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8-K/A - FORM 8-K/A - AMBASSADORS INTERNATIONAL INC | a54141e8vkza.htm |
EX-99.2 - EXHIBIT 99.2 - AMBASSADORS INTERNATIONAL INC | a54141exv99w2.htm |
EX-23.1 - EXHIBIT 23.1 - AMBASSADORS INTERNATIONAL INC | a54141exv23w1.htm |
Exhibit 99.1
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
(Reflects the retroactive application of FSP APB 14-1, the
reclassification of certain businesses of the Company as discontinued
operations in accordance with SFAS 144 and the reclassification of the loss on disposal on two vessels from Other income (expense) to Operating income (loss) from continuing operations)
Overview
Throughout
2007 and 2008, we operated as a cruise, marine and travel and events company. Our
cruise operations included U.S.-flagged cruise ships that sailed along the inland rivers and
coastal waterways of North America and international-flagged ships that sail to destinations in the
Caribbean, Europe, the Americas and the Greek Isles.
In April 2008, we announced our intention to sell the Majestic America Line operations and not
operate any of the ships under the Majestic America Line brand in 2009. In February 2009, we
announced our intention to focus solely on Windstar Cruises. We plan to sell all non-Windstar
Cruises related assets including our Majestic America Line Assets that we announced in April 2008,
in order to concentrate our efforts on our international small ship luxury segment. We believe that
Windstar Cruises has the most potential long term growth for our shareholders and believe that a
successful sale of our other businesses would provide us with stability in a difficult economy. We
have engaged third party firms to facilitate the sale of our non-Windstar Cruises assets.
The Company further determined that the Marine Group and Cypress Re qualified for the
held-for-sale treatment under Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), subsequent to year end. Accordingly,
the accompanying financial statements have been updated to present the operations of Marine Group
and Cypress Re as discontinued operations and the assets and liabilities of these two business
units are classified as held for sale and liabilities related to assets held for sale. SFAS No.
144 provides that if the discontinued operations had been a reportable segment, the Company is not
required to disclose information about the discontinued segment as required by SFAS No 131,
Disclosures about Segments of an Enterprise and Related Information.
Through our travel and events business, we provide event services to corporations,
associations and trade show companies. In addition, we developed, marketed, and managed performance
improvement programs utilizing travel incentives and merchandise awards designed to achieve
specific corporate objectives, including achieving sales goals, improving productivity and
attracting and retaining qualified employees. Our clients included Fortune 1000 companies, and
other large and small businesses.
In 2006 and 2007, we completed several major acquisitions in the cruise and marine segments.
In 2007, we successfully integrated both the marine acquisitions, as well as the acquisition of
Windstar Cruises. The integration of our domestic cruise operations proved to be more challenging
than anticipated and resulted in a significant loss for the years ended December 31, 2007 and 2008.
Critical Accounting Policies
Our consolidated 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.
Our businesses are seasonal. Historically, we have recognized the majority of our operating
results in the first and second quarters of each fiscal year. As a result of our cruise related
acquisitions and the size of our cruise operations in relation to our overall operations, the
majority of our operating results will be recognized in the second and third quarters of each
fiscal year, which coincide with our cruising season. Our annual results would be adversely
affected if our revenue were to be substantially below seasonal norms during the second and third
quarters of a year.
The following is a list of the accounting policies that we believe require the most
significant judgments and estimates, and that could potentially result in materially different
results under different assumptions or conditions.
Revenue Recognition
We recognize revenues in accordance with GAAP, including SEC Staff Accounting
Bulletin No. 104, Revenue Recognition and EITF 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. We recognize revenue when persuasive evidence of an arrangement exists,
the service fee is fixed or determinable, collectibility is reasonably assured and delivery has
occurred.
Passenger Ticket Revenue and Onboard and Other Cruise Revenues
Passenger ticket revenue is recorded net of applicable discounts. Passenger ticket revenue and
related costs of revenue are recognized when the cruise is completed. We generally receive from our
customers a partially refundable deposit within one week of booking a tour, with the balance
typically remitted 60 days prior to the departure date. If customers cancel their trips, the
nonrefundable portion of their deposit is recognized as revenue on the date of cancellation.
Passenger revenue representing travel insurance purchased at the time of reservation is recognized
upon the completion of the cruise or passenger cancellation, whichever is earlier and our
obligation has been met. Onboard and other cruise revenue are comprised of beverage and souvenir
sales and optional shore excursions are deferred and recognized as revenue when the cruise is
completed.
