##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-26420
 
 AMBASSADORS INTERNATIONAL, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 
 Delaware
    
    91-1688605(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1071 Camelback Street
Newport Beach, California 92660
(Address of Principal Executive Offices)
 Registrants Telephone Number, Including Area Code: (949) 759-5900
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 Yes o No þ
 The number of shares of the registrants Common Stock outstanding as of October 29, 2008 was
11,138,067.




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##### 



AMBASSADORS INTERNATIONAL, INC.  FORM 10-Q QUARTERLY REPORT   TABLE OF CONTENTS
 PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31,
2007
    
    
    1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2008 and 2007 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2008 and 2007 (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EXHIBIT INDEX
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Ambassadors International, Inc.
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share and per share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    9,802
    
    
    $
    21,998Restricted cash
    
    
    27,049
    
    
    
    31,084Available-for-sale securities
    
    
    1,741
    
    
    
    2,514Accounts and other receivables, net of allowance of $2,698 at
September 30, 2008 and $2,332 at December 31, 2007
    
    
    36,100
    
    
    
    40,798Costs in excess of billings on construction contracts
    
    
    6,253
    
    
    
    8,410Premiums receivable
    
    
    6,638
    
    
    
    10,188Reinsurance recoverable
    
    
    532
    
    
    
    1,148Inventory
    
    
    5,986
    
    
    
    5,751Deferred income taxes, net
    
    
    11
    
    
    
    1,262Prepaid costs and other current assets
    
    
    10,971
    
    
    
    8,530Total current assets
    
    
    105,083
    
    
    
    131,683Property, vessels and equipment, net
    
    
    179,815
    
    
    
    219,793Goodwill
    
    
    9,181
    
    
    
    9,181Other intangibles, net
    
    
    11,388
    
    
    
    11,152Other assets
    
    
    3,908
    
    
    
    4,680Total assets
    
    $
    309,375
    
    
    $
    376,489Liabilities:Current liabilities:Accounts payable
    
    $
    29,056
    
    
    $
    36,564Passenger and participant deposits
    
    
    33,237
    
    
    
    47,067Accrued expenses
    
    
    21,027
    
    
    
    16,175Billings in excess of costs on construction contracts
    
    
    11,096
    
    
    
    13,108Loss and loss adjustment expense reserves
    
    
    3,806
    
    
    
    6,674Deferred income taxes, net
    
    
    662
    
    
    
    Current portion of long term debt
    
    
    2,975
    
    
    
    5,479Total current liabilities
    
    
    101,859
    
    
    
    125,067Long term debt, net of current portion and net of discount of $2,046 at
September 30, 2008 and $2,479 at December 31, 2007
    
    
    123,177
    
    
    
    161,584Long term deferred tax liabilities
    
    
    247
    
    
    
    1,676Long term passenger and participant deposits
    
    
    5
    
    
    
    35Total liabilities
    
    
    225,288
    
    
    
    288,362Commitments and contingencies (Note 11)Stockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000,000 shares authorized; 10,888,067
and 10,888,655 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
    
    
    108
    
    
    
    108Additional paid-in capital
    
    
    98,771
    
    
    
    97,634Accumulated deficit
    
    
    (15,927
    )
    
    
    (11,170
    )Accumulated other comprehensive income
    
    
    1,135
    
    
    
    1,555Total stockholders equity
    
    
    84,087
    
    
    
    88,127Total liabilities and stockholders equity
    
    $
    309,375
    
    
    $
    376,489
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  1




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##### Table of Contents



Ambassadors International, Inc.
 
 Condensed Consolidated Statements of Operations
 (in thousands, except per share data)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)Revenues:Passenger ticket revenue
    
    $
    45,884
    
    
    $
    54,528
    
    
    $
    102,650
    
    
    $
    100,508Onboard and other cruise revenue
    
    
    8,424
    
    
    
    5,514
    
    
    
    20,096
    
    
    
    11,795Marine revenue
    
    
    24,871
    
    
    
    31,984
    
    
    
    85,537
    
    
    
    84,033Travel and event related
    
    
    4,356
    
    
    
    3,330
    
    
    
    12,690
    
    
    
    11,330Net insurance premiums earned
    
    
    
    
    
    
    84
    
    
    
    5
    
    
    
    90683,535
    
    
    
    95,440
    
    
    
    220,978
    
    
    
    208,572Costs and operating expenses:Cruise operating expenses:Compensation and benefits
    
    
    8,402
    
    
    
    9,580
    
    
    
    21,652
    
    
    
    20,343Passenger expenses
    
    
    3,191
    
    
    
    3,531
    
    
    
    7,554
    
    
    
    7,749Materials and services
    
    
    19,380
    
    
    
    14,709
    
    
    
    46,499
    
    
    
    32,597Repairs and maintenance
    
    
    3,892
    
    
    
    9,254
    
    
    
    9,842
    
    
    
    14,005Other cruise operating expenses
    
    
    4,553
    
    
    
    4,832
    
    
    
    10,908
    
    
    
