| AMBASSADORS INTERNATIONAL INC Item 1A Risk Factors Our operations and financial condition may be adversely affected by events adversely affecting the travel industry, including the affects of general economic conditions |
| A substantial portion of our operations are directly associated with the travel industry |
| As a result, our operations are subject to special risks inherent in doing business in that industry |
| The travel industry, especially the performance improvement and convention sectors, is sensitive to changes in economic conditions |
| During general economic downturns and recessions, companies tend to reduce or eliminate improvement programs and attendance at conventions and trade shows |
| In addition, the travel industry is highly susceptible to unforeseen events, such as wars, acts of terrorism, civil disturbances, political instability, governmental activities and deprivation of contract rights |
| Demand for our programs and services may also be adversely affected by natural occurrences such as hurricanes, earthquakes, epidemics and flooding in regions in which we conduct our programs and provide our services |
| Periods of instability or uncertainty surrounding the travel industry may reduce the demand for our programs and services and could have an adverse effect on our business, financial condition and results of operations |
| We are subject to risks associated with maintaining significant cash, cash equivalents and available-for-sale securities |
| Cash, cash equivalents and available-for-sale securities are exposed to concentrations of credit risk |
| We place our cash and temporary cash investments with high credit quality institutions |
| At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions that are not covered by this insurance |
| If such institutions were to become insolvent during the time we held our cash, cash equivalents or available-for-sale securities in excess of the insurance limit, it would be necessary for us to obtain credit financing to operate our programs |
| We may not realize the anticipated benefits of the companies and businesses that we acquire, including our acquisition of American West Cruises |
| Part of our business strategy is to acquire businesses that will assist in the overall growth of the Company |
| We will be competing for acquisition opportunities with other companies, many of which have greater name recognition, marketing support and financial resources, which may result in a diminished number of acquisition opportunities available to the Company and higher acquisition prices |
| No assurance can be given that we will be able to identify, pursue or acquire any targeted businesses |
| In addition, if any targeted businesses are acquired, such as American West Cruises, there can be no assurance that we will be able to profitably manage additional businesses or successfully integrate any acquired businesses into the Company without substantial costs, delays and/or other operational or financial problems |
| As a result, we may not realize the anticipated benefits of the companies or businesses that we acquire |
| Acquisitions involve a number of special risks in addition to those described above |
| These risks include: • the diversion of management’s attention to the assimilation of the operations and personnel of the acquired businesses; • the potential loss of key employees; 6 ______________________________________________________________________ [34]Table of Contents • potential exposure to unknown liabilities of acquired companies; • the ability of management to effectively and efficiently manage the new operations we acquire; and • adverse effects on the Company’s reported operating results due to acquisition costs and expenses associated with integrating and assimilating the operations of the acquired businesses |
| No assurance can be given that any acquisitions by the Company will or will not occur, or that if an acquisition does occur, that it will not have an adverse effect on the Company or that we will realize the anticipated benefits of such acquisition |
| In addition, if we enter into any significant acquisition for cash, a substantial portion of our available cash could be used in order to consummate any such acquisition |
| We may also seek to finance such acquisitions through debt or equity financings |
| There can be no assurance that such financings will be available at all or on terms acceptable to us |
| If consideration for an acquisition includes equity securities, our stockholders could experience dilution |
| Our financial performance is subject to seasonal and quarterly fluctuations |
| Our Ambassadors segment is subject to seasonal fluctuations |
| Insurance premiums are recognized as revenue over the period of the insurance contracts in proportion to the amount of the insurance coverage provided |
| We recognize revenue for marine and related services in accordance with the respective management contracts |
| Historically, we have recognized the majority of our operating results in the first and second quarters of each fiscal year |
| As a result of the acquisition of American West Cruises in January 2006, we anticipate that in future periods the majority of our operating results will be recognized in the second and third quarters of each fiscal year which coincides with the cruising season within this new segment |
| Our future annual results could be adversely affected if our revenue were to be substantially below seasonal norms during the second and third quarters of the year |
| Our operating results may fluctuate as a result of many factors, including: • 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; • the timing of program and event operation; • cancellation rates; • potential claims related to our reinsurance business; • the potentially volatile nature of the reinsurance business; • competitive conditions in the industries in which we operate; • marketing expenses; • extreme weather conditions; • timing of and costs related to acquisitions; • changes in relationships with certain travel providers; • our ability to effectively and efficiently operate Ambassadors Cruise Group; • changes in vacation industry capacity; • 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; and • other economic factors and other considerations affecting the travel industry |