Travel and Event Related
We
bill travel participants, mainly consisting of large corporations, in
advance, and the
cash received is recorded as a participant deposit. We pay for certain direct program costs such as
airfare, hotel and other program costs in advance of travel, and
record such payments as prepaid program
costs. We recognize travel revenue and related costs when travel convenes and classify such revenue
as travel and incentive related. This revenue is reported on a net basis, reflecting the net effect
of gross billings to the client less any direct program costs.
Revenue from hotel reservation, registration and related travel services is recognized when
the convention operates. Revenue from the sale of merchandise is recognized when the merchandise is
shipped, the service has been provided or when the redemption periods have expired. Revenue from
pre-paid, certificate-based merchandise incentive programs is deferred until our obligations are
fulfilled or upon managements estimates (based upon historical trends) that it is remote that the
certificate will be redeemed. These revenues are reported on a net basis, reflecting the net effect
of gross billings to the client less any direct program or merchandise costs.
Property, Vessels and Equipment
Property, vessel and equipment are stated at cost, net of accumulated depreciation. Cost of
maintenance and repairs which do not improve or extend the lives of the respective assets are
expensed as incurred. Major additions and betterments are capitalized. Our ships are capitalized
and depreciated using the straight-line method over the expected useful life ranging up to
30 years, net of a residual value which generally is approximately 15%. Ship replacement parts are
capitalized and depreciated upon being placed in service. Office and shop equipment is capitalized
and depreciated using the straight-line method over the expected useful life of the equipment,
ranging up to 10 years. Leasehold improvements are amortized using the straight-line method over
the lesser of the expected useful life of the improvement or the term of the related lease.
We review our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be fully recoverable. The assessment of
possible impairment is based on our ability to recover the carrying value of our assets based on
our estimate of their undiscounted future cash flows. If these estimated undiscounted future cash
flows are less than the carrying value of an asset, an impairment charge is recognized for the
excess, if any, of the assets carrying value over its estimated fair value. When property and
equipment are sold or retired, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in the statement of operations. Judgments and estimates
made related to property and equipment are affected by factors such as economic conditions, changes
in resale values and changes in operating performance. This process requires the use of estimates
and assumptions, which are subject to a high degree of judgment. If these assumptions change in the
future, we may be required to record impairment charges for these assets. All of our property,
vessels and equipment were subject to impairment testing as of December 31, 2008, and
only the assets related to the marine division were deemed to be impaired. This charge is
included in income (loss) from discontinued operations.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least
annually or sooner whenever events or changes in circumstances indicate that they may be impaired.
Management evaluates recoverability using both subjective and objective factors. Subjective factors
include the evaluation of industry and product trends and our strategic focus. Objective factors
include managements best estimates of projected future earnings and cash flows. We use a
discounted cash flow model to estimate the fair market value of each of our reporting units and
indefinite lived intangibles when performing our impairment tests. Assumptions used include growth
rates for revenues and expenses, investment yields on deposits, any future capital expenditure
requirements and appropriate discount rates. We established reporting units based on our current
reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated
to these reporting units to the extent it related to each reporting unit. Intangible assets with
finite lives are amortized over their estimated useful lives and reviewed for impairment at least
annually or sooner whenever events or changes in circumstances indicate that they may be impaired.
The majority of our intangible assets were assigned lives based on contract values associated with
each intangible asset. We amortize our acquired intangible assets with finite lives over periods
ranging from three to 20 years depending on the contract term where applicable. In connection with
our December 31, 2008 impairment testing, the trade name and goodwill associated with our marine
division reporting unit were deemed to be impaired and written off
and the charge is included as a component
of income (loss) from discontinued operations.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the fair value approach
in SFAS No. 123R is similar to the fair value approach described in SFAS No. 123. In 2005, we used
the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees.
We adopted SFAS No. 123R, using the modified-prospective method, beginning January 1, 2006. Based
on the terms of our plans, we did not have a cumulative effect of accounting change related to our
plans. We also elected to continue to estimate the fair value of stock options using the
Black-Scholes-Merton formula.
Using the Black-Scholes-Merton formula to estimate the fair value of stock-based compensation
requires the input of subjective assumptions. These assumptions include estimating the length of
time employees will retain their vested stock options before exercising them, risk free interest
rates, our dividend yield and the volatility of our common stock price over the expected term.
Changes in the subjective assumptions can materially affect the estimate of fair value of
stock-based compensation and consequently, the related amount recognized on our consolidated
statements of operations.
Income Taxes
We account for income taxes in accordance with the provisions of SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires an asset and liability approach which requires the recognition
of deferred tax assets and deferred tax liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. In making such determination, a review of all available positive and
negative evidence must be considered, including scheduled reversal of deferred tax liabilities,
projected future taxable income, tax planning strategies, and recent financial performance.
