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UNITED STATES SECURITIES
AND EXCHANGE 
COMMISSION Washington, D.C. 20549
 Form 10-K þ
    
    ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004Oro
    

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromto
 Commission file number: 0-33347 Ambassadors Group, Inc.  Delaware
    
    91-1957010(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)Dwight D. Eisenhower Building110 S. Ferrall StreetSpokane, WA
    
    99202(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone
number, including area code: (509) 534-6200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 Par Value
(Title of Each Class)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.þ      Yeso      No




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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.þIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).þ      Yeso      No
 The aggregate market value of the voting stock held by non-affiliates of the registrant,
based upon the closing sales price of the Common Stock on the Nasdaq National Market on June 30,
2004, was $195,007,000. Shares of Common Stock held by each executive officer and director, and by
each entity that owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes. The number of shares of the registrants Common Stock outstanding as of February 22, 2005 was
10,132,160. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement relating to the 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the
extent stated herein.




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TABLE OF CONTENTS PagePART IItem 1. Business
    
    1Item 2. Properties
    
    9Item 3. Legal Proceedings
    
    9Item 4. Submission of Matters to a Vote of Security Holders
    
    9PART IIItem 5. Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    10Item 6. Selected Financial Data
    
    12Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    15Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    27Item 8. Financial Statements and Supplementary Data
    
    28Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    28Item 9A. Controls and Procedures
    
    28Item 9B. Other Information
    
    29PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    30Item 11. Executive Compensation
    
    30Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    30Item 13. Certain Relationships and Related Transactions
    
    30Item 14. Principal Accountant Fees and Services
    
    30PART IVItem 15. Exhibits, Financial Statement Schedules
    
    31Signatures
    
    II-1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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Forward-Looking Statements Statements contained in this Annual Report onForm 10-Kof Ambassadors Group, Inc. which
are not historical in nature, are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements that relate to expectations
concerning matters that are not historical facts. Words such as projects, believes,
anticipates, plans, expects, intends, and similar words and expressions are intended to
identify forward-looking statements. These forward-looking statements reflect our beliefs or
current expectations with respect to, among other things, trends in the travel industry, our
business and growth strategies, our use of technology, our ability to integrate acquired
businesses, and fluctuations in our results of operations. Forward-looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from anticipated results. These risks and uncertainties include
factors affecting the travel industry generally, competition, our ability to successfully integrate
the operations of existing or acquired companies, and a variety of factors such as conflict in Iraq
and the Middle East, periods of international unrest, the outbreak of disease, changes in the
direct-mail environment, recession, weather conditions and concerns for passenger safety that could
cause a decline in travel demand, as well as the risk factors set
forth in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations  Factors that may Affect
Operating Results, and other factors as may be identified from time to time in our filings with
the Securities and Exchange Commission or in our press releases. All forward-looking statements are
expressly qualified in their entirety by these factors and all related cautionary statements. We
do not undertake any obligation to update any forward-looking statements. 
 PART I 
 Item 1.Business OVERVIEW Our business has been active since Ambassadors International, Inc. (International) was
founded in 1967. Prior to February 28, 2002, Ambassadors was a wholly-owned subsidiary of
International. Effective February 28, 2002, we spun off from International by virtue of a special
stock dividend to Internationals stockholders of all of the outstanding shares of our Company that
International owned (the Distribution). Beginning March 1, 2002, Ambassadors operated as an
independent stand-alone company. Trading of Ambassadors Common Stock on the Nasdaq National
Market began on March 1, 2002 under the symbol EPAX. Our business consists of several specialized private-label educational travel programs,
including (i) the People to People Student Ambassador Programs (Student Ambassador Programs),
which provide opportunities for middle school and high school students to visit domestic and
foreign destinations to learn about the history, government, economy and culture of such countries,
(ii) the People to People Sports Ambassador Programs (Sports Ambassador Programs), which
provide opportunities for middle school and high school athletes to participate in international
sports challenges, (iii) the People to People Leadership Summit, People to People Future Leaders
Summit, and World Leadership Forum (Conference Programs), which provide domestic travel
experiences for grade school and high school students emphasizing leadership, community
involvement, and government education, and (iv) the People to People Ambassador Programs
(Professional Ambassador Programs), which provide foreign travel experiences for professionals,
with emphasis on meetings and seminars between participants and persons in similar professions
abroad. Since Internationals initial public offering in 1995, we expanded our operations
primarily through internal growth and two acquisitions of travel businesses. Since 1983, we have
organized programs for
more than 263,000 students, adults and athletes. Our educational travel programs feature
visits abroad, 1




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including, but not limited to, Antarctica, Australia, China, France, Germany, Great
Britain, Italy, South Africa, and New Zealand. In 2004, more than 31,000 participants traveled on
our programs to more than 35 countries on seven continents. We believe that our 38 years of continuous experience, relationships arising from
organizing travel programs, and our association with People to People International (People to
People) have provided the foundation for our Company. This foundation allows us to develop and
maintain strong strategic alliances and a competitive edge in the travel industry at a competitive
program cost. This foundation also allows us to provide high quality and unique educational
programs and customer service. We intend to grow our business internally through
marketing enhancements, new programs and strategic alliances, and may make selective acquisitions
of and joint agreements with travel-, education-, and direct marketing-related businesses. Our principal offices are located in Spokane, Washington. 2




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BUSINESS Ambassadors organizes and promotes educational travel programs for students,
professionals and athletes, principally using the People to People name. People to People
International (People to People) is a private, non-profit organization dedicated to the promotion
of world peace through cultural exchange. People to People was founded by President Dwight D. Eisenhower in 1956 and was originally
administered by the U.S. State Department. Eight U.S. Presidents since President Eisenhower have
served as honorary chairman of People to People, including President George W. Bush, who currently
holds that position. Mary Eisenhower, the president and chief executive officer of People to
People, also continues her grandfathers legacy by serving the organization. Ambassadors has the exclusive right to develop and conduct student programs for
kindergarten through high school students using the People to People name. We also have the
non-exclusive right to develop, market and operate programs for professionals, college students and
athletes using the People to People name. However, at the present time, Ambassadors is the only
entity that has been given this right by People to People. These rights, granted pursuant to
agreements with People to People, expire in 2010 and, at our election, may be extended through
2020. Student Ambassador Programs Our Student Ambassador Programs provide an educational opportunity for students in grade
school, middle school and high school to travel to one or more foreign countries or domestically,
to learn about the history, government, economy and culture of such countries. We market our
Student Ambassador Programs through a combination of direct mail and local informational meetings
from August through February. Representatives of the Company review candidate applications and
conduct selection interviews throughout the country. Accepted applicants participate in orientation
meetings to prepare for their educational travel program. Our Student Ambassador Program delegations depart during the summer months, June through
August, and generally travel for approximately 14 to 23 days, during which time each delegation
visits one or more countries. Each delegation generally consists of approximately 30 to 40 students
and several teachers who act as the delegations leaders, and local guides in each country assist
the delegations for the duration of each program. Teachers and students comprising a delegation
generally come from the same locale. Programs are designed by our staff of international planners and researchers to provide
an educational and entertaining travel experience by exposing students to the history, government,
economy and culture of the country or countries visited. In each country, we have contracts with
program coordinators to provide day-to-day oversight of the programs. Additionally, a local guide
trained by us accompanies the group throughout the duration of its program. In many instances, we
also provide students with the opportunity for a home stay (a brief stay with a host family), which
gives students a glimpse of daily life in the visited country. Students who complete certain written assignments and other projects can receive high
school and university credit for their participation in the program. Universities recognizing
academic credit include, but are not limited to, Stanford University, the University of California,
Los Angeles, the University of Washington, MIT (Mass Institute of Technology), Brown University,
Johns Hopkins University, Columbia University, Cornell University, Dartmouth College, and
Georgetown University. In addition, high school
students who successfully complete the program may be eligible to receive service learning
credits, which have become a high school graduation requirement in many curricula countrywide. 3




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Sports Ambassador Programs Our Sports Ambassador Programs provide an opportunity for student athletes in middle
school and high school to explore the host countrys culture and to participate in international
tournaments with teams from across the world in up to eight different sports. We market our Sports
Ambassador Programs through a combination of direct mail and local informational meetings during
the months of January to March. Interested athletes apply to the program and are interviewed by our
representatives, after which the selected athletes are accepted for the program. Participants in the Sports Ambassador Programs depart during the summer months, June
through August, and travel for approximately nine to 14 days. Teams are formed based on gender and
age, and most teams comprise athletes from several different states. During a three to four day
training camp, all athletes participate in an individual skill assessment, after which rosters are
formed to ensure balanced and competitive teams. After the formation of rosters, the rest of the
training camp focuses on team practice and fundamentals in preparation for the ensuing tournament
competition. In each tournament, we have contracts with overseas tournament organizers to provide
day-to-day oversight of the programs. Additionally, athletes are exposed to international culture
through educational excursions which we arrange. Athletes who complete certain written assignments and projects can receive high school
and university credit for their participation in the program. Universities recognizing academic
credit include, but are not limited, to Stanford University, the University of California, Los
Angeles and Georgetown University. All athletes who successfully complete the program are eligible
to receive service learning credits, which have become a high school graduation requirement in many
curricula countrywide. Conference Programs Our Conference Programs provide the opportunity for motivated students with academic promise,
leadership potential and a desire to serve their communities to travel domestically and
internationally to exchange ideas with renowned speakers, field specific experts, professional
educators and their peers. This program is specifically designed for students in middle school and
high school. In addition to the academic coursework, delegates engage in specially designed
team-building and leadership-building exercises. We market the Conference Programs through a direct mail marketing effort throughout the year.
Our Conference Programs also travel throughout the year for approximately seven to ten days. They
include group discussions, workshops, educational meetings and other social and recreational
activities. Programs originate from our internal marketing and research staff, who identify
academic topics, speakers and facilitators. Delegates traveling on these programs may receive transferable high school or university
credits as part of the academic program. Universities recognizing academic credit include, but are
not limited to, Stanford University, the University of California, Los Angeles, the University of
Washington, MIT (Mass Institute of Technology), Brown University, Johns Hopkins University,
Columbia University, Cornell University, Dartmouth College, and Georgetown University. In addition,
students who successfully complete the program may be eligible to receive service learning credits,
which have become a high school graduation requirement in many curricula countrywide. Professional Ambassador Programs Our Professional Ambassador Programs provide professionals with common interests the
opportunity to travel abroad to meet and exchange ideas with foreign citizens who have similar
backgrounds, interests or professions. Professional Ambassador Programs are developed and travel
throughout the year. Direct mail invitations are sent to candidate delegates approximately six to
eight months prior to the travel period for the delegation. Each program is designed to meet the
interests of the individual participants, and travel for eight to twelve days, with an optional
additional cultural exchange following each program. Programs originate from our internal
development and research staff, who identify potential delegation topics and 4




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leaders. Professional programs have been conducted in such areas as agriculture, economics,
education, law, medicine and science, and within the legal and medical fields. Many of our
professional programs provide continuing educational credit for the participants as part of the
program experience. Continuing education credits are granted through alliances with professional
and academic institutions, including the American College of Medical Quality, the University of
Pittsburg, the American Bar Association, many state bar associations and other professionally
relevant associations and societies. We believe that our Professional Ambassador Programs provide participants with
enriching experiences and deeper understandings of foreign cultures and people than visits arranged
independently or through travel agencies. Unlike travel programs provided by travel agencies, these
professional exchanges are intended largely as working programs, with a significant amount of the
participants time involved in organized meetings, seminars and round-table discussions with their
foreign counterparts, visits to major foreign facilities and institutions, and informal gatherings
with foreign counterparts. Each program is led by a delegation leader chosen by the Company based
upon his or her recognition in the field and expertise regarding the special focus of the
particular program. Academic Accreditation During 2004, we gained academic accreditation through the Northwest Association of
Accredited Schools and developed the Washington School of World Studies to provide an opportunity
for middle school, junior high and high school students to earn academic credit through their
participation in the Student Ambassador Program, Sports Ambassador Program or the Conference
Program. The courses offered by the Washington School of World Studies emphasize the total learning
experience of the participant while preparing for and participating in the selected program. In
addition to elective academic credit, students are also eligible to earn service learning credits
by successfully completing the programs. Strategic Alliances Alliances with Students on Ice, Inc. and Full On (Europe) Limited provide adventure and
quality for our Student Ambassador Programs. These agreements prescribe the nature, scope and
pricing of the travel services provided to our delegates. Through our Student Ambassador Programs, we organize certain specialty travel programs to
North American destinations, and we have entered into an alliance with Yosemite National
Institutes, a non-profit organization with operations in Yosemite National Park, Olympic National
Park and Golden Gate National Recreation Area. Our agreement with Yosemite National Institutes
prescribes the nature, scope and pricing of the travel services provided by Yosemite National
Institutes to our delegates. The agreement with Yosemite National Institutes is exclusive, except
that Yosemite National Institutes may conduct its own programs. Through our Sport Ambassador Programs, we have agreements with the Amateur Athletic Union,
Young American Bowling Alliance, and American Youth Soccer Organization to offer international
travel for its players. These agreements currently do not generate significant revenues. We have also entered into strategic alliances to further introduce innovative, educational
travel experiences both internationally and domestically. Such strategic alliances include that
with the National Society of High School Scholars. Alliances also include those with the American
College of Medical Quality, the American Bar Association and the University of Pittsburgh to
provide continuing education credits on our Professional Ambassador Programs. Service Marks We have registered or applied for a variety of service and trademarks, including, but
not limited to the names Initiative for Understanding, People to People Student Ambassador
Program, People to People Sports Ambassador Program and Eisenhower Scholar. In addition, we
have the right, subject to certain 5




