##### 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 September 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, California
    
    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
October 25, 2004 was 9,866,325.




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AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I FINANCIAL INFORMATIONItem 1.Financial StatementsConsolidated Balance Sheets at September 30, 2004 (unaudited) and
December 31, 2003
    
    
    1Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2004 and 2003 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the Nine Months
Ended September 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
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT INDEX
    
    
    21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART 1  FINANCIAL INFORMATION 
 Item 1. Financial Statements Ambassadors International, Inc. 
 Consolidated Balance Sheets
 (in thousands, except share data) September 30,
    
    December 31,2004
    
    2003(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    48,039
    
    
    $
    43,609Available-for-sale securities
    
    
    50,980
    
    
    
    61,685Accounts receivable, net of allowance of $64 and $75 in 2004
and 2003, respectively
    
    
    5,058
    
    
    
    2,132Premiums receivable
    
    
    8,000
    
    
    
    Deferred policy acquisition costs
    
    
    1,271
    
    
    
    Reinsurance recoverable
    
    
    1,363
    
    
    
    Prepaid reinsurance premiums
    
    
    932
    
    
    
    Deferred income taxes
    
    
    270
    
    
    
    477Prepaid program costs and other current assets
    
    
    3,381
    
    
    
    3,202Total current assets
    
    
    119,294
    
    
    
    111,105Property and equipment, net
    
    
    762
    
    
    
    1,010Goodwill
    
    
    6,817
    
    
    
    6,817Other intangibles
    
    
    2,174
    
    
    
    2,194Deferred income taxes
    
    
    2,433
    
    
    
    2,433Other assets
    
    
    464
    
    
    
    1,491Total assets
    
    $
    131,944
    
    
    $
    125,050Liabilities:Current liabilities:Accounts payable
    
    $
    2,179
    
    
    $
    2,033Participants deposits
    
    
    7,131
    
    
    
    8,100Accrued and other expenses
    
    
    2,769
    
    
    
    1,778Loss and loss adjustment expense reserves
    
    
    4,916
    
    
    
    Unearned premiums
    
    
    4,714
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    747
    
    
    
    Total current liabilities
    
    
    22,456
    
    
    
    11,911Non-current participants deposits
    
    
    156
    
    
    
    270Other liabilities
    
    
    127
    
    
    
    179Total liabilities
    
    
    22,739
    
    
    
    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; 9,866,325 and 9,969,875 shares issued and outstanding in 2004
and 2003, respectively
    
    
    99
    
    
    
    100Additional paid-in capital
    
    
    87,087
    
    
    
    89,450Retained earnings
    
    
    21,986
    
    
    
    23,408Accumulated other comprehensive income (loss)
    
    
    33
    
    
    
    (268
    )Total stockholders equity
    
    
    109,205
    
    
    
    112,690Total liabilities and stockholders equity
    
    $
    131,944
    
    
    $
    125,050
 See Notes to Consolidated Financial Statements. 1




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Ambassadors International, Inc. 
 Consolidated Statements of Income
 (in thousands, except per share data) Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)Revenues:Travel and incentive related
    
    $
    2,493
    
    
    $
    2,683
    
    
    $
    9,811
    
    
    $
    9,333Software and technology related sales
    
    
    120
    
    
    
    171
    
    
    
    390
    
    
    
    1,113License fees
    
    
    37
    
    
    
    119
    
    
    
    170
    
    
    
    405Net insurance premiums earned
    
    
    1,879
    
    
    
    
    
    
    
    3,156
    
    
    
    4,529
    
    
    
    2,973
    
    
    
    13,527
    
    
    
    10,851Costs and operating expenses:Cost of software and technology related sales
    
    
    6
    
    
    
    92
    
    
    
    41
    
    
    
    879Selling and tour promotion
    
    
    707
    
    
    
    1,096
    
    
    
    2,291
    
    
    
    3,333General and administrative
    
    
    2,525
    
    
    
    2,739
    
    
    
    7,518
    
    
    
    8,348Loss and loss adjustment expenses
    
    
    753
    
    
    
    
    
    
    
    1,210
    
    
    
    Insurance acquisition costs and other operating expenses
    
    
    713
    
    
    
