##### 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 March 31, 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
April 28, 2004 was 9,716,614.




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AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2004 (unaudited) and
December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2004 and 2003 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 (unaudited)
    
    
    3Notes to Condensed 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
    
    
    15Item 4. Controls and Procedures
    
    
    16PART II OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17EXHIBIT INDEX
    
    
    18EXHIBIT 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. 
 Condensed Consolidated Balance Sheets
  (in thousands, except
share data)
 March 31,
    
    December 31,2004
    
    2003(unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    82,643
    
    
    $
    43,609Available-for-sale securities
    
    
    21,750
    
    
    
    61,685Accounts receivable, net of allowance of $74 and $75 in 2004
and 2003, respectively
    
    
    5,420
    
    
    
    2,132Premiums receivable
    
    
    3,820
    
    
    
    Deferred acquisition costs
    
    
    367
    
    
    
    Reinsurance recoverable
    
    
    512
    
    
    
    Prepaid reinsurance premiums
    
    
    325
    
    
    
    Deferred income taxes
    
    
    32
    
    
    
    477Prepaid program costs and other current assets
    
    
    4,460
    
    
    
    3,202Total current assets
    
    
    119,329
    
    
    
    111,105Property and equipment, net
    
    
    905
    
    
    
    1,010Goodwill
    
    
    6,817
    
    
    
    6,817Other intangibles
    
    
    2,084
    
    
    
    2,194Deferred income taxes
    
    
    2,433
    
    
    
    2,433Other assets
    
    
    1,178
    
    
    
    1,491Total assets
    
    $
    132,746
    
    
    $
    125,050Liabilities:Current liabilities:Accounts payable
    
    $
    2,856
    
    
    $
    2,033Participants deposits
    
    
    7,446
    
    
    
    8,100Accrued and other expenses
    
    
    3,505
    
    
    
    1,778Loss and loss adjustment expense reserves
    
    
    2,982
    
    
    
    Unearned premium
    
    
    1,396
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    339
    
    
    
    Total current liabilities
    
    
    18,524
    
    
    
    11,911Non-current participants deposits
    
    
    304
    
    
    
    270Other liabilities
    
    
    168
    
    
    
    179Total liabilities
    
    
    18,996
    
    
    
    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;
10,016,614 and 9,969,875 shares issued and outstanding in 2004
and 2003, respectively
    
    
    100
    
    
    
    100Additional paid-in capital
    
    
    89,667
    
    
    
    89,450Retained earnings
    
    
    23,591
    
    
    
    23,408Accumulated other comprehensive income (loss)
    
    
    392
    
    
    
    (268
    )Total stockholders equity
    
    
    113,750
    
    
    
    112,690Total liabilities and stockholders equity
    
    $
    132,746
    
    
    $
    125,050
 See Notes to Condensed Consolidated Financial Statements. 1




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Ambassadors International, Inc. 
 Condensed Consolidated Statements of Income
  (in thousands, except per share data)
 Three MonthsEnded March 31,2004
    
    2003(unaudited)Revenues:Travel and incentive related
    
    $
    4,726
    
    
    $
    3,414Software and technology related sales
    
    
    145
    
    
    
    591License fees from equity investee
    
    
    101
    
    
    
    2404,972
    
    
    
    4,245Operating expenses:Cost of software and technology related sales
    
    
    13
    
    
    
    339Selling and tour promotion
    
    
    810
    
    
    
    1,112General and administrative
    
    
    2,598
    
    
    
    2,879Other insurance operating expenses
    
    
    86
    
    
    
    3,507
    
    
    
    4,330Operating income (loss)
    
    
    1,465
    
    
    
    (85
    )Other income:Interest and dividend income
    
    
    305
    
    
    
    394Realized gains on sale of available-for-sale securities
    
    
    40
    
    
    
    Other, net
    
    
    68
    
    
    
    144413
    
    
    
    538Income before income taxes
    
    
    1,878
    
    
    
    453Provision for income taxes
    
    
    695
    
    
    
    65Net income
    
    $
    1,183
    
    
    $
    388Earnings per share:Basic
    
    $
    0.12
    
    
    $
    0.04Diluted
    
    $
    0.12
    
    
    $
    0.04Weighted-average common shares outstanding:Basic
    
    
    9,982
    
    
    
    9,860Diluted
    
    
    10,275
    
    
    
    10,048Dividends per common share
    
    $
    0.10
    
    
    $
    
 See Notes to Condensed Consolidated Financial Statements. 2




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Ambassadors International, Inc. 
 Condensed Consolidated Statements of Cash Flows
  (in thousands)
 Three Months EndedMarch 31,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    1,183
    