    9,86339,418
    
    
    
    41,906
    
    
    
    96,455
    
    
    
    84,557Cost of marine revenue
    
    
    17,863
    
    
    
    22,806
    
    
    
    64,542
    
    
    
    64,257Selling and tour promotion
    
    
    1,799
    
    
    
    8,008
    
    
    
    10,832
    
    
    
    20,816General and administrative
    
    
    13,175
    
    
    
    13,825
    
    
    
    42,547
    
    
    
    39,428Depreciation and amortization
    
    
    3,798
    
    
    
    3,234
    
    
    
    11,191
    
    
    
    7,922Loss and loss adjustment expenses, insurance acquisition costs and
other operating expenses
    
    
    80
    
    
    
    184
    
    
    
    245
    
    
    
    1,17676,133
    
    
    
    89,963
    
    
    
    225,812
    
    
    
    218,156Operating income (loss)
    
    
    7,402
    
    
    
    5,477
    
    
    
    (4,834
    )
    
    
    (9,584
    )Other income (expense):Interest and dividend income
    
    
    192
    
    
    
    1,209
    
    
    
    997
    
    
    
    2,968Interest expense
    
    
    (1,621
    )
    
    
    (2,082
    )
    
    
    (5,312
    )
    
    
    (5,277
    )Realized losses on sale of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Gain on vessel disposal, insurance recoveries and other, net
    
    
    4,380
    
    
    
    (23
    )
    
    
    5,069
    
    
    
    3612,951
    
    
    
    (896
    )
    
    
    754
    
    
    
    (1,996
    )Income (loss) before provision (benefit) for income taxes
    
    
    10,353
    
    
    
    4,581
    
    
    
    (4,080
    )
    
    
    (11,580
    )Provision (benefit) for income taxes
    
    
    762
    
    
    
    4,199
    
    
    
    677
    
    
    
    (9,170
    )Net income (loss)
    
    $
    9,591
    
    
    $
    382
    
    
    $
    (4,757
    )
    
    $
    (2,410
    )Earnings (loss) per share (Note 8):Basic
    
    $
    0.88
    
    
    $
    0.03
    
    
    $
    (0.44
    )
    
    $
    (0.22
    )Diluted
    
    $
    0.84
    
    
    $
    0.03
    
    
    $
    (0.44
    )
    
    $
    (0.22
    )Weighted-average common shares outstanding:Basic
    
    
    10,888
    
    
    
    11,058
    
    
    
    10,889
    
    
    
    11,085Diluted
    
    
    12,622
    
    
    
    11,529
    
    
    
    10,889
    
    
    
    11,085Dividends per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.20
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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Ambassadors International, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007(unaudited)Cash flows from operating activities:Net loss
    
    $
    (4,757
    )
    
    $
    (2,410
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    11,191
    
    
    
    7,922Amortization of debt discount and offering costs
    
    
    492
    
    
    
    330Loss on sale of available for sale securities
    
    
    
    
    
    
    48Gain on disposal of vessels and equipment
    
    
    (3,086
    )
    
    
    Stock-based compensation expense
    
    
    1,116
    
    
    
    1,212Undistributed (earnings) losses from equity investments
    
    
    39
    
    
    
    (182
    )Foreign currency translation
    
    
    (438
    )
    
    
    744Deferred income taxes
    
    
    (505
    )
    
    
    (8,956
    )Change in assets and liabilities, net of effects of business acquisitions and dispositions:Accounts and other receivables
    
    
    4,698
    
    
    
    (15,313
    )Costs in excess of billings on construction contracts
    
    
    2,157
    
    
    
    (1,836
    )Premiums receivable
    
    
    3,550
    
    
    
    3,473Deferred policy acquisition costs
    
    
    
    
    
    
    330Reinsurance recoverable
    
    
    616
    
    
    
    942Prepaid insurance premiums
    
    
    
    
    
    
    252Inventory
    
    
    (235
    )
    
    
    (1,539
    )Prepaid costs and other current assets
    
    
    (2,500
    )
    
    
    (6,950
    )Other assets
    
    
    725
    
    
    
    (1,534
    )Accounts payable and accrued expenses
    
    
    (2,586
    )
    
    
    19,011Passenger and participant deposits
    
    
    (13,860
    )
    
    
    8,870Billings in excess of costs on construction contracts
    
    
    (2,012
    )
    
    
    8,895Loss and loss adjustment expense reserves
    
    
    (2,868
    )
    
    
    (4,217
    )Unearned premiums
    
    
    
    
    
    
    (1,220
    )Other
    
    
    
    
    
    
    (19
    )Net cash provided by (used in) operating activities
    
    
    (8,263
    )
    
    
    7,853Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    804
    
    
    
    35,257Purchase of available-for-sale securities
    
    
    (43
    )
    
    
    (335
    )Restricted cash
    
    
    2,551
    
    
    
    (36,167
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    
    
    
    
    (10,954
    )Purchase of property and equipment
    
    
    (3,676
    )
    
