(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
91-1688605
(I.R.S. Employer
Identification No.)
2101
4thAvenue, 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
(Do not check if a smaller reporting company)
Smaller Reporting Company þ
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
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued
—
—
Common stock, $.01 par value; 40,000,000 shares authorized; 26,571,092
shares issued and outstanding at June 30, 2010 and 26,517,557 at
December 31, 2009
260
260
Additional paid-in capital
118,787
118,785
Accumulated deficit
(113,533
)
(102,516
)
Total stockholders’ equity
5,514
16,529
Total liabilities and stockholders’ equity
$
93,546
$
91,919
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 Baltic, the Americas and the Greek Isles. During the six months ended June 30, 2010, Windstar
Cruises was the only operating division of the Company.
As of June 30, 2010, the Company has two remaining Majestic America Line vessels from an original
fleet of seven. The two vessels are not operating and are currently being marketed for sale or
disposal, although there can be no assurances that the Company will be able to locate qualified
buyers or dispose of the vessels in a timely manner. One of the vessels, 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 Chattanooga Tennessee. In January 2010, the other remaining vessel,
the Columbia Queen, was pledged 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 June 30, 2010, the Delta Queen® qualified
for “held-for-sale” classification. During the second quarter of 2010, the Company sold the
Mississippi Queen and the Contessa for cash proceeds that approximated each vessel’s carrying
amount at the time of sale.
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 former business
segments are reported as discontinued operations in the accompanying condensed consolidated
financial statements. See additional discussion in Note 2.
Liquidity
As of June 30, 2010the Company held cash and cash equivalents and restricted cash of $13.1
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. 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.
The Company incurs capital expenditures and costs to maintain the Windstar Cruise vessels. In 2010,
capital expenditures and drydock projects are expected to be approximately $7.0 million. In April
2010, the Company completed the scheduled drydock for the Wind Sprit. The Company incurred
expenditures of $4.1 million on refurbishments to the Wind Spirit. The cash required to fund these
expenditures was advanced under the Credit Facility. A scheduled drydock for the Wind Star is
planned in November 2010 where the Company expects to incur $1.8 million in refurbishments.
It is expected that the cash required to fund the November project will also be provided under 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 $3.1 million at June 30, 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, or earlier in certain circumstances. 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.
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
Cruise-related revenues are recognized at the completion of each cruise and the Company operates
and provides cruise services throughout the year. The Company’s revenues have historically trended
higher in the third quarter of each year which coincides with the peak cruising season and highest
occupancy rates. Future annual results could be adversely affected if revenue were to be
substantially below norms during any quarter.
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. Intercompany
accounts and transactions have been eliminated upon consolidation. 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 June 30, 2010 and
its operating results and cash flow for the six months ended June 30, 2010 and June 30, 2009.
Operating results for the six month period ended June 30, 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 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. These documents can be found
at www.ambassadors.com/invrel.htm.
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.
As of December 31, 2009, the travel and events segment qualified as a discontinued operation as the
Company completed it’s wind down activities and ceased operations of the segment during the fourth
quarter of 2009. Accordingly, the assets and liabilities of the travel and events segment have
been classified as held for sale and the results of operations for the three and six months ended
June 30, 2009 for this segment 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, $0.4 million from current to long term assets, $0.6 million and
$1.3 million reclassified from compensation and benefits to onboard and other cruise revenue for
the three and six months ended June 30, 2009, respectively, as well as other amounts within cruise
operating expenses. These reclassifications had no impact on net loss for the three and six months
ended June 30, 2009.
Fair Value Measurements
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
512
—
Cash deposit in escrow
—
200
Certificate of deposits held as collateral
570
70
$
10,017
$
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. Borrowings under the Credit Facility, which are designated to fund drydock
and capital expenditures, are held in escrow pending payment for such expenditures. As of June 30,2010, the
remaining $0.5 million in escrow is expected to be paid to service providers in the third quarter
of 2010. In June 2010, the Company pledged a $0.5 million certificate of deposit to a bank as
security under certain bank account control agreements required under the Credit Facility. At
December 31, 2009 $0.2 million of restricted cash was 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.
Current
and Other Assets, including Drydock Costs
The Company defers 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 indicate 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.
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,
shore excursion sales, as well as pre and post cruise services, is recognized as revenue when the
cruise is completed.
