##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-26420
 AMBASSADORS INTERNATIONAL, INC.
  Delaware
    
    91-1688605(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)1071 Camelback StreetNewport Beach, CA
    
    92660(Address of Principal Executive Offices)
    
    (Zip Code)
 (949) 759-5900
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $.01 Par Value
    
    Nasdaq Global Market
 None
 o þ
 o þ
  þ o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
  o þ
   Class
    
    Outstanding at March 10, 2008Common Stock, $.01 par value per share
    
    11,141,067
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    11Item 1B.
    
    Unresolved Staff Comments
    
    
    23Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    24Item 6.
    
    Selected Financial Data
    
    
    25Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    27Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8.
    
    Financial Statements and Supplementary Data
    
    
    41Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    41Item 9A.
    
    Controls and Procedures
    
    
    42Item 9B.
    
    Other Information
    
    
    45PART
IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    45Item 11.
    
    Executive Compensation
    
    
    45Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    45Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    45Item 14.
    
    Principal Accountant Fees and Services
    
    
    45PART
IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    46SIGNATURES
    
    
    
    
    100EXHIBIT INDEX
    
    
    
    102EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I
 
 Item 1. Business
 Overview
      Business Operations
  
    
    cruise,
    
    marine,
    
    travel and events, and
    
    corporate and other, which consists of general corporate assets (primarily cash and cash
equivalents and investments), our reinsurance operations and other activities that are not
directly related to our cruise, marine, and travel and events operating segments.
  Cruise Segment
  Empress of the North Queen of the West Columbia
Queen Contessa American Queen® Delta Queen® Mississippi Queen®
  1




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Empress of the North Empress of the North Columbia Queen Queen of the West American Queen ® , Delta Queen ® and
Mississippi Queen ®
   Wind Surf Wind Spirit Wind
Star
  Mississippi
Queen ® Delta
Queen, ® Contessa Mississippi
Queen ®
 Ship
    
    Passenger Berths
    
    In-Service Year
    
    Itineraries   Empress of the North
    
    
    223
    
    
    
    2003
    
    
    Domestic   Queen of the West
    
    
    142
    
    
    
    1993
    
    
    Domestic   Columbia Queen
    
    
    150
    
    
    
    2000
    
    
    Domestic   Delta Queen®
    
    
    176
    
    
    
    1926
    
    
    Domestic   American Queen®
    
    
    436
    
    
    
    1995
    
    
    Domestic   Mississippi Queen®
    
    
    412
    
    
    
    1976
    
    
    Domestic   Contessa
    
    
    48
    
    
    
    1986
    
    
    Domestic   Wind Surf
    
    
    312
    
    
    
    1989
    
    
    International   Wind Star
    
    
    148
    
    
    
    1986
    
    
    International   Wind Spirit
    
    
    148
    
    
    
    1987
    
    
    International
 2




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Marine Segment
        3




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Travel and Events Segment
     Corporate and Other Segment
     4




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Business Strategy
  
    
    Improve promotion and pricing strategy;
    
    Diversify our channel strategy;
    
    Reduce our selling expenses; and
    
    Improve our operational execution.
     5




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Competition
    Regulation
 Ship Maintenance
  Passenger Health, Safety and Security
   6




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U.S. Ownership Requirements
   Environmental
  7




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Taxation
   Taxation to AICG of its Cruise Income: In General
    8




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Taxation in the Absence of an Exemption under Section 883
    Controlled Foreign Corporation Tax Regime
     State Taxation
  Labor and Employment
  9




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Licensing
  Reinsurance Capital Requirement
  Insurance
      10




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Environment
  Employees
  Seasonality
  Available Information
 http://www.sec.gov
 
 Item 1A. Risk Factors
  11




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Risks Related to Our Company and Our Industry
 Our success depends on our ability to manage our growth and integrate our acquisitions.
  
    
    diversion of managements attention to the assimilation of the operations and personnel
of the acquired businesses;
    
    potential loss of key employees;
    
    potential exposure to unknown liabilities of acquired companies; and
    
    adverse effects on reported operating results due to acquisition costs and expenses
associated with integrating and assimilating the operations of the acquired businesses.
   Prior to our acquisition of cruise-related assets and businesses in 2006 and our acquisition of
Bellingham Marine in 2006, we had no experience in operating a cruise business or marina
construction business.
  If we are unable to find suitable acquisition candidates in the future, our continued growth and
financial performance may be adversely affected.
  12




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In connection with our acquisitions within the cruise segment, we assumed or incurred a significant
amount of indebtedness, which could adversely affect our cash flows and business.
  
    
    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;
    
    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.
 If we are unable to manage our financial resources during our expansion, our financial performance
may be adversely affected.
   Our
financial performance is subject to seasonal and quarterly fluctuations, which could result in
substantial losses for investors purchasing shares of our common stock and in litigation against
us.
  13




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
    
    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;
    
    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.
  If we are unable to effectively compete against our competitors, our financial condition will
suffer.
    Our operations and financial condition may be adversely affected by events adversely affecting the
travel industry, including the effects of general economic conditions.
  14




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Our success in our travel and events business is highly dependent upon unaffiliated travel services
suppliers with whom we have limited agreements.
  Overcapacity within the cruise vacation industry, a reduction in demand or economic uncertainties
could adversely affect our revenues and profitability and impair our asset values.
  Our business could be adversely affected by unanticipated casualty losses.
  No assurance can be given that our insurance costs will not escalate.
  We are dependent upon key personnel.
  15




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Our success in our domestic and international cruise business is highly dependent on our third
party vessel management company.
  International political and other world events affecting safety and security could adversely affect
the demand for cruises, which could harm our future sales and profitability.
  Incidents or adverse publicity concerning the cruise vacation industry or unusual weather
conditions could adversely affect our reputation and harm our future sales and profitability.
 Empress of the North Empress of the North Mississippi Queen ®
 If we do not complete drydocking on schedule or if ship mechanical faults result in unscheduled
drydockings and repairs, we will incur additional expenses and may also lose revenues by canceling
planned cruises.
 Wind Star
 16




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Wind Spirit Queen of the West
 Unavailability of ports of call may adversely affect our profits by reducing our sales of cruise
vacations.
  The nature of our engineering and construction business exposes us to potential liability claims
and contract disputes, which may reduce our profits and cash available for operations.
  Supply shortages and other risks related to the demand for skilled labor and building materials
could increase costs and delay deliveries.
  The demand, timing and funding of marina construction awards and other factors could lead to
unpredictable operating results.
  We may incur costs related to repairing defects in marinas we design and construct, which could
adversely affect our profitability.
  17




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An inability to obtain bonding could limit the number of projects we are able to pursue.
  Natural disasters, severe weather conditions and forces in nature beyond our control could
adversely affect our marina construction and management operations.
  Our use of the percentage-of-completion method of accounting could result in a reduction or
reversal of previously recorded revenues or profits.
  Unexpected and adverse changes in the foreign countries in which we operate could result in project
disruptions, increased costs and potential losses.
  
    
    abrupt changes in foreign government policies and regulations;
    
    embargoes;
    
    trade restrictions;
    
    tax treatment;
    
    U.S. government policies relating to foreign operations; and
    
    international hostilities.
 18




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Our international operations expose us to foreign currency fluctuations that could increase our
U.S. dollar costs or reduce our U.S. dollar revenues.
  We expect to face significant and increasing costs to maintain our ships as they age and may have
difficulty replacing our ships when needed, which could adversely affect our result of operations
and financial condition.
 Delta Queen ®
 We may be unable to replace revenues lost when the Delta Queen ® ceases operations later
this year and may be subject to liability claims if a fire occurs due to our negligence.
 Delta Queen ® Delta Queen ® Delta
Queen ® Delta Queen ® Delta Queen ® Delta Queen ® Delta Queen ®
 If we experience delays and/or defaults in customer payments, we could suffer liquidity problems or
be unable to recover all expenditures.
  Our business could be adversely affected by losses associated with our reinsurance operations.
  19




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Environmental, health and safety, financial responsibility, tax and maritime and homeland security
legislation and other laws and regulations could adversely affect us by restricting our operations
increasing our operating costs.
          20




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U.S. maritime laws restrict foreign ownership of our stock, and the repeal, suspension or
substantial amendment of these laws could increase competition on inland waterways and adversely
affect our business.
  Our employees are covered by federal maritime laws that may subject us to job-related claims in
addition to those provided by state laws.
  We may
be subject to significantly higher U.S. income taxes if we do not qualify for exemption
from tax or for deferral of tax under U.S. tax laws in respect of Windstar Cruises income.
     Additional Risks Related to Our Stock
 We may not pay dividends in the future, which could adversely affect our share price.
  21




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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
     U.S. ownership requirements and transferability limitations may adversely affect the liquidity of
our common stock.
  22




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Future sales of shares of our common stock underlying derivative securities could cause our stock
price to decline.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
      
 Item 3. Legal Proceedings
   23




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Item 4. Submission of Matters to a Vote of Securities Holders
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Stock Market and Other Information
   High
    
    Low2007:Quarter ended March 31, 2007
    
    $
    47.50
    
    
    $
    40.82Quarter ended June 30, 2007
    
    
    46.81
    
    
    
    30.65Quarter ended September 30, 2007
    
    
    32.81
    
    
    
    22.90Quarter ended December 31, 2007
    
    
    26.73
    
    
    
    11.652006:Quarter ended March 31, 2006
    
    $
    18.16
    
    
    $
    15.71Quarter ended June 30, 2006
    
    
    25.23
    
    
    
    17.81Quarter ended September 30, 2006
    
    
    36.18
    
    
    
    21.73Quarter ended December 31, 2006
    
    
    47.31
    
    
    
    30.83
 24




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Dividend Policy
  Record Date
    
    Payment Date
    
    Dividend Amount2007:March 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,0842006:February 20, 2006
    
    March 2, 2006
    
    $
    1,050May 22, 2006
    
    June 1, 2006
    
    
    1,065August 16, 2006
    
    August 31, 2006
    
    
    1,072November 14, 2006
    
    November 28, 2006
    
    
    1,085
 Recent Sales of Unregistered Securities
  Transfer Agent and Registrar
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 6. Selected Financial Data
  2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(dollars in thousands, except per share data)Selected Consolidated Statements of
Operations Data:Revenues (A) (B)
    
    $
    287,005
    
    
    $
    144,272
    
    
    $
    26,940
    
    
    $
    18,736
    
    
    $
    13,679Costs and operating expenses:Cruise operating expenses (A)
    
    
    118,252
    
    
    
    48,943
    
    
    
    
    
    
    
    
    
    
    
    Cost of marine revenue (A)
    
    
    94,029
    
    
    
    34,516
    
    
    
    
    
    
    
    
    
    
    
    Selling and tour promotion (A)
    
    
    25,980
    
    
    
    12,189
    
    
    
    3,144
    
    
    
    3,117
    
    
    
    4,412General and administrative (A)
    
    
    57,140
    
    
    
    34,321
    
    
    
    11,826
    
    
    
    9,878
    
    
    
    11,034Depreciation and amortization (A)
    
    
    11,010
    
    
    
    4,224
    
    
    
    1,232
    
    
    
    890
    
    
    
    1,249Loss and loss adjustment expenses (E)
    
    
    387
    
    
    
    5,249
    
    
    
    6,051
    
    
    
    2,514
    
    
    
    
 25




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2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(dollars in thousands, except per share data)Insurance acquisition costs and other
operating expenses (E)
    
    $
    639
    
    
    $
    3,564
    
    
    $
    4,563
    
    
    $
    2,211
    
    
    $
    Impairment loss and lease exit costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,627
    
    
    
    891Operating income (loss)
    
    
    (20,432
    )
    
    
    1,266
    
    
    
    124
    
    
    
    (2,501
    )
    
    
    (3,907
    )Income (loss) before income tax
    
    
    (23,911
    )
    
    
    5,970
    
    
    
    4,253
    
    
    
    (1,567
    )
    
    
    (64
    )Net income (loss)
    
    
    (26,879
    )
    
    
    5,627
    
    
    
    3,142
    
    
    
    (1,937
    )
    
    
    (1,017
    )Earnings (loss) per share:Basic
    
    $
    (2.48
    )
    
    $
    0.53
    
    
    $
    0.30
    
    
    $
    (0.20
    )
    
    $
    (0.10
    )Diluted
    
    $
    (2.48
    )
    
    $
    0.49
    
    
    $
    0.30
    
    
    $
    (0.20
    )
    
    $
    (0.10
    )Weighted-average common shares outstanding:Basic
    
    
    10,838
    
    
    
    10,668
    
    
    
    10,321
    
    
    
    9,868
    
    
    
    9,912Diluted
    
    
    10,838
    
    
    
    11,445
    
    
    
    10,597
    
    
    
    9,868
    
    
    
    9,912Selected Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    21,998
    
    
    $
    8,246
    
    
    $
    17,716
    
    
    $
    39,474
    
    
    $
    43,609Restricted cash
    
    
    31,084
    
    
    
    11,127
    
    
    
    
    
    
    
    
    
    
    
    Available-for-sale securities
    
    
    2,514
    
    
    
    37,807
    
    
    
    77,415
    
    
    
    58,441
    
    
    
    61,685Total assets (A)
    
    
    376,489
    
    
    
    255,920
    
    
    
    134,783
    
    
    
    129,661
    
    
    
    125,050Long-term passenger and participant deposits
    
    
    35
    
    
    
    40
    
    
    
    5
    
    
    
    518
    
    
    
    449Long-term deferred tax liabilities
    
    
    1,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt, net of current portion (C)
    
    
    161,584
    
    
    
    71,779
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    88,127
    
    
    
    115,737
    
    
    
    109,226
    
    
    
    104,826
    
    
    
    112,690Other Data:Cash dividends declared and paid on common
shares (D)
    
    $
    2,168
    
    
    $
    4,272
    
    
    $
    4,134
    
    
    $
    3,957
    
    
    $
    1,991Cash dividends per common share (D)
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.20
 
 (A)
    
    In 2007 and 2006, we completed several acquisitions within the cruise and marine segments.
For a discussion of the businesses and activities acquired, see Item 1, Business  Business
Operations and Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations.(B)
    
    For a discussion of revenues, see Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Revenue Recognition and Note 1 to the Consolidated
Financial Statements, Description of the Company and Summary of Significant Accounting
Policies  Revenue Recognition.(C)
    
    For a discussion of long-term debt, see Note 9 to the Consolidated Financial Statements,
Long-Term Obligations.(D)
    
    For a discussion of cash dividends declared, see Item 5, Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  Dividend
Policy.(E)
    
    For a discussion of insurance operations and related loss and loss adjustment expenses, as
well as insurance acquisition costs and other operating expenses, see Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations-Reserve for Loss and
Loss Adjustment Reserves and -Reinsurance, and Note 3 to the Consolidated Financial
Statements, Reinsurance. 26




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
       
    
    Improve our marketing and pricing strategy by creating a multi-channel marketing
approach that embraces the travel agent community, opens up international markets, caters
to charter and incentive business and pursues a strong group support for our unique
offerings;
    
    Reduce our selling expenses by focusing our sales force and targeting our direct mail
campaigns which enable us to scale our campaigns to a level more appropriate for a company
our size; and
    
    Improve our operational execution by partnering with V.Ships to reduce costs while
enhancing the onboard guest experience.
 Critical Accounting Policies
    Revenue Recognition
 EITF 99-19
 Passenger Ticket Revenue and Onboard and Other Cruise Revenues
  27




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Marine Revenue
       Travel, Incentive and Event Related
  28




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Net Insurance Premiums Earned
   License Fees
  Property, Vessels and Equipment
   Goodwill and Intangible Assets
  29




