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Ambassadors International Inc – ‘10-Q’ for 6/30/07

On:  Thursday, 8/9/07, at 5:17pm ET   ·   For:  6/30/07   ·   Accession #:  1193125-7-177657   ·   File #:  0-26420

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 8/09/07  Ambassadors International Inc     10-Q        6/30/07    7:735K                                   RR Donnelley/FA

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 2: EX-31.1     Section 302 CEO Certification                       HTML     15K 
 3: EX-31.2     Section 302 Interim CFO Certification               HTML     15K 
 4: EX-32.1     Section 906 CEO Certification                       HTML      9K 
 5: EX-32.2     Section 906 Interim CFO Certification               HTML      9K 
 6: EX-99.1     Press Release Dated August 7, 2007                  HTML    105K 
 7: EX-99.2     Earnings Call Transcript                            HTML     99K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2007

OR

For the transition period from              to             

Commission file number: 0-26420

AMBASSADORS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (949) 759-5900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

The number of shares of the registrant’s Common Stock outstanding as of August 6, 2007 was 10,789,284.

Table of Contents

AMBASSADORS INTERNATIONAL, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

Table of Contents

PART 1 – FINANCIAL INFORMATION

Ambassadors International, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Ambassadors International, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Ambassadors International, Inc.

Condensed Consolidated Statements of Cash Flows (in thousands)

Non-Cash Investing and Financing Activities:

See Note 2 regarding the purchase of Windstar Cruises through assumption of debt.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

The Company

Ambassadors 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 wholly-owned subsidiary, Ambassadors International Cruise Group, LLC (“AICG”) which acquired Windstar Sail Cruises Limited (“Windstar Cruises”) in April 2007.

In 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 operations of Cypress Re and other activities which are not directly related to the Company’s cruise, marine and travel and events operating segments.

As of June 30, 2007, the following further describes the operations of the Company’s business segments:

The 2007 cruise schedule includes cruises through Alaska’s Inside Passage onboard the Empress of the North and Contessa, and on the Columbia and Snake Rivers onboard the Empress of the North, Columbia Queen and 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. Beginning in April 2007, the Company’s 2007 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.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

Seasonality

The Company’s businesses are seasonal. Historically, the majority of the Company’s operating results were recognized in the first and second quarters of each fiscal year. 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, the Company expects that the majority of its operating results will be recognized in the second and third quarters of each fiscal year, which coincides with the cruising season within this new segment. The Company’s future annual results could be adversely affected if its revenue were to be substantially below seasonal norms during the second and third quarters of the year.

Basis of Presentation

The 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 and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or any other future periods.

The condensed consolidated balance sheet at December 31, 2006 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 2006 condensed consolidated financial statements to conform to the 2007 presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K, as amended, for the year ended December 31, 2006.

Restricted Cash

The Company’s cruise passenger deposits are primarily received through credit card transactions. In 2006, the Company established a $9.6 million certificate of deposit with a bank in order to secure its processing of passenger deposits through credit cards. As of June 30, 2007, the Company had $18.4 millon of additional restricted cash held by a bank in cash equivalents and a certificate of deposit as additional amounts required to secure 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.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

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 outstanding.

As of June 30, 2007, the Company also had $1.5 million included in restricted cash, which represented principal and interest payments made to a depository account which will be used to pay bondholders of a vessel’s debt semi-annually as required under its loan agreement.

Drydocking

The 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 June 30, 2007, the Company had approximately $6.8 million in unamortized drydock costs that related to the 2007 season, of which, approximately $6.2 million is included in prepaid costs and other current assets and approximately $0.6 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.

Accounting for Stock Options

In 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 2006, 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):

As of June 30, 2007, total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the stock option plans expected for the remainder of 2007 and in future years through 2011, respectively, were approximately $0.2 million and $0.3 million. This expected cost does not include the impact of any future stock-based compensation awards.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions used for grants as of June 30, 2007 and 2006:

The expected volatility is based on historical volatilities. The risk-free interest rate is based on United States Treasury zero-coupon issue with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on historical experience and represents the time period options actually remain outstanding. The Company estimated forfeitures based on historical pre-vesting forfeitures and will revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

In May 2007, the Company’s stockholders approved an amendment and restatement of the Company’s 2005 Incentive Award Plan (the “Plan”) to (i) increase the maximum number of shares of the Company’s common stock that may be issued under the Plan from 600,000 to 1,200,000 shares, (ii) increase the maximum number of shares of common stock with respect to one or more awards that may be granted to any participant during any calendar year from 200,000 to 500,000 shares, (iii) increase the maximum amount that may be paid in cash pursuant to performance or incentive awards from $500,000 to $2,000,000 and (iv) revise the definition of “Fair Market Value” to equal the closing price of the Company’s common stock quoted on the Company’s listing exchange on the date an award is granted.

