##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q   [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 0-26420 AMBASSADORS INTERNATIONAL, INC.  Delaware
    
    91-1688605(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 1071 Camelback StreetNewport Beach, CA 92660
    
    92660(Address of Principal Executive Offices)
    
    (Zip Code)
 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [  ] The number of shares of the registrants Common Stock outstanding as of
July 27, 2004 was 9,840,019.




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##### Table of Contents



AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at June 30, 2004 (unaudited) and
December 31, 2003
    
    
    1Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2004 and 2003 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 6. Exhibits and Reports on Form 8-K
    
    
    19SIGNATURES
    
    
    20EXHIBIT INDEX
    
    
    21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION 
 Item 1. Financial
Statements
 Ambassadors International, Inc. 
 Consolidated Balance
Sheets
 (in thousands, except share data) June 30,
    
    December 31,2004
    
    2003(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    47,254
    
    
    $
    43,609Available-for-sale securities
    
    
    50,172
    
    
    
    61,685Accounts receivable, net of allowance of $64 and $75 in 2004
and 2003, respectively
    
    
    5,946
    
    
    
    2,132Premiums receivable
    
    
    5,025
    
    
    
    Deferred policy acquisition costs
    
    
    714
    
    
    
    Reinsurance recoverable
    
    
    519
    
    
    
    Prepaid reinsurance premiums
    
    
    646
    
    
    
    Deferred income taxes
    
    
    148
    
    
    
    477Prepaid program costs and other current assets
    
    
    1,691
    
    
    
    3,202Total current assets
    
    
    112,115
    
    
    
    111,105Property and equipment, net
    
    
    845
    
    
    
    1,010Goodwill
    
    
    6,817
    
    
    
    6,817Other intangibles
    
    
    1,975
    
    
    
    2,194Deferred income taxes
    
    
    2,433
    
    
    
    2,433Other assets
    
    
    780
    
    
    
    1,491Total assets
    
    $
    124,965
    
    
    $
    125,050Liabilities:Current liabilities:Accounts payable
    
    $
    1,730
    
    
    $
    2,033Participants deposits
    
    
    5,070
    
    
    
    8,100Accrued and other expenses
    
    
    2,167
    
    
    
    1,778Loss and loss adjustment expense reserves
    
    
    2,752
    
    
    
    Unearned premiums
    
    
    2,713
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    743
    
    
    
    Total current liabilities
    
    
    15,175
    
    
    
    11,911Non-current participants deposits
    
    
    156
    
    
    
    270Other liabilities
    
    
    139
    
    
    
    179Total liabilities
    
    
    15,470
    
    
    
    12,360Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 20,000,000 shares authorized;
9,779,777 and 9,969,875 shares issued and outstanding in 2004
and 2003, respectively
    
    
    98
    
    
    
    100Additional paid-in capital
    
    
    86,414
    
    
    
    89,450Retained earnings
    
    
    22,771
    
    
    
    23,408Accumulated other comprehensive income (loss)
    
    
    212
    
    
    
    (268
    )Total stockholders equity
    
    
    109,495
    
    
    
    112,690Total liabilities and stockholders equity
    
    $
    124,965
    
    
    $
    125,050
 See Notes to Consolidated Financial Statements. 1




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##### Table of Contents



Ambassadors International, Inc. 
 Consolidated Statements
of Income
 (in thousands, except per share data) Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)Revenues:Travel and incentive related
    
    $
    2,592
    
    
    $
    3,236
    
    
    $
    7,318
    
    
    $
    6,650Software and technology related sales
    
    
    125
    
    
    
    351
    
    
    
    270
    
    
    
    942License fees from equity investee
    
    
    32
    
    
    
    46
    
    
    
    133
    
    
    
    286Net insurance premiums earned
    
    
    1,277
    
    
    
    
    
    
    
    1,277
    
    
    
    4,026
    
    
    
    3,633
    
    
    
    8,998
    
    
    
    7,878Costs and operating expenses:Cost of software and technology related sales
    
    
    22
    
    
    
    448
    
    
    
    35
    
    
    
    787Selling and tour promotion
    
    
    774
    
    
    
    1,125
    
    
    
    1,584
    
    
    
    2,237General and administrative
    
    
    2,395
    
    
    
    2,730
    
    
    
    4,993
    
    
    
    5,609Loss and loss adjustment expenses
    
    
    457
    
    
    
    
    
    
    
    457
    
    
    
    Insurance acquisition costs and other operating expenses
    
    
    493
    
    
    
    
    
    
    
    579
    
    
    
    4,141
    
    
    
    4,303
    
    
    
    7,648
    
    
    
    8,633Operating income (loss)
    
    
    (115
    )
    
    
    (670
    )
    
    
    1,350
    
    
    
    (755
    )Other income:Interest and dividend income
    
    
    305
    
    
    
    326
    
    
    
    610
    
    
    
    720Realized gains on sale of available-for-sale securities
    
    
    
    
    
    
    1,152
    
    
    
    40
    
    
    
    1,152Other, net
    
    
    42
    
    
    
    297
    
    
    
    110
    
    
    
    441347
    
    
    
    1,775
    
    
    
    760
    
    
    
    2,313Income before income taxes
    
    
    232
    
    
    
    1,105
    
    
    
    2,110
    
    
    
    1,558Provision for income taxes
    
    
    78
    
    
    
    341
    
    
    
    773
    
    
    
    406Net income
    
    $
    154
    
    
    $
    764
    
    
    $
    1,337
    
    
    $
    1,152Earnings per share:Basic
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.12Diluted
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.11Weighted-average common shares outstanding:Basic
    