    
    
    
    
    1,292
    
    
    
    4,704
    
    
    
    3,927
    
    
    
    12,352
    
    
    
    12,560Operating income (loss)
    
    
    (175
    )
    
    
    (954
    )
    
    
    1,175
    
    
    
    (1,709
    )Other income:Interest and dividend income
    
    
    406
    
    
    
    294
    
    
    
    1,016
    
    
    
    1,014Realized gains on sale of available-for-sale securities
    
    
    1
    
    
    
    
    
    
    
    41
    
    
    
    1,152Other, net
    
    
    54
    
    
    
    492
    
    
    
    164
    
    
    
    933461
    
    
    
    786
    
    
    
    1,221
    
    
    
    3,099Income (loss) before income taxes
    
    
    286
    
    
    
    (168
    )
    
    
    2,396
    
    
    
    1,390Provision (benefit) for income taxes
    
    
    84
    
    
    
    (159
    )
    
    
    857
    
    
    
    247Net income (loss)
    
    $
    202
    
    
    $
    (9
    )
    
    $
    1,539
    
    
    $
    1,143Earnings per share:Basic
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.16
    
    
    $
    0.12Diluted
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.15
    
    
    $
    0.11Weighted-average common shares outstanding:Basic
    
    
    9,849
    
    
    
    9,933
    
    
    
    9,870
    
    
    
    9,895Diluted
    
    
    10,064
    
    
    
    9,933
    
    
    
    10,124
    
    
    
    10,137Dividends per common share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.10
 See Notes to Consolidated Financial Statements. 2




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Ambassadors International, Inc. 
 Consolidated Statements of Cash Flows
 (in thousands) Nine Months EndedSeptember 30,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    1,539
    
    
    $
    1,143Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    701
    
    
    
    910Undistributed earnings from equity investments
    
    
    72
    
    
    
    (525
    )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
    
    
    (2,926
    )
    
    
    (50
    )Premiums receivable
    
    
    (7,670
    )
    
    
    Deferred
policy acquisition costs
    
    
    (1,271
    )
    
    
    Reinsurance recoverable
    
    
    (1,363
    )
    
    
    Prepaid insurance premiums
    
    
    (932
    )
    
    
    Prepaid program costs and other current assets
    
    
    (193
    )
    
    
    (1,008
    )Other assets
    
    
    639
    
    
    
    (11
    )Accounts payable and accrued and other expenses
    
    
    1,492
    
    
    
    (478
    )Current and non-current participants deposits
    
    
    (1,083
    )
    
    
    1,979Loss and loss adjustment expense reserves
    
    
    4,916
    
    
    
    Unearned premiums
    
    
    4,714
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    747
    
    
    
    Other liabilities
    
    
    (52
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (670
    )
    
    
    808Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    64,690
    
    
    
    40,215Purchase of available-for-sale securities
    
    
    (53,477
    )
    
    
    (41,058
    )Purchase of other investments
    
    
    (627
    )
    
    
    (1,934
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    (30
    )
    
    
    (96
    )Purchase of property and equipment
    
    
    (131
    )
    
    
    (221
    )Net cash provided by (used in) investing activities
    
    
    10,425
    
    
    
    (3,094
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    1,311
    
    
    
    1,026Purchase and retirement of common stock
    
    
    (3,675
    )
    
    
    (833
    )Dividends paid on common stock
    
    
    (2,961
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (5,325
    )
    
    
    193Net increase (decrease) in cash and cash equivalents
    
    
    4,430
    
    
    
    (2,093
    )Cash and cash equivalents, beginning of year
    
    
    43,609
    
    
    
    46,910Cash and cash equivalents, end of year
    
    $
    48,039
    
    
    $
    44,817
 See Notes to Consolidated Financial Statements. 3




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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).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 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 United States
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 nine month periods ended September 30,
2004 are not necessarily indicative of the results that may be expected for
future periods or the year ending 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 United States 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 OptionsAs 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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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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    202
    
    
    $
    (9
    )
    
    $
    1,539
    
    
    $
    1,143Deduct: total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (74
    )
    
    
    (10
    )
    
    
    (257
    )
    
