**TABLE OF CONTENTS**     **PART I**         Item 1. Business  2 Item 1A. Risk Factors  8 Item 1B. Unresolved staff comments  16 Item 2. Properties  17 Item 3. Legal Proceedings  17 Item 4. Reserved  17      **PART II**         Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities  17 Item 6. Selected Financial Data  18 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk  30 Item 8. Financial Statements and Supplementary Data  31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  65 Item 9A(T). Controls and Procedures  65 Item 9B. Other Information  66      **PART III**         Item 10. Directors, Executive Officers and Corporate Governance  66 Item 11. Executive Compensation  66 Item 12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters  66 Item 13. Certain Relationships and Related Transactions, and Director Independence  66 Item 14. Principal Accountant Fees and Services  66      **PART IV**         Item 15. Exhibits and Financial Statement Schedules  67 SIGNATURES  72 EXHIBIT INDEX  68 
 

 
**PART I****Item 1.*****Business*****Overview**     In 2009, Ambassadors International, Inc. (the “Company”) continued to implement its previouslyannounced business strategy of focusing on the international cruise operations of its subsidiary,Windstar Sail Cruises Limited (“Windstar Cruises”). Windstar Cruises maintains a fleet of threeinternationally-flagged luxury yachts that provide travel and cruise opportunities to explorehidden harbors and secluded coves of treasured destinations with sailings in the Caribbean, Europe,the Americas and the Greek Isles.     ***Discontinued Operations***     During the past year, we managed the wind down of operations or disposition of our otherbusiness segments and divisions, including our marine business, our reinsurance business, ourtravel and events business, and the Majestic American Line, the domestic riverboat division of ourcruise business.     During May 2009, we sold the marine business through a stock sale.     In September 2009, we ceased reinsurance operations by executing an assignment agreement witha third party whereby all re-insurance assets were assigned and the related liabilities wereassumed. In addition to the assignment agreement, the Company also entered into a profit sharingagreement with the third party that allows the Company to participate in profit distributions forthe transferred programs.     In April 2009 we sold a significant portion of the travel and events business by completing anasset sale of certain assets related to the housing portion of the business. The buyer also assumedcertain liabilities related to such business. We retained the events component of the business andcompleted all 2009 events and programs as scheduled. In December 2009 we completed the wind down ofthe residual operations  As of December, 31, 2009 we have ceased operations of this businesssegment and have no further obligations related to this segment.     In November 2009, we sold the *Queen of the West,*one of our vessels in the Majestic AmericaLine.     As of March 1, 2010, we have four remaining Majestic American Line vessels from an originalfleet of seven. The four vessels, moored on the Columbia and Mississippi rivers, are not operatingand are currently being marketed for sale or disposal, although there can be no assurances that wewill be able to locate qualified buyers or dispose of the vessels in a timely manner The *DeltaQueen®*is currently leased under a barefoot charter agreement under which the lessee is operating afixed location hotel on the ship in Tennessee. In January 2010,we pledged one of the vessels,*Columbia Queen,*as collateral with a credit card processer rather than placing additional cashdeposits with the institution for the purpose of accepting credit card deposits from our customersfor passenger ticket revenues.     In September 2009 we completed the transition of management of our Windstar vessels from athird-party vendor to in-house management. This transition is expected to result in efficiencygains and lower operating costs.     ***Debt Restructuring and Credit Facility***     On November 13, 2009, we completed an exchange offer (the “Exchange Offer”) in which holdersof approximately $65.8 million aggregate principal amount of the Company’s 3.75% Convertible SeniorNotes due 2027 (the “Convertible Notes”) exchanged their Convertible Notes for approximately $18.0million aggregate principal amount in newly issued 10% senior secured notes due 2012 (the “SeniorSecured Notes”) and approximately 15.2 million shares ofthe Company’s common stock. Approximately$31.2 million aggregate principal amount of the Convertible Notes remain outstanding.     On March 23, 2010, we established a term loan and revolving credit facility for workingcapital purposes (the “Credit Facility”), the terms of which are governed by a Credit and GuarantyAgreement (the “Credit Agreement”),by and among the Company, our subsidiaries (as borrowers and/or guarantors), WhippoorwillAssociates, Inc. (and/
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or certain funds and accounts managed by it) (“Whippoorwill”), as lenders, and LawDebenture Trust Company of New York, as administrative agent and as collateral agent. The CreditFacility provides for a $5 million revolving credit facility and for a $10 million term loan to bedrawn in two tranches, all of which is to be used to fund dry-dock costs for two Windstar vesselsas well as working capital and other corporate purposes of the Company and its subsidiaries. OnMarch 23, 2010, the first tranche of the term loan, in the amount of $7.5 million, was funded.Borrowings under the Credit Facility bear interest at a rate of 12 percent per annum, are secured(on a first priority basis) by substantially all the assets of the Company and its subsidiaries,and mature on January 2, 2012. The Credit Facility provides for payment of a 4% annual facilityfee to the lenders and customary agent fees.     Our principal executive offices are located at 2101 4th Avenue Suite 210 SeattleWashington, 98121 and our telephone number is (206) 292-9606.**Business Strategy**     In February 2009, we announced our intention to focus our operations solely on theinternational cruise line market. We have now either sold or ceased operations for all of ourbusiness not related to Windstar Cruises in order to concentrate our efforts on the small luxuryship marketplace. In addition, during 2009, we completed the relocation of our corporateheadquarters from Newport Beach, California to Seattle, Washington where the U.S. operational andmanagement personnel of Windstar Cruises are located.     We believe that the Windstar Cruises operations have the potential to provide long term growthfor our shareholders. Our strategy for Windstar Cruises is to become a leader in the luxury smallship cruise segment. A key part of our business strategy will be achieving increased occupancyrates, higher rates on ticket sales, cost savings in the operations of our ships, as well asforming strategic partnership alliances or acquisitions that we believe are complementary to ourinternational cruise business. We believe that by acquiring or developing strong brands in theluxury small ship category, we can become a global provider of vacation experiences to unique anddesirable destinations. We intend to continue evaluating and pursuing strategic partners andacquisition opportunities that are complementary to our Windstar Cruises operations.**Business Operations**     For the year ended December 31, 2009, and for purposes of this report, we reported thefollowing business segments: **•** Cruise and  **•** Corporate and Other, general corporate assets and liabilities          Our marine, reinsurance, and travel and events businesses were sold or discontinued during2009 and are presented as discontinued operations for all periods in the accompanying consolidatedfinancial statements. See “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Business Segment Information” and Note 17, “Business Segments” in the Notes to theConsolidated Financial Statements listed under Item 8 for financial information concerning ourbusiness segments. We continue to market our Majestic America vessels and continue to wind downthis division. Due to uncertainties regarding the timing of the sale or disposition of certainvessels, only those vessels for which we have determined a buyer or plan of disposal are classifiedas assets available for sale in the accompanying consolidated financial statements.     ***Cruise Segment***     ***Windstar Cruises***     We conduct the cruise operations of Windstar Cruises and the wind down of operations ofMajestic America Line, within our Ambassadors Cruise Group, LLC (“ACG”) subsidiary.     In April 2007, we formed Ambassadors International Cruise Group, LLC (“AICG”) as a subsidiaryof ACG and purchased Windstar Cruises, a luxury, small ship cruise line consisting of threeinternational-flagged motor-sail yachts: *Wind Surf*, *Wind Spirit*and *Wind Star*. Windstar Cruises’fleet of luxury yachts explores hidden harbors and
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secluded coves of the world’s most treasured destinations. Windstar Cruises offers sailings inthe Caribbean, Europe, the Americas and the Greek Isles.     Sailing under the banner “180 Degrees From Ordinary,” Windstar Cruises was created with thevision to offer an alternative to the typical cruise or resort vacation. Windstar Cruises uniqueconcept of sailing has led the cruise industry in the luxury small ship, casual attire andalternative dining arenas.     Windstar Cruises’ ships are revolutionary in concept and design. Officially designated asmotor-sail-yachts, the ships have billowing white sails which are operated from the bridge bycomputer micro-chips and navigational devices. Each of our ships offers an elegant experienceunique to itself and intimate access to the scenic places, historical events and varied cultures ofthe world. The intimate ships ensure a comfortable, yet refined, cruise experience. Our attentionto quality focuses on deluxe comfort and warm, attentive service that makes voyages on our ships atruly unique experience.     On Windstar, all staterooms have ocean views, luxurious linens, Euro Top mattresses,flat-screen TV, DVD and stereo CD player, iPod® Nano and Bose Soundock® music system, bathrobes,slippers and L’Occitane bath amenities. The ships offer a spa, gaming casino, fitness room,library, outdoor pool and hot tub. The library stocks an array of international newspapers, booksand games, and a multi-media selection of more than 500 DVD titles and compact discs available forcomplimentary use.     Exceptional cuisine is prepared by Windstar’s expert culinary team, catering to the variedlifestyles of savvy travelers in The Restaurant on all three ships and in Degrees on *Wind Surf*.Guests enjoy water views, exquisite sunsets and star-filled skies while dining alfresco on 5-starcuisine at poolside grill Candles on all three ships and at the seafood bar Le Marché on *Wind Surf*.A water-sport platform is available on all ships when the ship is at anchor, and is subject toweather conditions and local restrictions. Complimentary offerings include: water skiing,kayaking, sailing, ski-tubing and windsurfing.     Windstar’s Signature Collection Host Series offers guests the unique opportunity to cruisewith distinguished experts in the culinary arts, wine, photography and writing.     To provide our customers with a varied travel experience, we contract with local agencies toprovide escorted tours and activities at our ports of call. As a convenience to our passengers, wealso arrange hotel accommodations as well as air and land transportation to and from ourembarkation and disembarkation locations.The majority of our revenues are derived from individual passenger ticket sales whereby ourcustomers enjoy leisure travel and vacations. We also derive revenues from charter and incentivesales to companies that provide incentive and reward travel to its employees as well asorganizations wishing to charter a private sailing.In the third quarter of 2009 we transitioned the management of deck, engine and hotel operationsfrom a third party management company to our personnel based in Seattle, Washington. As part ofthe transition, we recruited and hired new employees with the technical and industry knowledge toprovide expertise in the business and regulatory oversight of the vessels.The three ships of the Windstar fleet offer a total of 608 passenger berths. We utilize passengerberths as our measurement of capacity on our ships. Each passenger berth represents a bed that canbe sold to customers for overnight accommodations on our cruises.               **Passenger**  **In-Service**    **Ship** **Berths**  **Year**  **Itineraries** ****•** Wind Surf**  **312**   **1989**  **International******•** Wind Star**  **148**   **1986**  **International******•** Wind Spirit**  **148**   **1987**  **International**             
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***Majestic American Line***     The Majestic America Line was a domestic provider of overnight passenger cruises along theinland rivers and coastal waterways of North America. During 2008, we owned or leased sevenU.S.-flagged cruise ships under the brand, including the *Empress of the North*, *Queen of the West*,*Columbia Queen*, *Contessa*, *American Queen**®*, *Delta Queen**®* and *MississippiQueen**®*.     During 2008 we operated five of these seven vessels by offering cruises through Alaska’sInside Passage as well as on the Columbia, Snake, Ohio, Cumberland and Mississippi rivers. InApril 2008, we announced our intention to sell the Majestic America Line. The *Empress of theNorth*and the *American Queen**®* were surrendered to the United States through theDepartment of Transportation Maritime Administration (“MARAD”) in August 2008 and November 2008,respectively. In November 2009 we sold the *Queen of the West*to a third party in a substantiallyall cash sales transaction.     In January 2009 DQ Boat, LLC, a wholly owned subsidiary of the Company and owner of the *DeltaQueen**®* entered into a Bareboat Charter Agreement with Delta Queen, LLC to lease the*Delta Queen*® for use as a fixed location boutique hotel, restaurant and bar inChattanooga, Tennessee.     The remaining Majestic American Line vessels at December 31, 2009, (*Columbia Queen*, *Contessa,Mississippi Queen**®* and the *Delta Queen)**®*have been marketed for sale overthe last fifteen months but due to current U.S. economic conditions and more stringent access tocredit, interested and qualified buyers have been difficult to locate. We will continue ourefforts to sell or dispose of the remaining Majestic vessels in 2010, although there can be noassurances that we will be successful in the timely disposition of the vessels or in locatingqualified buyers.***Corporate and Other Segment***     Our corporate and other segment includes general corporate assets and liabilities (primarilycash, cash equivalents and long term debt), and other activities that are not directly related toour cruise operating segment.**Competition**     The cruise industry is a highly competitive marketplace with several larger operatorsproviding cruise vacations internationally. We compete in terms of price, itineraries, services andship types. In addition, cruising is one of several options that people have when selecting avacation. We face competition from other vacation operators that provide leisure and vacationalternatives including resorts, hotels and packaged tours. We believe that we provide a uniqueexperience that is appealing to our target market, but other alternatives may become moreappealing. There can be no assurance that our present or future competitors will not exertsignificant competitive pressures on us.**Regulation**     *Ship Maintenance*     Operation of our internationally flagged ships is subject to regulations established by theInternational Safety Management Code (“ISM”) that are enforced by the Administration of the flagstate and other international class societies. Windstar Cruise vessels are flagged under theBahamas jurisdiction. Among these regulations is the requirement that the ships be taken out ofoperation and removed from the water for inspection of the exterior of the hull on a periodicbasis, referred to as drydocking, as well as the performance of certain regularly scheduledmaintenance service. Our fleet must be drydocked at least twice every five years and therefore aretypically drydocked at preplanned times at the beginning or conclusion of a sailing season of theCaribbean or European itineraries.     *Passenger Health, Safety and Security*     We are subject to various international and local laws, regulations and treaties that govern,among other things, safety standards applicable to our ships, health and sanitary standardsapplicable to our passengers, security standards onboard our ships and at the ship/port interfaceareas, and financial responsibilities to our passengers.
