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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number: 0-26420
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AMBASSADORS INTERNATIONAL, INC.
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(Exact Name of Registrant As Specified In Its Charter)
Delaware 91-1688605
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Dwight D. Eisenhower Building
110 S. Ferrall Street
Spokane, WA 99202
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(Address of Principal (Zip Code)
Executive Offices)
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:
Title of Each Class
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Common Stock, $.01 Par Value
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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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. [X]
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the Registrant, based upon the closing sales
price of the Common Stock on the Nasdaq Stock Market on March 19,
1999, was $97,816,586. The number of shares of the registrant's
Common Stock outstanding as of March 19, 1999 was 9,824,948.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to
the 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
SIGNATURES
PART I
Item 1. BUSINESS
OVERVIEW
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Ambassadors International, Inc., a Delaware corporation, is a leading
educational travel, travel services and performance improvement
company, which, through its wholly owned subsidiaries, is engaged
primarily in the business of (i) organizing, marketing and operating
international educational travel programs on a worldwide basis for
students and adults (the "Education Group"); and (ii) developing,
marketing and managing performance improvement programs for a
nationwide roster of corporate clients that utilize merchandise awards
and incentive travel, providing business meeting management services,
and providing comprehensive housing reservation, registration and
travel services for meetings, conventions, expositions and trade shows
(the "Performance Group").
The Education Group is comprised of the Company's wholly owned
subsidiary, Ambassadors Education Group, Inc., a Delaware corporation
("AEG"), and AEG's wholly-owned subsidiaries, Ambassadors Programs,
Inc., a Delaware corporation ("API"), and Ambassadors Specialty Group,
Inc., a Delaware corporation ("ASG"). The Performance Group is
comprised of the Company's wholly owned subsidiary, Ambassadors
Performance Group, Inc., a Delaware corporation ("APG") and APG's
wholly-owned subsidiary, Ambassadors Performance Housing, Inc., a
Delaware corporation ("APH"). References to the Company herein
include Ambassadors International, Inc. and its subsidiaries, unless
the context otherwise requires.
The Company was originally incorporated in the State of Washington in
1967 under the name International Ambassador Programs, Inc. to provide
international educational travel programs for students and adults.
The Company was reincorporated in the State of Delaware in 1995. The
Company's principal executive offices are located at Dwight D.
Eisenhower Building, 110 S. Ferrall Street, Spokane, Washington 99202,
and its telephone number is (509) 534-6200.
For information reporting revenues from external customers, a measure
of profit and loss, and total assets, see Note 13 to Consolidated
Financial Statements, beginning on page F-1.
EDUCATION GROUP
The Company's Education Group has been active since the Company's
founding in 1967. The Education Group consists of several specialized
private-label travel programs, including (i) the "People to People
Student Ambassador Programs" ("Student Ambassador Programs"), which
provide opportunities for junior high and high school students to
visit foreign countries to learn about the politics, economy and
culture of such countries and (ii) the "People to People Ambassador
Programs" ("Professional Exchange Programs"), which provides foreign
travel experiences for adults, with emphasis on meetings and seminars
between participants and persons in similar jobs abroad. See
"Business--Education Group."
Since 1983, the Company has organized programs for more than 80,000
students and 48,000 adults in more than 35 countries on 5 continents.
In 1998, the Company's educational travel programs featured visits to
such countries as Australia, China, France, Germany, Great Britain,
India, Italy and New Zealand. In 1998, approximately 15,000
participants traveled on the Company's educational programs.
A majority of the Education Group's programs are organized in
connection with People to People International ("People to People"), 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. Seven Presidents since President
Eisenhower have served as Honorary Chairman of People to People,
including President Bill Clinton, who currently holds that position.
Subject to certain exceptions, the Company's agreements with People to
People give the Company the exclusive right to develop and conduct
programs for kindergarten through college age students using the
People to People name and the non-exclusive right to develop and
conduct programs for adults using the People to People name. The
Company believes that its long association with People to People has
been a major factor in its ability to provide quality educational
student and adult travel programs, and that this relationship provides
the Company with greater access to foreign governmental agencies,
officials and institutions.
The Company also believes that its association with the People to
People programs and the recent efforts of management have provided the
foundation for the Company to develop strategic alliances with
Yosemite National Institutes and the American Youth Soccer
Organization. In addition, through ASG, the Education Group provides
travel programs in such specialty markets as golf and motor racing.
PERFORMANCE GROUP
During 1996, the Company commenced operations of its Performance Group
through the acquisition of two existing entities engaged in this
business. These operations were expanded in 1998, through the
acquisition of Travel Incentives, Inc. ("TII") and Incentive
Associates, Inc. ("IAI"). Through the additional acquisitions in 1998
of Rogal America, Co. ("Rogal") and Destination, Inc. ("Destination"),
the Company further expanded its Performance Group to include
comprehensive housing reservation, registration and travel services
for meetings, conventions, expositions and trade shows. See "Business
- Recent Acquisitions."
The Performance Group develops, markets and manages performance
improvement programs for a nationwide roster of clients. The programs
offer services in three principal areas: (i) performance improvement
programs, (ii) business meeting management services and (iii)
comprehensive housing reservation, registration and travel services.
The Company's performance improvement programs utilize merchandise
awards and travel incentives designed to help clients achieve sales
goals, improve productivity and attract and retain qualified
employees. The Company's business meeting management services assist
clients in planning, coordinating and producing business meetings and
conferences. The Company also provides comprehensive housing
reservation, registration and travel services for meetings,
conventions, expositions and trade shows. These services include
hotel booking, guest registration, confirmation, and on-site services.
The Performance Group's clients include both small and large
businesses and organizations, including several Fortune 500 companies
and nationally recognized trade and professional associations.
The Company intends to continue its strategy of growth by making
selective acquisitions of travel and travel-related businesses which
are either compatible with the Company's existing businesses or
represent a developing specialty travel or travel-related segment not
currently addressed by the Company's operations.
BUSINESS
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EDUCATION GROUP
Through its Education Group, the Company organizes, markets and
operates educational travel programs for students and adults,
principally using the People to People name. The Company has the
exclusive right to develop and conduct programs for kindergarten
through college age students using the People to People name. The
Company also has the non-exclusive right to develop, market and
operate programs for adults using the People to People name; however,
at the present time the Company is the only entity that has been given
this right by People to People. These rights have been granted
pursuant to agreements with People to People, which expire in 2005.
The agreements will be automatically renewed for an additional ten
years unless either party elects otherwise. The principal offices of
the Company's Education Group are located in Spokane, Washington.
STUDENT AMBASSADOR PROGRAMS. The Company's Student Ambassador
Programs provide an opportunity for students in the sixth through
twelfth grades to visit one or more foreign countries to learn about
the politics, economy and culture of such countries. The Company
markets its Student Ambassador Programs through a combination of
direct mail and local informational meetings. Representatives of the
Company review candidate applications and conduct informational
meetings throughout the country from September through April, after
which selected applicants register to participate in the program.
Student Ambassador Program delegations depart during the summer and
generally travel for approximately 21 days, during which time each
delegation visits one or more foreign countries. Each delegation
generally consists of approximately 35 students and several teachers,
who act as the delegation's leaders. Teachers and students comprising
a delegation generally come from the same locale. Local guides assist
the delegation in their travels.
Programs are designed by the Company's 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 the
Company contracts with overseas program coordinators to provide day-
to-day oversight of the programs. Additionally, a guide trained by
the Company accompanies the group throughout the duration of its
program. In most instances, the Company also arranges to provide
students the opportunity for a "homestay" (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 which recognize academic credit include
Stanford University, University of California at Los Angeles, and
Georgetown University.
PROFESSIONAL EXCHANGE PROGRAMS. The Company's Professional Exchange
Programs provide adults with common interests the opportunity to
travel abroad to meet and exchange ideas with foreign citizens who
have similar backgrounds, interests or professions. The Company
markets its Professional Exchange Programs through a direct mail
marketing effort throughout the year. Programs originate from the
Company's internal marketing and research staff who identify potential
delegation topics and leaders. Adult programs have been conducted in
such areas as agriculture, economics, education, medicine and science.
The Company believes that its Professional Exchange Programs provide
participants with enriching experiences and deeper understandings of
foreign cultures and peoples than visits arranged independently or
through travel agencies. The Professional Exchange Programs operate
year-round and are generally designed to provide a more specialized
adult educational experience. Professional Exchange Programs
generally last from ten days to two weeks and are designed to provide
adults with similar backgrounds or common interests the opportunity to
exchange information and ideas with their counterparts in other
countries. Unlike travel programs provided by travel agencies, these
professional exchanges are intended largely as working trips, with a
significant amount of the participant's time involved in organized
meetings, seminars and round-table discussions with their foreign
counterparts, inspection 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.
The Company acquired additional People to People adult business
through an acquisition in February 1996, which included, among other
things, the right to operate adult educational and exchange travel
programs under the tradenames "American People Ambassador Programs"
and "Missions in Understanding" and rights under an agreement with
People to People to operate additional travel programs.
SPECIALTY TRAVEL. The Company also operates certain specialty travel
programs for niche markets. The Company has 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. The agreement with Yosemite National
Institutes is exclusive, except that Yosemite National Institutes may
conduct its own programs. The Company also has an agreement with the
American Youth Soccer Organization to provide international travel for
its players. In 1998, these programs included travel to France, the
United Kingdom, Ireland and the Netherlands to play soccer matches
against local teams.
Through I.G.S. Travel, Inc. ("IGS"), the Education Group has expanded
its business by organizing and operating high-end golf and golf-
related tours, trips and programs, both within the United States and
internationally. These programs are offered both as land programs at
private country clubs and as part of certain cruise line itineraries.
See "Business - Recent Acquisitions". Grand Prix Tours ("GPT"), in
which the Company has a minority investment, organizes and operates
over 40 programs annually to motor racing events in the United States
and internationally. GPT is the largest such travel company in the
United States.
PERFORMANCE GROUP
The Performance Group develops, markets and manages performance
improvement programs for a nationwide roster of clients. The programs
offer services in three principal areas: (i) performance improvement
programs, (ii) business meeting management services, and (iii)
comprehensive housing reservation, registration and travel services.
The Performance Group commenced operations through a series of
acquisitions commencing in 1996. The principal offices of the
Performance Group are located in Newport Beach, California.
In offering performance improvement programs and business meeting
management services, the Performance Group follows a strategy aimed at
developing and implementing programs tailored to each client's
objectives. The Company's employees first meet with existing or
potential clients to determine their business objectives and their
performance enhancement opportunities. Once a client agrees to pursue
a program, the Company works with the client to determine the scope of
the program by identifying concepts and parameters in terms of
purpose, costs, time and employee participation. Subsequently, the
Company's employees develop and provide customized services that fall
within the identified parameters.
Performance Group employees participate in various aspects of a
client's program development. The staff of creative writers and
graphic designers often delivers promotional campaigns and materials
that are complete from concept through production, including design,
printing, collating, labeling and mailing. The Company has developed
computerized monitoring systems and provides each client with lists
generated by internally-designed software programs which track the
program participants and enable the client to know the status of each
participant at any time. Additionally, the Company provides a program
coordinator to formulate, maintain and finalize each aspect of the
client's event.
For its services, the Company is usually paid a percentage markup of
the program components including air and ground transportation,
promotional gifts, meals and hotel accommodations. In addition, the
Company is reimbursed for expenses incurred in organizing the program.