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Reserve for Loss and Loss Adjustment Reserves
  Reinsurance
   Stock-Based Compensation
    30




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Income Taxes
       31




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Results of Operations
  2007
    
    2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and operating expenses:Cruise operating expenses
    
    
    41.2
    
    
    
    33.9
    
    
    
    Cost of marine revenue
    
    
    32.8
    
    
    
    23.9
    
    
    
    Selling and tour promotion
    
    
    9.1
    
    
    
    8.5
    
    
    
    11.7General and administrative
    
    
    19.9
    
    
    
    23.8
    
    
    
    43.8Depreciation and amortization
    
    
    3.8
    
    
    
    2.9
    
    
    
    4.6Loss and loss adjustment expenses
    
    
    0.1
    
    
    
    3.6
    
    
    
    22.5Insurance acquisition costs and other operating expenses
    
    
    0.2
    
    
    
    2.5
    
    
    
    16.9107.1
    
    
    
    99.1
    
    
    
    99.5Operating income (loss)
    
    
    (7.1
    )
    
    
    0.9
    
    
    
    0.5Other income (expense), net
    
    
    (1.2
    )
    
    
    3.3
    
    
    
    15.3Income (loss) before income taxes
    
    
    (8.3
    )
    
    
    4.2
    
    
    
    15.8Provision for income taxes
    
    
    1.0
    
    
    
    0.3
    
    
    
    4.1Net income (loss)
    
    
    (9.3
    )%
    
    
    3.9
    %
    
    
    11.7
    %
 Business Segment Information
    Travel
    
    CorporateCruise
    
    Marine
    
    and Events
    
    and Other
    
    Total2007:Revenues
    
    $
    148,691
    
    
    $
    123,221
    
    
    $
    14,511
    
    
    $
    582
    
    
    $
    287,005Operating income (loss)
    
    
    (24,045
    )
    
    
    8,567
    
    
    
    1,467
    
    
    
    (6,421
    )
    
    
    (20,432
    )Depreciation and amortization
expense
    
    
    (9,668
    )
    
    
    (963
    )
    
    
    (265
    )
    
    
    (114
    )
    
    
    (11,010
    )Interest and dividend income
    
    
    963
    
    
    
    152
    
    
    
    486
    
    
    
    2,024
    
    
    
    3,625Interest expense
    
    
    (4,044
    )
    
    
    (370
    )
    
    
    
    
    
    
    (2,916
    )
    
    
    (7,330
    )Equity in net loss and management
fees received from investments
accounted for by the equity method
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    (231
    )
 32




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##### Table of Contents



Travel
    
    CorporateCruise
    
    Marine
    
    and Events
    
    and Other
    
    TotalImpairment loss in investment in
affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165
    )
    
    
    (165
    )Provision (benefit) for income taxes
    
    
    (2,977
    )
    
    
    520
    
    
    
    3,657
    
    
    
    1,768
    
    
    
    2,968Capital expenditures for property,
equipment and intangible assets
    
    
    (20,019
    )
    
    
    (1,290
    )
    
    
    (297
    )
    
    
    (872
    )
    
    
    (22,478
    )Goodwill
    
    
    
    
    
    
    2,906
    
    
    
    6,275
    
    
    
    
    
    
    
    9,181Other intangibles, net
    
    
    8,431
    
    
    
    2,721
    
    
    
    
    
    
    
    
    
    
    
    11,152Total assets
    
    
    251,196
    
    
    
    72,979
    
    
    
    12,453
    
    
    
    39,861
    
    
    
    376,4892006:Revenues
    
    $
    75,667
    
    
    $
    46,614
    
    
    $
    13,143
    
    
    $
    8,848
    
    
    $
    144,272Operating income (loss)
    
    
    2,783
    
    
    
    3,567
    
    
    
    1,036
    
    
    
    (6,120
    )
    
    
    1,266Depreciation and amortization
expense
    
    
    (3,355
    )
    
    
    (554
    )
    
    
    (283
    )
    
    
    (32
    )
    
    
    (4,224
    )Interest and dividend income
    
    
    364
    
    
    
    
    
    
    
    560
    
    
    
    2,899
    
    
    
    3,823Interest expense
    
    
    (3,349
    )
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (3,500
    )Equity in net income (loss) and
management fees received from
investments accounted for by the
equity method
    
    
    
    
    
    
    (246
    )
    
    
    264
    
    
    
    
    
    
    
    18Provision (benefit) for income taxes
    
    
    99
    
    
    
    1,330
    
    
    
    (242
    )
    
    
    (844
    )
    
    
    343Capital expenditures for property,
equipment and intangible assets
    
    
    (3,109
    )
    
    
    (293
    )
    
    
    (427
    )
    
    
    (4
    )
    
    
    (3,833
    )Goodwill
    
    
    
    
    
    
    2,906
    
    
    
    6,275
    
    
    
    
    
    
    
    9,181Other intangibles
    
    
    
    
    
    
    3,409
    
    
    
    
    
    
    
    
    
    
    
    3,409Total assets
    
    
    126,521
    
    
    
    50,500
    
    
    
    15,189
    
    
    
    63,710
    
    
    
    255,9202005:Revenues
    
    $
    
    
    
    $
    758
    
    
    $
    14,726
    
    
    $
    11,456
    
    
    $
    26,940Operating income (loss)
    
    
    
    
    
    
    (61
    )
    
    
    2,550
    
    
    
    (2,365
    )
    
    
    124Depreciation and amortization
expense
    
    
    
    
    
    
    (206
    )
    
    
    (997
    )
    
    
    (29
    )
    
    
    (1,232
    )Interest and dividend income
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    2,664
    
    
    
    3,053Interest expense
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Equity in net income (loss) and
management fees received from
investments accounted for by the
equity method
    
    
    
    
    
    
    (113
    )
    
    
    1,162
    
    
    
    
    
    
    
    1,049Provision (benefit) for income taxes
    
    
    
    
    
    
    (72
    )
    
    
    1,501
    
    
    
    (318
    )
    
    
    1,111Capital expenditures for property,
equipment and intangible assets
    
    
    
    
    
    
    (4,392
    )
    
    
    (106
    )
    
    
    (42
    )
    
    
    (4,540
    )Goodwill
    
    
    
    
    
    
    2,721
    
    
    
    6,275
    
    
    
    
    
    
    
    8,996Other intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,325
    
    
    
    1,325Total assets
    
    
    
    
    
    
    5,947
    
    
    
    13,625
    
    
    
    115,211
    
    
    
    134,783
 Results for Year Ended December 31, 2007 Compared Year Ended December 31, 2006
 Revenue
  33




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##### Table of Contents



Cruise Operating Expenses
   Cost of Marine Revenue
  Selling and Tour Promotion
   34




---



##### Table of Contents



General and Administrative Expenses
   Depreciation and Amortization
   Loss and Loss Adjustment Expenses
  Insurance Acquisition Costs and Other Operating Expenses
  Operating Income (Loss)
    Other Income (Expense)
 Empress of the North
 Income Taxes
  35




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##### Table of Contents



Net Income (Loss)
  Results for Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 Revenue
  Cruise Operating Expenses
  Cost of Marine Revenue
  Selling and Tour Promotion
  General and Administrative Expenses
  Depreciation and Amortization
  Loss and Loss Adjustment Expenses
  36




---



##### Table of Contents



Insurance Acquisition Costs and Other Operating Expenses
  Operating Income
  Other Income
 Empress of the North
 Income Taxes
  Net Income
  Liquidity and Capital Resources
    37




---



##### Table of Contents



Columbia Queen Columbia Queen Columbia Queen
 Executive Explorer Contessa
    38




---



##### Table of Contents



Record Date
    
    Payment Date
    
    Dividend Amount2007:March 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,0842006:February 20, 2006
    
    March 2, 2006
    
    $
    1,050May 22, 2006
    
    June 1, 2006
    
    
    1,065August 16, 2006
    
    August 31, 2006
    
    
    1,072November 14, 2006
    
    November 28, 2006
    
    
    1,085
      39




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##### Table of Contents



Disclosures About Contractual Obligations and Commercial Commitments
  Payments Due by Period(dollars in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsContractual Obligations:Long-term debt obligations  principal*
    
    $
    169,542
    
    
    $
    5,479
    
    
    $
    10,403
    
    
    $
    105,542
    
    
    $
    48,118Long-term debt obligations  interest
    
    
    92,841
    
    
    $
    7,509
    
    
    $
    14,250
    
    
    $
    13,089
    
    
    $
    57,993Operating leases
    
    
    5,073
    
    
    
    2,570
    
    
    
    2,364
    
    
    
    137
    
    
    
    2Total contractual cash obligations
    
    $
    267,456
    
    
    $
    15,558
    
    
    $
    27,017
    
    
    $
    118,768
    
    
    $
    106,113
 
   Off-Balance Sheet Transactions
  Forward-Looking Statements
  
    
    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;
 40




---



##### Table of Contents




    
    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.
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
  Foreign Currency Exchange Risk
  Fuel Price Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  41




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##### Table of Contents



Item 9A. Controls and Procedures
    42




---



##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
    43




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal ControlIntegrated Framework
       /s/ Ernst & Young LLP 
 44




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##### Table of Contents



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  45




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##### Table of Contents



PART IV
 
 Item 15. Exhibit, Financial Statement Schedules
  (a) (1)
    
    Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    47Consolidated Balance Sheets at December 31, 2007 and 2006
    
    
    48Consolidated Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
    
    
    49Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2007, 2006 and 2005
    
    
    50Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    51Notes to Consolidated Financial Statements
    
    
    53(a) (2)
    
    Consolidated Financial Statement Schedules:Schedule II  Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 2007, 2006 and 2005
    
    
    90All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.(a) (3)
    
    Financial Statements of Incentive Travel, LLC:Report of Independent Registered Public Accounting Firm
    
    
    91Balance Sheets at December 31, 2005 and 2004 (unaudited)
    
    
    92Statements of Income for the years ended December 31, 2005, 2004 (unaudited) and 2003
    
    
    93Statements of Changes in Members Equity for the years ended December 31, 2005,
2004 (unaudited) and 2003
    
    
    94Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    95Notes to Financial Statements
    
    
    96(a) (4)
    
    Exhibits:The exhibits listed on the accompanying Exhibit Index are furnished or filed as part of
this Form 10-K.
 46




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payment
 Internal ControlIntegrated Framework
 /s/ Ernst & Young LLP 
 47




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##### Table of Contents



Ambassadors International, Inc.
 
 Consolidated Balance Sheets
  (in thousands, except share data)
 December 31,2007
    
    
    2006Assets:Current assets:Cash and cash equivalents
    
    $
    21,998
    
    
    $
    8,246Restricted cash
    
    
    31,084
    
    
    
    11,127Available-for-sale securities
    
    
    2,514
    
    
    
    37,807Accounts and other receivables, net of allowance of $2,332 and
$1,046 in 2007 and 2006, respectively
    
    
    40,798
    
    
    
    25,077Costs in excess of billings on construction contracts
    
    
    8,410
    
    
    
    7,061Premiums receivable
    
    
    10,188
    
    
    
    14,549Deferred policy acquisition costs
    
    
    
    
    
    
    330Reinsurance recoverable
    
    
    1,148
    
    
    
    2,152Prepaid reinsurance premiums
    
    
    
    
    
    
    252Inventory
    
    
    5,751
    
    
    
    3,383Deferred income taxes
    
    
    1,262
    
    
    
    1,606Prepaid costs and other current assets
    
    
    8,530
    
    
    
    9,018Total current assets
    
    
    131,683
    
    
    
    120,608Property, vessels and equipment, net
    
    
    219,793
    
    
    
    118,630Goodwill
    
    
    9,181
    
    
    
    9,181Other intangibles, net
    
    
    11,152
    
    
    
    3,409Deferred income taxes
    
    
    
    
    
    
    297Other assets
    
    
    4,680
    
    
    
    3,795Total assets
    
    $
    376,489
    
    
    $
    255,920Liabilities:Current liabilities:Accounts payable
    
    $
    36,564
    
    
    $
    18,270Passenger and participant deposits
    
    
    47,067
    
    
    
    17,622Accrued expenses
    
    
    16,175
    
    
    
    10,656Billings in excess of costs on construction contracts
    
    
    13,108
    
    
    
    4,334Loss and loss adjustment expense reserves
    
    
    6,674
    
    
    
    11,826Unearned premiums
    
    
    
    
    
    
    1,220Deferred gain on retroactive reinsurance
    
    
    
    
    
    
    19Current portion of long term debt
    
    
    5,479
    
    
    
    4,417Total current liabilities

    
    
    125,067
    
    
    
    68,364Long term passenger and participant deposits
    
    
    35
    
    
    
    40Long term deferred tax liabilities
    
    
    1,676
    
    
    
    Long term
debt, net of current portion and net of discount of $2,479 and $0 in
2007 and 2006, respectively
    
    
    161,584
    
    
    
    71,779Total liabilities
    
    
    288,362
    
    
    
    140,183Commitments and contingencies (Note 12)Stockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common
stock, $.01 par value; 40,000,000 and 20,000,000 shares authorized in
2007 and 2006, respectively;
10,888,655 and 10,838,179 shares issued and outstanding in 2007 and
2006, respectively
    
    
    108
    
    
    
    107Additional paid-in capital
    
    
    97,634
    
    
    
    97,050Retained earnings (accumulated deficit)
    
    
    (11,170
    )
    
    
    17,877Accumulated other comprehensive income
    
    
    1,555
    
    
    
    703Total stockholders equity
    
    
    88,127
    
    
    
    115,737Total liabilities and stockholders equity
    
    $
    376,489
    
    
    $
    255,920
 See Notes to Consolidated Financial Statements.
 48




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##### Table of Contents



Ambassadors International, Inc.
 
