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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K



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|    |  |                                                                                
|--- |  | -------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934


For the fiscal year ended December 31, 2003

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.

(Exact Name of Registrant as Specified in Its Charter)


|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Delaware                                 |  | 91-1688605                          
|(State or Other Jurisdiction of          |  | (I.R.S. Employer Identification No.)
|Incorporation or Organization)           |  |                                     
|                                         |  |                                     
|1071 Camelback Street                    |  |                                     
|Newport Beach, CA 92660                  |  | 92660                               
|(Address of Principal Executive Offices) |  | (Zip Code)                          

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value
Title of Each Class

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[  ]

The aggregate market value of the voting stock of the registrant held by
non-affiliates of the Registrant, based upon the closing sales price of the
Common Stock on the Nasdaq Stock Market on June 30, 2003, was $87,387,624. The
number of shares of the registrants Common Stock outstanding as of March 4,
2004 was 9,970,137.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement relating to the
2004 Annual Meeting of Stockholders are incorporated by reference into Part
III.



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TABLE OF CONTENTS



|                               |                                                                                               |  |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                        
|                               | Item 1. Business                                                                             
|                               | Item 2. Properties                                                                           
|                               | Item 3. Legal Proceedings                                                                    
|                               | Item 4. Submission of Matters to a Vote of Securities Holders                                
|PART II                       
|                               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                               | Item 6. Selected Financial Data                                                              
|                               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                               | Item 8. Financial Statements and Supplementary Data                                          
|                               | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                               | Item 9A. Controls and Procedures                                                             
|PART III                      
|                               | Item 10. Directors and Executive Officers of the Registrant                                  
|                               | Item 11. Executive Compensation                                                              
|                               | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                               | Item 13. Certain Relationships and Related Transactions                                      
|                               | Item 14. Principal Accounting Fees and Services                                              
|                               | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|REPORT OF INDEPENDENT AUDITORS
|Signatures                    
|EXHIBIT 21.1                  
|EXHIBIT 23.1                  
|EXHIBIT 23.2                  
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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TABLE OF CONTENTS

|              |          |  |                                                                                       |  |    |    |    |  | 
|------------- | -------- |  | ------------------------------------------------------------------------------------- |  | -- | -- | -- |  | 
|PART I        |          |  |                                                                                       |  |    |    |    | 
|              | Item 1.  |  | Business                                                                              |  |    | 1  |   
|              | Item 2.  |  | Properties                                                                            |  |    | 8  |   
|              | Item 3.  |  | Legal Proceedings                                                                     |  |    | 8  |   
|              | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |    | 8  |   
|PART II       |          |  |                                                                                       |  |    |    |    | 
|              | Item 5.  |  | Market for the Registrant's Common Equity and Related Stockholder Matters             |  |    | 9  |   
|              | Item 6.  |  | Selected Financial Data                                                               |  |    | 10 |   
|              | Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |    | 11 |   
|              | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |    | 19 |   
|              | Item 8.  |  | Financial Statements and Supplementary Data                                           |  |    | 20 |   
|              | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |    | 20 |   
|              | Item 9A. |  | Controls and Procedures                                                               |  |    | 20 |   
|PART III      |          |  |                                                                                       |  |    |    |    | 
|              | Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |    | 20 |   
|              | Item 11. |  | Executive Compensation                                                                |  |    | 20 |   
|              | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |    | 20 |   
|              | Item 13. |  | Certain Relationships and Related Transactions                                        |  |    | 20 |   
|              | Item 14. |  | Principal Accounting Fees and Services                                                |  |    | 21 |   
|              | Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |    | 21 |   
|SIGNATURES    |          |  |                                                                                       |  |    |    | 49 | 
|EXHIBIT INDEX |          |  |                                                                                       |  | 50 |   





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FORWARD-LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K 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. These forward-looking statements include,
without limitation, statements in Item 1., Business, and Item 7.,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, regarding intent, belief or current expectations of the Company or
its officers with respect to, among other things, trends in the travel
industry, the Companys business and growth strategies, the Companys use of
technology, the continued use of travel management companies by clients, the
Companys ability to integrate acquired businesses, and fluctuations in the
Companys quarterly results of operations.

Forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include factors affecting the travel industry
generally, competition, the ability of the Company to successfully integrate
the operations of existing or acquired companies, and a variety of factors such
as war with Iraq, recession, weather conditions and concerns for passenger
safety that could cause a decline in travel demand, as well as the risk factors
set forth in Item 1. Business  Risk Factors, and other factors as may be
identified from time to time in the Companys filings with the Securities and
Exchange Commission or in the Companys press releases.




PART I




Item 1.Business

Overview

Ambassadors International, Inc., a Delaware corporation, is a travel
services Company with subsidiaries currently operating in the businesses of (i)
developing, marketing and managing meetings and incentive programs for a
nationwide roster of corporate clients, utilizing incentive travel, merchandise
award programs and corporate meeting management services (the Performance
Group); (ii) providing comprehensive hotel reservation, registration and
travel services for meetings, conventions, expositions and trade shows (the
Services Group) and (iii) providing event portfolio management software
solutions (the Technology Group). The terms Company and we are used to
refer collectively to Ambassadors International, Inc. and its subsidiaries
through which our various businesses are conducted.

The Performance Group is comprised of the Companys wholly owned
subsidiary, Ambassadors Performance Group, LLC (APG), a 51% ownership
interest in Innovations In Marketing, LLC (IIM), and a 49% ownership interest
in Incentive Travel, LLC (ITI). On October 15, 2003, the Company sold its 51%
ownership interest in IIM to the minority owner. The Services Group is
comprised of the Companys wholly owned subsidiary, Ambassadors Services Group,
Inc. (ASG). The Technology Group is comprised of the Companys wholly owned
subsidiary, Ambassadors Technology Corporation (ATC) d.b.a. Ambassadors
Enterprise Services. In December 2003, the Company formed Cypress Reinsurance,
Ltd (Cypress Re) as a complement to its primary business. Cypress Re is a
specialty reinsurance company that takes selective reinsurance risks in
property and casualty insurance programs. In connection with these programs,
Cypress Re intends to market to the insureds the Performance Groups portfolio
of merchandise, incentive and debit card programs.

In 2004, the Company consolidated the Performance Group, the Services
Group and the Technology Group into one segment, called Ambassadors.

The Company was originally incorporated in the State of Washington in 1967
under the name International Ambassador Programs, Inc. to provide international
educational travel programs for students and professionals. The Company was
reincorporated in the State of Delaware in 1995 under the name Ambassadors
International, Inc. The Companys principal executive offices are located at
1071 Camelback Street, Newport Beach, California, 92660-3228 and its telephone
number is (949) 759-5900.

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Business Segments

Performance Group

The Performance Group develops, markets and manages performance
improvement programs for a nationwide roster of clients. In January 1996, the
Company completed the acquisition of The Helin Organization and commenced
operations of the Performance Group. In December 1996, the Company acquired
Bitterman & Associates, Inc.; in September 1997, the Company acquired certain
of the assets of Debol & Associates; in February 1998, the Company acquired the
stock of Travel Incentives, Inc.; in May 1998, the Company acquired the stock
of Incentive Associates, Inc.; in March 2002, the Company acquired a 49%
ownership interest in ITI and in November 2002, the Company acquired a 51%
ownership interest in IIM. On October 15, 2003, the Company sold its 51%
ownership interest in IIM to the minority owner.

During 1999, pursuant to a restructuring plan, the component of the
Performance Group operations located in Minneapolis, Minnesota was closed, and
all finance and accounting functions were consolidated into the principal
executive offices located in Newport Beach, California.

The Performance Group offers services in performance improvement programs
and business meeting management services. The performance improvement programs
utilize debit cards, travel incentives and merchandise awards, designed to
achieve a multitude of specific corporate objectives, including but not limited
to achieving sales goals, improving productivity, and attracting and retaining
qualified employees. The business meeting management services assist clients in
planning, coordinating and producing business meetings and conferences. These
clients include both small and large businesses, including Fortune 1000
companies.

In offering performance improvement programs and business meeting
management services, the Performance Group follows a strategy aimed at
developing and implementing programs tailored to each clients objectives.
These programs are generally designed to increase revenues and profits for the
client. The Companys employees meet with the existing or potential clients to
determine their business objectives and their performance enhancement
opportunities. The Company then works with the client to determine the scope of
the program by identifying concepts and parameters to meet the objectives of
the incentive program. The Companys employees develop and customize services
for the clients that fall within the identified parameters. Program rules are
then developed that specifically address the campaign participants, key
wholesalers or dealers involved in the clients distribution channel.

The Performance Groups marketing team participates in various aspects of
a clients program development. The staff of creative writers and graphic
designers generally delivers promotional campaigns and materials that are
complete from concept through production, including design, printing,
collating, labeling and mailing. Also, the Company offers web based campaign
performance tracking systems, with which clients can follow the period results
of their programs, and determine and notify the incentive program winners.
Based on the program structure, awards can be in the form of merchandise,
travel, cash, recognition or any combination thereof. The Company then fulfills
the award through a program coordinator that finalizes each aspect of the
clients event and delivers the awards directly to the clients award winners.

Services Group

The Companys Services Group operates hotel reservation, registration, and
other services for conventions, tradeshows and large specialty events through
ASG. The Services Group commenced operations in 1998 through the acquisition of
two hotel reservation companies. Through the acquisition of another company in
1999, ASG added pre-registration and on-site registration services to its list
of services offered. Also during 1999, pursuant to a restructuring plan, the
component of the Services Groups operations located in Boston, Massachusetts
was consolidated with the operations in Atlanta, Georgia, and the finance and
accounting functions were consolidated into the principal executive offices
located in Newport Beach, California.

The Services Group provides comprehensive hotel reservation, registration,
and other services for large event planners. The contracts for these services
generally cover an annual meeting or event and may be for a term of one to
several years. The hotel services include negotiating hotel room blocks,
creating sub-blocks and fulfilling

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thousands of requests for hotel rooms for large citywide events. Hotel
reservation requests are received by mail, fax and telephone by the Companys
call center staff. The Services Group accepts reservation requests over the
internet, by e-mail and through proprietary technology utilizing the internet
to book hotel reservations. This technology also enables clients, attendees,
and hotel partners to obtain real-time reports and information over the
internet at any time.

The Services Group registration technology assists planners in
pre-registering attendees for multiple show events. The on-site registration
technology operates through an efficient distribution network with the
capability of registering thousands of attendees in a short period of time and
in several different locations. The Services Group also offers attendees and
event exhibitors various forms of lead retrieval systems.

Technology Group

The Technology Group provides enterprise wide control software which
allows marketers, meeting planners and tradeshow organizers to run efficient,
less costly events, while focusing on sales and marketing strategies and
results. In December 2002, ATC acquired certain of the assets and business of
Bluedot Virtual Event Organization, Inc. (such business and assets shall be
referred to herein as Bluedot Software unless the context otherwise
requires). Bluedot Software is a provider of event portfolio management
software solutions which provides software infrastructure of web based and
traditional business events to transform the customers events into key drivers
of revenue growth, enhanced customer experience and cost savings. Global
corporations and large associations in technology, financial services, media
and healthcare have used the Companys products to automate marketing events.

In December 2003, the Technology Group operations were consolidated into
the principal executive offices located in Newport Beach, California.

Education Group Spin-Off

On January 25, 2002, the Companys Board of Directors approved the
spin-off of its wholly owned subsidiary, Ambassadors Group, Inc. (AGI), by
declaring a special stock dividend to the stockholders of the Company and
distributing to them all of the outstanding shares of AGI. The stock dividend
was paid to the Companys stockholders of record as of February 4, 2002, and
was distributed to such shareholders after the close of business on February
28, 2002, the date that the spin-off was completed. Each stockholder of the
Company received one share of common stock of AGI for each share of common
stock owned in the Company. The distribution of AGIs common stock pursuant to
the spin-off was intended to be tax free to the Company and its stockholders.
The Company received a favorable Internal Revenue Service private letter ruling
to that effect. The trading of the common stock of AGI on the NASDAQ National
Market began on March 1, 2002 under the symbol EPAX.

The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing total
assets, liabilities, and stockholders equity by $34.8 million, $21.0 million
and $13.8 million, respectively.

Corporate Investments

The Company has a 20% minority investment in Grand Prix Tours, Inc.
(GPT), which provides packaged tours primarily to Formula One, Indy Car and
NASCAR races in the United States and internationally. GPT is the largest such
travel company in the United States.

The Company had a minority interest in GetThere.com, a company engaged in
the travel business via the internet. During 2000, the Company sold its
investment in GetThere.com and recognized a gain on the investment of
approximately $7.9 million.

In January 1999, the Company purchased a minority interest in a joint
venture that owns the capital stock of Scheduled Airlines Traffic Offices, Inc.
(SatoTravel). In June 2001, the Company sold its ownership stake in
SatoTravel to Navigant International, Inc. (Navigant) (Nasdaq: FLYR). The
Company received approximately $7.2 million in cash, approximately 237,000
shares of common stock of Navigant and recorded a gain of

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approximately $8.3 million in other income ($5.5 million net of income
taxes). The agreement also provided for an additional payment of cash and stock
to be paid to the Company if SatoTravel, as a subsidiary of Navigant, had
achieved certain revenue objectives by June 14, 2002. The additional payment
was disputed by Navigant and both parties agreed to arbitration to settle the
dispute. In June 2003, the arbitration was settled and the Company received
approximately $0.7 million in cash, net of arbitration related expenses, and
approximately 36,000 shares of common stock of Navigant. As of December 31,
2003, the Company recorded in other income the final component of the gain
consideration on the sale of this investment in the amount of approximately
$1.2 million ($0.7 million net of income taxes).

In October 2000, the Company purchased a minority interest in Milepoint,
Inc., a development stage internet company which enables customers to convert
accrued credits toward online purchasing. During the quarter ended December 31,
2001, the Company recorded a loss of approximately $400,000 to write off its
investment due to what the Companys management believed to be other than a
temporary decline in the market value of this investment. The recorded loss
represented the balance of this investment and thus, the Company has no future
financial exposure on this investment.

In March 2002, the Performance Group acquired a 49% ownership interest in
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.

In 2003, the Company invested 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. The
Company believes these investments will lead to additional strategic business
opportunities within the Performance Group. Subsequent to year end, these
investments were transferred to the Companys newly formed reinsurance company,
Cypress Re.

Business Strategy

Our strategy in the Performance Group and Services Group is to maintain
our quality standards while increasing our overall volume of business by
differentiating ourselves from our competitors and extending the array of
services offered. In the Technology Group, the acquisition of Bluedot Software
allowed us to provide all customers, no matter the size and budget of their
events, the operational and strategic advantages gained by using Bluedot
Softwares event management software. The Company believes that Bluedot
Software is a natural fit allowing it to cross-sell its software in the
Performance Group and Services Group.

We continue to pursue selective acquisitions of businesses in the travel,
performance improvement, leisure and service sectors that will increase
stockholder value.

Competition

The travel industry in general is highly competitive. In the meeting
management and incentives businesses many of our competitors are larger and
have greater resources. We believe that, although some potential clients will
focus on price alone, other clients will also be interested in the quality of
the programs developed and the excellent customer service provided. The Company
believes that its programs are not easily duplicated by its competitors.

The Services Group operates within a highly competitive, technical segment
of the travel industry. We compete with respect to price and service, and
believe our technology is a key element of our service.

The Company believes the barriers to entry are relatively low for any
future competitors. Additionally, certain organizations engaged in the travel
business have substantially greater financial, marketing and sales resources
than the Company. There can be no assurance that the Companys present or
future competitors will not exert significant competitive pressures on the
Company.

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Insurance

The Company maintains insurance coverage that it believes is adequate for
its business, including but not limited to a total of $20 million in coverage
for professional and general liability. The Company also maintains insurance
coverage on real property and personal property, and as required on leased
properties, on a replacement cost basis. The Company has not experienced
difficulty in obtaining adequate insurance coverage. There is no assurance that
the insurance maintained by the Company will be adequate in the event of a
claim, or that such insurance will continue to be available in the future.

Employees

On December 31, 2003, the Company employed 121 employees, of which 113
were full-time employees. Of the Companys full-time employees, 58 are located
in Newport Beach, California; 34 are located in Atlanta, Georgia; 8 are located
in San Rafael, California; and 13 are located in other individual offices
throughout the United States. The Company has full-time employees engaged in
marketing and sales and full-time employees in operations, administration and
finance. The Company also employs temporary labor on a periodic basis to assist
with its program fulfillment efforts due to the seasonal nature of the
Companys travel programs. None of the Companys employees are subject to
collective bargaining agreements or are represented by a union. The Company
believes that its labor relations are good.

