##### 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 March 31, 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 
Incorporation or Organization)
    
    (I.R.S. Employer
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
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ
 The
number of shares of the registrants Common Stock outstanding as of April 29, 2008 was
11,141,067.




---



##### 



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and
2007 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




---



##### 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)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    17,292
    
    
    $
    21,998Restricted cash
    
    
    32,528
    
    
    
    31,084Available-for-sale securities
    
    
    2,396
    
    
    
    2,514Accounts and other receivables, net of allowance of $2,436 at
March 31, 2008 and $2,332 at December 31, 2007
    
    
    34,585
    
    
    
    40,798Costs in excess of billings on construction contracts
    
    
    9,236
    
    
    
    8,410Premiums receivable
    
    
    8,493
    
    
    
    10,188Reinsurance recoverable
    
    
    660
    
    
    
    1,148Inventory
    
    
    6,592
    
    
    
    5,751Deferred income taxes, net
    
    
    1,244
    
    
    
    1,262Prepaid costs and other current assets
    
    
    12,009
    
    
    
    8,530Total current assets
    
    
    125,035
    
    
    
    131,683Property, vessels and equipment, net
    
    
    220,804
    
    
    
    219,793Goodwill
    
    
    9,181
    
    
    
    9,181Other intangibles, net
    
    
    10,008
    
    
    
    11,152Other assets
    
    
    4,474
    
    
    
    4,680Total assets
    
    $
    369,502
    
    
    $
    376,489Liabilities:Current liabilities:Accounts payable
    
    $
    31,298
    
    
    $
    36,564Passenger and participant deposits
    
    
    61,002
    
    
    
    47,067Accrued expenses
    
    
    14,663
    
    
    
    16,175Billings in excess of costs on construction contracts
    
    
    14,418
    
    
    
    13,108Loss and loss adjustment expense reserves
    
    
    5,089
    
    
    
    6,674Current
portion of long term debt
    
    
    4,587
    
    
    
    5,479Total current liabilities
    
    
    131,057
    
    
    
    125,067Long term debt, net of current portion and net of discount of $2,335 and
$2,479, respectively
    
    
    159,604
    
    
    
    161,584Long term deferred tax liabilities
    
    
    1,635
    
    
    
    1,676Long term passenger and participant deposits
    
    
    305
    
    
    
    35Total liabilities
    
    
    292,601
    
    
    
    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; 10,891,067
and 10,888,655 shares issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
    
    
    108
    
    
    
    108Additional paid-in capital
    
    
    98,057
    
    
    
    97,634Accumulated deficit
    
    
    (23,147
    )
    
    
    (11,170
    )Accumulated other comprehensive income
    
    
    1,883
    
    
    
    1,555Total stockholders equity
    
    
    76,901
    
    
    
    88,127Total liabilities and stockholders equity
    
    $
    369,502
    
    
    $
    376,489
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  1




---



##### Table of Contents



Ambassadors International, Inc.
 
 Condensed Consolidated Statements of Operations
 (in thousands, except per share data)
 Three MonthsEnded March 31,2008
    
    
    2007(unaudited)Revenues:Passenger ticket revenue
    
    $
    18,783
    
    
    $
    4,843Onboard and other cruise revenue
    
    
    4,974
    
    
    
    359Marine revenue
    
    
    29,352
    
    
    
    23,484Travel, incentive and event related
    
    
    3,726
    
    
    
    3,524Net insurance premiums earned
    
    
    5
    
    
    
    65456,840
    
    
    
    32,864Costs and operating expenses:Cruise operating expenses:Compensation and benefits
    
    
    4,611
    
    
    
    1,812Passenger expenses
    
    
    1,380
    
    
    
    759Materials and services
    
    
    9,875
    
    
    
    3,035Repairs and maintenance
    
    
    2,229
    
    
    
    317Commissions and other cruise operating expenses
    
    
    2,506
    
    
    
    1,07820,601
    
    
    
    7,001Cost of marine revenue
    
    
    22,545
    
    
    
    19,444Selling and tour promotion
    
    
    6,416
    
    
    
    6,524General and administrative
    
    
    14,999
    
    
    
    11,320Depreciation and amortization
    
    
    3,476
    
    
    
    1,560Loss and loss adjustment expenses, insurance acquisition costs and
other operating expenses
    
    
    97
    
    
    
    71568,134
    
    
    
    46,564Operating loss
    
    
    (11,294
    )
    
    
    (13,700
    )Other income (expense):Interest and dividend income
    
    
    467
    
    
    
    692Interest expense
    
    
    (2,073
    )
    
    
    (1,005
    )Realized gains (losses) on sale of available-for-sale securities, net
    
    
    
    
    
    
    (48
    )Other, net
    
    
    817
    
    
    
    (190
    )(789
    )
    
    
    (551
    )Loss before benefit for income taxes
    
    
    (12,083
    )
    
    
    (14,251
    )Benefit for income taxes
    
    
    (106
    )
    
    
    (5,689
    )Net loss
    
    $
    (11,977
    )
    
    $
    (8,562
    )Earnings (loss) per share:Basic
    
    $
    (1.10
    )
    
    $
    (0.77
    )Diluted
    
    $
    (1.10
    )
    
    $
    (0.77
    )Weighted-average common shares outstanding:Basic
    
    
    10,890
    
    
    
    11,089Diluted
    
    
    10,890
    
    
    
    11,089Dividends per common share
    
    $
    
    
    
    $
    0.10
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




---



##### Table of Contents



Ambassadors International, Inc.
 