 Consolidated Statements of Operations
  (in thousands, except per share data)
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:Passenger ticket revenue
    
    $
    131,796
    
    
    $
    67,451
    
    
    $
    Onboard and other cruise revenue
    
    
    16,895
    
    
    
    8,216
    
    
    
    Marine revenue
    
    
    123,221
    
    
    
    46,614
    
    
    
    758Travel, incentive and event related
    
    
    14,511
    
    
    
    13,143
    
    
    
    14,726Net insurance premiums earned
    
    
    582
    
    
    
    8,848
    
    
    
    11,456287,005
    
    
    
    144,272
    
    
    
    26,940Costs and operating expenses:Cruise operating expenses:Compensation and benefits
    
    
    27,696
    
    
    
    12,016
    
    
    
    Passenger expenses
    
    
    13,420
    
    
    
    6,851
    
    
    
    Materials and services
    
    
    46,578
    
    
    
    18,326
    
    
    
    Repairs and maintenance
    
    
    17,310
    
    
    
    2,199
    
    
    
    Commissions and other cruise operating expenses
    
    
    13,248
    
    
    
    9,551
    
    
    
    118,252
    
    
    
    48,943
    
    
    
    Cost of marine revenue
    
    
    94,029
    
    
    
    34,516
    
    
    
    Selling and tour promotion
    
    
    25,980
    
    
    
    12,189
    
    
    
    3,144General and administrative
    
    
    57,140
    
    
    
    34,321
    
    
    
    11,826Depreciation and amortization
    
    
    11,010
    
    
    
    4,224
    
    
    
    1,232Loss and loss adjustment expenses
    
    
    387
    
    
    
    5,249
    
    
    
    6,051Insurance acquisition costs and other operating expenses
    
    
    639
    
    
    
    3,564
    
    
    
    4,563307,437
    
    
    
    143,006
    
    
    
    26,816Operating income (loss)
    
    
    (20,432
    )
    
    
    1,266
    
    
    
    124Other income (expense):Interest and dividend income
    
    
    3,625
    
    
    
    3,823
    
    
    
    3,053Realized gain (loss) on sale of available-for-sale securities
    
    
    (48
    )
    
    
    1,085
    
    
    
    34Interest expense
    
    
    (7,330
    )
    
    
    (3,500
    )
    
    
    (5
    )Other income, net (Note 10)
    
    
    274
    
    
    
    3,296
    
    
    
    1,047(3,479
    )
    
    
    4,704
    
    
    
    4,129Income (loss) before income taxes
    
    
    (23,911
    )
    
    
    5,970
    
    
    
    4,253Provision for income taxes
    
    
    2,968
    
    
    
    343
    
    
    
    1,111Net income (loss)
    
    $
    (26,879
    )
    
    $
    5,627
    
    
    $
    3,142Earnings (loss) per share:Basic
    
    $
    (2.48
    )
    
    $
    0.53
    
    
    $
    0.30Diluted
    
    $
    (2.48
    )
    
    $
    0.49
    
    
    $
    0.30Weighted-average common shares outstanding:Basic
    
    
    10,838
    
    
    
    10,668
    
    
    
    10,321Diluted
    
    
    10,838
    
    
    
    11,445
    
    
    
    10,597
 See Notes to Consolidated Financial Statements.
 49




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##### Table of Contents



Ambassadors International, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
  (in thousands, except share data)
 Retained
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    (Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    TotalBalance at December 31, 2004
    
    
    9,974,922
    
    
    $
    100
    
    
    $
    87,379
    
    
    $
    17,514
    
    
    $
    (167
    )
    
    $
    104,826Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,142
    
    
    
    
    
    
    
    3,142Other comprehensive loss:Marketable securities, net of tax
benefit of $191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (335
    )
    
    
    (335
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,807Stock options exercised
    
    
    275,634
    
    
    
    2
    
    
    
    1,476
    
    
    
    
    
    
    
    
    
    
    
    1,478Issuance of restricted stock
    
    
    80,000
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    412Issuance of common stock
    
    
    184,717
    
    
    
    2
    
    
    
    2,718
    
    
    
    
    
    
    
    
    
    
    
    2,720Tax benefit associated with stock grants
and exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    1,117Dividends ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,134
    )
    
    
    
    
    
    
    (4,134
    )Balance at December 31, 2005
    
    
    10,515,273
    
    
    
    105
    
    
    
    93,101
    
    
    
    16,522
    
    
    
    (502
    )
    
    
    109,226Comprehensive income (loss):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,627
    
    
    
    
    
    
    
    5,627Other comprehensive loss:Foreign currency translation, net of
tax benefit of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768
    
    
    
    768Marketable securities, net of tax
benefit of $271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    437Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,832Stock options exercised
    
    
    265,906
    
    
    
    3
    
    
    
    2,271
    
    
    
    
    
    
    
    
    
    
    
    2,274Issuance of restricted stock
    
    
    69,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reclassification upon adoption of SFAS No.
123(R)
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of restricted stock
    
    
    (12,000
    )
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    (55
    )Amortization of stock options and
restricted stock expense
    
    
    
    
    
    
    
    
    
    
    1,732
    
    
    
    
    
    
    
    
    
    
    
    1,732Dividends ($0.40 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,272
    )
    
    
    
    
    
    
    (4,272
    )Balance at December 31, 2006
    
    
    10,838,179
    
    
    
    107
    
    
    
    97,050
    
    
    
    17,877
    
    
    
    703
    
    
    $
    115,737Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,879
    )
    
    
    
    
    
    
    (26,879
    )Other comprehensive loss:Foreign currency translation, net of tax
benefit of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780
    
    
    
    780Marketable securities, net of tax
benefit of $45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    72Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,027
    )Stock options exercised
    
    
    60,626
    
    
    
    1
    
    
    
    648
    
    
    
    
    
    
    
    
    
    
    
    649Issuance of restricted stock
    
    
    95,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of restricted stock
    
    
    (54,000
    )
    
    
    
    
    
    
    (372
    )
    
    
    
    
    
    
    
    
    
    
    (372
    )Shares repurchased and cancelled
    
    
    (51,150
    )
    
    
    
    
    
    
    (1,576
    )
    
    
    
    
    
    
    
    
    
    
    (1,576
    )Restricted stock compensation
    
    
    
    
    
    
    
    
    
    
    1,158
    
    
    
    
    
    
    
    
    
    
    
    1,158Amortization of stock options and
restricted stock expense
    
    
    
    
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    
    
    
    
    726Dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,168
    )
    
    
    
    
    
    
    (2,168
    )Balance at December 31, 2007
    
    
    10,888,655
    
    
    $
    108
    
    
    $
    97,634
    
    
    $
    (11,170
    )
    
    $
    1,555
    
    
    $
    88,127
 See Notes to Consolidated Financial Statements.
 50




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##### Table of Contents



Ambassadors International, Inc.
 
 Consolidated Statements of Cash Flows
  (in thousands)
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (26,879
    )
    
    $
    5,627
    
    
    $
    3,142Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    11,010
    
    
    
    4,224
    
    
    
    1,232Provision for losses from uncollectible receivables
    
    
    1,438
    
    
    
    1,078
    
    
    
    37Foreign currency translation
    
    
    780
    
    
    
    972
    
    
    
    Undistributed (earnings) losses from equity investments
    
    
    231
    
    
    
    (358
    )
    
    
    187Share-based compensation amortization
    
    
    1,512
    
    
    
    1,677
    
    
    
    412Amortization of debt discount and deferred offering costs
    
    
    496
    
    
    
    
    
    
    
    Write-off of intangible assets
    
    
    143
    
    
    
    
    
    
    
    Impairment loss in investment
    
    
    165
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    2,667
    
    
    
    395
    
    
    
    146Loss (gain) on sale of available-for-sale securities
    
    
    48
    
    
    
    (1,085
    )
    
    
    Loss on disposal of fixed assets
    
    
    66
    
    
    
    
    
    
    
    Change in assets and liabilities, net of effects of business
acquisitions and dispositions:Accounts and other receivables
    
    
    (17,154
    )
    
    
    (7,273
    )
    
    
    1,125Costs in excess of billings on construction contracts
    
    
    (1,349
    )
    
    
    448
    
    
    
    Premiums receivable
    
    
    4,361
    
    
    
    (414
    )
    
    
    (4,095
    )Deferred policy acquisition costs
    
    
    330
    
    
    
    1,338
    
    
    
    90Reinsurance recoverable
    
    
    1,004
    
    
    
    (895
    )
    
    
    340Prepaid insurance premiums
    
    
    252
    
    
    
    843
    
    
    
    112Inventory
    
    
    (1,403
    )
    
    
    (1,181
    )
    
    
    Prepaid costs and other current assets
    
    
    1,964
    
    
    
    (1,545
    )
    
    
    293Other assets
    
    
    (1,199
    )
    
    
    (387
    )
    
    
    (503
    )Accounts payable and accrued and other expenses
    
    
    17,381
    
    
    
    6,435
    
    
    
    896Passenger and participant deposits
    
    
    6,474
    
    
    
    (6,943
    )
    
    
    (1,072
    )Billings in excess of costs on construction contracts
    
    
    8,774
    
    
    
    (2,025
    )
    
    
    Loss and loss adjustment expense reserves
    
    
    (5,152
    )
    
    
    2,805
    
    
    
    2,887Unearned premiums
    
    
    (1,220
    )
    
    
    (4,559
    )
    
    
    (630
    )Deferred gain on retroactive reinsurance
    
    
    (19
    )
    
    
    (132
    )
    
    
    (371
    )Other liabilities
    
    
    
    
    
    
    
    
    
    
    (114
    )Net cash provided by (used in) operating activities
    
    
    4,721
    
    
    
    (955
    )
    
    
    4,114Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    35,668
    
    
    
    61,220
    
    
    
    54,831Purchase of available-for-sale securities
    
    
    (306
    )
    
    
    (20,525
    )
    
    
    (74,331
    )Restricted cash
    
    
    (20,000
    )
    
    
    (9,600
    )
    
    
    Purchase of other investments
    
    
    
    
    
    
    (696
    )
    
    
    (497
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    (10,927
    )
    
    
    (27,085
    )
    
    
    (1,485
    )Purchase of property and equipment
    
    
    (22,478
    )
    
    
    (2,636
    )
    
    
    (150
    )Proceeds from disposal of assets
    
    
    34
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (18,009
    )
    
    
    678
    
    
    
    (21,632
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    649
    
    
    
    2,274
    
    
    
    1,478Proceeds from issuance of convertible note, net of offering
costs of $3,299
    
    
    93,701
    
    
    
    
    
    
    
    Proceeds from line of credit
    
    
    877
    
    
    
    
    
    
    
    Dividends paid on common stock
    
    
    (2,168
    )
    
    
    (4,272
    )
    
    
    (4,134
    )Purchase and retirement of common stock
    
    
    (1,576
    )
    
    
    
    
    
    
    Payment of long term debt
    
    
    (64,443
    )
    
    
    (6,443
    )
    
    
    (1,584
    )Restricted cash
    
    
    
    
    
    
    (752
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    27,040
    
    
    
    (9,193
    )
    
    
    (4,240
    )
 See Notes to Consolidated Financial Statements.
 51




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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Cash Flows (continued from previous page)
  (in thousands)
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Net increase (decrease) in cash and cash equivalents
    
    $
    13,752
    
    
    $
    (9,470
    )
    
    $
    (21,758
    )Cash and cash equivalents, beginning of year
    
    
    8,246
    
    
    
    17,716
    
    
    
    39,474Cash and cash equivalents, end of year
    
    $
    21,998
    
    
    $
    8,246
    
    
    $
    17,716Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    5,552
    
    
    $
    2,541
    
    
    $
    Cash paid for income taxes
    
    
    356
    
    
    
    994
    
    
    
    899
 See Notes 1 and 2 for non-cash investing and financing activities.
 See Notes to Consolidated Financial Statements.
 52




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##### Table of Contents



Ambassadors International, Inc.
 
 Notes to Consolidated Financial Statements
  1. Description of the Company and Summary of Significant Accounting Policies
 The Company
    
    
    Cruise  this segment operates the Majestic America Line and Windstar Cruises. Majestic
America Line consists of a North American river and coastal cruise company, American West
Steamboat Company (American West). ACG acquired American West on January 13, 2006 and the
cruise-related assets of Delta Queen Steamboat Company, Inc. (Delta Queen) on April 25,
2006. American West operates a seven-ship fleet which includes the 223-passenger Empress of
the North, the 142-passenger Queen of the West, the 436-passenger American Queen®, the
412-passenger Mississippi Queen® and the 176-passenger Delta Queen®. On June 12, 2006, ACG
acquired the 48-passenger Executive Explorer, renamed Contessa, and on October 13, 2006, ACG
acquired the 150-passenger Columbia Queen. On April 2, 2007, ACG, through its wholly-owned
subsidiary, Ambassadors International Cruise Group, LLC (AICG), acquired Windstar Sail Cruises
Limited (Windstar Cruises), an international-flagged small ship cruise line that operates
a three-ship fleet that includes the 312-passenger Wind Surf, 148-passenger Wind Spirit, and
148-passenger Wind Star.The 2008 cruise schedule includes cruises through Alaskas Inside Passage onboard the Empress
of the North, and on the Columbia and Snake Rivers onboard the Empress of the North, Columbia
Queenand Queen of the West. The Company also offers historical cruises onboard the American
Queen®, Delta Queen®and Mississippi Queen® on many American
rivers, including the Mississippi, Ohio, Tennessee, Cumberland and Arkansas Rivers, with stops
at many American historic cities, battle grounds and estates, including New Orleans, Memphis
and St. Louis. Each of the Companys cruises offers an onboard historian and naturalist and
shore excursions to enhance passengers understanding of the wildlife, history and cultures of
the areas traveled.The American Queen® was not in operation for the 2006 cruise season. The
Mississippi Queen® has not been in operation since it was placed into drydock in
November 2006. The Contessawill not be in operation for the 2008 cruise season and 2008 will
also be the farewell season for theDelta Queen®. The Company anticipates operating
the remaining five ships in the 2008 cruise season under the Majestic America Line. Since
April 2007, the Companys cruise schedule has also included destinations in the Greek Isles,
Caribbean Islands and Costa Rica and cruises on the Mediterranean, the Adriatic, and the
Panama Canal on one of the three Windstar Cruises ships.
    
    Marine this segment includes marina design, management and development. It also
includes BellPort Group, Inc. (BellPort), acquired in February 2005, which offers shipyard
operations, marina consulting and marina construction services. On July 21, 2006, the
Company acquired Bellingham Marine, a marina design and construction company that operates
throughout the world.
 53




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  
    
    Travel and Events this segment develops, markets and manages meetings and incentive
programs for a nationwide roster of corporate clients utilizing incentive travel,
merchandise award programs and corporate meeting services. It provides comprehensive hotel
reservation, registration and travel services for meetings, conventions, expositions and
trade shows. It also develops, markets and distributes event portfolio management
technology solutions for corporations and large associations.
    
    Corporate and Other This segment consists of general corporate assets (primarily cash
and cash equivalents and investments), the operations of Cypress Re and other activities
which are not directly related to the Companys cruise, marine or travel and events
segments. Cypress Re reinsures property and casualty risks written by licensed United States
insurers. The lines of business that are currently being reinsured include commercial auto
liability, commercial physical damage and workers compensation. These risks are associated
with members of highly selective affinity groups or associations.
 Basis of Consolidation
  Estimates
  Reclassifications
  Credit Risk
   54




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
    Cash and Cash Equivalents
  Restricted Cash
    Available-for-Sale Securities
   55




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Accumulated Other Comprehensive Income (Loss)
  Comprehensive Income (Loss)
  Other Investments
  Property,
Vessel and Equipment
   Drydocking
  Long-Lived Assets Including Intangibles
  56




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
    Reserve for Loss and Loss Adjustment Reserves
  Foreign Currency Transactions
  Revenue Recognition
  Passenger Ticket Revenue and Onboard and Other Cruise Revenues
  57




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Marine Revenue
       58




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Travel, Incentive and Event Related
   Net Insurance Premiums Earned
   License Fees
  Reinsurance
   Selling and Tour Promotion Expenses
  59




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Income Taxes
  Earnings (Loss) Per Share
  Accounting for Stock-Based Compensation Plans
     Net income, as reported
    
    $
    3,142Add: stock-based compensation expense included in net income 
as reported, net of related tax effects
    
    
    245Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (514
    )Net income pro forma
    
    $
    2,873Earnings per share  basicAs reported
    
 $
0.30Pro forma
    
    
    0.28Earnings per share  dilutedAs reported
    
    $
    0.30Pro forma
    
    
    0.27
 60




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
   2007
    
    2006
    
    2005Dividend yield
    
    
    0.0
    %
    
    
    0.9
    %
    
    
    2.6
    %Expected volatility
    
    
    53.0
    %
    
    
    53.0
    %
    
    
    54.0
    %Risk free interest rates
    
    
    3.7
    %
    
    
    4.8
    %
    
    
    4.4
    %Expected option lives
    
    4.0 years
    
    4.0 years
    
    4.0 yearsWeighted-average fair value of options granted
    
    $
    6.66
    
    
    $
    11.31
    
    
    $
    5.30
   61




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Fair Value of Financial Instruments
  2007
    
    2006Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    21,998
    
    
    $
    21,998
    
    
    $
    8,246
    
    
    $
    8,246Restricted cash
    
    
    31,084
    
    
    
    31,084
    
    
    
    11,127
    
    
    
    11,127Available-for-sale securities
    
    
    2,514
    
    
    
    2,514
    
    
    
    37,807
    
    
    