    
    9,795
    
    
    
    9,891
    
    
    
    9,888
    
    
    
    9,875Diluted
    
    
    10,061
    
    
    
    10,129
    
    
    
    10,168
    
    
    
    10,091Dividends per common share
    
    $
    0.10
    
    
    $
    
    
    
    $
    0.20
    
    
    $
    
 See Notes to Consolidated Financial Statements. 2




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Ambassadors International, Inc. 
 Consolidated Statements
of Cash Flows
 (in thousands) Six Months EndedJune 30,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    1,337
    
    
    $
    1,152Adjustments to reconcile net income to net cash used in
operating activities:Depreciation and amortization
    
    
    478
    
    
    
    630Undistributed earnings from equity investments
    
    
    341
    
    
    
    (105
    )Gain on sale of available-for-sale securities
    
    
    
    
    
    
    (1,152
    )Change in assets and liabilities, net of effects of business
acquisitions and dispositions:Accounts receivable
    
    
    (3,814
    )
    
    
    (1,558
    )Premiums receivable
    
    
    (4,695
    )
    
    
    Deferred acquisition costs
    
    
    (714
    )
    
    
    Reinsurance recoverable
    
    
    (519
    )
    
    
    Prepaid insurance premiums
    
    
    (646
    )
    
    
    Prepaid program costs and other current assets
    
    
    1,551
    
    
    
    452Other assets
    
    
    (2
    )
    
    
    9Accounts payable and accrued and other expenses
    
    
    743
    
    
    
    (274
    )Current and non-current participants deposits
    
    
    (3,144
    )
    
    
    (389
    )Loss and loss adjustment expense reserves
    
    
    2,752
    
    
    
    Unearned premiums
    
    
    2,713
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    743
    
    
    
    Other liabilities
    
    
    (40
    )
    
    
    Net cash used in operating activities
    
    
    (2,916
    )
    
    
    (1,235
    )Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    60,416
    
    
    
    31,662Purchase of available-for-sale securities
    
    
    (48,092
    )
    
    
    (24,559
    )Purchase of other investments
    
    
    (627
    )
    
    
    (1,934
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    (30
    )
    
    
    (71
    )Purchase of property and equipment
    
    
    (94
    )
    
    
    (127
    )Net cash provided by investing activities
    
    
    11,573
    
    
    
    4,971Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    637
    
    
    
    586Purchase and retirement of common stock
    
    
    (3,675
    )
    
    
    (833
    )Dividends paid on common stock
    
    
    (1,974
    )
    
    
    Net cash used in financing activities
    
    
    (5,012
    )
    
    
    (247
    )Net increase in cash and cash equivalents
    
    
    3,645
    
    
    
    3,489Cash and cash equivalents, beginning of year
    
    
    43,609
    
    
    
    46,910Cash and cash equivalents, end of year
    
    $
    47,254
    
    
    $
    50,399
 See Notes to Consolidated Financial Statements. 3




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##### Table of Contents



Ambassadors International, Inc. 
 Notes to Consolidated Financial Statements
  1.
    
    Description of the Company and Basis of Presentation The Company Ambassadors International, Inc. (the Company) was founded in 1967 as a
travel services company and reincorporated in Delaware in 1995. Ambassadors
Group, Inc. (AGI) represented the entire operations of the Company until
1996 when Ambassadors Performance Group, LLC (APG or the Performance
Group) commenced operations. Ambassadors Services Group, Inc. (ASG or the
Services Group) commenced operations in 1998 and Ambassadors Technology
Corporation (ATC or the Technology Group) commenced operations in 2002.
On February 28, 2002, the Company completed a spin-off of its wholly owned
subsidiary, AGI, into a separate publicly traded company. In December 2003,
the Company formed Cypress Reinsurance, Ltd (Cypress Re) as a complement to
its primary business. In January 2004, the Company realigned its business operations and
consolidated the Performance Group, the Services Group and the Technology
Group into one segment, called Ambassadors. The following further describes the operations of the Companys current
business segments:  
    
    Ambassadors 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. Provides comprehensive hotel reservation,
registration and travel services for meetings, conventions, expositions
and trade shows. Develops, markets and distributes event portfolio
management technology solutions for corporations and large associations.
    
    Cypress Re Participates in selective specialty property and
casualty reinsurance programs. Basis of Presentation The accompanying unaudited consolidated financial statement have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting
principles 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, 2004 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2004. The consolidated balance sheet at December 31, 2003 has been derived from the
audited consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. 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, 2003. Accounting for Stock Options As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and its related interpretations. Because all
options granted under the Companys plans had an exercise price equal to the
market value of the underlying common stock on the date of grant, no
stock-based compensation cost is reflected in net income under the Companys
application of APB Opinion No. 25. 4




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued The following table presents the effects on net income and earnings per share
if the Company had recognized compensation expense under the fair value
recognition provisions of SFAS No. 123 (in thousands, except per share data): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    154
    
    
    $
    764
    
    
    $
    1,337
    
    
    $
    1,152Deduct: total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (88
    )
    
    
    (93
    )
    
    
    (183
    )
    
    
    (205
    )Net income, pro forma
    
    $
    66
    
    
    $
    671
    
    
    $
    1,154
    
    
    $
    947Earnings per share  basicAs reported
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    $
    0.12Pro forma
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.12
    
    
    
    0.10Earnings per share  dilutedAs reported
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.11Pro forma
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.11
    
    
    
    0.09
 Dividends Declared On September 2, 2003, the Board of Directors authorized a new dividend policy
paying shareholders $0.40 per share annually, distributable at $0.10 per
share on a quarterly basis. For the quarter ended March 31, 2004, a dividend
of approximately $1,000,000 was paid on March 23, 2004 to shareholders of
record on March 9, 2004. For the quarter ended June 30, 2004, a dividend of
approximately $974,000 was paid on June 16, 2004 to shareholders of record on
June 1, 2004. 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.  2.
    