Dividends Declared

On 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 following dividends were declared in 2007 and 2006 on the dates indicated (in thousands):

The Company and its Board of Directors continually review the dividend policy to evaluate conditions that may affect the Company's desire or ability to pay dividends, which are declared at the discretion of the Board of Directors. In August 2007, the Company and its board of directors reviewed its dividend policy and chose not to declare a quarterly dividend for the next quarter of 2007.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which allows an entity to voluntarily choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 will be effective for fiscal years beginning after November 15, 2007, which is the Company’s fiscal year 2008. The Company has not yet completed is evaluation of the potential impact of adopting SFAS No. 159 on its consolidated financial statements.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007, which is the Company’s fiscal year 2008. The Company has not yet completed its evaluation of the potential impact of adopting SFAS No. 157 on its consolidated financial statements.

On February 1, 2005, the Company acquired 100% of the outstanding stock of BellPort. BellPort, located in Newport Beach, California, is a marina services company operating facilities in both the United States and Mexico. The purchase was completed in February 2005 for the consideration of approximately $1.3 million in cash and the issuance of 184,717 shares of the Company’s common stock, of which 130,389 shares were issued to related parties. In addition to the cash and stock consideration, the Company assumed a credit facility of approximately $1.6 million that the Company paid off in full on February 11, 2005. In connection with the acquisition, the Company was granted a twelve-month option to purchase a 34% interest in BellPort Japan Company, Ltd. (“BellPort Japan”), a marina operator, owner and developer of waterfront real estate, including both residential communities and marina facilities, located in Japan. In February 2006, BellPort acquired a 34% interest in BellPort Japan through the acquisition of BellJa Holding Company, Inc., a California corporation, for approximately $300,000, and extended its license agreement with BellPort Japan through 2010. The Company recorded its proportional share of the loss from BellPort Japan of approximately $100,000 during the six months ended June 30, 2007. As of March 31, 2007, the Company had incurred losses on its investment up to the original investment amount, resulting in the investment balance being zero at the end of the period. The Company is not required to contribute any funds to support the operation of this investee.

BellPort 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 the losses from DHWI of approximately $26,000 and $77,000 for the three and six months ended June 30, 2007, respectively, and $39,000 and $97,000 for the three and six months ended June 30, 2006, respectively, which are included in other income, net. As of June 30, 2007 and December 31, 2006, 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, 2006, 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 investments in BellPort Japan and DHWI on the equity method.

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. (“HAL Antillen”), 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.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

The Windstar Cruises purchase price was approximately $72.1 million. The following table summarizes the components of the Windstar Cruises purchase price (in thousands):

The final purchase price is dependent on the final valuation of the assets acquired, which has not been completed, and the actual final direct acquisition costs.

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 preliminary estimated fair value of net assets acquired (in thousands):

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 5 “Long-term obligations.”

The following pro forma information presents the Company’s summarized results of operations for the six months ended June 30, 2007 as if the acquisition of Windstar Cruises had occurred as of January 1, 2007 instead of April 2, 2007:

In 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.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

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.

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 a result, unearned premium reserves, deferred policy acquisition costs and ceded prepaid reinsurance premiums of $0.1 million, $27,000 and $24,000, respectively, were recorded on the balance sheet as of June 30, 2007.

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 June 30, 2007, the deferred gain on retroactive reinsurance was fully amortized and Cypress Re recognized in income $19,000 and $100,000 of the previously deferred gain on June 30, 2007 and 2006, respectively.

As of June 30, 2007, premiums receivable, reinsurance recoverable and loss and loss adjustment expense reserves of $0.6 million, $1.2 million and $1.0 million, respectively, related to retroactive reinsurance were recorded on the Company’s balance sheet. The June 30, 2007 loss and loss adjustment expense reserves balance includes $0.7 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 June 30, 2007 consists of funds held in trust by the ceding company of approximately $11.3 million and deferred and not yet due premiums from the ceding company of approximately $0.6 million. The funds held in trust primarily consist of high grade corporate bonds, government bonds and money market funds.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

As of June 30, 2007, reinsurance recoverable and prepaid reinsurance premiums of $1.2 million and $24,000, 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 and six months ended June 30, 2007 was as follows (in thousands):

As of June 30, 2007, 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.