 Condensed Consolidated Statements of Cash Flows 
(in thousands)
 Three Months EndedMarch 31,2008
    
    
    2007(unaudited)Cash flows from operating activities:Net loss
    
    $
    (11,977
    )
    
    $
    (8,562
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    3,476
    
    
    
    1,560Amortization of debt discount and offering costs
    
    
    166
    
    
    
    Share-based compensation and amortization
    
    
    402
    
    
    
    537Undistributed loss (earnings) from equity investments
    
    
    41
    
    
    
    (553
    )Deferred income taxes
    
    
    (24
    )
    
    
    (40
    )Loss on sale of available-for-sale securities
    
    
    
    
    
    
    48Foreign currency translation
    
    
    337
    
    
    
    244Change in assets and liabilities, net of effects of business
acquisitions and dispositions:Accounts and other receivables
    
    
    6,213
    
    
    
    (1,362
    )Costs in excess of billings on construction contracts
    
    
    (826
    )
    
    
    (808
    )Premiums receivable
    
    
    1,695
    
    
    
    1,567Deferred policy acquisition costs
    
    
    
    
    
    
    239Reinsurance recoverable
    
    
    488
    
    
    
    524Prepaid insurance premiums
    
    
    
    
    
    
    182Inventory
    
    
    (841
    )
    
    
    (368
    )Prepaid costs and other current assets
    
    
    (3,501
    )
    
    
    (9,383
    )Other assets
    
    
    159
    
    
    
    148Accounts payable and accrued expenses
    
    
    (6,254
    )
    
    
    (1,188
    )Passenger and participant deposits
    
    
    14,205
    
    
    
    24,944Billings in excess of costs on construction contracts
    
    
    1,310
    
    
    
    3,428Loss and loss adjustment expense reserves
    
    
    (1,585
    )
    
    
    (1,792
    )Unearned premiums
    
    
    
    
    
    
    (886
    )Deferred gain on retroactive insurance
    
    
    
    
    
    
    (12
    )Net cash provided by operating activities
    
    
    3,484
    
    
    
    8,467Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    200
    
    
    
    30,534Purchase of available-for-sale securities
    
    
    (91
    )
    
    
    (183
    )Restricted cash
    
    
    (2,341
    )
    
    
    (12,607
    )Purchase of property, vessels and equipment
    
    
    (3,414
    )
    
    
    (5,782
    )Net cash
provided by (used in) investing activities
    
    
    (5,646
    )
    
    
    11,962Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    21
    
    
    
    55Common stock dividends paid
    
    
    
    
    
    
    (1,084
    )Payments on long term debt
    
    
    (2,565
    )
    
    
    (1,670
    )Net cash used in financing activities
    
    
    (2,544
    )
    
    
    (2,699
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,706
    )
    
    
    17,730Cash and cash equivalents, beginning of period
    
    
    21,998
    
    
    
    8,246Cash and cash equivalents, end of period
    
    $
    17,292
    
    
    $
    25,976
 The accompanying notes are an integral part of these condensed consolidated financial statements
  3




---



##### Table of Contents



Ambassadors International, Inc.
 
 Notes to Condensed Consolidated Financial Statements (unaudited)
 1.
    
    Description of the Company and Basis of PresentationThe CompanyAmbassadors International, Inc. (the Company) was founded in 1967 as a travel services
company incorporated in Washington and reincorporated in Delaware in 1995. The Company operates
through four wholly-owned subsidiaries: (i) Ambassadors, LLC (Ambassadors), which commenced
operations in 1996; (ii) Cypress Reinsurance, Ltd (Cypress Re), which commenced operations in
2004; (iii) Ambassadors Marine Group, LLC (AMG), which commenced operations in 2006; and (iv)
Ambassadors Cruise Group, LLC (ACG), which commenced operations in 2006. ACG formed a
wholly-owned subsidiary, Ambassadors International Cruise Group, LLC (AICG) which acquired
Windstar Sail Cruises Limited (Windstar Cruises) in April 2007.The Company operates in 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 operations
of Cypress Re and other activities which are not directly related to the Companys cruise,
marine and travel and events operating segments.The following further describes the operations of the Companys business segments:
 
    
    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.The 2008 cruise schedule includes cruises through Alaskas Inside Passage onboard the
Empress of the North, and on the Columbia and Snake Rivers onboard the Empress of the
North, Columbia Queenand Queen of the West. The Company also offers historical cruises
onboard the American Queen®, Delta Queen®and Mississippi
Queen® on many American rivers, including the Mississippi, Ohio, Tennessee,
Cumberland and Arkansas Rivers, with stops at many American historic cities, battle
grounds and estates, including New Orleans, Memphis and St. Louis. Each of the Companys
cruises offers an onboard historian and naturalist and shore excursions to enhance
passengers understanding of the wildlife, history and cultures of the areas traveled. The
Companys 2008 cruise schedule also includes destinations in the Greek Isles, Caribbean
Islands and Costa Rica and cruises on the Mediterranean, the Adriatic, and the Panama
Canal on one of the three Windstar Cruises ships.
    
