
each cruise. As a result, a majority of the operating results will be recognized in the third
quarter of each fiscal year, which coincides with the cruising season and highest occupancy rates.
Future annual results could be adversely affected if revenue were to be substantially below
seasonal norms during any quarter, particularly the third quarter of any fiscal year.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim
financial reporting and include the accounts of the Company and its subsidiaries. Certain
information and footnote disclosures normally included in annual financial statements prepared in
accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management, the unaudited
condensed consolidated financial statements reflect all material adjustments, which consists of
normal recurring adjustments necessary to present fairly the Company’s financial position as of
March 31, 2010 and its operating results and cash flow for the
three months ended March 31, 2010 and March 31, 2009.
Operating results for the three month period ended March 31, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2010 or any other future periods.
The accompanying condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been eliminated upon
consolidation. The condensed consolidated balance sheet at December 31, 2009 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. For further
information, refer to the consolidated financial statements and footnotes thereto included in the
Company’s report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31,2010 and as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 26, 2010.
Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts reported in these
consolidated financial statements and accompanying notes. Actual results could differ materially
from those estimates.
Subsequent Events
The Company has evaluated subsequent events through the filing date of this quarterly report on
Form 10-Q.
Reclassifications
The travel and events segment qualified as a discontinued operation as of December 31, 2009.
Accordingly, the assets and liabilities of the travel and events segment have been classified as
held for sale as of March 31, 2009 and the results of operations for the three months ended March31, 2009 for travel and events have been included in the loss from discontinued operations.
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. They consist of $2.1 million reclassified from accounts payable trade to accrued
expenses as of December 31, 2009 and $0.7 million
reclassified from compensation and benefits expense to onboard and other cruise revenue for the three months ended March 31,2009. The reclassifications had no impact on net loss for the three months ended March 31, 2009.
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 the fair value hierarchy. 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 of
the fair value hierarchy.
If quoted market prices or inputs are not available, fair value measurements are based upon
methodologies that utilize current market or independently sourced market inputs. 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 of the fair value hierarchy even though there
may be some significant inputs that are readily observable.
Cash and Cash Equivalents
Securities with remaining maturities of three months or less are classified as cash equivalents.
The Company invests cash in excess of operating requirements in short-term time deposits, and other
low risk investments.
Restricted Cash
The Company’s restricted cash consisted of (in thousands):
Proceeds
from Credit Facility, escrow account for drydock and capital expenditures
4,500
—
Cash deposit in escrow
—
200
Certificate
of Deposit to secure letter of credit
70
70
Balance
$
12,733
$
11,270
The Company’s cruise passenger deposits are primarily received through credit card transactions.
The Company has restricted cash held by banks in cash equivalents in order to secure processing of
passenger deposits through credit cards. The restricted amounts are negotiated between the Company
and the bank based on a percentage of the expected volume of future credit card transactions within
a twelve-month period. The Company also received $4.5 million in borrowings under the Credit
Facility which are designated under the agreement to pay drydock expenditures and are currently
held in escrow. At December 31, 2009the Company had $0.2 million of restricted cash held in
escrow following the sale of the Queen of the West®which was released to the Company in February
2010.
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% of the initial
value of the vessel. Ship replacement parts are capitalized and depreciated upon being placed in
service. Office 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.
Assessment of possible impairment is based on the ability to recover the carrying value of the
asset based on estimated undiscounted future cash flows. If these estimated undiscounted future
cash flows are less than the carrying value of the asset, an impairment charge is recognized for
the excess, if any, of the asset’s carrying value over its estimated fair value. 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. Actual
results could differ materially from these estimates.
Drydocking
The Company capitalizes drydocking costs as incurred and amortizes such costs over the period to
the next scheduled drydock for each vessel and believes that this deferral method provides better
matching of revenues and expenses than immediately expensing drydocking costs. Drydocking costs are
included in prepaid costs and other current assets and in long-term assets in the accompanying
balance sheet and are amortized over the cruising period between scheduled drydockings.