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These issues are, and we believe will continue to be, an area of focus by the relevantauthorities. This could result in the enactment of more stringent regulation of cruise ships thatwould subject us to increasing compliance costs in the future.     *Environmental*     We are subject to numerous environmental laws. Our marine projects can involve the handling ofhazardous and other highly regulated materials which, if improperly handled or disposed of, couldsubject us to civil and criminal liabilities. It is impossible to reliably predict the full natureand effect of judicial, legislative or regulatory developments relating to health and safetyregulations and environmental protection regulations applicable to our operations. The applicableregulations, as well as the technology and length of time available to comply with thoseregulations, continue to develop and change. In addition, regulations covering our past activitiesor those of our predecessors could adversely affect us.     Various country and local international governments or regulatory agencies have enacted or areconsidering new environmental regulations or policies that could adversely affect the cruisevacation industry, including new restrictions on the type of fuel that can be utilized in certaininternational waters. Current and future environmental laws and regulations, or liabilities arisingfrom past or future releases of, or exposure to, hazardous substances or to ship discharges, couldincrease the cost of compliance or otherwise adversely affect the value of our vessels.     *Taxation*     The following summary of the principal United States tax laws applicable to our cruiseoperations, as well as the conclusions regarding certain issues of tax law, are based on theprovisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing andproposed U.S. Treasury Department regulations, administrative rulings, pronouncements and judicialdecisions, all as of the date of this Annual Report. No assurance can be given that changes in orinterpretation of existing laws will not occur or will not be retroactive or that anticipatedfuture circumstances will in fact occur. Our views should not be considered official, and noassurance can be given that the conclusions discussed below would be sustained if challenged bytaxing authorities.     We own and operate our Windstar Cruise fleet of three Bahamian registered cruise vesselsthrough foreign corporations that are subsidiaries of AICG which is a wholly owned subsidiaryincorporated in the Marshall Islands. As a result of special tax elections, these foreignsubsidiary corporations are treated as “branches” of AICG. Therefore, for purposes of the followingdiscussion, AICG and not the subsidiaries will be treated as the owner and operator of the WindstarCruise fleet.     *Taxation of Cruise Income: In General*     We derive substantially all of our gross income from the operation of the Windstar Cruisesvessels in international transportation. This income principally consists of hire for thetransportation of passengers, which is referred to herein as “cruise income.”     Under Section 883 of the Code, we believe we qualify for exemption from U.S. federal tax onour U.S. source cruise income derived from Windstar Cruises operations since for more than half thedays of the years 2009 and 2008: (i) Windstar Cruises was organized under the laws of the Republicof the Marshall Islands, a foreign country that grants the requisite equivalent exemption from taxon cruise income earned by U.S. corporations and (ii) Windstar was a “controlled foreigncorporation” as defined by Section 957 of the Code (“CFC”) and more than 50% of the stock was ownedby a U.S. domestic “C” corporation, namely us.     *Taxation in the Absence of an Exemption under Section 883*     In the absence of an exemption under Section 883, a foreign corporation such as WindstarCruises would be subject to either the net income and branch profits tax regimes of Section 882 andSection 884 of the Internal Revenue Code (the “net tax regime”) or the four percent of gross incometax regime of Section 887 of the Internal Revenue Code (the “four percent tax regime”).
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     We believe we would be subject to the net tax regime in the absence of an exemption underSection 883. Under the net tax regime, U.S. source shipping income, net of applicable deductions,would be subject to a federal corporate income tax of up to 35% and the net after-tax income wouldbe potentially subject to a further branch tax of 30%. In addition, interest paid by the foreigncorporations, if any, would generally be subject to a branch interest tax.**Insurance**     We maintain a variety of insurance coverages for the operations of our business, including butnot limited to coverage for professional and general liability. We also maintain insurance coverageon our ships, real property and personal property, and as required on leased properties.     We carry marine liability insurance on our ships through various mutual protection andindemnity associations. Our marine liability insurance arrangements are typical of common marineindustry practices and, subject to certain deductibles, provide coverage for losses, other thanhull physical damage losses, including casualty damage by the ships and claims by crew members,passengers and other third parties. As a member of mutual protection and indemnity associations, wepay our annual premiums based largely on our risk characteristics and loss experience, and the lossexperience of other members. In addition, because such associations and other maritime mutualindemnity associations around the world pool a portion of their loss experience in risk sharingarrangements, these associations also may be affected by the loss experience of other mutualprotection and indemnity associations. In addition to this pooling arrangement, these associationshave additional independent reinsurance protection.     Our annual protection and indemnity insurance premium consists of annual mutual premiums. Wemay be liable for supplemental premiums in excess of the anticipated amount in the event that anassociation incurs heavy losses or experiences unusual circumstances.     We also carry a multi-line marine and non-marine package policy that is underwritten byvarious insurers. This package policy provides hull and machinery coverage that insures againstphysical loss and damage to the Windstar Cruises ships, subject to various deductibles. The shipsare insured for their appraised value. Although we believe the risk of a total loss of our ships isremote, in all likelihood, the replacement costs would significantly exceed these coverage limits.Additionally, this package policy provides coverage against loss of revenue and extra expensesincurred in connection with a marine casualty or other covered interruption in service, subject tovarious deductibles.     We believe our insurance coverage is adequate based on our assessment of the risks to beinsured, the probabilities of loss and the relative cost of available coverages. However, there canbe no assurance that the insurance we maintain will be adequate in the event of a claim, or thatsuch insurance will continue to be available in the future or at reasonable prices.**Environment**     We are subject to federal, state and foreign environmental laws and regulations. We believethat our operations comply in all material respects with applicable environmental laws andregulations in each country where we operate. Although we continue to make capital expenditures forenvironmental protection, we do not anticipate any significant expenditure in order to comply withsuch laws and regulations that would have a material impact on our earnings or competitiveposition. We are not aware of any pending litigation or significant financial obligations arisingfrom current or past environmental practices that are likely to have a material adverse effect onour financial position. We cannot assure you, however, that environmental problems relating toassets owned or operated by us will not develop in the future, and we cannot predict whether anysuch problems, if they were to develop, could require significant expenditures on our part. Inaddition, we are unable to predict what legislation or regulations may be adopted or enacted in thefuture with respect to environmental protection and waste disposal.**Employees**     As of December 31, 2009, we employed 58 employees of whom 57 were full time employees and 1was a part time employee. Our U.S. employees are primarily located in Seattle, Washington. We havefull-time employees engaged in management, marketing and sales, operations, and administration andfinance. None of our U.S. employees are subject to collectivebargaining agreements or arerepresented by a union. Crew members are contracted through third-party manning agencies and areprimarily from countries of Northern Europe, the
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Philippines and Indonesia. Officers of our fleet are recruited for us by a British manningagency. Deck, engine and hotel crew members are members of certain international unionsestablished by their countries of origin. We believe that our labor relations are good.**Seasonality**     Our business is seasonal. We recognize cruise-related revenues at the completion of thecruise. As a result, a majority of our operating results will be recognized in the third quarter ofeach fiscal year, which coincides with the cruising season and highest occupancy rates. Our futureannual results could be adversely affected if our revenue were to be substantially below seasonalnorms during any quarter, particularly the third quarter of any fiscal year.**Available Information**     Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports are available without charge on our website, www.ambassadors.com,as soon as reasonably practicable after they are filed electronically with or furnished to theSecurities and Exchange Commission. We are providing the address to our Internet site solely forthe information of investors. We do not intend the address to be an active link or to otherwiseincorporate the contents of the website into this report. The public may also read and copy anymaterials we file with the Securities and Exchange Commission at the Securities and ExchangeCommission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtaininformation on the operation of the Public Reference Room by calling the Securities and ExchangeCommission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains athttp://www.sec.gov an Internet website that contains reports, proxy and information statements, andother information regarding issuers such as us that file electronically with the Securities andExchange Commission.**Item 1A.*****Risk Factors***     You should consider carefully the specific risk factors set forth below and other informationcontained or incorporated by reference in this Annual Report on Form 10-K, as these are importantfactors, among others, that could cause our actual results to differ from our expected orhistorical results. You should note that the risks described below are not the only risks that weface. The risks listed below are only those risks relating to our operations that we consider to bematerial. There may be additional risks that we currently consider not to be material or that weare not currently aware of, that could harm our business, financial condition and results ofoperations and cash flows. As a result, the trading price of our common stock could decline, andinvestors could lose the money they paid to buy our common stock.**Risks Related to Our Company and Our Industry**  *The adverse impact of the worldwide economic downturn and the effects of general economicconditions on the demand for cruises could adversely impact our operating results, cash flows andfinancial condition.*     The demand for cruises is affected by international, national and local economic conditions.The current worldwide economic downturn has had an adverse effect on vacationers’ discretionaryspending and consumer confidence, which has resulted in reduced cruise booking, decreased cruiseprices and lower onboard revenues for us and for our competitors. We cannot predict the extent orduration of this downturn or the timing or strength of a subsequent economic recovery. However, ifthe downturn continues for an extended period of time or worsens, we could experience a prolongedperiod of reduced bookings, depressed cruise prices and reduced onboard revenues. This wouldadversely impact our operating results, cash flows and financial condition including the impairmentof the value of our ships and intangible assets.Further, adverse changes in the economic climate, such as higher fuel prices, higher interest ratesand changes in governmental policies could reduce the discretionary income of our potential cruisepassengers or companies scheduling incentive charters. Consequently, this could negatively affectdemand for vacations, including cruise vacations, and for corporate incentive travel, all of whichare discretionary purchases. In addition, the travel industry is highly susceptible to unforeseenevents, such as wars, acts of terrorism, civil disturbances, political instability, governmentalactivities, deprivation of contract rights and adverse publicity regarding the outbreak ofinfections on