    
    (215
    )Net income, pro forma
    
    $
    128
    
    
    $
    (19
    )
    
    $
    1,282
    
    
    $
    928Earnings per share  basicAs reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.16
    
    
    $
    0.12Pro forma
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.13
    
    
    
    0.09Earnings per share  dilutedAs reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.15
    
    
    $
    0.11Pro forma
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.13
    
    
    
    0.09
  Dividends DeclaredOn September 2, 2003, the Board of Directors authorized a new dividend policy
paying stockholders $0.40 per share annually, distributable at $0.10 per
share on a quarterly basis. During the quarter ended March 31, 2004, a
dividend of approximately $1,000,000 was paid on March 23, 2004 to
stockholders of record on March 9, 2004. During the quarter ended June 30,
2004, a dividend of approximately $974,000 was paid on June 16, 2004 to
stockholders of record on June 1, 2004. During the quarter ended September
30, 2004, a dividend of approximately $987,000 was paid on September 14, 2004
to stockholders of record on August 30, 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 InvestmentsIn 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 5




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  described in Note 4, in the fourth quarter of 2003 the Company wrote off the
unamortized balance of the intangible asset.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 September 30, 2004,
Ambassadors 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. As of September 30, 2004, the Companys
obligation related to ITIs fiscal 2004 results is estimated to be $302,000
which has been accrued and allocated to intangible assets (license).License fees earned from ITI are included in the operations of Ambassadors
and represent approximately $37,000 and $119,000 for the three months ended
September 30, 2004 and 2003, respectively, and $170,000 and $405,000 for the
nine months ended September 30, 2004 and 2003, respectively. The Company also
recorded its proportional share of the earnings (loss) and management fees
from ITI of approximately $93,000 and $150,000 for the three months ended
September 30, 2004 and 2003, respectively, and $139,000 and $623,000 for the
nine months ended September 30, 2004 and 2003, respectively, which are
included in other income. At September 30, 2004 and 2003, the Company had
approximately $37,000 and $160,000, respectively, in receivables related to
license and management fees and approximately $72,000 and $466,000,
respectively, in undistributed earnings from ITI.3.
    
    ReinsuranceIn 2004, 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.During the quarter ended September 30, 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 Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.
One of the quota share reinsurance agreements covered 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 only contained a
prospective component. 6




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  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
$4.7 million, $1.3 million and $0.9 million, respectively, were recorded on
the balance sheet as of September 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
recalculated and amortized based on and in the period that the changes in
estimated ultimate payout are made. As of September 30, 2004, premiums
receivable, reinsurance recoverable, loss and loss adjustment expense
reserves and a deferred gain on retroactive reinsurance of $2.9 million, $1.3
million, $3.3 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 September 30, 2004
and the Company has recognized $0.4 million of the deferred gain associated
with its retroactive reinsurance activity.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 September 30, 2004 is comprised of funds held in
trust, by the ceding company, of approximately $4.0 million and deferred and
not yet due premiums, from the ceding company of approximately $4.0 million.
The funds held in trust primarily consist of high grade government bonds and
money market funds.As of September 30, 2004, reinsurance recoverable and prepaid reinsurance
premiums of $1.4 million and $0.9 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.Written premiums are a non- GAAP financial measure which represent the amount
of premiums charged for policies issued, net of reinsurance, during a fiscal
period. Earned premiums are a GAAP measure. Premiums are considered earned
and are included in the financial results on a pro rata basis over the policy
period. The effect of reinsurance on premiums written and earned for the
three and nine months ended September 30, 2004 was as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Written
    
    Earned
    
    Written
    
    EarnedAssumed
    
    $
    4,378
    
    
    $
    2,377
    
    
    $
    8,768
    
    
    $
    4,054Ceded
    
    
    (784
    )
    
    
    (498
    )
    
    
    (1,830
    )
    
    
    (898
    )Net premiums
    
    $
    3,594
    
    
    $
    1,879
    
    
    $
    6,938
    
    
    $
    3,156
  As of September 30, 2004, the Company has issued approximately $9,898,000 in
letters of credit related to property and casualty insurance programs which
expire at various dates through 2005.4.
    