Risk Factors

Travel Industry and Natural Occurrences

Substantially all of the Companys operations are directly associated with
the travel industry. As a result, the Companys operations are subject to
special risks inherent in doing business in that industry. Such risks include
the adverse effect on operations from war, terrorism, civil disturbances,
political instability, governmental activities and deprivation of contract
rights. Periods of instability or uncertainty surrounding the travel industry
may reduce the demand for the Companys programs and services and could have an
adverse effect on the Companys business and results of operations. The
repercussions of war with Iraq, terrorist attacks and the impact of regional
health epidemics similar to SARS are examples of events that could have an
adverse effect on the Companys operations. Demand for the Companys programs
and services may also be adversely effected by natural occurrences such as
hurricanes, earthquakes, epidemics and flooding in regions in which the Company
conducts its programs and provides its services.

General Economic Conditions

The Company derives a significant portion of its revenues directly or
indirectly from the travel industry. The travel industry, especially the
performance improvement and convention sectors, is sensitive to changes in
economic conditions. During general economic downturns and recessions,
companies tend to reduce or eliminate improvement programs and attendance at
conventions and trade shows. The travel industry is also highly susceptible to
unforeseen events, such as terrorism, fuel price escalation, travel-related
accidents, unusual weather patterns or other adverse occurrences. Any event
that results in decreased travel generally would have an adverse effect on the
Companys business, financial condition and results of operations.

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Cash, Cash Equivalents, and Available-for-Sale Securities

Cash, cash equivalents, and available-for-sale securities are exposed to
concentrations of credit risk. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such balances may
be in excess of the federal depository insurance limit or may be on deposit at
institutions that are not covered by this insurance. If such institutions were
to become insolvent during which time it held the Companys cash, cash
equivalents, or available-for-sale securities in excess of the insurance limit,
it would be necessary for the Company to obtain credit financing to operate its
programs.

Acquisitions and Expansion of Business

Part of the Companys business strategy is to acquire businesses that will
assist in the overall growth of the Company. The Company will be competing for
acquisition opportunities with other companies, many of which have greater name
recognition, marketing support and financial resources, which may result in a
diminished number of acquisition opportunities available to the Company and
higher acquisition prices. No assurance can be given that the Company will be
able to identify, pursue or acquire any targeted businesses. In addition, if
any targeted businesses are acquired, there can be no assurance that the
Company will be able to profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial costs,
delays and/or other operational or financial problems.

If the Company enters into any significant acquisition for cash, a
substantial portion of the Companys available cash could be used in order to
consummate any such acquisition. The Company may also seek to finance such
acquisitions through debt or equity financings. There can be no assurance that
such financings will be available at all or on terms acceptable to the Company.
If consideration for an acquisition includes equity securities, the Companys
stockholders could experience dilution.

Acquisitions involve a number of special risks in addition to those
described above. These risks include the diversion of managements attention to
the assimilation of the operations and personnel of the acquired businesses,
the potential loss of key employees of acquired companies, potential exposure
to unknown liabilities of acquired companies, adverse effects on the Companys
reported operating results due to acquisition costs and expenses associated
with integrating and assimilating the operations of the acquired businesses. No
assurance can be given that any acquisitions by the Company will or will not
occur, or that if an acquisition does occur, that it will not have an adverse
effect on the Company or that any such acquisition will be successful in
enhancing the Companys business.

To properly manage its expansion through potential acquisitions, the
Company will be required to expend significant management and financial
resources. There can be no assurance that the Companys systems, procedures and
controls will be adequate to support the Companys operations as they expand,
without additional capital and resource expenditures. There can also be no
assurance that the Companys management will be able to manage its growth and
operate a larger organization efficiently or profitably. To the extent the
Company is unable to manage its growth efficiently and effectively or is unable
to attract and retain additional qualified management personnel, the Companys
business, financial condition and results of operations could be adversely
effected.

Seasonality  Fluctuations in Quarterly Results

The Companys businesses are seasonal. The Company recognizes program
related revenues and expenses in the month a program operates. Historically,
the majority of the Companys operating income has been recognized in the
second and third quarters; however, as a result of the spin-off of AGI, the
Company anticipates that the majority of its operating income will be
recognized in the first, second and fourth quarters. The Companys annual
results would be adversely affected if the Companys revenue were to be
substantially below seasonal norms during the first, second and fourth quarters
of the year. The Companys operating results may fluctuate as a result of many
factors, including the mix of programs and events, program destinations and
event locations, the introduction and acceptance of new programs and program
and event enhancements by the Company and its competitors, timing of program
and event operation, cancellation rates, competitive conditions in the
industry, marketing expenses, extreme weather conditions, timing of and costs
related to acquisitions, changes in relationships with certain travel
providers, economic factors and other considerations affecting the travel
industry. As a result of the foregoing, annual or

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quarterly operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Companys common stock
could be adversely affected.

Competition

The travel industry in general, and the performance improvement and
convention services sectors in particular, are highly competitive. The
Companys improvement programs and convention services compete with other
companies that provide similar programs and services. In addition, corporations
and associations themselves may choose to provide these programs and services
in-house. The Company believes the barriers to entry in each of the fields in
which it operates are relatively low. Certain of the Companys competitors have
substantially greater financial, marketing, and sales resources than the
Company. There can be no assurance that the Companys present competitors or
competitors that elect to enter the marketplace in the future will not exert
significant competitive pressures on the Company. Such competition could have
an adverse effect on the Company.

Casualty Losses

Due to the nature of the Companys business, the Company may be subject to
liability claims arising out of accidents or disasters causing injury to
participants or attendees to its programs or events, including claims for
serious personal injury or death. The Company believes that it has adequate
liability insurance coverage for such risks arising in the normal course of
business. Although the Company has never experienced a liability loss for which
it did not have adequate insurance coverage, there can be no assurance that
insurance coverage will be sufficient to cover one or more large claims or that
the insurance carrier will be solvent at the time of any covered loss. There
can be no assurance that the Company will be able to obtain sufficient
insurance coverage at acceptable premium levels in the future. Successful
assertion against the Company of one or a series of large uninsured claims, or
of one or a series of claims exceeding the Companys insurance coverage, could
have an adverse effect on the Companys business, financial condition and
results of operations.

Dependence on Travel Suppliers

In order to provide its services and products, the Company is dependent on
airlines, hotels and other suppliers of travel services. Consistent with
industry practices, the Company does not currently have any long-term
agreements with its travel suppliers that obligate such suppliers to sell
services or products through the Company. Restricted access to suppliers of
travel services and a reduction in capacity or changes in pricing arrangements
with travel suppliers could have an adverse effect on the Companys business,
financial condition and results of operations.

Dependence on Key Personnel

The Companys performance is substantially dependent on the continued
services and performance of its senior management and certain other key
personnel. The loss of the services of any of its executive officers or other
key employees could have an adverse effect on the Companys business, financial
condition and results of operations. The Company does not have any long-term
employment agreements with its executive officers. The Companys future success
also depends on its ability to identify, attract, hire, train, retain and
motivate other highly skilled managerial, operational, marketing and customer
service personnel. The failure to retain and attract necessary managerial,
operational, marketing and customer service personnel could have an adverse
effect on the Companys business, financial condition and results of
operations.

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports are available without
charge on our website, www.ambassadors.com/investor, as soon as reasonably
practicable after they are filed electronically with the SEC. We are providing
the address to our Internet site solely for the information of investors. We do
not intend the address to be an active link or to otherwise incorporate the
contents of the website into this report.

7



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##### Table of Contents






Item 2.Properties

The principal executive offices of the Company occupy approximately 27,000
square feet of office space in Newport Beach, California, pursuant to a lease
dated June 15, 1998, which expires in June 2005. The lease currently provides
for monthly rental payments of approximately $35,000. The Company subleases
approximately 2,000 square feet to a related party for approximately $3,400 per
month.

The Company occupies offices totaling approximately 18,100 square feet in
Atlanta, Georgia pursuant to a lease dated January 7, 2000, which expires in
July 2005. The lease currently provides for monthly rental payments of
approximately $24,000 per month.

The Company occupies office space totaling 3,300 square feet in San
Rafael, California pursuant to a lease dated December 9, 2003, which expires in
December 2004. The lease currently provides for monthly rental payments
approximating $5,000 per month.

The Company occupies office space totaling approximately 1,000 square feet
in Chicago, Illinois, with current monthly rental payments of approximately
$2,500. This lease can be cancelled with 90 days advance notice to the landlord
and is contracted on a month-to-month basis.

The Company leases office space totaling approximately 8,100 square feet
in San Francisco, California pursuant to a lease dated June 9, 2003, which
expires in December 2008. The lease currently provides for current monthly
rental payments of approximately $14,000. The Company may cancel the lease with
penalty in July 2006 upon nine months written notice. In December 2003, the
Company vacated the office space and is currently looking for a sublessee for
the location.

Management believes that its existing facilities are sufficient to meet
its present needs and anticipated needs for the foreseeable future. However,
additional facilities may be required in connection with future business
acquisitions.




Item 3.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 4.Submission of Matters to a Vote of Securities Holders

None.

8



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##### Table of Contents






PART II




Item 5.Market for Registrants Common Equity and Related Stockholder Matters

Stock Market and Other Information

The Companys common stock is traded and prices are quoted on the Nasdaq
National Market under the symbol AMIE. As of March 4, 2004, there were
approximately 37 holders of record of the Companys common stock not including
beneficial owners holding shares through nominee or street name.

The following table sets forth the high and low bid prices of a share of
the Companys common stock as quoted on the Nasdaq National Market for the
periods indicated:

|                                 |  |      |       |     |  |   |       | 
|-------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                 |  | High |       | Low
|                                 |  |      |       |    
|2003:                            |  |      |       |     |  |   |       | 
|Quarter ended March 31, 2003     |  | $    | 9.59  |     |  | $ | 8.27  | 
|Quarter ended June 30, 2003      |  |      | 12.50 |     |  |   | 8.85  | 
|Quarter ended September 30, 2003 |  |      | 12.78 |     |  |   | 10.11 | 
|Quarter ended December 31, 2003  |  |      | 13.60 |     |  |   | 10.85 | 
|2002:                            |  |      |       |     |  |   |       | 
|Quarter ended March 31, 2002 (1) |  | $    | 21.35 |     |  | $ | 7.75  | 
|Quarter ended June 30, 2002      |  |      | 10.15 |     |  |   | 8.06  | 
|Quarter ended September 30, 2002 |  |      | 10.24 |     |  |   | 7.95  | 
|Quarter ended December 31, 2002  |  |      | 9.10  |     |  |   | 8.00  | 



---

|(1) |  | The Company spun-off AGI effective February 28, 2002 (see Item 1
Business for further discussion). All prices before that date reflect
the stock price prior to the spin-off.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dividend Policy

Prior to 2003, the Company had not historically paid dividends except as a
result of the Companys gain from the sale of its investment in GetThere.com in
2000 in which the Company paid a cash dividend of $0.53 per share on the
Companys common stock to stockholders of record on February 28, 2001. This
dividend represented the per share gain recorded by the Company.

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. The first dividend of approximately $995,000 was
paid on October 2, 2003 to shareholders of record on September 17, 2003. The
second dividend of approximately $996,000 was paid on December 8, 2003 to
shareholders of record on November 24, 2003. On February 24, 2004, the Company
announced the third dividend to be 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.

Transfer Agent and Registrar

Mellon Investor Services, LLC serves as transfer agent and registrar of
the Companys common stock.

9



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##### Table of Contents



Equity Compensation Plan Information

|                                                           |  |                         |           |                   |  |                         |      |                     |  |            |         | 
|---------------------------------------------------------- |  | ----------------------- | --------- | ----------------- |  | ----------------------- | ---- | ------------------- |  | ---------- | ------- | 
|                                                           |  |                         |           |                   |  |                         |      |                     |  | (c)       
|                                                           |  |                         |           |                   |  |                         |      |                     |  | Number of 
|                                                           |  |                         |           |                   |  |                         |      |                     |  | securities
|                                                           |  |                         |           |                   |  | (b)                     |      | remaining available
|                                                           |  | (a)                     |           | Weighted-average  |  | for future issuance    
|                                                           |  | Number of securities to |           | exercise price of |  | under equity           
|                                                           |  | be issued upon exercise |           | outstanding       |  | compensation plans     
|                                                           |  | of outstanding options, |           | options, warrants |  | (excluding securities  
|Plan category                                              |  | warrants and rights     |           | and rights        |  | reflected in column(a))
|                                                           |  |                         |           |                   |  |                        
|Equity compensation
plans approved by
security holders     |  |                         | 1,232,593 |                   |  | $                       | 8.09 |                     |  |            | 452,560 | 
|Equity compensation
plans not approved
by security holders |  |                         |          |                   |  |                         |     |                     |  |            |        | 
|                                                           |  |                         |           |                   |  |                         |      |                     |  |            |         | 
|Total                                                      |  |                         | 1,232,593 |                   |  | $                       | 8.09 |                     |  |            | 452,560 | 
|                                                           |  |                         |           |                   |  |                         |      |                     |  |            |         | 




Item 6.Selected Financial Data

The following selected consolidated financial data of the Company is
presented as of and for the years ended December 31, 2003, 2002, 2001, 2000 and
1999. The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the spin-off, and accordingly,
previously reported results of operations of the Company have been restated to
reflect the results of AGI in discontinued operations. The selected financial
data should be read in conjunction with the Companys audited Consolidated
Financial Statements and the notes thereto, and Managements Discussion and
Analysis of Financial Condition and Results of Operations.

|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |        |  
|------------------------------------------------------ | ------------------------------------------------- | - | --------------------------------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ |  | - | ------- | ------ | -
|                                                       |                                                   |   | 2003                                          |        | 2002 |   | 2001   |        | 2000 |   | 1999   
|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |        
|                                                       |                                                   |   | (dollars in thousands, except per share data)
|Selected Consolidated Statements of Operations
Data:   |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|Revenues (A)                                           |                                                   | $ | 13,679                                        |        |      | $ | 14,695 |        |      | $ | 17,041  |        |   | $ | 18,411 |        |  | $ | 17,455  |       
|Operating expenses:                                    |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|                                                       | Cost of software and technology related sales     |   |                                               | 1,050  |      |   |        |       |      |   |         |       |   |   |        |       |  |   |         |       |  
|                                                       | Selling and tour promotion                        |   |                                               | 4,412  |      |   |        | 4,014  |      |   |         | 5,544  |   |   |        | 6,029  |  |   |         | 7,266  |  
|                                                       | General and administrative                        |   |                                               | 11,233 |      |   |        | 10,343 |      |   |         | 15,531 |   |   |        | 13,340 |  |   |         | 13,565 |  
|                                                       | Impairment loss and lease exit costs              |   |                                               | 891    |      |   |        |       |      |   |         |       |   |   |        |       |  |   |         |       |  
|                                                       | Restructuring and impairment of long-lived
assets |   |                                               |       |      |   |        |       |      |   |         | 12,803 |   |   |        |       |  |   |         | 8,107  |  
|Operating income (loss)                                |                                                   |   | (3,907                                        | )      |      |   | 338    |        |      |   | (16,837 | )      |   |   | (958   | )      |  |   | (11,483 | )     
|Income (loss) from continuing operations
before tax    |                                                   |   | (64                                           | )      |      |   | 2,877  |        |      |   | (4,535  | )      |   |   | 9,903  |        |  |   | (7,731  | )     
|Income (loss) from continuing operations, net
of tax   |                                                   |   | (1,017                                        | )      |      |   | 2,763  |        |      |   | (2,939  | )      |   |   | 6,437  |        |  |   | (4,938  | )     
|Income (loss) from discontinued operations,
net of tax |                                                   |   |                                              |        |      |   | (1,197 | )      |      |   | 10,437  |        |   |   | 11,289 |        |  |   | 6,777   |       
|Net income (loss)                                      |                                                   |   | (1,017                                        | )      |      |   | 1,566  |        |      |   | 7,498   |        |   |   | 17,726 |        |  |   | 1,839   |       
|Earnings (loss) per share  basic:                     |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|                                                       | Continuing operations                             |   | $                                             | (0.10  | )    |   | $      | 0.28   |      |   | $       | (0.30  | ) |   | $      | 0.68   |  |   | $       | (0.51  | )
|                                                       | Discontinued operations                           |   |                                               |       |      |   |        | (0.12  | )    |   |         | 1.08   |   |   |        | 1.18   |  |   |         | 0.70   |  
|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|                                                       | Net income (loss)                                 |   | $                                             | (0.10  | )    |   | $      | 0.16   |      |   | $       | 0.78   |   |   | $      | 1.86   |  |   | $       | 0.19   |  
|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|Earnings (loss) per share  diluted:                   |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|                                                       | Continuing operations                             |   | $                                             | (0.10  | )    |   | $      | 0.27   |      |   | $       | (0.30  | ) |   | $      | 0.66   |  |   | $       | (0.51  | )
|                                                       | Discontinued operations                           |   |                                               |       |      |   |        | (0.12  | )    |   |         | 1.05   |   |   |        | 1.17   |  |   |         | 0.70   |  
|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       
|                                                       | Net income (loss)                                 |   | $                                             | (0.10  | )    |   | $      | 0.15   |      |   | $       | 0.75   |   |   | $      | 1.83   |  |   | $       | 0.19   |  
|                                                       |                                                   |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |  |   |         |       