Intangible Asset
The Company holds one indefinite lived intangible asset consisting of the Windstar trade name. The
Windstar trade name is tested for impairment at least annually or more frequently, whenever events
or changes in circumstances indicates that the asset 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 observable inputs such as third party appraisals and management’s estimates of projected
future earnings and cash flows.
Foreign Currency Transactions
Gains or losses resulting from the settlement of foreign currency transactions are included in the
statement of operations in the period of the settlement.
Revenue Recognition
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 cruise,
with the balance typically remitted 90 days prior to the departure date of such cruise. 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
primarily of beverage, spa, souvenir and shore excursion sales, is recognized as revenue when the
cruise is completed.
Selling and Tour Promotion Expenses
Selling and tour promotion costs are expensed as incurred.
The Company uses an asset and liability approach when accounting for income taxes 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 basis of assets and
liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. At March 31, 2010 and December 31, 2009, the net deferred
domestic tax asset is subject to a 100% valuation allowance.
Accounting for Share-Based Compensation Plans
The Company has two share-based employee compensation plans and uses the Black-Scholes-Merton
formula to estimate the fair value of stock options granted to employees. The Company has
recorded compensation expense of $0 and $(749,000) related to employee stock options and
restricted stock, for the three months ended March 31, 2010 and 2009, respectively. Cancellations
of unvested restricted stock due to employee terminations resulted in an $823,000 credit to
compensation expense during the three months ended March 31, 2009 and is reflected as general and
administrative expense in the accompanying financial statements.
No stock options were granted and no common shares were issued from the exercise of stock options
during the three months ended March 31, 2010 and 2009.
The
following table summarizes restricted stock award activity under the
share based compensation plan
during the three months ended March 31, 2010.
In June 2009, the FASB issued guidance under FASB ASC 810, Consolidation of Variable Interest
Entities. The guidance amends previous accounting related to the Consolidation of Variable
Interest Entities to require an enterprise to qualitatively assess the determination of the primary
beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to
direct the activities of a VIE that most significantly impact the entity’s economic performance and
(2) has the obligation to absorb losses of the entity or the right to receive benefits from the
entity that could potentially be significant to the VIE. Also, ASC 810 requires an ongoing
reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of
whether an entity is a VIE. Enhanced disclosures are also required to provide information about an
enterprise’s involvement in a VIE. This statement will be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The adoption of ASC 810 had no effect on our
consolidated financial statements.
2. Discontinued Operations and Assets Held for Sale
As of January 1, 2009, the assets and liabilities of the marine group and the reinsurance business
qualified for “held for sale” treatment. On May 13, 2009, the marine group was sold and in
September 2009, the Company executed an agreement with a third party whereby all reinsurance assets
were assigned and related liabilities assumed. The Company exited the reinsurance business
effective as of the date of this agreement. As of December 31, 2009, the travel and events
business qualified as a discontinued operation as the Company completed its wind-down activities
and ceased operations of the segment during the fourth quarter of 2009. As a result, the assets
and liabilities of travel and events are also classified as held for sale in the accompanying
financial statements.
The results of operations of these divisions are presented as discontinued operations in the
accompanying condensed financial statements. Summarized operating results for discontinued operations are
as follows (in thousands):
The Company estimated the recoverability of the carrying value of the marine group and travel and
events during the three months ended March 31, 2009 and recorded an impairment charge of $7.7
million, included in loss from discontinued operations. The amount of the impairment was based on
the difference between the estimated net sales proceeds and the carrying value of the division as
of March 31, 2009.
Certain Majestic America Line vessels qualified for classification as assets held for sale due to
the probability of the asset disposal within a twelve month period and accordingly, the carrying
value of these assets as well as assets and liabilities related to the discontinued travel and
events segment are presented as assets held for sale as of March 31, 2010 and December 31, 2009.
The Majestic vessels that met the criteria for assets held for sale did not operate in 2010 or
2009.