    
    (12,658
    )Net cash used in investing activities
    
    
    (364
    )
    
    
    (24,857
    )Cash flows from financing activities:Proceeds from line of credit
    
    
    704
    
    
    
    1,045Proceeds from exercise of stock options
    
    
    21
    
    
    
    403Proceeds from issuance of convertible notes
    
    
    
    
    
    
    97,000Payments on debt
    
    
    (4,294
    )
    
    
    (63,749
    )Convertible debt offering costs
    
    
    
    
    
    
    (3,281
    )Common stock dividends paid
    
    
    
    
    
    
    (2,168
    )Repurchase of common stock
    
    
    
    
    
    
    (1,577
    )Net cash provided by (used in) financing activities
    
    
    (3,569
    )
    
    
    27,673Net change in cash and cash equivalents
    
    
    (12,196
    )
    
    
    10,669Cash and cash equivalents, beginning of period
    
    
    21,998
    
    
    
    8,246Cash and cash equivalents, end of period
    
    $
    9,802
    
    
    $
    18,915
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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##### Table of Contents



Ambassadors International, Inc.
 
 Notes to Condensed Consolidated Financial Statements (unaudited)
 1.
    
    Description of the Company and Basis of Presentation
 The Company
    
    
    Cruise This segment operates Majestic America Line and Windstar Cruises brands
within ACG. Majestic America Line is a domestic provider of overnight passenger cruises
along inland rivers and coastal waterways of North America. The Company acquired seven
U.S.-flagged cruise ships under the Majestic America Line brand, including the
223-passenger Empress of the North, the 142-passenger Queen of the West, the
436-passenger American Queen®, the 412-passenger Mississippi
Queen®, the 176-passenger Delta Queen®, the
48-passenger Contessa,and the 150-passenger Columbia Queen. The Company acquired its
U.S. cruise operations through a series of acquisitions. In January 2006, ACG acquired
American West Steamboat Company, LLC (American West), a cruise company that offers
cruises through Alaskas Inside Passage and on the Columbia and Snake rivers. In April
2006, the Company acquired the cruise-related assets of Delta Queen Steamboat Company,
Inc. (Delta Queen). On April 2, 2007, ACG, through its wholly-owned subsidiary, AICG,
acquired Windstar Cruises, an international-flagged small ship cruise line that operates
a three-ship fleet that includes the 312-passenger Wind Surf, 148-passenger Wind Spirit,
and 148-passenger Wind Star.
 Empress of the North Empress of the
North Columbia Queen Queen of the West American Queen ® , Delta Queen ® and Mississippi
Queen ®
  Empress of the North Empress of the North
  4




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##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
 
    
    Marine This segment includes marina design, manufacturing and construction services.
The Company also offers marine operations, shipyard services, management and consulting
services to marina owners. The Companys marine operations primarily consist of
Bellingham Marine Industries, Inc. (Bellingham Marine) acquired on July 21, 2006 and
BellPort Group, Inc. (BellPort), acquired in February 2005.Bellingham Marine is
a global marina builder, providing design and construction services to marina owners
throughout the world. The Companys marine business customer base is widespread and
geographically diverse, and includes corporations, government agencies and private
individuals. In February 2008, in order to further expand the Companys shipyard
operations, BellPort purchased certain assets related to Anacapa Marine Services, a
shipyard business located in Channel Islands Harbor in Oxnard, California, for $0.4
million.
    
    Travel and Events Operating under the Ambassadors, LLC brand, this segment
develops, markets, and manages meetings and incentive programs for a nationwide roster
of corporate clients utilizing incentive travel, merchandise award programs and
corporate meeting management services. It provides comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions and trade shows.
It also develops, markets, and distributes event portfolio management technology
solutions for corporations and large associations.
    
    Corporate and Other This segment consists of general corporate assets
(primarily cash and cash equivalents and investments), the operations of Cypress Re and
other activities which are not directly related to the Companys cruise, marine or
travel and events segments. Cypress Re reinsures property and casualty risks written by
licensed United States insurers. The lines of business that are currently being
reinsured include commercial auto liability, commercial physical damage and workers
compensation. These risks are associated with members of highly selective affinity
groups or associations. Cypress Re has not entered into any new programs in 2007 and
2008.
 Seasonality
  Basis of Presentation
   Fair Value Measurements
   5




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
  
    
    Level 1  quoted prices for identical instruments in active markets;
    
    Level 2  quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations in which significant inputs and significant value drivers are observable in
active markets; and
    
    Level 3  valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
     Fair Value
    
    
    
    
    
    
    Change inSeptember 30,
    
    
    Fair Value
    
    
    Unrealized
    
    
    RealizedFair Value Hierarchy
    
    2008
    
    
    December 31, 2007
    
    
    Gain/(Loss)(1)
    
    
    Gain/(Loss)(1)Level 1
    
    $
    1,741
    
    
    $
    2,514
    
    
    $
    (21
    )
    
    $
    Level 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Settlements (net) or transfers out of Level I during the nine months ended September
30, 2008 amounted to $752.  6