    Business Acquisitions and Investments In November 2002, APG acquired a 51% ownership interest in Innovations in
Marketing, LLC (IIM). IIM was a start-up performance incentive and meeting
management company. IIMs initial capital consisted of $1,000 of which 51%
was contributed by APG and 49% was contributed by the minority owner. The
Operating Agreement specified that APG shall loan IIM up to $400,000, which
eliminates in consolidation, for the working capital needs of IIM. On
October 15, 2003, APG sold its 51% ownership interest to the minority owner
and the outstanding balance of the loan was resolved prior to sale. In December 2002, ATC acquired certain of the assets and business of Bluedot
Virtual Event Organization, Inc. (Bluedot Software) out of Chapter 11
bankruptcy. Bluedot Software, located in San Francisco, California, develops,
markets and distributes event portfolio management solutions for corporations
and large associations. The purchase price consisted of debtor-in possession
financing and other costs of $308,000, the assumption of liabilities and
future contingent payments to the sellers covering the twenty-four months
following the closing date. The Company allocated the excess purchase price
to an intangible asset, purchased software, of $607,000. The amortization
period for this intangible asset was five years. During 2003, the Company
provided an additional investment of approximately $21,000 which was
allocated to purchased software. As more fully described in Note 4, in the
fourth quarter of 2003 the Company wrote off the unamortized balance of the
intangible asset. 5




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued During the first twelve months following the closing, the Technology Group
shall pay the greater of (i) 5% of the gross revenues actually received in
each quarter allocable to the assets purchased, or (ii) $25,000 per quarter
as the First Year Minimum Payments. During the second year following the
closing, ATC shall pay the greater of (i) 5% of the gross revenues actually
received in each quarter allocable to the assets purchased, or (ii) $15,000
per quarter as the Second Year Minimum Payments. As of June 30, 2004, ATC
had paid $130,000 for the first and second year minimum contingent payments
and recorded these payments as an adjustment to the purchase price. In March 2002, APG acquired a 49% ownership interest in Incentive Travel, LLC
(ITI). ITI develops, markets and manages meetings and incentive programs
for a select roster of corporate clients utilizing incentive travel and
corporate meeting management services. The terms of the purchase agreement
call for contingent payments through 2005 based upon actual income before
income taxes multiplied by APGs 49% ownership interest calculated based on a
predefined multiplier. Total payments related to ITIs fiscal 2002 results
were $2.5 million of which approximately $1.9 million was paid during 2003
and was allocated to intangible assets (license). Total payments related to
ITIs fiscal 2003 results were $0.6 million and was allocated to intangible
assets (license). The remaining purchase price of $542,000 was paid during
2002 and was allocated to goodwill. License fees earned from ITI are included in the operations of Ambassadors
and represent approximately $32,000 and $46,000 for the three months ended
June 30, 2004 and 2003, respectively, and $133,000 and $286,000 for the six
months ended June 30, 2004 and 2003, respectively. The Company also recorded
its proportional share of the earnings (loss) and management fees from ITI of
approximately ($44,000) and $288,000 for the three months ended June 30, 2004
and 2003, respectively, and $46,000 and $473,000 for the six months ended
June 30, 2004 and 2003, respectively, which are included in other income. At
June 30, 2004 and 2003, the Company had approximately $169,000 and $97,000,
respectively, in receivables related to license and management fees and
approximately $401,000 and $356,000, respectively, in undistributed earnings
from ITI.  3.
    
    Reinsurance The Company transferred its investment interest in two insurance programs to
its wholly-owned subsidiary, Cypress Re. On March 29, 2004, Cypress Re
entered into a reinsurance agreement which 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. 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 acquisition costs and ceded prepaid reinsurance premiums of $2.7
million, $0.7 million and $0.6 million, respectively, were recorded on the
balance sheet as of June 30, 2004. 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 to
income. Loss and loss adjustment expense reserves are adjusted for changes
in the estimated ultimate payout and the original deferred gain is
re-calculated and amortized based on and in the period that the changes in
estimated ultimate payout are made. As of June 30, 2004, premium receivable,
reinsurance recoverable, loss and loss adjustment expense reserves and a
deferred gain on retroactive reinsurance of $2.3 million, $0.5 million, $2.1
million and $0.7 million, respectively, were recorded on the Companys
balance sheet. Loss and loss adjustment expense reserves include $0.4
million for incurred but not
reported claims as of June 30, 2004 and the Company has recognized $0.2
million of the deferred gain associated with its retroactive reinsurance
activity. 6




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued 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 are comprised of funds withheld by the ceding company of
approximately $4.4 million and deductible recoveries of $0.6 million. The
funds withheld by the ceding company are held in trust and primarily consist
of high grade government bonds and money market funds which are carried at
fair market value. Reinsurance recoverable and prepaid reinsurance premiums of $0.5 million and
$0.6 million, respectively, relate to a single reinsurer. Cypress Res
exposure to credit loss in the event of non-payment or nonperformance is
limited to these amounts. The effect of reinsurance on premiums written and earned as of June 30, 2004
was as follows: PremiumsWritten
    
    EarnedDirect
    
    $
    
    
    
    $
    Assumed
    
    
    4,390
    
    
    
    1,677Ceded
    
    
    (1,046
    )
    
    
    (400
    )Net premiums
    
    $
    3,344
    
    
    $
    1,277
  4.
    