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cruises. Demand for our products and services may also be adversely affected by naturaloccurrences such as hurricanes, earthquakes, epidemics and flooding in regions in which we offerour products and provide our services. Periods of instability or uncertainty surrounding the travelindustry may reduce the demand for our products and could adversely affect our business, financialcondition and results of operations.*We have significant amount of indebtedness, which could adversely affect our cash flows andbusiness.*     We currently have outstanding $18 million in Senior Secured Notes maturing in January 2012 and$31 million in Convertible Notes maturing in April 2027. The Convertible Notes contain aprovision whereby the note holders have the option to require us to repurchase the ConvertibleNotes at 100% of their principal amount in April 2012 or earlier if certain events occur (includinga change in control or a delisting of our common stock on the NASDAQ Global Market, unless ourcommon stock becomes listed or traded on another securities exchange or electronic tradingplatform). In addition we have a $15 million working capital facility that includes a $10 millionterm loan and a $5 million revolving line of credit that matures in January 2012.This outstanding indebtedness could: **•** require us to dedicate the majority of our cash flows from operations to payments on ourdebt, thereby reducing funds available for working capital, capital expenditures,acquisitions and other growth purposes;  **•** increase our vulnerability to, and limit flexibility in planning for, adverse economicand industry conditions;  **•** adversely affect our credit rating;  **•** limit our ability to obtain additional financing to fund future working capital, capitalexpenditures, additional acquisitions and other general corporaterequirements;  **•** create competitive disadvantages compared to other companies with less indebtedness; and  **•** limit our ability to apply proceeds from an offering of securities or asset sale topurposes other than the repayment of debt.     Further, while the Senior Secured Notes provide for payment-in-kind interest, if our operatingcash flow decreases, we may be unable to service our debt, including the Convertible Notes andSenior Secured Notes, borrowings under the Credit Facility, and any other debt we may incur,without refinancing or restructuring our debt, selling our assets or operations, or raisingadditional debt or equity capital. If these alternatives are not available in a timely manner or onsatisfactory terms or are not permitted under our existing agreements, we may default on our debtobligations. Such a default could result in the acceleration of all or a substantial portion of ourdebts or have other serious adverse consequences for  holders of our debt securities and ourcommon stock.     Also,substantially all of our long-term indebtedness is scheduled tomature or may need to be repaid during 2012.  The borrowings underour new Working Capital Credit Facility will mature on January 2, 2012, and our 10% Senior Secured Notes will mature on January 15, 2012. In addition, the holders of our 3.75% Convertible Senior Notes have the right torequire us to repurchase up to 100% of the outstanding Convertible Notes, in cash, at 100% oftheir principal amount (together with accrued interest), on April 15, 2012. We do not expect that our cash flows from operations will generate sufficient funds to enable us to repay orrepurchase this indebtedness when we are required to do so in 2012. Accordingly, our ability tosatisfy these obligations will depend upon our ability to refinance this indebtedness or toobtain additional funds through borrowings, sales of debt or equity securities, asset salesor other transactions.          *The Senior Secured Notes and the Credit Facility contain restrictive covenants that may limitour ability to operate our business and creates a risk of default.*          The indenture for the Senior Secured Notes and the Credit Agreement for our CreditFacility contain various restrictive covenants (including a covenant in the Indenture requiring usto maintain a minimum cash balance of $2 million after entering into the working capital facilityin March 2010). Our Credit Facility also requires us to comply with certain financial covenantsmeasured by our financial results on an ongoing basis. Any of our future debt agreements may alsocontain restrictive covenants. These covenants may limit our ability to operate our business andcreate a risk of default. Our ability to comply with these covenants is dependent on our futureperformance, which will be subject to many factors, some of which are beyond our control, includingprevailing economic conditions.          As a result of these covenants, our ability to respond to changes in business andeconomic conditions and to obtain additional financing, if needed, may be significantly restricted,and we may be prevented from engaging in transactions that might otherwise be beneficial to us. Inaddition, our failure to comply with these covenants could result in a default under the SeniorSecured Notes or under the Credit Agreement, and could cause a cross-default
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under the Convertible Notes and/or our other indebtedness, permitting the holders of any suchindebtedness to accelerate such indebtedness. If any of our indebtedness is accelerated, we maynot have sufficient funds available to repay such debt.          *The Company may receive deemed dividends from its foreign subsidiaries that could result intaxable income in future years.*          It is possible that the Company will receive one or more deemed dividends in future yearsas a result of the guarantees by the Company’s foreign subsidiaries of the Company’s obligationsunder the Senior Secured Notes. Such deemed dividends would constitute taxable income for theCompany and could result in a U.S. federal income tax liability for the Company.  *Our financial performance is subject to seasonal and quarterly fluctuations which could result insubstantial losses for investors purchasing shares of our common stock and could result insecurities class action in litigation.*     Our business is seasonal. We recognize cruise-related revenues at the completion of thecruise. As a result, a majority of our operating results will be recognized in the second andthird quarters of each fiscal year, which coincides with the cruising season. Our future annualresults could be adversely affected if our revenue were to be substantially below seasonal normsduring any quarter, particularly the third quarter of any fiscal year. Our operating results mayfluctuate as a result of many factors, including: **•** our ability to effectively and efficiently operate our cruise operations;  **•** customer cancellation rates;  **•** competitive conditions in the industry in which we operate;  **•** marketing expenses;  **•** extreme weather conditions;  **•** the impact of new laws and regulations affecting our business;  **•** negative incidents involving cruise ships, including those involving the health andsafety of passengers;  **•** cruise ship maintenance problems;  **•** reduced consumer demand for vacations and cruise vacations;  **•** changes in fuel, food, payroll, insurance and security costs;  **•** changes in relationships with certain travel providers;  **•** changes in vacation industry capacity;  **•** other economic factors and other considerations affecting the travel industry; and  **•** other factors discussed in this Annual Report on Form 10-K.     As a result of these and other factors, our operations and financial condition could suffer,which could cause our annual or quarterly operating results to be below the expectations of publicmarket analysts and investors. In such event, the price of our common stock could be adverselyaffected. In the past, securities class action litigation has often been brought against companieswhich experienced volatility in the market price of its securities. We may in the future be thetarget of similar litigation. Securities litigation could result in substantial costs and divertmanagement’s attention and resources.
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     *If we are unable to effectively compete against our competitors, our financial condition willsuffer.*     The cruise industry is highly competitive. We compete with a variety of other companies thatprovide similar products and services. We operate in the vacation market, and cruising is one ofmany alternatives for people choosing a vacation. We therefore risk losing business not only toother cruise lines, but also to other vacation operators that provide other leisure options,including hotels, resorts and package holidays and tours. We face significant competition fromother cruise lines, both on the basis of cruise pricing and also in terms of the nature of shipsand services we offer to cruise passengers.     We believe the barriers to enter the industry in which we operate are relatively low. Certainof our competitors have substantially greater financial, marketing and sales resources than we do.As a result, there can be no assurance that our present competitors or competitors that elect toenter the marketplace in the future will not exert significant competitive pressures on us. Thesecompetitive factors could adversely affect our business, financial condition and results ofoperations.*Overcapacity within the cruise vacation industry, a reduction in demand or economic uncertaintiescould adversely affect our revenues and profitability and impair our asset values.*     Cruising capacity has grown in recent years, and we expect it to increase further as cruisevacation companies introduce new ships. Demand for cruises has been and is expected to continue tobe dependent on economic conditions. Economic changes may reduce demand for cruise vacations andmay lead to reduced occupancy and/or price discounting which, in turn, could adversely affect ourresults of operations and financial condition and impair our asset values.*Our business could be adversely affected by unanticipated casualty losses.*     Due to the nature of our business, we may be subject to liability claims arising out ofaccidents or disasters causing injury to our customers, including claims for serious personalinjury or death. Although we have never experienced a liability loss for which we did not haveadequate insurance coverage, there can be no assurance that insurance coverage will be sufficientto cover one or more large claims or that the insurance carrier will be solvent at the time of anycovered loss. There can be no assurance that we will be able to obtain sufficient insurancecoverage at acceptable premium levels in the future. Successful assertion against us of one or aseries of large uninsured claims, or of one or a series of claims exceeding our insurance, couldadversely affect our business, financial condition and results of operations.*No assurance can be given that our insurance costs will not escalate.*     Our protection and indemnity insurance is provided by various mutual protection and indemnityassociations. As associations, they rely on member premiums, investment reserves and income, andreinsurance to manage liability risks on behalf of their members. Increased investment losses,underwriting losses or reinsurance costs could cause domestic or international marine insuranceassociations to substantially raise the cost of premiums, resulting not only in higher premiumcosts, but also higher levels of deductibles. Increases in our premiums or deductible levels couldadversely affect our operating costs.*We are dependent upon key personnel.*     Our performance is substantially dependent on the continued services and performance of oursenior management and certain other key personnel. The loss of the services of any of our executiveofficers or other key employees could adversely affect our business, financial condition andresults of operations. Our future success also depends on our ability to identify, attract, hire,train, retain and motivate other highly skilled managerial, operational, marketing and customerservice personnel. The failure to retain and attract necessary managerial, operational, marketingand customer service personnel could adversely affect our business, financial condition and resultsof operations.