Through APH, the Company also provides comprehensive housing
reservation, registration and travel services for meetings,
conventions, expositions and trade shows. The contracts for these
services generally cover an annual meeting or event and may be for a
term of one to several years. Pursuant to these agreements, the
Company provides a wide range of services associated with booking
hotel space and guest registration, including securing sufficient and
appropriate hotel room inventories, coordinating blocking and booking
of all hotel rooms, monitoring the status and volume of reservations,
accepting individual and group reservations, mailing reservation
confirmations and providing an on-site housing services desk at a
meeting site to coordinate attendees' housing needs. For providing
these and other services, the Company generally receives a fixed
commission, which is paid directly by the hotels.
RECENT ACQUISITIONS
On February 5, 1998, APG acquired certain of the assets (the "Rogal
Assets") of Rogal. Rogal provides comprehensive housing reservation,
registration and travel services for meetings, conventions,
expositions and trade shows. The Rogal Assets include two office
leases for premises in Massachusetts and Virginia, computer equipment
and Rogal's existing client service contracts. The Company has
continued to service the existing client contracts of Rogal and
intends to expand further this area of its business.
On February 20, 1998, the Company further expanded the operations of
its Performance Group through the merger of TII into APG. TII was
engaged in the performance incentives and meeting management
businesses.
On May 1, 1998, ASG acquired the assets of IGS, which organizes and
operates golf and golf-related tours, trips and programs.
On May 22, 1998, IAI was merged into APG. IAI provides travel
incentive, business meeting and conference planning services.
On July 17, 1998, APG acquired the assets of Destination, which is
engaged in the business of organizing and operating comprehensive
integrated housing, registration and travel services for meetings,
conventions, expositions and trade shows for business clients. With
the completion of this acquisition, the Company believes that it is
now one of the leading housing registration services in the United
States.
On January 25, 1999, subsequent to the end of the 1998 fiscal year,
the Company purchased a minority interest in connection with the
acquisition by a group of investors of all of the capital stock of
Scheduled Airlines Traffic Offices, Inc. ("SatoTravel"). SatoTravel
is a travel management firm that handles travel management services
primarily to the U.S. military and U.S. Government, with the remainder
to major U.S. corporations. SatoTravel was owned by eleven domestic
airlines prior to this transaction. The Company also entered into a
Management Agreement (the "Management Agreement") with SatoTravel
Holding Co., Inc., the newly-formed parent corporation of SatoTravel,
in which the Company is a minority shareholder, to provide general
financial and management consulting services to SatoTravel. In
consideration for providing these services, the Company will be paid a
management fee and will be reimbursed for reasonable expenses incurred
in connection with the rendering of services under the Management
Agreement. The term of the Management Agreement is five years,
subject to earlier termination under certain circumstances.
BUSINESS STRATEGY
The Company believes that high quality programs and exceptional
customer service are and will remain key elements of the Company's
success. The Company's strategy is to maintain its quality standards
while increasing its volume of business. To increase its business,
the Company intends to (i) expand the marketing and tour volume of its
existing student travel programs, (ii) introduce new student travel
programs and strategic alliances, (iii) broaden its adult travel
programs, (iv) expand the scope of services and increase the market
penetration of the Performance Group, and (v) pursue selective
acquisitions of travel and performance improvement businesses.
COMPETITION
The travel industry in general, and the educational segment of the
travel industry in particular, is highly competitive. The Company's
student 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. The Company's adult programs
also 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 for
adults.
The Company believes that the barriers to entry for any future
competitors are relatively low. Certain organizations engaged in the
travel business have substantially greater financial, marketing and
sales resources than the Company. There can be no assurance that the
Company's present competitors or competitors that choose to enter the
marketplace in the future will not exert significant competitive
pressures on the Company.
The Company believes that the principal bases of competition in the
educational segment of the market are the quality and uniqueness of
the educational program offered, customer service, reputation and
program cost. The Company believes that its agreements with People to
People, as well as its years of experience organizing student
educational programs and established relationships with public
officials, organizations and residents in countries in which it
provides programs, allow the Company to provide an educational
opportunity that is not easily duplicated by competitors' programs.
The Performance Group also competes in segments of the travel industry
that are highly competitive. In the meeting management and incentives
businesses, the Company competes with companies which are larger and
have greater resources than the Company. The Company believes that,
although some potential clients will focus on price alone, other
clients will also be interested in the quality of the programs
developed by the Performance Group and customer service. The Company
believes that its programs are not easily duplicated by its
competitors.
SERVICEMARKS
The Company has registered a variety of service and trademarks,
including the names "High School Student Ambassador Program" and
"Citizen Ambassador Program." In addition, the Company has the right,
subject to certain exceptions, to use People to People's name,
servicemark and logo for use in marketing student and adult programs.
In February 1996, the Company acquired the exclusive rights to the
names "American People Ambassador Programs" and "Missions in
Understanding." The Company believes that the strength of its service
and trademarks is valuable to its business and intends to continue to
protect and promote its marks as appropriate. However, the Company
believes that its business is not dependent upon any trademark or
servicemark.
INSURANCE
The Company maintains insurance coverage in amounts it believes are
adequate for its business, including a $5 million professional
liability policy and a $5 million umbrella policy. The Company also
maintains a $1 million general liability and property coverage policy.
The Company has not experienced difficulty in obtaining adequate
insurance coverage. There is no assurance that the insurance
maintained by the Company will be adequate in the event of a claim, or
that such insurance will continue to be available in the future.
EMPLOYEES
At February 28, 1999, the Company had approximately 406 employees, of
which 383 were full-time employees. Of the Company's total employees,
137 are located in Spokane, Washington, 66 are located in Newport
Beach, California, 12 are located in Novato, California, 3 are located
in Winnebago, Illinois, 35 are located in Plymouth, Minnesota, 93 are
located in Watertown, Massachusetts, 3 are located in Alexandria,
Virginia, 16 are located in Westlake Village, California and 41 are
located in Atlanta, Georgia. The Company has 76 full-time employees
engaged in marketing and sales and 330 full-time employees in
operations, administration and finance. The Company also occasionally
employs temporary labor on a seasonal basis to assist it with its
direct marketing efforts in recognition of the fact that the Company's
student travel programs are seasonal in nature. None of the Company's
employees is subject to collective bargaining agreements or is
represented by a union. The Company believes that its labor relations
are good.
Item 2. PROPERTIES
The principal executive offices of the Company, consisting of
approximately 41,000 square feet, are located in Spokane, Washington
and are occupied pursuant to a lease dated January 3, 1995 that
expires December 31, 2004. The lease currently provides for monthly
rental payments of $36,992. The Company may cancel the lease without
penalty (upon one year's prior notice) and also may extend the term of
the lease for an additional ten year period upon providing written
notice to the lessor of its intention to exercise such option at least
six months prior to the end of the initial term. If the Company
elects to exercise the extension option, the monthly rental during the
renewal period will be the fair market rental value of the leased
premises as of the date the option is exercised (as determined based
on market rentals of similar properties in the Spokane, Washington
area). The owner of the premises is a partnership consisting of two
former principals of the Company, who subsequently sold their interest
in the Company in January 1995.
In March 1998, the Company entered into a new lease for the
Ambassadors Performance Group headquarters office in Newport Beach,
California. The lease commenced on June 15, 1998 and is for a term of
seven years. The initial base rental is $28,346 per month in the
first year, increasing to $29,696 per month in the second year. The
premises consist of approximately 27,000 square feet. The Company
subleases approximately 2,000 square feet of this space to a sublessee
for a current monthly rental of $2,900 and subleases approximately
2,800 square feet of this space to another sublessee for a current
monthly rental of $2,600.
In July 1998, APG entered into a lease for office space in Novato,
California. The lease commenced on September 1, 1998 and is for a
term of five years. The premises consist of approximately 2,400
square feet. The base rent is $5,645 per month for the first year of
the lease and will increase in subsequent years based on the local
consumer price index.
The Company also leases approximately 900 square feet of office space
in Winnebago, Illinois pursuant to a lease that expires in August
2000. In addition, the Company currently leases approximately 15,360
square feet of office and warehouse space in Plymouth, Minnesota,
pursuant to a lease which expired in January 1999. That lease was
renewed until July 31, 2000 at a monthly rental of $10,144.
In February 1998, the Company assumed two additional leases for office
space in connection with its acquisition of the Rogal Assets. One
lease is for approximately 15,900 square feet in Watertown,
Massachusetts, with a current monthly rental of $15,640, which lease
expires in 2003. The second lease is for approximately 1,805 square
feet in Alexandria, Virginia, with a current monthly rental of $2,137;
that lease expired in November 1998 and has been extended for an
additional three years, until November 2001.
In February 1998, the Company assumed a month-to-month lease for
office space in connection with its acquisition of TII. The lease was
for approximately 4,841 square feet with a monthly rental of $6,051.
Effective February 1, 1999, this lease was renewed for two years,
expiring on January 31, 2001, for approximately 3,148 square feet, at
a monthly rental of $4,407.
In July 1998, the Company assumed a lease for office space in Atlanta,
Georgia, in connection with the acquisition of Destination. That
lease is for approximately 9,933 square feet and the term of the lease
expires in June 2002. The base rent is $11,333 per month through
June 30, 1999 and $11,786 from July 1, 1999 through June 30, 2000.
The Company also leases, but no longer occupies, approximately 4,500
square feet of office space in Newport Beach, California. The lease
expires in June 2000, and currently provides for monthly rental
payments of $4,742. The Company subleases this space to one sublessee
for a monthly rental of $6,744 for the period July 1998 through June
1999, increasing to $7,194 for the period July 1999 through June 2000.
Management believes that its existing facilities are sufficient to
meet its present needs and anticipated needs for the foreseeable
future. However, additional facilities may be required in connection
with future business acquisitions.
Item 3. LEGAL PROCEEDINGS
On September 22, 1997, Sarah Buffington and certain other individuals,
for themselves and on behalf of their children, six teenage students
(the "Plaintiffs"), filed a lawsuit in the District Court of Harris
County, Texas, against People to People and three individual tour
leaders. In February 1998, the lawsuit was amended to include the
Company (the original named defendants and the Company are
collectively referred to as the "Defendants"). The basis for the
Plaintiffs' claim was their allegation that, while the six teenagers
were in Europe in June 1997 as part of a tour involving 31 students,
three of the tour leaders behaved in an inappropriate manner toward
the six teenagers. The Plaintiffs alleged breach of contract,
negligence, negligent hiring and retention of the tour leaders,
slander, intentional infliction of emotional distress, and assault and
battery. The Plaintiffs sought at least $15,000,000 in punitive and
exemplary damages against the Defendants, together with unspecified
actual damages, attorneys' fees, court costs and other incidental
costs.
On December 14, 1998, this lawsuit was settled for a payment to the
Defendants in the aggregate amount of $64,000, and the suit was
dismissed with prejudice.
Except for the foregoing, the Company is not a party to any material
pending legal proceedings other than ordinary routine litigation
incidental to its business, the outcome of which the Company believes
will not have a material adverse effect on its business, financial
condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK MARKET AND OTHER INFORMATION
The Company's common stock has been traded on the Nasdaq National
Market under the symbol "AMIE" since August 3, 1995. Prior to such
date, there was no public trading market for the Company's equity
securities. As of March 19, 1999, there were approximately 42 holders
of record of the Company's Common Stock. This number does not include
beneficial owners holding shares through nominee or "street" name.
The following table sets forth the high and low sale prices of a share
of the Company's Common Stock as reported on the Nasdaq National
Market on a quarterly basis for the Company's fiscal years ended
December 31, 1997 and December 31, 1998.