However, due to the cumulative three-year historical losses generated as of the conclusion of 2007
and 2008, SFAS No. 109 largely precludes us from taking into consideration future outlook or
forecasted income due to our limited operating history in our domestic cruise business. We
concluded that SFAS No. 109 required that the valuation allowance equal 100% of our deferred tax
assets at December 31, 2008 and 2007. The establishment of a valuation allowance does not have any
impact on cash, nor does such an allowance preclude us from utilizing loss carry-forwards on our
deferred tax assets in the future.
We provide for income taxes based on our estimate of federal and state liabilities. Our
estimates may include, among other items, effective rates for state and local income taxes,
allowable tax credits, estimates related to depreciation and amortization expense allowable for tax
purposes and the tax deductibility of certain other items.
Our estimates are based on the information available to us at the time that we prepare our
income tax provision. We generally file our annual income tax returns several months after our year
end. Income tax returns are subject to audit by federal, state, and local governments, generally
years after the returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.
Windstar Cruises is primarily engaged in the international operations of ships. Generally,
income from the international operation of ships is subject to preferential tax regimes in the
countries where the ship owning companies are incorporated and exempt from income tax in other
countries where the ships call due to the application of income tax treaties or, in the case of the
United States, Section 883 of the Internal Revenue Code. Income earned by the Company that is not
associated with the international operation of ships (non-Section 883 income), primarily from the
air and ground transportation, hotel and tour business related to Windstar Cruises, is subject to
income tax in the countries where such income is earned. In the case of the United States, AICG has
retained certain U.S. affiliates of the Company to conduct this business on its behalf and the
non-Section 883 income so earned, net of applicable deductions, is fully subject to U.S. federal
tax and applicable state and local taxes.
We believe that substantially all of Windstar Cruises income was derived from, or incidental
to, the international operation of ships, and therefore all of such income qualifies for exemption
from U.S. federal income tax under Section 883 of the Code. We have reserved only for income taxes
imposed by countries in which non-Section 883 income is earned, including the United States.
Pretax earnings of the Windstar Cruises, as earned in our foreign subsidiaries, are only
subject to U.S. taxation when effectively repatriated. U.S. income taxes were not provided on
undistributed earnings of the Windstar Cruises since we intend to reinvest, as opposed to
repatriate, these earnings indefinitely. It is not practical to determine the amount of
undistributed earnings or income tax payable in the event we repatriate all undistributed foreign
earnings. However, if these earnings were distributed back to the Company, in the form of dividends
or otherwise, we would be subject to additional U.S. income taxes
Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. We are subject to
U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We
believe our tax return positions are fully supported, but tax authorities may challenge certain
positions, which may not be fully sustained. We assess our income tax positions and record tax
benefits for all years subject to examination based upon managements evaluation of the facts,
circumstances, and information available at the reporting date. For uncertain tax positions where
it is more likely than not that a tax benefit will be sustained, we record the greatest amount of
tax benefit that has a greater than 50.0% probability of being realized upon effective settlement
with a taxing authority that has full knowledge of all relevant information. For uncertain income
tax positions where it is more likely than not that a tax benefit will not be sustained, no tax
benefit has been recognized in the financial statements. Our policy is to recognize interest and
penalties that would be assessed in relation to the settlement value of unrecognized tax benefits
as a component of income tax provision.
Results of Operations
The following table reflects certain income and expense items as a percentage of revenue.
2008 | 2007 | |||||||
Revenues |
100.0 | % | 100.0 | % | ||||
Costs and operating expenses: |
||||||||
Cruise operating expenses |
73.5 | 73.4 | ||||||
Selling and tour promotion |
7.4 | 15.3 | ||||||
General and administrative |
18.8 | 22.3 | ||||||
Depreciation and amortization |
8.2 | 5.9 | ||||||
Loss on disposal of vessels |
4.2 | | ||||||
112.1 | 116.9 | |||||||
Operating
loss from continuing operations |
(12.1 | ) | (16.9 | ) | ||||
Other income (expense), net |
(1.2 | ) | (3.1 | ) | ||||
Loss from continuing operations before income taxes |
(13.3 | ) | (20.0 | ) | ||||
Provision (benefit) for income taxes |
| (.5 | ) | |||||
Net loss from continuing operations |
(13.3 | ) | (19.5 | ) | ||||
Net income (loss) from discontinued operations |
(9.7 | ) | 2.7 | |||||
Net loss |
(23.0) | % | (16.8 | )% | ||||
Business Segment Information
In January 2007, we realigned our business segments and report the following business segments:
(i) cruise, (ii) travel and events and (iii) corporate and other, which consists of general
corporate assets (primarily cash and cash equivalents and investments), and other activities which
are not directly related to our cruise, and travel and events operating segments. We reported our
Marine Group as a business segment in 2007 and 2008 and included our reinsurance business
Cypress Re, within the corporate segment. Following the determination that the Marine Group and
Cypress Re would be reported as discontinued operations as described above, our segment reporting
has now been updated to exclude the Marine Group and Cypress Re.