    37,807Debt
    
    
    167,063
    
    
    
    169,542
    
    
    
    76,196
    
    
    
    76,196
  Cash and Cash Equivalents
 Restricted Cash
 Available-for-Sale Securities
 Debt
 Dividends Declared
  Record Date
    
    Payment Date
    
    Dividend Amount2007:March 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,0842006:February 20, 2006
    
    March 2, 2006
    
    $
    1,050May 22, 2006
    
    June 1, 2006
    
    
    1,065August 16, 2006
    
    August 31, 2006
    
    
    1,072November 14, 2006
    
    November 28, 2006
    
    
    1,085
 62




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Record Date
    
    Payment Date
    
    Dividend Amount2005:February 28, 2005
    
    March 15, 2005
    
    $
    1,016May 31, 2005
    
    June 15, 2005
    
    
    1,034August 25, 2005
    
    September 8, 2005
    
    
    1,042November 18, 2005
    
    December 2, 2005
    
    
    1,042
 Business Segments
  Recent Accounting Pronouncements
     63




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
    2. Business Acquisitions and Investments
 Incentive Travel, LLC (ITI)
   64




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  BellPort
     American West
  65




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
    Cash and cash equivalents
    
    $
    3,617Accounts receivable
    
    
    238Prepaid and other current assets
    
    
    596Inventory
    
    
    236Vessels and equipment
    
    
    48,562Total assets acquired
    
    
    53,249Passenger deposits
    
    
    (3,824
    )Accounts payable and accrued and other expenses
    
    
    (2,645
    )Long term debt
    
    
    (41,526
    )Total liabilities assumed
    
    
    (47,995
    )Net assets acquired
    
    $
    5,254
 Delta Queen
 American Queen ® Delta Queen ® Mississippi Queen ®
  66




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
   Cash and cash equivalents
    
    $
    61Accounts receivable
    
    
    149Prepaid and other current assets
    
    
    2,609Vessels and equipment
    
    
    51,332Total assets acquired
    
    
    54,151Passenger deposits
    
    
    (14,652
    )Accounts payable and accrued and other expenses
    
    
    (2,258
    )Long term debt
    
    
    (35,464
    )Total liabilities assumed
    
    
    (52,374
    )Net assets acquired
    
    $
    1,777
 Columbia Queen
 Columbia Queen Columbia Queen Columbia Queen
 Contessa
 Executive Explorer Contessa
 Bellingham Marine
  67




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
   Cash and cash equivalents
    
    $
    1,330Accounts receivable
    
    
    15,519Costs in excess of billings on construction contracts
    
    
    7,509Prepaid and other current assets
    
    
    1,000Inventory
    
    
    1,795Property and equipment
    
    
    6,898Other intangibles
    
    
    1,812Other assets
    
    
    294Total assets acquired
    
    
    36,157Billings in excess of costs on construction contracts
    
    
    (6,359
    )Accounts payable and accrued and other expenses
    
    
    (10,881
    )Deferred income taxes
    
    
    (683
    )Other liabilities
    
    
    (501
    )Long term debt
    
    
    (4,237
    )Total liabilities assumed
    
    
    (22,661
    )Net assets acquired
    
    $
    13,496
 Windstar Cruises
  68




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
   Cash and cash equivalents
    
    $
    1,137Accounts receivable
    
    
    5Prepaid and other current assets
    
    
    811Inventory
    
    
    965Vessels and equipment
    
    
    89,497Intangible assets
    
    
    8,610Total assets acquired
    
    
    101,025Passenger deposits
    
    
    (22,966
    )Accounts payable and accrued and other expenses
    
    
    (5,995
    )Long term debt
    
    
    (60,000
    )Total liabilities assumed
    
    
    (88,961
    )Net assets acquired
    
    $
    12,064
   Pro FormaPro Forma
    
    
    Bellingham
    
    
    Pro Forma
    
    
    Pro FormaAs Reported
    
    
    Delta Queen
    
    
    Marine
    
    
    Windstar
    
    
    CombinedRevenues
    
    $
    144,419
    
    
    $
    3,124
    
    
    $
    41,253
    
    
    $
    75,107
    
    
    $
    263,903Net income (loss)
    
    $
    5,627
    
    
    $
    (3,528
    )
    
    $
    (1,289
    )
    
    $
    2,809
    
    
    $
    3,619Earnings per share  basic
    
    $
    0.53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.34Earnings per share  diluted
    
    $
    0.49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.32
   Pro FormaWindstar
    
    
    Pro FormaAs Reported
    
    
    Cruises
    
    
    CombinedRevenues
    
    $
    287,005
    
    
    $
    17,463
    
    
    $
    304,468Net income (loss)
    
    $
    (26,879
    )
    
    $
    1,080
    
    
    $
    (25,799
    )Earnings per share  basic
    
    $
    (2.48
    )
    
    
    
    
    
    $
    (2.39
    )Earnings per share  diluted
    
    $
    (2.48
    )
    
    
    
    
    
    $
    (2.39
    )
 3. Reinsurance
    69




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
        70




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
      2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    EarnedAssumed
    
    $
    (468
    )
    
    $
    752
    
    
    $
    6,315
    
    
    $
    10,874Ceded
    
    
    83
    
    
    
    (170
    )
    
    
    (1,183
    )
    
    
    (2,026
    )Net premiums
    
    $
    (385
    )
    
    $
    582
    
    
    $
    5,132
    
    
    $
    8,848
   2007
    
    
    2006Balance at January 1,
    
    $
    11,826
    
    
    $
    9,021Less reinsurance recoverables
    
    
    2,152
    
    
    
    1,257Net balance at January 1,
    
    
    9,674
    
    
    
    7,764Incurred related to:Amortization of deferred gain on retroactive reinsurance
    
    
    (19
    )
    
    
    (132
    )Current year
    
    
    568
    
    
    
    4,398Prior years
    
    
    (162
    )
    
    
    851Total incurred
    
    
    387
    
    
    
    5,117Paid related to:Current year
    
    
    (191
    )
    
    
    (1,084
    )Prior years
    
    
    (4,344
    )
    
    
    (2,123
    )Total paid
    
    
    (4,535
    )
    
    
    (3,207
    )Net balance at December 31,
    
    
    5,526
    
    
    
    9,674Plus reinsurance recoverable
    
    
    1,148
    
    
    
    2,152Balance at December 31,
    
    $
    6,674
    
    
    $
    11,826
 71




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  4. Available-for-Sale Securities
  Gross
    
    
    Gross
    
    
    Fair Value/Unrealized
    
    
    Unrealized
    
    
    CarryingCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2007:Debt securities:U.S. government and agency obligations
    
    $
    1,129
    
    
    $
    20
    
    
    $
    (10
    )
    
    $
    1,139Corporate bonds
    
    
    1,260
    
    
    
    12
    
    
    
    (25
    )
    
    
    1,2472,389
    
    
    
    32
    
    
    
    (35
    )
    
    
    2,386Interest receivable
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    128Total debt securities
    
    $
    2,517
    
    
    $
    32
    
    
    $
    (35
    )
    
    $
    2,514
 Gross
    
    
    Gross
    
    
    Fair Value/Unrealized
    
    
    Unrealized
    
    
    CarryingCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2006:Debt securities:U.S. government and agency obligations
    
    $
    17,330
    
    
    $
    3
    
    
    $
    (55
    )
    
    $
    17,278Corporate bonds
    
    
    18,643
    
    
    
    4
    
    
    
    (49
    )
    
    
    18,598State and political subdivisions
    
    
    1,278
    
    
    
    
    
    
    
    (9
    )
    
    
    1,26937,251
    
    
    
    7
    
    
    
    (113
    )
    
    
    37,145Interest receivable
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    662Total debt securities
    
    $
    37,913
    
    
    $
    7
    
    
    $
    (113
    )
    
    $
    37,807
  Less than
    
    
    Greater than12 Months
    
    
    12 Months
    
    
    TotalGross unrealized loss:U.S. government and agency obligations
    
    $
    (10
    )
    
    $
    
    
    
    $
    (10
    )Corporate bonds
    
    
    (9
    )
    
    
    (16
    )
    
    
    (25
    )$
    (19
    )
    
    $
    (16
    )
    
    $
    (35
    )
   72




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
   Year Ending December 31,2008
    
    
    2009Debt securities:U.S. government and agency obligations
    
    $
    625
    
    
    $
    514Corporate bonds
    
    
    555
    
    
    
    6921,180
    
    
    
    1,206Interest receivable
    
    
    111
    
    
    
    16Total debt securities
    
    $
    1,291
    
    
    $
    1,222Interest rate on debt securities
    
    
    4.56
    %
    
    
    1.00
    %
 5. Accounts Receivable
  2007
    
    
    2006Cruise
    
    $
    817
    
    
    $
    1,985Travel and events
    
    
    4,149
    
    
    
    4,070Marine
    
    
    37,969
    
    
    
    20,057Other
    
    
    195
    
    
    
    1143,130
    
    
    
    26,123Less allowance for doubtful accounts
    
    
    (2,332
    )
    
    
    (1,046
    )Total accounts receivable
    
    $
    40,798
    
    
    $
    25,077
  6. Inventory
  2007
    
    
    2006Marine construction materials
    
    $
    2,630
    
    
    $
    2,796Food, souvenirs and supplies
    
    
    2,390
    
    
    
    330Fuel
    
    
    731
    
    
    
    257$
    5,751
    
    
    $
    3,383
 73




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  7. Property, Vessels and Equipment
  2007
    
    
    2006Ships and vehicles
    
    $
    221,743
    
    
    $
    112,275Office furniture, fixtures and equipment
    
    
    9,130
    
    
    
    7,921Computer software and equipment
    
    
    5,409
    
    
    
    2,939Land
    
    
    1,765
    
    
    
    1,688Leasehold improvements
    
    
    683
    
    
    
    638Ship work in process
    
    
    70
    
    
    
    1,556238,800
    
    
    
    127,017Less accumulated depreciation and amortization
    
    
    (19,007
    )
    
    
    (8,387
    )$
    219,793
    
    
    $
    118,630
  8. Goodwill and Other Intangibles
  2007
    
    
    2006Goodwill, beginning of year
    
    $
    9,181
    
    
    $
    8,996Marine acquisition
    
    
    
    
    
    
    185Goodwill, end of year
    
    $
    9,181
    
    
    $
    9,181Other Intangibles:Trade names
    
    $
    9,980
    
    
    $
    2,523Management contracts
    
    
    853
    
    
    
    1,098Customer list
    
    
    717
    
    
    
    11,550
    
    
    
    3,621Less accumulated amortization
    
    
    (398
    )
    
    
    (212
    )Total other intangibles
    
    $
    11,152
    
    
    $
    3,409
  74




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  9. Long term Obligations
  2007
    
    
    2006Loans secured by ship mortgages at fixed rates varying from 2.3% to 6.5% due through
July 2028
    
    $
    69,743
    
    
    $
    73,973Secured note payable to bank at a fixed interest rate of 8.245%, due May 2010
    
    
    1,656
    
    
    
    1,907Amounts outstanding under $2.1 million secured lines of credit with an Australian bank
    
    
    926
    
    
    
    1243.75% Convertible Senior Notes, net of unamortized discount and offering costs of
$2,479 and $0, respectively
    
    
    94,521
    
    
    
    Equipment leases
    
    
    217
    
    
    
    192167,063
    
    
    
    76,196Less: current portion
    
    
    5,479
    
    
    
    4,417Non-current portion
    
    $
    161,584
    
    
    $
    71,779
  Loans Secured by Ship Mortgages
 Empress of the North
 American Queen ®
 Bellingham Marine Debt
   3.75% Convertible Senior Notes
  75




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
      Year Ended December 31,2008
    
    $
    5,4792009
    
    
    4,5962010
    
    
    5,8072011
    
    
    4,2672012
    
    
    101,275Thereafter
    
    
    48,118$
    169,542
 10. Other Income, net
  December 31,2007
    
    
    2006
    
    
    2005Non-compete agreement settlement (Note 2)
    
    $
    
    
    
    $
    2,750
    
    
    $
    Insurance proceeds received (Note 12)
    
    
    1,012
    
    
    
    516
    
    
    
    Foreign currency translation losses
    
    
    (228
    )
    
    
    
    
    
    
    Equity in earnings (loss) from unconsolidated entities and management fees
    
    
    (231
    )
    
    
    18
    
    
    
    1,049Impairment loss on investment in affiliates
    
    
    (165
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (114
    )
    
    
    12
    
    
    
    (2
    )$
    274
    
    
    $
    3,296
    
    
    $
    1,047
 76




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  11.
    
    Income TaxesPretax income (loss) summarized by region is as follows (in thousands):
 December 31,2007
    
    
    2006
    
    
    2005Domestic
    
    $
    (34,708
    )
    
    $
    5,307
    
    
    $
    4,253Foreign
    
    
    10,797
    
    
    
    663
    
    
    
    Total pretax income (loss)
    
    $
    (23,911
    )
    
    $
    5,970
    
    
    $
    4,253
 The income tax provision (benefit) included in the consolidated statements of operations is as
follows (in thousands):
 December 31,2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    (316
    )
    
    $
    (515
    )
    
    $
    416State
    
    
    253
    
    
    
    122
    
    
    
    (577
    )Foreign
    
    
    712
    
    
    
    380
    
    
    
    Total current
    
    
    649
    
    
    
    (13
    )
    
    
    (161
    )
 Deferred:Federal
    
    
    1,653
    
    
    
    644
    
    
    
    889State
    
    
    820
    
    
    
    (208
    )
    
    
    383Foreign
    
    
    (154
    )
    
    
    (80
    )
    
    
    Total deferred
    
    
    2,319
    
    
    
    356
    
    
    
    1,272Total income tax provision
    
    $
    2,968
    
    
    $
    343
    
    
    $
    1,111
 The reconciliation of U.S. statutory federal income tax expense to income tax provision (benefit)
on income (loss) before income taxes is as follows (in thousands):
 December 31,2007
    
    
    2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Provision (benefit) at the federal statutory rate
    
    $
    (8,130
    )
    
    
    34.0
    %
    
    $
    2,089
    
    
    
    35.0
    %
    
    $
    1,446
    
    
    
    34.0
    %Change in valuation allowance
    
    
    14,448
    
    
    
    (60.4
    )
    
    
    (2,134
    )
    
    
    (35.8
    )
    
    
    (338
    )
    
    
    (8.0
    )State income tax, net of federal benefit
    
    
    (982
    )
    
    
    4.1
    
    
    
    186
    
    
    
    3.1
    
    
    
    134
    
    
    
    3.2Tax exempt interest
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (0.1
    )
    
    
    (10
    )
    
    
    (0.2
    )Rate adjustment
    
    
    123
    
    
    
    (0.5
    )
    
    
    (163
    )
    
    
    (2.7
    )
    
    
    351
    
    
    
    8.3Reserve adjustment
    
    
    250
    
    
    
    (1.1
    )
    
    
    367
    
    
    
    6.2
    
    
    
    (559
    )
    
    
    (13.2
    )Foreign rate differential
    
    
    (3,113
    )
    
    
    13.0
    
    
    
    (34
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    Other permanent and return to provision items
    
    
    372
    
    
    
    (1.5
    )
    
    
    36
    
    
    
    0.7
    
    
    
    87
    
    
    
    2.0$
    2,968
    
    
    
    (12.4
    )%
    
    $
    343
    
    
    
    5.8
    %
    
    $
    1,111
    
    
    
    26.1
    %
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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Components of the net deferred tax assets and liabilities are as follows (in thousands):
 2007
    
    
    2006Deferred tax assets:Accrued vacation and compensation
    
    $
    2,169
    
    
    $
    1,666Unrealized loss on marketable securities
    
    
    4
    
    
    