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|                                          |  |      |                                               |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|----------------------------------------- |  | ---- | --------------------------------------------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                          |  | 2003 |                                               | 2002 |  | 2001 |         | 2000 |  | 1999
|                                          |  |      |                                               |      |  |      |         |      |  |     
|                                          |  |      | (dollars in thousands, except per share data)
|Selected Consolidated Balance Sheet Data: |  |      |                                               |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                 |  | $    | 43,609                                        |      |  | $    | 46,910  |      |  | $    | 28,021  |  |  | $ | 38,071  |  |  | $ | 18,461  | 
|Total assets                              |  |      | 125,050                                       |      |  |      | 128,159 |      |  |      | 165,304 |  |  |   | 168,390 |  |  |   | 142,763 | 
|Long-term debt                            |  |      |                                              |      |  |      |        |      |  |      |        |  |  |   | 200     |  |  |   | 400     | 
|Long-term obligations                     |  |      | 449                                           |      |  |      | 81      |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total stockholders equity                |  |      | 112,690                                       |      |  |      | 115,016 |      |  |      | 126,240 |  |  |   | 121,871 |  |  |   | 108,269 | 



---

|(A) |  | Revenue is a function of travel and incentive related gross program
receipts less program pass through expenses, software and technology
related sales and license fees from equity investee. Travel and incentive
related program pass through expenses include all direct costs associated
with the Companys programs, including costs related to airfare, hotels,
meals, and ground transportation. Gross program receipts during the years
ended December 31, 2003, 2002, 2001, 2000 and 1999 were $38.6 million,
$47.0 million, $59.9 million, $63.9 million and $67.8 million,
respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations

General

On January 25, 2002, the Companys Board of Directors approved the
spin-off of its wholly owned subsidiary, AGI, by declaring a special stock
dividend to the stockholders of the Company and distributing to them all of the
outstanding shares of AGI. The stock dividend was paid to the Companys
stockholders of record as of February 4, 2002, and was distributed to such
shareholders after the close of business on February 28, 2002, the date that
the spin-off was completed. Each stockholder of the Company received one share
of common stock of AGI for each share of common stock owned in the Company. The
distribution of AGIs common stock pursuant to the spin-off was intended to be
tax free to the Company and its stockholders. The Company received a favorable
Internal Revenue Service private letter ruling to that effect. The trading of
the common stock of AGI on the NASDAQ National Market began on March 1, 2002
under the symbol EPAX.

The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing total
assets, liabilities, and stockholders equity by $34.8 million, $21.0 million
and $13.8 million respectively. Therefore, the following discussion is based
upon continuing operations.

In the years presented, the Company has been engaged primarily in (i)
developing, marketing and managing meetings and incentive programs, and (ii)
providing comprehensive hotel reservation, registration, and travel services
for meetings, conventions, expositions, and trade shows.

In March 2002, the Company acquired a 49% ownership interest in San Diego,
California based ITI and in November 2002, the Company acquired a 51% ownership
interest in Newport Beach, California based IIM, the cumulative effect of which
was to further expand the Companys Performance Group. On October 15, 2003,
the Company sold its 51% ownership interest in IIM to the minority owner.

In December 2002, the Companys wholly owned subsidiary, ATC, acquired
Bluedot Software. Bluedot Software is a provider of event portfolio management
software solutions. In December 2003, the Technology Group operations were
consolidated into the principal executive offices located in Newport Beach,
California.

The Companys businesses are seasonal. The Company recognizes travel and
incentive related program revenues and expenses in the month a program
operates. Historically, the majority of the Companys operating income has been
recognized in the second and third quarters; however, as a result of the
spin-off of AGI, the Company anticipates that the majority of its operating
income will be recognized in the first, second and fourth quarters.

11



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##### Table of Contents



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.

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 commences. 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 its
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 a straight-line basis over the period that the services are
provided.

In May 2003, the 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 our 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.

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 operations since their
respective dates of acquisition. The Company accounts for its equity
investments in accordance with Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46). FIN 46

12



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##### Table of Contents



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 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

The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.
SFAS No. 142 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 events or changes in circumstances indicate
that they may be impaired. Prior to fiscal 2002, goodwill was amortized using
the straight-line method over its estimated useful life. The Company
established reporting units based on its current reporting structure. For
purposes of testing goodwill for impairment, goodwill has been allocated to
these reporting units to the extent it related to each reporting unit. SFAS No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful lives and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The Company is currently amortizing its
acquired intangible assets with definite lives over periods ranging from 5 to 6
years.

As of December 31, 2003, the Company completed its annual impairment tests
and recorded approximately $573,000 to write off the unamortized balance of an
intangible asset, purchased software, and equipment related to the 2002 asset
purchase within the Technology Group. See Note 4 to the consolidated financial
statements for further discussion.

Deferred Income Taxes

The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and
liability approach which requires the recognition of deferred tax assets and
deferred tax liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. As more fully
described in Note 9 to the consolidated financial statements, as of December
31, 2003 the Company established a valuation reserve of approximately
$1,587,000 on the net deferred tax asset.

13



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##### Table of Contents



Results of Operations

The following table reflects certain income and expense items as a
percentage of revenue.

|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |      | 
|------------------------------------------------------------ | --------------------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | 
|                                                             |                                               |  | 2003  |      | 2002 |  | 2001 
|                                                             |                                               |  |       |      |      |  |      
|Revenues                                                     |                                               |  | 100.0 | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|Operating expenses:                                          |                                               |  |       |      |      |  |       |      |  |  |       |     
|                                                             | Cost of software and technology related sales |  |       | 7.7  |      |  |       |     |  |  |       |     | 
|                                                             | Selling and tour promotion                    |  |       | 32.3 |      |  |       | 27.3 |  |  |       | 32.6 | 
|                                                             | General and administrative                    |  |       | 82.1 |      |  |       | 70.4 |  |  |       | 91.1 | 
|                                                             | Impairment loss and lease exit costs          |  |       | 6.5  |      |  |       |     |  |  |       |     | 
|                                                             | Impairment of long-lived assets               |  |       |     |      |  |       |     |  |  |       | 75.1 | 
|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |     
|                                                             |                                               |  | 128.6 |      |      |  | 97.7  |      |  |  | 198.8 |     
|Operating income (loss)                                      |                                               |  | (28.6 | )    |      |  | 2.3   |      |  |  | (98.8 | )   
|Other income                                                 |                                               |  | 28.1  |      |      |  | 17.3  |      |  |  | 72.2  |     
|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |     
|Income (loss) from continuing operations before income taxes |                                               |  | (0.5  | )    |      |  | 19.6  |      |  |  | (26.6 | )   
|Provision (benefit) for income taxes                         |                                               |  | 6.9   |      |      |  | 0.8   |      |  |  | (9.4  | )   
|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |     
|Income (loss) from continuing operations                     |                                               |  | (7.4  | )    |      |  | 18.8  |      |  |  | (17.2 | )   
|Income (loss) from discontinued operations                   |                                               |  |      |      |      |  | (8.1  | )    |  |  | 61.2  |     
|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |     
|Net income (loss)                                            |                                               |  | (7.4  | )%   |      |  | 10.7  | %    |  |  | 44.0  | %   
|                                                             |                                               |  |       |      |      |  |       |      |  |  |       |     

Business Segment Information

The Company operated the Performance Group and Services Group segments
during 2003, 2002 and 2001. The Technology Group segment was added in December
2002. On February 28, 2002, the Company spun-off the Education Group and
recorded the effect of the transaction as a disposition of discontinued
operations. Corporate and Other consists of general corporate assets (primarily
cash and cash equivalents, investments and goodwill) and other activities which
are not directly related to the Performance, Services and Technology Groups. In
2003, Corporate and Other also includes Cypress Re as this segment was not a
stand alone reporting unit during the period. Selected financial information
related to these segments is as follows (in thousands):

|                                                                                                      |  |             |       |          |  |            |       |           |  |              |        |       |  |   |         |   |  |   |   |  |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----- | -------- |  | ---------- | ----- | --------- |  | ------------ | ------ | ----- |  | - | ------- | - |  | - | - |  |  | - | ------- | -
|                                                                                                      |  | Performance |       | Services |  | Technology |       | Corporate |  | Discontinued |        |       |  |  
|                                                                                                      |  | Group       |       | Group    |  | Group      |       | and Other |  | Operations   |        | Total
|                                                                                                      |  |             |       |          |  |            |       |           |  |              |        |      
|2003:                                                                                                 |  |             |       |          |  |            |       |           |  |              |        |       |  |   |         |   |  |   |   |  |  |   |         |  
|Revenues                                                                                              |  | $           | 7,609 |          |  | $          | 4,578 |           |  | $            | 1,492  |       |  | $ |        |   |  | $ |  |  |  | $ | 13,679  |  
|Depreciation and amortization
expense                                                                 |  |             | 783   |          |  |            | 254   |           |  |              | 176    |       |  |   | 36      |   |  |   |  |  |  |   | 1,249   |  
|Impairment loss and lease exit
costs                                                                  |  |             |      |          |  |            |      |           |  |              | 891    |       |  |   |        |   |  |   |  |  |  |   | 891     |  
|Operating income (loss)                                                                               |  |             | 86    |          |  |            | 289   |           |  |              | (2,348 | )     |  |   | (1,934  | ) |  |   |  |  |  |   | (3,907  | )
|Interest income (expense) and
dividend income                                                         |  |             | 125   |          |  |            | 34    |           |  |              | (18    | )     |  |   | 1,166   |   |  |   |  |  |  |   | 1,307   |  
|Gain on sale of
available-for-sale securities                                                         |  |             |      |          |  |            |      |           |  |              |       |       |  |   | 1,152   |   |  |   |  |  |  |   | 1,152   |  
|Equity in net income and
management fees received from
investments accounted for by
the equity method |  |             | 1,019 |          |  |            |      |           |  |              |       |       |  |   | 332     |   |  |   |  |  |  |   | 1,351   |  
|Income tax expense (benefit)                                                                          |  |             | 477   |          |  |            | 134   |           |  |              | (951   | )     |  |   | 1,293   |   |  |   |  |  |  |   | 953     |  
|Capital expenditures of
property, equipment, and
intangible assets                                    |  |             | 980   |          |  |            | 54    |           |  |              | 142    |       |  |   |        |   |  |   |  |  |  |   | 1,176   |  
|Goodwill                                                                                              |  |             | 542   |          |  |            |      |           |  |              |       |       |  |   | 6,275   |   |  |   |  |  |  |   | 6,817   |  
|Other intangibles                                                                                     |  |             | 2,194 |          |  |            |      |           |  |              |       |       |  |   |        |   |  |   |  |  |  |   | 2,194   |  
|Total assets                                                                                          |  |             | 6,729 |          |  |            | 952   |           |  |              | 144    |       |  |   | 117,225 |   |  |   |  |  |  |   | 125,050 |  

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|                                                                                                      |  |             |        |          |  |            |       |           |  |              |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ------ | -------- |  | ---------- | ----- | --------- |  | ------------ | --- | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                      |  | Performance |        | Services |  | Technology |       | Corporate |  | Discontinued |     |       |  |  
|                                                                                                      |  | Group       |        | Group    |  | Group      |       | and Other |  | Operations   |     | Total
|                                                                                                      |  |             |        |          |  |            |       |           |  |              |     |      
|2002:                                                                                                 |  |             |        |          |  |            |       |           |  |              |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 9,224  |          |  | $          | 5,471 |           |  | $            |    |       |  | $ |        |   |  | $ |       |   |  | $ | 14,695  |  
|Depreciation and amortization
expense                                                                 |  |             | 422    |          |  |            | 301   |           |  |              |    |       |  |   | 32      |   |  |   |       |   |  |   | 755     |  
|Operating income (loss)                                                                               |  |             | 1,545  |          |  |            | 496   |           |  |              | (88 | )     |  |   | (1,615  | ) |  |   |       |   |  |   | 338     |  
|Interest and dividend income                                                                          |  |             | 145    |          |  |            | 19    |           |  |              |    |       |  |   | 1,890   |   |  |   |       |   |  |   | 2,054   |  
|Equity in net income and
management fees received from
investments accounted for by
the equity method |  |             | 410    |          |  |            |      |           |  |              |    |       |  |   |        |   |  |   |       |   |  |   | 410     |  
|Income tax expense (benefit)                                                                          |  |             | 816    |          |  |            | 263   |           |  |              | (36 | )     |  |   | (929    | ) |  |   | (703   | ) |  |   | (589    | )
|Capital expenditures of
property, equipment, and
intangible assets                                    |  |             | 637    |          |  |            | 171   |           |  |              | 717 |       |  |   | 66      |   |  |   |       |   |  |   | 1,591   |  
|Goodwill                                                                                              |  |             | 542    |          |  |            |      |           |  |              |    |       |  |   | 6,275   |   |  |   |       |   |  |   | 6,817   |  
|Other intangibles                                                                                     |  |             | 1,754  |          |  |            |      |           |  |              | 607 |       |  |   |        |   |  |   |       |   |  |   | 2,361   |  
|Total assets                                                                                          |  |             | 13,992 |          |  |            | 2,857 |           |  |              | 784 |       |  |   | 110,526 |   |  |   |       |   |  |   | 128,159 |  
|2001:                                                                                                 |  |             |        |          |  |            |       |           |  |              |     |       |  |   |         |   |  |   |        |   |  |   |         |  
|Revenues                                                                                              |  | $           | 10,334 |          |  | $          | 6,707 |           |  | $            |    |       |  | $ |        |   |  | $ |       |   |  | $ | 17,041  |  
|Depreciation and amortization
expense                                                                 |  |             | 463    |          |  |            | 291   |           |  |              |    |       |  |   | 793     |   |  |   |       |   |  |   | 1,547   |  
|Operating income (loss) prior
to impairment of long-lived
assets                                      |  |             | 510    |          |  |            | 216   |           |  |              |    |       |  |   | (4,760  | ) |  |   |       |   |  |   | (4,034  | )
|Impairment of long-lived assets                                                                       |  |             |       |          |  |            |      |           |  |              |    |       |  |   | 12,803  |   |  |   |       |   |  |   | 12,803  |  
|Operating income (loss)                                                                               |  |             | 510    |          |  |            | 216   |           |  |              |    |       |  |   | (17,563 | ) |  |   |       |   |  |   | (16,837 | )
|Interest and dividend income                                                                          |  |             | 374    |          |  |            | 24    |           |  |              |    |       |  |   | 3,189   |   |  |   |       |   |  |   | 3,587   |  
|Compensation charge related to
the acceleration of vesting of
restricted stock                        |  |             |       |          |  |            |      |           |  |              |    |       |  |   | 2,072   |   |  |   |       |   |  |   | 2,072   |  
|Gain on sale of investment                                                                            |  |             |       |          |  |            |      |           |  |              |    |       |  |   | 8,306   |   |  |   |       |   |  |   | 8,306   |  
|Income tax expense (benefit)                                                                          |  |             | 290    |          |  |            | 129   |           |  |              |    |       |  |   | (2,015  | ) |  |   | 5,633  |   |  |   | 4,037   |  
|Capital expenditures of
property, equipment, and
intangible assets                                    |  |             | 716    |          |  |            | 2,233 |           |  |              |    |       |  |   | 7       |   |  |   | 882    |   |  |   | 3,838   |  
|Goodwill                                                                                              |  |             |       |          |  |            |      |           |  |              |    |       |  |   | 6,344   |   |  |   |       |   |  |   | 6,344   |  
|Total assets                                                                                          |  |             | 13,230 |          |  |            | 2,456 |           |  |              |    |       |  |   | 105,862 |   |  |   | 43,756 |   |  |   | 165,304 |  

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. Furthermore, Cypress Re will be reported
as a stand alone segment from Corporate and Other. Corporate and Other will
consist of general corporate assets (primarily cash and cash equivalents,
investments and goodwill) and other activities which are not directly related
to the Ambassadors or Cypress Re segments.