Theses assets and liabilities are summarized as follows (in thousands):
The Company maintains an inventory of fuel, supplies, souvenirs and food and beverage products on
board the Windstar vessels. 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 March31, 2010 and December 31, 2009 were as follows (in thousands):
3.75% Convertible Notes, net of unamortized
discount and offering costs of $2,116 and
$2,362, respectively
29,084
28,838
Credit Facility
7,500
—
Less: current portion
(948
)
( 948
)
Non-current portion
$
58,465
$
50,719
Guaranteed Principal Payment
In conjunction with the acquisition of the Majestic America Line assets of the Delta Queen®,
the Company assumed a fixed-rate, 6.5% debt payable through 2020 guaranteed by MARAD and
secured by a mortgage on the American Queen®. On November 15, 2008, the
Company returned the American Queen® to MARAD’s custodial control. The
Company had guaranteed principal payments on the debt assumed. At March 31, 2010, the Company
had paid all guaranteed principal payments, except for $948,000.
On April 3, 2007, the Company closed the sale of $97.0 million of 3.75% Convertible Senior
Notes due 2027 (the “Convertible Notes”) in a private offering, pursuant to a purchase
agreement dated March 28, 2007. A portion of the proceeds from the sale of the Convertible
Notes was used to retire $60 million in seller financing incurred in connection with the
acquisition of Windstar Cruises. The remaining proceeds were used for general corporate
purposes.
The Company adopted FASB ASC 470-20-25, Debt with Conversion Options, to account for the
Convertible Notes in January 2009. In accordance with ASC 470-20-25, the Company measured the
fair value of the liability component as $84.9 million and allocated the remaining cash
proceeds of $12.1 million to an equity component. A discount rate of 6.875% was used to
determine the debt component based on assumed market conditions and the Company’s financial
position at the time of debt placement. The adoption of ASC 470-20-25 increases the effective
interest rate of the Convertible Notes to 6.875%.
On November 13, 2009, the Company completed an exchange offer (the “Exchange Offer”) to
exchange each $1,000 principal amount of the outstanding Convertible Notes for (i) 230.3766
shares of the Company’s common stock, par value $0.01 per share, and (ii) 273.1959 principal
amount of 10% Senior Secured Notes, due 2012, including guarantees from the Company’s
subsidiaries. Approximately $65.8 million aggregate principal amount of the Convertible Notes
were validly tendered and accepted. In exchange for the tendered Convertible Notes, the
Company issued $18.0 million aggregate principal amount of new 10% Senior Secured Notes due
January 2012 and approximately 15.2 million shares of its common stock. Approximately $31.2
million aggregate principal amount of the Convertible Notes remain outstanding.
The Convertible 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 (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 Convertible 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 remaining Convertible Notes in whole or in part after April 15, 2012. Holders
of the Convertible Notes may require the Company to purchase all or a portion of the
Convertible 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 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 Convertible Notes, the initial purchaser withheld
fees from the proceeds of the offering and the Company incurred debt offering costs. Debt
discounts and offering costs of $2.1 million are being amortized to interest expense through
the first note holder put date in April 2012 using the effective interest rate method.
10% Senior Secured Notes
The
Company recorded the cancellation of $65.8 million of the Convertible Notes and issuance of the Senior
Secured Notes and common shares as a troubled debt restructuring. The Company reduced the
carrying amount of the tendered Convertible Notes by the value of the common stock and the
future cash payments of the Senior Secured Notes. The Company valued the 15.2 million common
shares at $0.53 or $8.0 million which was the closing price of the stock on the day the
Exchange Offer was consummated. The future cash payment obligations of the Senior Secured
Notes are $21.9 million (principal of $18.0 million and future interest payments of $3.9
million). Interest on the Senior Secured Notes is payable in kind or in cash, semiannually,
at the Company’s option. In accordance with accounting for a troubled debt restructuring, the
Company will not recognize interest expense related to the Senior Secured Notes in periods
following the exchange as this cost reduced the gain at the time of the 2009 restructure.
In March 2010, the Company executed a $15.0 million Credit Facility that consists of a $10.0
million term loan and a $5.0 million revolving line of credit. In connection with the
establishment of the facility, we paid direct costs of $0.8 million to third parties and in
connection with the first funding, we paid $0.6 million in annual commitment fees.