    Marine This segment includes marina design, 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.
  4




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 
    
    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.
 SeasonalityThe Companys businesses are seasonal. Prior to 2006, the majority of the Companys operating
results were recognized in the first and second quarters of each fiscal year, which corresponds
to the busy season for the Companys travel and events services. As a result of the
acquisitions within the Companys cruise segment and the size of its cruise operations in
relation to its overall operations, since 2006, a majority of the Companys operating results
have been recognized in the second and third quarters of each fiscal year, which coincides with
the cruising season.Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008 or any
other future periods.The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements. Certain reclassifications have
been made to the 2007 condensed consolidated financial statements to conform to the 2008
presentation. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys annual report on Form 10-K for the year ended
December 31, 2007.Fair Value MeasurementsEffective January 1, 2008, the Company implemented the requirements of SFAS No. 157, Fair Value
Measurements (SFAS No. 157) for its financial assets and liabilities. SFAS No. 157 refines
the definition of fair value, expands disclosure requirements about fair value measurements and
establishes specific requirements as well as guidelines for a consistent framework to measure
fair value. SFAS No. 157 defines fair value as the price that would be received to sell an
asset, or paid to transfer a liability, in an orderly transaction between market participants.
Further, SFAS No. 157 requires the Company to maximize the use of observable market inputs,
minimize the use of unobservable market inputs and disclose in the form of an outlined
hierarchy the details of such fair value measurements.
  5




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 SFAS No. 157 specifies a hierarchy of valuation techniques based on whether the inputs to a
fair value measurement are considered to be observable or unobservable in a marketplace.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Companys market assumptions. This hierarchy requires the use of observable
market data when available. These two types of inputs have created the following fair value
hierarchy:
 
    
    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.
 The Company measures fair value using a set of standardized procedures that are outlined herein
for all financial assets and liabilities which are required to be measured at fair value. When
available, the Company utilizes quoted market prices from an independent third party source to
determine fair value and classifies such items in Level 1. In some instances where a market
price may be available, but in an inactive or over-the-counter market where significant
fluctuations in pricing could occur, the Company would consistently choose the dealer (market
maker) pricing estimate and classify the financial asset or liability in Level 2.If quoted market prices or inputs are not available, fair value measurements are based upon
valuation models that utilize current market or independently sourced market inputs, such as
interest rates, option volatilities, credit spreads, etc. Items valued using such
internally-generated valuation techniques are classified according to the lowest level input
that is significant to the fair value measurement. As a result, a financial asset or liability
could be classified in either Level 2 or 3 even though there may be some significant inputs
that are readily observable. Internal models and techniques used by the Company include
discounted cash flow and Black-Scholes-Merton option valuation models.
The adoption of SFAS No. 157 did not have a material impact on the Companys consolidated
financial position or results of operations.On February 12, 2008, the FASB amended the implementation of SFAS No. 157 related to
non-financial assets and liabilities until fiscal periods beginning after November 15, 2008. As
a result, the Company has not applied the above fair value procedures to its goodwill and
long-lived asset impairment analyses during the current period. The Company believes that the
adoption of SFAS No. 157 for non-financial assets and liabilities will not have a material
impact on its consolidated financial position or results of operations upon implementation for
fiscal periods beginning after November 15, 2008.The following table illustrates the Companys fair value measurements of its financial assets
and liabilities as classified in the fair value hierarchy, associated unrealized and realized
gains and losses, as well as purchases, sales, issuances, settlements (net) or transfers out of
a Level 1 classification. Realized gains and losses are recorded in other income, net on the
Companys consolidated statement of operations (in thousands):
 Change inFair Value
    
    
    Fair Value
    
    
    Unrealized
    
    
    RealizedFair Value Hierarchy
    
    March 31, 2008
    
    
    December 31, 2007
    
    
    Gain/(Loss)(1)
    
    
    Gain/(Loss)(1)Level 1
    
    $
    2,396
    
    
    $
    2,514
    
    
    $
    1
    
    
    $
    Level 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Settlements (net) or transfers out of Level I during the three months ended March 31,
2008 amounted to $119.
  6