    Impairment Loss and Lease Exit Costs In December 2003, the Company consolidated the operations of the Technology
Group into its corporate headquarters in Newport Beach, California in order
to improve operating efficiencies and reduce future costs. At December 31,
2003, the Company performed its annual impairment test on the Technology
Groups intangible asset, purchased software, and concluded that due to the
consolidation of operations, the asset was impaired. Accordingly, the
Company recorded a charge related to the unamortized balance of the purchased
software related to the acquisition of Bluedot Software in 2002 of
approximately $502,000. The Company also recorded approximately $389,000
related to the write-down of assets, lease exit costs and employee relocation
expenses due to the closure of the San Francisco office. The Company
recorded approximately $317,000 in accounts payable and other liabilities at
December 31, 2003 for the remaining unpaid balance of these expenses. The
Company paid and charged against the liability, net of sublease income
received, approximately $20,000 and $74,000 in the three and six months ended
June 30, 2004, respectively. In addition, the Company recorded an adjustment
to the lease exit costs in general and administrative expenses of
approximately $89,000 in the quarter ended June 30, 2004 due to executing a
sublease agreement which was more favorable than originally estimated. At
June 30, 2004, approximately $154,000 remained unpaid and is included in
accounts payable and other liabilities in the accompanying balance sheet. 7




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  5.
    
    Comprehensive Income The components of comprehensive income (loss) are as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    154
    
    
    $
    764
    
    
    $
    1,337
    
    
    $
    1,152Change in
unrealized gain
(loss) on
marketable equity
securities, net of
income tax expense
(benefit) of
($114), $226, $331
and $63
    
    
    (180
    )
    
    
    336
    
    
    
    480
    
    
    
    72$
    (26
    )
    
    $
    1,100
    
    
    $
    1,817
    
    
    $
    1,224
  6.
    
    Earnings Per Share The following table presents a reconciliation of basic and diluted earnings
per share (EPS) computations and the number of dilutive securities (stock
options) that were included in the dilutive EPS computation (in thousands). Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    154
    
    
    $
    764
    
    
    $
    1,337
    
    
    $
    1,152Denominator:Weighted-average shares outstanding  basic
    
    
    9,795
    
    
    
    9,891
    
    
    
    9,888
    
    
    
    9,875Effect of dilutive common stock options
    
    
    266
    
    
    
    238
    
    
    
    280
    
    
    
    216Weighted-average shares outstanding  diluted
    
    
    10,061
    
    
    
    10,129
    
    
    
    10,168
    
    
    
    10,091
 For the three months ended June 30, 2004 and 2003 there were approximately
112,000 and 141,000 stock options outstanding, respectively, whereby the
exercise price exceeded the average common stock market value. For the six
months ended June 30, 2004 and 2003 there were approximately 95,000 and
180,000 stock options outstanding, whereby the exercise price exceeded the
average common stock market value. The effects of the shares which would be
issued upon the exercise of these options have been excluded from the
calculation of diluted EPS because they are anti-dilutive.  7.
    
    Common Stock Repurchase Plan In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the
open market or through private transactions. This repurchase program is
ongoing and as of June 30, 2004, the Company has repurchased 1,051,500 shares
for approximately $12.4 million. During the quarter ended June 30, 2004, the
Company repurchased 300,000 shares for $3,675,000. 8




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  8.
    
    Business Segments In January 2004, the Company realigned its business operations and
consolidated the Performance Group, the Services Group and the Technology
Group into one segment, called Ambassadors. Also, during the first quarter
the Company launched its reinsurance business segment, Cypress Re. Corporate
and Other consists of general corporate assets (primarily cash and cash
equivalents, investments and goodwill). Selected financial information
related to these segments is as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Ambassadors
    
    $
    2,749
    
    
    $
    3,633
    
    
    $
    7,721
    
    
    $
    7,878Cypress Re
    
    
    1,277
    
    
    
    
    
    
    
    1,277
    
    
    
    Corporate and Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    $
    4,026
    
    
    $
    3,633
    
    
    $
    8,998
    
    
    $
    7,878Operating income (loss):Ambassadors
    
    $
    31
    
    
    $
    (232
    )
    
    $
    2,079
    
    
    $
    126Cypress Re
    
    
    327
    
    
    
    
    
    
    
    241
    
    
    
    Corporate and Other
    
    
    (473
    )
    
    
    (438
    )
    
    
    (970
    )
    
    
    (881
    )Total operating income (loss)
    
    $
    (115
    )
    
    $
    (670
    )
    
    $
    1,350
    
    
    $
    (755
    )
  9.
    