Borrowings under the facility bear interest at 12% and mature January 2012. As of March 31,2010, the Company has drawn $7.5 million under the term loan. Of these proceeds, $4.5 million
has been reserved to fund the April 2010 drydock expenditures (scheduled for payment during the
second quarter of 2010) and the remaining proceeds were used to pay the direct costs of the
transaction and general corporate purposes. The Credit Facility contains various restrictive
and financial covenants, including a requirement that the Company achieve certain minimum
EBITDA levels and a limitation on capital expenditures. There are also restrictions regarding
the use of the proceeds under the Credit Facility. In addition, at all times, the Company and
its subsidiaries must maintain a minimum of $2.0 million in unrestricted cash and cash
equivalents. If the Company fails to comply with these covenants the Company could default
under the Credit Facility. A default under the Credit Facility could result in a default under
the Senior Secured Notes or a cross-default under the Convertible Notes and/or other
indebtedness, permitting the holders of any such indebtedness to accelerate such indebtedness.
Change in unrealized gain (loss) on
foreign currency translation
—
(168
)
$
(5,779
)
$
(11,580
)
7. Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is computed by dividing net loss from continuing operations,
discontinued operations and total income (loss) by the weighted average common shares outstanding.
Diluted EPS includes the effect of any potential shares outstanding of dilutive stock options and
shares issuable under the Convertible 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 Convertible Notes is
calculated by adding back interest expense and amortization of offering costs, net of taxes, which
would not have been incurred assuming conversion. Diluted EPS for the three months ended March 31,2010 and 2009 does not include the dilutive effect of stock options or conversion of the
Convertible Notes into the Company’s common shares since their inclusion would be anti-dilutive.
The Company recorded an income tax provision from continuing operations of $33,000 for the three
months ended March 31, 2010 compared to an income tax provision from continuing operations of
$3,000 for the three months ended March 31, 2009. The Company currently records 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 2005; state and local income tax
examinations before 2004; and foreign income tax examinations before 2004.
The Company is not currently under Internal Revenue Service, state, local or foreign jurisdiction
tax examinations.
9. Commitments and Contingencies
The United States Maritime Administration (“MARAD”) filed a claim in the amount of $300,000 against
the Company seeking settlement of one month’s payment under a charter agreement related to the
Empress of the North®, prior to the vessel’s return in 2008, and a claim for amounts paid to third
parties, if any, that may qualify under federal debt priority statutes. The Company filed a
counter claim against MARAD which sought repayment from MARAD for inventory on the ship at the time
of the return and insurance proceeds related to reimbursement for repairs to the ship. During the
first quarter of 2010, the Company received and approved a settlement offer from the U.S.
Department of Justice. Under the terms of the settlement, the Company agreed to make the payment
under the charter agreement of $300,000 and accept a final payment from the U.S. government of
$50,000. The Company made a payment of $250,000 during the first quarter of March 31, 2010 in full
settlement of the claim.
MARAD has also filed a judgment against the Company for the collection of $1.2 million in
connection with the acquisition of the American Queen®. Included in current liabilities at March31, 2010 and December 31, 2009 is $948,000 in guaranteed principal payments that we believe is the
amount owed to MARAD under this claim. A trial date in this case is scheduled during the second
quarter of 2010. The Company intends to vigorously defend itself against this claim.
10. Subsequent Events
On May 7,2010the Company sold the Mississippi
Queen®,
one of the four remaining Majestic America Line vessels. The sales
price approximates the carrying value.
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 on Form 10-Q. 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 on Form 10-Q and in our annual report on Form 10-K for the year ended December 31,2009.
Cruise Operations - Our current cruise operations include the Windstar Cruise vessels which are
international-flagged ships that sail to destinations in the Caribbean, Europe, the Americas and
the Greek Isles. Windstar Cruises operates three sailing yachts including Wind Surf, Wind Spirit
and Wind Star known for their ability to visit the hidden harbors and secluded coves of the world’s
most treasured destinations. The luxurious ships of Windstar sail to nearly 50 nations, calling at
approximately 100 ports throughout Europe, the Caribbean and the Americas.
