##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
   FORM 10-K/A
 
 [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 OR [ ]
    
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the transition period from _______ to _________ Commission file number: 0-26420 AMBASSADORS INTERNATIONAL, INC.  Delaware
    
    91-1688605(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)1071 Camelback StreetNewport Beach, CA 92660
    
    92660(Address of Principal Executive Offices)
    
    (Zip Code)
   Registrants Telephone Number, Including Area Code: (949) 759-5900 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   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 23,
2004 was 10,007,978. 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 IIIItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSignaturesExhibit IndexEXHIBIT 23.1EXHIBIT 23.2EXHIBIT 23.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  EXPLANATORY NOTE We are filing this Amendment No. 1 on Form 10-K/A to Form 10-K, originally
filed with the Securities and Exchange Commission on March 12, 2004, solely for
the purpose of adding the audited financial statements of our significant
subsidiary, Incentive Travel, LLC. TABLE OF CONTENTS 
 PART III 
 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 of Ambassadors International, Inc.:Report of Independent Auditors
    
    
    1Report of Independent Auditors
    
    
    2Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    3Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
    
    
    4Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2003, 2002 and 2001
    
    
    5Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001
    
    
    6Notes to Consolidated Financial Statements
    
    
    7(2
    )
    
    Consolidated Financial Statement Schedules of Ambassadors International, Inc.:Schedule II  Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002 and 2001
    
    
    27All other schedules are omitted because they are not applicable or the required information
is shown in the consolidated financial statements or notes thereto.(3
    )
    
    Financial Statements of Incentive Travel, LLC:Report of Independent Auditors
    
    
    28Balance Sheet at December 31, 2003
    
    
    29Statement of Income for the year ended December 31, 2003
    
    
    30Statement of Changes in Members Equity for the year ended December 31, 2003
    
    
    31Statement of Cash Flows for the year ended December 31, 2003
    
    
    32Notes to Financial Statements
    
    
    33(4
    )
    
    Exhibits:The exhibits listed on the accompanying Exhibit Index are filed as part of this Form 10-K/A.(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.SIGNATURES
    
    
    37EXHIBIT INDEX
    
    
    38




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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 LLPIrvine, California
February 13, 2004
 1




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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 2




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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. 3




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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. 4




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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. 5




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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. 6




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements  1.
    
    Description of the Company and Summary of Significant Accounting Policies  The Company  Ambassadors 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. 7




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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 8




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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
    )
 9




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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. 10




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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 Declared  On September 2, 2003, the Board of Directors authorized a new dividend policy
paying shareholders $0.40 per share annually, distributable at $0.10 per
share on a quarterly basis. 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. 11




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  Business Segments  The 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. 12




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  2.
    
    Business Acquisitions and InvestmentsIn 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 13




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##### Table of Contents



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. 14




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##### Table of Contents



Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  3.
    
    Discontinued OperationsOn 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. 15




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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
    )
 16




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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. 17




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  7.
    
    Goodwill and Other Intangibles  Goodwill 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. 18




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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
 19




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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. 20




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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 PlansThe 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 21




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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 22




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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 PlanEffective 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 PlanIn November 1998, the Board of Directors of the Company authorized the
repurchase of the Companys common stock (up to an approved amount) in the
open market or through private transactions. This repurchase program is
ongoing and as of 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 InstrumentsThe 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. 23




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Ambassadors International, Inc.
Notes to Consolidated Financial Statements, Continued  15.
    
    Earnings (Loss) Per ShareThe 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 SegmentsThe 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
 24




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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. 25




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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
 26




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Ambassadors International, Inc.
Schedule II  Consolidated Valuation and Qualifying Accounts
For 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
 27




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REPORT OF INDEPENDENT AUDITORS Members of Incentive Travel, LLC We have audited the accompanying balance sheet of Incentive Travel, LLC as of
December 31, 2003, and the related statements of income, changes in members
equity, and cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis
for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Incentive Travel, LLC at
December 31, 2003, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States. /s/ Ernst & Young LLP
 Irvine, California
February 13, 2004 28




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Incentive Travel, LLC
Balance Sheet
As of December 31, 2003 (in thousands) Assets:Current assets:Cash and cash equivalents
    
    $
    1,193Accounts receivable
    
    
    783Prepaid program costs and other current assets
    
    
    503Total current assets
    
    
    2,479Property and equipment, net
    
    
    16Total assets
    
    $
    2,495Liabilities:Current liabilities:Accounts payable (including $395 to related parties; Note 3)
    