Selected financial information related to these segments is as follows (in thousands):
Travel | Corporate | |||||||||||||||
Cruise | and Events | and Other | Total | |||||||||||||
2008 |
||||||||||||||||
Revenues |
$ | 150,995 | $ | 14,941 | $ | | $ | 165,936 | ||||||||
Operating
income (loss) from continuing operations (as restated) |
(19,136 | ) | 2,635 | (3,560 | ) | (20,061 | ) | |||||||||
Depreciation and
amortization expense |
(12,934 | ) | (282 | ) | (250 | ) | (13,466 | ) | ||||||||
Interest and dividend income |
39 | 123 | 557 | 719 | ||||||||||||
Interest expense |
(1,759 | ) | | (6,509 | ) | (8,268 | ) | |||||||||
Provision for income taxes |
18 | 1,040 | (1,005 | ) | 53 | |||||||||||
Capital expenditures for
property, vessels,
equipment and intangible
assets |
(2,664 | ) | (89 | ) | (15 | ) | (2,768 | ) | ||||||||
Goodwill |
| 6,275 | | 6,275 | ||||||||||||
Other intangibles, net |
7,282 | | | 7,282 | ||||||||||||
Total assets |
155,132 | 8,921 | 15,710 | 179,763 | ||||||||||||
2007 |
||||||||||||||||
Revenues |
154,394 | 14,511 | | 168,905 | ||||||||||||
Operating
income (loss) from continuing operations |
(24,045 | ) | 1,467 | (5,979 | ) | (28,557 | ) | |||||||||
Depreciation and
amortization expense |
(9,668 | ) | (265 | ) | (114 | ) | (10,047 | ) | ||||||||
Interest and dividend income |
963 | 486 | 1,274 | 2,723 | ||||||||||||
Interest expense |
(4,044 | ) | | (4,451 | ) | (8,495 | ) | |||||||||
Provision (benefit) for
income taxes |
(2,977 | ) | 3,657 | (1,454 | ) | (774 | ) | |||||||||
Capital expenditures for
property, vessels,
equipment and intangible
assets |
(20,019 | ) | (297 | ) | (872 | ) | (21,188 | ) | ||||||||
Goodwill |
| 6,275 | | 6,275 | ||||||||||||
Other intangibles, net |
8,431 | | | 8,431 | ||||||||||||
Total assets |
251,196 | 12,453 | 46,478 | 310,127 |
Results for Year Ended December 31, 2008 Compared Year Ended December 31, 2007
Revenue
Total revenue for 2008 was $165.9 million, compared to $168.9 million in 2007, a decrease of
$3.0 million or 2%. The decrease in revenue resulted primarily from a decrease in revenue from
cruise operations, partially offset by a slight increase in revenue from our travel and events
operations. Revenue from our cruise operations decreased by $3.4 million (2.2%) to $151.0 in 2008
primarily due to an increase of $12.9 million from our Windstar Cruises brand offset by a decrease
of $16.3 million from our Majestic America Line brand. Revenue from our travel and events
operations increased by $0.4 million (3.0%) to $14.9 million in 2008 due to the overall size of
events operated during 2008.
In 2009, if we sell our non-Windstar Cruises assets and businesses, our revenues are expected
to decrease on an overall basis from the prior periods due to the decrease in reporting units.
Within our Windstar Cruises operations, we expect to carry fewer passengers at lower average per
diems (APD). APD represents average daily net ticket revenue (total cruise ticket revenues plus
non-discountable amounts, less discounts, commissions and various other items) our passengers pay
for their respective cruises.
Cruise Operating Expenses
Cruise operating expenses represents direct expenses incurred with owning and operating our
cruise ships. Cruise operating expenses decreased $2.0 million (1.6%) to $122.0 million in 2008.
This was due to a decrease in number of operating days and a decease in number of passengers
carried by the Majestic America vessels as compared to the prior year. Cruise operating expenses
decreased but were offset by the increase in cruise operating expenses for Windstar Cruises due to
a full year of operations of Windstar Cruises in 2008 compared to only nine months of operations in
2007.
In 2008, we experienced high costs for fuel, freight and logistics all of which negatively
impacted our cruise operating expenses. We expect cruise operating expenses related to Windstar
Cruises to decrease in 2009 as a result of more normalized expenses related to fuel, freight and
logistics.