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exceptions, to use People to Peoples name, service mark and
logo for use in our marketing. We believe that the strength of our service and trademarks is
valuable to our business and intend to continue to protect and promote our marks as appropriate. We
believe that our business is not overly dependent upon any trademark or service mark. Insurance We maintain insurance coverage that we believe is adequate for our business, including,
but not limited to, professional and general liability insurance. We also maintain insurance
coverage on our leased real property and personal property on a replacement cost basis. There is no
assurance that the insurance maintained by us will be adequate in the event of a claim, or that
such insurance will continue to be available in the future. Employees On December 31, 2004, we employed 183 employees, of which 178 were full-time employees.
Of the Companys full-time employees, 170 are located in Spokane, Washington, four are located in
California, one is located in Boise, Idaho, one is located in Denver, Colorado, and two are located
in the Washington, D.C. area. The Company has 138 full-time employees engaged in selling and tour
promotion and 40 full-time employees in general and administrative positions. We also employ a
temporary workforce on a seasonal basis to assist with our direct marketing efforts in recognition
of the fact that Ambassadors travel programs are seasonal in nature. None of our employees are
subject to collective bargaining agreements or are represented by a union. We believe that our
labor relations are good. Competition The travel industry and the educational segment within the travel industry are highly
competitive. Our Student Ambassador Programs, Sport Ambassador Programs, and Conference Programs
compete with similar educational travel programs operated by other individuals and organizations,
as well as independent programs organized and sponsored by local teachers with the assistance of
local travel agents. Our Sports Ambassador Programs also compete with independent organizations,
which coordinate and travel already intact teams for international competition. Professional
Ambassador Programs compete with independent professional associations that sponsor and organize
their own travel programs through the assistance of local travel agents, and other organizations
that design travel programs and continuing professional education for adults. We believe that the principal basis of competition in the educational segment of the
market is the quality and uniqueness of the educational program offered, customer service,
reputation and program cost. We believe that our 38 years of experience organizing student and
professional educational programs and established relationships with public officials,
organizations and residents in countries where we provide programs, as well as our agreements with
People to People, allow us to provide an educational opportunity that is not easily duplicated by
competitors programs. We believe the barriers to entry are relatively low for any future competitors. Certain
organizations engaged in the travel business could have substantially greater financial, marketing
and sales resources than we do. There can be no assurance that our present or future competitors
will not exert significant competitive pressures on us in the future. Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended (the Exchange Act) that require us to file, most often electronically, reports, proxy and
information statements, and other information with the Securities and Exchange Commission (SEC).
The public may read and copy our filings at the SECs Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public can obtain information on the operation of the Public
Reference Room by calling 800- 6




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SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that file electronically
with the SEC at www.sec.gov. Similarly, we maintain a website at www.AmbassadorsGroup.com. We make
available, free of charge, on this website, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably
practical after, and in any event on the same day as, such material is electronically filed with or
furnished to the SEC. 7




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BUSINESS STRATEGY We believe that high quality programs and exceptional customer service are and will
remain key elements of our success. Our strategy is to maintain quality standards while increasing
the volume of business. To grow the business, we intend to (i) expand the marketing and travel
volume of existing student, sport, conference and professional educational travel programs, (ii)
introduce new student, sport, conference and professional travel programs independently and through
strategic alliances, and (iii) pursue acquisition opportunities. Expand the Marketing and Travel Volume U.S.
Census data projects that there will be more than 41.2 million people in the 10 to
19 year-old age range by 2010. We believe that a large number of qualified students in this age
group are not aware of the Companys youth travel programs. In light of these factors, we intend to
improve our marketing techniques by targeting additional age groups, making greater use of
referrals from teachers, parents and past student travelers, and expanding and refining our
extensive databases of potential participants. According to U.S. Census data, the number of Americans 45 to 74 years old is expected to grow
substantially, increasing to more than 98.1 million people in
2010, from 77.8 million people in
2000. This trend is expected to benefit us, since this population segment historically has been the
most likely to participate in one of our professional travel programs. In addition, we believe that
American adults interested in traveling abroad will increasingly seek convenient and unique
experiences. Consequently, we believe that the opportunity exists to expand the professional
educational travel programs by continuing to improve the quality and number of specialty
professional programs, including professional education credit opportunities and by exploring new
country destinations. We continue to look for alliances with partners that have strong brand
recognition and access to well defined customer segments. Introduce New Programs We continually seek to develop and introduce additional innovative and educational travel
experiences. We intend to continue to maintain our contacts with foreign governmental agencies and
officials and intend to continue to utilize these and other foreign contacts to organize
opportunities for our program delegates that other travel programs do not currently offer. In
addition, we may develop new youth travel programs organized around common extracurricular
activities such as sports, science, nature and music. Pursue Acquisition Opportunities We consider the travel and youth education industries encompassed by our business to be
large and fragmented, which present attractive acquisition opportunities. We believe that these
industries large size and fragmentation provides an opportunity for acquisitions of businesses
that are either compatible with our current business or represent a developing specialty segment. 8




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Item 2.Properties Our principal executive offices, consisting of approximately 48,000 square feet, are
located in Spokane, Washington, and are occupied pursuant to a lease that expires December 31,
2009. The lease currently provides for monthly rental payments of approximately $37,000. We renewed
our lease in December 2004 with terms consistent with the expiring lease. We also occupy additional office space totaling approximately 11,000 square feet in
Spokane, Washington, pursuant to a lease which expires December 31, 2009. The lease was extended an
additional two years during 2004. Current monthly rent is approximately $4,400 per month, with
increases specified in the lease. We occupy additional space totaling approximately 4,800 square feet in Spokane,
Washington, primarily for storage of corporate records. We renewed this lease in 2004 with terms
consistent with the expiring lease. The lease term was extended to December 31, 2009. Current
monthly rent is approximately $1,000 per month. We believe that our existing facilities are sufficient to meet our present needs and
anticipated needs for the near future. However, additional facilities may be required in connection
with future business acquisitions as we continue to grow. 
 Item 3.Legal Proceedings We are not a party to any material pending legal proceedings other than ordinary routine
litigation incidental to our business, the outcome of which we believe will not have a material
adverse affect on our business, financial condition, cash flows or results of operations. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of
fiscal year 2004. 9




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PART II 
 Item 5.Market for the Registrants Common Equity, Related Stockholder
Matters and Issuer
Purchases of Equity Securities Market Information Our Common Stock has been traded on the Nasdaq National Market under the symbol EPAX
since March 1, 2002. Prior to March 1, 2002, there was no public trading market for our equity
securities. As of February 22, 2005, the last reported sale price of our Common Stock was $34.14. The following table sets forth the high and low sale prices of a share of our Common
Stock as reported on the Nasdaq National Market on a quarterly basis for our fiscal years ended
December 31, 2004 and 2003: High
    
    
    LowQuarter ended March 31, 2004
    
    $
    24.79
    
    
    $
    21.47Quarter ended June 30, 2004
    
    $
    25.61
    
    
    $
    20.59Quarter ended September 30, 2004
    
    $
    29.20
    
    
    $
    22.18Quarter ended December 31, 2004
    
    $
    36.00
    
    
    $
    27.41Quarter ended March 31, 2003
    
    $
    13.34
    
    
    $
    11.64Quarter ended June 30, 2003
    
    $
    15.29
    
    
    $
    11.70Quarter ended September 30, 2003
    
    $
    18.81
    
    
    $
    13.85Quarter ended December 31, 2003
    
    $
    24.16
    
    
    $
    16.75
 Holders of Record As of February 22, 2005, there were approximately 38 holders of record of our Common Stock.
This number does not include beneficial owners holding shares through nominee or street name. Dividends In November 2003, the Board of Directors initiated a dividend policy paying $0.44 per
share annually, distributable at $0.11 per share on a quarterly basis. In November 2004, the Board
of Directors increased the dividend policy, paying stockholders $0.52 per share annually,
distributable at $0.13 per share on a quarterly basis. Our Board of Directors declared the
following dividend payments: Declaration Date
    
    Record Date
    
    Payment Date
    
    Dividend Per ShareNovember 7, 2003
    
    November 24, 2003
    
    December 8, 2003
    
    $0.11February 24, 2004
    
    March 9, 2004
    
    March 23, 2004
    
    $0.11May 14, 2004
    
    June 1, 2004
    
    June 16, 2004
    
    $0.11August 13, 2004
    
    August 30, 2004
    
    September 14, 2004
    
    $0.11November 19, 2004
    
    December 6, 2004
    
    December 21, 2004
    
    $0.13February 11, 2005
    
    February 28, 2005
    
    March 15, 2005
    
    $0.13
 Each quarter, our Board of Directors will review the dividend payment assessing the
amount, timing and alignment with its strategic direction. 10




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Transfer Agent and Registrar Mellon Investor Services LLC serves as transfer agent and registrar of our Common Stock. Equity Compensation Plan Information The following tables provide information as of December 31, 2004 about our Common Stock that
may be issued upon the exercise of options, warrants and rights under all of our existing equity
compensation plans. (c)Number of securities remaining(a)
    
    
    (b)
    
    
    availableNumber of securities to
    
    
    Weighted-average
    
    
    for future issuance under equitybe issued upon exercise
    
    
    exercise price of
    
    
    compensation plans (excludingof outstanding options,
    
    
    outstanding options,
    
    
    securitiesPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    

reflected in column (a))Equity
compensation plans
approved by
security holders
    
    
    1,137,500
    
    
    
    $  13.75
    
    
    
    305,000Equity compensation
plans not approved
by security holders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    1,137,500
    
    
    
    $  13.75
    
    
    
    305,000
 Issuer Purchases of Equity Securities Maximum NumberTotal Number of
    
    
    (or ApproximateShares
    
    
    Dollar Value) ofPurchased as
    
    
    Shares that May YetTotal Number
    
    
    Average
    
    
    Part of Publicly
    
    
    Beof
    
    
    Price
    
    
    Announced
    
    
    Purchased UnderShares
    
    
    Paid per
    
    
    Plans or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    ProgramsAmount available for
repurchase at September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,796,042October 1, 2004  October 31, 2004
    
    
    10,291
    
    
    $
    26.00
    
    
    
    10,291
    
    
    
    2,528,430November 1, 2004 November 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,528,430December 1, 2004  December 31,
2004
    
    
    
    
    


    
    
    
    
    
    
    
    
    2,528,43010,291
    
    
    $
    26.00
    
    
    
    10,291
    
    
    $
    2,528,430
 11




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Item 6.Selected Financial Data This section presents our historical financial data which should be read carefully with
the financial statements included in this Form 10-K, including the notes to the consolidated
financial statements, and Managements Discussion and Analysis of Financial Condition and Results
of Operations. The statement of operations data for each of the years in the three-year period
ended December 31, 2004, and the balance sheet data as of December 31, 2004 and 2003 have been
derived from audited financial statements included elsewhere in this Form 10-K. The statement of
operations data for the years ending December 31, 2001 and 2000 and the balance sheet data as of
December 31, 2002, 2001 and 2000 has been derived from the audited financial statements, which are
not included in this Form 10-K. The financial data as of December 31, 2001 and 2000 and for the
years then ended and for the period January 1, 2002 through February 28, 2002, have been carved out
from the consolidated financial statements of International using the historical operating results
and historical bases of the assets and liabilities of Internationals business, which we comprised.
Historical results are not necessarily indicative of future results. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001 (B) (D)
    
    
    2000 (D)(in thousands, except per share data)Statement of Operations data:Net revenue (A)
    
    $
    51,824
    
    
    $
    37,665
    
    
    $
    36,090
    
    
    $
    43,414
    
    
    $
    40,322Selling and tour promotion
expenses
    
    $
    22,616
    
    
    $
    18,534
    
    
    $
    15,632
    
    
    $
    18,734
    
    
    $
    20,318General and administrative
expenses
    
    $
    6,537
    
    
    $
    4,566
    
    
    $
    5,131
    
    
    $
    6,189
    
    
    $
    4,675Write-down of intangible assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,937
    
    
    $
    Operating income
    
    $
    22,671
    
    
    $
    14,565
    
    
    $
    15,327
    
    
    $
    12,554
    
    
    $
    15,329Net income after tax
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798
    
    
    $
    9,488
    
    
    $
    11,056Earnings per share  basic
    
    $
    1.56
    
    
    $
    1.02
    
    
    $
    1.10
    
    
    $
    0.97
    
    
    $
    1.13Earnings per share  diluted
    
    $
    1.50
    
    
    $
    1.00
    
    
    $
    1.06
    
    
    $
    0.97
    
    
    $
    1.13Balance sheet data:Cash, cash equivalents and
available-for-sale securities (C)
    
    $
    87,557
    
    
    $
    67,525
    
    
    $
    51,399
    
    
    $
    39,773
    
    
    $
    71,543Total assets
    
    $
    97,516
    
    
    $
    79,321
    
    
    $
    58,517
    
    
    $
    46,123
    
    
    $
    81,142Total stockholders equity
    
    $
    49,501
    
    
    $
    40,809
    
    
    $
    27,860
    
    
    $
    24,839
    
    
    $
    53,554Other key financial measures:Cash flow from operating
activities
    
    $
    27,906
    
    
    $
    17,255
    
    
    $
    21,382
    
    
    $
    6,994
    
    
    $
    25,386Cash flow (used in) from
investing activities
    
    $
    (20,997
    )
    
    $
    (13,139
    )
    
    $
    1,259
    
    
    $
    16,683
    
    
    $
    (35,399
    )Cash flow (used in) from financing
activities
    
    $
    (5,825
    )
    
    $
    34
    
    
    $
    (9,668
    )
    
    $
    (37,462
    )
    
    $
    7,231Deployable cash (E1)
    
    $
    43,180
    
    
    $
    32,903
    
    
    $
    22,773
    
    
    $
    20,493
    
    
    $
    45,967Free cash generated (E2)
    
    $
    15,611
    
    
    $
    13,879
    
    
    $
    11,834
    
    
    $
    12,324
    
    
    $
    13,649Return on adjusted equity (E3)
    
    
    37
    %
    
    
    32
    %
    
    
    42
    %
    
    
    24
    %
    
    
    25
    %
   (A)
    
    Net revenue is a function of gross program receipts less program pass-through expenses. Program pass-through
expenses include all direct costs associated with our programs, including but not limited to costs related to
airfare, hotels, meals, ground transportation, guides, professional exchanges and changes in currency exchange
rates. Gross program receipts during the years ended
December 31, 2004, 2003, 2002, 2001, and 2000, were $147.1
million, $108.6 million, $97.1 million, $116.3 million, and $107.8 million, respectively. 12




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##### Table of Contents



(B)
    Excluding the effects of a write-down of intangible assets during the year
ended December 31, 2001, operating income, net income after tax, and basic and diluted
earnings per share would have been $18.5 million, $13.2 million, and $1.35, respectively.(C)
    Cash and cash equivalents and available-for-sale securities include restricted cash
equivalents of a nominal amount at December 31, 2004, 2003, 2002 and 2001 and the amount of
$112,000 for the period ended December 31, 2000.(D)
    Earnings per share  basic and diluted are calculated using our Common
Stock, which was split in April 2001 and February 2002 in anticipation of our spin-off from
International. Our Common Stock was split and 9,813,140 shares became issued and outstanding.
Shares outstanding for the years ended December 31, 2001 and 2000, and as of December 31,
2001, have been retroactively adjusted for this stock split.Earnings per share  diluted are calculated using stock options, which were originally
granted under International and converted to our options on February 28, 2002 in connection
with our spin-off from International. The dilutive effect of these converted stock options is
excluded from our earnings per share calculation for the years ended December 31, 2001 and
2000, as they were not our options.(E)
    See below for reconciliation and description of non-GAAP financial measures. Non-GAAP Financial Measures We analyze our performance on a net income, cash flow and liquidity basis in accordance
with generally accepted accounting principles (GAAP) as well as on a non-GAAP operating, cash
flow and liquidity basis referred to below as non-GAAP operating results or non-GAAP cash flows
and liquidity measures. These measures and related discussions are presented as supplementary
information in this analysis to enhance the readers understanding of, and highlight trends in, our
core financial results. Any non-GAAP financial measure used by us should not be considered in
isolation or as a substitute for measures of performance or liquidity prepared in accordance with
GAAP. (E1)
    