High Low
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1997:
Quarter ended March 31, 1997 $12.50 $ 9.00
Quarter ended June 30, 1997 $13.75 $ 8.75
Quarter ended September 30, 1997 $22.00 $12.25
Quarter ended December 31, 1997 $26.75 $17.25
1998:
Quarter ended March 31, 1998 $26.75 $17.50
Quarter ended June 30, 1998 $30.75 $24.50
Quarter ended September 30, 1998 $31.88 $15.75
Quarter ended December 31, 1998 $17.91 $13.00
DIVIDEND POLICY
The Company has not paid any dividends since the consummation of its
initial public offering of securities in 1995 and intends to continue
to retain its earnings for use in the operation and expansion of its
business and therefore does not anticipate declaring any cash
dividends in the foreseeable future. The payment of dividends in the
future will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board
of Directors, in its discretion, deems relevant.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services of Los Angeles, California serves as
transfer agent and registrar of the Company's Common Stock.
CHANGES IN SECURITIES
In February 1998, the Company issued 140,187 shares of its Common
Stock in connection with its acquisition of the Rogal Assets, and
52,068 shares of its Common Stock in connection with its acquisition
of TII. In May 1998, the Company issued 85,672 shares of its Common
Stock in connection with its acquisition of IAI.
Each of the foregoing issuances was made directly by the officers and
directors of the Company and no underwriting discounts or commissions
were paid. Each of the foregoing transactions was exempt from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof for issuances of
securities not involving a public offering and exempt from
registration under applicable state securities laws.
Each of the persons with whom the Company's Common Stock was issued
represented to the Company, substantially as follows: that he or it
acquired the securities for his or its own account, for investment
purposes only and not with a view to or for sale in connection with
any distribution thereof. Certificates evidencing the Common Stock
issued in these transactions bear restrictive legends to such effect
and state further that the securities have not been registered under
the Securities Act or state securities laws and may not be sold,
pledged or otherwise transferred without registration under the
Securities Act or an exemption therefrom.
Item 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
STATEMENT OF INCOME DATA (A):
Operating revenues $ 40,148 $ 26,541 $ 18,843 $ 17,133 $ 16,990
Operating expenses:
Selling and tour promotion 15,555 9,826 8,420 8,694 9,407
General and administrative 15,577 8,210 5,770 4,676 5,380
Operating income 9,016 8,505 4,653 3,763 2,203
Net income 8,362 5,637 3,947 5,157 2,127
Pro forma net income (B) -- -- -- 3,179 3,152
Net income per share - basic (B) $ 0.93 $ 0.83 $ 0.60 $ 0.57 $ 0.63
Net income per share - diluted (B) $ 0.92 $ 0.82 $ 0.59 $ 0.56 $ 0.63
BALANCE SHEET DATA (C):
Cash and cash equivalents $ 55,290 $ 22,871 $ 18,281 $ 12,974 $ 6,634
Total assets 127,732 34,449 27,269 16,016 9,637
Long-term debt 145 329 -- 6 17
Total stockholders' equity 107,049 22,556 16,783 11,135 1,829
SELECTED OPERATING DATA:
Gross program receipts (rounded
to nearest million) $116,000 $ 80,000 $ 57,000 $ 47,000 $ 45,000
(A) Since 1995, the Company has made several acquisitions which have
been accounted for under the purchase method of accounting.
Therefore, the results of operations of these acquired entities
are included in the results of operations of the Company since
their respective dates of acquisition. The statement of income
data for the years ended December 31, 1995 and 1994 only reflects
the Education Group. During 1996, the Company commenced
operations of its Performance Group through the acquisition of
two existing entities engaged in this business. Due to the
timing of these acquisitions, the results of operations for one
of these entities are included in the Company's results of
operations for the year ended December 31, 1996. The results of
operations of the second acquisition are included in the
financial presentation for the year ended December 31, 1997. The
results of operations for the year ended December 31, 1997 also
include the acquisition in September 1997 of a third company in
the Performance Group. The results of operations for the year
ended December 31, 1998 include the results of operations of
acquisitions as of February, April, May and July of 1998.
(B) In connection with the Company's change in ownership and
reincorporation in 1995, certain compensation agreements between
the Company and certain stockholders were terminated and new
employment agreements were executed. Also, notes receivable from
certain stockholders were repaid. Therefore, the pro forma net
income for the year ended December 31, 1994 reflects adjustments
to (i) reduce certain incentive compensation costs and (ii)
eliminate interest income on the repayment of notes receivable.
The pro forma net income for the years ended December 31, 1995
and 1994 reflects an adjustment to record income taxes which
would have been paid by the Company as a C Corporation rather
than as an S Corporation.
(C) All of the Company's acquisitions have been accounted for under
the purchase method of accounting. Therefore, the balance sheet
data include the accounts of the acquired entities as of their
respective dates of acquisition. Since one of the acquisitions
occurred effective December 31, 1996, the balance sheet data
includes the accounts of this entity as of December 31, 1996;
however, the results of operations of this entity are not
included in the statement of income data until the year ended
December 31, 1997. Acquisitions in 1998 include results of
operations in the statement of income data as of the months
described in note (A) above and also are included in balance
sheet data at the end of 1998.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto
incorporated by reference in this Annual Report on Form 10-K. Certain
statements contained herein that are not related to historical
results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934,
as amended, and involve risks and uncertainties. Actual results could
differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below.
All forward-looking statements contained in this Annual Report on Form
10-K are qualified in their entirety by this statement.
General
-------
The Company is engaged primarily in (i) organizing, marketing and
operating international educational travel programs on a worldwide
basis for students and adults and (ii) developing, marketing and
managing performance improvement programs that utilize merchandise
awards and incentive travel, providing business meeting management
services and providing comprehensive housing reservation, registration
and travel services for meetings, conventions, expositions and trade
shows.
Since its initial public offering in August 1995, the Company has
expanded its operations primarily through internal growth and a series
of acquisitions of businesses within the travel and performance
improvement industries. Prior to 1996, the Company's business was
conducted through its Education Group.
In January 1996, the Company completed the acquisition of The Helin
Organization and commenced operations of the Performance Group. This
acquisition was followed in February 1996 by the acquisition of
certain assets of Marc L. Bright & Associates, which expanded the
business of the Company's already existing Education Group. In
December 1996, the Company acquired Bitterman & Associates, Inc.; in
September 1997, the Company acquired certain of the assets of Debol &
Associates; in February 1998, the Company acquired certain of the
assets of Rogal America, Co. and the stock of Travel Incentives, Inc.;
in May 1998, the Company acquired the assets of I.G.S. Travel
Corporation and the stock of Incentive Associates, Inc.; and in July
1998, the Company acquired the assets of Destination, Inc.; the
cumulative effect of which was to further expand the Company's
Performance Group. All of these acquisitions were accounted for under
the purchase method of accounting. Therefore, the results of
operations of the acquired businesses are included in the Company's
results of operations since their respective dates of acquisition,
which, in the case of Incentive Associates, Inc., was effective
April 1, 1998.
Gross program receipts reflect the total payments received by the
Company from Education Group participants and Performance Group
clients. Gross program receipts less program pass-through expenses
constitute the Company's revenues. Program pass-through expenses
include all direct costs associated with the Company's programs
including costs related to airfare, ships, hotels, meals, ground
transportation, guides, professional exchanges, changes in currency
exchange rates and merchandise costs. The Company recognizes gross
program receipts, pass-through expenses and revenues upon the
departure of the program participant or as the Performance Group
service is rendered. Operating expenses, which are expensed by the
Company as incurred, are the costs related to the creation of
programs, promotional materials and marketing costs, salaries, rent,
other general and administrative expenses and all of the Company's
ordinary expenses. The Company's policy is to obtain payment for
substantially all travel services prior to entering into commitments
for incurring expenses relating to such travel.
The Company's businesses are seasonal. The Company earns more than
three-quarters of its annual revenues in the second and third
quarters, which historically has more than offset operating losses
incurred during the rest of the year. The Company anticipates that
this trend will continue for the foreseeable future. The Company's
annual results would be adversely affected if the Company's revenues
were to be substantially below seasonal norms during these periods.
The Company's operating results may fluctuate as a result of many
factors, including the mix of Education Group and Performance Group
programs and services, the mix of programs and program destinations
offered by the Company and its competitors, the introduction and
acceptance of new programs and program enhancements by the Company and
its competitors, timing of program completions, cancellation rates,
competitive conditions in the industry, marketing expenses, extreme
weather conditions, international conflicts, timing of and costs
relating to acquisitions, changes in relationships with certain travel
providers, economic factors and other considerations affecting travel.
The substantial majority of the Company's programs take place outside
the United States and most foreign suppliers require payment in local
currency rather than U.S. dollars. Accordingly, the Company is
exposed to foreign currency risks in certain countries as foreign
currency exchange rates between those currencies and the U.S. dollar
fluctuate. To manage these risks, the Company enters into forward
foreign exchange contracts and foreign currency option contracts.
These foreign exchange contracts and options are entered into to
support normal recurring purchases, and accordingly, are not entered
into for speculative purposes. See "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,
--------------------------
1998 1997 1996
----- ----- ------
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Selling and tour promotion 38.7 37.0 44.7
General and administrative 38.8 31.0 30.6
----- ----- -----
Total operating expenses 77.5 68.0 75.3
----- ----- -----
Operating income 22.4 32.0 24.7
----- ----- -----
Other income (expense) 8.8 1.8 7.0
Income before income taxes 31.2 33.8 31.7
Income tax provision (benefit) 10.7 12.6 10.8
----- ----- -----
Net income 20.8% 21.2% 20.9%
===== ===== =====
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31,
1997
The Company is organized in two operating divisions: the Education
Group and the Performance Group. Both groups strengthened their
business in 1998 by growing their sales volume. The Education Group
focused on internal growth and posted gains in both sales volume and
gross margin percentage. The Performance Group grew through both
internal sales increases and a series of acquisitions designed to
broaden the product appeal, geographic scope, and sales force
capabilities of the Performance Group.
Overall, gross program receipts grew by 44%, to $115.8 million in
1998, from $80.5 million in 1997, an increase of $35.3 million. Net
revenue grew by 51% to $40.1 million in 1998, from $26.5 million in
1997, an increase of $13.6 million.
Gross margins (revenues as a percentage of gross program receipts)
strengthened during 1998 to 35%, from 33% during 1997. This increase
was driven by improved gross margin percentages in both the Education
and Performance Groups. The Performance Group strengthened its gross
margins primarily through the addition of a new product line, housing
registration for convention services, while the Education Group
continued to achieve strong margins.
Selling and tour promotion expenses increased during 1998 when
compared to 1997 by $5.7 million. For the year ended December 31,
1998, selling and tour promotion expenses totaled $15.5 million in
comparison to $9.8 million for the year ended December 31, 1997.
Existing business contributed marginally to this increase, while the
new customers, clients and product lines added by the four
acquisitions in the Performance Group during 1998 accounted for the
substantial majority of this increase.
General and administrative expenses increased to $15.6 million in 1998
from $8.2 million during 1997. Existing businesses contributed
marginally to this increase, while the new customers, clients and
product lines added by the four acquisitions in the Performance Group
during 1998 accounted for the substantial majority of this increase.
The gains in both gross program receipts and net revenue enabled the
Company to realize operating income of $9.0 million in 1998 compared
to $8.5 million in 1997, an increase of $0.5 million.
Other income in 1998 consisted primarily of interest income generated
by cash and cash equivalents. As of December 31, 1998, the Company
had $93.0 million in cash, cash equivalents and short term
investments, compared to $22.9 million on December 31, 1997. This
$70.1 million increase is primarily attributable to the Company's
secondary offering of stock in April 1998, in which the Company
realized net proceeds of $70.3 million. As a result, the Company
realized interest income of $3.6 million in 1998, compared to $1.6
million in 1997, an increase of $2.0 million.