    
    $
    388Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    238
    
    
    
    318Undistributed earnings from equity investments
    
    
    (21
    )
    
    
    (118
    )Change in assets and liabilities, net of effects of business
acquisitions and dispositions:Accounts receivable
    
    
    (3,288
    )
    
    
    (542
    )Premiums receivable
    
    
    (3,490
    )
    
    
    Deferred acquisition costs
    
    
    (367
    )
    
    
    Reinsurance recoverable
    
    
    (512
    )
    
    
    Prepaid insurance premiums
    
    
    (325
    )
    
    
    Prepaid program costs and other current assets
    
    
    (1,254
    )
    
    
    (1,282
    )Other assets
    
    
    
    
    
    
    40Accounts payable and accrued and other expenses
    
    
    2,565
    
    
    
    (1,025
    )Current and non-current participants deposits
    
    
    (620
    )
    
    
    2,765Loss and loss adjustment expense reserves
    
    
    2,982
    
    
    
    Unearned premium
    
    
    1,396
    
    
    
    Deferred gain on retroactive reinsurance
    
    
    339
    
    
    
    Other liabilities
    
    
    (11
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    (1,185
    )
    
    
    544Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    54,592
    
    
    
    21,164Purchase of available-for-sale securities
    
    
    (13,552
    )
    
    
    (8,378
    )Purchase of other investments
    
    
    
    
    
    
    (1,754
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    (15
    )
    
    
    (45
    )Purchase of property and equipment
    
    
    (23
    )
    
    
    (18
    )Net cash provided by investing activities
    
    
    41,002
    
    
    
    10,969Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    217
    
    
    
    411Dividends paid on common stock
    
    
    (1,000
    )
    
    
    Purchase and retirement of common stock
    
    
    
    
    
    
    (833
    )Net cash used in financing activities
    
    
    (783
    )
    
    
    (422
    )Net increase in cash and cash equivalents
    
    
    39,034
    
    
    
    11,091Cash and cash equivalents, beginning of year
    
    
    43,609
    
    
    
    46,910Cash and cash equivalents, end of year
    
    $
    82,643
    
    
    $
    58,001
 See Notes to Condensed Consolidated Financial Statements. 3




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Ambassadors International, Inc. 
 Notes to Condensed Consolidated Financial Statements
   1.
    
    Description of the Company and Basis of Presentation  The CompanyAmbassadors International, Inc. (the Company) is a travel services and
performance improvement company that was founded in 1967 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 PresentationIn the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, necessary to present fairly the consolidated
financial position of Ambassadors International, Inc. and its subsidiaries as
of March 31, 2004 and the consolidated results of operations and cash flows
for the three months ended March 31, 2004 and 2003. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain reclassifications have
been made to amounts in 2003 to conform with the 2004 presentation.It should be understood that accounting measurements at interim dates
inherently involve greater reliance on estimates than at year-end. The
results of operations for the three months ended March 31, 2004 are not
necessarily indicative of those to be expected for the entire year. The
accompanying condensed consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission. 4




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements, Continued   Accounting for Stock OptionsAs permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company accounts for is
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.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 EndedMarch 31,2004
    
    2003Net income, as reported
    
    $
    1,183
    
    
    $
    388Deduct: total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (95
    )
    
    
    (112
    )Net income, pro forma
    
    $
    1,088
    
    
    $
    276Earnings per share  basicAs reported
    
    $
    0.12
    
    
    $
    0.04Pro forma
    
    
    0.11
    
    
    
    0.03Earnings per share  dilutedAs reported
    
    $
    0.12
    
    
    $
    0.04Pro forma
    
    
    0.11
    
    
    
    0.03
  Dividends DeclaredOn 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.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. 5




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements, Continued   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.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 March 31, 2004, ATC
had paid $115,000 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). The remaining purchase
price of $542,000 was paid during 2002 and was allocated to goodwill. The
Companys obligation related to ITIs fiscal 2003 results was approximately
$627,000 which has been accrued and allocated to intangible assets (license)
as of March 31, 2004.License fees earned from ITI are included in the operations of Ambassadors
and represent approximately $101,000 and $240,000 for the three months ended
March 31, 2004 and 2003, respectively. The Company also recorded its
proportional share of the earnings and management fees from ITI of
approximately $90,000 and $185,000 for the three months ended March 31, 2004
and 2003, respectively, which are included in other income. At March 31, 2004
and 2003, the Company had approximately $133,000 and $365,000, respectively,
in receivables related to license and management fees and approximately
$843,000 and $119,000, respectively, in undistributed earnings from ITI.3.
    