Selling and Tour Promotion Expenses
Selling and tour promotion costs are expensed as incurred.
Barter Transactions
The Company joined a barter organization in 2010. The membership allows the Company to exchange
Windstar cruises for barter credits, which the Company can use to purchase goods and services of
member organizations of the barter organization. The Company intends to use the barter credits
primarily for the purchase of advertising and promotional goods and services. The exchange of the
Company’s services for barter credits is recorded at the fair value of the cruise estimated by
reviewing comparable cruise fares sold in similar geographic areas. Non-cash revenue recognized as
a result of barter arrangements were $0.1 million in 2010 and $0 in 2009.
As of June 30, 2010the Company has barter credits of $0.2 million that are available for the
purchase of goods and services through the barter organization.
Income Taxes
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 June 30, 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
$(0.4 million) related to employee stock options and restricted stock, for the six months ended
June 30, 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 common shares were issued from the exercise of stock options during the six months ended June30, 2010 and 2009.
During the second quarter of 2010, the Company’s board of directors authorized the grant of stock
options to the Company’s chief executive officer but the grant was contingent on shareholder
approval of certain amendments to the 2005 Incentive Award Plan. These amendments were approved at
the 2010 annual meeting of shareholders. See Note 9.
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 Company’s 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. However, the Company retained the right to a 50%
participation in any future cash distribution of excess reserves related to the wind down and
conclusion of the reinsurance programs. During the three months ended June 30, 2010, the Company
earned $0.6 million, net of administration fees under the participation agreement. These amounts
are reflected in income from discontinued operations and assets held for sale at June 30, 2010. 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):
Income (loss) from discontinued operations before taxes
609
(7,739
)
Income tax provision
(204
)
(391
)
Income (loss) from discontinued operations, net of taxes
$
405
$
(8,130
)
The Company estimated the recoverability of the carrying value of the marine group and travel and
events during the six months ended June 30, 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 net sales proceeds and the carrying value of the division.
One Majestic American Line vessel 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 this asset as well as assets and liabilities related to the discontinued travel and events
segment are presented as assets held for sale as of June 30, 2010 and December 31, 2009. The
Majestic vessel 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 average
cost, and approximate the first-in, first-out method. The components of inventory as of June 30,2010 and December 31, 2009 are as follows (in thousands):
3.75% Convertible Notes, net of
unamortized discount of $1,866 and
$2,362, respectively
29,335
28,838
Credit Facility
8,075
—
Less: current portion
(948
)
( 948
)
Non-current portion
$
59,291
$
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 June 30, 2010, the Company had paid all guaranteed
principal payments, except for $948,000. See Note 8.
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 (the “Convertible Notes”) in a private offering. 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, which were guaranteed by 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 as of June 30,2010.
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, plus interest, in cash, on April 15, 2012, April 15, 2017 and April 15, 2022 or upon
the occurrence of specified fundamental changes. If the Company’s common stock ceases to be
listed on the Nasdaq Global Market and is not listed on an established national securities
exchange or automated over-the-counter trading market in the United States, a fundamental
change would be deemed to have occurred for purposes of the
Convertible Notes. The Company does not have sufficient funds available
for such repurchase, if required. Failure to make any such required repurchase would
constitute an event of default under the Convertible Notes and a cross-default for purposes of
substantially all outstanding long-term debt.
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 $1.9 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 in November 2009 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 per share (or $8.0 million in the
aggregate) which was the closing price of the stock on the day the Exchange Offer was
consummated. The future cash payment obligation of the Senior Secured Notes is $21.9 million
(principal and interest). Interest on the Senior Secured Notes is payable in kind or in
cash, semi-annually, 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.
Credit Facility
In March 2010, the Company established 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, the Company paid direct costs of $0.8 million to third parties
and $0.6 million in annual commitment fees. Borrowings under the facility bear interest at
12% and mature January 2012. As of June 30, 2010, the Company has drawn $7.1 million under
the term loan and $1.0 million under the revolving line of credit. Borrowings under the term
loan were reserved to fund the April 2010 drydock expenditures and capital expenditures and
the remaining proceeds were used to pay the direct costs of the transaction as well as general
expenditures. 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.
Basic earnings (loss) per share (EPS) is computed by dividing net earnings ( loss) from continuing
operations, discontinued operations and total earnings (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 six months ended
June 30, 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.