Comparison of Continuing Operations for the Year Ended December 31, 2003 to the
Year Ended
December 31, 2002

Revenue decreased to $13.7 million during 2003 from $14.7 million in 2002.
The decrease in revenue came from both the Performance Group and Services Group
and was partially offset by the inclusion of software and technology related
revenue from the Technology Group in 2003. The decrease in the Performance
Group was a result of fewer programs being operated in 2003 combined with an
overall decrease in program size due to corporate clients qualifying fewer
incentive winners and operating fewer business meetings. The decrease in the
Services Group was due to a lower number of registration events serviced, as
well as a decrease in the convention revenue retained.

We incurred cost of software and technology related sales in 2003 of $1.1
million related to the business acquired from Bluedot Software in the fourth
quarter of 2002. As there were no such sales in 2002, we did not incur this
cost in the prior year.

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Selling and tour promotion expenses increased to $4.4 million during 2003
from $4.0 million in 2002. The increase in selling and tour promotion expenses
was due to the addition of expenses related to the Technology Group and
additional sales personnel costs related to the Services Group. The increase in
these segment expenses was partially offset by lower personnel expenses in the
Performance Group.

General and administrative expenses increased during 2003 to $11.2 million
from $10.3 million in 2002. The increase in general and administrative expenses
resulted from the addition of expenses related to the Technology Group and the
amortization of intangible assets resulting from acquisitions conducted in 2002
in the Performance Group and the Technology Group.

In December 2003, we consolidated the operations of the Technology Group
into our corporate headquarters in Newport Beach, California in order to
improve operating efficiencies and reduce future costs. Accordingly, we
recorded a $0.9 million charge to write off the unamortized balance of the
intangible asset, purchased software, from the acquisition of Bluedot Software
in 2002, the write-down of assets, lease exit costs and employee relocation
expenses due to the closure of the San Francisco office. No such impairment
charge was recorded in 2002.

During 2003, we reported an operating loss of $3.9 million compared to
operating income of $0.3 million in 2002. Changes in operating income to an
operating loss from 2002 to 2003 are the result of changes as described above.

Other income in 2003 totaled $3.8 million in comparison to $2.5 million
during 2002. Other income during 2003 consisted primarily of $1.3 million in
interest income generated by cash, cash equivalents, and available-for-sale
securities, $1.2 million from the final component of contingent consideration
received on the sale of SatoTravel and $1.4 million resulting from income and
service fees earned on unconsolidated equity investments. Other income during
2002 consisted primarily of $2.0 million in interest income generated by cash,
cash equivalents, and available-for-sale securities and $0.5 million resulting
from income and service fees earned on an equity investment. The decrease in
interest income is due to the decrease in cash, cash equivalents and
available-for-sale securities from $106.7 million at December 31, 2002 to
$105.3 million at December 31, 2003 combined with lower investment yields.

The effective tax rate for 2003 was significantly higher than the U.S.
statutory rate due to recording approximately $1.6 million to establish a
valuation allowance against net federal and state deferred tax assets.

Loss from continuing operations was $1.0 million in 2003 compared to
income of $2.8 million in 2002. The changes between the two years were the
result of changes as described above.

Comparison of Continuing Operations for the Year Ended December 31, 2002 to the
Year Ended
December 31, 2001

Revenue decreased to $14.7 million during 2002 from $17.0 million in 2001.
The decrease in the Performance Group was a result of fewer programs being
operated in 2002 combined with an overall decrease in program size due to
corporate clients qualifying fewer incentive winners and operating fewer
business meetings. The decrease in the Services Group was due to a lower number
of convention events serviced, as well as a decrease in the participants at
conventions operated.

Selling and tour promotion expenses decreased to $4.0 million during 2002
from $5.5 million in 2001. The decrease in selling and tour promotion expenses
came from both the Performance Group and Services Group. The decrease resulted
from reduced headcount, salary reductions and lower commissions paid to sales
personnel due to lower business volume.

General and administrative expenses decreased during 2002 to $10.3 million
from $15.5 million in 2001. The decrease in general and administrative expenses
resulted from a stock compensation charge related to the acceleration of
vesting of restricted stock of $2.1 million recorded in 2001, lower personnel
costs in 2002 of approximately $1.8 million resulting from reduced headcount
and salary reductions taken in the fourth quarter of 2001 as a direct result of
the terrorist attacks on September 11, 2001, and the adoption of SFAS No. 142,
Goodwill

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and Other Intangibles effective January 1, 2002 which resulted in the
elimination of $0.8 million of goodwill amortization.

The impairment charge to the carrying value of long-lived assets of $12.8
million occurred during the fourth quarter of 2001 as a result of the impact to
operations of the terrorist attacks that occurred on September 11, 2001, the
response by the United States since October 7, 2001, the resulting negative
impact these events have had on domestic and international air travel and the
travel industry in general, and the slow down of the economy during 2001. This
impairment expense included the impairment charge for long-lived assets
associated with all segments of the Company. No such impairment charge was
recorded in 2002.

During 2002, we reported operating income of $0.3 million compared to an
operating loss of $16.8 million in 2001. Excluding the pre tax impairment
charge to the carrying value of long-lived assets of $12.8 million and the pre
tax stock compensation charge related to the acceleration of vesting of
restricted stock of $2.1 million, the operating loss would have been $1.9
million for 2001. Changes in operating income and loss from 2002 to 2001 are
the result of changes as described above.

Other income in 2002 totaled $2.5 million in comparison to $12.3 million
during 2001. Other income during 2002 consisted primarily of $2.0 million in
interest income generated by cash, cash equivalents, and available-for-sale
securities and $0.5 million resulting from income and service fees earned on an
equity investment. Other income during 2001 consisted primarily of $3.6 million
in interest income generated by cash, cash equivalents, and available-for-sale
securities, $0.4 million in management fees received on the SatoTravel
investment and an $8.3 million gain on the sale of the SatoTravel investment.
The decrease in interest income is due to the decrease in cash, cash
equivalents and available-for-sale securities from $135.3 million at December
31, 2001 to $106.7 million at December 31, 2002 as a direct result of the
spin-off of AGI on February 28, 2002, as well as lower investment yields.

Our effective income tax rate was 4% in 2002 compared to 35% in 2001. We
recorded an income tax provision of $0.1 million in 2002 compared to a tax
benefit of $1.6 million in 2001. The decrease in the effective tax rate for
2002 resulted from a high level of tax-exempt income in relation to operating
income and the revaluation of state deferred tax assets to a higher rate as
required by SFAS No. 109, Accounting for Income Taxes.

Income from continuing operations was $2.8 million in 2002 compared to a
loss of $2.9 million in 2001. Excluding the pre tax impairment charge to the
carrying value of long-lived assets of $12.8 million, pre tax stock
compensation charge related to the acceleration of vesting of restricted stock
of $2.1 million and the pre tax gain on sale of the Companys minority interest
in SatoTravel of $8.3 million, income from continuing operations would have
been $1.9 million for the year ended December 31, 2001. The changes between
years were the result of changes as described above.

Liquidity and Capital Resources

Our business is not capital intensive. However, we do 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 operations for the years ended December 31, 2003,
2002 and 2001, was $1.2 million, $0.6 million and $7.2 million, respectively.
The increase in cash flows from operations in 2003 versus 2002 is primarily due
to the effects of the non-cash charges recorded in 2003 related to the
amortization of the intangible assets, the impairment loss and lease exit costs
related to the Technology Group and the deferred tax asset valuation allowance,
which were partially offset by timing differences in the collection of current
assets and the payment of current liabilities.

Net cash provided by or (used in) investing activities for the years ended
December 31, 2003, 2002 and 2001 was ($2.8) million, $23.7 million and ($13.0)
million, respectively. The cash provided by investing activities for 2002
resulted from funding the distribution of the spin-off of AGI on February 28,
2002 and the Company holding a higher level of cash equivalents than in 2001
due to the relative indifference in investment yields. The cash used in
investing activities for 2003 was primarily due to the contingent payments and
residual purchases related to the 2002 business acquisitions of ITI and Bluedot
Software.

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We do not have any material capital expenditure commitments for 2004.

The terms of the Companys acquisition of Bluedot Virtual Event
Organization, Inc. included minimum contingent consideration of $100,000 to be
paid in 2003 and $60,000 to be paid in 2004. As of December 31, 2003, the
Company paid $100,000 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 December 31, 2003, the
Company accrued approximately $627,000 for the 2004 payment based upon 2003
income.

Net cash used in financing activities during 2003 totaled $1.7 million and
primarily relates to two $0.10 per share cash dividends paid to common
shareholders in 2003 and the purchase and retirement of 98,000 shares of
Companys common stock. These uses of cash were partially offset by the
proceeds received from the exercise of stock options. Net cash used in
financing activities during 2002 totaled $5.4 million and primarily related to
cash paid, net of liabilities assumed, as a dividend resulting from the
spin-off of AGI to the holders of the Companys common stock on February 28,
2002. Net cash used in financing activities during 2001 totaled $4.2 million
primarily and related to cash paid by the Company for a dividend to its
stockholders, repurchase and retirement of common stock and payments made on
debt obligations which was partially offset by proceeds from the exercise of
stock options. As of December 31, 2003, the Company had no long-term debt.

As of December 31, 2003, the Company had approximately $105.3 million of
cash and cash equivalents, and available-for-sale securities, including
participants deposits and deferred revenue of $8.4 million. Cash balances
could be reduced significantly if the financial institutions, which hold
balances beyond what is federally insured, become insolvent. Management
believes that existing cash and cash equivalents and cash flows from operations
will be sufficient to fund the Companys anticipated operating needs, capital
expenditures and acquisitions at least through 2004.

The Company has an 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. On
June 18, 2003, the 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 letter of credits. Subsequent to year end, these
investments were transferred to the Companys newly formed reinsurance company,
Cypress Re.

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 December 31, 2003, the Company has issued
approximately $458,000 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
during 2003 the Company repurchased 98,000 shares for approximately $833,000.
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. The first dividend of approximately $995,000 was
paid on October 2, 2003 to shareholders of record on September 17, 2003. The
second dividend of approximately $996,000 was paid on December 8, 2003 to
shareholders of record on November 24, 2003. On February 24, 2004, the Company
announced the third dividend to be paid on March 23, 2004 to shareholders of

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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. Disclosures about Contractual Obligations and Commercial Commitments The following table aggregates all contractual commitments and commercial
obligations that affect the Companys financial condition and liquidity
position as of December 31, 2003: Payments Due by Period(dollars in thousands)Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsContractual Obligations:Long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    2,290
    
    
    
    1,094
    
    
    
    996
    
    
    
    200
    
    
    
    Unconditional purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    449
    
    
    
    
    
    
    
    449
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    2,739
    
    
    $
    1,094
    
    
    $
    1,445
    
    
    $
    200
    
    
    $
    
 Off-Balance Sheet Transactions The Company does not maintain any off-balance sheet transactions,
arrangements, obligations or other relationships with unconsolidated entities
or others that are reasonably likely to have a material current or future
effect on the Companys financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk 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. The Companys available-for-sale securities included debt and marketable
equity securities of $57.9 million and $3.8 million, respectively, at December
31, 2003 and are subject to market risk. The potential change in the fair value
of these investments, assuming a 50 basis point increase in interest rates
relating to the debt securities and a 10% decline in price of the marketable
equity securities would be approximately $334,000 and $379,000, respectively. The following table represents principal cash flows from
available-for-sale debt securities outstanding as of December 31, 2003 by
contractual maturity date, and the relative fair value and average interest
rate (amounts in thousands, except interest rates): Expected Maturity DateDecember 31, 2003
    
    Year Ending December 31,Cost
    
    Fair Value
    
    2004
    
    2005Debt securities:State and political subdivisions
    
    $
    54,093
    
    
    $
    54,108
    
    
    $
    48,971
    
    
    $
    5,137Corporate bonds
    
    
    3,020
    
    
    
    3,038
    
    
    
    3,038
    
    
    
    57,113
    
    
    
    57,146
    
    
    
    52,009
    
    
    
    5,137Interest receivable
    
    
    752
    
    
    
    752
    
    
    
    684
    
    
    
    68Total debt securities
    
    $
    57,865
    
    
    $
    57,898
    
    
    $
    52,693
    
    
    $
    5,205Interest rate on debt securities
    
    
    
    
    
    
    1.48
    %
    
    
    1.48
    %
    
    
    1.38
    %
 19




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##### Table of Contents



Item 8.Financial Statements and Supplementary Data The Consolidated Financial Statements are listed in Item 15 and are
included herein on pages 24 through 47. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Information regarding the change in the Companys independent accountants
can be found in the Companys Current Report on Form 8-K filed on April 8,
2002, which is incorporated herein by reference. 
 Item 9A.Controls and Procedures (a) Evaluation of disclosure controls and procedures: As of December 31,
2003, 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 fiscal
year ended December 31, 2003, 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 III 
 Item 10.Directors and Executive Officers of the Registrant The information is incorporated by reference from the Registrants
definitive Proxy Statement for the fiscal year ended December 31, 2003 which is
expected to be filed with the Securities and Exchange Commission on or about
April 14, 2004. 
 Item 11.Executive Compensation The information is incorporated by reference from the Registrants
definitive Proxy Statement for the fiscal year ended December 31, 2003 which is
expected to be filed with the Securities and Exchange Commission on or about
April 14, 2004. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management The information is incorporated by reference from the Registrants
definitive Proxy Statement for the fiscal year ended December 31, 2003 which is
expected to be filed with the Securities and Exchange Commission on or about
April 14, 2004. 
 Item 13.Certain Relationships and Related Transactions The information is incorporated by reference from the Registrants
definitive Proxy Statement for the fiscal year ended December 31, 2003 which is
expected to be filed with the Securities and Exchange Commission on or about
April 14, 2004. 20




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##### Table of Contents



Item 14.Principal Accounting Fees and Services The information is incorporated by reference from the Registrants
definitive Proxy Statement for the fiscal year ended December 31, 2003 which is
expected to be filed with the Securities and Exchange Commission on or about
April 14, 2004. 
 Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    
    The following documents are filed as part of this Report:  (1)
    
    Consolidated Financial Statements: Report of Independent Auditors
    
    
    22Report of Independent Auditors
    
    
    23Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    24Consolidated Statements of Operations for the years ended December 31, 2003, 2002
and 2001
    
    
    25Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001
    
    
    26Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002, and 2001
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
  (2)
    
    Consolidated Financial Statement Schedules: Schedule II  Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002 and 2001
    
    
    48
  All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.  (3)
    
    Exhibits:  The exhibits listed on the accompanying Exhibit Index are filed as part of this Form 10-K.  (b)
    
    Reports on Form 8-K  (1)
    
    The Company filed a current report on Form 8-K on November 7, 2003 in connection with the
announcing a new Chief Executive Officer and Co-Chairman of the Board and declaring a
quarterly dividend.*(2)
    
    The Company filed a current report on Form 8-K on October 22, 2003 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 the 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. 21




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders
Ambassadors International, Inc. We have audited the accompanying consolidated balance sheets of Ambassadors
International, Inc. as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in stockholders equity, and
cash flows for the years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ambassadors
International, Inc. at December 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill and
other intangible assets. /s/ Ernst & Young LLP Irvine, California
February 13, 2004 22




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##### Table of Contents



Report of Independent Auditors Board of Directors and Stockholders
Ambassadors International, Inc. In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects the
results of operations and cash flows of Ambassadors International, Inc. and its
subsidiaries (the Company) for the year ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Portland, Oregon
February 7, 2002, except for Note 3, which is as of February 28, 2002 23




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##### Table of Contents



Ambassadors International, Inc.
Consolidated Balance Sheets (in thousands, except share data) December 31,2003
    
    2002Assets:Current assets:Cash and cash equivalents
    
    $
    43,609
    
    
    $
    46,910Available-for-sale securities
    
    
    61,685
    
    
    
    59,822Accounts receivable, net of allowance of $75 and $73 in 2003
and 2002, respectively
    
    
    2,132
    
    
    
    2,550Deferred income taxes
    
    
    477
    
    
    
    965Prepaid program costs and other current assets
    
    
    3,202
    
    
    
    2,472Total current assets
    
    
    111,105
    
    
    
    112,719Property and equipment, net
    
    
    1,010
    
    
    
    1,507Goodwill
    
    
    6,817
    
    
    
    6,817Other intangibles
    
    
    2,194
    
    
    
    2,361Deferred income taxes
    
    
    2,433
    
    
    
    4,146Other assets
    
    
    1,491
    
    
    
    609Total assets
    
    $
    125,050
    
    
    $
    128,159Liabilities:Current liabilities:Accounts payable
    
    $
    2,033
    
    
    $
    3,395Participants deposits
    
    
    8,100
    
    
    