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 Restricted CashThe Companys cruise passenger deposits are primarily received through credit card
transactions. At December 31, 2007, the Company had $17.1 million of restricted cash held by
banks in cash equivalents and a certificate of deposit in order to secure its processing of
passenger deposits through credit cards. The restricted amounts were negotiated between the
Company and the bank based on a percentage of the expected future volume of credit card
transactions within a standard twelve-month period. At March 31, 2008, the total amount of
restricted cash held by banks was $19.4 million.On March 27, 2007, the Company amended its credit facility with a bank to reduce its revolving
line of credit from $20.0 million to $12.5 million and established a $12.5 million certificate
of deposit with the bank to secure its outstanding letters of credit. The certificate amount
was based on the Companys current letters of credit then outstanding.As of March 31, 2008 and December 31, 2007, the Company also had $0.6 million and $1.5 million,
respectively, included in restricted cash representing principal and interest payments made to
a depository account which was used to pay bondholders of certain of the Companys vessel debt
in August 2008 as required under the loan agreement.Revenue RecognitionThe Company recognizes revenue in accordance with GAAP, including SEC Staff Accounting Bulletin
No. 104, Revenue Recognition, and EITF 99-19, Reporting Revenue Gross as a Principal Versus
Net as an Agent. The Company recognizes revenue when persuasive evidence of an arrangement
exists, the service fee is fixed or determinable, collectibility is reasonably assured and
delivery has occurred.Passenger Ticket Revenue and Onboard and Other Cruise RevenuesThe Company records passenger ticket revenue net of applicable discounts and recognizes
passenger ticket revenue and related costs of revenue when the cruise is completed. The Company
generally receives from its customers a partially refundable deposit within one week of booking
a tour, with the balance typically remitted 60 days prior to the departure date. If customers
cancel their trip, the nonrefundable portion of their deposit is recognized as revenue on the
date of cancellation. Passenger revenue representing travel insurance purchased at the time of
reservation is recognized upon the completion of the cruise or passenger cancellation,
whichever is earlier and the Companys obligation has been met. Onboard and other cruise
revenue consisting of beverage and souvenir sales and optional shore excursions are deferred
and recognized as revenue when the cruise is completed.Marine RevenueThe Company recognizes revenue for marine and related services, and shipyard related revenue in
accordance with the American Institute of Certified Public Accountants Statement of Position
No. 81-1 Accounting for Performance of Construction-Type and Production-Type Contracts.Revenues from fixed-price marine construction contracts are recognized on the
percentage-of-completion method, whereby a portion of the contract revenue, based on contract
costs incurred to date compared with total estimated costs at completion (based on Companys
estimates), is recognized as revenue each period. Revenues from cost-plus contracts are
recognized on the basis of costs incurred, plus the fee earned. Estimates of fees earned are
based on negotiated fee amounts or managements assessment of the fee amounts that are likely
to be earned. Each of these methods approximates percentage of completion revenue recognition
based on contract costs incurred to date compared with total estimated costs at completion.
The Company uses the completed contract method for shipyard related contracts for which
reasonably dependable estimates cannot be made.On occasion, the Company or its customers may seek to modify a contract to accommodate a change
in the scope of the work, such as changes in specifications, method or manner of performance,
equipment, materials, or period of performance, or to account for customer-caused delays,
errors in specifications or design, contract terminations, or other causes of unanticipated
additional costs. Such change orders or claims are evaluated according to their
characteristics and the circumstances under which they occur, taking into consideration such
factors as the probability of recovery, the Companys experience in negotiating change orders
and claims, and the adequacy of documentation
substantiating the costs of such change order or claim. Costs attributable to unpriced change
orders and claims are accounted for as costs of contract performance in the period in which the
costs are incurred, and revenue is recognized to the extent of costs incurred. Revenue in
excess of costs attributable to unpriced change orders is recorded when realization is assured
beyond a reasonable doubt, based on the Companys experience with the customer or when a bona
fide pricing offer has been provided by the customer. Receivables related to unpriced change
orders and claims are not material.
  7




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 The Company follows these revenue recognition methods because reasonably dependable estimates
of the revenue, costs and profits applicable to various stages of a contract can generally be
made. Recognized revenues and profit are subject to revisions as the contract progresses to
completion. If the Company does not accurately estimate the resources required or the scope of
work to be performed, or does not manage its projects properly within the planned periods of
time, or satisfy its obligations under the contracts, then profit may be significantly and
negatively affected or losses on contracts may need to be recognized. On a regular basis, the
Company reviews contract performance, costs incurred, and estimated costs to complete.
Revisions to revenue and profit estimates are reflected in income in the period in which the
facts that give rise to the revisions become known. Provisions for anticipated losses on
contracts are reflected in income in the period in which the loss becomes known.A contract may be regarded as substantially completed if remaining costs and potential risks
are insignificant in amount. The Company considers a contract to be substantially completed
upon delivery of the product, acceptance by the customer and compliance with contract
performance specifications.The asset, costs in excess of billings on construction contracts, represents revenues
recognized in excess of amounts billed. The liability, billings in excess of costs on
construction contracts, represents billings in excess of revenues recognized.Travel, Incentive and Event RelatedThe Company bills travel participants, mainly consisting of large corporations, in advance, of
which the cash received is recorded as a participant deposit. The Company pays for certain
direct program costs such as airfare, hotel and other program costs in advance of travel, which
are recorded as prepaid program costs. Travel revenue and related costs are recognized when
travel convenes and such revenue is classified as travel and incentive related. This revenue is
reported on a net basis, reflecting the net effect of gross billings to the client less any
direct program costs.The Company recognizes revenue from hotel reservation, registration and related travel services
when the convention operates. Revenue from the sale of merchandise is recognized when the
merchandise is shipped, the service has been provided or when the redemption periods have
expired. The Company defers revenue from prepaid, certificate-based merchandise incentive
programs until the Companys obligations are fulfilled or upon managements estimates (based
upon historical trends) that it is remote that the certificate will be redeemed. These revenues
are reported on a net basis, reflecting the net effect of gross billings to the client less any
direct program or merchandise costs.Net Insurance Premiums EarnedInsurance premiums are recognized as revenue over the period of the insurance contracts in
proportion to the amount of the insurance coverage provided. The insurance contracts are
typically twelve months in duration and are considered short-duration contracts. Unearned
premiums represent the unearned portion of the insurance contracts as of the balance sheet
date.Ceded reinsurance premiums relate to reinsurance purchased (excess of loss and aggregate stop
loss) to mitigate potential losses from severe adverse loss development, both on a per accident
claim basis and in the aggregate. These ceded reinsurance transactions are recognized as a
reduction of premium revenue in the same manner in which the insurance contract is recognized
as premium revenue.
  8