    $
    447Accrued and other expenses
    
    
    377Total liabilities
    
    
    824CommitmentsMembers equity:Members contribution
    
    
    71Undistributed earnings
    
    
    1,600Total members equity
    
    
    1,671Total liabilities and members equity
    
    $
    2,495
 See Notes to Financial Statements. 29




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##### Table of Contents



Incentive Travel, LLC
Statement of Income
For the Year Ended December 31, 2003 (in thousands) Revenue
    
    $
    3,474Operating expenses:Selling and tour promotion (including $584 to a related party; Note 3)
    
    
    603General and administrative (including $293 to related parties; Note 3)
    
    
    730License fees to a related party (Note 3)
    
    
    5611,894Operating income
    
    
    1,580Other income
    
    
    20Net income
    
    $
    1,600
 See Notes to Financial Statements. 30




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Incentive Travel, LLC
Statement of Changes in Members Equity (in thousands) AmbassadorsIncentive
    
    PerformanceTravel, Inc.
    
    Group, LLC
    
    TotalBalance at December 31, 2002
    
    $
    332
    
    
    $
    251
    
    
    $
    583Members earnings distributions
    
    
    (261
    )
    
    
    (251
    )
    
    
    (512
    )Net income
    
    
    816
    
    
    
    784
    
    
    
    1,600Balance at December 31, 2003
    
    $
    887
    
    
    $
    784
    
    
    $
    1,671
 See Notes to Financial Statements. 31




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Incentive Travel, LLC
Statement of Cash Flows
For the Year Ended December 31, 2003 (in thousands) Cash flows from operating activities:Net income
    
    $
    1,600Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    30Change in assets and liabilities:Accounts receivable
    
    
    (471
    )Prepaid program costs and other current assets
    
    
    1,167Accounts payable
    
    
    276Accrued and other expenses
    
    
    (2,694
    )Net cash used in operating activities
    
    
    (92
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (5
    )Cash flows from financing activities:Members earnings distribution
    
    
    (512
    )Net decrease in cash and cash equivalents
    
    
    (609
    )Cash and cash equivalents, beginning of year
    
    
    1,802Cash and cash equivalents, end of year
    
    $
    1,193
 See Notes to Financial Statements. 32




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Incentive Travel, LLC
Notes to Financial Statements  1.
    
    Description of the Company and Summary of Significant Accounting PoliciesThe CompanyIncentive Travel, LLC (the Company) is a travel services and performance
improvement company. The Company develops, markets and manages meetings and
incentive programs for a select roster of corporate clients utilizing
incentive travel and corporate meeting management services.The Company was formed in March 2002 through a partnership between Incentive
Travel, Inc. (ITI) and Ambassadors Performance Group LLC (APG). On March
29, 2002, APG purchased a 49% membership interest in the Company from ITI.
Both members share in the income and loss of the Company in accordance with
their ownership interest. On March 29, 2002, the Company also entered into
an Operating Agreement with APG and ITI and a License Agreement with APG.
The terms of both agreements expire on December 31, 2027.EstimatesThe preparation of these 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
financial statements and accompanying notes. Actual results could differ
materially from those estimates.Credit RiskCash and cash equivalents 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 and cash equivalents in excess
of the insurance limit, it would be necessary for the Company to obtain
credit financing to operate its programs.The 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 believes that its primary trade accounts receivable credit risk
exposure is limited because the entire estimated program costs are normally
collected prior to program departure and customers are credit worthy
corporations. Final billings are issued after program operation for costs in
excess of the estimated program costs.Cash and Cash EquivalentsThe Company invests cash in excess of operating requirements in short-term
time deposits and money market instruments. Securities with maturities of
three months or less at the date of purchase are classified as cash
equivalents.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. 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 income statement. 33




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Incentive Travel, LLC
Notes to Financial Statements, Continued  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.Three customers accounted for 47%, 32% and 14% of the Companys total
revenue, respectively.Selling and Tour Promotion ExpensesSelling and tour promotion costs are expensed as incurred.Income TaxesIncome taxes on income of the Company are payable by ITI and APG as the
Company is organized as a limited liability company. Therefore, no amounts
have been provided for income taxes in the accompanying financial statements.Comprehensive IncomeComprehensive income includes all changes in equity during a period except
those resulting from contributions by members and distributions to members,
such as net income, unrealized gains and losses on available-for-sale
securities, foreign currency translation adjustments, changes in the market
value of certain futures contracts, and changes in certain minimum pension
liabilities. Comprehensive income equals net income for the Company, as the
Company has no items of other comprehensive income to report.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. The Company operates under one business segment.Recent Accounting PronouncementsIn November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) 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, Consolidation of Variable Interest
Entities and in December 2003, a revised interpretation was issued (FIN No.
46(R)). In general, a variable interest entity (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, or SPEs, for periods ending after December 15, 2003. Application by
public entities, other than small business issuers, for all other types of
VIEs 34