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
 Restricted Cash
    Revenue Recognition
  Passenger Ticket Revenue and Onboard and Other Cruise Revenues
  Marine Revenue
     7




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
    Travel and Event Related
   Net Insurance Premiums Earned
   Property, Vessels and Equipment
   8




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
  Long-lived Assets including Intangible Assets
  Income Taxes
  Drydocking
  Accounting for Stock-Based Compensation
   9




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Compensation cost related to stock options
    
    $
    178
    
    
    $
    128
    
    
    $
    572
    
    
    $
    497Compensation cost related to restricted stock
    
    
    193
    
    
    
    293
    
    
    
    544
    
    
    
    715Total stock-based compensation costs
    
    $
    371
    
    
    $
    421
    
    
    $
    1,116
    
    
    $
    1,212
  Dividends Declared
   Record Date
    
    Payment Date
    
    
    Dividend AmountMarch 12, 2007
    
    March 19, 2007
    
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    
    1,084
 Recent Accounting Pronouncements
    10




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
     2.
    
    Business Acquisitions and Investments
    11




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
  Cash consideration
    
    $
    11,289Seller financing
    
    
    60,000Acquisition costs incurred
    
    
    802Purchase price
    
    $
    72,091
  Cash and cash equivalents
    
    $
    1,137Accounts receivable
    
    
    5Prepaid and other current assets
    
    
    811Inventory
    
    
    965Vessels and equipment
    
    
    90,825Intangible assets
    
    
    7,282Total assets acquired
    
    
    101,025Passenger deposits
    
    
    (22,966
    )Accounts payable and accrued and other expenses
    
    
    (5,995
    )Long term debt
    
    
    (60,000
    )Total liabilities assumed
    
    
    (88,961
    )Net assets acquired
    
    $
    12,064
   Pro FormaWindstar
    
    
    Pro FormaAs Reported
    
    
    Cruises
    
    
    CombinedRevenues
    
    $
    208,572
    
    
    $
    17,463
    
    
    $
    226,035Net loss
    
    $
    (2,410
    )
    
    $
    (1,080
    )
    
    $
    (3,490
    )Net loss  basic
    
    $
    (0.22
    )
    
    
    
    
    
    $
    (0.31
    )Net loss  diluted
    
    $
    (0.22
    )
    
    
    
    
    
    $
    (0.31
    )
 3.
    
    Reinsurance
     12




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
           13




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Written
    
    
    Earned
    
    
    Written
    
    
    EarnedAssumed
    
    $
    
    
    
    $
    
    
    
    $
    5
    
    
    $
    5Ceded
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net premiums
    
    $
    
    
    
    $
    
    
    
    $
    5
    
    
    $
    5
  4.
    
    Inventory
  September 30, 2008
    
    
    December 31, 2007Marine construction materials
    
    $
    2,892
    
    
    $
    2,630Food, souvenirs and supplies
    
    
    2,074
    
    
    
    2,390Fuel
    
    
    1,020
    
    
    
    731$
    5,986
    
    
    $
    5,751
 5.
    
    Prepaid costs and other current assets
  September 30, 2008
    
    
    December 31, 2007Current portion of prepaid drydocking costs
    
    $
    1,843
    
    
    $
    997Income tax receivable
    
    
    3,345
    
    
    
    2,385Prepaid program and tour costs
    
    
    1,176
    
    
    
    1,064Current portion of prepaid offering costs
    
    
    75
    
    
    
    78Deposits


    40



    Other prepaid costs and other current assets
    
    
    4,492
    
    
    
    4,006$
    10,971
    
    
    $
    8,530
  14




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##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
 6.
    
    Long term obligations
  September 30, 2008
    
    
    December 31, 2007Loans secured by ship mortgages at
fixed rates varying from 2.3% to 6.5%
due through July 2028
    
    $
    29,175
    
    
    $
    69,743Secured note payable to bank at a fixed
interest rate of 8.245%, due May 2010
    
    
    1,615
    
    
    
    1,656Amounts outstanding under $8.0 million
asset-based business loan secured line
of credit with an American bank
    
    
    223
    
    
    
    Amounts outstanding under $2.1 million
secured line of credit with an
Australian bank
    
    
    
    
    
    
    876Loans outstanding with New Zealand banks
    
    
    14
    
    
    
    503.75% Convertible Senior Notes, net of
unamortized discount and offering costs
of $2,046 and $2,479, respectively
    
    
    94,954
    
    
    
    94,521Equipment leases
    
    
    171
    
    
    
    217126,152
    
    
    
    167,063Less: current portion
    
    
    2,975
    
    
    
    5,479Non-current portion
    
    $
    123,177
    
    
    $
    161,584
  Loans Secured by Ship Mortgages
 Empress of the North
 Empress of the North Empress of
the North Empress of the North Empress of the North
 American Queen ®
 Bellingham Marine Debt
   15




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
   3.75% Convertible Senior Notes
     16




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##### Table of Contents



Ambassadors International, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)
  Year Ended December 31,2008 (remaining three months)
    
    $
    2552009
    
    
    2,7882010
    
    
    4,0012011
    
    
    2,4612012
    
    
    99,463Thereafter
    
    
    19,230128,198Less: Unamortized discount and offering costs
    
    
    (2,046
    )Less: current portion
    
    
    (2,975
    )Non-current portion
    
    $
    123,177
 7.
    