Selling and Tour Promotion
Selling and tour promotion expenses were $12.4 million in 2008, compared to $26.0 million in
2007. The decrease is primarily due to significant reductions in promotion and marketing expenses
for the Majestic America brand in 2008 as compared to 2007. In 2007 we incurred a significant
amount of promotion and marketing expenses to launch and establish the Majestic America brand and
to promote the full fleet of domestic ships that operated in 2007. In 2008, upon our decision to
scale back the Majestic America operations, we stopped all promotional and advertising expenditures
related to the Majestic America brand resulting in a decrease of $12.5 million. This was offset by
a $2.0 million increase in promotional and advertising materials related to the Windstar Cruises
brand as a result of full year operations in 2008 compared to nine months operations in 2007.
We expect selling and tour promotion expenses to decrease in 2009 for the Windstar Cruises
brand as a result of decreased promotion efforts necessary in the second full year of operations.
General and Administrative Expenses
General and administrative expenses decreased in dollar terms and as a percentage of total
revenue, to $31.2 million and 18.8% of total revenue in 2008 from $37.5 million and 22.2% of total
revenue in 2007. The decrease is primarily due to reduction in the general and administrative
expenses incurred by the cruise segment as a result of scaling back the Majestic America operations
and administrative costs related to corporate activities.
We expect general and administrative expenses to decrease in dollar terms in 2009 as a result
of the consolidation of our Company and the related decrease in the number of individual operating
divisions.
Depreciation and Amortization
Depreciation and amortization expenses were $13.5 million in 2008, compared to $10.0 million
in 2007. The increase is related to the additional depreciation expense resulting from the
acquisition of Windstar completed during 2007 and a full year of depreciation in 2008.
We expect depreciation expense to decrease in 2009 due to the disposal of some of the Majestic
America brand vessels in 2008 and the expected disposal of the remaining Majestic America brand
vessels in 2009.
Operating loss from continuing operations
We
reported an operating loss of $20.1 million in 2008 compared to $28.6 million in 2007
or a decrease of $8.5 million.
Operating loss from our cruise segment decreased by $4.9 million to $19.1 million in 2008
from $24.0 million in 2007. The 2007 operating loss in the Majestic America Line division was due
to aggressive discounting to drive capacity, over reliance on our direct mail campaigns and
increased cruise operating expenses.
Operating
loss from our cruise segment in 2008 also includes a $7.0 million loss
on the disposal of vessels related to the return of two of the
Majestic American Line vessels to MARAD.
Operating income from our travel and events segment increased by $1.2 million to $2.6 million
in 2008 from $1.4 million in 2007. Operating loss from our Corporate segment decreased $2.4
million, from a loss of $6 million in 2007 to a loss of $3.6 in 2008, primarily due to a reduction
in general and administrative expenses.
The
change in operating loss is the result of changes described above.
Other Expense
In
2008, we recorded other expense of $1.9 million compared to $5.2 million in 2007. Other
expense in 2008 consisted primarily of $0.8 million in insurance proceeds related to the Empress of
the North and Queen of the West incidents in 2007 and 2006, respectively; $1.1 million in legal
settlement related to the grounding of the Empress of the North in March 2006, and $2.6 million in
settlement of the dispute related to the purchase of Windstar Cruises. Other expense during 2008
and 2007 included $8.3 million and $8.5 million, respectively of interest expense related to
long-term debt assumed in our cruise acquisitions and interest expense on our convertible notes
issued in April 2007.
Income Taxes
We
recorded income tax expense of $53,000 for 2008 attributable to continuing
operations, compared to income tax benefit of $0.8 million for 2007. In accordance with
SFAS No. 109, we recorded a full valuation allowance on our domestic deferred tax assets commencing
in the fourth quarter of 2007 through December 31, 2008. A significant factor in determining the
requirement for the valuation allowance was our cumulative three-year historical loss generated as
of 2007. SFAS No. 109 largely precludes us from taking into consideration future outlook or
forecasted income due to our limited operating history in our domestic cruise business. The
establishment of a valuation allowance does not have any impact on cash, nor does such an allowance
preclude us from utilizing loss carry-forwards in the future.
Loss from continuing operations
Loss from
continuing operations was $22.0 million in 2008 and
$32.9 million in 2007 or a decrease of $10.9
million. This decrease is primarily attributable to the reduced operating loss in our cruise
segement discussed above and a reduction in general &
administrative expenses.
Income (loss) from discontinued operations
Income
(loss) from discontinued operations reflected a loss of $16.1 million during 2008 and income of
$4.5 million in 2007.
The loss in 2008 relates to the loss associated with our marine
segment that is attributable to a reduction in revenue from our marine operations which decreased by
$14.6 million (11.8%) in 2008 due to lower volume of work in 2008 as compared to 2007.