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Incentive Travel, LLC
Notes to Financial Statements, Continued  (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 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.2.
    
    Capital ContributionsThe Companys initial capital consisted of approximately $71,000 of fixed
assets transferred to the Company by ITI. The Operating Agreement specifies
that no member shall be required to make additional capital contributions to
the Company. The terms of the Purchase Agreement for APGs membership
interest call for contingent payments through 2005 payable to ITI based upon
actual income before income taxes multiplied by APGs 49% ownership interest
calculated based on a predefined multiplier. Total payments to ITI related to
the Companys fiscal 2002 results were $2.5 million of which approximately
$542,000 was paid during 2002 and $1.9 million was paid during 2003. APGs
obligation related to the Companys fiscal 2003 results is estimated to be
approximately $627,000 which is anticipated to be paid in 2004 to ITI.3.
    
    Related Party TransactionsPursuant to the License Agreement, the Company shall pay a license fee to APG
for the use of the Ambassadors Performance Group name. This agreement will
terminate on December 31, 2027; however, APG may elect to terminate the
agreement at any time and for any reason, with or without cause. As of
December 31, 2003, the agreement has not been terminated. The fee for the
use of the license is based upon a contracted percentage of total program
receipts recorded by the Company. The Company incurred approximately
$561,000 in license fees.Pursuant to the Operating Agreement, the Company shall pay ITI a sales
commission based upon a contracted percentage of total program receipts for
the sale, marketing and management of corporate incentive services in the
United States for as long as ITI is a member of the Company. The Company
incurred approximately $584,000 in sales commissions which are included in
selling and tour promotion expenses in the accompanying statement of income.The Operating Agreement also contracts the Company to pay a management fee to
APG for the use of select services of the member, including but not limited
to accounting, human resource and certain management functions. Management
fees of approximately $235,000 were incurred by the Company and are included
in general and administrative expenses in the accompanying statement of
income.The Company had approximately $395,000 in payables for the above related
party license fee, management fee and sales commission.The Company also leases its primary office space from a related party on a
month to month basis. Total rent expense for 2003 was approximately $58,000.
Currently, the Company is not committed to any other rental expenses. 35




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Incentive Travel, LLC
Notes to Financial Statements, Continued  4.
    
    Property and EquipmentProperty and equipment consists of the following (in thousands): Computer software and equipment
    
    $
    136Office furniture, fixtures and equipment
    
    
    92228Less accumulated depreciation and amortization
    
    
    (212
    )$
    16
  Depreciation and amortization expense related to property and equipment was
approximately $30,000. 36




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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)March 29, 2004
    By:
    Date: /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 29, 2004/s/ John A. Ueberroth
John A. Ueberroth
    
    Co-Chairman of the Board
of Directors
    
    March 29, 2004/s/ Peter V. Ueberroth
Peter V. Ueberroth
    
    Co-Chairman of the Board
of Directors
    
    March 29, 2004/s/ Brian R. Schaefgen
Brian R. Schaefgen
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 29, 2004/s/ Brigitte M. Bren
Brigitte M. Bren
    
    Director
    
    March 29, 2004/s/ James L. Easton
James L. Easton
    
    Director
    
    March 29, 2004/s/ Rafer L. Johnson
Rafer L. Johnson
    
    Director
    
    March 29, 2004/s/ John C. Spence
John C. Spence
    
    Director
    
    March 29, 2004/s/ Richard D.C. Whilden
Richard D.C. Whilden
    
    Director
    
    March 29, 2004
 37




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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 (12)23.2
    
    Consent of PricewaterhouseCoopers LLP (12)
 38




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ExhibitIndex23.3
    
    Consent of Independent Auditors, Ernst & Young LLP (12)31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 (12)31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 (12)32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (12)32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (12)
   (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 as an exhibit to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, and incorporated herein by reference.(12)
    
    Filed herewith. 39