    5,681Accrued and other expenses
    
    
    1,778
    
    
    
    3,986Total current liabilities
    
    
    11,911
    
    
    
    13,062Non-current participants deposits
    
    
    270
    
    
    
    81Other liabilities
    
    
    179
    
    
    
    Total liabilities
    
    
    12,360
    
    
    
    13,143Commitments 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;
9,969,875 and 9,916,614 shares issued and outstanding in 2003
and 2002, respectively
    
    
    100
    
    
    
    99Additional paid-in capital
    
    
    89,450
    
    
    
    88,940Retained earnings
    
    
    23,408
    
    
    
    26,416Accumulated other comprehensive loss
    
    
    (268
    )
    
    
    (439
    )Total stockholders equity
    
    
    112,690
    
    
    
    115,016Total liabilities and stockholders equity
    
    $
    125,050
    
    
    $
    128,159
 See Notes to Consolidated
Financial Statements. 24




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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Operations (in thousands, except per share data) Years Ended December 31,2003
    
    2002
    
    2001Revenues:Travel and incentive related
    
    $
    11,626
    
    
    $
    14,147
    
    
    $
    17,041Software and technology related sales
    
    
    1,492
    
    
    
    
    
    
    
    License fees from equity investee
    
    
    561
    
    
    
    548
    
    
    
    13,679
    
    
    
    14,695
    
    
    
    17,041Operating expenses:Cost of software and technology related sales
    
    
    1,050
    
    
    
    
    
    
    
    Selling and tour promotion
    
    
    4,412
    
    
    
    4,014
    
    
    
    5,544General and administrative
    
    
    11,233
    
    
    
    10,343
    
    
    
    15,531Impairment loss and lease exit costs
    
    
    891
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    12,80317,586
    
    
    
    14,357
    
    
    
    33,878Operating income (loss)
    
    
    (3,907
    )
    
    
    338
    
    
    
    (16,837
    )Other income:Interest and dividend income
    
    
    1,307
    
    
    
    2,054
    
    
    
    3,587Realized gain on sale of available-for-sale securities
    
    
    1,152
    
    
    
    
    
    
    
    8,306Other, net (Note 8)
    
    
    1,384
    
    
    
    485
    
    
    
    4093,843
    
    
    
    2,539
    
    
    
    12,302Income (loss) from continuing operations before income taxes
    
    
    (64
    )
    
    
    2,877
    
    
    
    (4,535
    )Provision (benefit) for income taxes
    
    
    953
    
    
    
    114
    
    
    
    (1,596
    )Income (loss) from continuing operations
    
    
    (1,017
    )
    
    
    2,763
    
    
    
    (2,939
    )Income (loss) from discontinued operations (net of income tax
expense (benefit) of $0, $(703) and $5,633, respectively)
    
    
    
    
    
    
    (1,197
    )
    
    
    10,437Net income (loss)
    
    $
    (1,017
    )
    
    $
    1,566
    
    
    $
    7,498Earnings (loss) per share  basic:Continuing operations
    
    $
    (0.10
    )
    
    $
    0.28
    
    
    $
    (0.30
    )Discontinued operations
    
    
    
    
    
    
    (0.12
    )
    
    
    1.08Net income (loss)
    
    $
    (0.10
    )
    
    $
    0.16
    
    
    $
    0.78Weighted-average common shares outstanding  basic
    
    
    9,912
    
    
    
    9,854
    
    
    
    9,642Earnings (loss) per share  diluted:Continuing operations
    
    $
    (0.10
    )
    
    $
    0.27
    
    
    $
    (0.30
    )Discontinued operations
    
    
    
    
    
    
    (0.12
    )
    
    
    1.05Net income (loss)
    
    $
    (0.10
    )
    
    $
    0.15
    
    
    $
    0.75Weighted-average common shares outstanding   diluted
    
    
    9,912
    
    
    
    10,162
    
    
    
    9,960
 See Notes to Consolidated
Financial Statements. 25




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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Changes in Stockholders Equity (in thousands, except share data) AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    OtherPaid-In
    
    Retained
    
    Unearned
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    Compensation
    
    Loss
    
    TotalBalance at December 31, 2000
    
    
    9,676,324
    
    
    $
    97
    
    
    $
    86,055
    
    
    $
    36,654
    
    
    $
    (1,336
    )
    
    $
    401
    
    
    $
    121,871Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,498
    
    
    
    
    
    
    
    
    
    
    
    7,498Other comprehensive loss:Foreign currency
translation, net of tax
benefit of $399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (741
    )
    
    
    (741
    )Marketable securities, net
of tax benefit of $435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (680
    )
    
    
    (680
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,077Stock options exercised
    
    
    155,779
    
    
    
    2
    
    
    
    1,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,934Stock grants vested
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    1,336
    
    
    
    
    
    
    
    2,072Stock retired
    
    
    (36,690
    )
    
    
    (1
    )
    
    
    (771
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (772
    )Tax benefit associated with
stock grants and exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )Additional consideration in
satisfaction of purchase price
contingencies
    
    
    17,588
    
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313Dividend payment on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,134
    )
    
    
    
    
    
    
    
    
    
    
    (5,134
    )Balance at December 31, 2001
    
    
    9,813,001
    
    
    
    98
    
    
    
    88,144
    
    
    
    39,018
    
    
    
    
    
    
    
    (1,020
    )
    
    
    126,240Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,566
    
    
    
    
    
    
    
    
    
    
    
    1,566Other comprehensive income:Foreign currency
translation included in
dividend paid upon
spin-off, net of taxes of
$163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340
    
    
    
    340Marketable securities, net
of taxes of $135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241
    
    
    
    241Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,147Stock options exercised
    
    
    97,389
    
    
    
    1
    
    
    
    599
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Issuance of stock
    
    
    44,224
    
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371Stock purchased and retired
    
    
    (38,000
    )
    
    
    
    
    
    
    (305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )Tax benefit associated with
stock grants and exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Stock dividend upon spin-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,168
    )
    
    
    
    
    
    
    
    
    
    
    (14,168
    )Balance at December 31, 2002
    
    
    9,916,614
    
    
    
    99
    
    
    
    88,940
    
    
    
    26,416
    
    
    
    
    
    
    
    (439
    )
    
    
    115,016Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,017
    )
    
    
    
    
    
    
    
    
    
    
    (1,017
    )Other comprehensive income:Marketable securities, net
of taxes of $83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    171Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (846
    )Stock options exercised
    
    
    151,261
    
    
    
    2
    
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,118Stock purchased and retired
    
    
    (98,000
    )
    
    
    (1
    )
    
    
    (832
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833
    )Tax benefit associated with
stock grants and exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226Dividends ($0.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,991
    )
    
    
    
    
    
    
    
    
    
    
    (1,991
    )Balance at December 31, 2003
    
    
    9,969,875
    
    
    $
    100
    
    
    $
    89,450
    
    
    $
    23,408
    
    
    $
    
    
    
    $
    (268
    )
    
    $
    112,690
 See Notes to Consolidated
Financial Statements. 26




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##### Table of Contents



Ambassadors International, Inc.
Consolidated Statements of Cash Flows (in thousands) Years Ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    (1,017
    )
    
    $
    1,566
    
    
    $
    7,498Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,249
    
    
    
    877
    
    
    
    2,466Deferred income tax provision (benefit)
    
    
    2,119
    
    
    
    1,641
    
    
    
    (7,267
    )Impairment loss and lease exit costs
    
    
    891
    
    
    
    
    
    
    
    Write-down of intangible assets
    
    
    
    
    
    
    
    
    
    
    18,010Write-down of other investments
    
    
    
    
    
    
    
    
    
    
    730Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    2,072Gain on sale of available-for-sale securities
    
    
    (1,152
    )
    
    
    
    
    
    
    (8,306
    )Unrealized gain on foreign currency exchange contracts
    
    
    
    
    
    
    
    
    
    
    (1,565
    )Undistributed earnings from equity investments
    
    
    (1,116
    )
    
    
    (251
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (70
    )Change in assets and liabilities, net of effects of business
acquisitions and dispositions:Accounts receivable
    
    
    418
    
    
    
    2,055
    
    
    
    (341
    )Prepaid program costs and other current assets
    
    
    (504
    )
    
    
    1,281
    
    
    
    1,689Other assets
    
    
    234
    
    
    
    57
    
    
    
    Accounts payable and accrued expenses
    
    
    (2,481
    )
    
    
    (2,218
    )
    
    
    1,071Current and non-current participants deposits
    
    
    2,608
    
    
    
    (4,440
    )
    
    
    (8,831
    )Net cash provided by operating activities
    
    
    1,249
    
    
    
    568
    
    
    
    7,156Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    50,977
    
    
    
    106,089
    
    
    
    94,225Purchase of available-for-sale securities
    
    
    (51,435
    )
    
    
    (81,474
    )
    
    
    (111,573
    )Proceeds from the sale of other investments
    
    
    
    
    
    
    
    
    
    
    7,205Purchase of other investments
    
    
    (1,934
    )
    
    
    (173
    )
    
    
    (320
    )Cash paid for acquisitions of subsidiaries, net of cash received
    
    
    (121
    )
    
    
    (308
    )
    
    
    (1,454
    )Purchase of property and equipment
    
    
    (348
    )
    
    
    (404
    )
    
    
    (1,141
    )Proceeds from sale of property and equipment
    
    
    17
    
    
    
    
    
    
    
    24Net cash provided by (used in) investing activities
    
    
    (2,844
    )
    
    
    23,730
    
    
    
    (13,034
    )Cash flows from financing activities:Distribution resulting from spin-off of subsidiary
    
    
    
    
    
    
    (5,299
    )
    
    
    Payments on note payable
    
    
    
    
    
    
    (200
    )
    
    
    (200
    )Proceeds from exercise of stock options
    
    
    1,118
    
    
    
    395
    
    
    
    1,934Purchase and retirement of common stock
    
    
    (833
    )
    
    
    (305
    )
    
    
    (772
    )Dividends paid on common stock
    
    
    (1,991
    )
    
    
    
    
    
    
    (5,134
    )Net cash used in financing activities
    
    
    (1,706
    )
    
    
    (5,409
    )
    
    
    (4,172
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,301
    )
    
    
    18,889
    
    
    
    (10,050
    )Cash and cash equivalents, beginning of year
    
    
    46,910
    
    
    
    28,021
    
    
    
    38,071Cash and cash equivalents, end of year
    
    $
    43,609
    
    
    $
    46,910
    
    
    $
    28,021Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    5
    
    
    $
    14Cash paid for income taxes
    
    
    352
    
    
    
    798
    
    
    
    10,296
 See Notes 2 and 11 for non-cash investing and financing activities. See Notes to Consolidated
Financial Statements. 27




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements 1. Description of the Company and Summary of Significant Accounting Policies  The CompanyAmbassadors International, Inc. (the Company) is a travel services and
performance improvement company. The Companys operations are classified in
the following segments:  
    
    Ambassadors Performance Group(APG)    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.
    
    Ambassadors Services Group(ASG)    Provides comprehensive
hotel reservation, registration and travel services for meetings,
conventions, expositions and trade shows.
    
    Ambassadors Technology Group(ATC)    Develops, markets and
distributes event portfolio management technology solutions for
corporations and large associations.  The Company was founded in 1967 and was reincorporated in Delaware in 1995.
Ambassadors Group, Inc. (AGI) represented the entire operations of the
Company until 1996 when the Performance Group commenced operations. The
Services Group commenced operations in 1998 and the Technology Group
commenced operations in 2002.In December 2003, the Company formed Cypress Reinsurance, Ltd (Cypress Re)
as a complement to its primary business. Cypress Re is a specialty
reinsurance company that takes selective reinsurance risks in property and
casualty insurance programs. In connection with these programs, Cypress Re
intends to market to the insureds the Performance Groups portfolio of
merchandise, incentive and debit card programs.Basis of PresentationAs more fully described in Note 3, on January 25, 2002, the Companys Board
of Directors approved a spin-off distribution that separated the Company into
two publicly traded entities. The consolidated statement of cash flows for
all years presented and related information in the notes to consolidated
financial statements for the year ended December 31, 2001 include the effects
of discontinued operations on a consolidated basis, without separate
identification and classification of discontinued operations. Certain
reclassifications have been made to amounts in 2001 and 2002 to conform with
the 2003 presentation.Basis of ConsolidationThe accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated. The equity method of accounting is used for investment
ownership ranging from 20 percent to 50 percent. Investment ownership of less
than 20 percent is accounted for using the cost method.EstimatesThe preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in these consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates. 28




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  Credit RiskThe majority of trade accounts receivable are from large credit worthy
companies. Most programs are billed in advance and are normally collected
prior to program departure. The Company generally does not require
collateral. The Company maintains adequate reserves for potential credit
losses and such losses have been minimal and within managements estimates.The Company believes that its primary trade accounts receivable credit risk
exposure in the Performance Group is limited because the entire estimated
program costs are normally collected prior to program departure and customers
are largely credit worthy corporations. Final billings are issued after
program operation for costs in excess of the estimated program costs. The
Services Group bills its customers after hotel reservation, registration, and
travel services for meetings, conventions, expositions and trade shows have
operated. The Companys major trade accounts receivable are principally with
hotel chains and independent hotel owners. This segment is exposed to credit
risk in the event that the hotel operator cannot meet its obligations. The
Technology Group has contracts with major corporations that reflect when
payments are due based upon certain milestones or events occurring.Cash and Cash EquivalentsThe Company invests cash in excess of operating requirements in short-term
time deposits, money market instruments, government mutual bond funds and
other investments. Securities with maturities of three months or less at the
date of purchase are classified as cash equivalents.Available-for-Sale SecuritiesThe Company classifies its marketable investments as available-for-sale
securities. Available-for-sale securities consist of debt securities with
maturities beyond three months and equity securities, which are carried at
fair value.Unrealized gains and losses on available-for-sale securities are excluded
from operations and reported as accumulated other comprehensive loss, net of
deferred income taxes. Realized gains and losses on the sale of
available-for-sale securities are recognized on a specific identification
basis in the statement of operations in the period the investments are sold.Accumulated Other Comprehensive LossAccumulated other comprehensive loss is comprised of net unrealized losses on
marketable securities of $268,000 and $439,000, net of deferred income taxes,
at December 31, 2003 and 2002, respectively.Comprehensive Income (Loss)Comprehensive income (loss) refers to the aggregate of net income (loss) and
certain other revenues, expenses, gains and losses recorded directly as
adjustments to stockholders equity, net of tax.Other InvestmentsThe Company includes its minority investments in other operating companies as
other assets in the accompanying balance sheets. The cost of these minority
investments is allocated against the underlying fair value of the net assets
of the investee. Any cost of the investment over the Companys portion of the
underlying
fair value of the net assets of the investee is recorded as goodwill. The
Company accounts for its equity investments in accordance with Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires
identification of our participation in 29




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  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 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.Property and EquipmentProperty and equipment are stated at cost, net of accumulated depreciation.
Cost of maintenance and repairs which do not improve or extend the lives of
the respective assets are expensed as incurred. Major additions and
betterments are capitalized. Property and equipment are depreciated using the
straight-line method generally over 3 to 7 years. Leasehold improvements are
amortized over the lesser of the useful life or respective term of the lease.
The Company performs reviews for the impairment of property and equipment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. When property and equipment are sold or
retired, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in the statement of operations.Long-Lived Assets Including IntangiblesThe Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS
No. 142 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 events or changes in circumstances indicate that
they may be impaired. Prior to fiscal 2002, goodwill was amortized using the
straight-line method over its estimated useful life. The Company established
reporting units based on its current reporting structure. For purposes of
testing goodwill for impairment, goodwill has been allocated to these
reporting units to the extent it related to each reporting unit. 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 for further
discussion.The following table reconciles the Companys net income (loss) and earnings
(loss) per share from continuing operations as reported, to the amounts
adjusted for the exclusion of goodwill amortization, net of related income
tax effect for the period prior to the adoption of SFAS No. 142 (in
thousands, except per share data): Years Ended December 31,2003
    
    2002
    
    2001Income (loss) from continuing operations:As reported
    
    $
    (1,017
    )
    
    $
    2,763
    
    
    $
    (2,939
    )Goodwill amortization, net of tax
    
    
    
    
    
    
    
    
    
    
    495As adjusted
    
    $
    (1,017
    )
    
    $
    2,763
    
    
    $
    (2,444
    )Earnings (loss) per share    basicAs reported
    
    $
    (0.10
    )
    
    $
    0.28
    
    
    $
    (0.30
    )As adjusted
    
    
    (0.10
    )
    
    
    0.28
    
    
    