    ReinsuranceThe 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 covers 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 $1.4
million, $0.4 million and $0.3 million, respectively, were recorded on the
balance sheet as of March 31, 2004. 6




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements, Continued   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. The initial
gain resulting from any such transaction is deferred and amortized into
income. Loss and loss adjustment expense reserves are recorded at the
estimated ultimate payout amount. As a result, premiums receivable,
reinsurance recoverable, loss and loss adjustment expense reserves and a
deferred gain on retroactive reinsurance of $3.1 million, $0.5 million, $3.0
million and $0.3 million, respectively, were recorded on the balance sheet as
of March 31, 2004. Loss and loss adjustment expense reserves include $1.4
million for incurred but not reported claims as of March 31, 2004.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
held in trust, of approximately $3.3 million and deductible recoveries of
$0.5 million. The funds withheld by the ceding company held in trust
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
$0.3 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 March 31, 2004
was as follows: PremiumsWritten
    
    EarnedDirect
    
    $
    
    
    
    $
    Assumed
    
    
    1,396
    
    
    
    Ceded
    
    
    (325
    )
    
    
    Net premiums
    
    $
    1,071
    
    
    $
    
  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 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. During
the first quarter of 2004, the Company paid approximately $53,000 of these
expenses. At March 31, 2004, approximately $264,000 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 Condensed Consolidated Financial Statements, Continued   5.
    
    Comprehensive IncomeThe components of comprehensive income are as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    1,183
    
    
    $
    388Change in unrealized gain (loss) on
marketable equity securities, net of income
tax expense (benefit) of $445 and ($163)
    
    
    660
    
    
    
    (264
    )$
    1,843
    
    
    $
    124
  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 EndedMarch 31,2004
    
    2003Net income
    
    $
    1,183
    
    
    $
    388Denominator:Weighted-average shares outstanding  basic
    
    
    9,982
    
    
    
    9,860Effect of dilutive common stock options
    
    
    293
    
    
    
    188Weighted-average shares outstanding  diluted
    
    
    10,275
    
    
    
    10,048
  At March 31, 2004 and 2003 there were approximately 79,000 and 363,000 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
earnings per share because they are anti-dilutive.7.
    
    Common Stock Repurchase PlanIn 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 March 31, 2004, the Company has repurchased 751,500 shares
for approximately $8.7 million. Subsequent to March 31, 2004, the Company
repurchased 300,000 shares for approximately $3,675,000. 8




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Ambassadors International, Inc.
Notes to Condensed Consolidated Financial Statements, Continued   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
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 EndedMarch 31,2004
    
    2003(unaudited)Revenue:Ambassadors
    
    $
    4,972
    
    
    $
    4,245Cypress Re
    
    
    
    
    
    
    Corporate and Other
    
    
    
    
    
    
    Total revenue
    
    $
    4,972
    
    
    $
    4,245Operating income (loss):Ambassadors
    
    $
    2,048
    
    
    $
    358Cypress Re
    
    
    (86
    )
    
    
    Corporate and Other
    
    
    (497
    )
    
    
    (443
    )Total operating income (loss)
    
    $
    1,465
    
    
    $
    (85
    )
  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
months ended March 31, 2003 (in thousands): Revenue
    
    $
    966Operating expenses
    
    
    728Operating income
    
    
    238Other income
    
    
    6Net income
    
    $
    244Companys share of net income
    
    $
    119
 9




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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 Ambassadors
International, Inc. (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 Reinsurance, Ltd (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 March 31, 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, 10




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policy provisions and product mix, Cypress Res 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 March
31, 2004. In the future, if net loss reserves develop deficiently, such
deficiency would have an adverse impact on future results of operations. 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. Acquisition Costs 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 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 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 acquisition costs. At March
31, 2004, management believes its deferred 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 its equity
investments in accordance with FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires
identification of our participation in variable interest entities (VIEs),
which are identified as entities with a level of invested equity insufficient
to fund future activities to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party, if any, bears a majority
of the exposure to the expected losses, or stands to gain from a majority of
the expected returns. FIN 46 also sets forth certain disclosures regarding
interests in VIEs that are deemed significant, even if consolidation is not
required. The Company reviewed its equity investments as of December 31, 2003
and March 31, 2004 and concluded that none classified as a VIE or met the
requirements for consolidation or disclosure within the scope of FIN 46. When
the requirements of FIN 46 are not met, 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. 12