    Impairment Loss and Lease Exit CostsIn 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 7




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  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 $3,500 and $77,000 in the three and
nine months ended September 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 September 30, 2004, approximately $151,000 remained unpaid and
is included in accounts payable and other liabilities in the accompanying
balance sheet.5.
    
    Comprehensive IncomeThe components of comprehensive income (loss) are as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    202
    
    
    $
    (9
    )
    
    $
    1,539
    
    
    $
    1,143Change in
unrealized gain
(loss) on
marketable equity
securities, net of
income tax expense
(benefit) of
($124), $95, $207
and $158
    
    
    (179
    )
    
    
    139
    
    
    
    301
    
    
    
    211$
    23
    
    
    $
    130
    
    
    $
    1,840
    
    
    $
    1,354
  6.
    
    Earnings Per ShareThe 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    202
    
    
    $
    (9
    )
    
    $
    1,539
    
    
    $
    1,143Denominator:Weighted-average shares outstanding  basic
    
    
    9,849
    
    
    
    9,933
    
    
    
    9,870
    
    
    
    9,895Effect of dilutive common stock options
    
    
    215
    
    
    
    
    
    
    
    254
    
    
    
    242Weighted-average shares outstanding  diluted
    
    
    10,064
    
    
    
    9,933
    
    
    
    10,124
    
    
    
    10,137
  For the three months ended September 30, 2004 and 2003 there were
approximately 112,000 and 79,000 stock options outstanding, respectively, for
which the exercise price exceeded the average common stock market value. For
the nine months ended September 30, 2004 and 2003 there were approximately
101,000 and 116,000 stock options outstanding, for which 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. 8




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  7.
    
    Common Stock Repurchase ProgramIn November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to $20.0 million) in the open
market or through private transactions. This repurchase program is ongoing
and as of September 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. The Company made no
additional repurchases during fiscal 2004.8.
    
    Business SegmentsIn 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
of 2004 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Ambassadors
    
    $
    2,650
    
    
    $
    2,973
    
    
    $
    10,371
    
    
    $
    10,851Cypress Re
    
    
    1,879
    
    
    
    
    
    
    
    3,156
    
    
    
    Corporate and Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    $
    4,529
    
    
    $
    2,973
    
    
    $
    13,527
    
    
    $
    10,851Operating income (loss):Ambassadors
    
    $
    (67
    )
    
    $
    (488
    )
    
    $
    2,012
    
    
    $
    (362
    )Cypress Re
    
    
    413
    
    
    
    
    
    
    
    654
    
    
    
    Corporate and Other
    
    
    (521
    )
    
    
    (466
    )
    
    
    (1,491
    )
    
    
    (1,347
    )Total operating income (loss)
    
    $
    (175
    )
    
    $
    (954
    )
    
    $
    1,175
    
    
    $
    (1,709
    )
  9.
    
    Summarized Income Statement Information of AffiliateThe 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
nine months ended September 30, 2003 (in thousands): Three Months
    
    Nine MonthsEnded
    
    EndedRevenue
    
    $
    601
    
    
    $
    2,333Operating expenses
    
    
    382
    
    
    
    1,399Operating income
    
    
    219
    
    
    
    934Other income
    
    
    5
    
    
    
    17Net income
    
    $
    224
    
    
    $
    951Companys share of net income
    
    $
    110
    
    
    $
    466
 9




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsThe following discussion of the Companys financial condition and the results
of operations should be read in conjunction with the 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 the Companys
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, 2003.Critical Accounting PoliciesThe Companys financial statements have been prepared in accordance with United
States generally accepted accounting principles. 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 TransactionsThe 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 in
general 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 on a per
accident claim basis and in the aggregate, respectively. In the excess of loss
purchased reinsurance, Cypress Re retains the first layer of risk on a per
policy basis which ranges from $250,000 to $500,000. The third party reinsurer
retains the next layer up to the policy limits of $1.0 million. In the
aggregate purchased reinsurance, Cypress Re retains losses up to the aggregate
reinsurance limit per the quota share reinsurance agreement. 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. As of September 30, 2004, loss
and loss adjustment expenses incurred have not exceeded Cypress Res aggregate
reinsurance limit on any of its quota share reinsurance agreements. Cypress Re
retains independent actuaries to determine the loss ratios to utilize in
recording its best estimate of the loss and loss adjustment expense reserves.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 ExpensesCypress 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 10