    40Intangible assets
    
    
    1,645
    
    
    
    1,117Allowance for billing reserve
    
    
    967
    
    
    
    527Unearned premiums
    
    
    
    
    
    
    68Loss and loss adjustment expense reserves
    
    
    199
    
    
    
    281Deferred gain on loss portfolio transfers
    
    
    
    
    
    
    7Net operating loss carryforward
    
    
    19,909
    
    
    
    1,304Other
    
    
    380
    
    
    
    973Total deferred tax assets
    
    
    25,273
    
    
    
    5,983Valuation allowance for deferred tax assets
    
    
    (15,509
    )
    
    
    (656
    )Total deferred tax assets, net of valuation allowance
    
    
    9,764
    
    
    
    5,327Deferred tax liabilities:Deferred policy acquisition costs
    
    
    
    
    
    
    (115
    )Intangibles
    
    
    (773
    )
    
    
    Property and equipment
    
    
    (9,128
    )
    
    
    (3,050
    )Other
    
    
    (278
    )
    
    
    (259
    )Total deferred tax liabilities
    
    
    (10,179
    )
    
    
    (3,424
    )Net deferred tax assets
    
    $
    (415
    )
    
    $
    1,903
 At December 31, 2007, the Company has federal, state and foreign net operating loss (NOL)
carryforwards of $58.0 million, $67.8 million and, $1.8 million, respectively. The federal and
state NOL carryforwards begin to expire in 2011 and 2008, respectively. The foreign NOL
carryforwards do not expire. Utilization of these losses may be subject to an annual limitation
due to ownership change constraints set forth in the Internal Revenue Code of 1986 and similar
state tax provisions.The Company has recorded valuation allowances of $15.5 million and $0.7 million at December 31,
2007 and 2006, respectively, due to uncertainty related to the future utilization of certain
deferred tax assets. In 2007, the Company increased its valuation allowance related to deferred
tax assets by $14.9 million. Included in the $15.5 million valuation allowance established at
December 31, 2007 is a $0.5 million valuation allowance established against certain acquired
deferred tax assets, as discussed below. Based on all available positive and negative evidence
at December 31, 2007, the Company has concluded that the realizability of the net domestic
deferred tax assets does not meet the more likely than not threshold under SFAS 109.As a result of its recent acquisitions, the Company has recorded deferred tax assets and
liabilities for temporary basis differences that existed at the time of the acquisitions as well
as for purchase accounting reserves that have been established related to these acquisitions.
Valuation allowances have been established against certain of these acquired deferred tax assets.
Subsequent recognition of these acquired deferred tax assets (i.e., by elimination of that
valuation allowance) will be first applied to reduce the remaining balance of non-current
intangible assets related to that acquisition until exhausted, and then to reduce income tax
expense. At December 31, 2007, $0.5 million of the valuation allowance relates to acquired
deferred tax assets.During 2007, the Company adjusted its federal tax rate from 35% to 34% based on future projected
income.
 78




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when
effectively repatriated. U.S. income taxes and foreign withholding taxes were not provided on
undistributed earnings of foreign subsidiaries. The Company intends to reinvest these earnings
indefinitely in its foreign subsidiaries. It is not practical to determine the amount of
undistributed earnings or income tax payable in the event the Company repatriated all
undistributed foreign earnings. However, if these earnings were distributed to the U.S. in the
form of dividends
or otherwise, the Company would be subject to additional U.S. income taxes and foreign
withholding taxes, offset by an adjustment for foreign tax credits.In June 2006, the FASB issued FASB Interpretation (FIN) No. 48 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement 109. FIN 48 establishes a single model to
address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes
by prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition.The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company
recognized no adjustment in its balance of unrecognized tax benefits. As of January 1, 2007, the
date of adoption, the Companys unrecognized tax benefits totaled $0.6 million exclusive of
associated interest and penalties. Of this total, $0.1 million, if recognized, will reduce
non-current intangibles. The remaining unrecognized tax benefits, if recognized, will not affect
the effective tax rate due to the valuation allowance recorded against the deferred tax assets.The following table summarizes the changes to unrecognized tax benefits for the year ended
December 31, 2007:
 Balance at January 1, 2007
    
    $
    551Additions based on tax positions related to the current year
    
    
    44Additions based on tax positions of prior years
    
    
    Reductions for tax positions of prior years
    
    
    Settlements
    
    
    Reduction as a result of lapse of applicable statute of limitations
    
    
    (18
    )Balance at December 31, 2007
    
    $
    577
 The Company expects a $0.1 million decrease to its unrecognized tax benefits within the next 12
months due to the lapse of applicable statute of limitations.The Company is subject to United States federal income tax as well as income tax of multiple
state and foreign jurisdictions. With few exceptions, the Company is no longer subject to United
States federal income tax examinations for years before 2004; state and local income tax
examinations before 2003; and foreign income tax examinations before 2003.Currently the Company is not under Internal Revenue Service, state, local or foreign jurisdiction
tax examinations.
 The Companys continuing practice is to recognize potential accrued interest and penalties
related to unrecognized tax benefits within its global operations in its provision for income
taxes. In conjunction with the adoption of FIN 48, the Company recognized $0.2 million for the
accrual of interest and penalties on January 1, 2007. In the normal course of business, the
Company provides for uncertain tax positions and adjusts its
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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  unrecognized tax benefits, including
related interest and penalties. During 2007, some adjustments were made to interest and
penalties that were not significant. To the extent interest and penalties are not assessed with
respect to the uncertain tax positions, amounts accrued will be reduced and $28,000 will be
reflected as a reduction of the overall income tax provision and $0.2 million will reduce
non-current intangibles.
 At December 31, 2007, the Company had net operating loss carryforwards of $58.0 million and $67.8
million for federal and states, respectively, expiring at various dates through 2027.
Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual
limitation due to ownership change limitations that have occurred previously or that could occur
in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended, as well
as similar state and foreign provisions. These ownership changes may limit the
amount of the NOL and tax credit carryforwards that can be utilized annually to offset future
taxable income. The Company has not completed a study to assess whether a change of control has
occurred due to the significant complexity and cost associated with such study and that there
could be additional changes in control in the future. If the Company has experienced a change of
control, utilization of the Companys NOL and tax credit carryforwards would be subject to an
annual limitation under Section 382. Any limitation may result in expiration of a portion of the
carryforwards before utilization. Any carryforwards that will expire prior to utilization as a
result of such limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance. Due to the existence of the valuation allowance, future
changes in the Companys unrecognized tax benefits will not impact the Companys effective tax
rate.12.
    
    Commitments and ContingenciesLeasesThe Company leases office facilities and office equipment under non-cancelable operating leases.
Certain of the Companys leases have escalation clauses. The Companys obligations under
non-cancelable lease commitments end in 2013 and are as follows (in thousands):
 Year Ending December 31,:2008
    
    $
    2,5702009
    
    
    1,6592010
    
    
    7052011
    
    
    1232012
    
    
    14Thereafter
    
    
    2$
    5,073
 Total rent expense for the years ended December 31, 2007, 2006 and 2005 was $2.9 million, $1.8
million and $0.7 million, respectively.The Company entered into agreements to sublease office facilities in Newport Beach, California
and Boston, Massachusetts. Sublease rental income for the years ended December 31, 2007, 2006 and
2005 was $60,000, $105,000 and $247,000, respectively. Included in the sublease income are
amounts received from a related party of $60,000, $60,000 and $68,000 for each of the years ended
December 31, 2007, 2006 and 2005, respectively.
 80




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  Letters of CreditIn the ordinary course of business the Company may from time to time be required to enter into
letters of credit related to its insurance programs and for its travel related programs with
airlines, travel providers and travel reporting agencies. As of December 31, 2007, the Company
has issued $10.7 million in letters of credit related to property and casualty insurance programs
which expire at various dates through 2008. As of December 31, 2007, the Company has issued $0.9
million in letters of credit related to cruise business operations which expired at various dates
through 2008. As of December 31, 2007, the Company also has issued $0.1 million in letters of
credit related to travel and event business operations which expire at various dates through
2008. The Company has a $12.5 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, 2007.General ClaimsThe Company is subject to claims, suits and complaints, which have arisen in the ordinary course
of business. In the opinion of management and its legal counsel, all matters are without merit or
are of such a nature, or involve such amounts as would not have a material effect on the
financial position, cash flows or results of operations of the Company.Surety BondsThe Company is often required to provide surety bonds to secure its performance under
construction contracts, development agreements and other arrangements. The Companys ability to
obtain surety bonds primarily depends upon its capitalization, working capital, past performance,
management expertise and certain external factors, including the overall capacity of the surety
market. As of December 31, 2007, the Company maintained surety bonds amounting to $0.3 million related to its marine
segment.The Federal Maritime Commission regulates passenger ships with 50 or more passenger berths
departing from U.S. ports and requires that operators post surety bonds to be used in the event
the operator fails to provide cruise services, or otherwise satisfy certain financial standards.
The Company has secured a $15.0 million surety bond as security under the Federal Maritime
Commission.Ship IncidentsOn May 14, 2007, the Empress of the Northran aground in Southeast Alaska. No passengers or crew
were injured during the incident. The ship was in drydock for damage inspection and repairs for
approximately seven initial weeks. In September 2007, the ship re-entered drydock for additional
repairs for a total of four additional non-consecutive weeks. The ship ended her season on
October 27, 2007 to enter her scheduled drydock lay up period early in order to complete work on
her propulsion system. The Queen of the Westassumed operation of the remaining published
itineraries of the Empress of the North. As of December 31, 2007, the Company recorded in cruise
operating expenses $6.1 million in costs associated with additional ship repairs, passenger
relocation and crew expenses incurred as a result of the incident. These expenses were offset by
insurance recoveries received of $4.3 million. As of December 31, 2007, the impact of
this incident was $8.1 million. The Company is in the process of seeking additional insurance
related recoveries from the grounding; however, due to the uncertainty regarding the claims no
additional amounts were recorded as expected to be received as of December 31, 2007.
 On March 24, 2006, the Empress of the Northran aground in Washougal, Washington. No passengers
or crew were injured during the grounding. The ship was in drydock for damage inspection and
repairs for approximately four weeks. The ship was released and began operations on April 16,
2006. As of December 31,
 81




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  2006, the Company recorded in cruise operating expenses $2.7 million
in costs associated with ship repairs, passenger relocation and crew expenses incurred as a
result of the grounding. These expenses were partially offset by insurance recoveries of $1.7
million received in the second quarter of 2006. In addition, the Company received $0.5 million
related to insurance recoveries under its business interruption insurance which is recorded in
other income for the year ended December 31, 2006.On October 20, 2006, approximately 20 passengers of the Mississippi Queenbecame sick with a
stomach illness which was later determined to be a case of Norovirus. The cruise stopped
sailing two days earlier than originally scheduled in order to inspect and clean the ship. The
ship was released and began operations for the next scheduled cruise on October 25, 2006 and
again stopped operation on October 27, 2006 due to the same Norovirus on additional passengers.
The Company cancelled two additional weeks of cruise sailings in order to further inspect and
clean the ship. As of December 31, 2006, the Company estimated that these interruptions and
cancellations had a negative impact to its financial results of $3.0 million, consisting of lost
passenger ticket revenue and costs associated with ship cleaning, passenger relocation and crew
expenses. The Company received $0.7 million related to insurance
recoveries under its business interruption insurance which is
recorded in other income for the year ended December 31, 2007.Legal ProceedingsThe Office of the Attorney General for the State of Florida is conducting a review of the
Companys fuel supplement implemented in the fourth quarter of 2007 on Majestic America Line and
Windstar Cruises brands. In addition, the Company has been informed that the same office is
conducting an investigation to determine whether there is or has been a violation of state or
federal anti-trust laws in connection with the setting by the Company and other cruise line
operators of the Companys and their respective fuel supplements. The Company is cooperating
with the Attorney Generals office in connection with this review and investigation. The Company
is not able at this time to estimate the impact of this review and investigation on the Company.In February 2008, three purported class action lawsuits were filed in the United States District
Court for the Southern District of Florida. The lawsuits allege, among other things, that the
Company, other cruise lines and a trade association violated federal anti-trust laws or state
deceptive and unfair trade practices laws by conspiring to fix the prices of the fuel
supplements announced by the various cruise lines or misleading consumers as to the relationship
between each cruise lines fuel costs and the fuel supplements it is charging its customers. The Company is
 not able at this time to estimate the impact of this proceeding on the Company.On February 26, 2008, the Company and several of its subsidiaries were named in a complaint by
David Giersdorf, the former President of ACG in the Superior Court of Washington for King
County. Mr. Giersdorf has alleged, based on verbal agreements, he was improperly terminated and has claimed damages which
appear to be in excess of $70.0 million. Mr. Giersdorfs claims,
include the following: (i) he left a tenured position with Holland America Line (HAL), which
well-positioned him to be the President of HAL earning a multi-million dollar annual salary
until retirement; (ii) he was denied the opportunity to vest in 87,500 option shares and 30,000
restricted stock grants, which should be valued at a $47 per share stock price; (iii) his
assistance in acquiring Windstar and his work in the transition of its vendors and employees
entitles him to approximately $54.0 million; (iv) he is owed compensation for future
acquisitions; and (v) he is owed sums for reputation and emotional damage. The Company believes all of Mr.
Giersdorfs claims lack merit and will defend them vigorously, but are not able at this time to
estimate the outcome of this proceeding.13.
    
    Stock PlansThe Company adopted the 1995 Equity Participation Plan (the 1995 Plan) during 1995 and amended
and restated the 1995 Plan in 1998, 1999 and 2002. In 2005, the Company adopted the 2005
Incentive Award Plan (the 2005 Plan) and amended and restated the 2005 Plan in 2007. Both the
1995 Plan and the 2005 Plan provide for the grant of stock options, awards of restricted stock,
performance or other awards or stock
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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  appreciation rights to directors, employees and consultants
of the Company. The maximum number of shares which may be awarded under the 1995 Plan is
2,200,000 shares. The maximum number of shares which may be awarded under the 2005 Plan is
1,200,000 shares. Under the terms of both the 1995 Plan and the 2005 Plan, options to purchase
shares of the Companys common stock are granted at a price set by the Compensation Committee of
the Board of Directors, not to be less than the par value of a share of common stock and if
granted as performance-based compensation or as incentive stock options, no less than the fair
market value of the stock on the date of grant. The Compensation Committee establishes the
vesting period of the awards. Vested options may be exercised for a period up to ten years from
the grant date, as long as option holders remain employed by the Company. As of
December 31, 2007, the Company had 600,882 shares available for grant under its equity
compensation plans.Stock option transactions are summarized as follows:
 Weighted-Number of
    
    AverageShares
    
    Exercise PriceBalance, December 31, 2004
    
    
    1,205,305
    
    
    $
    9.20Granted
    
    
    301,000
    
    
    
    13.81Forfeited
    
    
    (2,066
    )
    
    
    10.15Exercised
    
    
    (275,634
    )
    
    
    5.79Balance, December 31, 2005
    
    
    1,228,605
    
    
    
    11.09Granted
    
    
    210,500
    
    
    
    24.48Forfeited
    
    
    (41,440
    )
    
    
    15.44Exercised
    
    
    (265,906
    )
    
    
    8.10Balance, December 31, 2006
    
    
    1,131,759
    
    
    
    14.12Granted
    
    
    278,000
    
    
    
    14.86Forfeited
    
    
    (150,075
    )
    
    
    17.76Exercised
    
    
    (60,626
    )
    
    
    10.71Balance, December 31, 2007
    
    
    1,199,058
    
    
    
    14.01
  Weighted-Number of
    
    AverageShares
    
    Exercise PriceOptions exercisable at:December 31, 2005
    
    
    621,757
    
    
    $
    9.22December 31, 2006
    
    
    556,359
    
    
    
    10.93December 31, 2007
    
    
    711,308
    
    
    
    12.31
 The following table summarizes information about stock options outstanding and exercisable as of
December 31, 2007:
 Number
    
    
    
    
    
    
    
    
    
    NumberOutstanding
    
    Wtd. Avg.
    