| As a result of these and other factors, our operations and financial condition could suffer, which could cause our annual or quarterly operating results to be below the expectations of public market analysts and investors |
| In such event, the price of our common stock could be adversely affected |
| 7 ______________________________________________________________________ [35]Table of Contents If we are unable to effectively compete against our competitors, our financial conditions will suffer |
| The travel industry in general, and the performance improvement, event and convention services and hospitality cruises sectors in particular, are highly competitive |
| Our performance improvement programs and event services compete with other companies that provide similar programs and services |
| Corporations and associations themselves may choose to provide these programs and services “in-house |
| ” The hospitality cruise segment is also very competitive |
| We believe the barriers to entry within the travel and events sector in which we operate are relatively low |
| Certain of our competitors, particularly in the hospitality cruise sector, have substantially greater financial, marketing, and sales resources than we do |
| As a result, there can be no assurance that our present competitors or competitors that elect to enter the marketplace in the future will not exert significant competitive pressures on us |
| These competitive factors could have a material and adverse effect on our business, financial condition and results of operations |
| Due to the nature of our travel business, we may be subject to liability claims arising out of accidents or disasters causing injury to participants or attendees to our programs or events, including claims for serious personal injury or death |
| Although we have never experienced a liability loss for which we did not have adequate insurance coverage, there can be no assurance that insurance coverage will be sufficient to cover one or more large claims or that the insurance carrier will be solvent at the time of any covered loss |
| There can be no assurance that we will be able to obtain sufficient insurance coverage at acceptable premium levels in the future |
| Successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding our insurance coverage, could have an adverse effect on our business, financial condition and results of operations |
| Our business could be adversely affected by losses associated with Cypress Re’s reinsurance |
| We currently reinsure property and casualty risks written by licensed US insurers |
| The lines of business that are being reinsured include commercial auto liability, commercial physical damage and workers’ compensation |
| If a loss event occurs and the Company is required by its agreements to cover such losses, the amount of our cash and cash equivalents will be reduced, and our results of operations and financial condition would suffer |
| In order to provide our services and products, we are dependent on airlines, hotels and other suppliers of travel services |
| We do not currently have any long-term agreements with our travel suppliers that obligate such suppliers to sell services or products through us |
| Restricted access to suppliers of travel services and a reduction in capacity or changes in pricing arrangements with travel suppliers could have an adverse effect on our business, financial condition and results of operations |
| In connection with our acquisition American west Cruises, we assumed certain indebtedness, which could adversely affect our cash flows and business |
| In order to complete the acquisition of American West Cruises, we assumed approximately dlra41dtta5 million in fixed-rate, 4dtta63prca debt payable through 2028 |
| The increased levels of debt could, among other things: • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, dividends, acquisitions and other purposes; • increase our vulnerability to, and limit flexibility in planning for, adverse economic and industry conditions; 8 ______________________________________________________________________ [36]Table of Contents • adversely affect our credit rating; • limit our ability to obtain additional financing to fund future working capital, capital expenditures, additional acquisitions and other general corporate requirements; • create competitive disadvantages compared to other companies with less indebtedness; and • limit our ability to apply proceeds from an offering or asset sale to purposes other than the repayment of debt |
| We may lose business to competitors throughout the vacation market |
| As are result of our acquisition of American West Cruises, we operate in the vacation market, and cruising is one of many alternatives for people choosing a vacation |
| We therefore risk losing business not only to other cruise lines, but also to other vacation operators which provide other leisure options, including hotels, resorts and package holidays and tours |
| We face significant competition from other cruise lines, both on the basis of cruise pricing and also in terms of the nature of ships and services we offer to cruise passengers |
| In the event that we do not compete effectively with other vacation alternatives and cruise companies, our results of operations and financial condition could be adversely affected |
| Overcapacity within the cruise vacation industry, a reduction in demand or economic uncertainties could have a negative impact on revenues, result in impairment of assets and may adversely affect profitability |
| Cruising capacity has grown in recent years and we expect it to increase further as cruise vacation companies introduce new ships |