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 Property, Vessels and EquipmentProperty, vessels and equipment are stated at cost, net of accumulated depreciation. The
Company expenses the cost of maintenance and repairs that do not improve or extend the lives of
the respective assets when incurred. Major additions and betterments are capitalized. The
Companys ships are capitalized and depreciated using the straight-line method
over the expected useful life ranging up to 30 years, net of a residual value that generally is
approximately 15%. Ship replacement parts are capitalized and depreciated upon being placed in
service. Office and shop equipment is capitalized and depreciated using the straight-line
method over the expected useful life of the equipment, ranging up to 10 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the expected
useful life of the improvement or the term of the related lease.The Company performs reviews for the impairment of property, vessels and equipment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. When property, vessels and equipment are sold or retired, the Company removes the
related cost and accumulated depreciation from the accounts and recognizes any gain or loss in
the statement of operations. Judgments and estimates made related to property, vessels and
equipment are affected by factors such as economic conditions, changes in resale values and
changes in operating performance. This process requires the use of estimates and assumptions,
which are subject to a high degree of judgment. If these assumptions change in the future, the
Company may be required to record impairment charges for these assets.Long-lived Assets including Intangible AssetsGoodwill and intangible assets with indefinite useful lives are tested for impairment at least
annually or sooner whenever events or changes in circumstances indicate that they may be
impaired. The Companys management evaluates recoverability using both subjective and objective
factors. Subjective factors include the evaluation of industry and product trends and the
Companys strategic focus. Objective factors include managements best estimates of projected
future earnings and cash flows. The Company uses a discounted cash flow model to estimate the
fair market value of each of its reporting units when it tests goodwill for impairment.
Assumptions used include growth rates for revenues and expenses, investment yields on deposits,
any future capital expenditure requirements and appropriate discount rates. The Company
established reporting units based on its current reporting structure. For purposes of testing
goodwill for impairment, goodwill was allocated to these reporting units to the extent it
related to each reporting unit. Intangible assets with finite lives are tested for impairment
using an undiscounted cash flow model. The Company amortizes intangible assets with finite
lives over their estimated useful lives and reviews them for impairment at least annually or
sooner whenever events or changes in circumstances indicate that they may be impaired. The
majority of the Companys intangible assets were assigned lives based on contract values
associated with each intangible asset. The Company amortizes its acquired intangible assets
with finite lives over a period ranging from five to 20 years. No impairment charges were
recorded for the periods ended March 31, 2008 and 2007, respectively.Income TaxesThe Company accounts for income taxes in accordance with the provisions of SFAS No. 109, which
requires an asset and liability approach that requires the recognition of deferred tax assets
and deferred tax liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be
realized.DrydockingThe Company capitalizes drydocking costs as incurred and amortizes such costs over the period
to the next scheduled drydock. The Company believes that the deferral method provides a better
matching of revenues and expenses. Drydocking costs are included in prepaid and other current
assets and in long term assets in the accompanying balance sheet and are amortized over the
cruising season between scheduled drydockings. As of March 31, 2008, the Company had
approximately $3.4 million in unamortized drydock costs that related to the 2008 season and
beyond, of which, approximately $2.6 million is included in prepaid costs and other current
assets and approximately $0.8 million is included in other long term assets in the accompanying
balance sheet and will be amortized over the period to the next scheduled drydock.
  9




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 Accounting for Stock OptionsIn December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004) Share Based Payment (SFAS No.
123R). SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the fair value approach in SFAS No. 123R is similar to the fair value
approach described in SFAS No. 123. In 2005, the Company used the Black-Scholes-Merton formula
to estimate the fair value of stock options granted to employees. The Company adopted SFAS No. 123R, using the modified-prospective method, beginning January 1, 2006. Based on the terms of
the Companys plans, the Company was not required to record a cumulative effect related to its
plans. The Company also elected to continue to estimate the fair value of stock options using
the Black-Scholes-Merton formula.The following table details the stock-based compensation costs included in general and
administrative expense (in thousands):
 Three Months EndedMarch 31,2008
    
    
    2007Compensation cost related to stock options
    
    $
    202
    
    
    $
    214Compensation cost related to restricted stock
    
    
    200
    
    
    
    323Total stock-based compensation costs
    
    $
    402
    
    
    $
    537
 As of March 31, 2008, total unrecognized compensation cost related to nonvested stock-based
compensation arrangements granted under the stock option plans expected for the remainder of
2008 and in future years through 2011, respectively, were approximately $0.5 million and $0.4
million. This expected cost does not include the impact of any future stock-based compensation
awards. During the quarter ended March 31, 2008 and 2007, there were no grants of stock
options or restricted stock.Dividends DeclaredOn September 2, 2003, the Companys board of directors authorized a new dividend policy of
paying stockholders $0.40 per share annually, distributable at $0.10 per share on a quarterly
basis. The Company and its board of directors intend to continually review the dividend policy
to ensure compliance with capital requirements, regulatory limitations, the Companys financial
position and other conditions which may affect the Companys desire or ability to pay dividends
in the future. Subsequent to the dividend declared in May 2007, the Companys board of
directors did not approve any additional dividends for 2007 or for the first quarter of 2008.The following dividends were declared in 2007 on the dates indicated (in thousands):
 Record Date
    
    Payment Date
    
    Dividend AmountMarch 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,084
 Recent Accounting PronouncementsThe FASB issued a FSP APB14-a, an interpretation of APB Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants. The proposed FSP would require
an issuer of convertible debt instruments commonly referred to as Instruments B and C from EITF
Issue No. 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, and
any other convertible instruments that allow for settlement in any combination of cash and
 shares at the issuers option to separately account for the liability and equity components of
the instrument in a manner that reflects the issuers nonconvertible debt borrowing rate. The
proposed effective date for the FSP is for fiscal years beginning after December 15, 2008 and
does not permit early application. However, the proposed transition guidance requires
retrospective application to all periods presented, and does not grandfather existing
instruments. The Company has not yet completed its evaluation of the potential impact of
adopting this proposed FSP, if issued in final form but anticipates a material increase to
interest expense beginning in 2009 when it adopts the FSP in its final form.In December 2007, the FASB issued SFAS No. 141 (R) Business Combinations. SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. The
Company is evaluating SFAS No. 141(R) and has not yet determined the impact the adoption will
have on its consolidated financial statements.
  10




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an Amendment of Accounting Research
Bulletin No. 51. SFAS No. 160
changes the accounting and reporting for minority interests, which will be recharacterized as
non-controlling interests and classified as a component of equity. SFAS No. 160 is effective
on a prospective basis for business combinations that occur in fiscal years beginning after
December 15, 2008. The Company anticipates the adoption of SFAS No. 160 will not have a
material impact on its consolidated financial statements.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities-an Amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced
disclosures about an entitys derivative and hedging activities, specifically how derivative
and hedging activities affect an entitys financial position, financial performance, and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161
encourages, but does not require, comparative disclosures for earlier periods at initial
adoption. The Company anticipates the adoption of SFAS No. 161 will not have a material impact
on its consolidated financial statements.2.
    