    Comprehensive Income (Loss)The components of comprehensive income (loss) are as follows (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    9,591
    
    
    $
    382
    
    
    $
    (4,757
    )
    
    $
    (2,410
    )Change in unrealized
gain on foreign
currency translation
    
    
    (1,123
    )
    
    
    347
    
    
    
    (399
    )
    
    
    744Change in unrealized
gain (loss) on
available-for-sale
securities, net of
income tax expense of
$0, $0, $0 and $43
    
    
    (8
    )
    
    
    18
    
    
    
    (21
    )
    
    
    67$
    8,460
    
    
    $
    747
    
    
    $
    (5,177
    )
    
    $
    (1,599
    )
 8.
    
    Earnings (Loss) Per ShareBasic earnings (loss) per share (EPS) is computed by dividing net income (loss) by the weighted
average common shares outstanding. Diluted EPS includes the effect of any potential shares
outstanding, which for the Company consists of dilutive stock options and shares issuable under
convertible notes (Notes). The dilutive effect of stock options is calculated using the
treasury stock method with an offset from expected proceeds upon exercise of the stock options
and unrecognized compensation expense. The dilutive effect of the Notes is calculated by adding
back interest expense and amortization offering costs, net of taxes, which would not have been
incurred assuming conversion. Diluted EPS for the three months ended September 30, 2008
includes the dilutive effect of conversion of the Notes into the Companys common shares.
Options to purchase 1,085,388 shares of common stock at an average price of $2.77 per share
were outstanding during the three months ended September 30, 2008 but were not included in the
computation of diluted EPS because the options exercise price was greater than the average
market price of common shares and therefore, the effect would be antidilutive. Diluted EPS for
the three months ended September 30, 2007 and nine months ended September 30, 2008 and 2007 do
not include the dilutive effect of stock options and conversion of the Notes into the Companys
common shares since their inclusion would be anti-dilutive.
  17




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##### Table of Contents



Ambassadors International, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)
 The table below details the components of the basic and diluted EPS calculations (in thousands,
except per share amounts):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss)
    
    $
    9,591
    
    
    $
    382
    
    
    $
    (4,757
    )
    
    $
    (2,410
    )Add: Interest expense on
convertible debt, net of tax of $0
    
    
    910
    
    
    
    
    
    
    
    
    
    
    
    Add: Amortized offering costs, net
of tax of $0
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    10,664
    
    
    $
    382
    
    
    $
    (4,757
    )
    
    $
    (2,410
    )Denominator:Weighted-average shares outstanding
 basic
    
    
    10,888
    
    
    
    11,058
    
    
    
    10,889
    
    
    
    11,085Effect of dilutive securities:Stock options
    
    
    
    
    
    
    471
    
    
    
    
    
    
    
    Convertible debt
    
    
    1,734
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average shares outstanding
 diluted
    
    
    12,622
    
    
    
    11,529
    
    
    
    10,889
    
    
    
    11,085Earnings (loss) per share:Basic
    
    $
    0.88
    
    
    $
    0.03
    
    
    $
    (0.44
    )
    
    $
    (0.22
    )Diluted
    
    $
    0.84
    
    
    $
    0.03
    
    
    $
    (0.44
    )
    
    $
    (0.22
    )
 9.
    
    Business SegmentsIn January 2007, the Company realigned its business segments into the following four business
segments: (i) cruise, which includes the operations of ACG; (ii) marine, which includes the
operations of AMG; (iii) travel and events, which includes the operations of Ambassadors; and
(iv) corporate and other, which consists of general corporate assets (primarily cash and cash
equivalents and investments), the insurance operations of Cypress Re and other activities that
are not directly related to the Companys cruise, marine and travel and events operating
segments.Summary of business segment information is as follows (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Cruise
    
    $
    54,308
    
    
    $
    60,042
    
    
    $
    122,746
    
    
    $
    112,303Marine
    
    
    24,871
    
    
    
    31,984
    
    
    
    85,537
    
    
    
    84,033Travel and events
    
    
    4,356
    
    
    
    3,330
    
    
    
    12,690
    
    
    
    11,330Corporate and other
    
    
    
    
    
    
    84
    
    
    
    5
    
    
    
    906Total revenue
    
    $
    83,535
    
    
    $
    95,440
    
    
    $
    220,978
    
    
    $
    208,572
  18




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##### Table of Contents



Ambassadors International, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating income (loss):Cruise
    
    $
    5,394
    
    
    $
    3,671
    
    
    $
    (7,839
    )
    
    $
    (11,853
    )Marine
    
    
    1,548
    
    
    