Other income also included unrealized foreign currency gains or
losses. The Company enters into forward foreign exchange contracts
and foreign currency option contracts to offset certain operational
exposures from changes in foreign currency exchange rates. These
foreign exchange contracts and options are entered into to support
normal recurring purchases, and accordingly are not entered into for
speculative purposes. Forward foreign exchange contracts are utilized
to manage the risk associated with currency fluctuations on certain
purchase commitments. Beginning July 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." Therefore, the effective portion of any unrealized gains
or losses on foreign exchange contracts are no longer recorded in
other income, but are recorded as other comprehensive income and are
accumulated as a component of stockholders' equity. Realized gains
and losses on these contracts are recorded as a cost of the related
travel program when the contracts mature and are utilized. Prior to
July 1, 1998, all unrealized gains and losses on foreign exchange
contracts and options were recorded in the statement of income as
other income or expense. The Company reduced its unrealized foreign
exchange losses from $1.1 million in 1997 to an insignificant amount
in 1998.
The Company reduced its effective tax rate to 34% in 1998, from 37% in
1997. This improvement in the effective tax rate was primarily due to
the Company's cash management and investment strategies in 1998, which
resulted in the Company's receiving a significant amount of tax-exempt
interest income. The Company recorded an income tax provision of $4.3
million in 1998, compared to $3.3 million in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1996
The Company is organized in two operating divisions: the Education
Group and the Performance Group. For the year ended December 31,
1997, the Education Group increased its productivity by growth within
the core product lines while realizing efficiencies through the sales
and marketing process. The Performance Group contribution resulted
from its acquisitions and additional sales of incentive travel
programs and business meeting management services.
Gross program receipts increased 42% in 1997 over 1996, from $56.7
million to $80.3 million, and net revenue increased 41%, from $18.8
million in 1996 to $26.5 million in 1997. These increases were driven
by an increase in the number of Education Group program participants,
the addition of new acquisitions, and improved cross-selling in the
Performance Group.
The overall gross margins (revenues as a percentage of gross program
receipts) for the 1997 year remained consistent with the prior year at
33%. This reflects a strengthening of the Education Group margins,
combined with the margins achieved by the new acquisitions in the
Performance Group. Gross margins of the Performance Group are
expected to be slightly lower than those achieved in the Education
Group.
Selling and tour promotion expenses increased during 1997 when
compared to 1996 by $1.4 million, or 17%. Most of this increase
results from an acquisition in late 1996 within the Performance Group.
As a percentage of revenues, selling and tour expenses decreased to
37% in 1997 from 45% in 1996, as a result of sales and marketing
efficiencies and the benefits of a cost management program.
General and administrative expenses increased from $5.8 million to
$8.2 million between 1996 and 1997. Most of this increase is due to
the assumption of continuing expenses associated with the Performance
Group acquisitions.
Operating income increased 83% in the year ended December 31, 1997
compared to the year ended December 31, 1996.
Other income includes interest income and unrealized foreign currency
gains or losses. Other income decreased from $1.3 million in 1996 to
$0.5 million in 1997. The cash component of other income, interest
income, increased to $1.6 million from $1.1 million, a 47% increase on
a 25% increase in year-end cash balances. This increase in interest
income is the effect of improved cash management practices implemented
in 1997. The overall net decrease in other income can be attributed
to the non-cash component of other income, unrealized foreign exchange
losses. In 1997, the Company incurred $0.7 million of net unrealized
losses compared to an insignificant amount in 1996. The face amount
of forward foreign exchange contracts outstanding at December 31,
1997, was $17.4 million.
The Company's income before taxes in 1997 increased 50% over 1996 as a
result of the foregoing factors. The Company has recorded an income
tax provision of $3.3 million for 1997 which represents an effective
tax rate of 37%. The tax provision has increased over the prior
year's provision of $2.0 million due to the effect of certain
non-deductible expenses as well as the increase in state income taxes
with the expansion of the Company through acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is not capital intensive. However, the Company
does retain funds for operating purposes in order to conduct sales and
marketing efforts for future programs and to facilitate acquisitions
of other companies.
Net cash provided by operations for the years ended December 31, 1998,
1997 and 1996 was $8.8 million, $5.9 million and $6.1 million,
respectively. The increase in cash flow from operations in 1998
resulted primarily from the increase in net income of $2.7 million.
Net cash used in investing activities for the years ended December 31,
1998, 1997 and 1996 was $46.7 million, $1.2 million and $0.8 million,
respectively. The net cash used in investing activities increased in
1998 primarily due to investing the proceeds from the Company's
secondary offering, as well as $6.6 million spent on acquisitions.
The investing activities during 1997 were due primarily to leasehold
improvements in the corporate headquarters facilities as well as the
purchase of a company in the third quarter of the year. The Company
does not have any material capital expenditure commitments for 1999.
However, the terms of the Company's acquisitions of certain businesses
include contingent consideration. Additionally, the Company is
continuing to pursue further acquisitions of related travel and
performance improvement 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 the Company.
The Company had no significant long- or short-term debt as of
December 31, 1996; however, at December 31, 1998 and 1997, the Company
had $0.3 million and $0.5 million in long-term debt as a result of an
acquisition during 1997.
Net cash provided by financing activities in 1998 was $70.3 million as
a result of the Company's secondary offering of the Company's Common
Stock during April 1998. Net cash used in 1997 and 1996 was
insignificant. The Company has a credit facility available with
Seafirst Bank, with a current limit of up to $25.0 million for foreign
currency purchases and forward contracts. This credit facility is
renewable annually and the Company expects it to be renewed prior to
July 1999.
At December 31, 1998, the Company had approximately $55.3 million of
cash and cash equivalents, including program participant funds of
$15.7 million. Under the Company's cancellation policy, a program
participant may be entitled to a refund of a portion of his or her
deposit, less certain fees, depending on the time of cancellation.
Management believes that existing cash and cash equivalents and cash
flows from operations, combined with the net proceeds of the secondary
offering in April 1998, will be sufficient to fund the Company's
anticipated operating needs, capital expenditures and acquisitions at
least through 1999.
MARKET RISK
The following table summarizes the financial instruments other than
foreign currency forward exchange agreements held by the Company at
December 31, 1998, which are sensitive to changes in interest rates.
The table presents principal cash flows for available-for-sale
investments and a note payable outstanding at December 31, 1998 by
contractual maturity date and the related average interest rate and
fair value (amounts in thousands):
Year Ending
December 31,
------------------- Fair
1999 2000 Total Value
-------- -------- -------- --------
U.S. government and
agency obligations $ 37,660 $ -- $ 37,660 $ 37,660
Interest rate 3.7% 3.7%
Note payable 186 145 331 331
Interest rate (fixed) 6.5% 6.5% 6.5%
The substantial majority of the Company's travel programs take place
outside the United States and most foreign suppliers require payment
in currency other than the U.S. dollar. Accordingly, the Company is
exposed to foreign currency risk relative to changes in foreign
currency exchange rates between those currencies and the U.S. dollar.
The Company has a program to provide a hedge against certain of these
foreign currency risks. The Company uses forward contracts which
allow the Company to acquire the foreign currency at a fixed price for
a specified period of time. Additionally, the Company uses foreign
currency call options which provide the Company with the option to
acquire certain foreign currencies at a fixed exchange rate and time
period. Concurrent with the purchase of a foreign currency call
option, the Company sells a foreign currency put option to minimize
the net premium paid for the call option. The strike prices on these
options generally straddle the exchange rate at the time the options
are purchased. The Company also purchases futures contracts to
similarly hedge its foreign currency risk. The Company is 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 fair value of the foreign
currency options is based on the estimated amount to terminate the put
and call contracts with the counterparties at year end.
The table below provides information about the Company's 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 mature in 1999. 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. At December 31, 1998, the Company had outstanding forward
exchange contracts and call and put options to purchase and sell
foreign currencies as follows (amounts in thousands):
U.S. Dollar
U.S. Dollar Average
Contract Contractual
Amount Exchange Rate
----------- -------------
Forward contracts (pay $U.S./
receive foreign currency):
Australian dollar $3,450 $0.67
New Zealand dollar 63 0.51
British pound 776 1.66
------
$4,289
======
U.S. Dollar U.S. Dollar
Contract Average
Amount Strike Price
----------- -------------
Call options purchased (pay $U.S./
receive foreign currency):
Australian dollar $1,750 $0.70
New Zealand dollar 550 0.55
British pound 7,380 1.64
------
$9,680
======
Put options sold (pay $U.S./receive
foreign currency):
Australian dollar $ 714 $0.70
New Zealand dollar 227 0.63
------
$ 941
======
At December 31, 1998, the Company had unrealized foreign currency
losses associated with these financial instruments of approximately
$289,000.
YEAR 2000 COMPLIANCE
The Company has a comprehensive Year 2000 project designed to identify
and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers, and customers that
are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks. The
project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency
plans, and (4) implementation and testing. The Company's Year 2000
project is currently in the development of remediation and remediation
phases. The Company has been storing years as a four-digit field in
all mission critical databases since 1995 and believes that its
internal master records are Year 2000 compliant. Most of the software
which the Company uses, including all of its finance software, has
been certified as Year 2000 compliant. In addition, the Company is in
the process of obtaining Year 2000 compliance statements from the
manufacturers of the Company's hardware and software products. These
compliance statements are expected to be obtained by September 1999.
AEG's internally generated client databases are Year 2000 compliant.
APG's hardware, operating systems, applications software and
internally-generated data requires additional assessment and
remediation for Year 2000 compliance. The assessment phase has been
completed. It is expected that APG's remediation efforts will be
greater than those required by AEG, including the replacement of
certain APG hardware,operating system upgrades and a small amount of
applications software upgrades. This remediation is expected to be
completed by June 1999. The Company's voicemail software is not Year
2000 complaint. The Company intends to upgrade this software to a
Year 2000 compliant version by the end of 1999. The cost of this
upgrade is not expected to be material.
The Company believes that its greatest potential risks are associated
with (i) its information systems and systems embedded in its
operations and infrastructure; and (ii) its reliance on Year 2000
compliance by the Company's vendors and suppliers. The Company is at
the beginning stage of assessments for its operations and
infrastructure and cannot predict whether significant problems will be
identified. The Company is asking its vendors and suppliers to
complete a Year 2000 survey by the end of May 1999, to assess the
status of their compliance in order to assess the effect it could have
on the Company. The Company has not yet determined the full extent of
contingency planning that may be required. Based on the status of the
assessments made and remediation plans developed to date, the Company
is not in a position to state the total costs of remediation of all
Year 2000 issues. Costs identified to date have not been material.
The Company does not currently expect costs to be material, and it
expects to be able to fund the total costs through operating cash
flows. However, the Company has not yet completed its assessments,
developed remediation for all problems, developed any contingency
plans, or completely implemented or tested any of its remediation
plans.
Based on the Company's current analysis and assessment of the state of
its Year 2000 compliance, the Company's reasonably likely worst case
scenario involves booking delays of AEG and APG programs that would
take place later in 2000, and the more remote possibility of travel
interruptions for a small number of adult program participants
actually travelling on AEG millennium programs on and immediately
after January 1, 2000. Both of these types of delays and
interruptions would arise as a result of third-party Year 2000
noncompliance (e.g., computerized airline and hotel booking systems),
rather than because of the Company's internal Year 2000 compliance.
As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement,
or test remediation or contingency plans, or may find that the costs
of these activities exceed current expectations and become material.
In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be
Year 2000 compliant. The Company plans to test such third-party
products by June 30, 1999, but cannot be sure that its tests will be
adequate or that, if problems are identified, they will be addressed
in a timely and satisfactory way. Because the Company uses a variety
of informational systems and has additional systems embedded in its
operations and infrastructure, the Company cannot be sure that all of
its systems will work together in a Year 2000 compliant fashion.
Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems
or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments
to the Company. If the Company fails to satisfactorily resolve the
Year 2000 issues related to its products in a timely manner, it could
be exposed to liability to third parties. The Company is continuing
to evaluate Year 2000-related risks and will take such further
corrective actions as may be required.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in Management's
Discussion and Analysis of Results of Operations and Financial
Condition (Part II, Item 7).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company are submitted as a separate
section of this Form 10-K on pages F-1 through F-23.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1998, which Proxy Statement is expected
to be filed with the Securities and Exchange Commission on or about
April 14, 1999.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1998, which Proxy Statement is expected
to be filed with the Securities and Exchange Commission on or about
April 14, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1998, which Proxy Statement is expected
to be filed with the Securities and Exchange Commission on or about
April 14, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1998, which Proxy Statement is expected
to be filed with the Securities and Exchange Commission on or about
April 14, 1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) List of documents filed as part of Report
(1) FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31,
1998 and 1997 F-2
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-23
(2) FINANCIAL STATEMENT SCHEDULES INCLUDED IN ITEM 8:
No financial statement schedules are presented as the
required information is either not applicable or included in
the Consolidated Financial Statements or notes thereto.
(3) EXHIBITS
The exhibits listed on the accompanying Exhibit Index are
filed as part of this Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMBASSADORS INTERNATIONAL, INC.
(Registrant)
Date: March 30, 1999 By: /s/ Jeffrey D. Thomas
---------------------------------------
Jeffrey D. Thomas, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------------------------------- ------------------------------------- --------------
By: /s/ John A. Ueberroth President and Chief Executive Officer March 30, 1999
---------------------------- (Principal Executive Officer)
John A. Ueberroth
By: /s/ Peter V. Ueberroth Chairman of the Board of Directors March 30, 1999
----------------------------
Peter V. Ueberroth
By: /s/ Jeffrey D. Thomas Chief Financial Officer March 30, 1999
---------------------------- (Principal Financial and Accounting
Jeffrey D. Thomas Officer)
By: /s/ James L. Easton Director March 30, 1999
----------------------------
James L. Easton
By: /s/ Rafer L. Johnson Director March 30, 1999
----------------------------
Rafer L. Johnson
By: /s/ John C. Spence Director March 30, 1999
----------------------------
John C. Spence
By: /s/ Richard D.C. Whilden Director March 30, 1999
----------------------------
Richard D.C. Whilden
INDEX TO EXHIBITS
2.1 Form of Reincorporation Agreement(l)
2.2 Rescission Agreement(l)
2.3 Stock Purchase Agreement(l)
2.4 Redemption Agreement(l)
3.1 Certificate of Incorporation of Ambassadors International,
Inc.(1)
3.2 By-Laws of Ambassadors International, Inc.(l)
4.1 Specimen Stock Certificate(l)
10.1 People to People Contract - Student Ambassador Program(l)
10.2 People to People Contract - Citizen Ambassador Program(l)
10.3 Form of Equity Participation Plan of Ambassadors
International, Inc.(1)
10.4 Form of Registration Rights Agreement among the Company,
John and Peter Ueberroth, and certain other stockholders(l)
10.5 Form of Indemnification Agreement for officers and
directors(1)
10.6 Commercial Lease dated December 21, 1992 between Portolese
and Sample Investments and International Ambassador
Programs, Inc.(1)
10.7 First Amendment to Commercial Lease dated January 3, 1995
between Portolese and Sample Investments and International
Ambassador Programs, Inc.(l)
10.8 Form of Employment Agreement with Executive Officers(l)
10.9 Form of Note between the Company and the Ueberroths relating
to the Distribution(l)
10.10 General Contract between People to People and M.L. Bright
Associates dated July 1, 1995 and Assignment documents to
the Company dated February 6, 1996(2)
10.11 Agreement and Plan of Merger, effective as of December 11,
1996 by and among Ambassadors International, Inc., a
Delaware corporation, Ambassadors Performance Improvement,
Inc., a Delaware corporation and wholly owned subsidiary of
Ambassadors, Bitterman & Associates, Inc., a Minnesota
corporation, and Michael H. Bitterman(3)
10.12 Asset Purchase Agreement dated as of February 5, 1998 by and
among the company, Ambassador Performance Group, Inc., Rogal
America, Co. and Andrew Rogal(4)
10.13 Lease dated December 20, 1996 between Rogal America, Inc.
and Ark-Les Corp.(5)
10.14 Industrial Lease dated 19- between the Company and the
Irvine Company(5)
10.15 The Amended and Restated 1995 Equity Participation Plan of
Ambassadors International, Inc.(6)
10.16 The Atlanta Merchandise Mart Lease Agreement dated April 17,
1998 by and between AMC, Inc. and Destination, Inc. (6)
10.17 Agreement and Plan of Merger, dated May 22, 1998 by and
among Ambassadors International, Inc., Ambassador
Performance Group, Inc., Incentive Associates, Inc., Wayne
Wright and Russ Medevic(7)
10.18 Asset Purchase Agreement, dated July 17, 1998 by and among
Ambassadors International, Inc., Ambassador Performance
Group, Inc., Destination, Inc. and Gregory S. Cunningham(8)
10.19 Lease dated July 24, 1998 by and between the Joseph Pell and
Eda Pell Revocable Trust dated August 19, 1989 and
Ambassador Performance Group, Inc.(9)
21.1 Subsidiaries of Ambassadors International, Inc.(9)
23.1 Consent of PricewaterhouseCoopers LLP(9)
24.1 Powers of Attorney(9)
27.1 Financial Data Schedule(9)
(1) Filed as an exhibit of the same number to the Company's
Registration Statement on Form S-1 (Registration No.
33-93586), and incorporated herein by reference.
(2) Filed as an exhibit of the same number to the Company's Form
10-KSB for the year ended December 31, 1995, and
incorporated herein by reference.
(3) Filed as Exhibit 2.5 to a Current Report on Form 8-K dated
January 3, 1997, and incorporated herein by reference.
(4) Filed as Exhibit 2.6 to a Current Report Form 8-K dated
February 12, 1998 (as amended on Form 8-K/A dated April 2,
1998), and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, and
incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1998, and
incorporated herein by reference.
(7) Filed as Exhibit 2.5 to a Current Report on Form 8-K, which
was filed on June 5, 1998, and incorporated herein by
reference.
(8) Filed as Exhibit 2.6 to a Current Report on Form 8-K, which
was filed on August 3, 1998, and incorporated herein by
reference.
(9) Filed herewith.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Ambassadors International, Inc.
Spokane, Washington
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Ambassadors
International, Inc. and its subsidiaries (the Company) at December 31,
1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
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 generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for the opinion expressed above.
As described in Note 1 to the financial statements, the Company
changed its accounting for derivative instruments on July 1, 1998 and
accounting for impairment of long-lived assets in 1996.
/s/PricewaterhouseCoopers LLP
Spokane, Washington
February 5, 1999
Ambassadors International, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 55,289,580 $ 22,870,546
Restricted cash equivalents 152,000 125,000
Investments 37,659,994 --
Accounts receivable 4,371,898 2,005,029
Prepaid program costs and expenses 4,637,121 2,004,995
Deferred income taxes -- 31,229
Other assets 159,158 246,469
------------ ------------
Total current assets 102,269,751 27,283,268
Property and equipment, net 4,199,889 2,148,305
Other investments 462,500 462,500
Goodwill, net of $1,285,950 and
$290,711 of accumulated
amortization 20,401,794 4,247,219
Covenants-not-to-compete, net of
$370,047 and $179,485 of
accumulated amortization 254,953 195,515
Deferred income taxes -- 26,608
Other assets 142,897 85,573
------------ ------------
Total assets $127,731,784 $ 34,448,988
============ ============
LIABILITIES:
Current liabilities:
Accounts payable $ 2,348,759 $ 1,616,120
Accrued expenses 942,047 724,008
Participants' deposits 15,742,697 7,397,924
Customer advances 744,077 980,834
Note payable, current portion 185,851 171,241
Foreign currency exchange contracts 289,322 674,625
Deferred income taxes 284,957 --
------------ ------------
Total current liabilities 20,537,710 11,564,752
Note payable, due after one year 145,243 328,696
------------ ------------
Total liabilities 20,682,953 11,893,448
------------ ------------
Commitments and contingencies (Notes 2, 6, 7 and 10)
Ambassadors International, Inc.
Consolidated Balance Sheets, Continued
December 31, 1998 and 1997
1998 1997
------------ ------------
Stockholders' equity:
Preferred 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,
9,915,534 and 6,768,223 shares 99,155 67,682
Additional paid-in capital 90,043,060 13,760,963
Retained earnings 17,088,888 8,726,895
Accumulated other comprehensive loss (182,272) --
------------ ------------
Total stockholders' equity 107,048,831 22,555,540
------------ ------------
Total liabilities and stockholders'
equity $127,731,784 $ 34,448,988
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
Ambassadors International, Inc.
Consolidated Statements of Income
for the years ended December 3, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Revenue $40,147,525 $26,540,897 $18,843,422
----------- ----------- -----------
Operating expenses:
Selling and tour promotion 15,554,540 9,825,916 8,420,151
General and administrative 15,577,361 8,210,378 5,769,874
----------- ----------- -----------
31,131,901 18,036,294 14,190,025
----------- ----------- -----------
Operating income 9,015,624 8,504,603 4,653,397
----------- ----------- -----------
Other income (expense):
Interest and dividend income 3,620,097 1,588,408 1,079,855
Realized and unrealized gain
(loss) on investments (25,787) (1,101,526) 290,253
Other, net (71,305) (8,888) (42,575)
----------- ----------- -----------
3,523,005 477,994 1,327,533
----------- ----------- -----------
Income before income taxes 12,538,629 8,982,597 5,980,930
Income tax provision 4,304,346 3,345,465 2,034,395
----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle 8,234,283 5,637,132 3,946,535
Cumulative effect of change
in accounting principle,
net of income taxes of
$75,005 127,710 -- --
----------- ----------- -----------
Net income $ 8,361,993 $ 5,637,132 $ 3,946,535
=========== =========== ===========
Earnings per share - basic:
Income before cumulative
effect of change in
accounting principle $ 0.92 $ 0.83 $ 0.60
Cumulative effect of
accounting change 0.01 -- --
----------- ----------- -----------
Net income per share $ 0.93 $ 0.83 $ 0.60
=========== =========== ===========
Weighted-average common
shares outstanding - basic 8,938,812 6,759,541 6,618,454
=========== =========== ===========
Ambassadors International, Inc.
Consolidated Statements of Income, Continued
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Earnings per share - diluted:
Income before cumulative
effect of change in
accounting principle $ 0.91 $ 0.82 $ 0.59
Cumulative effect of
accounting change 0.01 -- --
----------- ----------- -----------
Net income per share $ 0.92 $ 0.82 $ 0.59
=========== =========== ===========
Weighted-average common
shares outstanding -
diluted 9,087,398 6,893,231 6,649,884
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Ambassadors International, Inc.