    Business Acquisitions and InvestmentsBellPort has a 50% ownership interest in Deer Harbor WI, LLC (DHWI). DHWI owns a marina
facility in Deer Harbor, Orcas Island, Washington. The Company recorded its proportional share
of its losses from DHWI of approximately $41,000 and $51,000 for the three months ended March
31, 2008 and March 31, 2007, respectively, which are included in other income, net. As of March
31, 2008 and December 31, 2007, BellPort had a note receivable from DHWI for approximately $1.9
million and $1.9 million, respectively, that is classified in other assets in the accompanying
balance sheet. The note is secured by a deed of trust on property and bears interest at a
variable rate equal to the London Interbank Offered Rate plus 2.75% per year, adjusted
annually. As of December 31, 2007, the interest rate was 8.06%. All unpaid principal and
accrued and unpaid interest is due no later than November 30, 2011. The Company accounts for
its investment in DHWI on the equity method. At March 31, 2008 and December 31, 2007, the
other investments represented $1.4 million and $1.4 million, respectively.In order to expand its cruise offerings to include international cruise offerings, on April 2,
2007, the Company, through its wholly-owned subsidiary AICG, completed its acquisition of all
of the issued and outstanding shares of Windstar Cruises from HAL Antillen N.V., a unit of Carnival Corporation, plc. Under the terms of the purchase agreement, the
Company paid approximately $11.3 million in cash, $60 million in seller financing and assumed
approximately $28.5 million in liabilities. The $60 million in seller financing was payable
over ten years at 7% and was collateralized by each of the three Windstar Cruises ships.The Windstar Cruises purchase price was approximately $72.1 million. The following table
summarizes the components of the Windstar Cruises purchase price (in thousands):
 Cash consideration
    
    $
    11,289Seller financing
    
    
    60,000Acquisition costs incurred
    
    
    802Purchase price
    
    $
    72,091
  11




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 In accordance with SFAS No. 141, Business Combinations, the acquisition has been accounted
for under the purchase method of accounting. The estimates of fair value of the assets acquired
and liabilities assumed are based on managements estimates. The following table summarizes the
final estimated fair value of net assets acquired (in thousands):
 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
 On April 18, 2007, the Company paid off $60 million in seller financing and accrued interest of
$0.1 million using proceeds from its convertible senior notes offering discussed in Note 6
Long term obligations.The following unaudited pro forma information presents the Companys summarized results of
operations for the three months ended March 31, 2007 as if the acquisition of Windstar Cruises
had occurred as of January 1, 2007 instead of April 2, 2007 (in thousands, except per share
data):
 Pro FormaWindstar
    
    
    Pro FormaAs Reported
    
    
    Cruises
    
    
    CombinedRevenues
    
    $
    32,864
    
    
    $
    17,463
    
    
    $
    50,327Net (loss) income
    
    $
    (8,562
    )
    
    $
    1,080
    
    
    $
    (7,482
    )Loss per share  basic
    
    $
    (0.77
    )
    
    
    
    
    
    $
    (0.67
    )Loss per share  diluted
    
    $
    (0.77
    )
    
    
    
    
    
    $
    (0.67
    )
 3.
    
    ReinsuranceIn December 2003, the Company formed Cypress Re and registered it as a Class 3 Reinsurer
pursuant to Section 4 of the Bermuda Monetary Authority Act to carry on business in that
capacity subject to the provisions of that Act.The Company reinsures property and casualty risks written by licensed United States insurers
through Cypress Re. The lines of business that are 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. Members whose risk is
reinsured under a program must meet certain loss control program qualifications. A member of a
group must pass certain pre-qualification criteria that are part of the underwriting review by
a third party.The assumed reinsurance transactions are typically reinsured through a quota share agreement in
which Cypress Re agrees to accept a certain fixed percentage of premiums written from the
ceding company and in general assumes the same percentage of purchased reinsurance, direct
acquisition costs and ultimate incurred claims.Cypress Re retains the first layer of risk on a per policy basis, which ranges from $250,000 to
$500,000 and the third party reinsurer (through excess of loss reinsurance) retains the next
layer up to the policy limits of $1.0 million. Cypress Re retains losses up to the aggregate
reinsurance limit, which varies with each quota share reinsurance agreement and the third party
reinsurer then pays losses in excess of Cypress Res aggregate reinsurance limit up to $5.0
million. Cypress Re is responsible for any additional losses in excess of the aggregate
reinsurance limit.In 2004, the Company transferred its investment interest in two insurance programs to Cypress
Re. On March 29, 2004, Cypress Re entered into a reinsurance agreement that incorporated the
terms and conditions of the above interest of these programs. The quota share reinsurance
agreement covered a retroactive period from July 1, 2002 through March
29, 2004, as well as a prospective period from March 29, 2004 to June 30, 2004. The reinsurance
agreement meets the requirements of SFAS No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts and has both prospective and retroactive elements.
  12