During 2009 and continuing in 2010, we are focused on improving our Windstar Cruises business
performance and have identified several major areas for improvement as follows:
•
increase our sales and marketing efficiencies to drive more sales, which will enable us
to scale our campaigns to a level appropriate for a company of our size; and
•
reduce operational costs by continuing to renegotiate key vendor contracts that will
allow for significant direct cost savings, efficiency gain and product improvements.
In September 2009 we completed the transition of our vessel management from a third-party vendor to
in-house management. We believe this transition has resulted in efficiency gains and lower
operating costs.
Majestic America Line- In April 2008, we announced plans to sell and cease operating the Majestic
America Line, our U.S. flagged cruise ships that sailed along the inland rivers and coastal
waterways of North America at the conclusion of the 2008 sailing season. The vessels are
currently in lay up status and did not operate in 2010 or 2009, as we plan to exit the business in
an orderly fashion. We sold one of the vessels, Queen of the West®, in November 2009. As of March31, 2010, we had four remaining vessels. On May 7, 2010 the
Company disposed of the Mississippi Queen®. We will
continue marketing and disposition activities of the Majestic America Line in 2010, although there
can be no assurances that we will be successful in the disposition of the vessels or in locating
qualified buyers in a timely fashion.
The operations of previously owned businesses, including the marine group, reinsurance business,
and travel and events are shown as discontinued operations in the accompanying consolidated
financial statements. The assets and liabilities of travel and events
and certain Majestic vessels are
classified as “held for sale” at March 31, 2010 and December 31, 2009.
In November 2009, we completed an exchange offer (the “Exchange Offer”) to exchange each $1,000
principal amount of our outstanding 3.75% Convertible Notes due 2027 (the “Convertible Notes”) for:
(i) 230.3766 shares of the Company’s common stock, par value $0.01 per share, and (ii) 273.1959
principal amount of 10% Senior Secured Notes, due 2012, including guarantees from the Company’s
subsidiaries, (the “Senior Notes”). Approximately $65.8 million aggregate principal amount of the
Convertible Notes were validly tendered and accepted. In exchange for the tendered Convertible
Notes, we issued approximately $18.0 million aggregate principal amount of Senior Notes and
approximately 15.2 million shares of our common stock. Approximately $31.2 million aggregate
principal amount of the Convertible Notes remain outstanding.
In March 2010, we entered into a $15.0 million credit facility (“Credit Facility”) which is
composed of a $10.0 million term loan facility and a $5.0 million revolving line of credit. In
connection with the establishment of the facility, we paid direct costs of $0.8 million to third
parties which are reflected as current and long term prepaid expenses and will be amortized over
the term of the facility as a component of interest expense. Borrowings under the facility bears
interest at 12%, are secured on a first priority basis by substantially all of our assets and
mature on January 2, 2012. The Credit Facility requires an annual commitment fee equal to 4% of
each of the term loan and the outstanding revolving credit commitment. In connection with the
first funding under the facility, we paid $0.6 million in annual
commitment fees. As of March 31, 2010, we had drawn $7.5 million
under the Credit Facility.
Critical Accounting Policies
Our
consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”). The preparation of these 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 which impact our most critical
accounting policies, on an ongoing basis. We base our estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under the circumstances,
within the framework of current accounting literature. Actual results may differ, significantly at
times, from these estimates under different assumption or conditions.
Our critical accounting policies, as described in our Annual Report on Form 10-K for the year ended
December 31, 2009, relate to property, vessels and equipment, drydocking, intangible assets,
revenue recognition, income taxes and share-based compensation. There have been no material
changes to our critical accounting policies since December 31, 2009.
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 Windstar Cruises operations statistical information is as follows:
Total revenue from continuing operations for the three months ended March 31, 2010 was $12.6
million, compared to $16.1 million for the three months ended March 31, 2009. The decrease in
revenue was primarily due to the economic conditions over the last twelve months which impacted
both occupancy rates and price points of ticket sales during the first quarter of 2010. Our
occupancy rates were 74.8% during the first quarter of 2010 compared to 85.0% in the comparable
quarter in 2009. The Company experienced a decline in the number of charter and incentive sailings
during the first quarter of 2010 as compared to the prior period in 2009. This is a primary driver
in the decline in ticket revenue year over year. Bookings for 2011 charter and incentive sailings
have increased in recent months when compared to the same timeframe a year ago.