    Summarized Income Statement Information of Affiliate The Company has a 49% ownership interest in ITI and accounts for this
investment using the equity method as discussed in Note 2. This investment
was considered significant to the Companys fiscal 2003 operations as defined
by applicable Securities and Exchange Commission regulations. The following
summarizes the unaudited income statement of the investee for the three and
six months ended June 30, 2003 (in thousands): Three Months
    
    Six MonthsEnded
    
    EndedRevenue
    
    $
    766
    
    
    $
    1,732Operating expenses
    
    
    289
    
    
    
    1,017Operating income
    
    
    477
    
    
    
    715Other income
    
    
    6
    
    
    
    12Net income
    
    $
    483
    
    
    $
    727Companys share of net income
    
    $
    237
    
    
    $
    356
 9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Statements contained in this Quarterly Report on Form 10-Q of the Company which
are not historical in nature, are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. A forward-looking
statement may contain words such as will continue to be, will be, continue
to, expect to, anticipates that, believes that, to be, or can
impact. Forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
A more complete discussion of these risks and uncertainties, as well as other
factors, may be identified from time to time in the Companys filings with the
Securities and Exchange Commission, including the Companys Annual Report on
Form 10-K, or in the Companys press releases. Critical Accounting Policies The Companys financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and costs
and expenses during the period. Management evaluates its estimates and
judgments, including those which impact its most critical accounting policies,
on an ongoing basis. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, within the framework of current accounting literature. The following is a list of the accounting policies that management believes are
the more significant judgments and estimates, and that could potentially result
in materially different results under different assumptions or conditions. Reinsurance Transactions The Companys wholly-owned subsidiary, Cypress Re, assumes and cedes
reinsurance transactions relating to property and casualty risks in the
ordinary course of business. 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
assumes the same percentage of purchased reinsurance, direct acquisition costs
and ultimate incurred claims. The purchased reinsurance relates to excess of
loss and aggregate stop loss reinsurance purchased to mitigate potential losses
from severe adverse loss development, in the aggregate, on an accident year
basis. Amounts recoverable from reinsurance companies are estimated in a manner
consistent with the claim liability associated with the reinsured policies. For
retroactive reinsurance contracts, the amount by which the liabilities
associated with the reinsured policies are less than the amount due from the
ceding company (i.e. the deferred gain) for reinsurance coverage is amortized
into income over the estimated remaining settlement period of the liabilities
assumed. Reserves for Losses and Loss Adjustment Expenses Cypress Re has identified the following estimates as critical, in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: loss reserves, loss adjustment expense reserves and reserves for
incurred but not reported claims. In developing these estimates management
makes subjective and complex judgments that are inherently uncertain and
subject to material change as facts and circumstances develop. Although
variability is inherent in these estimates, management believes the amounts
provided are appropriate based upon the facts available as of June 30, 2004. The liabilities for unpaid claims and loss adjustment expenses of unpaid claims
are based upon: (a) estimates received from ceding reinsurers; (b) the
accumulation of case estimates for losses reported prior to the close of the
accounting period; (c) estimates based on experience of expense for adjusting
claims; (d) estimates of unreported losses based on industry and past
experience; and (e) the current state of law and coverage litigation. Using
these items as well as historical industry trends adjusted for changes in
various external and internal factors, such as underwriting standards,
policy provisions and product mix, Cypress Res actuary determines a point
estimate which management utilizes in recording its best estimate of the
liabilities. 10




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##### Table of Contents



While Cypress Re utilizes its best efforts in estimating its future loss
reserves, there can be no assurance that Cypress Res ultimate losses will not
adversely develop and materially exceed Cypress Res loss reserves as of June
30, 2004. In the future, if net loss reserves develop deficiently, such
deficiency would have an adverse impact on future results of operations. A 1%
difference in the ultimate value of reserves, net of reinsurance recoverable,
would increase or decrease future pretax earnings by approximately $27,000. Revenue Recognition The 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, rail
passes and other program costs in advance of travel, which are recorded as
prepaid program costs. The Company recognizes travel revenue and related costs
when travel convenes and classifies such revenue as travel and incentive
related. Revenue from hotel reservation, registration and related travel services are
recognized when the convention operates. Revenue from the sale of merchandise
is recognized when the merchandise is shipped. Revenue from pre-paid
certificate-based merchandise incentive programs is deferred until the
Companys obligations are fulfilled or upon managements estimates (based upon
historical trends) that the certificates will not be redeemed. These revenues
are classified as travel and incentive related. Revenue from software and technology related sales is derived from a
combination of license and maintenance fees and services provided with
enterprise software tools. The services provided include hosting of data,
development and workflow configuration. Revenue from contracts with multiple
elements is recognized using the residual method in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition as amended by SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions. Revenue from development contracts is recognized using
the percentage-of-completion method in accordance with SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts.
Revenue from contracts relating to only maintenance or hosting of data is
recognized on the straight-line basis over the period that the services are
provided. In May 2003, the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) reached a final consensus on Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables (EITF 00-21). The EITF
addresses how to account for multiple-deliverable revenue arrangements and
focuses on when a revenue arrangement should be separated into different
revenue-generating deliverables or units of accounting and if so, how the
arrangement considerations should be allocated to the different deliverables or
units of accounting. The provisions of EITF 00-21 are effective for revenue
arrangements entered into at the beginning of the first interim period after
June 15, 2003. The adoption of the EITF did not have a material effect on the
Companys financial position or results of operations. Revenue from license fees is recognized based on a contracted percentage of
total program receipts recorded from licensing sources. The insurance contract 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 considered short-duration contracts and
are mainly twelve months in duration. Unearned premiums represent the unearned
portion of the insurance contracts as of the balance sheet date. The purchased or ceded reinsurance relates to excess of loss and aggregate stop
loss reinsurance purchased to mitigate potential losses from severe adverse
loss development, in the aggregate, on an accident year basis. 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. 11