The Company maintains inventory of 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 June 30, 2007 and December 31, 2006 were as follows (in thousands):

The components of prepaid costs and other current assets as of June 30, 2007 and December 31, 2006 were as follows (in thousands):

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

In conjunction with ACG’s acquisition of American West, the Company assumed approximately $41.5 million in fixed-rate, 4.63% debt payable through 2028 and guaranteed by the United States Government through the United States Maritime Administration (“MARAD”) under Title XI, Merchant Marine Act, 1936, as amended and is secured by a First Preferred Ship Mortgage on the Empress of the North. Annual principal payments of approximately $1.8 million plus accrued interest are required through July 18, 2028.

In conjunction with ACG’s acquisition of the cruise-related assets of Delta Queen, the Company assumed approximately $35.0 million of fixed-rate, 6.5% debt payable through 2020 and guaranteed by MARAD under Title XI, Merchant Marine Act, 1936, as amended, and secured by a First Preferred Ship Mortgage on the American Queen^®. Semi-annual principal payments accumulating to approximately $2.4 million annually plus accrued interest are required through June 2020.

In conjunction with the acquisition of Bellingham Marine, in July 2006, the Company assumed a $5.0 million line of credit with a bank. Interest was payable monthly at the bank's prime rate plus 0.25%. The line of credit was collateralized by inventory, accounts receivable, and equipment of Bellingham Marine. The agreement contained certain limitations and various financial covenants. On December 28, 2006, the line of credit was paid in full and the facility was terminated. Bellingham Marine has a note payable to a bank with a balance of $2.1 million at June 30, 2007, secured by property, payable in monthly installments of approximately $16,000 including interest at 8.245%, subject to certain limitations and various financial covenants, due May 10, 2010. As of June 30, 2007, the Company was in compliance with the financial covenants.

Bellingham Marine’s international operations have a $1.2 million line of credit for its Australian subsidiary with National Australia Bank Limited. Interest is payable monthly at 10.162%, and is collateralized by substantially all of the subsidiary’s assets, including any uncalled or unpaid capital. As of June 30, 2007, there were approximately $1.0 million in borrowings on the line of credit. In addition, the international operations have six equipment contracts secured by the respective equipment payable in monthly installments aggregating approximately $6,000, including interest, through July 2010.

On April 3, 2007, the Company closed the sale of $97.0 million of 3.75% Convertible Senior Notes due 2027 (“Notes”) to Thomas Weisel Partners LLC (“Initial Purchaser”), in a private offering, pursuant to a purchase agreement dated March 28, 2007. A portion of the proceeds from the sale of the Notes was used to retire the $60 million in seller financing incurred in connection with the acquisition of Windstar Cruises as discussed in note 2 “Business Acquisitions and Investments.” The remaining proceeds are to be used for general corporate purposes and future growth of the Company.

The Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 17.8763 shares per $1,000 principal amount of the Notes (which is equivalent to an initial conversion price of approximately $55.94 per share), subject to adjustment upon the occurrence of certain events. Interest on the Notes is payable semi-annually in arrears on April 15 and on October 15 in each year, commencing October 15, 2007. The Company may redeem the Notes in whole or in part after April 15, 2012. After April 20, 2010 and prior to April 15, 2012, the Company may redeem all or a portion of the Notes only if the price of the Company’s common stock reaches certain thresholds for a specified period of time. Holders of the Notes may require the Company to purchase all or a portion of the Notes, in cash, on April 15, 2012, April 15, 2017 and April 15, 2022 or upon the occurrence of specified fundamental changes (as defined in the purchase agreement dated March 28, 2007). If a holder elects to convert Notes in connection with a specified fundamental change that occurs prior to April 15, 2012, the Company will in certain circumstances increase the conversion rate by a specified number of additional shares.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

The components of comprehensive income (loss) are as follows (in thousands):

Basic earnings 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 is comprised of dilutive stock options and convertible senior notes. The dilutive effect of stock options is calculated using the treasury method with an offset from expected proceeds upon exercise of the stock options and unrecognized compensation expense. The dilutive effect of the convertible senior notes is calculated by adding back interest expense and amortized offering costs, net of taxes, that would not have been incurred assuming conversion. There are no stock options with option prices that would not be dilutive for the three and six months ended June 30, 2007. The diluted EPS for the three months ended June 30, 2007 includes the effect of conversion of the Convertible Senior Notes into the Company’s common shares as if the conversion occurred as of the dates of issuance in April 2007. The dilutive EPS for the six months ended June 30, 2007, does not include the dilutive effect of conversion of the convertible senior notes into the Company’s common shares since it would be anti-dilutive. The table below details the components of the basic and diluted EPS calculations (in thousands, except per share amounts):

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

In November 1998, the Board of Directors of the Company authorized the repurchase of the Company’s common stock in the open market or through private transactions, up to $20.0 million in the aggregate. In August 2006, the Company’s’ Board of Directors authorized an additional $10.0 million for the repurchase of the Company’s common stock in the open market or through private transactions, providing for an aggregate of $30.0 million. This repurchase program is ongoing and as of June 30, 2007, the Company had repurchased 1,102,650 shares for approximately $14.0 million. The Company repurchased 51,150 shares during the three and six months ended June 30, 2007 for approximately $1.6 million. The Company made no purchases during the three and six months ended June 30, 2006.