Onboard revenues totaled $3.2 million during the three months ended March 31, 2010 compared to $3.6
million during 2009. Beverage sales and spa services are the primary sources of onboard guest
revenues and have remained consistent year over year.
Cruise operating expenses were $11.7 million for the three months ended March 31, 2010 compared to
$13.2 million for the three months ended March 31, 2009. The decrease in cruise operating expenses
is primarily due to the reduction in materials and services and efficiencies gained following the
transition of the ship management from a third party management company to in-house personnel in
September of 2009.
Selling and Tour Promotion Expenses
Selling and tour promotion expenses increased to $2.3 million for the three months ended March 31,2010 from $1.9 million for the three months ended March 31, 2009. This was mainly due to an
aggressive initiative in 2009 to reduce spending in the areas of direct advertising, co-op
marketing and advertising media. As a percentage of total revenue, selling and tour promotion
increased to 18.2% during the three months ended March 31, 2010 from 11.7% during the three months
ended March 31, 2009.
General and Administrative Expenses
General and administrative expenses were $2.0 million for the three months ended March 31, 2010
compared to $1.3 million for the three months ended March 31, 2009, or an increase of $0.7 million.
The prior year reflected a $0.8 million credit in stock based compensation related to forfeitures
of equity awards upon employee termination. During the current three months, we have incurred
legal costs for general corporate matters related to the continued restructuring of our company,
including recruiting qualified personnel to replace our interim chief executive officer and for
other positions. As a percentage of total revenue, general and administrative expenses increased
to 16.2% for the three months ended March 31, 2010 from 7.8% for the three months ended March 31,2009 due primarily to the nonrecurring stock-based compensation expense credit.
Depreciation and Amortization
Depreciation expense was $1.9 million for the three months ended March 31, 2010 compared to $2.7
million for the three months ended March 31, 2009. Depreciation expense during the three months
ended March 31, 2010 decreased $0.8 million due to the reduction in the carrying value of the
Windstar Cruises and Majestic vessels following fair value impairments in the second and third
quarters of 2009, as well as the reduction in the number of vessels in the Majestic America Line
subject to depreciation.
Operating loss from continuing operations
Operating loss from continuing operations totaled $5.2 million for the three months ended March 31,2010 compared to an operating loss from continuing operations of $3.0 million for the three months
ended March 31, 2009. The decline in operating income is the result of the changes described above
for each of the revenue and expense line items, primarily due to the decrease in total revenue from
continuing operations.
Other Expense
Other expense for the three months ended March 31, 2010 was $0.5 million compared to $1.4 million
for the three months ended March 31, 2009. The decrease in other expense is attributed to $1.1
million reduction in interest expense attributable to our Exchange
Offer, resulting from accounting
for the exchange of the 3.75% Convertible Notes in November of 2009
for common stock and 10% Senior Secured Notes as
a debt restructuring.
We recorded an income tax provision from continuing operations for the three months ended March 31,2010 of $33,000 compared to an income tax provision of $3,000 for the three months ended March 31,2009. We have established a full valuation allowance on our deferred tax assets as of March 31,2010.
Net loss from discontinued operations
Net loss from discontinued operations for the three months ended March 31, 2010 totaled $11,000
compared to $7.1 million in the comparable quarter in 2009. The three months ended March 31, 2010
include costs related to travel and events residual activity. The three months ended March 31,2009 includes the operating results of the marine, reinsurance, and travel and events business.
The losses recorded during the three months ended March 31, 2009 also include an impairment charge
of $5.0 million related to the marine group and a $2.7 million impairment charge related to travel
and events due to the excess carrying value of the assets of the divisions compared to the
realizable value upon disposition.
Liquidity and Capital Resources
Due to the global downturn in the economy and other factors, we have restructured our long term
indebtedness, restructured our operations, and obtained additional sources of financing. The
downturn in the economy and these restructuring activities have resulted in cash outflows from
operating activities of $6.0 million and $4.5 million during the three months ended March 31, 2010
and 2009, respectively.