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Net income $ 8,361,993 $ 5,637,132 $ 3,946,535
Unrealized losses on
available-for-sale invest-
ments, net of $107,049
income taxes (182,272) -- --
----------- ----------- -----------
Comprehensive income $ 8,179,721 $ 5,637,132 $ 3,946,535
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
Ambassadors International, Inc.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996
Retained Accumulated
Common Stock Additional Earnings Other
---------------------- Paid-In (Accumulat- Comprehen-
Shares Amount Capital ed Deficit sive Loss Total
--------- ----------- ----------- ----------- ------------ ------------
Balances, December 31, 1995 6,535,030 $ 65,350 $11,926,468 $ (856,772)$ -- $ 11,135,046
Stock issued for acquisition
of subsidiaries 218,857 2,189 1,698,811 -- -- 1,701,000
Net income -- -- -- 3,946,535 -- 3,946,535
--------- ----------- ----------- ----------- ----------- ------------
Balances, December 31, 1996 6,753,887 67,539 13,625,279 3,089,763 -- 16,782,581
Stock options exercised 14,336 143 135,684 -- 135,827
Net income -- -- -- 5,637,132 -- 5,637,132
--------- ----------- ----------- ----------- ----------- ------------
Balances, December 31, 1997 6,768,223 67,682 13,760,963 8,726,895 -- 22,555,540
Stock options exercised 18,184 182 176,550 -- -- 176,732
Stock grants issued 12,500 125 98,312 -- -- 98,437
Tax benefit associated with
stock grants and exercise of
stock options -- -- 95,430 -- -- 95,430
Stock issued for acquisition
of subsidiaries 277,927 2,779 5,592,221 -- -- 5,595,000
Stock issued for cash, net of
offering costs 2,838,700 28,387 70,319,584 -- -- 70,347,971
Other comprehensive loss, net
of income taxes -- -- -- -- (182,272) (182,272)
Net income -- -- -- 8,361,993 -- 8,361,993
--------- ----------- ----------- ----------- ----------- ------------
Balances, December 31, 1998 9,915,534 $ 99,155 $90,043,060 $17,088,888 $ (182,272) $107,048,831
========= =========== =========== =========== =========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
Ambassadors International, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 8,361,993 $ 5,637,132 $ 3,946,535
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,943,213 894,963 392,403
Deferred income tax provision (benefit) 449,843 (196,297) 458,235
(Gain) loss on investments 25,787 1,101,526 (290,253)
Loss on sale of property and equipment -- 15,245 880
Compensation expense for stock grants 98,437 -- --
Purchase of trading securities (8,073,218) (6,699,420) (7,765,969)
Proceeds from sale of trading
securities 7,575,521 6,225,946 8,330,781
Change in assets and liabilities, net of
effects of purchase of subsidiaries:
Restricted cash equivalents (27,000) (70,000) (10,000)
Accounts receivable 488,707 (535,976) 882,787
Prepaid program costs and expenses (1,055,334) 179,635 62,447
Other assets 256,518 86,011 --
Accounts payable and accrued
expenses (1,926,870) (246,801) (564,821)
Participants' deposits 891,215 (116,226) 684,834
Customer advances (236,757) (354,534) --
------------ ------------ ------------
Net cash provided by operating
activities 8,772,055 5,921,204 6,127,859
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (2,147,524) (1,032,040) (338,072)
Proceeds from sale of property and equipment -- -- 1,220
Proceeds from sale of available-for-sale
securities 7,128,851 636,684 --
Purchase of available-for-sale securities (44,991,559) (200,000) (262,500)
Cash paid for acquisition of subsidiaries,
net of cash received (6,553,679) (199,075) (105,340)
Payment for covenant-not-to-compete agreement (250,000) (220,000) (125,000)
Change in other assets (57,324) (48,781) 19,766
Payments received on (issuance of) notes
receivable, net 162,354 (162,354) --
------------ ------------ ------------
Net cash used in investing
activities (46,708,881) (1,225,566) (809,926)
------------ ------------ ------------
Cash flows from financing activities:
Payments on long-term debt (168,843) (242,352) (10,752)
Proceeds from exercise of stock options 176,732 135,827 --
Net proceeds from sale of common stock 70,347,971 -- --
------------ ------------ ------------
Net cash provided by (used in)
financing activities 70,355,860 (106,525) (10,752)
------------ ------------ ------------
Ambassadors International, Inc.
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Net increase in cash and cash equivalents 32,419,034 4,589,113 5,307,181
Cash and cash equivalents, beginning of year 22,870,546 18,281,433 12,974,252
------------ ------------ ------------
Cash and cash equivalents, end of year $ 55,289,580 $ 22,870,546 $ 18,281,433
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 39,818 $ 9,535 $ 1,515
Cash paid for income taxes 4,568,700 3,688,507 1,440,000
See Notes 7 and 10 for noncash investing and financing activities.
The accompanying notes are an integral part of the consolidated
financial statements.
Ambassadors International, Inc.
Notes to Financial Statements
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION
The Company is an educational travel, travel services and
performance improvement company. The Company is engaged
primarily in the business of (i) organizing, marketing and
operating international education travel programs on a
worldwide basis for students and adults (the Education Group)
and (ii) developing, marketing and managing performance
improvement programs for a nationwide roster of corporate
clients that utilize merchandise awards and incentive travel,
providing business meeting management services and providing
comprehensive housing reservation, registration and travel
services for meetings, conventions, expositions and trade shows
(the Performance Group).
The Company was founded in 1967 and was reincorporated in
Delaware in 1995. The Education Group represented the entire
operations of the Company until 1996 when the Performance Group
commenced operations.
The consolidated financial statements include the accounts of
Ambassadors International, Inc. (the Company) and its
subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
CREDIT RISK
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and
cash equivalents, investments and trade accounts receivable.
The Company places its cash and temporary cash investments with
high credit quality institutions. At times, such investments
may be in excess of the federal insurance limit or at
institutions which are not covered by this insurance. The
Company believes that its primary trade accounts receivable
credit risk exposure is limited as travel program participants
are required to pay for their entire program costs prior to the
program departure and trade accounts receivable for non-travel
related programs are principally with large credit-worthy
corporations. The Company invests in foreign currency
contracts and options to hedge its foreign currency risk. The
Company is exposed to credit risk under these contracts to the
extent that the counterparty is unable to perform under the
agreement.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CASH AND CASH EQUIVALENTS
The Company invests cash in excess of operating requirements in
short-term time deposits, money market instruments, government
mutual bond funds and marketable securities. The Company
considers investments with remaining maturities at date of
purchase of three months or less to be cash equivalents.
The Company's restricted cash equivalents represent
certificates of deposit issued in the Company's name and held
by four airline companies as collateral for airfare purchase
agreements.
DERIVATIVE FINANCIAL INSTRUMENTS AND INVESTMENTS
In June 1998, Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities" was issued. The Company elected to
implement the Statement early on July 1, 1998. The Statement
requires that all derivative instruments be recorded on the
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 cash flow
hedge transactions in which the Company is hedging the
variability of cash flows related to a variable-rate asset,
liability or a forecasted transaction, changes in the fair
value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will
be 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 will be recognized
in current period earnings. The adoption of SFAS 133 on
July 1, 1998 resulted in the cumulative effect of an accounting
change of $127,710, net of income taxes, being recognized as
income in the statement of income.
The Company classifies its marketable investments as available-
for-sale securities. Available-for-sale securities consist of
foreign currency futures, forward contracts, options and debt
securities which are carried at fair value. The Company uses
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
DERIVATIVE FINANCIAL INSTRUMENTS AND INVESTMENTS, CONTINUED
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,
the Company has assumed the risk which might arise from the
possible inability of counterparties to meet the terms of their
contracts. The Company does not expect any losses as a result
of counterparty defaults. Prior to the adoption of SFAS 133 on
July 1, 1998, the Company classified the foreign currency
contracts as trading securities with realized and unrealized
gains and losses on these securities recognized in the
statement of income.
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 fair value of
the foreign currency options is based on the estimated amount
to terminate the put and call contracts with the counterparties
at year end.
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 income in the period the investments are sold.
The Company owns a 20% interest in a company which provides
packaged tours primarily to Formula One, Indy Car and NASCAR
races. This investment is reported on the equity method. The
Company also owns a 15% interest in a joint venture. The joint
venture's purpose is the acquisition of preferred stock (which
represents 8.2% of the total outstanding stock) of an internet
company. This investment is reported at the lower of cost or
estimated net realizable value. The chairman of the board of
the internet company is also a director of the Company. Also,
the president of the Company is a director of the internet
company.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost of maintenance
and repairs which 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 5 to 8 years.
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 operations.
GOODWILL AND COVENANTS-NOT-TO-COMPETE
Goodwill is being amortized using the straight-line method over
10 to 30 years. Costs of covenants-not-to-compete are
amortized using the straight-line method over the term of the
agreements, generally 5 to 10 years.
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets or Long-Lived Assets to be Disposed Of".
SFAS 121 requires certain long-lived assets, including
goodwill, be reviewed for impairment in value when the carrying
value of such assets may not be recoverable. There was no
effect on the Company's financial statements of adopting SFAS
121 on January 1, 1996.
REVENUE RECOGNITION
The Company bills travel participants in advance, which are
recorded as participants' deposits. The Company pays for
certain direct program costs such as airfare, hotel, rail
passes and other program costs in advance of travel, which are
recorded as prepaid program costs and expenses. The Company
recognizes travel revenue and related costs when travel
convenes.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
REVENUE RECOGNITION, CONTINUED
Revenue from housing reservation, registration and related
travel services is recognized when the convention commences.
Revenue from the sale of merchandise is recognized when the
merchandise is shipped. Revenue from pre-paid certificate-
based merchandise incentive programs is deferred as customer
advances until the Company's obligations are fulfilled or upon
management's estimates (based upon historical trends) that the
certificate will not be redeemed. Revenue is recognized from
printing and administration based upon the percentage of
completion of the related program.
SELLING AND TOUR PROMOTION EXPENSES
The Company expenses all selling, tour promotion and
advertising costs as incurred.
NET INCOME PER SHARE
Net income per share - basic is computed by dividing net income
by the weighted-average number of common shares outstanding
during the period. Net income 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 dilutive potential common shares had
been issued.
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.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with the 1998 presentation. These reclassifications had no
effect on net income or retained earnings as previously
reported.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and display of comprehensive income
(loss) and its components in a full set of general purpose
financial statements. The Company adopted SFAS 130 in 1998.
Accordingly, prior periods' financial statements presented
herein have been restated to reflect this new standard. As of
December 31, 1998, the only component of comprehensive income
is the unrealized gains and losses on derivative instruments of
$182,272, which has been presented net of $107,049 of deferred
income taxes.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments for an Enterprise and Related
Information". This Statement requires presentation of segment
information in reports to stockholders including disclosures
about the products and services an entity provides and its
major customers. The Company adopted SFAS 131 in 1998.
Accordingly, prior periods presented include disclosures
required by this new standard.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
2. INVESTMENTS:
At December 31, 1998 and 1997, the Company had foreign currency
forward contracts, foreign currency put and call options and U.S.
government and agency obligations. The cost and estimated fair
values of these investments were as follows:
Gross Gross Fair Value/
Unrealized Unrealized Carrying
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 1998:
U.S. government and
agency obligations $37,659,994 $ -- $ -- $37,659,994
=========== =========== =========== ===========
Foreign currency contracts
and options $ -- $ 177,929 $ (467,251) $ (289,322)
=========== =========== =========== ===========
December 31, 1997:
Foreign currency contracts $ -- $ 374,775 $(1,049,400) $ (674,625)
=========== =========== =========== ===========
The fair value of the Company's investments in foreign currency
forward contracts is based upon the spot price of these
currencies at December 31, 1998 and 1997. All available-for-sale
investments mature in 1999.
Net realized gains (losses) on investments of $25,787, $(426,901)
and $290,253 for the years ended December 31, 1998, 1997 and
1996, respectively, were included in the determination of net
income.
Prior to the adoption of SFAS 133 on July 1, 1998, the Company
classified the foreign currency contracts as trading securities
with realized and unrealized gains and losses on these securities
recognized in the statement of income. The net unrealized loss
reclassified to revenue from other comprehensive income for the
year ended December 31, 1998 (subsequent to the adoption of
SFAS 133) was $212,388.