    Deployable cash: Deployable cash is a non-GAAP liquidity
measure. Deployable cash is calculated as the sum of cash and cash equivalents, available
for sale securities and prepaid program costs and expenses less the sum of accounts
payable, accrued expenses and other short-term liabilities (excluding deferred taxes),
participant deposits and the current portion of long-term capital lease. Management
believes this non-GAAP measure is useful to investors in understanding the cash available
to deploy for future business opportunities.
 Deployable Cash Reconciliation 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Cash and cash
equivalents and available-for-sale securities
    
    $
    87,557
    
    
    $
    67,525
    
    
    $
    51,399
    
    
    $
    39,773
    
    
    $
    71,543Prepaid program costs
and expenses
    
    
    2,461
    
    
    
    1,608
    
    
    
    1,516
    
    
    
    1,501
    
    
    
    1,006Less: accounts payable
    
    
    (1,390
    )
    
    
    (2,599
    )
    
    
    (2,181
    )
    
    
    (2,521
    )
    
    
    (2,076
    )Less: accrued expenses and
other short-term
liabilities (excluding
deferred taxes)
    
    
    (6,693
    )
    
    
    (5,260
    )
    
    
    (2,060
    )
    
    
    (1,709
    )
    
    
    (1,743
    )Less: participant deposits
    
    
    (38,608
    )
    
    
    (28,220
    )
    
    
    (25,901
    )
    
    
    (16,551
    )
    
    
    (22,763
    )Less: current portion of
long-term capital lease
    
    
    (147
    )
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    Total deployable cash
at December 31
    
    $
    43,180
    
    
    $
    32,903
    
    
    $
    22,773
    
    
    $
    20,493
    
    
    $
    45,967
 13




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##### Table of Contents



(E2)
    
    Free cash generated: Free cash generated is a non-GAAP
cash flow measure. Free cash generated is calculated as cash flow from operations less
change in participant deposits less purchase of property and equipment. Management
believes this non-GAAP measure is useful to investors in understanding the cash generated
within a calendar year for future use in operations. The change in participant deposits is
excluded, as the cash related to such deposits is limited in use until travel has
occurred.
 Free Cash Generated Reconciliation 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Cash flow from operations as
reported
    
    $
    27,906
    
    
    $
    17,255
    
    
    $
    21,382
    
    
    $
    6,994
    
    
    $
    25,386Change in participant deposits
    
    
    (10,388
    )
    
    
    (2,319
    )
    
    
    (9,350
    )
    
    
    6,212
    
    
    
    (10,756
    )Purchase of property and equipment
    
    
    (1,907
    )
    
    
    (1,057
    )
    
    
    (198
    )
    
    
    (882
    )
    
    
    (981
    )Total free cash generated
    
    $
    15,611
    
    
    $
    13,879
    
    
    $
    11,834
    
    
    $
    12,324
    
    
    $
    13,649
 (E3)
    
    Return on adjusted equity: Return on adjusted equity is a
non-GAAP operating result. Average adjusted equity is calculated as the average of
stockholders equity at January 1 less other comprehensive income at January 1 and
stockholders equity at December 31 less other comprehensive income at December 31. Other
comprehensive income is excluded from the calculation as it represents the marking to
market of certain foreign exchange contracts designated as cash flow hedges. As
management fully intends to use the foreign exchange contracts for their stated purpose
the amounts related to the marking to market of these cash flow hedges do not reflect the
equity generated from past performance, which has been reinvested in our Company. We
believe this non-GAAP measure is useful to investors in understanding the performance of
equity maintained in the business from past earnings net of any dividends and share
repurchases distributed to stockholders.
 Return on Adjusted Stockholders Equity Reconciliation 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Stockholders equity at
January 1, as reported
    
    $
    40,809
    
    
    $
    27,860
    
    
    $
    24,839
    
    
    $
    53,554
    
    
    $
    34,634Less: other
comprehensive income at
January 1
    
    
    3,451
    
    
    
    1,155
    
    
    
    (340
    )
    
    
    401
    
    
    
    (232
    )Plus: stockholders equity at
December 31, as reported
    
    
    49,501
    
    
    
    40,809
    
    
    
    27,860
    
    
    
    24,839
    
    
    
    53,554Less: other comprehensive
income at December 31
    
    
    1,645
    
    
    
    3,451
    
    
    
    1,155
    
    
    
    (340
    )
    
    
    633Average adjusted
stockholders equity (the sum
of the above divided by two)
    
    $
    42,607
    
    
    $
    32,032
    
    
    $
    25,942
    
    
    $
    39,166
    
    
    $
    43,894Net income
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798
    
    
    $
    9,488
    
    
    $
    11,056Return on adjusted equity
    
    
    37
    %
    
    
    32
    %
    
    
    42
    %
    
    
    24
    %
    
    
    25
    %
 14




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##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion should be read in conjunction with the selected consolidated
financial data and our consolidated financial statements and the notes thereto included in this
Annual Report. Executive Overview Ambassadors is a leading educational travel company that organizes and promotes
international and domestic programs for students, athletes and professionals. Youth programs
provide opportunities for grade school, middle school and high school students to learn about the
history, government, economy and culture of the foreign and domestic destinations they visit as
well as for middle and high school athletes to participate in international sports challenges. Our
conference programs provide educational opportunities for middle school and high school students to
learn leadership, government, college admissions and community involvement skills at domestic
destinations. Our professional programs emphasize meetings and seminars between delegates and
persons in similar professions abroad. We were founded in 1967 and were reincorporated in Delaware in 1995, when we were
purchased and consolidated with International. We composed the operations of the former Education
Group segment of International. On January 25, 2002, the Board of Directors of International
approved the distribution of all of our Common Stock to Internationals stockholders (the
Spin-Off). The International Board of Directors declared a dividend of our Common Stock to the
Internationals stockholders of record on February 4, 2002. The dividend was distributed after the
close of business on February 28, 2002, in the amount of one share of our Common Stock for each
outstanding share of International common stock. The distribution of Common Stock was intended to
be tax-free to us and to our stockholders, and International received a favorable Internal Revenue
Service private letter ruling to that effect. Beginning March 1, 2002, we operated as an
independent stand-alone company and trading of our Common Stock began on the Nasdaq National Market
under the ticker symbol EPAX. The consolidated financial statements include the accounts of Ambassadors Group, Inc., and our
wholly owned subsidiaries, Ambassador Programs, Inc., Ambassadors Specialty Group, Inc., and
Ambassadors Unlimited, LLC. All significant inter-company accounts and transactions have been
eliminated in consolidation. The consolidated financial statements for the period January 1, 2002 through February 28,
2002, have been carved out from the consolidated financial statements of International using the
historical operating results and historical bases of the assets and liabilities of Internationals
business, which we comprised. Accordingly, the historical financial information presented herein
does not necessarily reflect what our Companys financial position, operating results and cash
flows would have been had we been a separate, stand-alone entity during the periods presented. See
Notes to Consolidated Financial Statements, Note 1. We have a single operating segment consisting of the educational travel and sports
programs for students, athletes and professionals. These programs have similar economic
characteristics, offer comparable products to delegates, and utilize similar processes for program
marketing. Our Gross Receipts and Accounting Structure Gross program receipts reflect total payments received by us. Gross program receipts less
program pass-through expenses constitute our revenues. Program pass-through expenses include all
direct costs associated with our programs, including, but not limited to, costs related to airfare,
hotels, meals, ground transportation, guides, professional exchanges and changes in currency
exchange rates. We recognize gross program receipts, pass-through expenses and revenues upon the
departure of the program. Our policy is to obtain payment for substantially all travel services
prior to entering into commitments for incurring expenses relating to such travel. Operating
expenses, which are expensed as incurred, are the costs related 15




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##### Table of Contents



to the creation of programs, promotional materials and marketing costs, salaries, rent, other
general and administrative expenses and all ordinary expenses. Our Seasonality Our business is seasonal. The majority of our travel programs occur in June and July of each
year. We have historically earned more than 90 percent of our annual revenues in the second and
third quarters, which we anticipate will continue for the foreseeable future. Historically, these
seasonal revenues have more than offset operating losses incurred during the rest of the year. Our
annual results would be adversely affected if our revenues were to be substantially below seasonal
norms during these periods. Our operating results may fluctuate as a result of many factors. See
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations 
Factors That May Affect Operating Resultsfor further explanation. Our Foreign Exposure The majority of our programs take place outside the United States and most foreign suppliers
require payment in local currency rather than in U.S. dollars. Accordingly, we are exposed to
foreign currency risks in certain countries as foreign currency exchange rates between those
currencies and the U.S. dollar fluctuate. We have a program to provide a hedge against certain of
these foreign currency risks. We use forward contracts and options that allow us to acquire the
foreign currency at a fixed price for a specified period of time. Some of our forward contracts and
options include a synthetic component if a pre-determined trigger occurs during the term of the
contract. These foreign exchange contracts and options are entered into to support normal
anticipated recurring purchases and, accordingly, are not entered into for speculative purposes.
See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
 Market Risk. Results of Operations The following table sets forth, for the periods indicated, the relative percentages that
certain income and expense items bear to consolidated revenues. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001 (A)
    
    
    2000(% of revenues)Net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Selling and tour promotion expenses
    
    
    44
    
    
    
    49
    
    
    
    43
    
    
    
    43
    
    
    
    50General and administrative
expenses
    
    
    13
    
    
    
    12
    
    
    
    14
    
    
    
    14
    
    
    
    12Write-down of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    Operating income
    
    
    44
    
    
    
    39
    
    
    
    43
    
    
    
    29
    
    
    
    38Other income
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    4Income before tax
    
    
    46
    
    
    
    41
    
    
    
    45
    
    
    
    34
    
    
    
    42Income tax provision
    
    
    16
    
    
    
    14
    
    
    
    15
    
    
    
    12
    
    
    
    14Net income
    
    
    30
    %
    
    
    27
    %
    
    
    30
    %
    
    
    22
    %
    
    
    27
    %
   (A)
    
    Excluding the effects of a write-down of intangible assets during the year
ended December 31, 2001, the relative percentages of operating income, income before tax, and
net income to consolidated revenues would have been 43%, 48% and 31%, respectively. 16




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##### Table of Contents



Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003 Gross program receipts increased to $147.1 million for the year ended December 31, 2004
from $108.6 million for the year ended December 31, 2003. The $38.5 million, 36 percent, increase
is primarily the result of traveling approximately 35 percent more delegates over 2003. We
traveled more than 31,000 delegates during 2004 as compared to more than 23,000 delegates during
2003. Net revenue increased to $51.8 million for the year ended December 31, 2004 from $37.7
million for the year ended December 31, 2003. The $14.2 million, 38 percent, increase is primarily
the result of traveling the additional delegates mentioned above. Gross margin (revenue as a
percentage of gross program receipts) remained comparable at 35 percent for the years ended
December 31, 2004 and 2003 while we also maintained the quality measurements of our programs. Our policy is to expense all selling and tour promotion costs as incurred. Selling and
tour promotion expenses increased to $22.6 million from $18.5 million comparing the years ended
December 31, 2004 and 2003, respectively. The $4.1 million increase is primarily the result of $2.9
million additional personnel costs to support the larger volume of delegates and $1.1 million of
increased marketing efforts toward 2005 travel. General and administrative expenses increased to $6.5 million for the year ended December
31, 2004 from $4.6 million for the year ended December 31, 2003. The $2.0 million, 43 percent,
increase is primarily the result of additional personnel supporting the additional delegate base,
combined with professional fees related to compliance with the Sarbanes Oxley Act of 2002. For the year ended December 31, 2004, we earned operating income of $22.7 million in
comparison to the operating income of $14.6 million for the year ended December 31, 2003. Changes
in operating income from 2003 to 2004 are the result of changes as described above. Other income consisted primarily of interest income generated by cash, cash equivalents
and available-for-sale securities. We realized interest and dividend income of $1.1 million in the
year ended December 31, 2004, compared to $0.8 million in the year ended December 31, 2003. The
increase in interest and dividend income is related to higher cash balances held by us. In 2004 and
2003, the average rate of return was 1.4 percent and 1.3 percent, respectively. For the year ended December 31, 2004, income before income taxes was $23.7 million in
comparison to income before income taxes of $15.4 million for the year ended December 31, 2003.
Changes in income before income taxes are the result of changes as described above. We incurred an income tax provision of approximately $8.1 million for the year ended
December 31, 2004, in comparison to $5.2 million for the year ended December 31, 2003. The income
tax provision incurred was based upon the annual effective income tax rate applied to the pre-tax
income. Our effective tax rate was 34.0 percent for both 2004 and 2003. Net income increased to $15.6 million for the year ended December 31, 2004 from $10.2
million for the year ended December 31, 2003. Changes in net income from 2004 to 2003 are the
result of changes as described above. 17