    
    
    
    
    Exercisable
    
    Wtd. Avg.as of
    
    Remaining
    
    Wtd. Avg.
    
    as of
    
    Exercise PriceRange of
    
    December 31,
    
    Contractual
    
    Exercise
    
    December 31,
    
    of ExercisableExercise Price
    
    2007
    
    Life
    
    Price
    
    2007
    
    Options$2.93 - $5.85
    
    
    16,287
    
    
    
    2.1
    
    
    $
    5.44
    
    
    
    16,287
    
    
    $
    5.445.85
 -    8.78
    
    
    58,383
    
    
    
    3.3
    
    
    
    7.73
    
    
    
    58,383
    
    
    
    7.738.78 - 11.70
    
    
    130,896
    
    
    
    3.4
    
    
    
    9.36
    
    
    
    130,896
    
    
    
    9.3611.70 - 14.63
    
    
    554,492
    
    
    
    5.9
    
    
    
    12.83
    
    
    
    450,492
    
    
    
    12.7214.63 - 17.55
    
    
    305,000
    
    
    
    9.7
    
    
    
    14.89
    
    
    
    11,625
    
    
    
    15.1217.55 - 20.48
    
    
    36,500
    
    
    
    6.8
    
    
    
    17.97
    
    
    
    13,625
    
    
    
    17.9726.33 - 29.25
    
    
    97,500
    
    
    
    8.0
    
    
    
    27.94
    
    
    
    30,000
    
    
    
    27.941,199,058
    
    
    
    6.6
    
    
    
    14.01
    
    
    
    711,308
    
    
    
    12.31
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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  In addition to the stock options above, in 2005, the Company granted restricted stock awards to
certain members of executive management aggregating 80,000 shares, at $13.36 per share,
representing the closing price of the shares on the date of grant. The restricted stock fully
vests on the third anniversary of the date of grant subject to meeting certain performance
goals. In 2006, the Company granted restricted stock awards to certain members of executive
management aggregating 55,000 shares, at $27.94 per share, representing the closing price of the
shares on the date of grant and 6,000 shares, at $39.03 per share, representing the closing
price of the shares on the date of grant. The restricted stock for both dates of grants fully
vests on the fourth anniversary of the dates of grants. In addition in 2006, the Company granted
restricted stock awards to the board of directors aggregating 8,000 shares, at $27.94 per share,
representing the closing price of the shares on the date of grant. The restricted stock fully
vested on the first anniversary of the date of grant. In 2007, the Company granted restricted
stock awards to certain members of executive management aggregating 95,000 shares, at $14.86 per
share, representing the closing price of the shares on the date of grant. The restricted stock
fully vests on the fourth anniversary of the date of grant. The Company recorded compensation
expense of $0.8 million, $0.8 million, and $0.4 million related to the restricted stock grants
for the year ended December 31, 2007, 2006 and 2005, respectively.14.
    
    Employee Benefit PlanThe Company has a 401(k) Profit-Sharing Plan (the 401(k) Plan) that employees are eligible to
participate in upon six months of service and 21 years of age. Employees may contribute up to
92% of their salary, subject to the maximum contribution allowed by the Internal Revenue
Service. The Companys matching contribution is discretionary based upon approval by management.
Employees are 100% vested in their contributions and vest in Company matching contributions
equally over four years. During the years ended December 31, 2007, 2006 and 2005, the Company
contributed $11,000, $31,000 and $29,000, respectively, to the 401(k) Plan.15.
    
    Common Stock Repurchase PlanIn November 1998, the board of directors of the Company authorized the repurchase of the
Companys common stock in the open market or through private transactions, up to $20.0 million
in the aggregate. In August 2006, the Companys board of directors authorized an additional
$10.0 million for the repurchase of the Companys common stock in the open market or through
private transactions, providing for an aggregate of $30.0 million. This repurchase program is
ongoing and as of December 31, 2007, the Company had repurchased 1,102,650 shares for
approximately $14.0 million. In 2007, the Company repurchased 51,150 shares for $1.6 million.
The Company made no share repurchases in 2006 or 2005.16.
    
    Summarized Income Statement Information of AffiliateIn March 2002, Ambassadors acquired a 49% ownership interest in ITI. ITI developed, marketed and
managed meetings and incentive programs for a select roster of corporate clients utilizing
incentive travel and corporate meeting management services. The terms of the purchase agreement
called for contingent payments through 2005 based upon actual income before income taxes
multiplied by Ambassadors 49% ownership interest calculated based on a predefined multiplier. As
of December 31, 2006, the Company had paid all remaining obligations under the purchase
agreement.
 84




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  On December 28, 2006, ITI was dissolved and its assets were distributed to its members based on
their ownership percentage. Prior to dissolution, the Company accounted for this investment
using the equity method as discussed in Note 2. This investment was considered significant to
the Companys fiscal 2005 operations as defined by applicable Securities and Exchange Commission
regulations. The following summarizes the audited income statement of the investee for the year
ended December 31, 2005 (in thousands):
 Year EndedDecember 31,2005Revenue
    
    $
    3,781Operating expenses
    
    
    1,960Operating income
    
    
    1,821Other income
    
    
    42Net income
    
    $
    1,863Companys share of net income
    
    $
    913
 17.
    
    Accumulated Other Comprehensive Income (Loss)The table below details the components of the accumulated other comprehensive income (loss) (in
thousands):
 2007
    
    
    2006Unrealized gains (losses) on available-for-sale securities
    
    $
    8
    
    
    $
    (64
    )Foreign currency translation gains
    
    
    1,547
    
    
    
    767Total accumulated other comprehensive income
    
    $
    1,555
    
    
    $
    703
 18.
    
    Earnings (Loss) Per ShareBasic earnings (loss) per share (EPS) is computed by dividing net income (loss) by the weighted
average common shares outstanding. Diluted EPS includes the effect of any potential shares
outstanding, which for the Company consists of dilutive stock options and shares issuable under
convertible notes (Notes). The dilutive effect of stock options is calculated using the
treasury stock method with an offset from expected proceeds upon exercise of the stock options
and unrecognized compensation expense. The dilutive effect of the Notes is calculated by adding
back interest expense and amortization of offering costs, net of taxes, which would not have been
incurred assuming conversion. Diluted EPS for the year ended December 31, 2007 does not include
the dilutive effect of conversion of the Notes into the Companys common shares since it would
be anti-dilutive.The table below details the components of the basic and diluted EPS calculations (in thousands,
except per share amounts):
 2007
    
    
    2006
    
    
    2005Numerator:Net (loss) income for basic and diluted earnings per share
    
    $
    (26,879
    )
    
    $
    5,627
    
    
    $
    3,142Denominator:Weighted-average shares outstanding  basic
    
    
    10,838
    
    
    
    10,668
    
    
    
    10,321Effect of dilutive securities:Stock options
    
    
    
    
    
    
    777
    
    
    
    276NotesWeighted-average shares outstanding  diluted
    
    
    10,838
    
    
    
    11,445
    
    
    
    10,597Earnings (loss) per share:Basic
    
    $
    (2.48
    )
    
    $
    0.53
    
    
    $
    $0.30Diluted
    
    $
    (2.48
    )
    
    $
    0.49
    
    
    $
    0.30
 At December 31, 2007 and 2006 there were no stock options outstanding, whereby the exercise
price exceeded the Companys average common stock price. At December 31, 2005, there were 17,000
shares issuable under
outstanding stock options where the exercise price exceeded the Companys average common stock
price. For the year ended December 31, 2007, the effects of the common stock equivalent shares have
been excluded from the calculation of diluted loss per share because they are anti-dilutive.
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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued
  19.
    
    Business SegmentsIn January 2007, the Company realigned its business segments into the following four business
segments: (i) cruise, which includes the operations of ACG; (ii) marine, which includes the
operations of AMG; (iii) travel and events, which includes the operations of Ambassadors; and
(iv) corporate and other, which consists of general corporate assets (primarily cash and cash
equivalents and investments), the insurance operations of Cypress Re and other activities that
are not directly related to the Companys cruise, marine and travel and events operating
segments. As of December 31, 2006, the Companys business segments were: (i) cruise, (ii)
marine, (iii) travel and events, (iv) insurance and (v) corporate and other. As of December 31,
2005, the companys business segments were: (i) Ambassadors, (ii) Cypress Re and (iii)
corporate and other. The financial information for the prior periods have been reclassified
into the current year segment presentation.Selected financial information related to these segments is as follows (in thousands):
 Travel
    
    CorporateCruise
    
    Marine
    
    and Events
    
    and Other
    
    Total2007:Revenues
    
    $
    148,691
    
    
    $
    123,221
    
    
    $
    14,511
    
    
    $
    582
    
    
    $
    287,005Operating income (loss)
    
    
    (24,045
    )
    
    
    8,567
    
    
    
    1,467
    
    
    
    (6,421
    )
    
    
    (20,432
    )Depreciation and
amortization expense
    
    
    (9,668
    )
    
    
    (963
    )
    
    
    (265
    )
    
    
    (114
    )
    
    
    (11,010
    )Interest and dividend income
    
    
    963
    
    
    
    152
    
    
    
    486
    
    
    
    2,024
    
    
    
    3,625Interest expense
    
    
    (4,044
    )
    
    
    (370
    )
    
    
    
    
    
    
    (2,916
    )
    
    
    (7,330
    )Equity in net loss and
management fees received
from investments accounted
for by the equity method
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    (231
    )Impairment loss on
investment in affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165
    )
    
    
    (165
    )Provision (benefit) for
income taxes
    
    
    (2,977
    )
    
    
    520
    
    
    
    3,657
    
    
    
    1,768
    
    
    
    2,968Capital expenditures for
property, equipment and
intangible assets
    
    
    (20,019
    )
    
    
    (1,290
    )
    
    
    (297
    )
    
    
    (872
    )
    
    
    (22,478
    )Goodwill
    
    
    
    
    
    
    2,906
    
    
    
    6,275
    
    
    
    
    
    
    
    9,181Other intangibles, net
    
    
    8,431
    
    
    
    2,721
    
    
    
    
    
    
    
    
    
    
    
    11,152Total assets
    
    
    251,196
    
    
    
    72,979
    
    
    
    12,453
    
    
    
    39,861
    
    
    
    376,4892006:Revenues
    
    $
    75,667
    
    
    $
    46,614
    
    
    $
    13,143
    
    
    $
    8,848
    
    
    $
    144,272Operating income (loss)
    
    
    2,783
    
    
    
    3,567
    
    
    
    1,036
    
    
    
    (6,120
    )
    
    
    1,266Depreciation and
amortization expense
    
    
    (3,355
    )
    
    
    (554
    )
    
    
    (283
    )
    
    
    (32
    )
    
    
    (4,224
    )Interest and dividend income
    
    
    364
    
    
    
    
    
    
    
    560
    
    
    
    2,899
    
    
    
    3,823Interest expense
    
    
    (3,349
    )
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (3,500
    )Equity in net income (loss)
and management fees
received from investments
accounted for by the equity
method
    
    
    
    
    
    
    (246
    )
    
    
    264
    
    
    
    
    
    
    
    18Provision (benefit) for
income taxes
    
    
    99
    
    
    
    1,330
    
    
    
    (242
    )
    
    
    (844
    )
    
    
    343Capital expenditures for
property, equipment and
intangible assets
    
    
    (3,109
    )
    
    
    (293
    )
    
    
    (427
    )
    
    
    (4
    )
    
    
    (3,833
    )
 86




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Ambassadors International, Inc.  Notes to Consolidated Financial Statements, Continued
  Travel
    
    CorporateCruise
    
    Marine
    
    and Events
    
    and Other
    
    TotalGoodwill
    
    $
    
    
    
    $
    2,906
    
    
    $
    6,275
    
    
    $
    
    
    
    $
    9,181Other intangibles, net
    
    
    
    
    
    
    3,409
    
    
    
    
    
    
    
    
    
    
    
    3,409Total assets
    
    
    126,521
    
    
    
    50,500
    
    
    
    15,189
    
    
    
    63,710
    
    
    
    255,9202005:Revenues
    
    $
    
    
    
    $
    758
    
    
    $
    14,726
    
    
    $
    11,456
    
    
    $
    26,940Operating income (loss)
    
    
    
    
    
    
    (61
    )
    
    
    2,550
    
    
    
    (2,365
    )
    
    
    124Depreciation and
amortization expense
    
    
    
    
    
    
    (206
    )
    
    
    (997
    )
    
    
    (29
    )
    
    
    (1,232
    )Interest and dividend income
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    2,664
    
    
    
    3,053Interest expense
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Equity in net income (loss)
and management fees
received from investments
accounted for by the equity
method
    
    
    
    
    
    
    (113
    )
    
    
    1,162
    
    
    
    
    
    
    
    1,049Provision (benefit) for
income taxes
    
    
    
    
    
    
    (72
    )
    
    
    1,501
    
    
    
    (318
    )
    
    
    1,111Capital expenditures for
property, equipment and
intangible assets
    
    
    
    
    
    
    (4,392
    )
    
    
    (106
    )
    
    
    (42
    )
    
    
    (4,540
    )Goodwill
    
    
    
    
    
    
    2,721
    
    
    
    6,275
    
    
    
    
    
    
    
    8,996Other intangibles, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,325
    
    
    
    1,325Total assets
    
    
    
    
    
    
    5,947
    
    
    
    13,625
    
    
    
    115,211
    
    
    
    134,783
 20.
    