The substantial majority of the Company's travel programs take
place outside of the United States and most foreign suppliers
require payment in currency other than the U.S. dollar.
Accordingly, the Company is exposed to foreign currency risk
relative to changes in foreign currency exchange rates between
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
2. INVESTMENTS, CONTINUED:
those currencies and the U.S. dollar. The Company has a program
to provide a hedge against certain of these foreign currency
risks. The Company uses forward contracts which allow the
Company to acquire the foreign currency at a fixed price for a
specified period of time. Additionally, the Company uses foreign
currency call options which provide the Company with the option
to acquire certain foreign currencies at a fixed exchange rate
and time period. Concurrent with the purchase of a foreign
currency call option, the Company sells a foreign currency put
option to minimize the net premium paid for the call option. The
strike prices on these options generally straddle the exchange
rate at the time the options are purchased and utilized. Since
July 1, 1998, unrealized gains or losses associated with these
transactions are reported in other comprehensive income. Prior
to July 1, 1998, any unrealized gains or losses associated with
these transactions were recognized in operations based upon the
fair value of the instruments. Any realized gains or losses
associated with these transactions are recognized in the
Company's operations in the period the investments are sold. The
Company also purchases future contracts to similarly hedge its
foreign currency risk. The Company is exposed to credit risk
under the foreign currency contracts to the extent that the
counterparty is unable to perform under the agreement. The
Company has a $25,000,000 credit facility through July 1999 to
support foreign currency purchases and foreign exchange forward
contracts.
At December 31, 1998, the Company had outstanding forward
exchange contracts and call and put options to purchase and sell
foreign currencies as follows:
Currency Amount Matures
--------------------------- ----------- ---------------
Forward contracts:
Australian dollar $ 3,449,954 March-July 1999
New Zealand dollar 62,902 June 1999
British pound 776,348 April 1999
-----------
$ 4,289,204
===========
Call options purchased:
Australian dollar $ 1,750,000 March 1999
New Zealand dollar 550,000 April 1999
British pound 7,380,000 June 1999
-----------
$ 9,680,000
===========
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
2. INVESTMENTS, CONTINUED:
Currency Amount Matures
----------------------- ----------- ---------------
Put options sold:
Australian dollar $ 714,000 March 1999
New Zealand dollar 226,800 April 1999
-----------
$ 940,800
===========
At December 31, 1998, 1997 and 1996, the Company had unrealized
foreign currency losses associated with these financial
instruments of $(289,322), $(674,625) and $0, respectively.
Since all of the Company's outstanding contracts at December 31,
1998 mature in 1999, all of the unrealized losses are expected to
be reclassified as a reduction to revenue during the year ending
December 31, 1999.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
-------------------------
1998 1997
----------- -----------
Office furniture, fixtures and
equipment $ 2,847,937 $ 1,519,240
Computer equipment 3,406,937 2,308,828
Leasehold improvements 1,058,255 676,065
----------- -----------
7,313,129 4,504,133
Less accumulated depreciation and
amortization (3,113,240) (2,355,828)
----------- -----------
$ 4,199,889 $ 2,148,305
=========== ===========
Depreciation and amortization expense on property and equipment
of approximately $757,000, $444,000 and $327,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, were
included in the determination of net income.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
4. NOTE PAYABLE:
During 1997, in conjunction with an acquisition, the Company
issued an unsecured $541,143 note payable with a three-year
maturity and quarterly payments of $50,000, including interest at
6.5%. At December 31, 1998, $185,851 is due during the year
ending December 31, 1999, and $145,243 is due during 2000.
5. INCOME TAXES:
The provision (benefit) for income taxes for the years ended
December 31, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996
---------- ---------- ----------
Current:
Federal $3,541,697 $3,396,592 $1,542,186
State 312,806 145,170 33,974
Deferred 449,843 (196,297) 458,235
---------- ---------- ----------
$4,304,346 $3,345,465 $2,034,395
========== ========== ==========
Components of the net deferred tax assets and liabilities are as
follows:
December 31, 1998
------------------------------------
Assets Liabilities Total
---------- ----------- ----------
Accrued vacation $ 80,778 $ 80,778
Depreciation $ (198,442) (198,442)
Unrealized loss on futures contracts 107,049 107,049
Amortization of goodwill and non-
compete agreements (83,964) (83,964)
Net operating loss carryforwards 293,045 293,045
Customer advances (492,738) (492,738)
Inventory valuation 29,467 29,467
Other 1,257 (21,409) (20,152)
---------- ---------- ----------
Total temporary differences and
tax attributes $ 511,596 $ (796,553) $ (284,957)
========== ========== ==========
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
5. INCOME TAXES, CONTINUED:
December 31, 1997
------------------------------------
Assets Liabilities Total
---------- ----------- ----------
Accrued vacation $ 44,051 $ 44,051
Depreciation $ (199,614) (199,614)
Unrealized loss on futures contracts 272,565 272,565
Amortization of goodwill and non-
compete agreements 31,782 31,782
Net operating loss carryforwards 293,045 293,045
Customer advances (415,661) (415,661)
Inventory valuation 29,467 29,467
Other 2,202 2,202
---------- ---------- ----------
Total temporary differences and
tax attributes $ 673,112 $ (615,275) $ 57,837
========== ========== ==========
The income tax provision (benefit) for the years ended
December 31, 1998, 1997 and 1996 differs from that computed using
the federal statutory rate applied to income before income taxes
as follows:
1998 1997 1996
----------------- ----------------- -----------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
Provision at the federal
statutory rate $4,388,520 35.0% $3,054,083 34.0% $2,033,516 34.0%
Nondeductible goodwill 144,349 1.1 78,869 0.9 -- --
State income tax, net of
federal benefit 203,324 1.6 67,892 0.8 -- --
Tax exempt interest (404,418) (3.2) -- -- -- --
Adjustment of prior years'
taxes -- -- 104,144 1.2 -- --
Other (27,429) (0.2) 40,477 0.3 879 --
---------- ---- ---------- ----- ---------- ----
$4,304,346 34.3% $3,345,465 37.2% $2,034,395 34.0%
========== ==== ========== ===== ========== ====
At December 31, 1998, the Company has acquired companies with
federal net operating loss carryforwards of approximately
$792,000, which can be used to offset future regular taxable
income of the subsidiary, up to approximately $133,000 annually.
These carryforwards expire in 2011.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
6. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities and office equipment under
non-cancelable operating leases. At December 31, 1998, future
non-cancelable lease commitments are as follows:
Year Ending
December 31,
------------
1999 $1,420,387
2000 1,349,294
2001 1,260,636
2002 1,004,092
2003 902,134
Thereafter 1,091,814
----------
$7,028,357
==========
Total rent expense for the years ended December 31, 1998, 1997
and 1996 was approximately $1,319,000, $747,000 and $503,000,
respectively. The Company may cancel the lease on the Company's
Education Group office without penalty (upon one year's prior
notice) and also may extend the term of the lease for an
additional ten-year period upon providing written notice to the
lessor at least six months prior to the end of the initial lease
term.
The Company entered into agreements to sublease office facilities
in Newport Beach, California. Sublease rental income for the
year ended December 31, 1998 was $40,464. Future minimum rental
income under the non-cancelable subleases is $83,628 and $43,164
for the years ended December 31, 1999 and 2000, respectively.
The Company is subject to claims, suits and complaints which have
arisen in the ordinary course of business. In the opinion of
management and its legal counsel, all matters are adequately
covered by insurance or, if not covered, are without merit or are
of such a nature, or involve such amounts as would not have a
material effect on the financial position, cash flows or results
of operations of the Company.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
7. STOCK PLANS:
The Company adopted the 1995 Equity Participation Plan (the Plan)
during 1995 and amended and restated the Plan in 1998. The Plan
provides for the grant of stock options, awards of restricted
stock, performance or other awards or stock appreciation rights
to directors, key employees and consultants of the Company. The
maximum number of shares which may be awarded under the Plan is
900,000 shares. Awards cannot exceed 100,000 shares to any
individual in a calendar year.
Under the terms of the Plan, options to purchase shares of the
Company's common stock are granted at a price set by the
Compensation Committee of the Board of Directors, not to be less
than the par value of a share of common stock and if granted as
performance-based compensation or as incentive stock options, no
less than the fair market value of the stock on the date of
grant. The Compensation Committee establishes the vesting period
of the awards. The options may be exercised any time after they
are fully vested for a period up to 10 years from the grant date.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
7. STOCK PLANS, CONTINUED:
Had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards under the
plans consistent with the method of SFAS No. 123, the Company's
pro forma net income and net income per share would have been
changed to the pro forma amounts indicated below:
Year Ended Year Ended YearEnded
December 31, 1998 December 31, 1997 December 31, 1996
----------------------- ----------------------- -----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of change in accounting
principle $8,234,283 $7,648,036 $5,637,132 $5,388,258 $3,946,535 $3,783,749
Cumulative effect of accounting
change 127,710 127,710 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income $8,361,993 $7,775,746 $5,637,132 $5,388,258 $3,946,535 $3,783,749
========== ========== ========== ========== ========== ==========
Net income per share - basic:
Income before cumulative
effect of change in accounting
principle $ 0.92 $ 0.86 $ 0.83 $ 0.80 $ 0.60 $ 0.57
Cumulative effect of accounting
change 0.01 0.01 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income per share - basic $ 0.93 $ 0.87 $ 0.83 $ 0.80 $ 0.60 $ 0.57
========== ========== ========== ========== ========== ==========
Net income per share - diluted:
Income before cumulative
effect of change in accounting
principle $ 0.91 $ 0.84 $ 0.82 $ 0.78 $ 0.59 $ 0.57
Cumulative effect of accounting
change 0.01 0.01 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income per share - diluted $ 0.92 $ 0.85 $ 0.82 $ 0.78 $ 0.59 $ 0.57
========== ========== ========== ========== ========== ==========
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
7. STOCK PLANS, CONTINUED:
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 1998,
1997 and 1996:
1998 1997 1996
-------- -------- -----------
Dividend yield 0% 0% 0%
Expected volatility 55% 63% 84%
Risk free interest rates 4.8% 6.50% 6.40%-6.44%
Expected option lives 10 years 9.7 years 8 years
Stock option transactions are summarized as follows:
Number of Weighted-Average Expiration
Shares Exercise Price Date
--------- ---------------- ----------
Balance, December 31, 1995 277,050 $ 8.90 2005
Granted 109,400 10.79 2006
Forfeited (145,087) 9.06
--------- ------
Balance, December 31, 1996 241,363 9.66 2005-2006
Granted 269,950 10.84 2007
Forfeited (49,925) 9.53
Exercised (14,336) 9.47
--------- ------
Balance, December 31, 1997 447,052 10.39 2005-2007
Granted 247,100 24.43 2008
Forfeited (33,779) 14.94
Exercised (18,184) 9.82
--------- ------
Balance, December 31, 1998 642,189 $15.52 2005-2008
========= ======
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
7. STOCK PLANS, CONTINUED:
The following table presents information about the options as of
December 31, 1998:
Weighted-Average
----------------------------
Number of Range of Remaining
Shares Exercise Price Exercise Price Life (Years)
--------- -------------- -------------- ------------
Exercisable options 58,750 $ 8.25-8.75 $ 8.55 7.9
Exercisable options 93,014 8.76-11.70 9.84 7.2
Exercisable options 19,750 14.63-17.55 14.84 9.0
------- ------------ ------ ---
Total exercisable 171,514 8.25-17.55 9.97 8.3
Unexercisable options 91,500 8.25-8.75 8.64 7.9
Unexercisable options 88,425 8.76-11.70 9.96 7.2
Unexercisable options 94,750 14.63-17.55 15.36 9.0
Unexercisable options 50,100 17.56-20.48 20.38 9.1
Unexercisable options 58,800 23.40-26.32 26.25 9.5
Unexercisable options 87,100 26.33-29.25 29.18 9.4
------- ------------ ------ ---
Total all options 642,189 $ 8.25-29.25 $15.52 8.3
======= ============ ====== ===
Exercisable, December 31,
1997 76,326 $ 9.34
======= ======
Exercisable, December 31,
1996 36,688 $ 8.90
======= ======
The weighted-average fair value of options granted during 1998,
1997 and 1996 were $12.15 per share, $8.32 per share and $7.95
per share, respectively.