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##### Table of Contents



Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002 Gross program receipts increased to $108.6 million for the year ended December 31, 2003
from $97.1 million for the year ended December 31, 2002. The $11.5 million, or 12 percent, increase
is primarily the result of traveling approximately 1,700 additional delegates, which represents an
increase of 8.4 percent and approximately a 3.2 percent increase in program tuition. We traveled
more than 23,000 delegates during 2003 as compared to more than 21,000 delegates during 2002. Net revenue increased to $37.7 million for the year ended December 31, 2003 from $36.1
million for the year ended December 31, 2002. The $1.6 million, or 4 percent, increase is primarily
the result of traveling additional delegates. Gross margin (revenue as a percentage of gross
program receipts) decreased to 35 percent for the year ended December 31, 2003, as compared to 37
percent for the year ended December 31, 2002. The 2 percent gross margin decrease primarily
resulted from two events. First, a decline in the gross margin resulted from a weaker U.S. dollar
relative to the currencies in which the Company pays foreign suppliers, including the Euro dollar,
Australian dollar and British pound. Second, the average travel group size was smaller during 2003
compared to 2002 due to higher cancellations because of the war with Iraq and the outbreak of the
SARS virus. Our policy is to expense all selling and tour promotion costs as incurred. Selling and
tour promotion expenses increased to $18.5 million from $15.6 million, when comparing the years
ended December 31, 2003 and 2002, respectively. The $2.9 million, 19 percent, increase is primarily
the result of $1.3 million of increased marketing efforts and $0.9 million of personnel costs. The
increase in marketing efforts resulted from increased mailings for 2004 travel, shifting the timing
of certain mail campaigns, and retention efforts of delegates during the war with Iraq. General and administrative expenses decreased to $4.6 million for the year ended December
31, 2003 from $5.1 million for the year ended December 31, 2002. The $0.6 million, 11 percent,
decrease is primarily the result of a reduction in estimated liability related to certain general
and administrative expenses. For the year ended December 31, 2003, we earned operating income of $14.6 million in
comparison to the operating income of $15.3 million for the year ended December 31, 2002. Changes
in operating income from 2002 to 2003 are the result of changes as described above. Other income consisted primarily of interest income generated by cash, cash equivalents
and available-for-sale securities. We realized $0.8 million interest and dividend income in the
year ended December 31, 2003, compared to $1.1 million in the year ended December 31, 2002. The
realized interest and dividend income decrease is related to lower rates of return, despite higher
levels of cash. In 2003 and 2002, the average rate of return was 1.3 percent and 2.2 percent,
respectively. For the year ended December 31, 2003, income before income taxes was $15.4 million in
comparison to $16.4 million income before income taxes for the year ended December 31, 2002.
Changes in income before income taxes are the result of changes as described above. We incurred an income tax provision of approximately $5.2 million for the year ended
December 31, 2003, in comparison to $5.6 million for the year ended December 31, 2002. The income
tax provision incurred was based upon the annual effective income tax rate applied to the pre-tax
income. Our Companys effective tax rate of 34.0 percent for 2003 was comparable to 34.1 percent
for 2002. Net income decreased to $10.2 million for the year ended December 31, 2003 from $10.8
million for the year ended December 31, 2002. Changes in net income from 2003 to 2002 are the
result of changes as described above. 18




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##### Table of Contents



Liquidity and Capital Resources Our business is not capital intensive. However, we do retain funds for operating purposes
in order to conduct sales and marketing efforts for future programs. Net cash provided by operations for years ended December 31, 2004 and 2003 was
approximately $27.9 million and $17.3 million, respectively. The $10.6 million increase in
operating cash flows from the year ending December 31, 2003, to the year ending December 31, 2004,
primarily results from a $5.5 million increase in earnings, combined with a $8.0 million increase
in the year over year change of participant deposits held at each respective year end. The increase
in participant funds held results from a variance in the marketing for future travel programs each
year as well as marketing enhancements year over year. Additionally, this increase was netted with
a $0.8 million decrease in the amount of prepaid deposits we had spent for future travel programs,
when comparing December 31, 2004 to that time at 2003. Net cash used in investing activities for the years ended December 31, 2004 and 2003 was
$21.0 million and $13.1 million, respectively. The $7.9 million increase year over year resulted
from $7.0 million net increased activities with the sale or maturity and purchase of
available-for-sale securities and $0.9 million in purchases of property and equipment. Net cash provided by (used in) financing activities was $(5.8) million in the year ending
December 31, 2004 and insignificant during the year ending December 31, 2003. The increased use of
$5.8 million in cash from financing activities in the year ended December 31, 2004, is primarily
due to our dividend policy, which began in the fourth quarter 2003 in comparison to the whole 2004
year, and our stock repurchase program, which began in 2004. During 2004, the increased use of cash
in financing activities resulted in a $3.5 million increase in dividend payments, and a $2.6
million increase in stock repurchased when compared to 2003. At December 31, 2004, we had approximately $87.6 million of cash, cash equivalents,
restricted cash and available-for-sale securities, which included program participant funds of
approximately $38.6 million. At December 31, 2003, we had approximately $67.5 million of cash and
cash equivalents, restricted cash, and available-for-sale securities, which included program
participant funds of $28.2 million. Under our cancellation policy, a program delegate may be
entitled to a refund of a portion of his or her deposit, less certain fees, depending on the time
of cancellation. Should a greater number of delegates cancel their travel in comparison to that
which is part of our ongoing operations, due to circumstances such as international or domestic
unrest, terrorism or general economic downturn, our cash balances could be significantly reduced.
Cash balances could also be reduced significantly if the financial institutions, which held
balances beyond that federally insured, were to become insolvent. The results of operations and financial position of our business may be affected by a
number of trends or uncertainties that have, or we reasonably expect could have, a material impact
on income from continuing operations and cash flows, as well as the balance sheet. Such trends and
uncertainties include: the repercussions of the continued deployment of U.S. military as a result
of the war with Iraq, possible future terrorist acts, and possible natural occurrences such as
flooding or epidemics. Furthermore, these international occurrences and others may continue to
affect the travel industry, as well as the markets in which we operate. The potential and long-term
effects of these circumstances result in uncertainties for our customers, the market for our Common
Stock, the markets for our services, the strength of the U.S. dollar and the U.S. economy. The
consequences of such trends or events are unpredictable, and we are not currently able to determine
whether the impact will be material or highly material on our business, financial condition, cash
flows and results of operations. We are continuing to pursue further acquisitions of travel and youth education businesses
that may require the use of cash and cash equivalents. No such acquisitions are currently pending
and no assurance can be given that definitive agreements for any such acquisitions will be entered
into, or, if they are entered into, that they will be on terms favorable to us. 19




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We do not have any material capital expenditure commitments for 2005. Management believes
that existing cash and cash equivalents and cash flows from operations will be sufficient to fund
our anticipated operating needs, capital expenditures, dividend payments and acquisitions through
the next 12 months of operation. The following table presents the maturities of our contractual cash obligations as of December
31, 2004 (in thousands): Payments due by periodLessthan
    
    
    1  3
    
    
    3  5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    yearsOperating leases
    
    $
    3,451
    
    
    $
    739
    
    
    $
    2,190
    
    
    $
    522Capital lease
    
    
    643
    
    
    
    164
    
    
    
    479
    
    
    
    Total
    
    $
    4,094
    
    
    $
    903
    
    
    $
    2,669
    
    
    $
    522
 Market Risk The following table summarizes the financial instruments other than derivative financial
instruments held by us at December 31, 2004 and 2003, which are sensitive to changes in interest
rates. This table presents principal cash flows for available-for-sale securities by contractual
maturity date and the related average interest rate and fair value (in thousands): December 31, 2004
    
    
    December 31, 2003Fair
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    ValueU.S. govt. and
agency obligations
    
    $
    12,295
    
    
    $
    40,525
    
    
    $
    52,820
    
    
    $
    52,820
    
    
    $
    33,872
    
    
    $
    33,872Interest rate
    
    
    1.38
    %
    
    
    1.38
    %
    
    
    1.38
    %
    
    
    
    
    
    
    1.39
    %
    
    
    
 The majority of our travel programs take place outside the United States and most foreign
suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to
foreign currency risk relative to changes in foreign currency exchange rates between those
currencies and the U.S. dollar. We have a program, however, to provide a hedge against certain of
these foreign currency risks with less than two years maturity, and we use forward contracts and
options, which allow us to acquire the foreign currency at a fixed price for a specified period of
time. Some of our forward contracts and options include a synthetic component if a pre-determined
trigger occurs during the term of the contract. We are exposed to credit risk under the foreign currency contracts and options to the
extent that the counterparty is unable to perform under the agreement. The fair value of foreign
currency exchange contracts is based on quoted market prices and the spot rate of the foreign
currencies subject to contracts at year-end. The table below provides information about our derivative financial instruments that are
sensitive to foreign currency exchange rates. For foreign currency forward exchange agreements, the
table presents the notional amounts and weighted average exchange rates. All contracts held as of
December 31, 2004 mature in 2005. These notional amounts generally are used to calculate the
contractual payments to be exchanged under the contract. None of these contracts is entered into
for trading purposes. 20




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At December 31, 2004 and 2003, we had outstanding forward contracts as follows (in
thousands): U.S. DollarAverageNotional
    
    
    ContractualAmount
    
    
    Exchange RateDecember 31, 2004Forward contracts (pay $U.S./receive foreign currency):Australian dollar
    
    
    7,400
    
    
    $
    0.74British pound
    
    
    4,150
    
    
    $
    1.78Canadian dollar
    
    
    500
    
    
    $
    0.74Euro dollar
    
    
    7,500
    
    
    $
    1.19Japanese yen
    
    
    92,500
    
    
    $
    0.01South African rand
    
    
    763
    
    
    $
    0.17New Zealand dollar
    
    
    1,000
    
    
    $
    0.62Forward contracts with synthetic option (pay $U.S./receive foreign currency):Australian dollar
    
    
    5,000
    
    
    $
    0.76Euro dollar
    
    
    3,500
    
    
    $
    1.28New Zealand dollar
    
    
    1,000
    
    
    $
    0.66December 31, 2003Forward contracts (pay $U.S./receive foreign currency):Australian dollar
    
    
    12,400
    
    
    $
    0.64British pound
    
    
    5,650
    
    
    $
    1.58Euro dollar
    
    
    16,500
    
    
    $
    1.12New Zealand dollar
    
    
    6,240
    
    
    $
    0.55
 At December 31, 2004 and 2003, we had unrealized foreign currency gains associated with
these financial instruments of approximately $2.6 million and $5.2 million, respectively. Off Balance Sheet Arrangements As of December 31, 2004, we had no off balance sheet arrangements, as defined in Item
303(a)(4) of the SECs Regulation S-K. Critical Accounting Policies The preparation of consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates and judgments, including those associated with cash and cash equivalents,
available-for-sale securities, income taxes, derivative financial instruments, and contingencies
and litigation. Cash, cash equivalents, and available-for-sale securities are exposed to concentrations
of credit risk. We place 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, which are not covered by this insurance. If such institutions were to
become insolvent during which time it held our 21




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cash, cash equivalents, or available-for-sale securities in excess of the insurance limit, it
would be necessary for us to obtain credit financing to operate travel programs. The asset and liability approach is used to account for income taxes by recognizing deferred
tax assets and liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, in the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made. We use foreign currency exchange contracts and options as part of an overall
risk-management strategy. These instruments are used as a means of mitigating exposure to foreign
currency risk connected to anticipated travel programs. In entering into these contracts, we have
assumed the risk, which might arise from the possible inability of counterparties to meet the terms
of their contracts. We do not expect any losses as a result of counterparty defaults. However, if
such defaults occurred, the necessity would arise to locate alternative counterparties, or we would
then consider alternate means of settling our foreign exchange contractual obligations. We base our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions. Factors That May Affect Operating Results The following risk factors could materially and adversely affect our future operating results
and could cause actual results to differ materially from those predicated in forward-looking
statements we make about our business. Travel Industry Our results of operations will depend upon factors affecting the travel industry in general.
Our revenues and earnings are especially sensitive to events that affect domestic and international
air travel and the level of hotel reservations. A number of factors, including those mentioned
above, a rise in fuel prices or other travel costs, excessive inflation, currency fluctuations,
foreign taxation changes, extreme weather conditions and concerns about passenger safety could
result in a temporary or longer-term overall decline in demand for our programs. Also, demand for
our products and services may be significantly affected by the general level of economic activity
and employment in the United States and key international markets. Therefore, any significant
economic downturn or recession in the United States or these other markets could have a material
adverse affect on our business, financial condition, cash flows and results of operations. International Operations and Natural Occurrences Our operations are subject to special risks inherent in doing business internationally, as
substantially all of our travel programs are conducted outside the United States. In the past,
gross receipts from programs to Europe, the South Pacific (Australia and New Zealand) and China
have accounted for a majority of our gross receipts. Risks inherent in doing business
internationally include potential adverse effects from operations from war, U.S. military
deployments, international and domestic terrorism, civil disturbances, political instability,
governmental activities and deprivation of contract rights. The continued U.S. military presence as a result from the war with Iraq has affected and will
continue to affect the travel industry, the markets in which we operate, and our operations and
profitability. The potential and long-term effects are uncertain for our customers, the market for
our Common Stock, the 22




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markets for our services, the strength of the U.S. dollar and the U.S. economy. We have
experienced increased cancellations for our travel programs and a weakened U.S. dollar. The
negative effect of a weakened U.S. dollar will cost us more to travel participants abroad. Periods of international and domestic unrest have reduced demand for our travel programs and
could have a material adverse effect on our business and results of operations. Examples of such
past events include the attacks on September 11, 2001, the Gulf War in 1991, civil unrest in China
in 1989 and the Chernobyl disaster in 1986. Demand for our travel programs also may be adversely affected by natural occurrences such as
hurricanes, earthquakes, epidemics or other disease outbreaks, and flooding in geographic regions
in which we conduct travel programs. The occurrence of any of the events described above or other
unforeseen developments in one or more of these regions would have a material adverse effect on our
business, financial condition, cash flows, and results of operations. Terrorism Terrorist attacks, such as the attacks that occurred on September 11, 2001, the continued U.S.
military response, and other acts of violence or war have and will affect the travel industry
generally, the markets in which we operate, as well as our operations and profitability. Further
terrorist attacks against the United States or U.S. businesses at home and abroad may occur. The
September 11 attacks have had a very negative impact on domestic and international air travel and
the travel industry in general. As a result, we experienced a significant decrease in profitability
in 2002. The potential near-term and long-term effects of these attacks are uncertain for our
customers, the market for our Common Stock, the markets for our services and the U.S. economy. The
consequences of any terrorist attacks, or any armed conflicts including war which may result, are
unpredictable, and we may not be able to foresee events that could have an adverse affect on our
business or operations. Seasonality; Fluctuations in Quarterly Results Our business is highly seasonal. The majority of our travel programs are scheduled in June and
July of each year, and we anticipate that this trend will continue for the foreseeable future. We
recognize gross program receipts, revenues and program pass-through expenses upon the departure of
our program delegates. Substantially all of our operating income is generated in the second and
third quarters, which historically has offset the operating losses incurred during the rest of the
year. Annual results would be adversely affected if our revenues were to be substantially below
seasonal norms during the second and third quarters of the year. Our operating results may
fluctuate as a result of many factors, including the mix of student, sports, conferences and
professional programs and program destinations offered by us and our competitors, the introduction
and acceptance of new programs and program enhancements by us and our competitors, timing of
program completions, cancellation rates, competitive conditions in the industry, marketing
expenses, extreme weather conditions, international or domestic conflicts, timing of and costs
related to acquisitions, changes in relationships with certain travel providers, economic factors
and other considerations affecting travel. In addition, we record on a quarterly basis realized
gains and losses on our forward foreign exchange contracts that do not qualify as cash flow hedges
under Statement of Financial Accounting Standards No. 133. As a result of the foregoing, annual or
quarterly operating results may be below the expectations of public market analysts and investors.
In such event, the price of our Common Stock could be materially and adversely affected. Competition The travel industry in general and the educational segment of the travel industry is highly
competitive and has relatively low barriers to entry. We compete with other companies that provide
similar educational travel programs for students and athletes, as well as independent programs
organized and sponsored by local teachers and coaches with the assistance of local travel agents.
People to People International, under the terms of its agreement with the Company, reserves the
right to offer programs to college students for 23