In 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):

The Company recorded an income tax benefit of $7.7 million and $13.4 million for the three and six months ended June 30, 2007, respectively, compared to a tax expense of $1.0 million and a tax benefit of $73,000, respectively, for the three and six months ended June 30, 2006. The effective tax benefit rate for the six months ended June 30, 2007 was 82.7%, compared to a rate of 55.0% for the six months ended June 30, 2006. The effective tax rate change is primarily related to the preferential tax treatment associated with the international operation of ships.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109.” FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company recognized no adjustment in its balance of unrecognized tax benefits. As of the date of adoption, the Company’s unrecognized tax benefits totaled approximately $0.7 million, of which $0.4 million would affect the effective tax rate, if recognized. The Company does not expect any significant increases or decreases to its unrecognized tax benefits within 12 months of this reporting date.

The Company and its subsidiaries are subject to United States federal income tax as well as income tax of multiple state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years before 2003; state and local income tax examinations before 2002; and foreign income tax examinations before 2002.

The Company is not currently under Internal Revenue Service, state, local or foreign jurisdiction tax examinations.

The Company’s continuing practice is to recognize potential accrued interest and penalties related to unrecognized tax benefits within its global operations in income tax expense. In conjunction with the adoption of FIN 48, the Company recognized approximately $0.2 million for the accrual of interest and penalties which are included as a component of the $0.7 million unrecognized tax benefits noted above. In the normal course of business, we provide for uncertain tax positions and adjust our unrecognized tax benefits, including related interest, accordingly. In the second quarter of 2007, those adjustments were not significant. To the extent interest and penalties are not assessed with respect to the uncertain tax positions, amounts accrued will be reduced and $23,000 will be reflected as a reduction of the overall income tax provision and $0.2 million will reduce non-current intangibles.

On October 20, 2006, approximately 20 passengers of the Mississippi Queen^® became sick with a stomach illness which was later determined to be a case of norovirus. The cruise stopped sailing two days earlier than originally scheduled in order to inspect and clean the ship. The ship was released and began operations for the next scheduled cruise on October 25, 2006 and again stopped operation on October 27, 2006 due to the same norovirus on additional passengers. The Company cancelled two additional weeks of cruise sailings in order to further inspect and clean the ship. The Company received $0.6 million related to insurance recoveries under its business interruption insurance which is recorded in other income as of June 30, 2007. The Company is in the process of seeking additional insurance related recoveries with respect to these incidents; however, due to the uncertainty regarding the claims, no additional amounts were recorded as expected to be received as of June 30, 2007.

On May 14, 2007, the Empress of the North ran aground in Southeast Alaska. As a result, the ship was in dry dock for damage inspection and repairs for approximately seven weeks. No passengers or crew were injured during the incident. As of June 30, 2007, the Company recorded in cruise operating expenses approximately $5.2 million in costs associated with ship repairs, passenger relocation and crew expenses incurred as a result of the incident. These expenses are offset by estimated insurance recoveries of $4.1 million which is recorded in accounts and other receivables in the accompanying balance sheet. The Company estimates that the overall negative impact of the cancelled revenue related to this incident is approximately $6.2 million. As of June 30, 2007, the Company estimates the net negative impact on cruise operating income from the cancelled sailings to be approximately $4.4 million, which includes the lost revenue and incident related expenses, net of the insurance recovery, and costs savings from non-operation of the ship. The Company is in the process of seeking additional insurance related recoveries with respect to this incident; however, due to the uncertainty regarding the claims, no additional amounts were recorded as expected to be received as of June 30, 2007.

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Ambassadors International, Inc.

Notes to Condensed Consolidated Financial Statements

The Company is from time to time threatened or involved in litigation incidental to its business. The Company believes that the outcome of all current litigation will not have a material adverse effect on its business, financial condition, cash flows or results of operations.

Since 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 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 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 June 30, 2007.

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The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report. This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2006, as amended.