7. Income Taxes
The Company recorded an income tax benefit from continuing operations of $0.2 million for the six
months ended June 30, 2010 and June 30, 2009. Discontinued operations are reported net of a tax
provision of $0.2 and $0.4 million, respectively for the six months ended June 30, 2010 and 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.
8. Commitments and Contingencies
The United States Maritime Administration (“MARAD”) filed a judgment against the Company for the
collection of the remaining guaranteed principal payments in connection with the acquisition of the
American Queen®. Included in current liabilities at June 30, 2010 and December 31, 2009 is $948,000
in guaranteed principal payments. During the three months ended June 30, 2010, the presiding judge
determined that all claims in this case would be reviewed under motion. Motions by both parties
were submitted and on August 4, 2010, the Company received a court judgment requiring payment of
$958,142.
On July 30, 2010, the Company held its annual shareholder meeting whereby shareholders voted upon
and approved the following four proposals: (1) re-election of a Class I Director for a new three
year term; (2) a reverse stock split at a ratio of eight-to-one; (3) a reduction in the authorized
common shares from 40 million to 5 million (contingent upon
the reverse stock split); and (4) an amendment to the 2005 Incentive Award Plan
to increase the authorized shares from 1.2 million shares to
3.0 million shares (before giving effect to the reverse
stock split) and to increase the
number of shares that can be awarded to an employee in a single year. The
amendments to the 2005 Employee Stock Incentive Plan became effective
upon stockholder approval establishing a July 30, 2010 grant
date for the approximately 663,000 stock options award that was
granted in May 2010 subject to shareholder approval. The reverse stock split and reduction in the
authorized common shares are expected to take effect in
August 2010 or during the quarter ending September 30, 2010.
On
August 3, 2010, the Company advised the staff of the Nasdaq
Stock Market that the Company anticipated that it will not
continue to meet the applicable continued listing requirement of the
Nasdaq Global Market set forth in Nasdaq Listing
Rule 5450(b)(1)(A) requiring stockholders’ equity of at
least $10 million when the Company files its financial
statements for the period ending June 30, 2010 contained in its
Quarterly Report on Form 10-Q to be filed with the Securities and
Exchange Commission. Thereafter, on August 10, 2010, the Company
received formal notification from the staff of the Nasdaq Stock
Market of the Company’s non-compliance with the listing
requirements of the Nasdaq Global Market. The notice indicated that
the Nasdaq Listing Qualifications Panel, which has been considering
the Company’s request for continued listing on the Nasdaq
Global Market will consider the failure to satisfy the
stockholders’ equity requirement in their decision regarding the
Company’s continued listing on the Nasdaq Global Market. The
Company was invited to present its views with respect to the
stockholders’ equity deficiency to the Panel in writing, and the
Company intends to do so shortly. The Company’s management
and board of directors are discussing potential actions that the Company might take regarding this
non-compliance but have not decided on any specific course of action.
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 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 Baltic, 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 Baltic, the Caribbean and the
Americas.
We are focused on improving our Windstar Cruises business performance and have identified 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;
•
increase revenues by providing exceptional customer service
and guest experiences; 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. As of June 30, 2010, we
have completed the sale or disposition of five of the original fleet of seven vessels. The vessels
did not operate in 2009 or 2010, as we continued to exit the domestic cruise business in an orderly
fashion. We sold the Queen of the West® in November 2009. In May 2010, we sold the Mississippi
Queen®. In June 2010, we sold the Contessa for a cash sales price that approximated carrying
value.
We are continuing marketing, disposition and wind down activities of Majestic American Line,
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 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, one of the vessels, the Columbia Queen, was pledged 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.
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
were classified as “held for sale” at June 30, 2010 and December 31, 2009.
In November 2009, we completed an exchange offer (the “Exchange Offer”) to exchange $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. Holders
of the Convertible Notes may require the Company to purchase all or a
portion of the Convertible Notes, plus interest, in cash, on April 15, 2012, April 15, 2017 and April 15, 2022 or upon the occurrence of specified fundamental changes. If the
Company’s common stock ceases to be listed on the Nasdaq Global
Market and is not listed on an established national securities
exchange or automated over-the-counter trading market in the United
States, a fundamental change would be deemed to have occurred
for purposes of the Convertible Notes. The Company does not have
sufficient funds available for such repurchase, if required. Failure
to make any such required repurchase would constitute an event of
default under the Convertible Notes and a cross-default for purposes
of substantially all outstanding long-term debt.