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studies abroad and to grant other entities which we compete with, the right to use the People
to People name in connection with People to Peoples professional education and sports programs. In
general, our Professional Ambassador Programs compete with independent professional organizations
that sponsor and organize their own travel programs through the assistance of local travel agents,
and other organizations that offer travel programs and continuing education credits for adults.
Some of our competitors are larger and have greater brand name recognition and financial resources
than we do. There can be no assurance that we will be able to compete successfully, and the failure
to compete successfully may have a material adverse affect on our business, financial condition,
cash flows and results of operations. Dependence on People to People Our agreements with People to People International give us the exclusive right to develop and
conduct programs for kindergarten through high school students using the People to People name, and
the non-exclusive right to develop and conduct programs for professionals, college students and
athletes using the People to People name. Our agreements with People to People International,
however, allow People to People International to continue to conduct college and professional
seminars and internship programs and to develop other sports and professional programs. The People
to People International agreements expire in 2010 and, at the election of the Company, may be
further extended through 2020. We believe that we derive benefit from our ability to market our
programs using the People to People name. If our agreements with People to People were terminated
or if we were unable to use the People to People name to market new programs or destinations, we
could have a material adverse affect on our business, financial condition, cash flows and results
of operations. Similarly, if our relationship with People to People is disrupted or is adversely
impacted because People to People experiences interruption, delay or ceases operations in the
future for any reason, our business would be harmed and our stock price may decline. Dependence on Travel Suppliers We are dependent upon travel suppliers for access to their products and services. Travel
suppliers include airlines, hotels, bus lines and other participants in the travel industry.
Consistent with industry practices, we currently have no long-term agreements with travel suppliers
that obligate such suppliers to sell services or products through us on an ongoing basis.
Therefore, the travel suppliers generally can cancel or modify their agreements with us upon
relatively short notice. In addition, any decline in the quality of travel products and services
provided by these suppliers, or a perception by our delegates of such a decline, could adversely
affect our reputation. The loss of contracts, changes in our pricing agreements, commission
schedules or incentive override commission arrangements, more restricted access to travel
suppliers products and services or less favorable public opinion of certain travel suppliers and
resulting low demand for the products and services of such travel suppliers could have a material
adverse affect on our business, financial condition, cash flows and results of operations. Dependence on Key Personnel Our performance is substantially dependent on the continued services and performances of our
senior management and certain other key personnel. The loss of the services of any of our executive
officers or other key employees could have a material adverse affect on our business, financial
condition and results of operations. We do not have long-term employment agreements with any of our
executive officers. Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate other highly skilled managerial, marketing and customer service
personnel. The failure to retain and attract necessary managerial, marketing and customer service
personnel could have a material adverse affect on our business, financial condition, cash flows and
results of operations. Marketing Our performance is substantially dependent on effectiveness of our direct marketing efforts,
including but not limited to, direct mail and local informational meetings. Failure of our
marketing efforts or changes 24




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in the direct mail environment could have a material adverse affect on our business, financial
condition, cash flows and results of operations. Such changes in the direct mail environment could
include, but not be limited to, a threat of disease or bioterrorism within the mail environment and
new or different regulatory schemes or changes in costs or services by the United States Postal
Service. Government Regulation and Taxation Many travel suppliers, particularly airlines, are subject to extensive regulation by federal,
state and foreign governments. In addition, the travel industry is subject to certain seller of
travel laws of certain states and special taxes by federal, state, local and foreign governments,
including hotel bed taxes, car rental taxes, airline excise taxes and airport taxes and fees. New
or different regulatory schemes or changes in tax policy could have an adverse impact on the travel
industry in general and could have a material adverse affect on our business, financial condition,
cash flows and results of operations. Fluctuation of Currency Exchange Rate; Increased Costs Many of our arrangements with our foreign-based suppliers require payment to be made in
foreign currencies. Any decrease in the value of the U.S. dollar in relation to foreign currencies
has the effect of increasing the cost of the services to be provided. Since late 1993, we generally
have purchased forward contracts and options with less than two years maturity to help manage
program costs and hedge against foreign currency valuation increases. While the ability to utilize
forward contracts for the delivery of foreign currencies can mitigate the effect of increased
program costs and foreign currency exchange fluctuations, there can be no assurance that increased
program costs relating to such currency fluctuations will not be substantial in future periods.
There can also be no assurance our hedging strategy will mitigate longer term foreign exchange
valuation trends. Our contract with delegates in our travel programs provides us the option of
passing along to delegates any increase in program costs resulting from currency fluctuations.
Although we have exercised this option in the past, there can be no assurance that we will be able
to increase program prices to offset any such cost increases in the future and any failure to do so
could have a material adverse affect on our business, financial condition, cash flows and results
of operations. Casualty Losses Due to the nature of our business, we may be subject to liability claims arising out of
accidents or disasters causing injury to delegates in its programs, including claims for serious
personal injury or death. We believe that we have adequate liability insurance for risks arising in
the normal course of business. Although we have experienced no claims for which we did not have
adequate insurance coverage, there can be no assurance that insurance coverage will be sufficient
to cover one or more large claims or that the applicable insurer will be solvent at the time of any
covered loss. Further, there can be no assurance that we will be able to obtain insurance coverage
at acceptable levels and cost in the future. Successful assertion against us of one or a series of
large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could
have a material adverse affect on our business, financial condition, cash flows and results of
operations. See Item 1. Business  Insurance. Growth, Acquisitions and Alliances Our performance is dependent on our ability to grow our business and expand the marketing and
travel volume of our youth, sports, conferences and professional travel programs. In addition, our
ability to grow is dependent on ability to acquire or enter into strategic alliances. Failure of
growth strategies could have a material adverse affect on our business, financial condition, cash
flows and results of operations. Control by Certain Stockholders As of December 31, 2004, John Ueberroth, Joseph Ueberroth and Peter Ueberroth (all family
members) beneficially owned in the aggregate approximately 18 percent of the outstanding shares of
our Common 25




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##### Table of Contents



Stock. Accordingly, they have the ability to exercise effective voting control, and may elect
all of our directors and be able to determine the outcome of any matter being voted upon by our
stockholders, including any merger, sale of assets or other change in control. The Ueberroths
ownership position, together with the anti-takeover effects of certain provisions contained in our
Certificate of Incorporation and Bylaws may have the effect of delaying or preventing a change of
control. Concentration of Credit Risk Cash, cash equivalents and available-for-sale securities are exposed to concentrations of
credit risk. We place our 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 which are not covered by this insurance. If such institutions
were to become insolvent during which time it held our cash, cash equivalents or available-for-sale
securities in excess of the insurance limit, it could be necessary to obtain credit financing to
operate our travel programs. Risks Relating to the Separation of the Company from International Indemnification of International for Tax Liabilities Incurred in Connection With the
Distribution In connection with the Distribution, Ambassadors and International entered into a tax sharing
agreement pursuant to which we agreed to indemnify International for certain taxes and similar
obligations that we would incur if the Distribution does not qualify for tax-free treatment due to
any of the following events:  
    the acquisition of a controlling interest in our stock after
the Distribution;
    our failure to continue its business after the Distribution;
    a repurchase of our stock; or
    other acts or omissions by us. International agreed to indemnify us for any tax liabilities we incur as a result of our
operations and Internationals operations prior to our separation from International. Nevertheless,
we may be held jointly and severally liable for such liabilities, and we cannot make any assurances
that we will be able to recover from International any losses it may suffer. If we take any action
or fail to take any action that would cause Internationals distribution of our common stock to be
taxable to International, our financial condition could be seriously harmed. Risks Relating to the Securities Markets and Ownership of our Common Stock Fluctuations in Stock Price The market price of our Common Stock could be subject to significant fluctuations. Among the
factors that could affect our stock price are:  
    Quarterly variations in operating results;
    Changes in revenue or earnings estimates or publication of
research reports by analysts;
    Speculation in the press or investment community;
    Strategic actions by us or our competitors, such as
acquisitions or restructurings;
    Actions by institutional stockholders;
    General market conditions;
    Change in key employees;
    Domestic and international, social and economic factors
unrelated to our performance; and 26




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
    Limited shares of Common Stock available for trading The stock markets have experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. These broad market fluctuations may adversely affect
the trading price of our Common Stock. In particular, we cannot make assurances that its stock will
sell at any particular price, or at all. Recent Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123(R), Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No.
25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee
stock options, to be valued at fair value on the date of grant, and to be expensed over the
applicable vesting period. Pro forma disclosure of share-based payments effect to the statement of
operations is no longer an alternative, and SFAS No. 123(R) is effective for all stock-based awards
granted on or after July 1, 2005. In addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the effective date. Compensation expense for
the unvested awards will be measured based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We are
currently evaluating the effect that the adoption of SFAS 123(R) will have on our financial
position and results of operations. The adoption of SFAS No. 123(R) is expected to increase
compensation expense in the future. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk The information contained in Item 7. Managements Discussion and Analysis of Results of
Operations and Financial Condition  Market Risk is incorporated by reference into Item 7A. 27




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Item 8.Financial Statements and Supplementary Data Reference is made to the Index to Consolidated Financial Statements that appear on page
F-1 to this Annual Report. The Report of Independent Registered Public Accounting Firm from
PricewaterhouseCoopers LLP, the Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements listed in the Index to Consolidated Financial Statements, which appear
beginning on page F-2 of this Annual Report, are incorporated by reference into this Item 8. 
 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures As of December 31, 2004, the end of the period covered by this Annual Report, our chief
executive officer and chief financial officer reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which
are designed to ensure information required to be disclosed in our Annual Report filed or
submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis,
and have concluded, based on that evaluation, that as of such date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed in our reports that
we file or submit under the Exchange Act is accumulated and communicated to the our chief executive
officer and chief financial officer as appropriate to allow timely decisions regarding required
disclosure. Managements
Report on Financial Statements and Practices Our management is responsible for the preparation and fair presentation of the financial
statements included in this Annual Report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America and
reflect our managements judgments and estimates concerning effects of events
and transactions that are accounted for or disclosed. Managements
Report on Internal Control over Financial Reporting We are responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting includes the policies
and procedures that pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the registrant; to recording
transactions as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, to making receipts and expenditures only in accordance
with authorizations of management and directors of our Company; and for
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements. We recognize that because of
its inherent limitation, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Accordingly, internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives. We conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2004. This evaluation was based on the
framework in Internal Control  Integrated Framework published by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, our management concluded that we
maintained effective internal control over financial reporting as of December 31, 2004. 28




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Our managements assessment of the effectiveness of our Companys internal control over
financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
Independent Registered Public Accounting Firm, as stated in their report which appears herein. Changes
in Internal Control over Financial Reporting For the fiscal year ended December 31, 2004, there has been no change in our internal control
over financial reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 
 Item 9B.Other Information None. 29




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PART III 
 Item 10.Directors and Executive Officers of the Registrant The information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2004, to be filed with the SEC on
or about April 14, 2005. 
 Item 11.Executive Compensation The information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2004, to be filed with the SEC on
or about April 14, 2005. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management The information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2004, to be filed with the SEC on
or about April 14, 2005. 
 Item 13.Certain Relationships and Related Transactions The information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2004, to be filed with the SEC on
or about April 14, 2005. 
 Item 14.Principal Accountant Fees and Services The information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2004, to be filed with the SEC on
or about April 14, 2005. 30




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this Annual Report: (1) Financial Statements.Please see the accompanying Index to Consolidated
Financial Statements, which appears on page F-1 of the Annual Report. The Report of
Independent Registered Public Accounting Firm, the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements listed in the Index
to Consolidated Financial Statements, which appear beginning on page F-2 of this
report, are incorporated by reference into Item 8 above. (2) Financial Statement Schedules. Financial Statement Schedules have been
omitted because the information required to be set forth therein is either not
applicable or is included in the Consolidated Financial Statements or the notes
thereto. (3) Exhibits. See Item 15(b) below. (b) Exhibits. The exhibits listed on the accompanying Exhibit Index immediately
following the signature page are filed as part of, or are incorporated by reference into, this
Annual Report on Form 10-K. (c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above. 31




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##### Table of Contents



AMBASSADORS GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets
    
    F-4Consolidated Statements of Operations
    
    F-5Consolidated Statements of Comprehensive Income
    
    F-6Consolidated Statements of Changes in Stockholders Equity
    
    F-7Consolidated Statements of Cash Flows
    
    F-8Notes to Consolidated Financial Statements
    
    F-9
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders
of Ambassadors Group, Inc.: We have completed an integrated audit of Ambassadors Group, Inc.s 2004 consolidated financial
statements and of its internal control over financial reporting as of 2004 and audits of its
December 31, 2003 and 2002 consolidated financial statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below. Consolidated financial statements In our opinion, the consolidated financial statements listed in the index under Item 15(a)(1)
present fairly, in all material respects, the financial position of Ambassadors Group, Inc. and its
subsidiaries at December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (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 of financial
statements 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
audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report On Internal
Control over Financial Reportingappearing in Item 9A. Controls and Procedures, that the
Company maintained effective internal control over financial reporting as of December 31, 2004
based on criteria established in Internal Control - Integrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Frameworkissued by the COSO. The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on managements assessment and on the
effectiveness of the Companys internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions. F-2




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##### Table of Contents



A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP
Portland, Oregon
March 11, 2005 F-3




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##### Table of Contents



AMBASSADORS GROUP, INC. CONSOLIDATED BALANCE SHEETS December 31,2004
    
    
    2003(in thousands,except share andper share data)AssetsCurrent Assets:Cash and cash equivalents (includes $12 of restricted cash)
    
    $
    34,737
    
    
    $
    33,653Available-for-sale securities
    
    
    52,820
    
    
    
    33,872Foreign currency exchange contracts
    
    
    2,609
    
    
    
    5,209Accounts receivable
    
    
    123
    
    
    
    233Prepaid program costs and expenses
    
    
    2,461
    
    
    
    1,608Total current assets
    
    
    92,750
    
    
    
    74,575Property and equipment, net
    
    
    3,911
    
    
    
    2,966Deferred tax asset
    
    
    735
    
    
    
    1,664Other long-term assets
    
    
    120
    
    
    