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in these estimates, management believes the amounts provided are appropriate
based upon the facts available as of September 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 independent actuary determines a point
estimate which management utilizes in recording its best estimate of the
liabilities.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
September 30, 2004. In the future, if net loss reserves develop a deficiency,
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 the Companys future pretax earnings by
approximately $47,000.Revenue RecognitionThe 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. 11




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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 on a per accident claim basis and in the aggregate. These
ceded reinsurance transactions are recognized as a reduction of premium revenue
in the same manner in which the insurance contract is recognized as premium
revenue.Claim Cost RecognitionLoss 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 CostsDeferred 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 considers anticipated investment income in determining the
recoverability of these costs. At September 30, 2004, management believes its
deferred policy acquisition costs are recoverable.Other InvestmentsThe 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 AssetsStatement 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. 12




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Deferred Income TaxesThe 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.COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2003:RevenueTotal revenue for the three months ended September 30, 2004 was $4.5 million,
compared to $3.0 million for the three months ended September 30, 2003. For the
quarter ended September 30, 2004, the increase in revenue was attributable to
insurance related revenue of approximately $1.9 million, partially offset by a
decrease in revenue of approximately $0.3 million from the Ambassadors segment,
including lower software and technology related sales and license fees.Cost of Software and Technology Related SalesCost of software and technology related sales were $6,000 for the quarter ended
September 30, 2004, a decrease of $86,000, compared to the third quarter of
2003. The decrease was due to reduced 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 ExpensesSelling and tour promotion expenses were $0.7 million for the quarter ended
September 30, 2004, a decrease of $0.4 million, compared to the third quarter
of 2003. The decrease was due to a reduction in personnel and other expenses
related to the businesses that were sold or consolidated in the fourth quarter
of 2003.General and Administrative ExpensesGeneral and administrative expenses were $2.5 million for the quarter ended
September 30, 2004, a decrease of $0.2 million, compared to the third quarter
of 2003. The decrease was due to a reduction in personnel and other expenses
related to the businesses that were sold or consolidated in the fourth quarter
of 2003.Loss and Loss Adjustment ExpensesLoss 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. Loss
and adjustment expenses were $0.8 million for the third quarter ended September
30, 2004. The Company did not incur loss and adjustment expense in the third
quarter of 2003.Insurance Acquisition Costs and Other Operating ExpensesInsurance 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. Insurance acquisition costs and other 13




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operating expenses were $0.7 million for the quarter ended September 30, 2004.
The Company did not incur insurance acquisition costs and other operating
expenses in the third quarter of 2003.Operating LossThe Company recorded an operating loss of $0.2 million for the quarter ended
September 30, 2004, compared to an operating loss of $1.0 million in the
comparable quarter of 2003, a change of $0.8 million. The change is the result
of the changes described above.Other IncomeOther income for the three months ended September 30, 2004 was $0.5 million,
compared to $0.8 million for the three months ended September 30, 2003. The
Company experienced a decrease in other income due to a decrease in income and
service fees earned on minority investments.Income TaxesThe Company recorded income tax expense of $0.1 million for the quarter ended
September 30, 2004, compared to a tax benefit of $0.2 million for the quarter
ended September 30, 2003, a change of $0.3 million. The effective tax rate for
the quarter ended September 30, 2004 was 29.4%, compared to a benefit rate of
(94.6%) for the quarter ended September 30, 2003. The increase in the
effective tax rate is primarily due to the change in the Companys investment
portfolio such that tax-exempt interest income represents approximately 8% of
the Companys investment income for the quarter ended September 30, 2004,
compared to 87% for the quarter ended September 30, 2003.Net Income (Loss)Net income for the quarter ended September 30, 2004 was $202,000, compared to a
loss of $9,000 for the comparable quarter of 2003, a change of $211,000. The
change is the result of the changes described above.COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2003:RevenueTotal revenue for the nine months ended September 30, 2004 was $13.5 million,
compared to $10.9 million for the nine months ended September 30, 2003, an
increase of $2.6 million. The increase was primarily attributable to insurance
related revenue of approximately $3.2 million and travel and incentive related
revenue of $0.5 million due to increase in the overall volume of business
generated earlier in the year. The increase was partially offset by a decrease
in the software and technology related sales and license fees.Cost of Software and Technology Related SalesCost of software and technology related sales were $41,000 for the nine months
ended September 30, 2004, a decrease of $0.8 million, compared to the third
quarter of 2003. The decrease was due to reduced 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 ExpensesSelling and tour promotion expenses were $2.3 million for the nine months ended
September 30, 2004, a decrease of $1.0 million, compared to the third quarter
of 2003. The decrease was due to a reduction 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