In
March 2010, we entered into a $15.0 million credit facility
(the “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 in March 2010, we paid $0.6 million in annual commitment fees. As
of June 30, 2010, we had drawn $8.1 million under the Credit Facility.
The Credit Facility contains various restrictive and financial
covenants, including a requirement that we 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 we fail to comply with these covenants we could
default under the Credit Facility. A default under the Credit
Facility could result in a default under the Senior Secured Notes of
a cross-default under the Convertible Notes and/or other
indebtedness, permitting the holders of any such indebtedness to
accelerate such indebtedness.
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.
Passenger Cruise Days (“PCD”)
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the
number of days in their respective cruises.
Occupancy
Occupancy, in accordance with the cruise vacation industry practice, is calculated by dividing PCD
by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some
cabins.
Selected Windstar Cruises operations statistical information is as follows:
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2010 TO THE THREE MONTHS ENDED JUNE 30,2009
Revenue
Total revenue from continuing operations for the three months ended June 30, 2010 was $13.4
million, compared to $14.6 million for the three months ended June 30, 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 second quarter of 2010. Our
occupancy rates were 64.2% during the second quarter of 2010 compared to 73.9% in the comparable
quarter 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 and other cruise revenues totaled $2.9 million during the three months ended June 30, 2010
compared to $3.2 million during 2009. Beverage sales and shore excursions are the primary sources
of onboard guest revenues however other revenues are also derived from spa and retail sales, as
well as pre and post cruise services.
Cruise operating expenses were $12.2 million for the three months ended June 30, 2010 compared to
$12.5 million for the three months ended June 30, 2009 or a 2.5% reduction. The decrease in cruise
operating expenses is primarily due to efficiencies gained following the transition of the ship
management from a third party management company to in-house personnel in September of 2009, offset
by an increase in fuel prices in 2010.
Selling and Tour Promotion Expenses
Selling and tour promotion expenses decreased to $1.9 million for the three months ended June 30,2010 from $2.1 million for the three months ended June 30, 2009 or a 10.6% decline. It is
anticipated that marketing expenditures will increase in the later half of 2010 in promotional
efforts for the 2011 sailing season. As a percentage of total revenue, selling and tour promotion
costs remained consistent at 14.2% during the three months ended June 30, 2010 and 14.5% during the
three months ended June 30, 2009.
General and Administrative Expenses
General and administrative expenses were $2.1 million for the three months ended June 30, 2010
compared to $2.6 million for the three months ended June 30, 2009, or a decrease of $0.5 million.
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 decreased to 15.9% for the three months ended June 30, 2010
from 17.6% for the three months ended June 30, 2009 due primarily to the overall reduction in our
corporate structure and number of business segments.
Depreciation
Depreciation expense was $1.7 million for the three months ended June 30, 2010 compared to $2.7
million for the three months ended June 30, 2009. Depreciation expense during the current three
months decreased $0.9 million due to the reduction in the carrying value of the Windstar vessels,
the sale of certain Majestic vessels and the fair value impairments in the second and third
quarters of 2009.
Operating loss from continuing operations
Operating loss from continuing operations totaled $4.8 million for the three months ended June 30,2010 compared to an operating loss from continuing operations of $19.3 million for the three months
ended June 30, 2009. The three months ended June 30, 2009 included a $14.0 million impairment
charge for certain Majestic vessels compared to a 2010 second quarter charge of $0.2 million. The
reduction in operating loss of $1.0 million, after giving consideration to the non-cash impairment
charges, is the result of the changes described above, primarily due to the decrease in operating
expenses.
Other Expense
Other expense for the three months ended June 30, 2010 was $1.0 million compared to $1.8 million
for the three months ended June 30, 2009. The decrease in other expense is primarily attributed to
$0.6 million reduction in interest expense attributable to the Exchange Offer, whereby we accounted
for the exchange of the 3.75% Convertible Notes in November 2009 for common stock and 10% Senior
Secured Notes as a debt restructuring, offset by an increase in interest expense under the Credit
Facility.
We recorded an income tax benefit from continuing operations for the three months ended June 30,2010 and June 30, 2009 of $0.2 million. We have established a full valuation allowance on our
deferred tax assets as of June 30, 2010.