    (0.25
    )
 30




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued Years Ended December 31,2003
    
    2002
    
    2001Earnings (loss) per share  dilutedAs reported
    
    $
    (0.10
    )
    
    $
    0.27
    
    
    $
    (0.30
    )As adjusted
    
    
    (0.10
    )
    
    
    0.27
    
    
    
    (0.25
    )
  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 commences. 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 certificate 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 its
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 a straight-line basis over
the period that the services are provided.Revenue from license fees is recognized based on a contracted percentage of
total program receipts recorded from licensing sources.Selling and Tour Promotion ExpensesSelling and tour promotion costs are expensed as incurred.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. As more fully described in Note 9, in 2003 the Company established
a valuation reserve of approximately $1,587,000 on the net deferred tax
asset.Earnings (Loss) Per ShareBasic earnings per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by increasing the
weighted-average number of common shares outstanding by the additional common
 shares that would have been outstanding if the potentially dilutive common shares
had been issued. The dilutive effect of options outstanding is
reflected in dilutive earnings (loss) per share by application of the
treasury method. 31




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  Accounting for Stock OptionsThe Company has certain stock-based employee compensation plans, which are
more fully described in Note 11, Stock Plans. As permitted by SFAS No.
123, Accounting for Stock-Based Compensation, the Company accounts for
those 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 (loss) under the Companys application of APB
Opinion No. 25.The following table presents the effects on net income (loss) and earnings
(loss) 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): Years Ended December 31,2003
    
    2002
    
    2001Net income (loss), as reported
    
    $
    (1,017
    )
    
    $
    1,566
    
    
    $
    7,498Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (327
    )
    
    
    (937
    )
    
    
    (689
    )Net income (loss), pro forma
    
    $
    (1,344
    )
    
    $
    629
    
    
    $
    6,809Earnings (loss) per share    basicAs reported
    
    $
    (0.10
    )
    
    $
    0.16
    
    
    $
    0.78Pro forma
    
    
    (0.14
    )
    
    
    0.06
    
    
    
    0.71Earnings (loss) per share    dilutedAs reported
    
    $
    (0.10
    )
    
    $
    0.15
    
    
    $
    0.75Pro forma
    
    
    (0.14
    )
    
    
    0.06
    
    
    
    0.68
  The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2003, 2002, and 2001: 2003
    
    2002
    
    2001Dividend yield
    
    
    3.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    59
    %
    
    
    61
    %
    
    
    56
    %Risk free interest rates
    
    
    3.2
    %
    
    
    4.0
    %
    
    
    5.8
    %Expected option lives
    
    4.5 years
    
    4.5 years
    
    4.7 years
  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. The first dividend of approximately $995,000 was
paid on October 2, 2003 to shareholders of record on September 17, 2003. The
second dividend of approximately $996,000 was paid on December 8, 2003 to
shareholders of record on November 24, 2003.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. 32




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  Business SegmentsThe Company reports segment data based on the management approach which
designates the internal reporting used by management for making operating
decisions and assessing performance as the source of the Companys reportable
segments.Recent Accounting PronouncementsIn November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability for the fair value of an obligation for guarantees issued or
modified after December 31, 2002 be recorded in the financial statements of
the guarantor. Guarantees pre-existing before the implementation of FIN 45
are required to be disclosed in financial statements issued after December
15, 2002. The adoption of this interpretation did not have a material impact
on the Companys consolidated results of operations or financial position.In January 2003, the FASB issued FIN 46 and in December 2003, a revised
interpretation was issued (FIN No. 46(R). In general, a VIE is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a VIE to
be consolidated by a company if that company is designated as the primary
beneficiary. Application of FIN 46 is required in financial statements of
public entities that have interest in structures that are commonly referred
to as special-purpose entities (SPEs) for periods ending after December 15,
2003. Application by public entities, other than small business issuers, for
all other types of VIEs (i.e. non-SPEs) is required in financial statements
for periods ending after March 15, 2004. The adoption of FIN 46 did not and
will not have a material effect on the Companys financial position or
results of operations.In May 2003, the Emerging Issues Task Force issued EITF 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue generating activities; specifically, how to
determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting and how arrangement consideration should be
measured and allocated to the separate units of accounting in the
arrangement. EITF 00-21 does not change otherwise applicable revenue
recognition criteria. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
EITF 00-21 did not have a material effect on the Companys consolidated
results of operations or financial position.In December 2003, the SEC published Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104). SAB 104 was effective upon issuance and
supercedes SAB No. 101, Revenue Recognition in Financial Statements (SAB
101) and rescinds the accounting guidance contained in SAB 101 related to
multiple-element revenue arrangements that was superseded by EITF 00-21.
Additionally, SAB 104 rescinds portions of the interpretive guidance included
in Topic 13 of the codification of staff accounting bulletins. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 have remained largely unchanged.
The adoption of SAB 104 did not have a material effect on the Companys
consolidated results of operations or financial position. 33




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued 2. Business Acquisitions and Investments  In November 2002, the Performance Group acquired a 51% ownership interest in
Innovations In Marketing, LLC (IIM). IIM was a start-up performance
incentive and meeting management company which operated out of the Companys
corporate headquarters in Newport Beach, California. IIMs initial capital
consisted of $1,000 of which 51% was contributed by APG and 49% was
contributed by the minority owner. Members shared in IIMs gains and losses
in proportion to their membership interests. However, loss allocations to a
member were to be made only to the extent that such loss allocations would
not create a deficit capital account balance for that member greater than the
members share of the liquidation value of the company. The Operating
Agreement specified that APG may loan IIM up to $400,000 for the working
capital needs of the company during its first six months of operation.
Furthermore, the agreement stated that after the first six months of
operation the minority shareholder may loan IIM up to $100,000. Both loans
shall bear interest at a rate of 2% per year and shall be repaid by IIM prior
to any distributions of earnings being made to any IIM shareholder. The
outstanding balance on APGs loan to IIM as of December 31, 2002 was
approximately $176,000 which was eliminated in consolidation. 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, the Technology Group acquired certain of the assets and
business of Bluedot Virtual Event Organization, Inc. (Bluedot Software) out
of Chapter 11 bankruptcy. Bluedot Software, located in San Francisco,
California, develops, markets and distributes event portfolio management
solutions for corporations and large associations. The purchase price
consisted of debtor-in possession financing and other costs of $308,000, the
assumption of liabilities and future contingent payments to the sellers
covering the twenty-four months following the closing date. The Company
allocated the excess purchase price to an intangible asset, purchased
software, of $607,000. The amortization period for this intangible asset was
five years. During 2003, the Company provided an additional investment of
approximately $21,000 which was allocated to purchased software. As more
fully described in Note 4, in 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 December 31, 2003,
ATC had paid $100,000 for the first year minimum contingent payments and
recorded these payments as an adjustment to the purchase price.All of the above acquisitions have been accounted for using the purchase
method of accounting. The results of operations of these companies have been
included in other income in the consolidated statements of operations since
their respective dates of acquisition. The above amounts are based upon
certain assumptions and estimates which the Company believes are reasonable
and do not reflect any benefit from economies which might be achieved from
combined operations.In addition to the business acquisitions described above, the Company holds
minority investments in other operating companies. Other investments during
the periods presented in the accompanying balance sheets and statements of
operations include the following:  
    
    In October 1997, the Company purchased a 20% interest in a company,
which provides packaged tours primarily to Formula One, Indy Car and
NASCAR races. This investment is reported on the equity method.
    
    In January 1999, the Company purchased a minority interest in a joint
venture that owns the capital stock of Scheduled Airlines Traffic
Offices, Inc. (SatoTravel). In June 2001, the Company sold its
ownership stake in SatoTravel to Navigant International, Inc.
(Navigant) (Nasdaq: FLYR). The Company received approximately $7.2
million in cash, approximately 237,000 shares of common stock of
Navigant and 34




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  recorded a gain of approximately $8.3 million in other income ($5.5 million
net of income taxes). The agreement also provided for an additional payment
of cash and stock to be paid to the Company if SatoTravel, as a subsidiary
of Navigant, had achieved certain revenue objectives by June 14, 2002. The
additional payment was disputed by Navigant and both parties agreed to
arbitration to settle the dispute. In June 2003, the arbitration was
settled and the Company received approximately $0.7 million in cash, net of
arbitration related expenses, and approximately 36,000 shares of common
stock of Navigant. As of December 31, 2003, the Company recorded in other
income the final component of the gain consideration on the sale of this
investment in the amount of approximately $1.2 million ($0.7 million net of
income taxes).
    
    In October 2000, the Company purchased a minority interest in
Milepoint, Inc., a development stage internet company which enables
customers to convert accrued credits toward online purchasing. This
investment was reported at the lower of cost or estimated net realizable
value. During the quarter ended December 31, 2001, the Company recorded
a loss of approximately $400,000 which the Companys management believed
to be other than a temporary decline in the market value of this
investment. The recorded loss represented the balance of this investment
and thus, the Company has no future financial exposure on this
investment.
    
    In March 2002, the Performance Group 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 the Performance Group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. As of December 31, 2003, the Performance Groups
obligation related to ITIs fiscal 2003 results is estimated to be
approximately $627,000 which has been accrued and allocated to
intangible assets (license). License fees earned from ITI are included
in the operations of the Performance Group and represent approximately
$561,000 and $548,000 for the years ended December 31, 2003 and 2002,
respectively. The Company also recorded its proportional share of the
earnings and management fees from ITI of approximately $1,019,000 and
$410,000 for the years ended December 31, 2003 and 2002, respectively,
which are included in other income. At December 31, 2003 and 2002, the
Company had approximately $233,000 and $59,000, respectively, in
receivables related to license and management fees and approximately
$784,000 and $251,000, respectively, in undistributed earnings from ITI.
    
    The Company has an 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. On June 18, 2003, the 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 has recorded its proportional share of the income
from this investment of approximately $331,000 for the year ended
December 31, 2003 in other income. The Companys maximum exposure to
potential loss is approximately $2.1 million for the accident year ended
June 30, 2003 and $2.5 million for the accident year ending June 30,
2004, both of which include the issued letter of credits. Subsequent to
year end, these investments were transferred to the Companys newly
formed reinsurance company, Cypress Re.  At December 31, 2003 and 2002, the above other investments represented
approximately $1,278,000 and $413,000, respectively, and were included in
other assets in the accompanying balance sheets. 35




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued 3. Discontinued Operations  On January 25, 2002, the Companys Board of Directors approved the spin-off
of its wholly owned subsidiary, AGI, by declaring a special stock dividend to
the stockholders of the Company and distributing to them all of the
outstanding shares of AGI. The stock dividend was paid to the Companys
stockholders of record as of February 4, 2002, and was distributed to such
shareholders after the close of business on February 28, 2002, the date that
the spin-off was completed. Each stockholder of the Company received one
share of common stock of AGI for each share of common stock owned in the
Company. The distribution of AGIs common stock pursuant to the spin-off was
intended to be tax free to the Company and its stockholders. The Company
received a favorable Internal Revenue Service private letter ruling to that
effect. The trading of the common stock of AGI on the Nasdaq National Market
began on March 1, 2002 under the symbol EPAX.The spin-off of AGI was accounted for as a disposition of discontinued
operations as of February 28, 2002, the date of the dividend. The spin-off
impacted the Companys balance sheet on February 28, 2002 by reducing total
assets, liabilities, and stockholders equity by $34.8 million, $21.0 million
and $13.8 million respectively. The effect of the spin-off on the Companys
statements of operations for the years ended December 31, 2002 and 2001 are
reflected as discontinued operations.The revenues and income (loss) from discontinued operations before income
taxes are as follows (in thousands): Years Ended December 31,2003
    
    2002
    
    2001Revenue
    
    $
    
    
    
    $
    518
    
    
    $
    43,413Income (loss) from discontinued operations
before income taxes
    
    
    
    
    
    
    (1,900
    )
    
    
    16,070
  The Company entered into various agreements with AGI providing for the
separation of AGIs business operations from the Company. These agreements
also govern various interim and ongoing relationships.One of these agreements provided for a credit facility in which the Company
agreed to provide loans to AGI for certain purposes. AGI may borrow up to $20
million at any time with three days written notice to the Company. All monies
outstanding, including principal and interest, mature no later than August
31, 2003. All borrowings bear interest at the prime interest rate as reported
in the Wall Street Journal one business day after the request for a borrowing
is received by the Company. The credit facility expired in 2003 and contained
no borrowings upon expiration.The majority of AGIs travel programs take place outside of the United States
and most foreign suppliers require payment in currency other than the U.S.
dollar. Accordingly, AGI was exposed to foreign currency risk relative to
changes in foreign currency exchange rates between those currencies and the
U.S. dollar. As such, the Company had a program to provide a hedge against
certain of these foreign currency risks. The Company used forward contracts
which allowed the Company to acquire the foreign currency at a fixed price
for a specified period of time. Some of the Companys forward contracts
included a synthetic component if a pre-determined trigger occurs during the
term of the contract. All of the Companys derivatives at December 31, 2001
were cash flow hedges of forecasted transactions. The Company accounted for
these derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.The Company had a $50.0 million credit facility with a major financial
institution to support foreign currency purchases and foreign exchange
forward contracts. This credit facility was terminated upon the spin-off of
the Companys Ambassadors Group effective March 2002. Furthermore, subsequent
to the spin-off, the Company has not engaged in any derivative financial
instruments. 36




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued 4. Impairment Loss and Lease Exit Costs  In December 2003, the Company consolidated the operations of the Technology
Group into its corporate headquarters in Newport Beach, California in order
to improve operating efficiencies and reduce future costs. As discussed in
Note 1, the Company performed its annual impairment test on the Technology
Groups intangible asset, purchased software, and concluded that due to the
recent 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. At December 31,
2003, approximately $317,000 remained unpaid and is included in accounts
payable and other liabilities in the accompanying balance sheet. 5. Available-for-Sale Securities  At December 31, 2003 and 2002, the cost and estimated fair values of the
Companys investments in marketable equity securities and U.S. government and
agency obligations were as follows (in thousands): Gross
    
    Gross
    
    Fair Value/Unrealized
    
    Unrealized
    
    CarryingCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2003:Debt securities:State and political subdivisions
    
    $
    54,093
    
    
    $
    28
    
    
    $
    (13
    )
    
    $
    54,108Corporate bonds
    
    
    3,020
    
    
    
    18
    
    
    
    
    
    
    
    3,03857,113
    
    
    
    46
    
    
    
    (13
    )
    
    
    57,146Interest receivable
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    752Total debt securities
    
    
    57,865
    
    
    
    46
    
    
    
    (13
    )
    
    
    57,898Marketable equity securities
    
    
    4,269
    
    
    
    
    
    
    
    (482
    )
    
    
    3,787$
    62,134
    
    
    $
    46
    
    
    $
    (495
    )
    
    $
    61,685
 Gross
    
    Gross
    
    Fair Value/Unrealized
    
    Unrealized
    
    CarryingCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2002:Debt securities:State and political subdivisions
    
    $
    44,532
    
    
    $
    126
    
    
    $
    (1
    )
    
    $
    44,657Corporate bonds
    
    
    11,237
    
    
    
    42
    
    
    
    
    
    
    
    11,27955,769
    
    
    
    168
    
    
    
    (1
    )
    
    
    55,936Interest receivable
    
    
    961
    
    
    
    
    
    
    
    
    
    
    
    961Total debt securities
    
    
    56,730
    
    
    
    168
    
    
    
    (1
    )
    
    
    56,897Marketable equity securities
    
    
    3,795
    
    
    
    
    
    
    
    (870
    )
    
    
    2,925$
    60,525
    
    
    $
    168
    
    
    $
    (871
    )
    
    $
    59,822
  The following table represents the gross unrealized loss by date acquired as
of December 31, 2003 (in thousands): Less than
    
    Greater than12 Months
    
    12 Months
    
    TotalGross unrealized loss:State and political subdivisions
    
    $
    (13
    )
    
    $
    
    
    
    $
    (13
    )Marketable equity securities
    
    
    28
    
    
    
    (510
    )
    
    
    (482
    )$
    15
    
    
    $
    (510
    )
    
    $
    (495
    )
 37




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  As of December 31, 2003, the Company reviewed the available-for-sale debt and
equity securities concluding that the unrealized losses incurred are
considered to be temporary and are not impaired.As discussed in Note 2, the Company recorded realized gains related to its
investment in SatoTravel of approximately $1.2 million and $8.3 million for
the years ended December 31, 2003 and 2001, respectively. The Company also
realized a loss on its investment in Milepoint, Inc. of approximately
$400,000 for the year ended December 31, 2001 which is also discussed in Note
2. The Company recorded no realized gains or losses in 2002.The following table represents principal cash flows from available-for-sale
debt securities outstanding as of December 31, 2003 by contractual maturity
date and average interest rate (in thousands, except interest rates): Maturity DateYear Ending December31,2004
    
    2005Debt securities:State and political subdivisions
    
    $
    48,971
    
    
    $
    5,137Corporate bonds
    
    
    3,038
    
    
    
    52,009
    
    
    
    5,137Interest receivable
    
    
    684
    
    
    
    68Total debt securities
    
    $
    52,693
    
    
    $
    5,205Interest rate on debt securities
    
    
    1.48
    %
    
    
    1.38
    %
 6. Property and Equipment  Property and equipment consists of the following at December 31, 2003 and
2002 (in thousands): 2003
    
    2002Computer software and equipment
    
    $
    2,019
    
    
    $
    1,897Office furniture, fixtures and equipment
    
    
    1,894
    
    
    
    1,855Leasehold improvements
    
    
    638
    
    
    
    6784,551
    
    
    
    4,430Less accumulated depreciation and amortization
    
    
    (3,541
    )
    
    
    (2,923
    )$
    1,010
    
    
    $
    1,507
  Depreciation and amortization expense from continuing operations related to
property and equipment was approximately $756,000, $755,000 and $761,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.In 2003, the Company also incurred approximately $38,000 in additional
depreciation expense related to the write-off of equipment from the 2002
asset purchase within the Technology Group as described in Note 4. 38




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  7.
    