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     Our chief executive officer, Arthur Rodney, became our interim chief executive officer in2009. Mr. Rodney and the other members of our senior management are all at-will employees who mayelect to leave the Company at any time.*International political and other world events affecting safety and security could adverselyaffect the demand for cruises, which could harm our future sales and profitability.*     Demand for cruises and other vacation options has been, and is expected to continue to be,affected by the public’s attitude towards the safety and security of travel. Events, such asterrorist attacks in the U.S. and the threats of additional attacks in the U.S. and elsewhere,concerns of an outbreak of additional hostilities and national government travel advisories,together with the resulting political instability and concerns over safety and security aspects oftraveling, have had a significant adverse effect on demand and pricing in the travel and vacationindustry and may continue to do so in the future. Decreases in demand could lead to pricediscounting which, in turn, could reduce the profitability of our business.*Incidents or adverse publicity concerning the cruise vacation industry or unusual weatherconditions could adversely affect our reputation and harm our future sales and profitability.*     The operation of cruise ships involves the risk of accidents, including those caused by theimproper operation of our ships, passenger and crew illnesses such as the spread of contagiousdiseases, mechanical failures, fires, collisions, inappropriate crew or passenger behavior, weatherevents, security breaches and other incidents which may bring into question passenger safety,health, security and vacation satisfaction and thereby adversely affect future industry performanceand expose us to claims by those that may be harmed. It is possible that we could be forced toalter itineraries or cancel a cruise or a series of cruises due to these or other factors, whichwould adversely affect our results of operations and financial condition due to loss of revenuefrom cancellations passenger relocation, crew expenses, ship repairs and passenger refunds or otheraccommodations. Incidents involving cruise ships, adverse media publicity concerning the cruisevacation industry, events such as terrorist attacks, war and other hostilities, or unusual weatherpatterns or natural disasters, such as storms and earthquakes, could impact demand and consequentlyadversely affect our profitability.*If we do not complete drydocking on schedule or if ship mechanical faults result in unscheduleddrydockings and repairs, we will incur additional expenses and may also lose revenues by cancelingplanned cruises.*     When we drydock one of our cruise ships as is required for inspection of the exterior of thehull on a periodic basis, we lose the revenue from that ship’s operations for the period it is outof service. We also incur the additional cost of the drydocking. Also, our cruise ships from timeto time experience mechanical problems or extended or extraordinary maintenance. Mechanical faultsor extended maintenance may result in delays or cancellation of cruises or necessitate unscheduleddrydocks and repairs. For example, in November 2007 our *Wind Star*was placed into a scheduleddrydock that required more repairs than originally anticipated. Our *Wind Spirit*experienced an oilleak due to a broken seal in the controllable pitch propeller in December 2007, which caused us tocancel one sailing. These types of events together with any related adverse publicity, couldadversely affect our financial results.*Unavailability of ports of call may adversely affect our profits by reducing our sales of cruisevacations.*     We believe that port destinations are a major reason why passengers choose to go on aparticular cruise or on a cruise vacation. The availability of ports is affected by a number offactors, including, but not limited to, existing capacity constraints, security concerns, adverseweather conditions and natural disasters, financial limitations on port development, localgovernment regulations and local community concerns about port development and other adverseimpacts on their communities. Any limitations on the availability of our ports of call couldadversely affect our results of operations by reducing our sales of cruise vacations.
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*Unexpected and adverse changes in the foreign countries in which we operate could result inbusiness disruptions, increased costs and potential losses.*     We offer cruise itineraries with destinations in Costa Rica, Greece, Spain, Portugal, Turkey,Italy, France, British Virgin Islands, Barbados, French West Indies, Grenada and other foreignports of call. We anticipate that our foreign destinations will change and expand over time.Operating in the international marketplace exposes us to a number of risks including: **•** abrupt changes in foreign government policies and regulations;  **•** embargoes;  **•** trade restrictions;  **•** tax treatment;  **•** U.S. government policies relating to foreign operations; and  **•** international hostilities.     We also face significant risks due to civil strife, acts of war, terrorism and insurrection.To the extent that our international business is affected by unexpected and adverse foreigneconomic and political conditions, we may experience business disruptions which could significantlyreduce our revenues and results of operations.     *Our international operations expose us to foreign currency fluctuations that could increase ourU.S. dollar costs.*     Local purchases from international ports of call and other suppliers are typically denominatedin currencies other than the US dollar. This results in additional risk of fluctuating currencyvalues and exchange rates. Changes in the value of foreign currencies could increase our U.S.dollar costs for products and services. Any increased costs as a result of foreign currencyfluctuations could adversely affect our results of operations and cash flows.*We expect to face significant and increasing costs to maintain our ships as they age and may havedifficulty replacing our ships when needed, which could adversely affect our result of operationsand financial condition.*     We believe that the costs to maintain our fleet of ships will increase over time. The averageage of our ships is approximately 20 years. We expect to incur increasing expenses to operate andmaintain our ships in good condition as they age. Eventually, our ships will need to be replaced.We may not be able to replace our ships with new ships based on uncertainties related to financing,timing and shipyard availability.*We may be required to record impairments on our long-lived and intangible assets which couldhave an adverse material impact on our financial condition and results of operations.*During 2009 we recorded total impairment charges of $51.3 million related to our vessels and theWindstar Cruises trade name. We continuously assess the value of our long lived and intangibleassets. There can be no assurances that there will not be an additional impairment with respect tothe value of such assets in the future. If these assets become further impaired, the amount ofsuch impairment will be expensed in the period in which such impairment is recognized. This couldhave a material adverse impact on our financial condition and results of operations.
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*Environmental, health and safety, financial responsibility, tax and maritime legislation andother laws and regulations could adversely affect us by restricting our operations and increasingour operating costs.*     As described in Item 1, “Business — Regulation”, we are subject to numerous laws andregulations covering various aspects of our businesses. Compliance with those or future laws andregulations could be costly and could restrict our operations, and failure to comply with any suchlaws could result in penalties or otherwise adversely affect us.     Regulations and treaties that govern safety standards applicable to our ships, health andsanitary standards applicable to our passengers, security standards onboard our ships and at theship/port interface areas, and financial responsibilities to our passengers continue to be, an areaof focus by the relevant authorities, which could result in the enactment of more stringentregulation of cruise ships that would subject us to increasing compliance costs in the future.     A failure to operate in accordance with international maritime security regulations or anapproved security plan may result in the imposition of a fine or control and compliance measures,including the suspension or revocation of the security plan, thereby making the ship or facilityineligible to operate. We are also required to audit these security plans on an annual basis and,if necessary, submit amendments to our security plans for their review and approval. Failure totimely submit the necessary amendments may lead to the imposition of the fines and control andcompliance measures mentioned above.In addition, many aspects of our operations are subject to environmental regulations. Variouscountry and local international governments or regulatory agencies have enacted or are consideringnew environmental regulations or policies that could adversely affect the cruise vacation industry,including new restrictions on the type of fuel that can be utilized in certain internationalwaters. Current and future environmental laws and regulations, or liabilities arising from past orfuture releases of, or exposure to, hazardous substances or to ship discharges, could increase thecost of compliance or otherwise adversely affect the value of our vessels, resulting in adverseaffects on our business and financial condition. We continue to evaluate ongoing environmentalregulation developments at the international, federal and state levels and assess the potentialassociated impacts on our business and operations.*We may be subject to significantly higher U.S. income taxes if we do not qualify forexemption from tax or for deferral of tax under U.S. tax laws in respect to our cruise income.*     Changes under the Code may adversely affect the U.S. federal income taxation of our U.S.source shipping income derived from Windstar Cruises. In addition, changes in other countries’ orstates’ income or other tax laws, regulations or treaties could also adversely affect our netincome.     We believe that substantially all of the U.S. source shipping income of Windstar Cruisesqualifies for exemption under Section 883 of the Code. We further believe that substantially all ofthe income derived from international operations qualifies for deferral from tax, until repatriatedby dividend or otherwise, back to the United States under the “controlled foreign corporation”(“CFC”) regime of the Code.     However, if as a result of changes in the law, we do not qualify for exemption from tax underSection 883, or qualify for deferral of tax under the CFC regime, in respect to our cruise income,we would have significantly higher U.S. income tax expenses. In addition, changes in the income orother tax laws affecting our industry elsewhere in the world could result in higher income and/orother taxes, such as value added taxes, being levied on our cruise operations, thus resulting inlower net income.     For additional information see “Taxation” under Part I, Item 1. Business.