    116Total assets
    
    $
    97,516
    
    
    $
    79,321LiabilitiesCurrent Liabilities:Accounts payable
    
    $
    1,390
    
    
    $
    2,599Accrued expenses
    
    
    2,887
    
    
    
    1,836Other liabilities
    
    
    3,806
    
    
    
    3,424Participants deposits
    
    
    38,608
    
    
    
    28,220Deferred tax liability
    
    
    723
    
    
    
    1,690Current portion of long-term capital lease
    
    
    147
    
    
    
    151Total current liabilities
    
    
    47,561
    
    
    
    37,920Long-term capital lease
    
    
    454
    
    
    
    592Total liabilities
    
    
    48,015
    
    
    
    38,512Commitments and contingencies (Notes 3 and 9)Stockholders EquityPreferred stock, $.01 par value; 2,000,000 shares authorized; none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; authorized, 20,000,000 shares;
issued and outstanding, 10,125,841 and 10,013,967 shares at December
31, 2004 and 2003, respectively
    
    
    101
    
    
    
    100Additional paid-in capital
    
    
    18,288
    
    
    
    17,406Retained earnings
    
    
    30,869
    
    
    
    19,852Unearned restricted stock compensation
    
    
    (1,402
    )
    
    
    Accumulated other comprehensive income
    
    
    1,645
    
    
    
    3,451Total stockholders equity
    
    
    49,501
    
    
    
    40,809Total liabilities and stockholders equity
    
    $
    97,516
    
    
    $
    79,321
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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##### Table of Contents



AMBASSADORS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands, exceptper share data)Net revenues *
    
    $
    51,824
    
    
    $
    37,665
    
    
    $
    36,090Operating expenses:Selling and tour promotion
    
    
    22,616
    
    
    
    18,534
    
    
    
    15,632General and administrative
    
    
    6,537
    
    
    
    4,566
    
    
    
    5,13129,153
    
    
    
    23,100
    
    
    
    20,763Operating income
    
    
    22,671
    
    
    
    14,565
    
    
    
    15,327Other income (expense):Interest and dividend income
    
    
    1,067
    
    
    
    820
    
    
    
    1,062Realized and unrealized loss on foreign currency
exchange contracts and other, net
    
    
    (32
    )
    
    
    
    
    
    
    1,035
    
    
    
    820
    
    
    
    1,062Income before income taxes
    
    
    23,706
    
    
    
    15,385
    
    
    
    16,389Income tax provision
    
    
    8,059
    
    
    
    5,231
    
    
    
    5,591Net income
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798Earnings per
share - basic and diluted:Net income
per share  basic
    
    $
    1.56
    
    
    $
    1.02
    
    
    $
    1.10Weighted-average common shares outstanding - basic
    
    
    10,045
    
    
    
    9,923
    
    
    
    9,837Net income
per share  diluted
    
    $
    1.50
    
    
    $
    1.00
    
    
    $
    1.06Weighted-average common shares outstanding - diluted
    
    
    10,449
    
    
    
    10,170
    
    
    
    10,207
 The accompanying notes are an integral part of the consolidated financial statements.   *See Managements Discussion and Analysis of Financial Condition and Results of Operation on Gross
Program Receipts F-5




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##### Table of Contents



AMBASSADORS GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Net income
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798Unrealized gain
(loss) on foreign
currency exchange
contracts, net of income
tax (provision) benefit
of $884, $(1,213), and
$(784)
    
    
    (1,716
    )
    
    
    2,354
    
    
    
    1,424Unrealized gain (loss)
on available-for-sale
securities, net of
income tax (provision)
benefit of $48, $35 and
$(41)
    
    
    (90
    )
    
    
    (58
    )
    
    
    71Comprehensive income
    
    $
    13,841
    
    
    $
    12,450
    
    
    $
    12,293
 The accompanying notes are an integral part of the consolidated financial statements. F-6




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##### Table of Contents



AMBASSADORS GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Unearned
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Restricted
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Stock
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital

    
    
    Earnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Total(in thousands)Balances, December 31, 2001
    
    
    9,813
    
    
    $
    98
    
    
    $
    15,630
    
    
    $
    9,451
    
    
    $
    
    
    
    $
    (340
    )
    
    $
    24,839Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,798
    
    
    
    
    
    
    
    
    
    
    
    10,798Stock issued
    
    
    10
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Stock options exercised
    
    
    55
    
    
    
    1
    
    
    
    424
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425Tax benefit associated with
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Dividend to parent company
    
    
    
    
    
    
    
    
    
    
    (10,851
    )
    
    
    (9,451
    )
    
    
    
    
    
    
    
    
    
    
    (20,302
    )Contribution from parent
    
    
    
    
    
    
    
    
    
    
    10,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,400Other comprehensive loss,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,495
    
    
    
    1,495Balances, December 31, 2002
    
    
    9,878
    
    
    
    99
    
    
    
    15,808
    
    
    
    10,798
    
    
    
    
    
    
    
    1,155
    
    
    
    27,860Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,154
    
    
    
    
    
    
    
    
    
    
    
    10,154Stock options exercised
    
    
    136
    
    
    
    1
    
    
    
    1,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,147Tax benefit associated with
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452Dividend to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,100
    )
    
    
    
    
    
    
    
    
    
    
    (1,100
    )Other comprehensive
income, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,296
    
    
    
    2,296Balances, December 31, 2003
    
    
    10,014
    
    
    
    100
    
    
    
    17,406
    
    
    
    19,852
    
    
    
    
    
    
    
    3,451
    
    
    
    40,809Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,647
    
    
    
    
    
    
    
    
    
    
    
    15,647Stock options exercised
    
    
    165
    
    
    
    2
    
    
    
    1,513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,515Tax benefit associated with
exercise of stock options
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489Stock redemptions
    
    
    (98
    )
    
    
    (1
    )
    
    
    (2,567
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,568
    )Restricted stock grant
    
    
    45
    
    
    
    
    
    
    
    1,447
    
    
    
    
    
    
    
    (1,447
    )
    
    
    
    
    
    
    Amortization of unearned
restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    45Dividend to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,630
    )
    
    
    
    
    
    
    
    
    
    
    (4,630
    )Other comprehensive
income, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,806
    )
    
    
    (1,806
    )Balances, December 31, 2004
    
    
    10,126
    
    
    $
    101
    
    
    $
    18,288
    
    
    $
    30,869
    
    
    $
    (1,402
    )
    
    $
    1,645
    
    
    $
    49,501
 The accompanying notes are an integral part of the consolidated financial statements. F-7




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##### Table of Contents



AMBASSADORS GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,2004
    
    
    2003
    
    
    2002(in thousands)Cash flows from operating activities:Net income
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798Adjustments to reconcile net income
to net cash provided by operating
activities:Depreciation and amortization
    
    
    962
    
    
    
    935
    
    
    
    775Amortization of unearned compensation
    
    
    45
    
    
    
    
    
    
    
    Deferred income tax provision
    
    
    894
    
    
    
    44
    
    
    
    157Equity in earnings on investment
    
    
    
    
    
    
    (33
    )
    
    
    Change in assets and liabilities, net of effects of
purchase of subsidiary:Accounts receivable
    
    
    110
    
    
    
    (142
    )
    
    
    52Prepaid program costs and expenses
    
    
    (853
    )
    
    
    (92
    )
    
    
    (15
    )Accounts payable and accrued expenses
    
    
    713
    
    
    
    4,070
    
    
    
    265Participants deposits
    
    
    10,388
    
    
    
    2,319
    
    
    
    9,350Net cash provided by operating activities
    
    
    27,906
    
    
    
    17,255
    
    
    
    21,382Cash flows from investing activities:Proceeds from sale of available-for-sale securities
    
    
    29,985
    
    
    
    24,012
    
    
    
    32,516Purchase of available-for-sale securities
    
    
    (49,071
    )
    
    
    (36,081
    )
    
    
    (31,057
    )Purchase of property and equipment
    
    
    (1,907
    )
    
    
    (1,057
    )
    
    
    (198
    )Purchase of other investments
    
    
    (4
    )
    
    
    (13
    )
    
    
    (2
    )Net cash provided by (used in) investing activities
    
    
    (20,997
    )
    
    
    (13,139
    )
    
    
    1,259Cash flows from financing activities:Contribution from parent company
    
    
    
    
    
    
    
    
    
    
    10,400Dividend to parent company
    
    
    
    
    
    
    
    
    
    
    (20,493
    )Proceeds from exercise of stock options
    
    
    1,515
    
    
    
    1,147
    
    
    
    425Dividend payment to shareholders
    
    
    (4,630
    )
    
    
    (1,100
    )
    
    
    Payments for stock buyback
    
    
    (2,568
    )
    
    
    
    
    
    
    Payments on capital lease
    
    
    (142
    )
    
    
    (13
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (5,825
    )
    
    
    34
    
    
    
    (9,668
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,084
    
    
    
    4,150
    
    
    
    12,973Cash and cash equivalents, beginning of period
    
    
    33,653
    
    
    
    29,503
    
    
    
    16,530Cash and cash equivalents, end of period
    
    $
    34,737
    
    
    $
    33,653
    
    
    $
    29,503
 See Note 14 for Supplemental Disclosures of Consolidated Statements of Cash Flows. The accompanying notes are an integral part of the consolidated financial statements. F-8




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##### Table of Contents



AMBASSADORS GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    The Company Ambassadors Group, Inc. is a leading educational travel company that organizes and
promotes international and domestic educational travel and sports programs for youth, athletes and
professionals. These consolidated financial statements include the accounts of Ambassadors Group,
Inc. and our wholly owned subsidiaries, Ambassador Programs, Inc., Ambassadors Specialty Group,
Inc., and Ambassadors Unlimited, LLC. All significant inter-company accounts and transactions are
eliminated in consolidation. Beginning March 1, 2002, we operated as an independent stand-alone company. Prior to that
date, we were a wholly owned subsidiary of Ambassadors International, Inc. (International) and
comprised the operations of the former Education Group segment of International.On January 25, 2002, the board of directors of International approved the distribution of all
of our Companys common stock to Internationals stockholders (the spin-off), and such stock was
distributed after the close of business on February 28, 2002, in the amount of one share of our
common stock for each outstanding share of International common stock. The distribution of common
stock was intended to be tax-free to our Company and to its stockholders, and International
received a favorable Internal Revenue Service private letter ruling to that effect. In connection with the spin-off, we entered into agreements with International that
separated our business operations. These agreements also govern ongoing relationships. During
2002 prior to its spin-off from International and pursuant to the Master Separation and
Distribution Agreement, we paid to International a cash dividend approximating $20.5 million, or
$2.08 per outstanding share, and International contributed a capital contribution approximating
$10.4 million to our Company. Our Company has a single operating segment consisting of the educational travel and sports
programs for students, athletes and professionals. These programs have similar economic
characteristics, offer comparable products to participants and utilize similar processes for
program marketing. All of our assets are located in the United States. Our revenues as a percentage
of total revenues were derived from travel programs conducted in the following geographic areas: Years EndedDecember 31,2004
    
    
    2003
    
    
    2002South Pacific
(primarily Australia
and New Zealand)
    
    
    34
    %
    
    
    36
    %
    
    
    55
    %Europe
    
    
    48
    %
    
    
    50
    %
    
    
    31
    %Asia (primarily China)
    
    
    4
    %
    
    
    2
    %
    
    
    5
    %United States
    
    
    9
    %
    
    
    7
    %
    
    
    5
    %Other
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %
 F-9




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  2.Summary of Significant Accounting Policies Credit Risk Our financial instruments that are exposed to concentrations of credit risk consist
primarily of cash and cash equivalents, certain investments and trade accounts receivable. Our
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, which are not covered by this insurance. We believe that our primary trade
accounts receivable credit risk exposure is limited as delegates are required to pay for their
entire program tuition prior to the program departure. Our Company uses foreign currency exchange contracts as part of an overall
risk-management strategy. These instruments are used as a means of mitigating exposure to foreign
currency risk connected to anticipated travel programs. In entering into these contracts, our
Company has assumed the risk, which might arise from the possible inability of counterparties to
meet the terms of their contracts, but we do not expect any losses as a result of counterparty
defaults. Cash and Cash Equivalents Our Company invests cash in excess of operating requirements in short-term time deposits,
money market instruments, government mutual bond funds and other investments. We consider
investments with remaining maturities at date of purchase of three months or less to be cash
equivalents. Our restricted cash equivalents represent certificates of deposit issued in our name and
held by an airline company as collateral for airfare purchase agreements. Additionally, we have a
$2.5 million revolving credit facility for the purpose of issuing letters of credit to several
airlines. The facility allows for letters of credit to be issued through September 2005, which must
expire no later than November 2006. At December 31, 2004, 2003 and 2002, the Company had letters of
credit outstanding of approximately $1.2 million, $1.3 million, and $1.3 million, respectfully,
under this facility. We anticipate renewal of the facilities. Derivative Financial Instruments We value all derivative instruments on our balance sheet at fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge transaction and, if it
is, depending on the type of hedge transaction. For qualifying cash flow hedge transactions in
which we hedge the variability of cash flows related to a forecasted transaction, changes in the
fair value of derivative instruments are reported in other comprehensive income. The gains and
losses on the derivative instruments that are reported in other comprehensive income are
reclassified as earnings in the periods in which earnings are impacted by the variability of the
cash flows of the hedged item. The ineffective portion of all hedges is recognized in the
statements of operations as other income (expense). Unrealized gains and losses on foreign currency
exchange contracts that are not qualifying cash flow hedges as defined by SFAS 133 are recognized
in the statements of operations as other income (expense). All of our outstanding foreign currency
exchange contracts at December 31, 2004 and 2003 qualify as cash flow hedges. F-10




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Investments Our Company classifies its marketable debt investments as available-for-sale 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 income, 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. During August 2003, we purchased a minority interest in a certain company. The company
provides a one full day development activity for delegates traveling in Europe. This investment is
reported using the equity method. Property and Equipment Property and equipment are stated at cost. Cost of maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed currently. Major additions and
betterments are capitalized. Depreciation and amortization are provided over the lesser of the
estimated useful lives of the respective assets or the lease term (including extensions), using the
straight-line method, generally five to seven years. Our 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 income. Goodwill and Intangible Assets Intangible assets total approximately $70,000 at December 31, 2004 and 2003.These assets are subject to estimates regarding future cash flows associated with such goodwill. If
expected cash flows do not occur as forecasted, an adjustment to the carrying value of intangible
assets would be charged to income in the period incurred. In March 2002, our Company issued 2,000 shares of its common stock to the owners of a golf
travel company in exchange for certain assets of the golf travel company. The cost of the assets
would be amortized using the straight-line method over five years and would be classified as other
long-term assets on the balance sheet. In June 2003, however, we reviewed the carrying value of
this asset and determined that there is no future value of the asset and our Company will not be
able to generate future profits. We therefore wrote off the remaining unamortized balance of
approximately $154,000. Revenue Recognition We bill travel delegates in advance, payments of which are recorded as participants
deposits. Our Company pays for certain direct program costs in advance of travel, including but not
limited to airfare, hotel, rail passes and other program costs, which are recorded as prepaid
program costs and expenses. We recognize travel revenue and related costs when travel convenes. Selling and Tour Promotion Expenses We expense all selling and tour promotion expenses as incurred. F-11