In addition to the stock options above, during 1997, the Company
granted an executive 50,000 shares of the Company's stock which
vests over four years. The Company incurred compensation expense
of approximately $98,000 and $53,000 in 1998 and 1997,
respectively, related to this grant of shares.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
8. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1993, the Company established a
noncontributory profit sharing plan which covers substantially
all employees. During 1996, the assets of the plan were
transferred into a new 401(k) Profit-Sharing Plan (the Plan).
Employees are eligible to participate in the Plan upon one year
of service and 21 years of age. Employees may contribute up to
15% of their salary, subject to the maximum contribution allowed
by the Internal Revenue Service. The Company's matching
contribution is discretionary based upon approval by management.
Employees are 100% vested in their contributions and vest in
Company matching contributions equally over four years. During
the years ended December 31, 1998, 1997 and 1996, the Company
contributed approximately $81,000, $26,000 and $57,000 to the
Plan, respectively.
9. SECONDARY OFFERING:
In April 1998, the Company completed a public offering of
2,838,700 shares of the Company's common stock. During the year
ended December 31, 1998, a portion of the $70.3 million net
proceeds have been used for business acquisitions. Management
intends to use the remaining net proceeds for additional
acquisitions of educational travel and performance improvement
companies and related businesses. These proceeds will also be
used for general corporate purposes.
10. BUSINESS ACQUISITIONS:
In February 1998, the Company acquired certain assets of a
company located in Boston, Massachusetts engaged in providing
comprehensive housing reservation, registration and travel
services for meetings, conventions, expositions and trade shows.
In February 1998, the Company also acquired all of the
outstanding stock of a performance incentive and meeting
management company located in Westlake Village, California. In
April 1998, the Company acquired all of the outstanding stock of
a performance incentive and meeting management company located in
Laguna Hills, California. In May 1998, the Company acquired
certain assets of a specialized golf tour company located in
Burbank, California. In July 1998, the Company acquired certain
assets of a company located in Atlanta, Georgia, engaged in
providing comprehensive housing reservation, registration and
travel services for meetings, conventions, expositions and trade
shows.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
10. BUSINESS ACQUISITIONS, CONTINUED:
The total purchase price for these acquisitions in 1998 was $11.7
million plus 277,927 shares of the Company's restricted common
stock and certain contingent consideration as described below.
Total assets acquired and liabilities assumed in these
acquisitions was approximately $10.5 million and $10.3 million,
respectively. Assets acquired consisted primarily of cash,
accounts receivables and prepaid expenses. Liabilities consisted
primarily of accounts payable and participant deposits. The
common stock issued to effect the transactions was recorded at
its estimated fair value based upon quoted market price adjusted
for trading restrictions of $5.6 million. Goodwill related to
these acquisitions of approximately $17.0 million is being
amortized over 15 to 30 years.
In September 1997, the Company acquired the assets of a company
located in Waconia, Minnesota. The company organizes and
operates travel and other incentive programs, professional
meetings, conventions and seminars for businesses. The total
purchase price of this company was $500,000 in cash, a $541,000
note payable and certain contingent consideration as described
below. The results of operations of this acquired business for
the year ended December 31, 1996 and for the 1997 period prior to
being acquired by the Company were immaterial to the consolidated
operating results of the Company.
In December 1996, the Company acquired all of the outstanding
common stock of a company which is located in Minneapolis,
Minnesota, with sales offices in Des Moines, Iowa; Newport Beach
and Novato, California; Philadelphia, Pennsylvania and Fairway,
Kansas. The company administers incentive travel and merchandise
programs. In connection with this acquisition, the Company also
entered into a ten-year covenant-not-to-compete agreement for a
total of $1.2 million, payable in equal annual installments over
eight years. In February 1996, the company acquired the assets
of a company which has offices in Winnebago, Illinois and
Birmingham, Alabama and provides adult travel programs. In
January 1996, the Company acquired all of the outstanding stock
of a meeting management and incentive travel company located in
Newport Beach, California. Total purchase price for these
acquisitions was $1.45 million plus 218,857 shares of the
Company's restricted common stock, with an estimated fair value
of $1.7 million.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
10. BUSINESS ACQUISITIONS, CONTINUED:
All of the above acquisitions have been accounted for using the
purchase method of accounting. The results of operations of
these companies have been included in the consolidated statement
of income since their respective dates of acquisition. The
contingent consideration to be paid is dependent upon the success
of the acquired companies' programs. Substantially all of the
contingent consideration will be accounted for as goodwill and
will be amortized accordingly when, and if, the contingency is
removed and additional consideration is paid.
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the 1998
acquisitions had occurred at January 1, 1997:
1998 1997
----------- -----------
Revenue $42,716,000 $40,396,000
=========== ===========
Net income $ 8,632,000 $ 7,125,000
=========== ===========
Net income per share - basic $ 0.96 $ 1.01
=========== ===========
Net income per share - diluted $ 0.95 $ 0.99
=========== ===========
The above amounts are based upon certain assumptions and
estimates which the Company believes are reasonable and do not
reflect any benefit from economies which might be achieved from
combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisitions
had taken place on the bases assumed above, nor are they
indicative of the results of future combined operations.
In January 1999, the Company acquired a minority interest in a
company located in Arlington, Virginia.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
11. 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 the Company 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.
CASH AND CASH EQUIVALENTS - The carrying value of cash and cash
equivalents approximates fair value due to the nature of the
cash investments.
INVESTMENTS - The fair value of the Company's investments in
foreign currency forward contracts is based on quoted market
prices and the spot rate of the foreign currencies subject to
contracts at year end. The fair value of the Company's foreign
currency put and call options is based on the estimated amount
to terminate the put and call contracts with the
counterparties at year end. The fair value of the Company's
investment in debt securities is based on quoted market prices.
OTHER ASSETS - The fair value of the note receivable, which is
included in other assets, is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for notes with similar remaining
maturities and credit risks.
OTHER INVESTMENTS - The fair value of other investments
approximates carrying value.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
11. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
NOTE PAYABLE - The fair value of the note payable is based on
the discounted value of contractual cash flows of the note.
The discount rate is estimated using the rates currently
offered for debt with similar remaining maturities.
The estimated fair values of the financial instruments as of
December 31, 1998 and 1997 are as follows:
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash
equivalents $55,289,580 $55,289,580 $22,870,546 $22,870,546
Investments and foreign
currency contracts
and options 37,370,672 37,370,672 (674,625) (674,625)
Other assets -- -- 162,354 162,354
Other investments 462,500 462,500 462,500 462,500
Financial liabilities:
Note payable 331,094 331,094 499,937 499,937
LIMITATIONS - The fair value estimates are made at a discrete
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 the Company could realize in a
current market exchange.
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
12. EARNINGS PER SHARE:
The following table presents a reconciliation of basic and
diluted EPS computations and the number of dilutive securities
(stock options) that were included in the dilutive EPS
computation.
1998 1997 1996
---------- ---------- ----------
Numerator:
Income before cumulative effect
of change in accounting
principle $8,234,283 $5,637,132 $3,946,535
Cumulative effect of accounting
change 127,710 -- --
---------- ---------- ----------
Net income for basic and diluted
earnings per share $8,361,993 $5,637,132 $3,946,535
========== ========== ==========
Denominator:
Weighted-average shares out-
standing - basic 8,938,812 6,759,541 6,618,454
Effect of dilutive common stock
options 148,586 133,690 31,430
---------- ---------- ----------
Weighted-average shares out-
standing - diluted 9,087,398 6,893,231 6,649,884
========== ========== ==========
Earnings per share - basic:
Income before cumulative effect
of change in accounting
principle $ 0.92 $ 0.83 $ 0.60
Cumulative effect of accounting
change 0.01 -- --
---------- ---------- ----------
$ 0.93 $ 0.83 $ 0.60
========== ========== ==========
Earnings per share - diluted:
Income before cumulative effect
of change in accounting
principle $ 0.91 $ 0.82 $ 0.59
Cumulative effect of accounting
change 0.01 -- --
---------- ---------- ----------
$ 0.92 $ 0.82 $ 0.59
========== ========== ==========
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
13. BUSINESS SEGMENTS:
All of the Company's assets are located in the United States.
During the years ended December 31, 1998, 1997 and 1996, the
Company's revenues as a percentage of total revenues were derived
from programs in the following geographic areas:
1998 1997 1996
---- ---- ----
Europe 30% 35% 39%
South Pacific 19% 24% 26%
China 6% 11% 10%
United States 39% 19% 4%
Other 6% 11% 21%
The Company operated the Education Group segment and the
Performance Group segment during 1998, 1997 and 1996. Corporate
and other consists of general corporate assets (primarily cash
and investments) and other activities which are not directly
related to the Education or Performance Groups. Selected
financial information related to these segments is as follows:
Education Performance Corporate
Group Group and Other Total
------------ ------------ ------------ ------------
1998
-------------------------
Revenue $ 24,407,294 $ 15,607,942 $ 132,289 $ 40,147,525
============ ============ ============ ============
Depreciation and
amortization $ 416,089 $ 316,776 $ 1,210,348 $ 1,943,213
============ ============ ============ ============
Operating income (loss) $ 10,786,215 $ 520,942 $ (2,291,533) $ 9,015,624
============ ============ ============ ============
Total additions to
property, equipment,
goodwill and covenant-
not-to-compete $ 380,607 $ 1,741,641 $ 17,604,064 $ 19,726,312
============ ============ ============ ============
Total assets $ 26,010,847 $ 9,006,736 $ 92,714,201 $127,731,784
============ ============ ============ ============
Ambassadors International, Inc.
Notes to Financial Statements, Continued
as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996
13. BUSINESS SEGMENTS, CONTINUED:
Education Performance Corporate
Group Group and Other Total
------------ ------------ ------------ ------------
1997
-------------------------
Revenue $ 21,296,003 $ 5,236,505 $ 8,389 $ 26,540,897
============ ============ ============ ============
Depreciation and
amortization $ 334,835 $ 107,812 $ 452,316 $ 894,963
============ ============ ============ ============
Operating income (loss) $ 9,176,078 $ 490,146 $ (1,161,621) $ 8,504,603
============ ============ ============ ============
Total additions to
property, equipment,
goodwill and covenant-
not-to-compete $ 916,049 $ 100,174 $ 1,476,817 $ 2,493,040
============ ============ ============ ============
Total assets $ 20,930,033 $ 3,095,490 $ 10,423,465 $ 34,448,988
============ ============ ============ ============
1996
-------------------------
Revenue $ 17,635,199 $ 1,208,223 $ -- $ 18,843,422
============ ============ ============ ============
Depreciation and
amortization $ 238,873 $ 36,982 $ 116,548 $ 392,403
============ ============ ============ ============
Operating income (loss) $ 5,158,389 $ 218,828 $ (723,820) $ 4,653,397
============ ============ ============ ============
Total additions to
property, equipment,
goodwill and covenant-
not-to-compete $ 315,936 $ -- $ 3,298,136 $ 3,614,072
============ ============ ============ ============
Total assets $ 21,074,647 $ 5,297,064 $ 897,339 $ 27,269,050
============ ============ ============ ============