    Quarterly Financial Data (unaudited)Summarized quarterly financial data for 2007, 2006 and 2005 was as follows (in thousands, except
per share data):
 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2007:Revenues:Passenger ticket revenue
    
    $
    4,843
    
    
    $
    41,137
    
    
    $
    54,528
    
    
    $
    31,288Onboard and other cruise revenue
    
    
    359
    
    
    
    5,922
    
    
    
    5,514
    
    
    
    5,100Marine Revenue
    
    
    23,484
    
    
    
    28,565
    
    
    
    31,984
    
    
    
    39,188Travel, incentive and event related
    
    
    3,524
    
    
    
    4,476
    
    
    
    3,330
    
    
    
    3,181Net insurance premiums earned
    
    
    654
    
    
    
    168
    
    
    
    84
    
    
    
    (324
    )32,864
    
    
    
    80,268
    
    
    
    95,440
    
    
    
    78,433Costs and operating expenses:Cruise operating expenses
    
    
    7,001
    
    
    
    35,650
    
    
    
    41,906
    
    
    
    33,695Cost of marine revenue
    
    
    19,444
    
    
    
    22,007
    
    
    
    22,806
    
    
    
    29,772Selling and tour promotion
    
    
    6,524
    
    
    
    6,284
    
    
    
    8,008
    
    
    
    5,164General and administrative
    
    
    11,320
    
    
    
    14,283
    
    
    
    13,825
    
    
    
    17,712Depreciation and amortization
    
    
    1,560
    
    
    
    3,128
    
    
    
    3,234
    
    
    
    3,088Loss and loss adjustment expenses
    
    
    378
    
    
    
    96
    
    
    
    49
    
    
    
    (136
    )Insurance acquisition costs and other
operating expenses
    
    
    337
    
    
    
    181
    
    
    
    135
    
    
    
    (14
    )Operating income (loss)
    
    
    (13,700
    )
    
    
    (1,361
    )
    
    
    5,477
    
    
    
    (10,848
    )Other income (expense)
    
    
    (551
    )
    
    
    (549
    )
    
    
    (896
    )
    
    
    (1,483
    )Net income (loss)
    
    $
    (8,562
    )
    
    $
    5,770
    
    
    $
    382
    
    
    $
    (24,469
    )Earnings (loss) per share  basic
    
    $
    (0.77
    )
    
    $
    0.52
    
    
    $
    0.03
    
    
    $
    (2.26
    )
 87




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Ambassadors International, Inc.  Notes to Consolidated Financial Statements, Continued
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Earnings (loss) per share  diluted
    
    $
    (0.77
    )
    
    $
    0.43
    
    
    $
    0.03
    
    
    $
    (2.26
    )Weighted average outstanding sharesbasic
    
    
    11,089
    
    
    
    11,083
    
    
    
    11,058
    
    
    
    10,824Weighted average outstanding sharesdiluted
    
    
    11,089
    
    
    
    13,349
    
    
    
    11,529
    
    
    
    10,8242006:Revenues:Passenger ticket revenue
    
    $
    1,291
    
    
    $
    19,179
    
    
    $
    30,530
    
    
    $
    16,451Onboard and other cruise revenue
    
    
    104
    
    
    
    2,503
    
    
    
    4,485
    
    
    
    1,124Marine Revenue
    
    
    170
    
    
    
    2,250
    
    
    
    16,725
    
    
    
    27,469Travel, incentive and event related
    
    
    4,269
    
    
    
    3,108
    
    
    
    3,467
    
    
    
    2,299Net insurance premiums earned
    
    
    2,484
    
    
    
    2,536
    
    
    
    2,341
    
    
    
    1,4878,318
    
    
    
    29,576
    
    
    
    57,548
    
    
    
    48,830Costs and operating expenses:Cruise operating expenses
    
    
    2,762
    
    
    
    12,338
    
    
    
    18,367
    
    
    
    15,476Cost of marine revenue
    
    
    
    
    
    
    1,082
    
    
    
    12,965
    
    
    
    20,469Selling and tour promotion
    
    
    1,589
    
    
    
    2,974
    
    
    
    2,714
    
    
    
    4,912General and administrative
    
    
    4,361
    
    
    
    8,199
    
    
    
    11,322
    
    
    
    10,439Depreciation and amortization
    
    
    470
    
    
    
    921
    
    
    
    1,309
    
    
    
    1,524Loss and loss adjustment expenses
    
    
    1,365
    
    
    
    1,492
    
    
    
    1,470
    
    
    
    922Insurance acquisition costs and other
operating expenses
    
    
    1,043
    
    
    
    990
    
    
    
    891
    
    
    
    640Operating income (loss)
    
    
    (3,272
    )
    
    
    1,580
    
    
    
    8,510
    
    
    
    (5,552
    )Other income (expense)
    
    
    512
    
    
    
    1,047
    
    
    
    197
    
    
    
    2,948Net income (loss)
    
    $
    (1,720
    )
    
    $
    1,660
    
    
    $
    7,598
    
    
    $
    (1,911
    )Earnings (loss) per share  basic
    
    $
    (0.16
    )
    
    $
    0.15
    
    
    $
    0.69
    
    
    $
    (0.17
    )Earnings (loss) per share  diluted
    
    $
    (0.16
    )
    
    $
    0.15
    
    
    $
    0.66
    
    
    $
    (0.17
    )Weighted average outstanding sharesbasic
    
    
    10,545
    
    
    
    10,898
    
    
    
    10,936
    
    
    
    11,077Weighted average outstanding sharesdiluted
    
    
    10,545
    
    
    
    11,376
    
    
    
    11,490
    
    
    
    11,0772005:Revenues:Passenger ticket revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Onboard and other cruise revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Marine Revenue
    
    
    114
    
    
    
    214
    
    
    
    221
    
    
    
    209Travel, incentive and event related
    
    
    5,271
    
    
    
    4,518
    
    
    
    3,081
    
    
    
    1,856Net insurance premiums earned
    
    
    2,596
    
    
    
    3,096
    
    
    
    3,072
    
    
    
    2,6927,981
    
    
    
    7,828
    
    
    
    6,374
    
    
    
    4,757Costs and operating expenses:Cruise operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of marine revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling and tour promotion
    
    
    842
    
    
    
    770
    
    
    
    735
    
    
    
    797General and administrative
    
    
    2,730
    
    
    
    3,325
    
    
    
    3,156
    
    
    
    2,615Depreciation and amortization
    
    
    195
    
    
    
    102
    
    
    
    81
    
    
    
    854Loss and loss adjustment expenses
    
    
    1,261
    
    
    
    1,602
    
    
    
    1,699
    
    
    
    1,489Insurance acquisition costs and other
operating expenses
    
    
    1,050
    
    
    
    1,195
    
    
    
    1,220
    
    
    
    1,098Operating income (loss)
    
    
    1,903
    
    
    
    834
    
    
    
    (517
    )
    
    
    (2,096
    )Other income (expense)
    
    
    601
    
    
    
    1,386
    
    
    
    1,213
    
    
    
    929Net income (loss)
    
    $
    1,519
    
    
    $
    1,344
    
    
    $
    428
    
    
    $
    (149
    )
 88




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Ambassadors International, Inc.  Notes to Consolidated Financial Statements, Continued
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Earnings (loss) per share  basic
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.04
    
    
    $
    (0.01
    )Earnings (loss) per share  diluted
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.04
    
    
    $
    (0.01
    )Weighted average outstanding sharesbasic
    
    
    10,111
    
    
    
    10,337
    
    
    
    10,407
    
    
    
    10,423Weighted average outstanding sharesdiluted
    
    
    10,473
    
    
    
    10,574
    
    
    
    10,668
    
    
    
    10,423
 21.
    
    Subsequent Event (unaudited)In February 2008, BellPort purchased certain assets related to Anacapa Marine Services, a
shipyard business located in Channel Islands Harbor in Oxnard, California, for $0.4 million.
The Company completed the acquisition in order to further expand the Companys shipyard
operations.
 89




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Ambassadors International, Inc.
 
 Schedule II  Consolidated Valuation and Qualifying Accounts
For the Years Ended December 31, 2007, 2006 and 2005
  Balance at
    
    
    
    
    
    Deductions,
    
    Balance atBeginning
    
    
    
    
    
    Recoveries
    
    End ofof Year
    
    Additions
    
    and Write-Offs
    
    YearDecember 31, 2007:Allowance for doubtful accounts receivable
    
    $
    1,046,283
    
    
    $
    1,438,446
    
    
    $
    (152,742
    )
    
    $
    2,331,987December 31, 2006:Allowance for doubtful accounts receivable (A)
    
    $
    17,363
    
    
    $
    1,078,244
    
    
    $
    (49,324
    )
    
    $
    1,046,283December 31, 2005:Allowance for doubtful accounts receivable
    
    $
    51,922
    
    
    $
    36,696
    
    
    $
    (71,255
    )
    
    $
    17,363
 
 (A)
    
    The additions during the year ended December 31, 2006 include the allowance for
doubtful accounts of Bellingham Marine as of the date of acquisition. 90




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
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##### Table of Contents



Incentive Travel, LLC
 
 Balance Sheets
(in thousands)
 December 31,2005
    
    
    2004(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    255
    
    
    $
    1,820Accounts receivable
    
    
    1,110
    
    
    
    1,191Prepaid program costs and other current assets
    
    
    364
    
    
    
    297Total current assets
    
    
    1,729
    
    
    
    3,308Property and equipment, net
    
    
    17
    
    
    
    25Total assets
    
    $
    1,746
    
    
    $
    3,333Liabilities:Current liabilities:Participant deposits
    
    $
    585
    
    
    $
    1,258Accounts payable (including $286 and $140 to related parties at
2005 and 2004, respectively; Note 3)
    
    
    401
    
    
    
    168Accrued and other expenses
    
    
    77
    
    
    
    1,678Total liabilities
    
    
    1,063
    
    
    
    3,104CommitmentsMembers equity:Members contribution
    
    
    71
    
    
    
    71Undistributed earnings
    
    
    612
    
    
    
    158Total members equity
    
    
    683
    
    
    
    229Total liabilities and members equity
    
    $
    1,746
    
    
    $
    3,333
 See Notes to Financial Statements.
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Incentive Travel, LLC
 
 Statements of Income
(in thousands)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(unaudited)Revenue
    
    $
    3,781
    
    
    $
    1,874
    
    
    $
    3,474Operating expenses:Selling and tour promotion (including
$463, $438 and $584 to a related party
at 2005, 2004 and 2003, respectively;
Note 3)
    
    
    500
    
    
    
    478
    
    
    
    603General and administrative (including
$255, $165 and $293 to related parties
at 2005, 2004 and 2003, respectively;
Note 3)
    
    
    1,015
    
    
    
    668
    
    
    
    730License fees to a related party (Note 3)
    
    
    445
    
    
    
    421
    
    
    
    5611,960
    
    
    
    1,567
    
    
    
    1,894Operating income
    
    
    1,821
    
    
    
    307
    
    
    
    1,580Other income
    
    
    42
    
    
    
    15
    
    
    
    20Net income
    
    $
    1,863
    
    
    $
    322
    
    
    $
    1,600
 See Notes to Financial Statements.
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##### Table of Contents



Incentive Travel, LLC
 
 Statements of Changes in Members Equity
(in thousands)
 Incentive
    
    
    Ambassadors,Travel, Inc.
    
    
    LLC
    
    
    TotalBalance at December 31, 2002 (unaudited)
    
    $
    332
    
    
    $
    251
    
    
    $
    583Members earnings distributions
    
    
    (261
    )
    
    
    (251
    )
    
    
    (512
    )Net income
    
    
    816
    
    
    
    784
    
    
    
    1,600Balance at December 31, 2003
    
    
    887
    
    
    
    784
    
    
    
    1,671Members earnings distributions
    
    
    (900
    )
    
    
    (864
    )
    
    
    (1,764
    )Net income
    
    
    164
    
    
    
    158
    
    
    
    322Balance at December 31, 2004 (unaudited)
    
    
    151
    
    
    
    78
    
    
    
    229Members earnings distributions
    
    
    (718
    )
    
    
    (691
    )
    
    
    (1,409
    )Net income
    
    
    950
    
    
    
    913
    
    
    
    1,863Balance at December 31, 2005
    
    $
    383
    
    
    $
    300
    
    
    $
    683
 See Notes to Financial Statements.
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Incentive Travel, LLC
 
 Statements of Cash Flows
(in thousands)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    1,863
    
    
    $
    322
    
    
    $
    1,600Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    15
    
    
    
    13
    
    
    
    30Change in assets and liabilities:Accounts receivable
    
    
    81
    
    
    
    (408
    )
    
    
    (471
    )Prepaid program costs and other current assets
    
    
    (67
    )
    
    
    206
    
    
    
    1,167Participant deposits
    
    
    (673
    )
    
    
    1,256
    
    
    
    (2,771
    )Accounts payable
    
    
    233
    
    
    
    (279
    )
    
    
    276Accrued and other expenses
    
    
    (1,601
    )
    
    
    1,303
    
    
    
    77Net cash provided by (used in) operating activities
    
    
    (149
    )
    
    
    2,413
    
    
    
    (92
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (7
    )
    
    
    (22
    )
    
    
    (5
    )Cash flows from financing activities:Members earnings distribution
    
    
    (1,409
    )
    
    
    (1,764
    )
    
    
    (512
    )Net increase (decrease) in cash and cash equivalents
    
    
    (1,565
    )
    
    
    627
    
    
    
    (609
    )Cash and cash equivalents, beginning of year
    
    
    1,820
    
    
    
    1,193
    
    
    
    1,802Cash and cash equivalents, end of year
    
    $
    255
    
    
    $
    1,820
    
    
    $
    1,193
 See Notes to Financial Statements.
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Incentive Travel, LLC
 
 Notes to Financial Statements
2004 Unaudited
 1.
    
    Description of the Company and Summary of Significant Accounting PoliciesThe CompanyIncentive Travel, LLC (the Company) is a travel services and performance improvement company.
The Company develops, markets and manages meetings and incentive programs for a select roster of
corporate clients utilizing incentive travel and corporate meeting management services.The Company was formed in March 2002 through a partnership between Incentive Travel, Inc.
(ITI) and Ambassadors Performance Group LLC (APG). On March 29, 2002, APG purchased a 49%
membership interest in the Company from ITI. Both members share in the income and loss of the
Company in accordance with their ownership interest. On March 29, 2002, the Company also
entered into an Operating Agreement with APG and ITI and a License Agreement with APG. The
terms of both agreements expire on December 31, 2027.In 2004, APG changed its name to Ambassadors, LLC (Ambassadors).EstimatesThe preparation of these financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the amounts reported in these financial statements and accompanying notes. Actual results could
differ materially from those estimates.Credit RiskCash and cash equivalents are exposed to concentrations of credit risk. The Company places its
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 which time they held the Companys cash and cash equivalents in excess of the
insurance limit, it would be necessary for the Company to obtain credit financing to operate its
programs.The trade accounts receivable are from large credit worthy companies. Most programs are billed in
advance and are normally collected prior to program departure. The Company generally does not
require collateral.The Company believes that its primary trade accounts receivable credit risk exposure is limited
because the entire estimated program costs are normally collected prior to program departure and
customers are credit worthy corporations. Final billings are issued after program operation for
costs in excess of the estimated program costs.Cash and Cash EquivalentsThe Company invests cash in excess of operating requirements in short-term time deposits and
money market instruments. Securities with maturities of three months or less at the date of
purchase are classified as cash equivalents.
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Incentive Travel, LLC  Notes to Financial Statements, Continued  2004 Unaudited
 Property and EquipmentProperty 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. Property and equipment are depreciated
using the straight-line method generally over 3 to 7 years. The Company performs reviews for the
impairment of property and equipment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. When property and equipment are sold or
retired, the related cost and accumulated depreciation are removed from the accounts and any gain
or loss is recognized in the income statement.Revenue RecognitionThe Company bills travel participants, mainly consisting of large corporations, in advance, of
which the cash received is recorded as a participant deposit. The Company pays for certain direct
program costs such as airfare, hotel and other program costs in advance of travel, which are
recorded as prepaid program costs. The Company recognizes travel revenue and related costs when
travel convenes. This revenue is reported on a net basis, reflecting the net effect of gross billings to the client less any direct program costs.In 2005, two customers accounted for 88% and 12% of the Companys total revenue, respectively.
In 2004, two customers accounted for 53% and 47% of the Companys total revenue, respectively.
In 2003, three customers accounted for 47%, 32% and 14% of the Companys total revenue,
respectively.Selling and Tour Promotion ExpensesSelling and tour promotion costs are expensed as incurred.Income TaxesIncome taxes on income of the Company are payable by ITI and Ambassadors as the Company is
organized as a limited liability company. Therefore, no amounts have been provided for income
taxes in the accompanying financial statements.Comprehensive IncomeComprehensive income includes all changes in equity during a period except those resulting from
contributions by members and distributions to members, such as net income, unrealized gains and
losses on available-for-sale securities, foreign currency translation adjustments, changes in the
market value of certain futures contracts, and changes in certain minimum pension liabilities.
Comprehensive income equals net income for the Company, as the Company has no items of other
comprehensive income to report.Business SegmentsThe Company reports segment data based on the management approach which designates the internal
reporting used by management for making operating decisions and assessing performance as the
source of the Companys reportable segments. The Company operates under one business segment.
 97




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Incentive Travel, LLC  Notes to Financial Statements, Continued  2004 Unaudited
 2.
    