General and Administrative ExpensesGeneral and administrative expenses were $7.5 million for the nine months ended
September 30, 2004, a decrease of $0.8 million, compared to the third quarter
of 2004. The decrease was due to a reduction in personnel and other expenses
related to the businesses that were sold or consolidated in the fourth quarter
of 2003.Loss and Loss Adjustment ExpensesLoss and loss adjustment expenses were $1.2 million for the nine months
ended September 30, 2004. The Company did not incur loss and loss adjustment
expense in the first nine months of 2003.Insurance Acquisition Costs and Other Operating ExpensesInsurance acquisition costs and other operating expenses were $1.3 million for
the nine months ended September 30, 2004. The Company did not incur insurance
acquisition costs and other operating expenses in the first nine months of
2003.Operating Income (Loss)The Company recorded operating income of $1.2 million for the nine months ended
September 30, 2004, compared to an operating loss of $1.7 million in the
comparable period of 2003, a change in operating income of $2.9 million. The
change is the result of the changes described above.Other IncomeOther income for the nine months ended September 30, 2004 was $1.2 million,
compared to $3.1 million for the nine months ended September 30, 2003. Other
income for the nine months ended September 30, 2003 included $1.2 million from
contingent consideration received on the sale of SatoTravel in June 2001 which
was recorded in the second quarter of 2003. 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 minority investments.Income TaxesThe Company recorded income tax expense of $0.9 million for the nine months
ended September 30, 2004, compared to $0.2 million for the nine months ended
September 30, 2003, an increase of $0.7 million. The effective tax rate for
the nine months ended September 30, 2004 was 35.8%, compared to 17.8% for the
nine months ended September 30, 2003. The increase in the effective tax rate
is due to the increase in the Companys operating income combined with the
change in the Companys investment portfolio such that tax-exempt interest
income represents approximately 27% of the Companys investment income for the
nine months ended September 30, 2004, compared to 87% for the nine months ended
September 30, 2003.Net IncomeNet income for the nine months ended September 30, 2004 was $1.5 million,
compared to $1.1 million for the comparable quarter of 2003, an increase of
$0.4 million. The increase is the result of the changes described above.Liquidity and Capital ResourcesNet cash provided by (used in) operating activities for the nine months ended
September 30, 2004 and 2003 was approximately ($0.7) million and $0.8 million,
respectively, a change of $1.5 million. The change in net cash 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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Net cash provided by (used in) investing activities for the nine months ended
September 30, 2004 and 2003 was approximately $10.4 million and ($3.1) million,
respectively, a change of $13.5 million. The change 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
September 30, 2004, the Company paid an additional $30,000 of this minimum
consideration. In addition, the terms of the Companys investment in ITI
included contingent payments due in March 2004 based upon fiscal 2003 income
before income taxes. In the quarter ended June 30, 2004, the Company paid
approximately $627,000 for the 2004 payment based upon 2003 income. As of
September 30, 2004, the Company has accrued approximately $302,000 for the 2005
ITI related payment based upon the current estimate of 2004 income.Net cash provided by (used in) financing activities for the nine months ended
September 30, 2004 and 2003 was ($5.3) million and $0.2 million, respectively,
a change of $5.5 million. Current period activity consisted of three quarterly
$0.10 per share cash dividends paid to common stockholders 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 provided by financing activities for the nine months ended
September 30, 2003 consisted of the proceeds received from the exercise of
employee stock options partially offset by the purchase and retirement of
common stock.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 September 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 September 30,
2004, the Company has issued approximately $9,898,000 in letters of credit
related to property and casualty insurance programs which expire at various
dates through 2005. The Company has a $15 million line of credit 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 September 30, 2004, the
Company was in compliance with these covenants.In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to $20.0 million) 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 stockholders $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 stockholders of record on March 9, 2004, a dividend
of approximately $974,000 was paid on June 16, 2004 to stockholders of record
on June 1, 2004 and a dividend of approximately $987,000 was paid on September
14, 2004 to stockholders of record on August 30, 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.The Companys cash, cash equivalents and available-for-sale securities totaled
$99.0 million at September 30, 2004. 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. The Company continues to pursue further
acquisitions of related travel and performance improvement, service and other
businesses, although no assurance can be given that definitive agreements for
any acquisition will be entered into or, if they are entered into, that any
acquisition will be consummated on terms favorable to the Company. The Company
could use cash and financing sources discussed herein, or financing sources
that subsequently become available, to fund additional acquisitions or
investments. In addition, the Company may consider issuing additional debt or
equity securities in the future to fund potential acquisitions or investments,
to refinance existing debt, or for 16