Net Loss
Net loss was $38.2 million in 2008 compared to $28.4 million in 2007 as a result of changes
described above.
Liquidity and Capital Resources
Due
to the current global downturn in the economy, specifically the decrease in vacationers
discretionary spending and the direct impact this has on the
reduction in cruise bookings and decrease
in corporate spending on incentive programs, we will need additional sources of cash in the immediate
future in order to fund operations in 2009. Accordingly, in February 2009, we announced our
intention to sell our non-Windstar Cruises related assets, including the operations of marine,
travel and events, Majestic America Line and insurance. We hired an investment banking firm who is
actively marketing the non-Windstar Cruise assets for immediate sale. In addition to the sale of
assets, we are also seeking additional financing sources and renegotiating existing debt
obligations. Based on the terms of the asset sales or additional financing, if any, our
stockholders may have additional dilution. The amount of dilution could be attributed to the
issuance of warrants or securities with other dilutive characteristics, such as anti-dilution
clauses or price resets.
Although
we are in discussions with potential buyers and other prospects for additional funds,
we currently have no completed funding commitments. If we are not able to sell our remaining non- Windstar Cruises assets, raise
additional financing and/or successfully renegotiate existing debt obligations in order to raise
funds for operations, we will be forced to extend payment terms with vendors where possible, and/or
to suspend or curtail certain of our planned operations and possibly seek protection in bankruptcy.
Any of these actions would harm our business, results of operations and future prospects could cause our debt-obligations to be accelerated and could result in
potential damages on existing contracts within our marine and travel and events businesses.
As a result of our need for additional financing and other factors, the report from our
independent registered public accounting firm regarding our consolidated financial statements for
the year ended December 31, 2008 includes an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern. If we cease to continue as a going concern, due
to lack of available capital or otherwise, you may lose your entire investment in our company.
Net cash provided by (used in) operations for the years ended December 31, 2008 and 2007 was
($18.6) million and $3.3 million, respectively. The decrease in cash flows from operations in 2008
compared to 2007 is due to the timing differences in the collection of current assets and the
payment of current liabilities offset by the increase in net loss adjusted for non-cash related
charges incurred during the period.
Net cash provided by (used in) investing activities for the years ended December 31, 2008 and
2007 was $10.4 million and ($16.6) million, respectively. Cash provided by investing activities in
2008 was due to the cash received in the reduction of the restriction requirements and proceeds
from sale of available-for-sale securities partially offset by purchases of property and equipment,
consisting mainly of ship improvements conducted during lay-up and drydock periods, and cash paid
for the acquisition of Windstar Cruises. These uses of cash were partially offset by sales of
available-for-sale securities net of increases in invested restricted cash.
In 2009, we will incur capital expenditures and costs for improvements to and maintenance of
our ships. In 2009, planned capital expenditures and drydock projects are expected to be
approximately $4.3 million for Windstar Cruises. We do not have any material commitments of capital
expenditures in our travel and events business in 2009.
On January 13, 2006, we acquired American West. Under the terms of the agreement, we acquired
the membership interests of American West for $1.00, repaid debt of $4.3 million and assumed
$41.5 million in fixed-rate, 4.63% debt payable through 2028 and guaranteed by U.S. Maritime
Administration (MARAD). In addition, the transaction consideration consisted of 250,000 shares of
our restricted common stock, which was forfeited because the required financial targets were not
met. EN Boat, a subsidiary of the Company and owner of the Empress of the North, was unable to make
its semi-annual payment on the note due July 17, 2008 and was unable to cure the payment default
within the 30 day cure period. On August 15, 2008, we returned the Empress of the North to MARADs
custodial control following its last sailing on August 9, 2008. As a result of the disposal of the
Empress of the North, we wrote off $34.2 million in assets (primarily vessels) and $37.3 million in
liabilities (primarily loans payable) and recorded a $3.1 million gain on disposal for the year
ended December 31, 2008. The default under the note will have a limited financial impact because
recourse on the default is limited to the Empress of the North.