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Claim Cost Recognition Loss and loss adjustment expenses paid are recognized in the period payment is
made. A liability for unpaid claim costs relating to insurance contracts
including estimates of costs relating to incurred but not reported claims and
claims adjustment expenses expected to be incurred in connection with the
settlement of unpaid claims are recognized when insured events occur.
Anticipated deductible recoveries from insureds are recorded as receivables at
the time the liability for unpaid claims is established. Other estimated
recoveries on unsettled claims, such as salvage and subrogation are recorded
upon collection. Deferred Policy Acquisition Costs Deferred policy acquisition costs represent those costs that vary with and are
directly related to the acquisition of the insurance contracts and are charged
to expense in proportion to premium revenue recognized. Significant acquisition
costs include commissions, policy issuance costs, claims administration,
fronting fees and premium taxes. Deferred policy acquisition costs represent
those costs directly related to the unearned premiums as of the balance sheet
date. Cypress Re evaluates the recoverability of its deferred policy
acquisition costs by comparing the present value of future cash flows from its
insurance programs to the loss and maintenance reserves being held, less its
deferred policy acquisition costs. At June 30, 2004, management believes its
deferred policy acquisition costs are recoverable. Other Investments The Company owns majority and minority investments in other operating
companies. All of these investment acquisitions were accounted for under the
purchase method of accounting. The statements of operations of the majority
investments are included in the Companys statements of income since their
respective dates of acquisition. The Company accounts for equity investments
with ownership ranging from 20% to 50% using the equity method and equity
investments with ownership of less than 20% using the cost method. Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investments
current carrying value. Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually or sooner whenever changes in circumstances
indicate that they may be impaired. For purposes of testing goodwill for
impairment, goodwill has been allocated to the reporting units from which it
originated. SFAS No. 142 also requires that intangible assets with definite
lives be amortized over their estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is
currently amortizing its acquired intangible assets with definite lives over
periods ranging from 5 to 6 years. As of December 31, 2003, the Company completed its annual impairment tests and
recorded approximately $573,000 to write off the unamortized balance of an
intangible asset, purchased software, and equipment related to the 2002 asset
purchase within the Technology Group. See Note 4 to the consolidated financial
statements for further discussion. Deferred Income Taxes The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and
liability approach which 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 will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. 12




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##### Table of Contents



COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE
MONTHS ENDED JUNE 30, 2003: Revenue Total revenue for the three months ended June 30, 2004 was $4.0 million
compared to $3.6 million for the three months ended June 30, 2003. For the
quarter ended June 30, 2004, the Company realized insurance related revenue of
approximately $1.3 million. The addition of this new revenue stream was
partially offset by a decrease in the volume of business generated during the
current quarter by the Ambassadors segment, as well as lower software and
technology related revenue. Cost of Software and Technology Related Sales Cost of software and technology related sales decreased $0.4 million due to the
decrease in software and technology related sales combined with the change in
the type of revenue generated being less labor intensive than in the prior
year. In 2004, the Company has changed its technology focus from custom
configuration in 2003 to primarily licensing, hosting, support and maintenance. Selling and Tour Promotion Expenses The Companys policy is to expense all selling and tour promotion costs as they
are incurred. Selling and tour promotion expense decreased $0.4 million due to the decrease
in personnel and other expenses related to the businesses that were sold or
consolidated in the fourth quarter of 2003. General and Administrative Expenses General and administrative expenses decreased $0.3 million due to the decrease
in personnel and other expenses related to the businesses that were sold or
consolidated in the fourth quarter of 2003. Loss and Loss Adjustment Expenses Loss and loss adjustment expenses relate to the insurance operations of Cypress
Re, the Companys new business segment, which began operations in 2004. Loss
and loss adjustment expenses represent actual payments made and changes in
estimated future payments to be made, including expenses required to settle
claims, under Cypress Res reinsurance treaties and amortization of the
deferred gain related to Cypress Res retroactive reinsurance activity. Insurance Acquisition Costs and Other Operating Expenses Insurance acquisition costs and other operating expenses relate to the
insurance operations of Cypress Re. Insurance acquisition costs consist of
commissions, premium taxes and other ceding fees incurred under Cypress Res
reinsurance treaties and are amortized to expense on the same basis as premiums
are earned. Other operating expenses represent general operating expenses and
are expensed as incurred. Operating Loss The Company recorded an operating loss of $0.1 million for the quarter ended
June 30, 2004 compared to a loss of $0.7 million in the comparable quarter of
2003, an increase of $0.6 million. The increase is the result of the changes
described above. 13




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##### Table of Contents



Other Income Other income for the three months ended June 30, 2004 was $0.3 million compared
to $1.8 million for the three months ended June 30, 2003. Other income for the
three months ended June 30, 2003 included $1.2 million from contingent
consideration received on the sale of Scheduled Airlines Traffic Offices, Inc.
(SatoTravel) in June 2001. The Company also experienced a decrease in other
income due to a decrease in income and service fees earned on equity
investments combined with lower yields on its investment portfolio. Income Taxes The Company recorded income tax expense of $0.1 million for the quarter ended
June 30, 2004 compared to $0.3 million for the quarter ended June 30, 2003, a
decrease of $0.2 million. The effective tax rate for the quarter ended June
30, 2004 was 33.6% compared to 30.9% for the quarter ended June 30, 2003. The
increase in the effective tax rate is primarily due to the change in the
Companys investment portfolio such that the tax-exempt interest income
represents approximately 8% of the Companys investment income for the quarter
ended June 30, 2004 compared to 96% for the quarter ended June 30, 2003. Net Income Net income for the quarter ended June 30, 2004 was $0.2 million compared to
$0.8 million for the comparable quarter of 2003, a decrease of $0.6 million.
The decrease is the result of the changes as described above. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS
ENDED JUNE 30, 2003: Revenue Total revenue for the six months ended June 30, 2004 was $9.0 million compared
to $7.9 million for the six months ended June 30, 2003. In 2004, the Company
realized insurance related revenue of approximately $1.3 million. The addition
of this new revenue stream was partially offset by a decrease in the software
and technology related revenue and license fees earned from an equity investee. Cost of Software and Technology Related Sales Cost of software and technology related sales decreased $0.8 million due to the
decrease in software and technology related sales combined with the change in
the type of revenue generated being less labor intensive than in the prior
year. In 2004, the Company has changed its technology focus from custom
configuration in 2003 to primarily licensing, hosting, support and maintenance. Selling and Tour Promotion Expenses The Companys policy is to expense all selling and tour promotion costs as they
are incurred. Selling and tour promotion expense decreased $0.7 million due to the decrease
in personnel and other expenses related to the businesses that were sold or
consolidated in the fourth quarter of 2003. General and Administrative Expenses General and administrative expenses decreased $0.6 million due to the decrease
in personnel and other expenses related to the businesses that were sold or
consolidated in the fourth quarter of 2003. 14