Net loss from discontinued operations
Net income from discontinued operations for the three months ended June 30, 2010 was $0.4 million
compared to a net loss of $1.1 million in the comparable quarter in 2009. The three months ended
June 30, 2010 includes a profit distribution of $0.6 million, net of a tax provision of $0.4
million, relating to the reinsurance business. The three months ended June 30, 2009 includes the
operating results of the marine, reinsurance, and travel and events business.
Liquidity
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 $1.8 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 $3.1 million at June 30, 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.
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. In addition, if our common stock ceases to be
listed on the Nasdaq Global Market and is not listed on an established national securities exchange
or automated over-the-counter trading market in the United States, this would constitute a
“Fundamental Change” for purposes of the indenture governing our outstanding Convertible Notes,
whereby holders would have the right to require us to repurchase for cash all or a portion of the $31.2 million principal
amount of outstanding Convertible Notes plus accrued and unpaid interest. We do not have sufficient funds
available for such repurchase, if required. Failure to make any such required repurchase would
constitute an event of default under the Convertible Notes and a cross-default for purposes of
substantially all our outstanding long-term debt.
Total revenue from continuing operations for the six months ended June 30, 2010 was $26.0 million,
compared to $30.7 million for the six months ended June 30, 2009. The decrease in revenue was
primarily due to lower number of passengers carried.
Cruise Operating Expenses
Cruise operating expenses were $23.8 million for the six months ended June 30, 2010 compared to
$25.5 million for the six months ended June 30, 2009. The decrease in cruise operating expenses is
primarily due to a reduction in the number of passengers traveling and efficiencies and cost
savings gained following the transition of the vessel management to in-house, offset by a $0.9
million increase in fuel costs during 2010.
Selling and Tour Promotion Expenses
Selling and tour promotion expenses increased to $4.2 million for the six months ended June 30,2010 from $3.9 million for the six months ended June 30, 2009. As a percentage of total revenue,
selling and tour promotion increased to 16.0% during the six months ended June 30, 2010 from 12.7%
during the six months ended June 30, 2009.
General and Administrative Expenses
General and administrative expenses totaled $4.2 million in each of the six months ended June 30,2010 and June 30, 2009. General and administrative costs decreased $0.8 million in the current six
months as the 2009 period reflects a non-recurring $0.8 million credit related to the wind down of
certain compensation packages. We experienced an increase in corporate legal and recruiting costs
in the 2010 period as we continue to restructure our business, offset by a $0.8 million credit in
stock based compensation expense due to non-vested restricted stock forfeitures upon employee
terminations in the six months ended June 30, 2009. As a percentage of total revenues, general and
administrative expenses increased to 16.3% for the six months ended June 30, 2010 from 13.7% for
the six months ended June 30, 2009.
Impairment charge
During the six months ended June 30, 2010, we recorded a non-cash impairment charge of $0.2 million
for one of the Majestic vessels based on the difference between carrying value of the asset and the
cash sales proceeds we received upon sale of the vessel in June 2010. During the six months ended
June 30, 2009, we recorded a non-cash charge of $14.0 million related to the assets of Majestic
American Line.
Depreciation expense
Depreciation expense was $3.7 million for the six months ended June 30, 2010 compared to $5.4
million for the six months ended June 30, 2009. Depreciation expense during the six months ended
June 30, 2010 decreased compared to the prior six months due to impairment charges recorded for
both the Windstar Cruise and Majestic vessels during the second and third quarters of 2009, as well
as the reduction in the number of vessels subject to depreciation under Majestic America Line.
Operating Loss
We recorded an operating loss from continuing operations of $10.1 million for the six months ended
June 30, 2010, compared to $22.3 million for the six months ended June 30, 2009. The decrease is
the result of the changes described above.
Other expense for the six months ended June 30, 2010 was $1.5 million, compared to $3.2 million for
the six months ended June 30, 2009. The decrease in other expense is attributed to $1.7 million in
lower interest expense due to the Exchange Offer in the fourth quarter of 2009, offset with
interest under the 2010 Credit Facility. In 2009 we received $0.1 million in insurance recoveries
related to the 2008 Queen of the West incident.
Income Taxes
We recorded an income tax benefit for the continuing operations of $0.1 million for the six months
ended June 30, 2010, compared to $0.2 million for the six months ended June 30, 2009. We have
established a full valuation allowance on our domestic deferred tax assets.