In 2009, we restructured a significant portion of the Convertible Notes in the Exchange Offer and,
in 2010, we obtained a $15.0 million Credit Facility. In addition to reducing outstanding
indebtedness and obtaining the Credit Facility for working capital
and to fund drydock and capital
expenditures, we restructured our core business activities so as to allow us to dedicate liquidity
resources to the operations and growth of Windstar Cruises.
In 2010, as in other years, we will incur capital expenditures and costs for improvements required
in the maintenance of our ships. In 2010, planned capital expenditures and drydock projects are
expected to be approximately $7.0 million. We completed a drydock in April 2010 for the Wind Sprit
where we incurred $4.1 million in refurbishments. We also have a scheduled drydock for the Wind
Star in November 2010 where we expect to incur $2.5 million in refurbishments.
We believe that the operating cash flows, financing cash flows, and investing cash flows projected
for 2010, cash and cash equivalents of $3.0 million at March 31, 2010, and the remaining funds
available under the Credit Facility, will be sufficient to fund ongoing operations through 2010. We
expect our business improvement initiatives and other actions will improve operating income and
cash flow results. However, the timing and extent of success for these strategies cannot be
predicted with any level of certainty. If we are unable to meet our cash flow projections in 2010,
we may need to seek additional sources of funding. If the pricing or terms for any new financing do
not meet our expectations, we may be required to choose between completion of the financing on such
unfavorable terms or not completing the financing. If sources of capital are unavailable, or are
available only on a limited basis or under unacceptable terms, then we could be required to
substantially reduce operating, marketing, general and administrative costs related to our
continuing operations.
Substantially all of our long-term indebtedness is scheduled to mature or may need to be repaid
during 2012. We do not expect that our cash flows from operations will generate sufficient funds
to enable us to repay or repurchase this indebtedness when we are required to do so in 2012.
Accordingly, our ability to satisfy these obligations will depend upon our ability to refinance
this indebtedness or to obtain additional funds through borrowings, sales of debt or equity
securities, asset sales or other transactions.
Net cash used in operating activities for the three months ended March 31, 2010 was approximately
$6.0 million, compared to net cash used in operating activities of $4.5 million for the three
months ended March 31, 2009. The increase in cash used in operating activities during the current
quarter primarily relates to the
reduction of cash provided by discontinued operations and an increase in restricted cash relating
to the Credit Facility, offset by reduced payment of trade payables and accrued liabilities and an
increase in passenger deposits.
Net cash used in investing activities for the three months ended March 31, 2010 decreased slightly
to $0.1 million compared to $0.2 million for the three months ended March 31, 2009.
Net cash
provided by financing activities for the three months ended March 31, 2010 was $6.5
million compared to net cash used in financing activities of $0.2 million for the three months
ended March 31, 2009. The significant source of cash in the current quarter was the $7.5 million
draw on the Credit Facility, less $1.0 million in financing fees, in March 2010 with no similar
transaction in the first quarter of 2009.
Our cruise passenger deposits are primarily received through credit card transactions. As of March31, 2010, we had $8.2 million of restricted cash held by banks in cash equivalents as amounts
required to secure processing of passenger deposits through credit cards. The restricted amounts
are negotiated between us and the banks based on a percentage of the expected future volume of
credit card transactions within a standard twelve-month period. In addition to cash held by the
banks, we pledged one of the Majestic America Line vessels as collateral under a processing
agreement. This action reduced the amount of cash held as required by the processor.
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 global economic downturn, natural disasters or terrorist acts. We
will also, from time to time, consider the acquisition of or investment in businesses, services and
technologies that might affect our liquidity requirements.
Forward-Looking Statements
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 forecasted 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 were made. Such risks and uncertainties
include, among others:
•
our ability to obtain additional financing at reasonable rates;
•
our ability to refinance our debt;
•
our ability to continue to operate as a going concern;
•
our ability to effectively and efficiently operate our cruise operations;
•
customer cancellation rates;
•
competitive conditions in the industry in which we operate;
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;
•
reduced consumer demand for vacations and cruise vacations;
•
changes in fuel, food, payroll, insurance and security costs;
•
changes in relationships with certain travel providers;
•
changes in vacation industry capacity;
•
other economic factors and other considerations affecting the travel industry; and
•
other factors discussed in this Quarterly Report on Form 10-Q.