    Capital ContributionsThe Companys initial capital consisted of approximately $71,000 of fixed assets transferred to
the Company by ITI. The Operating Agreement specifies that no member shall be required to make
additional capital contributions to the Company. The terms of the Purchase Agreement for
Ambassadors membership interest call for contingent payments through 2005 payable to ITI based
upon actual income before income taxes multiplied by Ambassadors 49% ownership interest
calculated based on a predefined multiplier. Total payments to ITI related to the Companys
fiscal 2002 results were $2.5 million of which approximately $542,000 was paid during 2002 and
$1.9 million was paid during 2003. Total payments to ITI related to Companys fiscal 2003
results were $0.6 million and was paid in 2004. Total payments to ITI related to the Companys
fiscal 2004 results were $0.3 million and was paid in 2005. Ambassadors obligation related to
the Companys fiscal 2005 results is estimated to be approximately $669,000 of which $211,000
was paid in 2005 and the remaining $458,000 is anticipated to be paid in 2006 to ITI.3.
    
    Related Party TransactionsPursuant to the License Agreement, the Company shall pay a license fee to Ambassadors for the
use of the Ambassadors name. This agreement will terminate on December 31, 2027; however,
Ambassadors may elect to terminate the agreement at any time and for any reason, with or without
cause. As of December 31, 2005, the agreement has not been terminated. The fee for the use of
the license is based upon a contracted percentage of total program receipts recorded by the
Company. The Company incurred approximately $445,000, $421,000 and $561,000 in license fees for
the years ended December 31, 2005, 2004 and 2003, respectively.Pursuant to the Operating Agreement, the Company shall pay ITI a sales commission based upon a
contracted percentage of total program receipts for the sale, marketing and management of
corporate incentive services in the United States for as long as ITI is a member of the Company.
The Company incurred approximately $463,000, $438,000 and $584,000 in sales commissions for the
years ended December 31, 2005, 2004 and 2003, respectively, which are included in selling and
tour promotion expenses in the accompanying statements of income.The Operating Agreement also contracts the Company to pay a management fee to Ambassadors for
the use of select services of the member, including but not limited to accounting, human
resource and certain management functions. Management fees of approximately $255,000, $127,000
and $235,000 for the years ended December 31, 2005, 2004 and 2003, respectively, were incurred
by the Company and are included in general and administrative expenses in the accompanying
statements of income.The Company had approximately $286,000 and $140,000 in payables for the years ended December 31,
2005 and 2004, respectively, for the above related party license fee, management fee and sales
commission.In 2004 and 2003, the Company also leased its primary office space from a related party on a
month to month basis. Total rent expense for was approximately $38,000 and $58,000 for 2004 and
2003, respectively, and are included in general and administrative expenses in the accompanying
statements of income. Total rent expense for 2005 was approximately $43,000 and is included in
general and administrative expenses in the accompanying statements of income. Currently, the
Company is not committed to any other rental expenses.
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Incentive Travel, LLC  Notes to Financial Statements, Continued  2004 Unaudited
 4.
    
    Property and EquipmentProperty and equipment consists of the following (in thousands):
 2005
    
    
    2004Computer software and equipment
    
    $
    106
    
    
    $
    103Office furniture, fixtures and equipment
    
    
    151
    
    
    
    147257
    
    
    
    250Less accumulated depreciation and amortization
    
    
    (240
    )
    
    
    (225
    )$
    17
    
    
    $
    25
 Depreciation and amortization expense related to property and equipment was approximately
$15,000, $13,000 and $30,000 in 2005, 2004 and 2003, respectively.
 99




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Signatures
  AMBASSADORS INTERNATIONAL, INC.
(Registrant)Date: March 13, 2008
    By:
    /s/ Blake T. BarnettBlake T. Barnett,Chief Financial Officer POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Joseph J. Ueberroth

Joseph J. Ueberroth
    
    Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 13, 2008/s/ Blake T. Barnett

Blake T. Barnett
    
    Chief Financial Officer
(Principal Financial Officer)
    
    March 13, 2008/s/ Laura T. Tuthill

Laura T. Tuthill
    
    Vice President and Chief Accounting Officer
(Principal Accounting Officer)
    
    March 13, 2008/s/ Brigitte M. Bren

Brigitte M. Bren
    
    Director
    
    March 13, 2008/s/ James L. Easton

James L. Easton
    
    Director
    
    March 13, 2008/s/ Rafer L. Johnson

Rafer L. Johnson
    
    Director
    
    March 13, 2008/s/ Kevin M. Luebbers

Kevin M. Luebbers
    
    Director
    
    March 13, 2008/s/ Robert P. Mosier

Robert P. Mosier
    
    Director
    
    March 13, 2008
 100




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Signature
    
    Title
    
    Date/s/ J. Fife Symington IV

J. Fife Symington IV
    
    Director
    
    March 13, 2008/s/ Peter V. Ueberroth

Peter V. Ueberroth
    
    Director
    
    March 13, 2008/s/ Richard D.C. Whilden

Richard D.C. Whilden
    
    Director
    
    March 13, 2008
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EXHIBIT INDEX
 ExhibitNo.2.1
    
    
    Agreement and Plan of Merger, dated February 1, 2005, among Ambassadors
International, Inc., BellPort Acquisition Corp. #1, BellPort Acquisition
Corp. #2, BellPort Group, Inc. and Paul Penrose, as a company
stockholder representative (incorporated by reference to Exhibit 2.1 to
our Current Report on Form 8-K filed on February 3, 2005)2.2
    
    
    Membership Interest Purchase Agreement, dated December 27, 2005, by and
among Ambassadors International, Inc., Ambassadors Cruise Group, LLC and
Oregon Rail Holdings LLC (incorporated by reference to Exhibit 2.1 to
our Current Report on Form 8-K filed on December 28, 2005)2.3
    
    
    Amendment No. 1 to Membership Interest Purchase Agreement by and among
Ambassadors International, Inc., Ambassadors Cruise Group, LLC and
Oregon Rail Holdings LLC dated January 13, 2006 (incorporated by
reference to Exhibit 2.2 to our Current Report on Form 8-K filed on
January 13, 2006)2.4
    
    
    Asset Purchase Agreement, dated April 6, 2006, by and among Ambassadors
Cruise Group, LLC, Delta Queen Steamboat Company, Inc., American Queen
Steamboat, LLC, Delta Queen Steamboat, LLC and Mississippi Queen
Steamboat, LLC (incorporated by reference to Exhibit 2.1 to our Current
Report on Form 8-K filed on April 7, 2006)2.5
    
    
    Stock Purchase Agreement, dated July 21, 2006, by and among Ambassadors
Marine Group, LLC, Nishida Tekko Corporation, Nishida Tekko America
Corporation and BMI Acquisition Company (incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed on July 26, 2006)2.6
    
    
    Stock Purchase Agreement, dated February 21, 2007, by and among
Ambassadors International Cruise Group, LLC and HAL Antillen N.V. and
certain exhibits listed therein including: First Preferred Mortgages,
Pledge Agreement, Security Agreement, Buyer Note, Deeds of Covenants,
Subsidiary Guarantee and Parent Guarantee (incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed April 2, 2007).3.1
    
    
    Certificate of Incorporation of Ambassadors International, Inc.
(incorporated by reference to Exhibit 3.1 to our Registration Statement
on Form S-1 (Registration No. 33-93586))3.2
    
    
    By-Laws of Ambassadors International, Inc. (incorporated by reference to
Exhibit 3.2 to our Registration Statement on Form S-1 (Registration No.
33-93586))3.3
    
    
    Amendment to the Certificate of Incorporation of Ambassadors
International, Inc. (incorporated by reference to Appendix A of our
definitive proxy statement filed on April 18, 20074.1
    
    
    Registration Rights Agreement dated March 28, 2007 by and between
Ambassadors International, Inc. and Thomas Weisel Partners (incorporated
by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on
April 3, 2007)4.2
    
    
    Indenture dated as of April 3, 2007 between Ambassadors International,
Inc. and Wells Fargo Bank National Association, as Trustee (incorporated
by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on
April 3, 2007)4.3
    
    
    Form of Global Note (incorporated by reference to the Indenture dated as
of April 3, 2007 between Ambassadors International, Inc. and Wells Fargo
Bank National Association filed as Exhibit 4.1 to our Current Report on
Form 8-K filed on April 3, 2007)4.4
    
    
    Purchase Agreement dated March 28, 2007 by and between Ambassadors
International, Inc. and Thomas Weisel Partners (incorporated by
reference to Exhibit 4.2 to our Current Report on Form 8-K filed on
April 3, 2007)10.1
    
    
    Form of Registration Rights Agreement among the Company, John and Peter
Ueberroth, and certain other stockholders (incorporated by reference to
Exhibit 10.4 to our Registration Statement on Form S-1 (Registration No.
33-93586))10.2
    
    
    Form of Indemnification Agreement for officers and directors
(incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on August 7, 2006)
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ExhibitNo.10.3
    
    
    Lease dated December 20, 1996 between Rogal America, Inc. and Ark-Les
Corp. (incorporated by reference to Exhibit 10.13 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 1997)10.4
    
    
    Industrial Lease dated 1998 between Ambassadors International, Inc. and
The Irvine Company (incorporated by reference to Exhibit 10.14 to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1997)10.5
    
    
    The Atlanta Merchandise Mart Lease Agreement dated April 17, 1998 by and
between AMC, Inc. and Destination, Inc. (incorporated by reference to
Exhibit 10.16 to our Quarterly Report on Form 10-Q for the period ended
June 30, 1998)10.6
    
    
    Lease dated July 24, 1998 by and between the Joseph Pell and Eda Pell
Revocable Trust dated August 19, 1989 and Ambassador Performance Group,
Inc. (incorporated by reference to Exhibit 10.19 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 1998)10.7
    
    
    The Amended and Restated 1995 Equity Participation Plan of Ambassador
International, Inc., as amended by the Companys Shareholders at the
1999 Annual Meeting of Shareholders held on May 14, 1999 (incorporated
by reference to Exhibit 4.1 to our Registration Statement on Form S-8
(Registration No. 333-81023))10.8
    
    
    First Amendment to Commercial Lease dated September 7, 2004 by and
between The Irvine Company and Ambassadors, LLC (incorporated by
reference to Exhibit 10.21 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004)10.9
    
    
    Option Agreement, dated February 1, 2005, by and between Ambassadors
International, Inc. and BellJa Holding Company, Inc. (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
February 3, 2005)10.10
    
    
    Third Amendment to Lease Agreement, dated April 29, 2005, by and between
Ambassadors, LLC and AmericasMart Real Estate, LLC (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May
4, 2005)10.11
    
    
    Form of the Ambassadors International, Inc. 2005 Incentive Award Plan
Stock Option Grant Notice and Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to our Registration Statement on Form S-8
(Registration No. 333-104280) filed on November 2, 2005)10.12
    
    
    Form of the Ambassadors International, Inc. 2005 Incentive Award Plan
Restricted Stock Award Grant Notice and Restricted Stock Award Agreement
(incorporated by reference to Exhibit 10.1 to our Registration Statement
on Form S-8 (Registration No. 333-104280) filed on November 2, 2005)10.13
    
    
    Restricted Stock Agreement, dated December 27, 2005, between Ambassadors
International, Inc. and ORC Investments I, Inc., ORC Holdings, Inc. and
C.G. Grefenstette, E.C. Johnson and Bruce I. Crocker, Trustees Under a
Trust dated August 28, 1968 for Henry L. Hillman, Jr. (incorporated by
reference to Exhibit 10.29 to our Annual Report on Form 10-K for the
period ended December 31, 2005)10.14
    
    
    Assumption Agreement and 2006 Supplement to Trust Indenture, dated April
25, 2006, by and among AQ Boat, LLC, the Bank of New York as indenture
trustee, and the United States of America, represented by the Secretary
of Transportation, acting by and through the Maritime Administrator
(incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on April 28, 2006)10.15
    
    
    Amended and Restated 2006 Security Agreement, dated April 25, 2006, by
and between AQ Boat, LLC and the United States of America, represented
by the Secretary of Transportation, acting by and through the Maritime
Administrator (incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed on April 28, 2006)10.16
    
    
    Title XI Reserve Fund and Financial Agreement, dated April 25, 2006, by
and between AQ Boat, LLC and the United States of America, represented
by the Secretary of Transportation, acting by and through the Maritime
Administrator (incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K filed on April 28, 2006)10.17
    
    
    Depository Agreement, dated April 25, 2006, by and between AQ Boat, LLC
and the United States
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ExhibitNo.of America, represented by the Secretary of
Transportation, acting by and through the Maritime Administrator
(incorporated by reference to Exhibit 10.4 to our Current Report on Form
8-K filed on April 28, 2006)10.18
    
    
    Restricted Stock Agreement, dated April 25, 2006, by and among
Ambassadors International, Inc., Delta Queen Steamboat Company, Inc.,
American Queen Steamboat, LLC, Delta Queen Steamboat, LLC and
Mississippi Queen Steamboat, LLC (incorporated by reference to Exhibit
10.5 to our Current Report on Form 8-K filed on April 28, 2006)10.19
    
    
    Option Agreement, dated July 21, 2006, by and between Ambassadors Marine
Group, LLC and Nishida Tekko Corporation (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed on July 26, 2006)10.20
    
    
    Loan Agreement, dated as of September 1, 2006, by and among Ambassadors
International, Inc., Ambassadors Marine Group, LLC, Ambassadors, LLC,
Ambassadors Cruise Group, LLC, Cypress Reinsurance, Ltd and Bank of
America, N.A. (incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on September 8, 2006)10.21
    
    
    Employment Agreement, dated November 2, 2006, between Ambassadors
International, Inc. and Joseph J. Ueberroth (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7,
2006)*10.22
    
    
    The Ambassadors International, Inc. Amended and Restated 2005 Incentive
Award Plan (incorporated by reference to Appendix B to our definitive
proxy statement filed on Schedule 14A on April 18, 2007)10.23
    
    
    Amendment No. 1, dated as of March 27, 2007, to Loan Agreement dated as
of September 1, 2006 by and among Ambassadors International, Inc.,
Ambassadors Marine Group, LLC, Ambassadors, LLC, Ambassadors Cruise
Group, LLC, Cypress Reinsurance, Ltd. and Bank of America, N.A.
(incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on , 2007)10.24
    
    
    Amendment No. 2 dated as of November 16, 2007, to Loan Agreement by and
among Ambassadors International, Inc., Ambassadors Marine Group, LLC,
Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress Reinsurance,
Ltd. and Bank of America, N.A., dated as of September 1, 2006
(incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on November 20, 2007)10.25
    
    
    Change in Control Agreement dated as of January 14, 2008, by and between
Ambassadors International, Inc., and Blake T. Barnett (incorporate by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
January 17, 2008)*21.1
    
    
    Subsidiaries of Ambassadors International, Inc. (filed herewith)23.1
    
    
    Consent of Independent Registered Public Accounting Firm (filed herewith)23.2
    
    

Consent
of Independent Registered Public Accounting Firm (filed herewith)24.1
    
    
    Power of Attorney (contained on the signature page of this Report)31.1
    
    
    Certification of Principal Executive Officer Required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)31.2
    
    
    Certification of Principal Financial Officer Required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.1
    
    
    Certification of Principal Executive Officer Required by 18 U.S.C.
Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)32.2
    
    
    Certification of Principal Financial Officer Required by 18 U.S.C.
Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
 
 *
    
    Management contract or compensatory plan, contract or arrangement required to be filed as an
exhibit. 104