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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 condensed 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. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE
MONTHS ENDED MARCH 31, 2003: Revenue Total revenue for the three months ended March 31, 2004 was $5.0 million
compared to $4.2 million for the three months ended March 31, 2003. Travel and
incentive related revenue increased $1.3 million due to an increase in the
overall volume of business. This increase was partially offset by lower
revenue from software and technology related sales and lower license fees from
an equity investee. Cost of Software and Technology Related Sales Cost of software and technology related sales decreased $0.3 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 $0.3 million due to the decrease
in personnel and other expenses related to the businesses that were sold and
reorganized 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 and
reorganized in the fourth quarter of 2003. Other Insurance Operating Expenses Other insurance operating expenses are related to the Companys new business
segment, Cypress Re. These costs represent the operating expenses incurred in
2004 to begin operations of this segment. Operating Income (Loss) The Company recorded operating income of $1.5 million for the quarter ended
March 31, 2004 compared to a loss of $0.1 in the comparable quarter of 2003, an
increase of $1.6 million. The increase is the result of changes as described
above. 13




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Other Income Other income for the three months ended March 31, 2004 was $0.4 million
compared to $0.5 million for the three months ended March 31, 2003. Interest
and dividend income decreased $0.1 due to lower yields on the investment
portfolio. In addition to the interest and dividend income received on the
portfolio, the Company also sold some of its available-for sale securities for
gains during the quarter ended March 31, 2004. Income and services fees earned
on equity investments decreased by $0.1 million compared to 2003. Income Taxes The Company recorded income tax expense of $0.7 million for the quarter ended
March 31, 2004 compared to $0.1 million for the quarter ended March 31, 2003,
an increase of $0.6 million. The effective tax rate for the quarter ended
March 31, 2004 was 37.0% compared to 14.3% for the quarter ended March 31,
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 66% of the Companys investment income for the quarter
ended March 31, 2004 compared to 92% for the quarter ended March 31, 2003. Net Income Net income increased to $1.2 million for the quarter ended March 31, 2004 from
$0.4 million for the comparable quarter of 2003, an increase of $0.8 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 provided by (used in) operating activities for the three months ended
March 31, 2004 and 2003 was approximately ($1.2) million and $0.5 million,
respectively, a decrease of $1.7 million. The decrease 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. Net cash provided by investing activities for the three months ended March 31,
2004 and 2003 was approximately $41.0 million and $11.0 million, respectively,
an increase of $30.0 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 Virtual Event Organization, Inc. included minimum contingent
consideration of $100,000 in 2003 and $60,000 in 2004. During 2003, the
Company paid $100,000 and as of March 31, 2004, the Company paid an additional
$15,000 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 March 31, 2004, the Company accrued
approximately $627,000 for the 2004 payment based upon 2003 income. Net cash used in financing activities for the three months ended March 31, 2004
and 2003 was $0.8 million and $0.4 million, respectively, a decrease of $0.4
million. Current period activity consisted of one $0.10 per share cash dividend
paid to common shareholders in 2004. This payment was partially offset by the
proceeds received from the exercise of employee stock options during the
quarter. Cash used in financing activities for the three months ended March
31, 2003 consisted of the purchase and retirement of common stock partially
offset by the proceeds received from the exercise of employee stock options. In 2004, the Company transferred its investment in the financial results of a
property and casualty insurance program mainly consisting of auto liability and
auto physical damage risks for the accident years ended June 30, 2003 and 2004
to Cypress Re and entered into a reinsurance agreement on March 29, 2004. On
June 18, 2003, the 14




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Company issued a letter of credit of approximately $1.3 million for its right
to participate proportionately in the underwriting profits or losses of the
accident year ended June 30, 2003. On November 5, 2003, the Company issued a
letter of credit of approximately $1.8 million for its right to participate
proportionately in the underwriting profits or losses of the accident year
ending June 30, 2004. The Companys maximum exposure to potential loss is
approximately $2.1 million for the June 30, 2003 accident year and $2.5 million
for the June 30, 2004 accident year, both of which includes the issued letters
of credit. 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 or
travel reporting agencies. As of March 31, 2004, the Company has issued
approximately $220,000 in letters of credit related to normal business
operations which expire at various dates through 2005. 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. Subsequent to March 31, 2004, the Company repurchased
300,000 shares for approximately $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. 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. 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. 15




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Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures: As of March 31, 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
months ended March 31, 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. 
 PART II  OTHER INFORMATION 
 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
February 27, 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 Securities Exchange Act of
1934 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 or the Exchange Act. 16




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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: May 6, 2004
    
    
    By:
    /s/ Brian R. SchaefgenBrian R. Schaefgen,Chief Financial Officer
 17




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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
 18