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##### Table of Contents



Loss and Loss Adjustment Expenses Loss and loss adjustment expenses relate to the insurance operations of Cypress
Re. Loss and loss adjustment expenses represent actual payments made and
changes in estimated future payments to be made, including expenses required to
settle claims, under Cypress Res reinsurance treaties and amortization of the
deferred gain related to Cypress Res retroactive reinsurance activity. Insurance Acquisition Costs and Other Operating Expenses Insurance acquisition costs and other operating expenses relate to the
insurance operations of Cypress Re. Insurance acquisition costs consist of
commissions, premium taxes and other ceding fees incurred under Cypress Res
reinsurance treaties and are amortized to expense on the same basis as premiums
are earned. Other operating expenses represent general operating expenses and
are expensed as incurred. Operating Income (Loss) The Company recorded operating income of $1.4 million for the six months ended
June 30, 2004 compared to a loss of $0.8 million in the comparable period of
2003, an increase of $2.2 million. The increase is the result of the changes
described above. Other Income Other income for the six months ended June 30, 2004 was $0.8 million compared
to $2.3 million for the six months ended June 30, 2003. Other income for the
period ended June 30, 2003 included $1.2 million from contingent consideration
received on the sale of SatoTravel in June 2001. The realized gains recorded
in 2004 are due to the Companys sale of some of its available-for-sale
securities for gains during the quarter ended March 31, 2004. The Company also
experienced a decrease in other income due to a decrease in income and service
fees earned on equity investments combined with lower yields on its investment
portfolio. Income Taxes The Company recorded income tax expense of $0.8 million for the six months
ended June 30, 2004 compared to $0.4 million for the six months ended June 30,
2003, an increase of $0.4 million. The effective tax rate for the six months
ended June 30, 2004 was 36.6% compared to 26.1% for the six months ended June
30, 2003. The increase in the effective tax rate is primarily due to the
change in the Companys investment portfolio such that the tax-exempt interest
income represents approximately 40% of the Companys investment income for the
six months ended June 30, 2004 compared to 94% for the six months ended June
30, 2003. Net Income Net income for the six months ended June 30, 2004 was $1.3 million compared to
$1.2 million for the comparable quarter of 2003, an increase of $0.1 million.
The increase is the result of the changes as described above. Liquidity and Capital Resources The Companys business is not capital intensive. However, the Company does
retain funds for operating purposes in order to conduct sales and marketing
efforts for future programs and to facilitate acquisitions of other companies. Net cash used in operating activities for the six months ended June 30, 2004
and 2003 was approximately $2.9 million and $1.2 million, respectively, an
increase of $1.7 million. The increase in net cash used primarily relates to
timing differences in the collection of current assets and the payment of
current liabilities partially offset by the increase in net income. 15




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##### Table of Contents



Net cash provided by investing activities for the six months ended June 30,
2004 and 2003 was approximately $11.6 million and $5.0 million, respectively,
an increase of $6.6 million. The increase is due to the timing differences in
reinvesting matured securities. The Company does not have any material capital expenditure commitments for
2004. The terms of the Companys acquisition of certain of the assets and business of
Bluedot Software included minimum contingent consideration of $100,000 in 2003
and $60,000 in 2004. During 2003, the Company paid $100,000 and as of June 30,
2004, the Company paid an additional $30,000 of this minimum consideration.
The terms of the Companys investment in ITI included contingent payments due
in March 2004 based upon fiscal 2003 income before income taxes. As of June 30,
2004, the Company paid approximately $627,000 for the 2004 payment based upon
2003 income. Net cash used in financing activities for the six months ended June 30, 2004
and 2003 was $5.0 million and $0.2 million, respectively, an increase of $4.8
million. Current period activity consisted of two $0.10 per share cash
dividends paid to common shareholders in 2004 and the purchase and retirement
of common stock. These payments were partially offset by the proceeds received
from the exercise of employee stock options during the period. Cash used in
financing activities for the six months ended June 30, 2003 consisted of the
purchase and retirement of common stock partially offset by the proceeds
received from the exercise of employee stock options. In the ordinary course of business the Company may from time to time be
required to enter into letters of credit with airlines, travel providers and
travel reporting agencies. As of June 30, 2004, the Company has issued
approximately $908,500 in letters of credit related to normal business
operations which expire at various dates through 2006. As of June 30, 2004,
the Company has issued approximately $6,488,500 in letters of credit related to
property and casualty insurance programs which expire at various dates through
2005. On July 2, 2004, the Company issued an additional letter of credit of
approximately $1,909,000 for a property and casualty insurance program which
will expire in 2005. The Company has a $10 million credit line to support the
outstanding letters of credit. Pursuant to the line of credit, the Company is
subject to certain covenants, which include, among other things, a requirement
for unencumbered liquid assets. As of June 30, 2004, the Company was in
compliance with these covenants. We are continuing to pursue further acquisitions of related travel and
performance improvement, service and other businesses that may require the use
of cash and cash equivalents. No assurance can be given that definitive
agreements for any acquisitions will be entered into, or, if they are entered
into, that they will be on terms favorable to the Company. In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the open
market or through private transactions. This repurchase program is ongoing and
in the first quarter of 2003 the Company repurchased 98,000 shares for
approximately $833,000. In the second quarter of 2004, the Company repurchased
300,000 shares for $3,675,000. The Company does not believe that any future
repurchases will have a significant impact on the Companys liquidity. On September 2, 2003, the Board of Directors authorized a new dividend policy
paying shareholders $0.40 per share annually, distributable at $0.10 per share
on a quarterly basis. Accordingly, a dividend of approximately $1,000,000 was
paid on March 23, 2004 to shareholders of record on March 9, 2004 and a
dividend of approximately $974,000 was paid on June 16, 2004 to shareholders of
record on June 1, 2004. 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. Management believes that cash, cash equivalents, available-for-sale securities
and cash flows from operations will be sufficient to meet the Companys
anticipated operating cash needs for at least the next twelve months. 16