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**Additional Risks Related to Our Stock***If we are unable to meet listing requirements of The NASDAQ Global Market and NASDAQ determines todelist our common stock, the market liquidity and market price of our common stock could decline.*          Our common stock is listed on the NASDAQ Global Market. On November 12, 2009, the Companyreceived a Nasdaq Staff Deficiency Letter indicating that the Company no longer meets the minimumbid price requirement for continued listing on the NASDAQ Global Market as set forth in MarketplaceRule 5450(a)(1). The letter gave the Company notice that the bid price of its common shares hasclosed under $1.00 for the last 30 consecutive business days. The notification did not result inthe immediate delisting of the Company’s common shares from the NASDAQ Global Market. The Companyhas until May 11, 2010 to regain compliance with the minimum closing bid price requirement. Toregain compliance, the closing bid price of the Company’s common shares must meet or exceed $1.00per share for at least ten consecutive business days.     The Company is considering actions that it may take in response to this notification in orderto regain compliance with continued listing requirements. For example, in order to regaincompliance with Nasdaq’s minimum bid price requirement, the Company may implement a 1-for-3 or a1-for-4 reverse stock split as approved by its stockholders at the Company’s 2009 annual meeting.The Company may also seek stockholder approval of a reverse stock split at a different ratio thanthe 1-for-3 of 1-for-4 ratios approved at the Company’s 2010 annual meeting. Alternatively, theCompany may apply to transfer the listing of its common shares to the NASDAQ Capital Marketif it satisfies all criteria for initial listing on the NASDAQ Capital Market, other thancompliance with the minimum bid price requirement. If such application to the NASDAQ Capital Marketis approved, then the Company may be eligible for an additional 180 day period to regain compliancewith the minimum bid price requirement. If the Company does not regain compliance by May 11, 2010,Nasdaq will provide written notification to the Company that the Company’s common shares will bedelisted. At that time, the Company may appeal Nasdaq’s delisting determination to a NasdaqHearings Panel. If our common stock is not eligible for quotation on another exchange, trading ofour common stock could be conducted in the over-the-counter market or on an electronic bulletinboard established for unlisted securities such as Pink Quote (formerly known as the PinkSheets) or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, orobtain accurate quotations for the price of our common stock, and there would likely also be areduction in our coverage by security analysts and the news media, which could cause the price ofour common stock to decline further. In addition, if our common stock ceases to be listed on theNASDAQ Global Market and is not listed on an established national securities exchange or automatedover-the-counter trading market in the United States, the holders of our Convertible Notes willhave the right to require us to repurchase such notes for cash at a price equal to 100% of theprincipal amount plus accrued and unpaid interest.     *Provisionsof the**Senior Secured Notes and the Credit Facility could discourage anacquisition of us by a third party****.***     Theprovisions of the Convertible Notes, the Senior Secured Notes and theCredit Facility regarding redemption, repurchase or mandatory prepayment could make it moreexpensive or more difficult for a third party to acquire us due to the requirements to repurchaseor repay such indebtedness in cash at par value upon a change of control or a sale of all orsubstantially all of our assets (or our entry into an agreement for such a sale).     *Certain significant stockholders have designated directors who are members of our Board ofDirectors****.****As a result, these stockholders may exercise significant influence over the Company andtheir interests may conflict with the interests of other stockholders.*     As a result of the Exchange Offer, Whippoorwill Associates, Inc. (as agent for itsdiscretionary accounts), and Polygon Investments Inc. which are unaffiliated with each other, aresignificant stockholders of the Company and each have a director designee on our Board ofDirectors, which consists of five total members. In connection with the Exchange Offer, anothersignificant stockholder, Highbridge Investments, Inc., previously designated a director whosubsequently resigned from our Board. Whippoorwill, Polygon and Highbridge are also significantcreditors of the Company through their holdings of Senior Secured Notes and, in the case ofWhippoorwill, its status as lender under the Credit Facility. As a result, such stockholders mayexercise significant influence over corporate policy and decisions with respect to fundamentalcorporate transactions and, due to, among other things, their position as both equity holders andcreditors of the Company, their interests may conflict with the interests of other stockholders.For example, the directors designated by Whippoorwill or Polygon may exert influence oversignificant corporate transactions such as asset sales, debt restructuring transactions orissuances of additional capital stock. In addition, in matters requiring or otherwise involving avote of stockholders, each of such holders will have the ability to vote a significant percentageof our Common Stock for or against any proposal.
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*Anti-takeover provisions in our charter documents and under Delaware law could make an acquisitionof us, which may be beneficial to our stockholders, more difficult and may prevent attempts by ourstockholders to replace or remove our current management.*     Certain anti-takeover provisions of Delaware law and our certificate of incorporation andbylaws, as currently in effect, could make it more difficult for stockholders to effect certaincorporate actions. These provisions may delay or prevent the acquisition of us, even if theacquisition may be considered beneficial by some of our stockholders. In addition, these provisionsmay frustrate or prevent any attempts by our stockholders to replace or remove our currentmanagement by making it more difficult for stockholders to replace members of our board ofdirectors, who are responsible for appointing the members of our management.     In addition, a change of control of our company may be delayed or deterred as a result of ourhaving three classes of directors. Our certificate of incorporation provides for a staggered boardof directors, whereby directors serve for three-year terms, with approximately one-third of thedirectors coming up for re-election each year. Having a staggered board of directors makes it moredifficult for a third party to obtain control of our board of directors through a proxy contest,which may be a necessary step in an acquisition of us that is not favored by our board ofdirectors.*U.S. ownership requirements and transferability limitations may adversely affect the liquidity ofour common stock.*     We have added restrictions to our certificate of incorporation limiting the transferability ofour common stock or control to non-U.S. citizens. We believe that such limitations may have theeffect of decreasing the liquidity of our common stock, thereby making it more difficult forinvestors to dispose of their shares in an orderly manner. We may also add legends to our stockcertificates to indicate the citizenship of our stockholders to facilitate our ability to monitorand control our U.S. citizenship. Such provisions and the level of ownership by insiders and ourlargest stockholders, we believe, may deter a change in control and limit non-U.S. citizens’,including corporations’ and individuals’, purchases of our common stock.*Future sales of shares of our common stock could cause our stock price to decline.*     We cannot predict the effect, if any, that market sales of shares of our common stock or theavailability of shares of common stock for sale will have on the market price prevailing from timeto time. As of March 1, 2010, we had outstanding 26,517,557 shares of common stock. A substantialnumber of these shares are eligible or registered for public resale. Sales of these underlyingshares of our common stock in the public market, or the perception that those sales may occur,could cause the trading price of our common stock to decrease or to be lower than it might be inthe absence of those sales or perceptions.*The market price for our common stock has experienced significant price and volume volatility andmay continue to experience significant volatility in the future. This volatility may impair ourability to finance strategic transactions with our stock and otherwise harm our business*     The closing price of our common stock fluctuated from a high of $1.49 per share to a low of$0.26 per share during the year ended December 31, 2009. On March 25, 2010 our closing stock pricewas $0.52. Our stock price is may continue to experience significant volatility in the future. Thesignificant declines in our stock price may interfere with our ability to raise additional fundsthrough equity financing or to finance strategic transactions with our stock. We have historicallyused equity incentive compensation as part of our overall compensation arrangements. Theeffectiveness of equity incentive compensation in retaining key employees may be adversely impactedby volatility in our stock price. In addition, there may be increased risk of securities litigationfollowing periods of fluctuations or decline in our stock price. These and other consequences ofvolatility in our stock price could have the effect of diverting management’s attention and couldmaterially harm our business, and could be exacerbated by the current worldwide financial crisis.**Item 1B.*****Unresolved Staff Comments***     Not applicable.
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**Item 2.*****Properties***     Our principal executive offices occupy approximately 11,275 square feet in Seattle, Washingtonpursuant to a lease dated April 26, 2005, as amended, which expires in August 2013. In June 2009,we completed the relocation of our corporate offices from Newport Beach, California to Seattle,Washington.     We believe that our existing facilities are sufficient to meet our present needs andanticipated needs for the foreseeable future. However, additional facilities may be required inconnection with any future business acquisitions we may undertake.     Information about our cruise ships, including their size and primary areas of operation may befound within Item 1, “Business — Business Operations”.**Item 3.** ***Legal Proceedings***     The United States Maritime Administration (“MARAD”) filed a claim in the amount of $300,000against us in the US District court of Oregon seeking settlement of one month’s payment under acharter agreement related to the *Empress of the North*®, prior to the vessel’s return in 2008, and aclaim for amounts paid to third parties, if any, that may qualify under federal debt prioritystatutes. We filed a counter claim against MARAD which seeks repayment from MARAD for inventory onthe ship at the time of the return and insurance proceeds related to reimbursement for repairs tothe ship funded by us. In January 2010, we received a proposed settlement offer from the U.S.Department of Justice and in January 2010, our Board of Directors approved the settlement offer.The terms of the settlement require us to make the payment under the charter agreement of $300,000and accept a final payment from the U.S. government of $50,000, representing reimbursement to usfor costs we previously incurred. We will dismiss our claim to receive any insurance proceedspreviously retained by the U.S. government. The final settlement agreement and payments areexpected to be completed during the second quarter of 2010.     MARAD has also filed a judgment against the Company for the collection of $1.2 million inconnection with the acquisition of the *American Queen®*as discussed in Note 11. Trial date in thiscase is scheduled during the second quarter of 2010. The Company intends to vigorously defenditself against this claim.**Item 4.** ***Reserved*****PART II****Item 5.** ***Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities*****Stock Market and Other Information**     Our common stock is traded and prices are quoted on the NASDAQ Global Market under the symbol“AMIE.” As of March 12, 2010, there were 42 holders of record of our common stock not includingbeneficial owners holding shares through nominee or street name.     The following table sets forth the high and low sales prices of a share of our common stock asquoted on the NASDAQ Global Market for the periods indicated:           **High** **Low****2009:**        Quarter ended March 31, 2009 $1.05  $0.36 Quarter ended June 30, 2009  1.49   0.27 Quarter ended September 30, 2009  0.90   0.29 Quarter ended December 31, 2009  1.00   0.26 **2008:**        Quarter ended March 31, 2008 $13.77  $7.10 Quarter ended June 30, 2008  7.76   3.76 Quarter ended September 30, 2008  4.64   1.78 Quarter ended December 31, 2008  2.10   0.65      The Company did not declare or pay any dividends on its common stock during the years endedDecember 31, 2009 and 2008. The payment of dividends is prohibited by our debt instruments.
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**Securities Authorized for Issuance under Equity Compensation Plans**                       **Number of Securities**          **Remaining Available for**  **Number of Securities**     **Future Issuance Under**  **to Be Issued Upon** **Weighted Average** **Equity Compensation**  **Exercise of** **Exercise Price of** **Plans (Excluding**  **Outstanding Options,** **Outstanding Options,** **Securities Reflected in****Plan Category** **Warrants and Rights (1)** **Warrants and Rights** **Column (2)**Equity compensation plans approved by security holders  7,000  $14.89   778,961 Equity compensation plans not approved by security holders  N/A   N/A   N/A              Total  7,000   $14.89   778,961               (1) Represents outstanding options and restricted stock to be issued upon exercise and/orvesting under our Amended and Restated 1995 Equity Participation Plan and our 2005Incentive Award Plan. (2) Represents securities remaining available for issuance under our Amended and Restated1995 Equity Participation Plan and our 2005 Incentive Award Plan.**Recent Sales of Unregistered Securities**     On November 13, 2009, we completed the Exchange Offer, in which holders of approximately $65.8million aggregate principal amount of our Convertible Notes exchanged their Convertible Notes forapproximately $18.0 million aggregate principal amount in our newly issued Senior Secured Notesmaturing January 2012 and approximately 15.2 million shares of our common stock.**Transfer Agent and Registrar**     BNY Mellon Shareowner Services serves as transfer agent and registrar of our common stock.**Purchases of Equity Securities by the Issuer and Affiliated Purchasers**     Not applicable.**Item 6.** ***Selected Financial Data***     Not applicable.