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AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Income Taxes The asset and liability approach is used to account for income taxes by recognizing
deferred tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and liabilities. Earnings Per Share Earnings per share  basic is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Earnings per share  diluted 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. Comprehensive Income Other comprehensive income refers to revenues, expenses, gains and losses that under
accounting principles generally accepted in the United States are included in comprehensive income
but are excluded from net income as these amounts are recorded directly as an adjustment to
stockholders equity, net of tax. Our Companys other comprehensive income is composed of
unrealized gains and losses on foreign currency exchange contracts and available-for-sale
securities. Accounting for Stock Options As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, the Company has chosen to measure compensation cost for
stock-based employee compensation plans using the intrinsic value method of accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and to
provide the disclosure only requirements of SFAS 123. The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions used for grants
in 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Expected dividend yield
    
    
    1.75
    %
    
    
    1.81
    %
    
    
    0.00
    %Expected stock price volatility
    
    
    37.44
    %
    
    
    38.87
    %
    
    
    41.94
    %Risk-free interest rate
    
    
    3.63
    %
    
    
    5.27
    %
    
    
    3.14
    %Expected life of options
    
    6.27

    years
    
    7.12
    years
    
    5.03
    years
 The weighted-average fair value of options granted during 2004, 2003, and 2002 was
$10.22, $8.54, and $5.01, respectively. F-12




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AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Our Company adopted the disclosure-only provisions of SFAS No. 123 and as amended by SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, no
compensation expense has been recognized in 2004 and 2003 for unexercised options related to the
stock option plan. Had compensation cost for our stock option plan been determined based on fair
value at the grant dates under the plan consistent with the method of SFAS No. 123, net income and
net income per share amounts for the years ended December 31, 2004 and 2003, would have been
changed to the pro-forma amounts indicated below (in thousands except per share data): 2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798Total stock-based employee compensation
expense determined under fair-value
based method for all awards, net of
related tax effects
    
    
    372
    
    
    
    474
    
    
    
    724Pro forma net income
    
    $
    15,275
    
    
    $
    9,680
    
    
    $
    10,074Pro forma net income per share - basic
    
    $
    1.52
    
    
    $
    0.98
    
    
    $
    1.02Pro forma net income per share - diluted
    
    $
    1.46
    
    
    $
    0.95
    
    
    $
    0.99
 Estimates The preparation of consolidated financial statements requires our Company to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates and judgments, including those associated with investments, intangible
assets, income taxes, derivative financial instruments, and contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. Reclassifications Certain prior-year amounts have been reclassified to conform with current year financial
statement presentation. Such reclassifications had no impact on previously reported net income,
cash flows or stockholders equity. F-13




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AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (''FASB) issued SFAS No. 123(R),
''Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to be expensed over the applicable
vesting period. Pro forma disclosure of share-based payments effect to the statement of operations
is no longer an alternative, and SFAS No. 123(R) is effective for all stock-based awards granted on
or after July 1, 2005. In addition, companies must also recognize compensation expense related to
any awards that are not fully vested as of the effective date. Compensation expense for the
unvested awards will be measured based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We are
currently evaluating the effect that the adoption of SFAS 123(R) will have on our financial
position and results of operations. The adoption of SFAS No. 123(R) is expected to increase
compensation expense in the future. 3. Derivative Financial Instruments The majority of our travel programs take place outside of the United States and most
foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are
exposed to foreign currency risk relative to changes in foreign currency exchange rates between
those currencies and the U.S. dollar. Our processes include a program to provide a hedge against
certain of these foreign currency risks, and we use forward contracts that allow us to acquire the
foreign currency at a fixed price for a specified period of time. Some of the forward contracts
include a synthetic component if a pre-determined trigger occurs during the term of the contract.
All of the derivatives are cash flow hedges of forecasted transactions. At December 31, 2004, the following forward contracts were outstanding (in thousands): NotionalAmount
    
    
    MaturesForward contracts:Australian dollar
    
    
    7,400
    
    
    January - July 2005British pound
    
    
    4,150
    
    
    January - July 2005Canadian dollar
    
    
    500
    
    
    January - April 2005Euro dollar
    
    
    7,500
    
    
    January - June 2005Japanese yen
    
    
    92,500
    
    
    March - July 2005South African rand
    
    
    763
    
    
    January 2005New Zealand dollar
    
    
    1,000
    
    
    February 2005Forward contracts with synthetic option:Australian dollar
    
    
    5,000
    
    
    May - September 2005Euro dollar
    
    
    3,500
    
    
    March - May 2005New Zealand dollar
    
    
    1,000
    
    
    May 2005
 F-14




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At December 31, 2003, the following forward contracts were outstanding (in thousands): NotionalAmount
    
    
    MaturesForward contracts:Australian dollar
    
    
    12,400
    
    
    January - July 2004British pound
    
    
    5,650
    
    
    January - July 2004Euro dollar
    
    
    16,500
    
    
    February - June 2005New Zealand dollar
    
    
    6,240
    
    
    March - July 2004
 At December 31, 2004 and 2003, associated with these financial instruments, we recorded a
net unrealized gain of approximately $2.6 million and $5.2 million, respectively. Unrealized gains
on forward contracts recorded in other comprehensive income and expected to be reclassified to
revenue during the year ending December 31, 2005 are approximately $1.7 million. Unrealized gains or losses associated with these transactions that qualify as cash flow
hedges under SFAS 133 are reported in other comprehensive income. Any realized gains or losses
associated with these transactions are recognized in our operations in the period the contracts are
closed. The net unrealized gain (loss) reclassified to revenue (expense) from other accumulated
comprehensive income for the years ended December 31, 2004 and 2003, was approximately $3.1 million
and $(1.1) million, respectively. Income tax (benefit) on the unrealized gain (loss) reclassified
in 2004 and 2003 was approximately $(1.6) million and $(0.6) million, respectively. The Company
assesses hedge ineffectiveness on a quarterly basis and records the gain or loss related to the
ineffective portion in the statements of income. During the years ended December 31, 2004 and 2003,
there were no significant amounts recognized in income due to hedge ineffectiveness.  4.
    Investments At December 31, 2004, and December 31, 2003, the cost and estimated fair values of our
Companys investments in U.S. government and agency obligations were as follows (in thousands): Gross
    
    
    Gross
    
    
    Fair Value/Unrealized
    
    
    Unrealized
    
    
    CarryingCost
    
    
    Gain
    
    
    Losses
    
    
    ValueDecember 31, 2004
    
    $
    52,939
    
    
    $
    
    
    
    $
    119
    
    
    $
    52,820December 31, 2003
    
    $
    33,853
    
    
    $
    19
    
    
    $
    
    
    
    $
    33,872
 F-15




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) At December 31, 2004, the amortized cost and fair value of the available-for-sale securities,
by contractual maturity were as follows (in thousands): Amortized
    
    
    FairCost
    
    
    ValueOne year or less
    
    $
    12,295
    
    
    $
    12,295After one year through two years
    
    
    40,644
    
    
    
    40,525$
    52,939
    
    
    $
    52,820
 Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties.  5.
    Property and Equipment Property and equipment consists of the following (in thousands): December 31,2004
    
    
    2003Office furniture, fixtures and equipment
    
    $
    3,591
    
    
    $
    3,504Computer equipment and software
    
    
    4,573
    
    
    
    4,682Leasehold improvements
    
    
    980
    
    
    
    9729,144
    
    
    
    9,158Less accumulated depreciation and amortization
    
    
    (5,233
    )
    
    
    (6,192
    )$
    3,911
    
    
    $
    2,966
 Depreciation and amortization expense on property and equipment of approximately $1.0
million, $0.8 million and $0.7 million, for the years ended December 31, 2004, 2003, and 2002,
respectively, was included in the determination of net income. During 2004, approximately $1.9
million in fully depreciated property and equipment was written off.  6.
    Other Liabilities During October 2003, we received a $3.1 million refund of moneys previously paid to a
foreign tax authority. It is currently unclear as to whether the refund is permanent and
accordingly, we have recorded this refund as a liability on the balance sheet. On a quarterly
basis, we adjust the liability for interest and any gain or loss on the currency exchange. At
December 31, 2004 and 2003, the refund of $3.8 million and $3.4 million was included in other
liabilities. F-16




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##### Table of Contents



MBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 7. Income Taxes The provision for income taxes consisted of the following (in thousands): Years Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    7,147
    
    
    $
    5,176
    
    
    $
    5,429State
    
    
    18
    
    
    
    11
    
    
    
    5Deferred
    
    
    894
    
    
    
    44
    
    
    
    157$
    8,059
    
    
    $
    5,231
    
    
    $
    5,591
 Components of the net deferred tax assets and liabilities are as follows (in thousands): December
31, 2004Assets
    
    
    Liabilities
    
    
    TotalAmortization of goodwill and non-compete agreement
    
    $
    1,490
    
    
    $
    
    
    
    $
    1,490Accrued vacation and compensation
    
    
    122
    
    
    
    
    
    
    
    122Unrealized gain on foreign currency exchange contracts
    
    
    
    
    
    
    (887
    )
    
    
    (887
    )Unrealized gain on available-for-sale securities
    
    
    42
    
    
    
    
    
    
    
    42Depreciation
    
    
    
    
    
    
    (755
    )
    
    
    (755
    )Total temporary differences
    
    $
    1,654
    
    
    $
    (1,642
    )
    
    $
    12
 December 31, 2003Assets
    
    
    Liabilities
    
    
    TotalAmortization of goodwill and non-compete agreement
    
    $
    1,675
    
    
    $
    
    
    
    $
    1,675Accrued vacation and compensation
    
    
    87
    
    
    
    
    
    
    
    87Unrealized gain on foreign currency exchange contracts
    
    
    
    
    
    
    (1,771
    )
    
    
    (1,771
    )Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Depreciation
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Total temporary differences
    
    $
    1,762
    
    
    $
    (1,788
    )
    
    $
    (26
    )
 F- 17




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The income tax provision differs from that computed using the federal statutory rate
applied to income before income taxes as follows (in thousands): Years Ended December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Provision at
the federal
statutory rate
    
    $
    8,297
    
    
    
    35.0
    %
    
    $
    5,385
    
    
    
    35.0
    %
    
    $
    5,736
    
    
    
    35.0
    %Tax exempt interest
    
    
    (350
    )
    
    
    (1.5
    )
    
    
    (235
    )
    
    
    (1.5
    )
    
    
    (221
    )
    
    
    (1.3
    )State income tax,
net of federalbenefit
    
    
    12
    
    
    
    0.1
    
    
    
    7
    
    
    
    
    
    
    
    3
    
    
    
    Other
    
    
    100
    
    
    
    0.4
    
    
    
    74
    
    
    
    0.5
    
    
    
    73
    
    
    
    0.4$
    8,059
    
    
    
    34.0
    %
    
    $
    5,231
    
    
    
    34.0
    %
    
    $
    5,591
    
    
    
    34.1
    %
 8. Capital Lease We lease certain office equipment under a capital lease arrangement. The total cost and
accumulated depreciation of equipment under capital lease is approximately $756,000 and $164,000,
respectively, at December 31, 2004. The following is a schedule of minimum lease payments required
under the capital lease as of December 31, 2004 (in thousands): Year Ended December 31,2005
    
    $
    1642006
    
    
    1642007
    
    
    1642008
    
    
    151643Less amount representing
interest
    
    
    42601Less current portion
    
    
    147$
    454
 At the end of the lease term, we have the option to purchase the equipment at fair market
value. F-18




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 9. Commitments and Contingencies We lease office facilities and office equipment under non-cancelable operating leases. At
December 31, 2004, future minimum lease commitments were as follows (in thousands): Year Ended December 31,2005
    
    $
    7392006
    
    
    7412007
    
    
    7422008
    
    
    7072009
    
    
    522$
    3,451
 Total rent expense for the years ended December 31, 2004, 2003, and 2002, was
approximately $0.8 million, $0.7 million, and $0.7 million, respectively. We are 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 our Company. 10. Stock Plans Effective November 2001, our Company adopted the 2001 Equity Participation Plan (the
Plan). 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 our
Company. The maximum number of shares which may be awarded under the Plan is 1.8 million shares. Under the terms of the Plan, options to purchase shares of our 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, which is generally set at 25
percent per year for four years. The options may be exercised any time after they are vested for a
period up to 10 years from the grant date. Under the terms of the Plan, stock grants follow the same grant price parameters as options.
The Compensation Committee also establishes the vesting period of the grants, which is generally
set at 100 percent at the conclusion of four years. Key employees of our Company who have been
awarded stock grants and are full time employees upon the four year vesting period then own the
stock. During 2004, we granted approximately 44,600 stock grants to key employees, and these
grants are expensed on a straight line basis over the life of the grant, through 2008. F- 19




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Upon our spin-off effective February 28, 2002, we granted approximately 1.2 million stock
options to our Company employees and directors pursuant to this Plan. The total grant of
approximately 1.2 million stock options resulted from approximately 0.8 million converted options
originally granted under International and approximately 0.4 million additional options granted by
us in conjunction with the spin-off. The stock options and other awards, as converted or adjusted,
have the same vesting provisions, option periods, and other terms and conditions as International
options. The number of shares and exercise price of each stock option were adjusted so that each
option has the same ratio of the exercise price per share to the market value per share, and the
same economic value. In order for the economic value to remain constant, the aggregate difference
between market value and exercise price prior to and immediately after the spin-off had to be the
same. No new measurement date occurred upon conversion of the stock options. The following table presents information about the options as of December 31, 2004: Weighted-AverageNumber
    
    
    Range of
    
    
    Exercise
    
    
    Remainingof Shares
    
    
    Exercise Price
    
    
    Price
    
    
    Life (years)Exercisable options
    
    
    47,765
    
    
    $
    5.27
    
    
    
    6.69
    
    
    $
    6.33
    
    
    
    3.1Exercisable options
    
    
    234,332
    
    
    
    6.69
    
    
    
    10.04
    
    
    
    8.32
    
    
    
    4.3Exercisable options
    
    
    302,850
    
    
    
    10.04
    
    
    
    13.39
    
    
    
    12.30
    
    
    
    7.0Exercisable options
    
    
    16,930
    
    
    