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, 2009,
filed with the Securities and Exchange Commission and the “Risk Factors” we included in that
report.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4.
Controls and Procedures.
Not applicable.
Item 4T.
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.
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, management, being our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective at the reasonable assurance level as of
March 31, 2010.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting, known to the Chief Executive
Officer or the Chief Financial Officer, that occurred during the last fiscal quarter covered by the
report that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings.
The United States Maritime Administration (“MARAD”) filed a claim in the amount of $300,000 against
the Company seeking settlement of one month’s payment under a charter agreement related to the
Empress of the North®, prior to the vessel’s return in 2008, and a claim for amounts paid to third
parties, if any, that may qualify under federal debt priority statutes. The Company filed a
counter claim against MARAD which sought repayment from MARAD for inventory on the ship at the time
of the return and insurance proceeds related to reimbursement for repairs to the ship. During the
first quarter of 2010, the Company received and approved a settlement offer from the U.S.
Department of Justice. Under the terms of the settlement, the Company agreed to make the payment
under the charter agreement of $300,000 and accept a final payment from the U.S. government of
$50,000. The Company made a payment of $250,000 during the first quarter of March 31, 2010 in full
settlement of the claim.
MARAD has also filed a judgment against the Company for the collection of $1.2 million in
connection with the acquisition of the American Queen®. Included in current liabilities at March31, 2010 and December 31, 2009 is $948,000 in guaranteed principal payments that we believe is the
amount owed to MARAD under this claim. A trial date in this case is scheduled during the second
quarter of 2010. The Company intends to vigorously defend itself against this claim.
Item 1A.
Risk Factors.
Item 1A of Part I of our Form 10-K, for the year ended December 31, 2009, summarizes 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.
Notice of Delisting or Failure to
Satisfy a Continued Listing Rule or Standard; Transfer of Listing
As previously disclosed, on November 12, 2009, the Company
received a Nasdaq Staff
Deficiency Letter from the Nasdaq Stock Market Listing Qualifications Department indicating that the
Company had failed to meet the minimum bid price requirement of $1.00 for continued listing on
the NASDAQ Global Market as set forth in Marketplace Rule 5450(a)(1) (the “Minimum Bid Requirement”).
The letter gave the Company notice that the bid price of its common shares had closed under $1.00
for 30 consecutive business days. The letter gave the Company until May 11, 2010 to regain
compliance with the Minimum Bid Requirement. To regain compliance, the closing bid price of
the Company’s common shares would have to meet or exceed the Minimum Bid Requirement for at
least ten consecutive business days.
As anticipated, on May 12, 2010,
the Company received a Nasdaq Staff Determination Letter indicating that the Company had not regained compliance with the
Minimum Bid Requirement. The May 12, 2010 letter further indicated that trading of the Company’s common
stock will be suspended at the opening of business on May 21, 2010, and that the Company’s common
stock will be removed from listing on the NASDAQ Global Market. The letter also indicated that
if the Company requests a hearing to appeal the staff’s determination by May 19, 2010, the
suspension will be stayed.
The Company plans to request a
hearing before a Nasdaq Hearings Panel to appeal the staff’s delisting determination.
As noted above, the request for a hearing will stay the suspension of the Company’s common
stock pending the issuance of the panel’s written decision. Accordingly, the Company’s common
stock is expected to continue to be traded on the NASDAQ Global Market pending the conclusion
of the appeal process. There can be no assurance that the panel will
grant the Company’s request for a hearing or for continued listing.
The board of directors of the Company
is considering implementing a reverse stock split to achieve the Minimum Bid Requirement, but
has not yet made a final determination. Any such action may require
stockholder approval.
Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2
*
Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
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
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
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 Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
*
Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
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
*
Attached hereto.
26
Dates Referenced Herein and Documents Incorporated by Reference