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**Item 7.** ***Management’s Discussion and Analysis of Financial Condition and Results of Operations***(The following discussion reflects the retroactive application of Financial Accounting StandardsBoard (“FASB”) Accounting Standards Codification (“ASC”) 470-20-25, *Debt with Conversion Options,*the reclassification of certain businesses of the Company as discontinued operations in accordancewith FASB ASC 205-20, *Presentation of Financial Statements —Discontinued Operations*, and thereclassification of the 2008 loss on disposal on two vessels from Other income (expense) toOperating loss from continuing operations.)**Overview**     The following discussion of our financial condition and results of operations should be readin conjunction with the consolidated financial statements and notes thereto included elsewhere inthis annual report. This discussion contains forward-looking statements that are subject to knownand unknown risks, uncertainties and other factors that may cause our actual results to differmaterially from those expressed or implied by such forward-looking statements. These risks,uncertainties and other factors include, among others, those identified under “Cautionary NoteRegarding Forward-Looking Statements” and elsewhere in this annual report. During 2009, the Companyoperated in the following business segments: cruise, which includes the operations of WindstarCruises and Majestic American Line, and corporate and other, which consists of general corporateassets and liabilities.     *Cruise Operations*- Our current cruise operations include the Windstar Cruise vessels whichare international-flagged ships that sail to destinations in the Caribbean, Europe, the Americasand the Greek Isles. Windstar Cruises operates three sailing yachts including *Wind Surf*, *WindSpirit*and *Wind Star*known for their ability to visit the hidden harbors and secluded coves of theworld’s most treasured destinations. The luxurious ships of Windstar sail to nearly 50 nations,calling at approximately 100 ports throughout Europe, the Caribbean and the Americas.During 2009 and continuing in 2010, we are focused on improving our Windstar Cruises businessperformance and have identified several major areas for improvement as follows: **•** increase our sales and marketing efficiencies to drive more sales, which will enable usto scale our campaigns to a level appropriate for a company of our size; and  **•** reduce operational costs by continuing to renegotiate key vendor contracts that willallow for significant direct cost savings, efficiency gain and product improvements.  **•** In September 2009 we completed the transition of our vessel management from athird-party vendor to in-house management. This transition is expected to result inefficiency gains and lower operating costs.     *Majestic America Line-*In April 2008, we announced plans to sell and cease operating theMajestic America Line, our U.S. flagged cruise ships that sailedalong the inland rivers and coastalwaterways of North America at the conclusion of the 2008 sailing season. The vessels arecurrently in lay up status and did not operate in 2009 as we plan to exit the business in anorderly fashion. We sold one of the vessels, *Queen of the West,*in November 2009. As of December31, 2009 we have four remaining vessels of Majestic American Line that we will continue marketingand disposition activities in 2010, although there can be no assurances that we will be successfulin the disposition of the vessels or in locating qualified buyers in a timely fashion.     *Travel & Events-*In April 2009 we sold a significant portion of the travel and eventsbusiness whereby we completed an asset sale of certain assets related to the housing portion of thebusiness. The buyer also assumed certain liabilities related to housing. We retained the eventscomponent of the business and completed all 2009 programs as scheduled. As of December 31, 2009,we have completed all programs and exited the events business in an efficient and orderly fashion.
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     *Marine-*In May 2009 we sold Marine Group to a company formed by our former chief executiveofficer through a stock sale for $5 million in cash proceeds. These proceeds were used to fundcurrent operations.     *Re-insurance*- In September 2009 we executed an assignment agreement with a third party wherebyall re-insurance assets were assigned and the related liabilities were assumed by the third party.The Company recorded a $1.8 million loss on the disposition of the re-insurance business. Becausethe Company no longer had an obligation for potential claims under the re-insurance programs andcertain programs were concluded during 2009, letters of credit used to collateralize formerre-insurance obligations were cancelled, releasing cash of $5.9 million. The Company used the cashto fund current operations. In addition to the assignment agreement, the Company also entered intoa profit sharing agreement with the third party that allows the Company to participate in up to 50%of net profit distributions minus losses and expenses as the remaining programs wind down.Although there is a potential for additional cash distributions over the next several years, theprofit distributions are contingent on the underlying insurance program performance and release ofthe profits are subject to regulatory approval.     Theoperations of the Marine Group, Cypress Re, and Travel and  Events are shown as discontinuedoperations in the accompanying consolidated financial statements. The assets and liabilities ofCypress Re, Travel and Events and the Marine Group at December 31, 2008 were classified as “heldfor sale”.***Exchange Offer and Credit Facility***     In September 2009, we launched an exchange offer (the “Exchange Offer”) to exchange each$1,000 principal amount of our outstanding 3.75% Convertible Notes due 2027 (the “ConvertibleNotes”) for: (i) 230.3766 shares of the Company’s common stock, par value $0.01 per share, and(ii) 273.1959 principal amount of 10% Senior Secured Notes, due 2012, including guarantees fromthe Company’s subsidiaries, (the “Senior Notes”). Interest on the Senior Notes can be payable inkind or in cash, at the Company’s option.     On November 13, 2009, we consummated the Exchange Offer. Approximately $65.8 millionaggregate principal amount of the Convertible Notes were validly tendered and accepted. Inexchange for the tendered Convertible Notes, we issued approximately $18.0 million aggregateprincipal amount of Senior Notes and approximately 15.2 million shares of our common stock.Approximately $31.2 million aggregate principal amount of the Convertible Notes remain outstanding.Our stockholders approved the issuance of the shares of common stock in the Exchange Offer at aspecial stockholder meeting held on November 12, 2009.     In March 2010, we entered into a $15.0 million credit facility which is composed of a $10.0million term loan facility and a $5.0 million revolving line of credit. In connection with theestablishment of the new credit facility, we paid fees of $0.6 million. Borrowings under thefacility bears interest at 12%, are secured on a first priority basis by substantially all of ourassets and mature on January 2, 2012. The credit facility requires an annual commitment fee equalto 4% of each of the term loan and the outstanding revolving credit commitment.     **Critical Accounting Policies**     Our consolidated financial statements have been prepared in accordance with U.S. generallyaccepted accounting principles (“GAAP”). The preparation of these financial statements requires usto make estimates and judgments that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues and costs and expenses duringthe period. We evaluate our estimates and judgments, including those which impact our most criticalaccounting policies, on an ongoing basis. We base our estimates and judgments on historicalexperience and on various other factors that are believed to be reasonable under the circumstances,within the framework of current accounting literature.     Our businesses are seasonal. Historically, we have recognized the majority of our operatingresults in the first and second quarters of each fiscal year. As a result of our business strategyto focus only on the international cruise operations, the majority of our operating results arerecognized in the third quarter of each fiscal year, which coincides with our cruising season. Ourannual results would be adversely affected if our revenue were to be substantially below seasonalnorms during any quarter, particularly the third quarter of any year.
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     The following is a list of the accounting policies that we believe require the mostsignificant judgments and estimates, and that could potentially result in materially differentresults under different assumptions or conditions.***Property, Vessels and Equipment***     Property, vessels and equipment are stated at cost, net of accumulated depreciation. Weexpense the cost of maintenance and repairs that do not improve or extend the lives of therespective assets when incurred. Major additions and betterments are capitalized. Our ships arecapitalized and depreciated using the straight-line method over the expected useful life ranging upto 30 years, net of a residual value that generally is approximately 15%. Ship replacement partsare capitalized and depreciated upon being placed in service. Office equipment is capitalized anddepreciated using the straight-line method over the expected useful life of the equipment, rangingup to 10 years. Leasehold improvements are amortized using the straight-line method over the lesserof the expected useful life of the improvement or the term of the related lease.We perform reviews for the impairment of property, vessels and equipment whenever events or changesin circumstances indicate that the carrying amount of an asset may not be recoverable. Impairmentreviews of our vessels require us to make significant estimates and assumptions to determine thefair value of these assets. One input in our fair value review is comparable ship sale prices andother comparable ship values in inactive markets. We also use discounted future cash flow analysisto estimate fair value. Discounted cash flow analysis requires significant judgments related toforecasting future operating results, including net revenue yields, net cruise costs including fuelprices, capacity increases, terminal values, cruise itineraries, consumer demand, and competition,among others. In addition, third party appraisers are sometimes used to assist in the determinationof fair values of vessels. Third party appraisers and their valuation methodologies are alsosubject to uncertainties similar to those discussed above. We performed a review of our property,vessels and equipment during 2009 and recorded impairments to the carrying values of these assets.***Drydocking***We capitalize drydocking costs as incurred and amortize such costs over the period to the nextscheduled drydock. We believe that the deferral method provides a better matching of revenues andexpenses. Drydocking costs are included in prepaid and other current assets and in long term assetsin the accompanying balance sheet and are amortized over the cruising season between scheduled drydockings.***Goodwill and Intangible Assets***     Goodwill and intangible assets with indefinite useful lives are tested for impairment at leastannually or sooner whenever events or changes in circumstances indicate that they may be impaired.We evaluate recoverability using both subjective and objective factors. Subjective factors includethe evaluation of industry and product trends and our strategic focus. Objective factors includeobservable inputs such as third party appraisals and our estimates of projected future earnings andcash flows. We use a discounted cash flow model to estimate the fair market value of each of ourreporting units and other observable inputs when we test goodwill for impairment. Assumptions usedinclude growth rates for revenues and expenses, investment yields on deposits, any future capitalexpenditure requirements and appropriate discount rates. We established reporting units based onour current reporting structure. For purposes of testing goodwill for impairment, goodwill has beenallocated to reporting units to the extent it related to each reporting unit. Intangible assetswith finite lives are tested for impairment using an undiscounted cash flow model and othervaluation techniques such as the income approach.     In addition, in determining our trade name fair value we also use discounted future cash flowanalysis, which requires significant judgments and estimates. Specifically, determining theestimated amount of royalties avoided by our ownership of the trademark is based on forecastedcruise revenues and estimated royalty rates based on comparable royalty agreements used in similarindustries.***Revenue Recognition***     We recognize revenue when persuasive evidence of an arrangement exists, the service fee isfixed or determinable, collectability is reasonably assured and delivery has occurred.