    13.39
    
    
    
    16.74
    
    
    
    15.05
    
    
    
    6.2Exercisable options
    
    
    27,393
    
    
    
    16.74
    
    
    
    20.08
    
    
    
    18.61
    
    
    
    8.2Total exercisable
    
    
    629,270
    
    
    
    5.27
    
    
    
    20.08
    
    
    
    10.71Unexercisable options
    
    
    515
    
    
    
    9.10
    
    
    
    10.04
    
    
    
    8.32
    
    
    
    4.3Unexercisable options
    
    
    264,090
    
    
    
    10.04
    
    
    
    13.39
    
    
    
    12.24
    
    
    
    7.0Unexercisable options
    
    
    8,540
    
    
    
    13.39
    
    
    
    16.74
    
    
    
    14.94
    
    
    
    6.2Unexercisable options
    
    
    56,458
    
    
    
    16.74
    
    
    
    20.08
    
    
    
    19.17
    
    
    
    8.2Unexercisable options
    
    
    28,850
    
    
    
    20.08
    
    
    
    23.43
    
    
    
    22.30
    
    
    
    8.8Unexercisable options
    
    
    33,800
    
    
    
    23.43
    
    
    
    26.78
    
    
    
    24.36
    
    
    
    8.9Unexercisable options
    
    
    70,715
    
    
    
    30.12
    
    
    
    33.47
    
    
    
    33.47
    
    
    
    9.8Total unexercisable
    
    
    462,968
    
    
    
    9.10
    
    
    
    33.47
    
    
    
    17.89Total all options
    
    
    1,092,238
    
    
    $
    5.27
    
    
    
    33.47
    
    
    $
    13.75
    
    
    
    6.6
 At December 31, 2003, there were 571,286 exercisable stock options at the weighted
average exercise price of $9.54 per share. F-20




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Stock option transactions during 2003 and 2004 were as follows: WeightedNumber of
    
    
    AverageShares
    
    
    Exercise PriceBalance at December 31, 2002
    
    
    1,183,127
    
    
    $
    10.28Granted
    
    
    127,223
    
    
    
    16.74Forfeited
    
    
    (34,793
    )
    
    
    11.31Exercised
    
    
    (136,265
    )
    
    
    8.32Balance at December 31, 2003
    
    
    1,139,292
    
    
    
    11.21Granted
    
    
    136,665
    
    
    
    28.60Forfeited
    
    
    (17,358
    )
    
    
    15.09Exercised
    
    
    (166,361
    )
    
    
    8.39Balance December 31, 2004
    
    
    1,092,238
    
    
    $
    13.75
 11. Employee Benefit Plan Effective March 2002, our Company established a 401(k) Profit Sharing Plan for the
employees of our Company. All Plan assets associated with the employees of our Company were
transferred from Internationals Plan to the new Plan established by the Company during April 2002.
Prior to March 2002, the Companys employees participated in Internationals 401(k) Profit Sharing
Plan. Our employees participate in Ambassadors Group, Inc. 401(k) Profit Sharing Plan (the
Plan). Employees are eligible to participate in the Plan upon six months of service and 18 years of
age. Employees may contribute up to 92 percent of their salary, subject to the maximum contribution
allowed by the Internal Revenue Service. Our matching contribution is discretionary based upon
approval by management. Employees are 100 percent vested in their contributions and vest in Company
matching contributions after their initial four years of employment. During the years ended
December 31, 2004, 2003, and 2002, we contributed approximately $33,000, $31,000, and $34,000, to
the Plan, respectively. 12. Fair Value of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been
determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data and to
develop the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. 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. F- 21




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AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Cash and Cash Equivalents The carrying value of cash and cash equivalents approximates fair
value due to the nature of the cash investments. Derivatives The fair value of our investments in foreign currency forward contracts is
based on quoted market prices and the spot rate of the foreign currencies subject to contracts at
period end. Available-for-Sale Securities The fair value of our investment in debt securities is
based on quoted market prices. The estimated fair values of the financial instruments as of the dates indicated are as
follows (in thousands): December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    $
    34,737
    
    
    $
    34,737
    
    
    $
    33,653
    
    
    $
    33,653Derivatives
    
    
    2,609
    
    
    
    2,609
    
    
    
    5,209
    
    
    
    5,209Available-for-sale securities
    
    
    52,820
    
    
    
    52,820
    
    
    
    33,872
    
    
    
    33,872
 Limitations The fair-value estimates are made at a distinct point in time based on
relevant market information and information about the financial instruments. Fair value estimates
are based on judgments regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. Accordingly, the
estimates presented herein are not necessarily indicative of what our Company could realize in a
current market exchange. F- 22




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 13. Earnings Per Share The following table presents a reconciliation of basic and diluted earnings per share
(EPS) computations (in thousands, except per share data): Years Ended December 31,2004
    
    
    2003
    
    
    2002Numerator:Net income for basic and diluted earnings per share
    
    $
    15,647
    
    
    $
    10,154
    
    
    $
    10,798Denominator:Weighted-average shares outstanding  basic
    
    
    10,045
    
    
    
    9,923
    
    
    
    9,837Effect of dilutive common stock options
    
    
    399
    
    
    
    247
    
    
    
    370Effect of dilutive common stock grants
    
    
    5
    
    
    
    
    
    
    
    Weighted-average shares outstanding  diluted
    
    
    10,449
    
    
    
    10,170
    
    
    
    10,207Earnings per share  basic:Net income per share  basic
    
    $
    1.56
    
    
    $
    1.02
    
    
    $
    1.10Earnings per share  diluted:Net income per share  diluted
    
    $
    1.50
    
    
    $
    1.00
    
    
    $
    1.06
 14. Supplemental Disclosures of Consolidated Statements of Cash Flows We paid cash for taxes during 2004 and 2003 of approximately $7.4 million and $4.5
million, respectively. Prior to our spin-off from International, all taxes were paid by
International. Non-cash investing and financing activities of the Company during the years ended
December 31, 2004, 2003 and 2002, are as follows (in thousands): 2004
    
    
    2003
    
    
    2002Unrealized gain (loss) on foreign currency
exchange contracts
    
    $
    (2,600
    )
    
    $
    3,567
    
    
    $
    2,145Unrealized gain (loss) on available-for-sale securities
    
    
    (138
    )
    
    
    (93
    )
    
    
    112Tax benefit from stock options exercised
    
    
    489
    
    
    
    452
    
    
    
    128A capital lease obligation was incurred when the
Company entered into a lease for new equipment
    
    
    
    
    
    
    756
    
    
    
    
 F- 23




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##### Table of Contents



AMBASSADORS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 15. Quarterly Financial Data Summarized quarterly financial data for 2004, 2003, and 2002 is as follows (unaudited,
and in thousands except per share data): Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312004Net Revenues
    
    $
    1,260
    
    
    $
    25,854
    
    
    $
    21,391
    
    
    $
    3,319Selling and tour promotion expense
    
    
    3,785
    
    
    
    5,031
    
    
    
    6,926
    
    
    
    6,874General and administrative expense
    
    
    1,072
    
    
    
    1,248
    
    
    
    1,204
    
    
    
    3,013Income (loss) before taxes
    
    
    (3,395
    )
    
    
    19,877
    
    
    
    13,511
    
    

    
    (6,288
    )Net income (loss)
    
    
    (2,241
    )
    
    
    13,119
    
    
    
    8,918
    
    
    
    (4,149
    )Earnings (loss) per share-basic
    
    
    (0.22
    )
    
    
    1.31
    
    
    
    0.89
    
    
    
    (0.41
    )Earnings (loss) per share-diluted
    
    
    (0.22
    )
    
    
    1.26
    
    
    
    0.85
    
    
    
    (0.41
    )
 Gross program receipts totaled $4.1 million, $72.8 million, $61.2 million and $9.0
million for the quarters ended March 21, June 30, September 30, and December 31, 2004,
respectively. Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312003Net Revenues
    
    $
    1,037
    
    
    $
    18,184
    
    
    $
    16,231
    
    
    $
    2,213Selling and tour promotion expense
    
    
    2,976
    
    
    
    3,659
    
    
    
    6,377
    
    
    
    5,522General and administrative expense
    
    
    883
    
    
    
    1,127
    
    
    
    726
    
    
    
    1,830Income (loss) before taxes
    
    
    (2,600
    )
    
    
    13,665
    
    
    
    9,304
    
    
    
    (4,985
    )Net income (loss)
    
    
    (1,716
    )
    
    
    9,019
    
    
    
    6,141
    
    
    
    (3,290
    )Earnings (loss) per share-basic
    
    
    (0.17
    )
    
    
    0.91
    
    
    
    0.62
    
    
    
    (0.33
    )Earnings (loss) per share-diluted
    
    
    (0.17
    )
    
    
    0.90
    
    
    
    0.60
    
    
    
    (0.33
    )
 Gross program receipts totaled $2.6 million, $53.7 million, $46.8 million and $5.5
million for the quarters ended March 31, June 30, September 30, and December 31, 2003,
respectively. Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312002Net Revenues
    
    $
    667
    
    
    $
    17,367
    
    
    $
    16,284
    
    
    $
    1,772Selling and tour promotion expense
    
    
    2,437
    
    
    
    3,325
    
    
    
    5,310
    
    
    
    4,560General and administrative expense
    
    
    1,056
    
    
    
    1,101
    
    
    
    978
    
    
    
    1,996Income (loss) before taxes
    
    
    (2,633
    )
    
    
    13,278
    
    
    
    10,279
    
    
    
    (4,535
    )Net income (loss)
    
    
    (1,765
    )
    
    
    8,843
    
    
    
    6,731
    
    
    
    (3,011
    )Earnings (loss) per share-basic
    
    
    (0.18
    )
    
    
    0.90
    
    
    
    0.68
    
    
    
    (0.31
    )Earnings (loss) per share-diluted
    
    
    (0.18
    )
    
    
    0.88
    
    
    
    0.67
    
    
    
    (0.31
    )
 Gross program receipts totaled $2.4 million, $49.5 million, $41.0 million, and $4.3
million for the quarters ended March 31, June 30, September 30, and December 31, 2001,
respectively. F- 24




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. AMBASSADORS GROUP, INC.By:
    
    /s/ JEFFREY D. THOMASJeffrey D. Thomas,Chief Executive Officer
 Date: March 11, 2005 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/ JEFFREY D. THOMAS
    
    President, Chief Executive
    
    March 11, 2005Officer and DirectorJeffrey D. Thomas
    
    (Principal Executive Officer)/s/ JOHN A. UEBERROTH
    
    Chairman of the Board of Directors
    
    March 11, 2005John A. Ueberroth/s/ MARGARET M. THOMAS
    
    Executive Vice-President
    
    March 11, 2005Margaret M. Thomas/s/ COLLEEN K.MCCANN-LILLIE
    
    Chief Financial Officer and Secretary
    
    March 11, 2005Colleen K. McCann-Lillie/s/ BRIGITTE M. BREN
    
    Director
    
    March 11, 2005Brigitte M. Bren/s/ JAMES L. EASTON
    
    Director
    
    March 11, 2005James L. Easton/s/ DALE F. FREY
    
    Director
    
    March 11, 2005Dale F. Frey/s/ RAFER L. JOHNSON
    
    Director
    
    March 11, 2005Rafer L. Johnson/s/ JOHN C. SPENCE
    
    Director
    
    March 11, 2005John C. Spence/s/ JOSEPH J. UEBERROTH
    
    Director
    
    March 11, 2005Joseph J. Ueberroth/s/ RICHARD D. C. WHILDEN
    
    Director
    
    March 11, 2005Richard D. C. Whilden
 II - 1




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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    Description2.1
    
    Master Separation and Distribution Agreement between Ambassadors International, Inc. and
the registrant incorporated by reference to the registrants Registration Statement on Form
10 filed on February 4, 2002.2.2
    
    Indemnification and Insurance Matters Agreement between Ambassadors International, Inc.
and the registrant incorporated by reference to the registrants Registration Statement on
Form 10 filed on November 15, 2001.2.3
    
    Master Transitional Services Agreement between Ambassadors International, Inc. and the
registrant incorporated by reference to the registrants Registration Statement on Form 10
filed on November 15, 2001.2.4
    
    Employee Matters Agreement between Ambassadors International, Inc. and the registrant
incorporated by reference to the registrants Registration Statement on Form 10 filed on
November 15, 2001.2.5
    
    Tax Sharing Agreement between Ambassadors International, Inc. and the registrant
incorporated by reference to the registrants Registration Statement on Form 10 filed on
November 15, 2001.2.6
    
    Master Confidential Disclosure Agreement between Ambassadors International, Inc. and the
registrant incorporated by reference to the registrants Registration Statement on Form 10
filed on November 15, 2001.2.7
    
    Credit Facility Agreement between Ambassadors International, Inc. and the registrant
incorporated by reference to the registrants Registration Statement on Form 10 filed on
November 15, 2001.3.1
    
    Amended and Restated Certificate of Incorporation of the registrant incorporated by
reference to the registrants Registration Statement on Form 10 filed on November 15, 2001.3.2
    
    Bylaws of the registrant incorporated by reference to the registrants Registration
Statement on Form 10 filed on November 15, 2001.4.1
    
    Form of Common Stock certificate of the registrant incorporated by reference to the
registrants Registration Statement on Form 10 filed on February 5, 2002.10.1
    
    2001 Equity Participation Plan incorporated by reference to the registrants
Registration Statement on Form 10 filed on January 7, 2002.10.2
    
    Form of 2001 Equity Participation Plan Agreement incorporated by reference to the
registrants Registration Statement on Form 10 filed on November 15, 2001.10.3
    
    Form of Indemnification Agreement between the registrant and each of its executive
officers and directors incorporated by reference to the registrants Registration Statement
on Form 10 filed on January 25, 2002.10.4
    
    Commercial Lease Agreement by and between Portolese & Sample Investments and registrant
(Ferrall Street) incorporated by reference to the registrants 8-K filed on January 4,
2005.
 II - 2




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ExhibitNumber
    
    Description21.1
    
    Subsidiaries of the registrant incorporated by reference to the registrants
Registration Statement on Form 10 initially filed on November 15, 2001.23.1
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.*31.1
    
    Certification by Chief Executive Officer required by Rule 13a-14(a) or Rule 15(d)-14(a).*31.2
    
    Certification by Chief Financial Officer required by Rule 13a-14(a) or Rule 15(d)-14(a).*32.1
    
    Certification by the Chief Executive Officer and Chief Financial Officer as required
by Rule 13a-14(b) or 15(d)-14-(b) and Section 1350 of Chapter 63 of Title 13 of the United
States Code (18 U.S.C. §1350).*
   *
    
    Filed herewith II - 3