    Goodwill and Other IntangiblesGoodwill and other intangibles consists of the following at December 31, 2003
and 2002 (in thousands): 2003
    
    2002Goodwill
    
    $
    8,063
    
    
    $
    8,063Less accumulated amortization
    
    
    (1,246
    )
    
    
    (1,246
    )Goodwill, net
    
    $
    6,817
    
    
    $
    6,817Other Intangibles:License
    
    $
    2,561
    
    
    $
    1,754Purchased software
    
    
    628
    
    
    
    6073,189
    
    
    
    2,361Less accumulated amortization
    
    
    (995
    )
    
    
    Total other intangibles
    
    $
    2,194
    
    
    $
    2,361
  Due to the adoption of SFAS No. 142, there was no goodwill amortization for
the years ended December 31, 2003 and 2002. Amortization expense from
continuing operations related to goodwill was approximately $786,000 for the
year ended December 31, 2001. As of December 31, 2002, there was no
accumulated amortization on the license and purchased software as these
amounts were recorded at year end. As of December 31, 2003, the Company
recorded amortization expense of the license and purchased software of
approximately $367,000 and $126,000, respectively. As described in Note 4,
also included in accumulated amortization at December 31, 2003 is
approximately $502,000 related to the write off of the unamortized balance of
the purchased software.  The estimated aggregate amortization expense for other intangibles is
approximately $439,000 per year for fiscal years ended December 31, 2004
through December 31, 2008.  The Company increased other intangibles by approximately $807,000 related to
additional license fee contingent payments for the ITI investment and by
approximately $21,000 related to an additional investment that was allocated
to purchased software.  Goodwill associated with discontinued operations was approximately $700,000
with an accumulated amortization balance of approximately $630,000. The
Company increased goodwill by approximately $543,000 resulting from the
investment in ITI in March 2002. During 2001, the Company paid final
consideration for the Performance Group and Services Group acquisitions of
$1,763,000 and $930,000, respectively, which was allocated to goodwill.  Principally as a result of the impact of the terrorist acts that occurred on
September 11, 2001, the response by the United States since October 7, 2001,
and the resulting negative impact these events have had on domestic and
international air travel, and the travel industry in general, the Company
reviewed the carrying value of long-lived assets associated with certain of
its acquisitions. The Company recorded a non-cash charge of $12.8 million in
the fourth quarter of 2001, which represented the impairment of such
long-lived assets in the Corporate and Other business segment; goodwill and
other related intangible assets. This charge was based on the amount by which
the book value exceeded the current estimated fair market value of the
goodwill. The current estimated fair market value was determined primarily
using the anticipated cash flows of the operations of the related acquired
companies. 39




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  8.
    
    Other Income  Other income includes the following at December 31, 2003, 2002 and 2001
(in thousands): December 31,2003
    
    2002
    
    2001Other, net:Equity earnings and management fees
    
    $
    1,020
    
    
    $
    410
    
    
    $
    Allocable earnings from insurance contract
    
    
    331
    
    
    
    
    
    
    
    Other income (expense)
    
    
    33
    
    
    
    75
    
    
    
    409Total other, net
    
    $
    1,384
    
    
    $
    485
    
    
    $
    409
  9.
    
    Income Taxes  The income tax provision (benefit) included in the consolidated statements of
operations is as follows (in thousands): December 31,2003
    
    2002
    
    2001Current:Federal
    
    $
    (1,347
    )
    
    $
    (2,395
    )
    
    $
    10,722State
    
    
    (45
    )
    
    
    (280
    )
    
    
    581Total current
    
    
    (1,392
    )
    
    
    (2,675
    )
    
    
    11,303Deferred:Deferred
    
    
    758
    
    
    
    2,086
    
    
    
    (7,266
    )Valuation allowance for deferred tax assets
    
    
    1,587
    
    
    
    
    
    
    
    Total deferred
    
    
    2,345
    
    
    
    2,086
    
    
    
    (7,266
    )Total income tax provision (benefit)
    
    $
    953
    
    
    $
    (589
    )
    
    $
    4,037
  The income tax provision (benefit) applicable to continuing operations and
discontinued operations is as follows (in thousands): December 31,2003
    
    2002
    
    2001Provision for continuing operations:Current
    
    $
    (1,392
    )
    
    $
    (1,977
    )
    
    $
    3,726Deferred
    
    
    758
    
    
    
    2,091
    
    
    
    (5,322
    )Valuation allowance for deferred tax assets
    
    
    1,587
    
    
    
    
    
    
    
    Total provision for continuing operations
    
    
    953
    
    
    
    114
    
    
    
    (1,596
    )Provision for discontinued operations:Current
    
    
    
    
    
    
    (698
    )
    
    
    7,577Deferred
    
    
    
    
    
    
    (5
    )
    
    
    (1,944
    )Total provision for discontinued operations
    
    
    
    
    
    
    (703
    )
    
    
    5,633Total income tax provision (benefit)
    
    $
    953
    
    
    $
    (589
    )
    
    $
    4,037
 40




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  The reconciliation of U.S. statutory federal income tax expense to income tax
provision (benefit) on income (loss) from continuing operations is as follows
(in thousands): 2003
    
    2002
    
    2001Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Provision (benefit) at the federal
statutory rate
    
    $
    (22
    )
    
    
    35.0
    %
    
    $
    1,007
    
    
    
    35.0
    %
    
    $
    (1,587
    )
    
    
    35.0
    %Nondeductible goodwill amortization
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    151
    
    
    
    (3.3
    )Write-down of intangible assets
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    717
    
    
    
    (15.8
    )Valuation allowance for deferred tax assets
    
    
    1,587
    
    
    
    (2,479.7
    )
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0State income tax, net of federal benefit
    
    
    22
    
    
    
    (35.0
    )
    
    
    (512
    )
    
    
    (17.8
    )
    
    
    170
    
    
    
    (3.7
    )Tax exempt interest
    
    
    (436
    )
    
    
    681.3
    
    
    
    (556
    )
    
    
    (19.3
    )
    
    
    (991
    )
    
    
    21.9Other
    
    
    (198
    )
    
    
    309.4
    
    
    
    175
    
    
    
    6.1
    
    
    
    (56
    )
    
    
    1.2$
    953
    
    
    
    (1,489.0
    )%
    
    $
    114
    
    
    
    4.0
    %
    
    $
    (1,596
    )
    
    
    35.3
    %
  Components of the net deferred tax assets and liabilities are as follows (in
thousands): 2003
    
    2002Deferred tax assets:Accrued vacation and compensation
    
    $
    62
    
    
    $
    103Unrealized loss on marketable securities
    
    
    180
    
    
    
    591Amortization of intangible assets
    
    
    3,833
    
    
    
    4,064Allowance for billing reserve
    
    
    190
    
    
    
    184Other
    
    
    232
    
    
    
    169Total deferred tax assets
    
    
    4,497
    
    
    
    5,111Valuation allowance for deferred tax assets
    
    
    (1,587
    )
    
    
    Net deferred tax assets
    
    $
    2,910
    
    
    $
    5,111
  At December 31, 2003, the Company has a federal and state net operating loss
(NOL) carryforward of approximately $126,000 and $980,000, which begin to
expire in 2011 and 2008, respectively. Utilization of these losses may be
subject to an annual limitation due to ownership change constraints set forth
in the Internal Revenue Code of 1986 and similar state tax provisions.  The Company has federal AMT credit carryforwards of $213,000 which
carryforward indefinitely.  At December 31, 2003, the Company recorded a valuation allowance against its
net deferred tax assets of approximately $1,587,000. SFAS No. 109 requires
that a valuation allowance must be established when it is more likely than
not that all or a portion of deferred tax assets will not be realized. In
making such determination, a review of all available positive and negative
evidence must be considered, including scheduled reversal of deferred tax
liabilities, projected future taxable income, tax planning strategies, and
recent financial performance. In accordance with SFAS No. 109, the recent
decline in the Companys operating and taxable income and full utilization of
its available loss carrybacks represents sufficient negative evidence so as
to require the establishment of a partial valuation allowance. 41




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  10.
    
    Commitments and Contingencies  The Company leases office facilities and office equipment under
non-cancelable operating leases. The Companys obligations under
non-cancelable lease commitments end in 2008 and are as follows (in
thousands): Year Ending December 31,:2004
    
    $
    1,0942005
    
    
    6172006
    
    
    1872007
    
    
    1922008
    
    
    200$
    2,290
  Total rent expense from continuing operations for the years ended December
31, 2003, 2002 and 2001 was approximately $1,237,000, $1,024,000 and
$1,149,000 respectively. As described in Note 4, the Company incurred
approximately $304,000 of lease exit costs associated with the San Francisco,
California office of the Technology Group which represents lease obligations,
net of anticipated sublease income, beginning January 2004 and continuing
until the Company can exercise the early termination clause of the contract.  The Company entered into agreements to sublease office facilities in Newport
Beach, California and Boston, Massachusetts. Sublease rental income from
continuing operations for the years ended December 31, 2003, 2002 and 2001
was approximately $246,000, $187,000 and $353,000, respectively. Included in
the sublease income are amounts received from a related party of
approximately $40,000, $40,000 and $36,000 for each of the years ended
December 31, 2003, 2002 and 2001, respectively. Future minimum rental income
under the non-cancelable subleases is approximately $41,000 for the year
ended December 31, 2004 and is due from a related party.  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 December 31, 2003, the Company has issued
approximately $457,600 in letters of credit related to normal business
operations which expire at various dates through 2005.  The Company is subject to claims, suits and complaints, which have arisen in
the ordinary course of business. In the opinion of management and its legal
counsel, all matters are adequately covered by insurance or, if not covered,
are without merit or are of such a nature, or involve such amounts as would
not have a material effect on the financial position, cash flows or results
of operations of the Company.  11.
    
    Stock Plans  The Company adopted the 1995 Equity Participation Plan (the Plan) during
1995 and amended and restated the Plan in 2002, 1999 and 1998. The Plan
provides for the grant of stock options, awards of restricted stock,
performance or other awards or stock appreciation rights to directors, key
employees and consultants of the Company. The maximum number of shares which
may be awarded under the Plan is 2,200,000 shares. Awards cannot exceed
100,000 shares to any individual in a calendar year. Under the terms of the
Plan, options to purchase shares of the Companys common stock are granted at
a price set by the Compensation Committee of the Board of Directors, not to
be less than the par value of a share of common stock and if granted as
performance-based compensation or as incentive stock options, no less than
the fair market value of the stock on the date of grant. The Compensation
Committee establishes the vesting period of the awards. Vested options may be
exercised for a period up to 10 years from the grant date.In conjunction with the spin-off of AGI on February 28, 2002, the number of shares and exercise price of outstanding stock options were adjusted. As a
result of this adjustment, each option has the same ratio of exercise price
per share to market value per share and the same economic value. In order for
the economic value to 42




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  remain constant, the aggregate difference between market value and exercise
price immediately prior to and immediately after the spin-off had to be the
same. No new measurement date occurred upon modification of the stock
options.  Stock option transactions are summarized as follows: Weighted-Number of
    
    AverageShares
    
    Exercise PriceBalance, December 31, 2000
    
    
    1,064,387
    
    
    $
    14.12Granted
    
    
    233,850
    
    
    
    21.54Forfeited
    
    
    (145,097
    )
    
    
    13.86Exercised
    
    
    (155,779
    )
    
    
    12.41Balance, December 31, 2001
    
    
    997,361
    
    
    
    16.40Granted
    
    
    113,784
    
    
    
    8.12Spin-off conversion adjustment
    
    
    623,665
    
    
    
    N/ACanceled upon spin-off
    
    
    (381,839
    )
    
    
    13.97Forfeited
    
    
    (56,230
    )
    
    
    10.17Exercised
    
    
    (97,389
    )
    
    
    6.16Balance, December 31, 2002
    
    
    1,199,352
    
    
    
    7.40Granted
    
    
    224,900
    
    
    
    12.28Forfeited
    
    
    (40,398
    )
    
    
    7.72Exercised
    
    
    (151,261
    )
    
    
    7.31Balance, December 31, 2003
    
    
    1,232,593
    
    
    $
    8.09
 Weighted-Number of
    
    AverageShares
    
    Exercise PriceOptions exercisable at:December 31, 2001
    
    
    997,361
    
    
    $
    16.40December 31, 2002
    
    
    699,840
    
    
    
    7.36December 31, 2003
    
    
    743,465
    
    
    
    6.89
  The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2003: Wtd. Avg.
    
    
    
    
    
    
    
    
    
    Wtd. Avg.Number
    
    Remaining
    
    Wtd. Avg.
    
    Number
    
    Exercise PriceRange of
    
    Outstanding
    
    Contractual
    
    Exercise
    
    Exercisable
    
    of ExercisableExercise Price
    
    as of 12/31/03
    
    Life
    
    Price
    
    as of 12/31/03
    
    Options$2.93-$4.41
    
    
    199,522
    
    
    
    3.0
    
    
    $
    3.91
    
    
    
    199,522
    
    
    $
    3.91$4.42-$6.61
    
    
    288,372
    
    
    
    5.7
    
    
    
    5.50
    
    
    
    229,819
    
    
    
    5.53$6.62-$9.91
    
    
    373,966
    
    
    
    7.3
    
    
    
    8.43
    
    
    
    181,709
    
    
    
    8.41$9.92-$14.64
    
    
    370,733
    
    
    
    7.8
    
    
    
    12.00
    
    
    
    132,415
    
    
    
    11.681,232,593
    
    
    
    6.4
    
    
    $
    8.09
    
    
    
    743,465
    
    
    $
    6.89
  The weighted-average fair value of options granted during 2003, 2002 and 2001
was $5.19, $3.35 and $11.49, per share, respectively.  In addition to the stock options above, restricted stock awards were granted
during 2000 to five Company officers and directors aggregating
110,000 shares, at a weighted average price of $14.31. These awards were to fully
vest within the period from May 2003 to December 2004, provided the grantees
are employees, officers, or directors of the Company at that time. During December 2001, the vesting of
these restricted stock awards was accelerated at the direction of the Board
of Directors resulting in a new measurement date. The Company 43




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  incurred compensation expense of approximately $1,305,000, net of income
taxes, related to these stock grants during 2001.  12.
    
    Employee Benefit Plan  Effective January 1, 1993, the Company established a noncontributory profit
sharing plan that covers substantially all employees. During 1996, the assets
of the plan were transferred into a new 401(k) Profit-Sharing Plan (the
401(k) Plan). In connection with the spin-off in February 2002, AGI
established a separate 401(k) Profit Sharing Plan for the employees of AGI.
All of the assets associated with the employees of AGI were transferred from
the plan to AGIs new Plan. The transfer was completed on June 30, 2002 and
represented 88 participants and approximately $1,338,000 of Plan assets.  Employees are eligible to participate in the 401(k) Plan upon six months of
service and 21 years of age. Employees may contribute up to 92% of their
salary, subject to the maximum contribution allowed by the Internal Revenue
Service. The Companys matching contribution is discretionary based upon
approval by management. Employees are 100% vested in their contributions and
vest in Company matching contributions equally over four years. During the
years ended December 31, 2003, 2002 and 2001, the Company contributed
approximately $40,000, $40,000 and $82,000, respectively, to the 401(k) Plan.  13.
    