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  *Passenger Ticket Revenue and Onboard and Other Cruise Revenues*     We record passenger ticket revenue net of applicable discounts and recognize passenger ticketrevenue and related costs of revenue when the cruise is completed. We generally receive from ourcustomers a partially refundable deposit within one week of booking a tour, with the balancetypically remitted 90 days prior to the departure date. If customers cancel their trip, thenonrefundable portion of their deposit is recognized as revenue on the date of cancellation.Passenger revenue representing travel insurance purchased at the time of reservation is recognizedupon the completion of the cruise or passenger cancellation, whichever is earlier and ourobligation has been met. Onboard and other cruise revenue consisting of beverage and souvenir salesand optional shore excursions are deferred and recognized as revenue when the cruise is completed.     We recognize revenue from hotel reservation, registration and related travel services when theconvention operates. Revenue from the sale of merchandise is recognized when the merchandise isshipped, the service has been provided or when the redemption periods have expired. We deferrevenue from prepaid, certificate-based merchandise incentive programs until our obligations arefulfilled. These revenues have been reported on a net basis, reflecting the net effect of grossbillings to the client less any direct program or merchandise costs. As of December 31, 2009, wehave completed all obligations related to the Travel and Events programs and have recognized allrevenues. We will not engage in this business in periods subsequent to 2009.***Income Taxes***     As part of the process of preparing our consolidated financial statements, we arerequired to estimate income taxes in each of the countries and other jurisdictions in which weoperate. This process involves estimating our current tax exposure together with assessingtemporary differences resulting from the differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxable income, and, to theextent we believe that recovery is not likely, we must establish a valuation allowance. To theextent we establish a valuation allowance, or increase this allowance in a period, it may result inan expense within the tax provision in the statement of operations. Conversely, to the extent wedetermine that a valuation allowance is no longer necessary, it may result in a benefit within thetax provision in the statement of operations. Significant management judgment is required indetermining our provision for income taxes, deferred tax assets and liabilities and anyvaluation allowance recorded against our net deferred tax assets. We have provided a full valuationallowance on deferred tax assets because of our uncertainty regarding theirrealizability. If we determine that it is more likely than not that the deferred taxassets, or a portion thereof, would be realized, the valuation allowance would be reversed. Inorder to realize our deferred tax assets, we must be able to generate sufficient taxable income. AtDecember 31, 2009 and December 31, 2008, the net deferred domestic tax asset is subject to a 100%valuation allowance.***Share Based Compensation***     We have certain share-based employee compensation plans, which are more fully described inNote 13, “Stock Plans.” The Company uses the Black-Scholes-Merton formula to estimate the fairvalue of stock options granted to employees. Expected volatility is based on historicalvolatilities. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with aremaining term equal to the expected option life assumed at the date of grant. The expected term iscalculated based on historical experience and represents the time period options actually remainoutstanding. The Company estimated forfeitures based on historical pre-vesting forfeitures and willrevise those estimates in subsequent periods if actual forfeitures differ from those estimates.***Fair Value of Financial Instruments***     The estimated fair values of the financial instruments as of December 31, 2009 and 2008 are asfollows (in thousands):                   **2009** **2008**  **Carrying** **Fair** **Carrying** **Fair**  **Amount** **Value** **Amount** **Value**Financial assets:                Cash and cash equivalents $2,576  $2,576  $10,105  $10,105 Restricted cash  11,270   11,270   16,625   16,625 Debt  50,719   40,691   87,627   27,309 
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**Results of Operations**Thefollowing table reflects certain income and expense items as a percentage of revenue:            **2009**   **2008** Revenues  100.0%  100.0%         Costs and operating expenses:        Cruise operating expenses  86.6   81.1 Selling and tour promotion  12.8   8.0 General and administrative  11.0   12.5 Depreciation and amortization  16.1   8.6 Impairment charge  83.7   — Business interruption insurance claim  (1.9)  — Loss on disposal / impairment of vessels  —   4.6             208.3   114.8          Operating loss from continuing operations  (108.3)  (14.8)         Other income (expense), net, including gain on debt restructure  38.2   (1.3)                  Loss from continuing operations before income taxes  (70.1)  (16.1)Provision  for income taxes  0.2   —          Net loss from continuing operations  (70.3)  (16.1)Net loss from discontinued operations  (14.0)  (8.7)                  Net loss  (84.3)  (24.8)         **Business Segment Information**     We report the following business segments: (i) cruise and (ii) corporate and other, whichconsists of general corporate assets and liabilities (primarily cash, cash equivalents and longterm debt), and other activities which are not directly related to our cruise operating segment. Wereported our Marine Group and our Travel and Events as business segments in 2008 and included ourreinsurance business Cypress Re, within the corporate segment. The operations of the Marine Group,Travel and Events and Cypress Re are shown as discontinued operations in the accompanyingconsolidated financial statements. ASC 205-20, *Presentation of Financial Statements-DiscontinuedOperations,*provides that if a discontinued operation had been a reportable segment, we are notrequired to disclose information about the discontinued segment as required by FASB ASC 280,*Segment Reporting.*Accordingly, our segment reporting has been updated to exclude the Marine Group,Travel and Events and Cypress Re.
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Selected financial information related to these segments is as follows (in thousands):                   **Corporate**    **Cruise** **and Other** **Total**2009            Revenues $61,277  $—  $61,277 Operating income (loss) from continuing operations  (62,645)  (3,727)  (66,372)Depreciation and amortization expense  (9,592)  (248)  (9,840)Impairment Charge  (51,275)  —   (51,275)Interest and dividend income  2   41   43 Interest expense  —   (5,927)  (5,927)Gain on debt restructure  —   29,548   29,548 Provision for income taxes      83   83              Capital expenditures for property, vessels, equipment  223   —   223 Intangible asset  5,500   —   5,500 Total assets excluding assets of discontinued segments  90,966   775   91,741              2008            Revenues $153,660  $—  $153,660 Operating income (loss) from continuing operations (as restated)  (19,136)  (3,559)  (22,695)Depreciation and amortization expense  (12,934)  (249)  (13,183)             Interest and dividend income  39   557   596 Interest expense  (1,759)  (6,509)  (8,268)Provision for income taxes  18   35  53             Capital expenditures for property, vessels, equipment and intangible assets  (2,689)  (15)  (2,704)             Intangible asset  7,282   —   7,282 Total assets excluding assets of discontinued segments  155,132   15,710   170,842 
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**Statistical Terminology and Information for Cruise Operations***Available Passenger Cruise Days (“APCD”)*APCD’s are our measurement of capacity and represent double occupancy per cabin multiplied by thenumber of cruise days for the period.*Occupancy*Occupancy, in accordance with the cruise vacation industry practice, is calculated by dividingPassenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or morepassengers occupied some cabins.*Passenger Cruise Days*Passenger Cruise Days represent the number of passengers carried for the period multiplied by thenumber of days in their respective cruises.Selected Windstar operational statistical information is as follows:           **Year**  **Ended December31,**  **2009** **2008**Passengers Carried  24,074   25,087 Occupancy Percentage  80.8%  83.2%Passenger Cruise Days  171,970   180,738 APCD  212,800   217,168 
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**Results for the Year Ended December 31, 2009 Compared to Results for the Year Ended December 31,2008**   ***Revenue***Total revenue from continuing operations in 2009 was $61.3 million, compared to $153.7 million in2008, a decrease of $92.4 million. The decrease in revenue is primarily related to Majestic AmericaLine which did not operate in 2009 and which generated $73.5 million in revenues during 2008. OurWindstar Cruises passenger revenue decreased $14 million or (23%) from $61.3 million in 2008 to$47.2 million in 2009. Onboard revenues decreased $4.8 million or (25.7%) from $18.9 million in2008 to $14.0 million in 2009. The reduction in Windstar Cruises passenger ticket revenues areprimarily due to lower ticket prices and occupancy rates caused by current economic conditions andoverall reduction in consumer discretionary spending.   ***Cruise Operating Expenses***     Cruise operating expenses represent direct costs incurred with owning and operating our cruiseships. Cruise operating expenses decreased $71.5 million (57%) from $124.6 million in 2008 to $53.1million in 2009. This reduction in overall expenditures is due to Majestic America Line vessels notoperating in 2009. Cruise operating expenses for Windstar Cruises decreased $9.2 million or (15%)to $52.3 million in 2009 from $61.5 million in 2008. This reduction is attributable to lower fuelcosts during 2009 and the transition of vessel management from a third party management company toin house personnel during the third quarter of 2009.***Selling and Tour Promotion***     Selling and tour promotion expenses totaled $7.9 million in 2009, compared to $12.3 million in2008. The decrease is primarily due to the absence of promotion and marketing expenses for theMajestic America Line in 2009. Selling and tour promotion expenses related to Windstar Cruisesincreased $0.9 million in 2009 to $7.9 million in 2009 from $7.0 million in 2008. The increase incosts in 2009 is attributable to operational efforts targeted at increasing occupancy during theeconomic down turn.G***eneral and Administrative Expenses***     General and administrative expenses decreased $12.5 million from $19.2 million in 2008 to$6.8 million in 2009 or (64.8%). As a percentage of total revenue, general and administrativeexpenses decreased to 11% in 2009 from 13% in 2008. The decrease is primarily due to thereduction in the number of operating divisions and the consolidation of the corporate headquartersduring 2009.     ***Insurance Settlement***     During 2009, we reached a settlement with an insurance company and received a $1.2 millionbusiness interruption claim associated with 2007 sailing incidents involving the *Empress of theNorth*and the *Queen of the West*of the Majestic American Line*.*There were no similar transactionsfor the year ended December 31, 2008. The insurance proceeds are reflected as a reduction inoperating expenses from continuing operations in 2009.     ***Impairment charges***During 2009 we recorded non-cash impairment charges of $51.3 million. There were no comparablecharges recorded in continuing operations during the year ended December 31, 2008. The 2009charges are as follows: $27.7 million related to the three vessels of the Windstar Cruise fleet;$21.8 million related to Majestic America Line vessels and $1.8 million related to the WindstarCruise trade name. Our impairment analysis of the long-lived vessel assets included observable andunobservable inputs to estimate the fair value under the market approach and income approachvaluation techniques. The market approach to estimate the fair value of the assets was based onobservable inputs, including third party appraisal reports, sales of other vessels and estimatedreplacement value. The Company’s income approach to estimate the fair value of the assets includeda discounted cash flow model based on unobservable inputs and a range of future probabilities,including fluctuations in operating costs.
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     ***Depreciation and Amortization***     Depreciation and amortization expense was $9.8 million in 2009 compared to $13.2 millionrecorded in 2008. The decrease is related to the disposition to MARAD of two Majestic American Linevessels in the later half of 2008 as well as the reduction in carrying value of certain MajesticAmerica Line vessels during 2009.   ***Operating loss from continuing operations***     We reported an operating loss from continuing operations of $66.4 million in 2009 compared toan operating loss from continuing operations of $22.7 million in 2008 or an increase in operatinglosses of $43.7 million year over year. The primary driver of the current year operating loss isthe non cash impairment charges of $51.3 million described above. Operating loss from the cruisesegment in 2008 includes a $7.0 million net loss on the disposal of two Majestic American Linevessels upon the return of the vessels to MARAD.Other changes in operating losses from 2008 to 2009 are the result of events described above.   ***Other Income (Expense)***     In 2009 we recorded other income (expense) of $23.4 million compared to ($2.1) million in2008. In November 2009, we completed the Exchange Offer for $65.8 million aggregate principalamount of Convertible Notes which were validly tendered and accepted. In exchange for the tenderedConvertible Notes, we issued approximately $18.0 million aggregate principal amount of Senior Notesand 15.2 million shares of our common stock. The difference between the carrying value of theConvertible Notes plus accrued interest at the time of the exchange and the Senior Notes, includingfuture interest costs, the value of the common shares issued and less third party direct costs ofthe transaction, resulted in a gain on debt restructure of $29.5 million during 2009. No similartransaction occurred in 2008.     Other expense during 2009 and 2008 includes $5.9 million and $8.3 million, respectively ofinterest expense related to our Convertible Notes. The reduction of interest expense in 2009reflects the Exchange Offer, including the reduction in interest due for the interest period fromApril 16, 2009 to completion of the Exchange Offer.     Other income in 2008 consisted primarily of $1.1 million in legal settlement related to thegrounding of the *Empress of the North*in March 2006; $2.6 million in settlement of the disputerelated to the purchase of Windstar Cruises and $0.8 million in insurance proceeds related to the*Empress of the North*and *Queen of the West*ship incidents in 2007 and 2006. No such legalsettlements occurred in 2009.   ***Income Taxes***     We recorded income tax expense of $83,000 and $53,000, respectively for the years ended December 31, 2009 and 2008, attributable to continuing operations. We recorded a full valuation allowanceon our domestic deferred tax assets as of December 31, 2009 and 2008. A significant factor indetermining the requirement for the valuation allowance was our cumulative three-year historicalloss. The establishment of a valuation allowance does not have any impact on cash, nor does such anallowance preclude us from utilizing any available loss carry-forwards in the future. The ExchangeOffer constituted a change of control in ownership as defined by Section 382(g) of the InternalRevenue Code of 1986, as amended. The ownership change has and will continue to subject our netoperating loss carryforwards to an annual limitation, which will significantly restrict our abilityto use them to offset taxable income in periods following the ownership change.***Loss from continuing operations***Loss from continuing operations was $43.1 million in 2009 compared to $24.8 million in 2008 or anincrease of $18.3 million. This increase is primarily attributable to the non cash impairment chargeof $51.3 million, offset by the non cash gain on debt restructure of $29.5 million.