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 During 2004, Cypress Re entered into additional quota share reinsurance agreements. These
reinsurance agreements represent participation in selective property and casualty programs. The
reinsurance agreements meet the requirements of SFAS No. 113. One of the quota share
reinsurance agreements covers a retroactive period from January 1, 2003 through May 31, 2004
and a prospective period from June 1, 2004 through December 31, 2004. The other agreements
contain only prospective components.Accounting for prospective reinsurance transactions results in premiums and related acquisition
costs being recognized over the remaining period of the insurance contracts reinsured. As of March 31, 2008, there were no balances in unearned premium
reserves, deferred policy acquisition costs or ceded prepaid reinsurance premiums.Accounting for retroactive reinsurance transactions results in the reinsurer reimbursing the
ceding company for liabilities incurred as a result of past insurable events covered by the
underlying policies reinsured. Loss and loss adjustment expenses are initially recorded at the
estimated ultimate payout amount and any gain from any such transaction is deferred and
amortized into income. Loss and loss adjustment expense reserves are adjusted for changes in
the estimated ultimate payout and the original deferred gain is recalculated and reamortized to
the balance that would have existed had the changes in estimated ultimate payout been available
at the inception of the transaction, resulting in a corresponding charge or credit to income in
the period that the changes in estimated ultimate payout are made. As of March 31, 2008, the
deferred gain on retroactive reinsurance was fully amortized and Cypress Re recognized in
income $11,000 of the previously deferred gain on March 31, 2007.As of March 31, 2008, premiums receivable, reinsurance recoverable and loss and loss adjustment
expense reserves of $1.2 million, $0.2 million and $1.6 million, respectively, related to
retroactive reinsurance were recorded on the Companys balance sheet. The March 31, 2008 loss
and loss adjustment expense reserves balance includes $1.3 million for incurred but not
reported claims.Cypress Re retrocedes risk to the ceding company under specific excess and aggregate loss
treaties. Cypress Re remains obligated for amounts ceded in the event that the reinsurer does
not meet its obligations.Premiums receivable at March 31, 2008 consists of funds held in trust by the ceding company of
approximately $8.1 million and deferred and not yet due premiums from the ceding company of
approximately $0.4 million. The funds held in trust primarily consist of high grade corporate
bonds, government bonds and money market funds.As of March 31, 2008, reinsurance recoverable and prepaid reinsurance premiums of $0.7 million
and zero, respectively, relate to a single reinsurer. Cypress Res exposure to credit loss in
the event of non-payment or non-performance is limited to these amounts.The effect of reinsurance on premiums written and earned for the three months ended March 31,
2008 was as follows (in thousands):
 Three Months EndedMarch 31, 2008Written
    
    
    EarnedAssumed
    
    $
    5
    
    
    $
    5Ceded
    
    
    
    
    
    
    Net premiums
    
    $
    5
    
    
    $
    5
 As of March 31, 2008, the Company had issued approximately $10.7 million in letters of credit
related to property and casualty insurance programs that expire at various dates through 2008.
  13




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 4.
    
    InventoryThe Company maintains inventory of marine construction materials, fuel, supplies, souvenirs and
food and beverage products. Inventories are stated at the lower of cost or market, using
standard costs, which approximates the first-in, first-out method. The components of inventory
as of March 31, 2008 and December 31, 2007 were as follows (in thousands):
 March 31, 2008
    
    
    December 31, 2007Marine construction materials
    
    $
    2,892
    
    
    $
    2,630Food, souvenirs and supplies
    
    
    2,477
    
    
    
    2,390Fuel
    
    
    1,223
    
    
    
    731$
    6,592
    
    
    $
    5,751
 5.
    
    Prepaid costs and other current assetsThe components of prepaid costs and other current assets as of March 31, 2008 and December 31,
2007 were as follows (in thousands):
 March 31, 2008
    
    
    December 31, 2007Current portion of prepaid drydocking costs
    
    $
    2,609
    
    
    $
    997Income tax receivable
    
    
    2,515
    
    
    
    2,385Prepaid program and tour costs
    
    
    2,035
    
    
    
    1,064Current portion of prepaid offering costs
    
    
    75
    
    
    
    78Other prepaid costs and other current assets
    
    
    4,775
    
    
    
    4,006$
    12,009
    
    
    $
    8,530
 6.
    
    Long term obligationsLong term obligations as of March 31, 2008 and December 31, 2007 were as follows (in
thousands):
 March 31, 2008
    
    
    December 31, 2007Loans secured by ship mortgages at
fixed rates varying from 2.3% to 6.5%
due through July 2028
    
    $
    67,628
    
    
    $
    69,743Secured note payable to bank at a fixed
interest rate of 8.245%, due May 2010
    
    
    1,642
    
    
    
    1,656Amounts outstanding under $2.1 million
secured line of credit with an
Australian bank
    
    
    
    
    
    
    877Loans outstanding with New Zealand banks
    
    
    40
    
    
    
    503.75% Convertible Senior Notes, net of
unamortized discount and offering costs
of $2,335 and $2,479, respectively
    
    
    94,665
    
    
    
    94,521Equipment leases
    
    
    216
    
    
    
    217164,191
    
    
    
    167,063Less: current portion
    
    
    4,587
    
    
    
    5,479Non-current portion
    
    $
    159,604
    
    
    $
    161,584
 At March 31, 2008 and December 31, 2007, the Companys cash-secured revolving credit facility
with a bank in the amount of $12.5 million and $12.5 million respectively, had no balances
outstanding at the end of each of the respective periods.
  14




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 Loans Secured by Ship Mortgages
 Empress of the
North
 American Queen ®
 Bellingham Marine Debt
   3.75% Convertible Senior Notes
     15




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
  Year Ended December 31,2008 (remaining nine months)
    
    $
    2,4642009
    
    
    4,5932010
    
    
    5,8072011
    
    
    4,2662012
    
    
    101,279Thereafter
    
    
    48,117166,526Less: Unamortized discount and offering costs
    
    
    (2,335
    )Less: current portion
    
    
    (4,587
    )Non-current portion
    
    $
    159,604
 7.
    