    Common Stock Repurchase Plan  In November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the
open market or through private transactions. This repurchase program is
ongoing and as of December 31, 2003, the Company has repurchased 751,500
   shares for approximately $8.7 million. During the year ended December 31,
2003, 98,000 shares for approximately $833,000 were repurchased.  14.
    
    Fair Value of Financial Instruments  The estimated fair values of the financial instruments as of December 31,
2003 and 2002 are as follows (in thousands): 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    43,609
    
    
    $
    43,609
    
    
    $
    46,910
    
    
    $
    46,910Available-for-sale securities
    
    
    61,685
    
    
    
    61,685
    
    
    
    59,822
    
    
    
    59,822Other investments
    
    
    1,278
    
    
    
    1,278
    
    
    
    413
    
    
    
    413
  The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale and/or
settlement have not been taken into consideration.  Cash and Cash Equivalents- The carrying value of cash and cash equivalents
approximates fair value due to the liquid nature of the cash investments.  Available-for-Sale Securities- The fair value of the Companys investment in
debt and marketable equity securities is based on quoted market prices.Other Investments- The carrying value of other investments approximates fair
value due to the amount consisting of undistributed earnings from equity
investees. 44




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  15.
    
    Earnings (Loss) Per Share  The following table presents a reconciliation of basic and diluted earnings
(loss) per share (EPS) computations and the number of dilutive securities
(stock options) that were included in the dilutive EPS computation (in
thousands). 2003
    
    2002
    
    2001Numerator:Net income (loss) for basic and diluted earnings per share
    
    $
    (1,017
    )
    
    $
    1,566
    
    
    $
    7,498Denominator:Weighted-average shares outstanding  basic
    
    
    9,912
    
    
    
    9,854
    
    
    
    9,642Effect of dilutive common stock options
    
    
    
    
    
    
    308
    
    
    
    208Effect of dilutive unvested restricted common stock
    
    
    
    
    
    
    
    
    
    
    110Weighted-average shares outstanding  diluted
    
    
    9,912
    
    
    
    10,162
    
    
    
    9,960
  At December 31, 2003, 2002 and 2001 there were approximately 147,000, 144,000
and 367,000 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. At
December 31, 2003 the effect of dilutive common stock options of 258,000
   shares have also been excluded from the weighted-average share calculation as
the effects of these shares are anti-dilutive.  16.
    
    Business Segments  The Company operated the Performance Group and Services Group segments during
2003, 2002 and 2001. The Technology Group segment was added in December 2002.
On February 28, 2002, the Company spun-off the Education Group and recorded
the effect of the transaction as a disposition of discontinued operations.
Corporate and Other consists of general corporate assets (primarily cash and
cash equivalents, investments and goodwill) and other activities which are
not directly related to the Performance, Services and Technology Groups. In
2003, Corporate and Other also includes Cypress Re as this segment was not a
stand alone reporting unit during the period. Selected financial information
related to these segments is as follows (in thousands): Performance
    
    Services
    
    Technology
    

    Corporate
    
    DiscontinuedGroup
    
    Group
    
    Group
    
    and Other
    
    Operations
    
    Total2003:Revenues
    
    $
    7,609
    
    
    $
    4,578
    
    
    $
    1,492
    
    
    $
    
    
    
    $
    
    
    
    $
    13,679Depreciation and
amortization expense
    
    
    783
    
    
    
    254
    
    
    
    176
    
    
    
    36
    
    
    
    
    
    
    
    1,249Impairment loss and lease
exit costs
    
    
    
    
    
    
    
    
    
    
    891
    
    
    
    
    
    
    
    
    
    
    
    891Operating income (loss)
    
    
    86
    
    
    
    289
    
    
    
    (2,348
    )
    
    
    (1,934
    )
    
    
    
    
    
    
    (3,907
    )Interest income (expense)
and dividend income
    
    
    125
    
    
    
    34
    
    
    
    (18
    )
    
    
    1,166
    
    
    
    
    
    
    
    1,307Gain on sale of
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152
    
    
    
    
    
    
    
    1,152Equity in net income and
management fees received
from investments accounted
for by the equity method
    
    
    1,019
    
    
    
    
    
    
    
    
    
    
    
    332
    
    
    
    
    
    
    
    1,351Income tax expense (benefit)
    
    
    477
    
    
    
    134
    
    
    
    (951
    )
    
    
    1,293
    
    
    
    
    
    
    
    953Capital expenditures of
property, equipment, and
intangible assets
    
    
    980
    
    
    
    54
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    1,176Goodwill
    
    
    542
    
    
    
    
    
    
    
    
    
    
    
    6,275
    
    
    
    
    
    
    
    6,817
 45




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##### Table of Contents



Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued Performance
    
    Services
    
    Technology
    
    Corporate
    
    DiscontinuedGroup
    
    Group
    
    Group
    
    and Other
    
    Operations
    
    TotalOther intangibles
    
    
    2,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,194Total assets
    
    
    6,729
    
    
    
    952
    
    
    
    144
    
    
    
    117,225
    
    
    
    
    
    
    
    125,0502002:Revenues
    
    $
    9,224
    
    
    $
    5,471
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    14,695Depreciation and amortization
expense
    
    
    422
    
    
    
    301
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    755Operating income (loss)
    
    
    1,545
    
    
    
    496
    
    
    
    (88
    )
    
    
    (1,615
    )
    
    
    
    
    
    
    338Interest and dividend income
    
    
    145
    
    
    
    19
    
    
    
    
    
    
    
    1,890
    
    
    
    
    
    
    
    2,054Equity in net income and
management fees received from
investments accounted for by
the equity method
    
    
    410
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410Income tax expense (benefit)
    
    
    816
    
    
    
    263
    
    
    
    (36
    )
    
    
    (929
    )
    
    
    (703
    )
    
    
    (589
    )Capital expenditures of
property, equipment, and
intangible assets
    
    
    637
    
    
    
    171
    
    
    
    717
    
    
    
    66
    
    
    
    
    
    
    
    1,591Goodwill
    
    
    542
    
    
    
    
    
    
    
    
    
    
    
    6,275
    
    
    
    
    
    
    
    6,817Other intangibles
    
    
    1,754
    
    
    
    
    
    
    
    607
    
    
    
    
    
    
    
    
    
    
    
    2,361Total assets
    
    
    13,992
    
    
    
    2,857
    
    
    
    784
    
    
    
    110,526
    
    
    
    
    
    
    
    128,1592001:Revenues
    
    $
    10,334
    
    
    $
    6,707
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,041Depreciation and amortization
expense
    
    
    463
    
    
    
    291
    
    
    
    
    
    
    
    793
    
    
    
    
    
    
    
    1,547Operating income (loss) prior
to impairment of long-lived
assets
    
    
    510
    
    
    
    216
    
    
    
    
    
    
    
    (4,760
    )
    
    
    
    
    
    
    (4,034
    )Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,803
    
    
    
    
    
    
    
    12,803Operating income (loss)
    
    
    510
    
    
    
    216
    
    
    
    
    
    
    
    (17,563
    )
    
    
    
    
    
    
    (16,837
    )Interest and dividend income
    
    
    374
    
    
    
    24
    
    
    
    
    
    
    
    3,189
    
    
    
    
    
    
    
    3,587Compensation charge related to
the acceleration of vesting of
restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,072
    
    
    
    
    
    
    
    2,072Gain on sale of investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,306
    
    
    
    
    
    
    
    8,306Income tax expense (benefit)
    
    
    290
    
    
    
    129
    
    
    
    
    
    
    
    (2,015
    )
    
    
    5,633
    
    
    
    4,037Capital expenditures of
property, equipment, and
intangible assets
    
    
    716
    
    
    
    2,233
    
    
    
    
    
    
    
    7
    
    
    
    882
    
    
    
    3,838Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,344
    
    
    
    
    
    
    
    6,344Total assets
    
    
    13,230
    
    
    
    2,456
    
    
    
    
    
    
    
    105,862
    
    
    
    43,756
    
    
    
    165,304
  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. Furthermore, Cypress Re will be
reported as a stand alone segment from Corporate and Other. Corporate and
Other will consist of general corporate assets (primarily cash and cash
equivalents, investments and goodwill) and other activities which are not
directly related to the Ambassadors or Cypress Re segments. 46




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Ambassadors International, Inc.Notes to Consolidated Financial Statements, Continued  17.
    
    Quarterly Financial Data (unaudited)  Summarized quarterly financial data for 2003 and 2002 is as follows (in
thousands, except per share data): Quarters EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2003:Revenues
    
    $
    4,245
    
    
    $
    3,633
    
    
    $
    2,973
    
    
    $
    2,828Net income (loss)
    
    
    388
    
    
    
    764
    
    
    
    (9
    )
    
    
    (2,160
    )Earnings (loss) per share  basic
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.00
    
    
    
    (0.22
    )Earnings (loss) per share  diluted
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.00
    
    
    
    (0.22
    )
 Quarters EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2002:Revenues
    
    $
    3,846
    
    
    $
    4,022
    
    
    $
    2,656
    
    
    $
    4,172Income from continuing operations
    
    
    576
    
    
    
    958
    
    
    
    171
    
    
    
    1,058Loss from discontinued operations
    
    
    (1,127
    )
    
    
    (70
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    (551
    )
    
    
    888
    
    
    
    171
    
    
    
    1,058Earnings (loss) per share  basicContinuing operations
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.02
    
    
    
    0.11Discontinued operations
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    (0.06
    )
    
    
    0.09
    
    
    
    0.02
    
    
    
    0.11Earnings (loss) per share  dilutedContinuing operations
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.02
    
    
    
    0.11Discontinued operations
    
    
    (0.11
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    (0.05
    )
    
    
    0.09
    
    
    
    0.02
    
    
    
    0.11
 47




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##### Table of Contents



Ambassadors International, Inc.Schedule II  Consolidated Valuation and Qualifying AccountsFor the Years Ended December 31, 2003, 2002 and 2001 Balance at
    
    
    
    
    
    Deductions,
    
    Balance atBeginning
    
    
    
    
    
    Recoveries
    
    End ofof Year
    
    Additions
    
    and Write-Offs
    
    YearDecember 31, 2003:Allowance for doubtful accounts receivable
    
    $
    72,704
    
    
    $
    4,773
    
    
    $
    (2,794
    )
    
    $
    74,683December 31, 2002:Allowance for doubtful accounts receivable
    
    $
    15,627
    
    
    $
    57,077
    
    
    $
    
    
    
    $
    72,704December 31, 2001:Allowance for doubtful accounts receivable
    
    $
    31,586
    
    
    $
    
    
    
    $
    (15,959
    )
    
    $
    15,627
 48




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##### Table of Contents



Signatures Pursuant to the requirements of Section 13 or 15(d) 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: March 12, 2004
    
    By:
    
    /s/ Joseph J. UeberrothJoseph J. Ueberroth,President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Joseph J. Ueberroth

Joseph J. Ueberroth
    
    President and
Chief Executive Officer
(Principal Executive Officer)

    
    March 12, 2004/s/ John A. Ueberroth

John A. Ueberroth
    
    Co-Chairman of the Board
of Directors
    
    March 12, 2004/s/ Peter V. Ueberroth

Peter V. Ueberroth
    
    Co-Chairman of the Board
of Directors
    
    March 12, 2004/s/ Brian R. Schaefgen

Brian R. Schaefgen
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 12, 2004/s/ Brigitte M. Bren

Brigitte M. Bren
    
    Director
    
    March 12, 2004/s/ James L. Easton

James L. Easton
    
    Director
    
    March 12, 2004/s/ Rafer L. Johnson

Rafer L. Johnson
    
    Director
    
    March 12, 2004/s/ John C. Spence

John C. Spence
    
    Director
    
    March 12, 2004/s/ Richard D.C. Whilden

Richard D.C. Whilden
    
    Director
    
    March 12, 2004
 49




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##### Table of Contents



ExhibitIndex2.1
    
    Form of Reincorporation Agreement (l)2.2
    
    Rescission Agreement (l)2.3
    
    Stock Purchase Agreement (l)2.4
    
    Redemption Agreement (l)3.1
    
    Certificate of Incorporation of Ambassadors International, Inc. (1)3.2
    
    By-Laws of Ambassadors International, Inc. (l)4.1
    
    Specimen Stock Certificate (l)10.1
    
    People to People Contract  Student Ambassador Program (l)10.2
    
    People to People Contract  Citizen Ambassador Program (l)10.3
    
    Form of Equity Participation Plan of Ambassadors International, Inc. (1)10.4
    
    Form of Registration Rights Agreement among the Company, John and Peter Ueberroth, and
certain other stockholders (l)10.5
    
    Form of Indemnification Agreement for officers and directors (1)10.6
    
    Commercial Lease dated December 21, 1992 between Portolese and Sample Investments and
International Ambassador Programs, Inc. (1)10.7
    
    First Amendment to Commercial Lease dated January 3, 1995 between Portolese and Sample
Investments and International Ambassador Programs, Inc. (l)10.8
    
    Form of Employment Agreement with Executive Officers (l)10.9
    
    Form of Note between the Company and the Ueberroths relating to the Distribution (l)10.10
    
    General Contract between People to People and M.L. Bright Associates dated July 1, 1995 and
Assignment documents to the Company dated February 6, 1996 (2)10.11
    
    Agreement and Plan of Merger, effective as of December 11, 1996 by and among Ambassadors
International, Inc., a Delaware corporation, Ambassadors Performance Improvement, Inc., a
Delaware corporation and wholly owned subsidiary of Ambassadors, Bitterman & Associates,
Inc., a Minnesota corporation, and Michael H. Bitterman (3)10.12
    
    Asset Purchase Agreement dated as of February 5, 1998 by and among the company, Ambassador
Performance Group, Inc., Rogal America, Co. and Andrew Rogal (4)10.13
    
    Lease dated December 20, 1996 between Rogal America, Inc. and Ark-Les Corp. (5)10.14
    
    Industrial Lease dated 1998 between the Company and the Irvine Company (5)10.15
    
    The Amended and Restated 1995 Equity Participation Plan of Ambassadors International, Inc. (6)10.16
    
    The Atlanta Merchandise Mart Lease Agreement dated April 17, 1998 by and between AMC, Inc.
and Destination, Inc. (6)10.17
    
    Agreement and Plan of Merger, dated May 22, 1998 by and among Ambassadors International,
Inc., Ambassador Performance Group, Inc., Incentive Associates, Inc., Wayne Wright and Russ
Medevic (7)10.18
    
    Asset Purchase Agreement, dated July 17, 1998 by and among Ambassadors International, Inc.,
Ambassador Performance Group, Inc., Destination, Inc. and Gregory S. Cunningham (8)10.19
    
    Lease dated July 24, 1998 by and between the Joseph Pell and Eda Pell Revocable Trust dated
August 19, 1989 and Ambassador Performance Group, Inc.(9)10.20
    
    The Amended and Restated 1995 Equity Participation Plan of Ambassador International, Inc., as
amended by the Companys Shareholders at the 1999 Annual Meeting of Shareholders held on May
14, 1999 (10)21.1
    
    Subsidiaries of Ambassadors International, Inc. (11)23.1
    
    Consent of Independent Auditors, Ernst & Young LLP (11)23.2
    
    Consent of PricewaterhouseCoopers LLP (11)
 50




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##### Table of Contents



ExhibitIndex31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 (11)31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 (11)32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (11)32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (11)
   (1)
    
    Filed as an exhibit of the same number to the Companys Registration
Statement on Form S-1 (Registration No. 33-93586), and incorporated herein
by reference.(2)
    
    Filed as an exhibit of the same number to the Companys Form 10-KSB for
the year ended December 31, 1995, and incorporated herein by reference.(3)
    
    Filed as Exhibit 2.5 to a Current Report on Form 8-K dated January 3,
1997, and incorporated herein by reference.(4)
    
    Filed as Exhibit 2.6 to a Current Report Form 8-K dated February 12, 1998
(as amended on Form 8-K/A dated April 2, 1998), and incorporated herein by
reference.(5)
    
    Filed as an exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, and incorporated herein by reference.(6)
    
    Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998, and incorporated herein by reference.(7)
    
    Filed as Exhibit 2.5 to a Current Report on Form 8-K, which was filed on
June 5, 1998, and incorporated herein by reference.(8)
    
    Filed as Exhibit 2.6 to a Current Report on Form 8-K, which was filed on
August 3, 1998, and incorporated herein by reference.(9)
    
    Filed as an exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and incorporated herein by reference.(10)
    
    Filed as Exhibit 4.1 to the Companys Registration statement on Form S-8
(Registration No. 333-81023) and incorporated herein by this reference.(11)
    
    Filed herewith. 51