    3,500
    
    
    
    3,414
    
    
    
    5,321Travel and events
    
    
    1,600
    
    
    
    30
    
    
    
    3,013
    
    
    
    1,663Corporate and other
    
    
    (1,140
    )
    
    
    (1,724
    )
    
    
    (3,422
    )
    
    
    (4,715
    )Total operating income (loss)
    
    $
    7,402
    
    
    $
    5,477
    
    
    $
    (4,834
    )
    
    $
    (9,584
    )
 As of
    
    
    As ofSeptember 30,
    
    
    December 31,2008
    
    
    2007Total assets:Cruise
    
    $
    214,015
    
    
    $
    251,196Marine
    
    
    59,450
    
    
    
    72,979Travel and events
    
    
    13,665
    
    
    
    12,453Corporate and other
    
    
    22,245
    
    
    
    39,861Total assets
    
    $
    309,375
    
    
    $
    376,489
 10.
    
    Income TaxesThe Company recorded an income tax provision of $0.7 million for the nine months ended
September 30, 2008, compared to an income tax benefit of $9.2 million for the nine months ended
September 30, 2007. The Company continues to record a full valuation allowance on its domestic
deferred tax assets.The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of multiple state and foreign jurisdictions. With a few exceptions, the Company is no longer
subject to U.S. federal income tax examinations for years before 2005; state and local income
tax examinations before 2003; and foreign income tax examinations before 2004.The Company is not currently under Internal Revenue Service, state, local or foreign
jurisdiction tax examinations.During the nine months ended September 30, 2008, the Company recognized approximately $17,000
in potential interest and penalties associated with uncertain tax positions. The Company does
not expect any significant increases or decreases to its unrecognized tax benefits within 12
months of this reporting date.11.
    
    Commitments and ContingenciesOn February 26, 2008, the Company and several of its subsidiaries were named in a complaint by
David Giersdorf, the former President of ACG in the Superior Court of Washington for King
County. Mr. Giersdorf has alleged he was improperly terminated and has claimed damages which
appear to be in excess of $70.0 million. Mr. Giersdorfs claims, based on verbal agreements,
include the following: (i) he left a tenured position with Holland America Line (HAL), which
well-positioned him to be the President of HAL earning a multi-million dollar annual salary
until retirement; (ii) he was denied the opportunity to vest in 87,500 option shares and 30,000
restricted stock grants, which should be valued at a $47 per share stock price; (iii) his
assistance in acquiring Windstar and his work in the transition of its vendors and employees
entitles him to approximately $54.0 million; (iv) he is owed compensation for future
acquisitions; and (v) he is owed sums for reputation and emotional damage. The Company believes
all of Mr. Giersdorfs claims lack merit and will defend them vigorously, but is not able at
this time to estimate the outcome of this proceeding.
  19




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Ambassadors International, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)
 Empress of the NorthOn March 24, 2006, the Empress of the North ran aground near the Washougal Upper Range on the
Columbia River in Washington in order to avoid collision with a tug boat. No passengers or
crew were injured during the grounding. The Company filed a claim against the tug boat
operator and was awarded $1.1 million as a settlement of the case which amount has been
recorded in other income for the three months ended September 30, 2008, and as an outstanding
receivable as of that date. The settlement amount was received in full in October 2008.Queen of the WestIn April 2008, a fire occurred in the engine room of the Queen of the West, while the vessel
was cruising between The Dalles and John Day Locks in Oregon. The fire was extinguished with
no injuries to guests. The Columbia Queenwas brought into service in April, earlier than
originally scheduled, in order to accommodate guests while the Queen of the Westwas undergoing
repairs. The incident sailing and eight additional sailings were cancelled.As of September 30, 2008, the Company incurred costs related to relocating passengers and crew,
vessel repair costs and refund passenger deposits totaling $0.4 million which have been
recorded in operations. In addition, the Company lost revenue of $2.4 million as a result of
the cancellations of the nine sailings. During the three months ended September 30, 2008, the
Company received $0.4 million in insurance recoveries which was recorded as a reduction to the
cruise operating expenses. The Company is in the process of seeking insurance related
recoveries with respect to this incident but has recorded no receivables related to the
estimated recoveries as of September 30, 2008.Change in OfficerOn September 19, 2008, Joseph J. Ueberroth, Chairman, President and Chief Executive Officer
(the Executive) of the Company terminated his employment agreement Without Good Reason (as
such term is defined in the employment agreement) and gave twelve (12) months notice of his
last day as Chairman, President and Chief Executive Officer of the Company as September 19,
2009. Pursuant to the terms of Mr. Ueberroths Employment Agreement dated November 2, 2006, in
the event of termination of the Executives employment by the Executive Without Good Reason
and upon at least twelve months notice, the Company is obligated to pay the Executive the sum
of (i) an amount equal to the projected cost of Executives medical insurance under COBRA for
the eighteen month period immediately following the termination, and (ii) an amount equal to
one times the average annual base salary plus the average annual bonus paid to the Executive
for the two full fiscal years immediately preceding such termination. The Company calculated
the payment due to Mr. Ueberroth to be $2,931,047 as previously disclosed in the Companys
Proxy Statement as filed on April 14, 2008, excluding any amounts for unpaid expenses and
unpaid vacation days as of his last day.
The Company expects to record this amount as compensation expense ratably over a twelve
month period ending in September 2009 and, accordingly, recorded $122,000 in compensation
expense for the three months ended September 30, 2008.12.
    