    Comprehensive loss
  Three Months EndedMarch 31,2008
    
    
    2007Net loss
    
    $
    (11,977
    )
    
    $
    (8,562
    )Change in unrealized gain on foreign currency translation
    
    
    327
    
    
    
    244Change in unrealized gain (loss) on available-for-sale
securities, net of income tax expense of $0 and $32
    
    
    
    
    
    
    58$
    (11,650
    )
    
    $
    (8,260
    )
 8.
    
    Earnings (Loss) Per Share
   16




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
  Three Months EndedMarch 31,2008
    
    
    2007Numerator:Net loss
    
    $
    (11,977
    )
    
    $
    (8,562
    )Denominator:Weighted-average shares outstanding  basic
    
    
    10,890
    
    
    
    11,089Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Convertible debt
    
    
    
    
    
    
    Weighted-average shares outstanding  diluted
    
    
    10,890
    
    
    
    11,089Earnings
(loss) per share:Basic
    
    $
    (1.10
    )
    
    $
    (0.77
    )Diluted
    
    $
    (1.10
    )
    
    $
    (0.77
    )
 9.
    
    Business Segments
   Three Months EndedMarch 31,2008
    
    
    2007Revenue:Cruise
    
    $
    23,757
    
    
    $
    5,202Marine
    
    
    29,352
    
    
    
    23,484Travel and events
    
    
    3,726
    
    
    
    3,524Corporate and other
    
    
    5
    
    
    
    654Total revenue
    
    $
    56,840
    
    
    $
    32,864
 Three Months EndedMarch 31,2008
    
    
    2007Operating income (loss):Cruise
    
    $
    (11,393
    )
    
    $
    (12,542
    )Marine
    
    
    968
    
    
    
    226Travel and events
    
    
    375
    
    
    
    361Corporate and other
    
    
    (1,244
    )
    
    
    (1,745
    )Total operating loss
    
    $
    (11,294
    )
    
    $
    (13,700
    )
  17




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 10.
    
    Income Taxes
   
 11.
    
    Commitments and Contingencies
   12.
    
    Impairment or Disposal of Long-Lived Assets
 Delta Queen ® Delta Queen ® Delta Queen ® Delta Queen ® Delta
Queen ® Delta
Queen ®
 Contessa Contessa
  18




---



##### Table of Contents



Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
 13.
    
    Subsequent Events
 Queen of the West
 Queen of the West Columbia Queen Queen of
the West
     19




---



##### 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
    20




---



##### Table of Contents



Revenue Recognition
  Passenger Ticket Revenue and Onboard and Other Cruise Revenues
  Marine Revenue
       21




---



##### Table of Contents



Travel, Incentive and Event Related
   Net Insurance Premiums Earned
 
 Property, Vessels and Equipment
   Drydocking
   22




---



##### Table of Contents



Long-Lived Assets Including Intangibles
  Reserve for Loss and Loss Adjustment Expenses
  Reinsurance
   Stock-Based Compensation
    23




---



##### Table of Contents



Income Taxes
  Statistical Terminology and Information for Cruise Operations
 Available Passenger Cruise Days (APCD)
  Occupancy
  Passenger Cruise Days
   Three MonthsEnded March 31,2008
    
    
    2007(unaudited)Passengers Carried
    
    
    9,155
    
    
    
    3,055Occupancy Percentage
    
    
    90
    %
    
    
    82
    %Passenger Cruise Days
    
    
    63,243
    
    
    
    17,964APCD
    
    
    70,199
    
    
    
    21,858
 COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2008 TO THE THREE MONTHS ENDED MARCH 31,
2007
 Revenue
   24




---



##### Table of Contents



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 Loss
  Other Income (Expense)
 Queen of the West Empress of the North
  25




---



##### Table of Contents



Income Taxes
   Net Loss
  Liquidity and Capital Resources
          26




---



##### Table of Contents



Record Date
    
    Payment Date
    
    Dividend AmountMarch 12, 2007
    
    March 19, 2007
    
    $
    1,084May 21, 2007
    
    May 31, 2007
    
    
    1,084
     27




---



##### Table of Contents



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;
    
    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.
  28




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
   
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
   29




---



##### Table of Contents



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.
   30




---



##### Table of Contents



Item 6. Exhibits.
 Exhibit No.
    
    Description31.1
    
    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 (1)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 (1)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 (1)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 (1)
 
 (1)
    
    Attached hereto.
  31




---



##### Table of Contents



Signatures
  AMBASSADORS INTERNATIONAL, INC.
(Registrant)Date: May 6, 2008
    By:
    /s/ Blake T. BarnettBlake T. BarnettChief Financial Officer,
(Principal Financial Officer and Duly Authorized Officer)  32




---



##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description31.1
    
    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 (1)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 (1)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 (1)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 (1)
 
 (1)
    
    Attached hereto.
  33