| Demand for cruises has been and is expected to continue to be dependent on economic conditions |
| Economic changes may reduce demand for cruise vacations and may lead to reduced occupancy and/or price discounting which, in turn, could adversely affect our results of operations and financial condition and could result in impairment of our asset values |
| Incidents or adverse publicity concerning the cruise vacation industry or unusual weather conditions could affect our reputation and harm our future sales and profitability |
| The operation of cruise ships involves the risk of accidents, illnesses and other incidents which may bring into question passenger safety, health, security and vacation satisfaction and thereby adversely affect future industry performance |
| Incidents involving cruise ships, adverse media publicity concerning the cruise vacation industry or unusual weather patterns or natural disasters, such as storms and earthquakes, could impact demand and consequently have an adverse impact on our profitability |
| Environmental, health and safety, financial responsibility, tax and maritime legislation and regulations could affect operations and increase operating costs |
| The United States, Canada and various state government or regulatory agencies have enacted or are considering new environmental regulations or policies that could adversely impact the cruise vacation industry |
| Some environmental groups have lobbied for more stringent regulation of cruise ships and have generated negative publicity about the cruise vacation industry and its environmental impact |
| In addition, we are subject to various international, national, state and local laws, regulations and treaties that govern, among other things, safety standards applicable to our ships, health and sanitary standards applicable to our passengers, security standards on board our ships and at the ship/port interface areas, and financial responsibilities to our passengers |
| These issues are, and we believe will continue to be, an area of focus by the relevant authorities |
| This could result in the enactment of more stringent regulation of cruise ships that would subject us to increasing compliance costs in the future |
| In 2005, the United States issued a proposed Western Hemisphere Travel Initiative which would require United States citizens to have a passport or other accepted identity document to travel to or from certain countries or areas that were previously exempt, such as Canada |
| The proposal is currently expected to be implemented as 9 ______________________________________________________________________ [37]Table of Contents of December 31, 2006 for all United States citizens traveling to or from Canada by air and sea and as of December 31, 2007 for all travel by land border crossings |
| Many of our United States cruise passengers visiting Canada currently do not have passports, and it is therefore likely that these regulations will have a negative impact on our bookings when they are implemented |
| Recently, the State of Alaska determined that an Initiative Petition (the “Initiative”) to, among other things, impose a tax on cruise passengers sailing in Alaskan waters had sufficient signatures to qualify for the August 2006 statewide primary election ballot |
| If the Initiative is approved by voters, it would likely take effect in 2007 |
| Among other things, the Initiative would impose an additional fee of dlra4 per passenger for an Ocean Ranger program and remove the exemption from Alaska corporate income taxes for commercial passenger vessels |
| The Initiative would also impose a number of other regulations, reporting and operational requirements on cruise vessel operators |
| Some or all of these provisions may be subject to legal challenges if the Initiative is approved |
| Separately, two bills have been introduced for consideration in the Alaska Legislature |
| No action was taken on either of these bills |
| The legislature has until the end of the 2006 session to consider these bills |
| One bill would impose taxes of dlra50 per cruise passenger and the other bill proposes a tax of dlra75 per passenger |
| Similar legislation has been proposed in Alaska in the past and has not been approved |
| Both measures raise legal questions and it is uncertain whether either bill will be passed in its current form |
| It is expected that any proposed passenger taxes, such as the Initiative discussed above, would be directly charged to and collected from our guests |
| The ultimate outcomes of these Alaskan matters cannot be determined at this time |
| Increases in operating, financing and tax costs could adversely affect our results because we may not be able to recover these increased costs through price increases of our cruise vacations |
| Ship mechanical faults may result in cancellation of cruises and unscheduled drydocks and repairs |
| Our cruise ships have from time to time experienced mechanical problems and there can be no assurance that they will not experience such problems in the future |
| Mechanical faults may result in delays or cancellation of cruises or necessitate unscheduled drydocks and repairs |
| These events together with any related adverse publicity could affect our financial results |
| We are dependent upon key personnel |
| Our performance is substantially dependent on the continued services and performance of our senior management and certain other key personnel |
| The loss of the services of any of our executive officers or other key employees could have an adverse effect on our business, financial condition and results of operations |
| We do not have any long-term employment agreements with our executive officers |
| Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled managerial, operational, marketing and customer service personnel |
| The failure to retain and attract necessary managerial, operational, marketing and customer service personnel could have an adverse effect on our business, financial condition and results of operations |