    Impairment or Disposal of Long-Lived AssetsSince 1968, Congress has granted the Delta Queen® eight consecutive exemptions from
the Safety at Sea Act requirement because of fire prevention and safety enhancements made to
the ship and the historic status of the Delta Queen®. The current exemption has been
extended to November 1, 2008. The Companys ability to operate the Delta Queen® was
dependent upon retaining the current Congressional exemption and obtaining additional
exemptions subsequent to 2008. In July 2007, the Company was made aware that the Congressional
exemption would not be extended beyond 2008 and announced 2008 as the farewell season for the
Delta Queen®. The Company reviewed the remaining vessel value of the Delta
Queen® for impairment. Management evaluated the recoverability using both subjective
and objective factors. Subjective factors included the evaluation of industry and product
trends and the Companys strategic focus. Objective factors included managements best
estimates of projected future earnings and cash flows. The Company used a discounted cash flow
model using assumptions including expected revenues and expenses, investment yields on
deposits, any future capital expenditure requirements and appropriate discount rates. Based on
the analysis performed, the Company believes that the remaining vessel value on the Delta
Queen® is recoverable and no impairment charge has been recorded as of September 30,
2008.The Company has decided not to operate the 48-passenger Contessain 2008 and anticipates
selling the vessel in the near future. The Company believes that the remaining vessel value on
the Contessais recoverable and no impairment charge has been recorded as of September 30,
2008.
  20




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##### Table of Contents



Ambassadors International, Inc.  Notes to Condensed Consolidated Financial Statements (unaudited)
 In April 2008, the Company announced its intention to sell the Majestic America Line. As of
September 30, 2008, the net assets of the Majestic America Line did not qualify for
held-for-sale treatment under SFAS No. 144. The
Company also determined that there was no impairment of the assets of Majestic America Line as
of September 30, 2008.EN Boat, a subsidiary of the Company and owner of the Empress of the North, was unable to make
its semi-annual payment on the note due July 17, 2008 and was unable to cure the payment
default within the 30 day cure period. On August 15, 2008, the Company returned the Empress of
the Northto MARADs custodial control following its last sailing on August 9, 2008. As a
result of the disposal of the Empress of the North, the Company wrote off $34.2 million in
assets (primarily vessels) and $37.3 million in liabilities (primarily loans payable) and
recorded a $3.1 million in gain on disposal for the quarter ended September 30, 2008. The
default under the note will have a limited financial impact because recourse on the default is
limited to the Empress of the North.13.
    
    Subsequent EventOn October 28, 2008, the Company entered into a settlement agreement with HAL Antillen N.V.,
whereby the Company received on October 31, 2008, approximately $2.6 million related to a dispute that arose
from the purchase of Windstar Cruises.
  21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
         
    
    Improve our marketing and pricing strategy by creating a multi-channel marketing
approach that embraces the travel agent community, opens up international markets, caters
to charter and incentive business and pursues a strong group support for our unique
offerings;
    
    Reduce our selling expenses by focusing our sales force and targeting our direct mail
campaigns, which enable us to scale our campaign to a level more appropriate for a company
of our size;
    
    Improve our operational execution by partnering with V.Ships to reduce costs while
enhancing the onboard guest experience.
 Critical Accounting Policies
   22




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Revenue Recognition
  Passenger Ticket Revenue and Onboard and Other Cruise Revenues
  Marine Revenue
     23




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##### Table of Contents



Travel and Event Related
  Net Insurance Premiums Earned
 
 Property, Vessels and Equipment
    24




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##### Table of Contents



Drydocking
  Long-Lived Assets Including Intangibles
  Reserve for Loss and Loss Adjustment Expenses
  Reinsurance
   Stock-Based Compensation
    25




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##### Table of Contents



Income Taxes
  Statistical Terminology and Information for Cruise Operations
 Available Passenger Cruise Days (APCD)
  Occupancy
  Passenger Cruise Days
   Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)Passengers Carried
    
    
    16,852
    
    
    
    21,119
    
    
    
    39,905
    
    
    
    41,763Occupancy Percentage
    
    
    81
    %
    
    
    88
    %
    
    
    79
    %
    
    
    87
    %Passenger Cruise Days
    
    
    119,617
    
    
    
    145,192
    
    
    
    282,900
    
    
    
    284,374APCD
    
    
    147,322
    
    
    
    165,076
    
    
    
    357,772
    
    
    