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general corporate purposes. If a material acquisition or investment is
completed, the Companys operating results and financial condition could change
materially in future periods. However, no assurance can be given that
additional funds will be available on satisfactory terms, or at all, to fund
such activities.Under Bermuda regulations, Cypress Re is required to maintain surplus greater
than 20% of gross written premiums or 10% of loss and loss adjustment expense
reserves. As of September 30, 2004, Cypress Re has $10.1 million of
contributed capital from the Company which is in excess of the required
statutory capital and surplus of $1.8 million.Trends and UncertaintiesThe 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 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.Cautionary Note Regarding Forward Looking StatementsStatements 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 expect, anticipate,
outlook, could, target, project, intend, plan, believe, seek,
estimate, should, may, assume, continue, and variations of such words
and similar expressions. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions that are
difficult to predict. We caution you that actual outcomes and results may
differ materially from what is expressed, implied, or forecast by our forward
looking statements. We have based our forward looking statements on our
managements beliefs and assumptions based on information available to our
management at the time the statements are made. Such risks and uncertainties
include, among others:  
    
    general economic financial and business conditions;  
    
    overall conditions in the travel services and insurance markets;  
    
    potential claims related to the Companys reinsurance business;  
    
    the potentially volatile nature of the reinsurance business;  
    
    the impact of competition;  
    
    the Companys ability to successfully acquire and integrate companies;  
    
    a decline in corporate meeting demand caused by terrorism,
war, weather conditions or health and safety concerns;  
    
    potential liability related to accidents or disasters causing
injury to participants or attendees to the Companys programs or
events;  
    
    our dependence upon travel suppliers and the risks associated
with a deterioration in our relationships with these travel
suppliers; and  
    
    and other factors discussed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. 17




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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. We disclaim any obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. 
  Item 3. Quantitative and Qualitative Disclosures About Market RiskThe 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 ProceduresThe Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys Securities
Exchange Act of 1934 reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms, and that such information is accumulated and communicated to
the Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. The Companys disclosure controls and
procedures are designed to provide a reasonable level of assurance of reaching
the Companys desired disclosure control objectives. Also, the Company has
investments in certain unconsolidated entities. As the Company does not control
or manage these entities, the Companys disclosure controls and procedures with
respect to such entities are necessarily substantially more limited than those
the Company maintains with respect to the Companys consolidated subsidiaries.As required by Securities and Exchange Commission Rule 13a-15(b), the Company
carried out an evaluation, under the supervision and with the participation of
management, including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the quarter covered by this
report. Based on the foregoing, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures were effective at the reasonable assurance level.There has been no change in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 18




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings  The Company is not a party to any material pending legal proceedings. 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. 
 Item 6. Exhibits (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
 19




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Signatures  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AMBASSADORS INTERNATIONAL,
INC.(Registrant)Date: November 5, 2004
    
    By:
    
    /s/ Brian R. SchaefgenBrian R. Schaefgen,Chief Financial Officer
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Exhibit Index Exhibit No.
    
    Description31.1
    
    
    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