Net Loss
Net loss for the six months ended June 30, 2010 totaled $11.0 million, including income from
discontinued operations of $0.4 million, compared to $33.5 million for six months ended June 30,2009, which includes a loss from discontinued operations of $8.1 million. The decrease is the result
of the changes described above.
Liquidity and Capital Resources
Net cash used in operating activities for the three months ended June 30, 2010 was $7.6 million,
compared to net cash used in operating activities of $3.3 million for the three months ended June30, 2009. The increase in cash used in operating activities during the current quarter primarily
relates to the cash requirements of the Wind Spirit drydock in April 2010, offset by a $6.8 million
increase in cash received as deposits for future cruises. Cash provided by discontinued operations
totaled $4.5 million during the six months of the 2009 period,
as compared to cash used of $0.2 million in the
current period.
Net cash used in investing activities for the six months ended June 30, 2010 decreased to $2,000
compared to $1.3 million for the six months ended June 30, 2009.
Net cash provided by financing activities for the six months ended June 30, 2010 was $8.1 million
compared to $48,000 in the six months ended June 30, 2009. The significant source of cash in the
current six months was the $8.1 million draw on the Credit Facility in March 2010, with no similar
transaction in the same period of 2009.
Our cruise passenger deposits are primarily received through credit card transactions. As of June30, 2010, we had $8.9 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.
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 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 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;
•
marketing expenses;
•
extreme weather conditions;
•
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;
•
potential of our common stock not listed on a U.S. national securities exchange or
quoted on an established automated over the counter trading market in the U.S. exchange;
and
•
other factors discussed in this Quarterly Report on Form 10-Q and in our Annual Report
on Form 10-K.
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.
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 recognizes 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 judgment is required 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
June 30, 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 judgment against the Company for the
collection of the remaining guaranteed principal payments in connection with the acquisition of the
American Queen®. Included in current liabilities at June 30, 2010 and December 31, 2009 is $948,000
in guaranteed principal payments. During the three months ended June 30, 2010, the presiding judge
determined that all claims in this case would be reviewed under motion. Motions by both parties
have been submitted and on August 4, 2010, the Company received a court judgment requiring the
Company to pay $958,142.
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 other than as follows:
If we are unable to meet listing requirements of The Nasdaq Global Market and Nasdaq determines to
delist our common stock, the market liquidity and market price of our common stock could decline
and we could become obligated to repurchase some or all of our outstanding Convertible Notes.
Our common stock is listed on the Nasdaq Global Market. On May 12, 2010, the Company received a
Nasdaq Staff Determination Letter indicating that the Company was not in compliance with the
minimum
bid requirement of $1.00 for continued listing on the Nasdaq Global
Market
set forth in Marketplace Rule 5450(a)(1).
The May 12, 2010 letter stated that our stock would be suspended from
trading at the opening of business on May 21, 2010, and that our
stock would be removed from listing on the Nasdaq Global Market, if
we did not request a hearing before a Listing Qualifications Panel in
accordance with Nasdaq procedures to appeal the staff’s
determination. We requested a hearing before the Nasdaq Listing
Qualifications Panel, which had the effect of staying the suspension.
A hearing before the Listing
Qualifications Panel was held on June 24, 2010.
In preparation for the hearing, and at the hearing, we advised the
Listing Qualifications Panel that, in order to regain compliance with
the minimum bid price requirement, we were proposing a one-for-eight
reverse stock split for stockholder approval at the 2010 Annual
Meeting of Stockholders.
On July 16, 2010, the Company was notified by the
Nasdaq Office of General Counsel that the Nasdaq Listing Qualifications Panel had granted the
Company’s request for an extension of time to regain compliance with the Minimum Bid Requirement.
The Panel’s determination to grant the Company’s request for continued listing was subject to the
condition that, on or before September 10, 2010, the Company must
have evidenced a closing bid price of $1.00 or more for a minimum of
ten prior consecutive trading days. In order to fully comply with the
terms of the Panel’s decision, the Company must also
be able to demonstrate compliance
with all requirements for continued listing on the Nasdaq Global Market.