On April 25, 2006, we acquired the cruise-related assets of Delta Queen for $2.75 million in
cash, the assumption of $9.0 million of passenger deposits and the assumption of $35.0 million of
fixed-rate, 6.50% debt payable through 2020 and guaranteed by the U.S. Maritime Administration. In
addition, the transaction included contingent consideration of 100,000 shares of our common stock
to be granted to Delta Queen if certain future financial targets were met in any of the three years
following the close of the transaction. AQ Boat, LLC, a subsidiary of the Company and owner of the
American Queen®, was unable to make its semiannual principal payments on the note. On
November 15, 2008, we returned the American Queen® to MARADs custodial control
following its last sailing on November 15, 2008. Under the Trust Indenture, we, as the ultimate
parent of AQ Boat, LLC, had guaranteed principal payments on the debt assumed by AQ Boat, LLC and
we were required to make principal payments on the debt or additional note amounting to
$7.3 million by February 23, 2009, in the event of default by AQ Boat, LLC. Through November 15,
2008, AQ Boat, LLC had paid $6.3 million towards principal payments. At December 31, 2008, we
accrued the remaining guaranteed principal payment of $0.9 million. As a result of the disposal of
the American Queen®, we wrote off $38.3 million in assets (primarily vessels) and
$28.3 million in liabilities (primarily loans payable) and recorded a $10.0 million loss on
disposal for the year ended December 31, 2008.
On April 25, 2006, we acquired the $9.0 million first preferred ship mortgage on a ship, the
150-passenger Columbia Queen, from the U.S. Maritime Administration for $5.0 million. In August
2006, we acquired the $5.0 million second preferred ship mortgage on the Columbia Queen, from the
mortgage holder for $3.5 million. On October 13, 2006, we purchased the Columbia Queen during a
foreclosure auction for additional consideration of $1,000 and now own the ship outright and
operated her in 2007 and 2008.
On June 12, 2006, we acquired the 48-passenger Executive Explorer for $2.5 million from the
U.S. Federal Marshal. We renamed the ship Contessa and operated her in 2007.
In April 2007, we consummated our acquisition of Windstar Cruises for a total consideration of
$72.1 million of which $12.1 million was paid in cash and $60.0 million in seller financing that
was subsequently repaid with a portion of the proceeds from our convertible debt offering.
Net cash used in financing activities during 2008 totaled $3.7 million primarily relating to
the payment of cruise-related debt. Net cash provided by financing activities in 2007 totaled
$27.0 million and primarily relates to $97.0 million from our convertible debt offering offset by
$64.4 million used to repay the seller financing debt incurred in the acquisition of Windstar
Cruises and payments on existing debt acquired during the 2006 acquisitions within the cruise
segment. In 2007, we also paid $3.3 million of convertible debt offering costs, two cash dividends
totaling $0.20 per share paid to common stockholders and $1.6 million for the purchase and
retirement of 51,150 shares of our common stock. These payments were partially offset by the
proceeds received from the exercise of employee stock options during the period.
On September 2, 2003, our board of directors authorized a new dividend policy paying
stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly basis. We
and our board of directors intend to continually review our dividend policy to evaluate conditions
that may affect our desire or ability to pay dividends, which are declared at the discretion of the
board of directors. Subsequent to the dividend declared in May 2007, our board of directors has not
approved any additional dividends.
The following dividends have been declared in 2007 on the dates indicated (in thousands):
Record Date | Payment Date | Dividend Amount | ||||||
2007: |
||||||||
March 12, 2007 |
March 19, 2007 | $ | 1,084 | |||||
May 21, 2007 |
May 31, 2007 | 1,084 |
We may, from time to time, be required to enter into letters of credit related to our
insurance operations which is presented as discontinued operations, and travel related programs
with airlines, travel providers and travel reporting agencies. As of December 31, 2008, we had
outstanding $5.9 million in letters of credit related to insurance programs which expire at various
dates through 2009. As of December 31, 2008, we had no outstanding letters of credit related to
cruise business operations and $0.1 million in letters of credit related to travel and events
business operations which expire at various dates through 2009. We have a $6.0 million line of
credit to support the outstanding letters of credit which is secured by a certificate of deposit in
the same amount and is classified as restricted cash as of December 31, 2008.
Under Bermuda regulations our insurance subsidiary, which is presented as discontinued
operations, is required to maintain a surplus of 20% of gross written premiums or 15% of loss and
loss adjustment expense reserves, or $1.0 million, whichever is greater. As of December 31, 2008,
Cypress Re had $2.6 million in total statutory capital and surplus which exceeded the required
statutory capital and surplus of $1.0 million. In April 2008, we reduced our capital by
$3.3 million based on authority from Bermuda.
In November 1998, our board of directors authorized the repurchase of our common stock in the
open market or through private transactions up to $20.0 million. In August 2006, our board of
directors authorized an additional $10.0 million for the repurchase of our common stock in the open
market or through private transactions, providing for an aggregate of $30.0 million. In 2007, we
repurchased 51,150 shares for approximately $1.6 million. In 2008 we made no share repurchases. We
do not believe that any future repurchases will have a significant impact on our liquidity.