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##### Table of Contents



Trends and Uncertainties The results of operations and financial position of the Companys business may
be affected by a number of trends or uncertainties that have, or the Company
reasonably expects could have, a material impact on income from continuing
operations, cash flows and financial position. Such trends and uncertainties
include the repercussions of war with Iraq or terrorist acts, the impact of the
SARS epidemic and the Companys acquisition of or investment in complementary
businesses. The Company will also, from time to time, consider the acquisition
of or investment in businesses, services and technologies that might affect the
Companys liquidity requirements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to changes in financial market conditions in the normal
course of business due to its use of certain financial instruments. Market risk
generally represents the risk that losses may occur in the values of financial
instruments as a result of movements in interest rates and equity prices. There have been no material changes in the reported market risks or the overall
credit risk of the Companys portfolio since December 31, 2003. See further
discussion of these market risks and related financial instruments in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003. 
 Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures: As of June 30, 2004,
the end of the period covered by this report, the Companys chief executive
officer and its chief financial officer reviewed and evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined
in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure
that material information the Company must disclose in its report filed or
submitted under the Securities Exchange Act of 1934, as amended (the Exchange
Act) is recorded, processed, summarized, and reported on a timely basis, and
have concluded, based on that evaluation, that as of such date, the Companys
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is accumulated and communicated to the Companys chief
executive officer and chief financial officer as appropriate to allow timely
decisions regarding required disclosure. (b) Changes in internal control over financial reporting: For the three and
six months ended June 30, 2004, there has been no change in the Companys
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, its internal control over financial
reporting. 17




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. Issuer Purchases of Equity Securities (1) (d) Maximum Number(c) Total Number of
    
    (or ApproximateShares Purchased as
    
    Dollar Value) ofPart of Publicly
    
    Shares that May Yet(a) Total Number of
    
    (b) Average Price
    
    Announced Plans or
    
    Be Purchased UnderPeriod
    
    Shares Purchased
    
    Paid per Share
    
    Programs
    
    the Plans or ProgramsApril 1, 2004 through April 30, 2004
    
    
    300,000
    
    
    $
    12.25
    
    
    
    300,000
    
    
    $
    7,642,701May 1, 2004 through May 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1, 2004 through June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    $
    12.25
    
    
    
    300,000
    
    
    $
    7,642,701
   (1)
    
    In November 1998, the Board of Directors of the Company authorized the repurchase of the Companys common stock (up
to an approved amount of $20.0 million) in the open market or through private transactions. This repurchase program
is ongoing and as of June 30, 2004, the Company has repurchased 1,051,500 shares for approximately $12.4 million.
During the quarter ended June 30, 2004, the Company repurchased 300,000 shares for $3,675,000 million. As of June
30, 2004, approximately $7.6 million was available for share repurchases under the program. 
 Item 4. Submission of Matters to a Vote of Security Holders. At the annual meeting of shareholders of registrant on May 14, 2004, the
following matter was voted upon: Election of Directors (1): Nominee
    
    Votes For
    
    Votes WithheldPeter V. Ueberroth
    
    
    9,290,906
    
    
    
    240,457Richard D.C. Whilden
    
    
    9,275,760
    
    
    
    255,657
   (1)
    
    The two directors will hold office for a three-year term or
until their respective successors are duly elected and
qualified. 18




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K: (1)
    
    The Company filed a current report on Form 8-K on
April 22, 2004 in connection with the dissemination of an
earnings release.*
   *
    
    Report containing information that under Item 12 is not deemed to be
filed for the purpose of Section 18 of the Exchange Act and the Company
is not subject to the liabilities of that section. The Company is not
incorporating, and will not incorporate by reference this report into a
filing under the Securities Act of 1933, as amended or the Exchange Act. 19




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##### Table of Contents



Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. AMBASSADORS INTERNATIONAL, INC.
(Registrant)Date: August 5, 2004
    By:
    /s/ Brian R. SchaefgenBrian R. Schaefgen,Chief Financial Officer 20




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##### Table of Contents



Exhibit Index 31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002
 21