On August 3, 2010, the Company advised the staff of the Nasdaq Stock Market that the Company
anticipated that it will not continue to meet the applicable
continued listing requirement of the Nasdaq Global Market set forth in Nasdaq Listing
Rule 5450(b)(1)(A) requiring stockholders’ equity of at
least $10 million when the Company files its financial
statements for the period ended June 30, 2010 contained in this
Quarterly Report on Form 10-Q being filed with the Securities and
Exchange Commission. Thereafter, on August 10, 2010, the Company
received formal notification from the staff of the Nasdaq Stock
Market of the Company’s non-compliance with the listing
requirements of the Nasdaq Global Market. The notice indicated that
the Nasdaq Listing Qualifications Panel will consider the failure to
satisfy the stockholders’ equity requirement in their decision
regarding the Company’s continued listing on the Nasdaq Global
Market. The Company was invited to present its views with respect to
the stockholders’ equity deficiency to the Panel in writing, and
the Company intends to do so shortly. The Company’s management
and board of directors are discussing potential actions that the Company might take regarding this
non-compliance but have not decided on any specific course of action.
If our common stock is delisted on the Nasdaq Global Market and is not
eligible for quotation on another exchange, trading of our common
stock could be conducted in the over-the-counter market or on an
electronic bulletin board established for unlisted securities such as
Pink Quote (formerly known as the Pink Sheets) or the OTC Bulletin
Board. In such event, it could become more difficult to dispose of, or
obtain accurate quotations for the price of our common stock, and
there would likely also be a reduction in our coverage by security
analysts and the news media, which could cause the price of our
common stock to decline further. In addition, if
our common stock ceases to be listed on the Nasdaq Global Market and is not listed on an
established national securities exchange or automated over-the-counter trading market in the United
States, this would constitute a “Fundamental Change” for purposes of the indenture governing our
outstanding Convertible Notes, whereby one or more holders of the Convertible Notes will have the
right to require us to repurchase for cash all or a portion of the
$31.2 million principal amount of outstanding Convertible Notes
plus accrued and unpaid interest. We do not have sufficient funds available for such repurchase,
if required. Failure to make any such required repurchase would constitute an event of default
under the Convertible Notes and a cross-default for purposes of substantially all our outstanding
long-term debt.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved)
Item 5. Other Information.
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”). 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 letter indicated that if the Company requested a hearing before a
Nasdaq Listing Qualifications Panel in accordance with Nasdaq procedures to appeal the staff’s
determination, the suspension would be stayed.
Our hearing before the Listing Qualifications Panel was held on June 24, 2010. We advised the
Listing Qualifications Panel that, in order to regain compliance with the minimum bid price
requirement, we were proposing a one-for-eight reverse stock split for stockholder approval at the
2010 Annual Meeting of Stockholders. On July 16, 2010, the Company was notified that the Nasdaq
Listing Qualifications Panel had granted the Company’s request for an extension of time to regain
compliance with the Minimum Bid
Requirement. The Panel’s determination to grant the Company’s request for continued listing is
subject to the condition that, on or before September 10, 2010, the Company must have evidenced a
closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days. The
stockholders approved the reverse stock split on July 30, 2010.
The Company expects the reverse stock split to take effect in late
August 2010. In order to fully comply with the
terms of the Panel’s decision, the Company must also be able to demonstrate compliance with all
other requirements for continued listing on The Nasdaq Global Market.
On August 3, 2010, the Company informed the staff that the Company anticipated that it will
not meet the applicable continued listing requirements set forth in Nasdaq Listing Rule
5450(b)(1)(A) requiring stockholders’ equity of at least $10 million when the Company files its
financial statements for the period ended June 30, 2010 contained in this Quarterly Report on Form
10-Q being filed with the Securities and Exchange Commission. Thereafter, on August 10, 2010, the Company received formal notification from the staff of the Nasdaq Stock Market of the Company’s non-compliance with the listing requirements of the Nasdaq Global Market. The notice indicated that the Nasdaq Listing Qualifications Panel will consider the failure to satisfy the stockholders’
equity requirement in their decision regarding the
Company’s continued listing on the Nasdaq Global Market.
The Company was invited to present its views with respect to the stockholders’ equity deficiency to the
Panel in writing, and the Company intends to do so shortly. The Company’s
management and board of directors are discussing potential actions that the Company
might take regarding this non-compliance but have not decided on any specific course of action.
Item 6. Exhibits.
Exhibit No.
Description
31.1*
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.