Our cruise passenger deposits are primarily received through credit card transactions. As of
December 31, 2008, we had $10.6 million of restricted cash held by a bank in cash equivalents and a
certificate of deposit as additional amounts required for secure processing of passenger deposits
through credit cards. The restricted amounts were negotiated between us and the bank based on a
percentage of the expected future volume of credit card transactions within a standard twelve-month
period. Due to reductions in the insurance contract liabilities associated with our reinsurance
business, we were able to reduce certain letters of credit requirements. During 2008, this
reduction made available $6.5 million of cash that was previously restricted. Accordingly this
reduction allowed us to reduce our bank facility that secured the letters of credit to $6.0 million
as of December 31, 2008.
Events of Default Under Debt Agreements
Reflected as discontinued operations, Assets Held for Sale and Liabilities related to assets held
for sale in the accompanying financial statements
At December 31, 2008, we were in violation of certain financial covenants under a working line
of credit with Bank of the Pacific. We received a letter from Bank of the Pacific on March 23,
2009, notifying us of non-compliance and a demand for payment was made. Upon negotiations with the
bank, we were able to obtain a waiver of the violation of the covenants until April 9, 2009. On
April 13, 2009, we received a notice of payoff pursuant to which Bank of the Pacific exercised its
right of setoff whereby the outstanding debt of approximately $1.0 million under the working line
of credit was fully repaid utilizing funds in our account maintained at the bank. This working
line of credit obligation is included in liabilities related to assets held for sale in the
accompanying financial statements as a component of discontinued operations.
Reflected as discontinued operations, Assets Held for Sale and Liabilities related to assets held
for sale in the accompanying financial statements
We also have a $1.6 million note payable with Bank of Pacific with a maturity date of May 10,
2010 secured by property. Due to the default under the working line of credit with Bank of the
Pacific described above, we are subject to a cross default under the note payable. Accordingly, the
full amount of the obligation has been presented as a current maturity in the accompanying
financial statements. This note payable is included in liabilities related to assets held for
sale in the accompanying financial statements as a component of discontinued operations.
Continuing Operations
We did not make a $1.8 million scheduled interest payment due and payable on April 15, 2009 on
our 3.75% senior convertible notes. We have until May 15, 2009 to cure this default on our
3.75% senior convertible notes, at which time an event of default would have occurred and the
trustee or the holders of not less than 25% in aggregate principal amount of the outstanding notes
could declare the principal and accrued and unpaid interest on all the outstanding notes to be due
and payable immediately.
Although there can be no assurances that we will satisfy the
scheduled interest obligation prior to May 15, 2009, it is our
current intent to cure the default prior to that date.
Off-Balance Sheet Transactions
We do not maintain any off-balance sheet transactions, arrangements, obligations or other
relationships with unconsolidated entities or others that will have a current or future effect on
our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K that are not historical in nature are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. A forward-looking statement may contain words such as expect, anticipate, outlook,
could, target, project, intend, plan, believe, seek, estimate, should, may,
assume, continue, and variations of such words and similar expressions. These statements are
not guarantees of future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. We caution you that actual outcomes and results may differ materially
from what is expressed, implied, or forecast by our forward-looking statements. We have based our
forward-looking statements on our managements beliefs and assumptions based on information
available to our management at the time the statements are made. Such risks and uncertainties
include, among others:
| our ability to effectively complete our planned sale of assets; | ||
| our ability to obtain additional financing at reasonable rates; | ||
| our ability to renegotiate 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 industries in which we operate; | ||
| marketing expenses; | ||
| extreme weather conditions; | ||
| timing of and costs related to acquisitions; | ||
| the impact of new laws and regulations affecting our business; | ||
| negative incidents involving cruise ships, including those involving the health and safety of passengers; | ||
| cruise ship maintenance problems; | ||
| reduced consumer demand for vacations and cruise vacations; | ||
| changes in fuel, food, payroll, insurance and security costs; | ||
| the availability of raw materials; | ||
| our ability to enter into profitable marina construction contracts; | ||
| changes in relationships with certain travel providers; | ||
| changes in vacation industry capacity; | ||
| the mix of programs and events, program destinations and event locations; | ||
| the introduction and acceptance of new programs and program and event enhancements by us and our competitors; | ||
| other economic factors and other considerations affecting the travel industry; | ||
| changes in U.S. maritime tax laws; | ||
| potential claims related to our reinsurance business; | ||
| the potentially volatile nature of the reinsurance business; and | ||
| other factors discussed in this Annual Report on Form 10-K. |
A more complete discussion of these risks and uncertainties, as well as other factors, may be
identified from time to time in our filings with the Securities and Exchange Commission, including
elsewhere in this Annual Report on Form 10-K, or in our press releases. We disclaim any obligation
to publicly update any forward-looking statements, whether as a result of new information, future
events or otherwise.