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***Loss from discontinued operations***Loss from discontinued operations was $13.4 million during 2009 compared to a loss of $14.4 millionin 2008. The loss in 2009 is attributable primarily to losses incurred in the disposition of theMarine Group, Travel and Events and Cypress Re whereby the carrying value of the net assets sold orassigned were greater than the sales proceeds. The loss in 2008 relates to the operating lossesassociated with the Marine Group which was attributable to an impairment and reduction in revenuesand the operating losses of Cypress Re, offset by $1.7 million in income from Travel and Events***Net Loss***Net loss was $51.6 million in 2009 compared to $38.2 million in 2008 as a result of changesdescribed above.**Liquidity and Capital Resources**     Due to the global downturn in the economy and other factors, we haverestructured our long term indebtedness, restructured our operations, and obtained additionalsources of financing. The downturn in the economy and these restructuring activities have resultedin cash outflows from operating activities of $16.3 million in 2009 and $18.6 million in 2008.     We have been successful in obtaining the $15 million Credit Facility to provide funding fordrydock costs for two Windstar vessels as well as working capital and other corporate purposes.Additionally, in 2009, we restructured a significant portion of the Convertible Notes in theExchange Offer. In addition to reducing outstanding indebtedness and obtaining the CreditFacility, we have restructured our core business activities so as to allow us to dedicate liquidityresources to the operations and growth of Windstar Cruises.     In 2010, as in other years, we will incur capital expenditures and costs for improvementsrequired in the maintenance of our ships. In 2010, planned capital expenditures and drydockprojects are expected to be approximately $7.0 million for our vessels. We have a scheduleddrydock in April 2010 for the *Wind Sprit*where we expect to incur $4.5 million in refurbishments.We also have a scheduled drydock project for the *Wind Star*in November 2010 where we expect toincur $2.5 million in refurbishments.     We believe that the operating cash flows, financing cash flows, and investing cash flowsprojected for 2010, and the cash and cash equivalents of $2.6 million at December 31, 2009,(including amounts available under the Credit Facility) will be sufficient to fund ongoingoperations through 2010. We expect our business improvement initiatives and other actions willimprove our operating income and cash flow results. However, the timing and extent of success forthese strategies cannot be predicted with any level of certainty. If we are unable to meet our cashflow projections in 2010, we may need to seek additional sources of funding. If the pricing orterms for any new financing do not meet our expectations, we may be required to choose betweencompletion of the financing on such unfavorable terms or not completing the financing. If sourcesof capital are unavailable, or are available only on a limited basis or under unacceptable terms,then we could be required to substantially reduce operating, marketing, general and administrativecosts related to our continuing operations.     Substantiallyall of our long-term indebtedness is scheduled to mature or may needto be repaid during 2012. We do not expect that our cash flows fromoperations will generate sufficient funds to enable us to repay orrepurchase this indebtedness when we are required to do so in 2012.Accordingly, our ability to satisfy these obligations will dependupon our ability to refinance this indebtedness or to obtainadditional funds through borrowings, sales of debt or equitysecurities, asset sales or other transactions.**Term Loan and Revolving Credit Facility**On March 23, 2010, we established a term loan and revolving credit facility for working capitalpurposes (the “Credit Facility”), the terms of which are governed by a Credit and GuarantyAgreement (the “Credit Agreement”), by and among the Company, our subsidiaries (as borrowers and/orguarantors), Whippoorwill Associates, Inc. (and/or certain funds and accounts managed by it) (“Whippoorwill”) aslenders and Law Debenture Trust Company of New York, as administrative agent and as collateralagent. The Credit Facility provides for a $5 million revolving credit facility and for a $10million term loan to be drawn in two tranches, all of which is to be used to fund dry-dock costsfor two Windstar vessels as well as working capital and other corporate purposes of the Company andits subsidiaries. On March 23, 2010, the first tranche of the term loan, in the amount of $7.5million, was funded. Borrowings under the Credit Facility bear interest at a rate of 12 percentper annum, are secured (on a first priority basis) by substantially all the assets of the Companyand its subsidiaries, and mature on January 2, 2012. The Credit Facility provides for payment of a4% annual facility fee to the lenders and customary agent fees. The Credit Facility containsvarious
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restrictive and financial covenants, including a requirement that we achieve certain minimum EBITDAlevels and a limitation on our capital expenditures. There are also restrictions regarding the useof the proceeds under the Credit Facility. We plan to use a significant amount of the proceedsborrowed under the Credit Facility to fund our scheduled drydocks in April and November of 2010, as discussed below.**Cash Flows**     Net cash used in operations for the years ended December 31, 2009 and 2008 was $16.3 millionand $18.6 million, respectively. The $2.3 million increase in cash flows from operations in 2009compared to 2008 is primarily due to the increase in net loss adjusted for non-cash related gainsand losses incurred during the current year. We made payments of $7.9 millionduring 2009 in settlement of trade accounts payable and accrued expenses. During 2008, net cashused in operating activities reflects a $27.5 million reduction in operating cash due to thedecline in customer deposits for the cruise businessactivity.     Net cash provided by investing activities for the years ended December 31, 2009 and 2008 was$8.7 million and $10.4 million, respectively. Cash provided by investing activities in 2009 wasattributable to cash received in the release of collateral related to certificates of depositspreviously required in the re-insurance business and a reduction in amounts required by banks forcredit card processing. During 2009 cash from investing activities was also provided from the saleof a Majestic American Line vessel partially offset by activities in segments compromising discontinued operations prior todisposition.     Net cash used in financing activities during 2009 was $48,000 related to activities insegments compromising discontinued operations prior to disposition. Net cash used in financingactivities in 2008 totaled $3.7 million, primarily attributable to repayments of long term debt.     As of December 31, 2009, we had an outstanding line of credit of $70,000 which is secured by acertificate of deposit in the same amount and is classified as restricted cash as of December 31,2009. Both the line of credit and certificate of deposit relate to insurance programs which expireat various dates through 2010. We have exited the re-insurance business and expect to cancel theline of credit and receive funds from the certificate of deposit in 2010.     Our cruise passenger deposits are primarily received through credit card transactions. As ofDecember 31, 2009, we had $11.0 million of restricted cash held by banks in cash equivalentsrequired for secure processing of passenger deposits through credit cards. The restricted amountswere negotiated between us and the banks based on a percentage of the expected future volume ofcredit card transactions within a standard twelve-month period. Due to reductions in the insurancecontract liabilities associated with our sold re-insurance business, we were able to reduce certainletters of credit requirements during 2009, this reduction made available $5.9 million of cash thatwas previously restricted. Accordingly this reduction allowed us to reduce our bank line of creditthat secured the letters of credit to $70,000 as of December 31, 2009.We currently are in compliance with all covenants under our 3.75% Senior Convertible Notes and 10%Senior Secured Notes and our Credit Facility.**Off-Balance Sheet Transactions**     We do not maintain any off-balance sheet transactions, arrangements, obligations or otherrelationships with unconsolidated entities or others that will have a current or future effect onour financial condition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources.**Forward-Looking Statements**     Statements contained in this Annual Report on Form 10-K that are not historical in nature areforward-looking statements within the meaning of the Private Securities Litigation Reform Act of1995. A forward-looking statement may contain words such as “expect,” “anticipate,” “outlook,”“could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,”“assume,” “continue,” and variations of such words and similar expressions. These statements arenot guarantees of future performance and involve certain risks, uncertainties and
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assumptions that are difficult to predict. We caution you that actual outcomes and results maydiffer materially from what is expressed, implied, or forecasted by our forward-looking statements.We have based our forward-looking statements on our management’s beliefs and assumptions based oninformation available to our management at the time the statements were made. Such risks anduncertainties include, among others: **•** our ability to obtain additional financing at reasonable rates;  **•** our ability to continue to operate as a going concern;  **•** our ability to effectively and efficiently operate our cruise operations;  **•** customer cancellation rates;  **•** competitive conditions in the industry in which we operate;  **•** marketing expenses;  **•** extreme weather conditions;  **•** the impact of new laws and regulations affecting our business;  **•** negative incidents involving cruise ships, including those involving the health andsafety of passengers;  **•** cruise ship maintenance problems;  **•** reduced consumer demand for vacations and cruise vacations;  **•** changes in fuel, food, payroll, insurance and security costs;  **•** changes in relationships with certain travel providers;  **•** changes in vacation industry capacity;  **•** other economic factors and other considerations affecting the travel industry; and  **•** other factors discussed in this Annual Report on Form 10-K.     A more complete discussion of these risks and uncertainties, as well as other factors, may beidentified from time to time in our filings with the Securities and Exchange Commission, includingelsewhere in this Annual Report on Form 10-K, or in our press releases. We disclaim any obligationto publicly update any forward-looking statements, whether as a result of new information, futureevents or otherwise.**Item 7A.** ***Quantitative and Qualitative Disclosures About Market Risk***     Not applicable.
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**Item 8.** ***Financial Statements and Supplementary Data*****Index to Consolidated Financial Statements**     Report of Independent Registered Public Accounting Firm  32 Report of Independent Registered Public Accounting Firm  33 Consolidated Balance Sheets at December 31, 2009 and 2008  34 Consolidated Statements of Operations for the years ended December 31, 2009 and 2008  35 Consolidated Statements of Changes in Stockholders’ Equity for the years endedDecember 31, 2009 and 2008  37 Consolidated Statements of Cash Flows for the years ended December 31, 2009 and2008  38 Notes to Consolidated Financial Statements  40 The Financial Statements and Supplementary Data reflect the retroactive application of FASB ASC470-20-25, *Debt with Conversion and Other Options*and the reclassification of certain businesses of theCompany as discontinued operations in accordance with ASC 205-20, *Presentation of FinancialStatements — Discontinued Operations.*
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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**Board of Directors and Stockholders