    326,534
  26




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##### Table of Contents



COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007
 Revenue
  Cruise Operating Expenses
  Cost of Marine Revenue
  Selling and Tour Promotion Expenses
  General and Administrative Expenses
  Depreciation and Amortization
  Loss and Loss Adjustment Expenses, Insurance Acquisition Costs and Other Operating Expenses
  Operating Income
   27




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##### Table of Contents



Other Income (Expense)
 Empress
of the North Empress of the North
 Empress of the North Empress of
the North, Empress of
the North Empress of the North
 Income Taxes
   Net Income
  COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2007
 Revenue
  Cruise Operating Expenses
   28




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##### Table of Contents



Cost of Marine Revenue
  Selling and Tour Promotion Expenses
  General and Administrative Expenses
  Depreciation and Amortization
  Loss and Loss Adjustment Expenses, Insurance Acquisition Costs and Other Operating Expenses
  Operating Loss
  Other Income (Expense)
 Empress of the North Empress of the North Queen of the West, Mississippi Queen ®
 Empress of the North Empress of the North, Empress of the
North Empress of the
North
  29




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##### Table of Contents



Income Taxes
   Net Loss
  Liquidity and Capital Resources
     Empress of the North Empress of the North
  30




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31




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##### Table of Contents



Record Date
    
    Payment Date
    
    Dividend AmountMarch 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,084
     Trends and Uncertainties
  Cautionary Note Regarding Forward-Looking Statements
  
    
    our ability to effectively and efficiently operate our cruise operations;
    
    our ability to effectively and expeditiously divest Majestic America Line;
    
    customer cancellation rates;
    
    competitive conditions in the industries in which we operate;
  32




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##### Table of Contents




    
    marketing expenses;
    
    extreme weather conditions;
    
    timing of and costs related to acquisitions;
    
    the impact of new laws and regulations affecting our business;
    
    negative incidents involving cruise ships, including those involving the health
and safety of passengers;
    
    cruise ship maintenance problems and emergency ship repairs;
    
    reduced consumer demand for vacations and cruise vacations;
    
    changes in fuel, food, payroll, insurance and security costs;
    
    the availability of raw materials;
    
    our ability to enter into profitable marina construction contracts;
    
    changes in relationships with certain travel providers;
    
    changes in vacation industry capacity;
    
    the mix of programs and events, program destinations and event locations;
    
    the introduction and acceptance of new programs and program and event
enhancements by us and our competitors;
    
    other economic and geo-political factors and other considerations affecting the
travel industry;
    
    changes in United States maritime tax laws;
    
    potential claims related to our reinsurance business; and
    
    the potentially volatile nature of the reinsurance business.
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
   
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
    33




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
   34




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##### Table of Contents



Item 6. Exhibits.
 Exhibit No.
    
    Description10.1
    
    
    Amendment
No. 3, dated as of July 19, 2008, to Loan Agreement
dated as of September 1, 2006 by and among Ambassadors
International, Inc., Ambassadors Marine Group, LLC,
Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress
Reinsurance, Ltd. and Bank of America, N.A. (1)10.2
    
    
    Amendment No. 4, dated as of September 25, 2008, to Loan
Agreement dated as of September 1, 2006 by and among
Ambassadors International, Inc., Ambassadors Marine Group,
LLC, Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress
Reinsurance, Ltd. and Bank of America, N.A. (2)31.1
    
    
    Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (3)31.2
    
    
    Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (3)32.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (3)32.2
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (3)
 
 (1)
    
    Filed as an exhibit to our Form 8-K for July 19, 2008 and
incorporated herein by reference.(2)
    
    Filed as an exhibit to our Form 8-K for September 25, 2008 and incorporated herein by
reference.(3)
    
    Attached hereto.  35




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##### Table of Contents



Signatures
 
 AMBASSADORS INTERNATIONAL, INC.
(Registrant)Date: October 31, 2008
    By:
    /s/ Blake T. BarnettBlake T. BarnettChief Financial Officer,

(Principal Financial Officer and 
Duly Authorized Officer)  36




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Exhibit Index
 Exhibit No.
    
    Description10.1
    
    
    Amendment
No. 3, dated as of July 19, 2008, to Loan Agreement
dated as of September 1, 2006 by and among Ambassadors
International, Inc., Ambassadors Marine Group, LLC,
Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress
Reinsurance, Ltd. and Bank of America, N.A. (1)10.2
    
    
    Amendment No. 4, dated as of September 25, 2008, to Loan
Agreement dated as of September 1, 2006 by and among
Ambassadors International, Inc., Ambassadors Marine Group,
LLC, Ambassadors, LLC, Ambassadors Cruise Group, LLC, Cypress
Reinsurance, Ltd. and Bank of America, N.A. (2)31.1
    
    
    Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (3)31.2
    
    
    Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (3)32.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (3)32.2
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (3)
 
 (1)
    
    Filed as an exhibit to our Form 8-K for July 19, 2008 and incorporated herein by reference.(2)
    
    Filed as an exhibit to our Form 8-K for September 25, 2008 and incorporated herein by
reference.(3)
    
    Attached hereto.  37