SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- --------------
Commission file number: 0-26420
AMBASSADORS INTERNATIONAL, INC.
----------------------------------------------
(Name of Small Business Issuer In Its Charter)
Delaware 91-1688605
------------------------------- --------------------
(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
------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (509) 534-6200
Securities registered under Section 12(b)
of the Exchange Act: None
Securities registered under Section 12(g)
of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
---------------------------- -------------------------
Common Stock, $.01 Par Value NASDAQ
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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
<PAGE>
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B in this form, and no disclosure
will 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-KSB or any amendment to
this Form 10-KSB.[ ]
The issuer's revenues for the most recent fiscal year were
$18,843,000.
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 on February 28,
1997 was $38,281,270.
The number of shares of the registrant's Common Stock
outstanding, as of February 28, 1997 was 6,753,888.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1996 are incorporated by reference
into Part III.
<PAGE>
TABLE OF CONTENTS
ITEM
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Description of Business
--------------------------------
Organization
------------
Ambassadors International, Inc., a Delaware corporation
("Ambassadors"), is a holding company of three wholly owned
subsidiaries, Ambassador Programs, Inc., a Delaware corporation
("API"), Ambassador Performance Improvement, Inc., a Delaware
corporation ("AP Improvement"), and The Helin Organization, Inc., a
California corporation ("Helin"). API is sometimes collectively
referred to herein as the "Travel Group." AP Improvement and Helin
are sometimes collectively referred to herein as the "Performance
Group."
Ambassadors was originally incorporated in the State of Washington in
1967. Effective as of January 1, 1995, John T. Tatham, Emanuele F.
Portolese, Trudy K. Tatham, and Joe M. Sample, the sole stockholders
of Ambassadors (collectively referred to herein as the "Former
Stockholders"), sold a majority of their shares to John A. Ueberroth
and Peter V. Ueberroth (collectively referred to herein as the
"Ueberroths") and Ambassadors. The operative stock purchase agreement
provided that the Ueberroths would collectively purchase 3,698,130
shares (43% of the then outstanding shares of Ambassadors) of the
Former Stockholders' shares of common stock for a cash purchase price
of $1.9 million and Ambassadors would redeem 3,698,130 shares (43% of
the then outstanding shares of Ambassadors) of the Former
Stockholders' shares of common stock for a cash redemption price of
$1.8 million, in each case effective as of January 1, 1995.
In August 1995, Ambassadors completed an offering of 1,540,000 shares
of its common stock and raised approximately $12 million. In
connection with this offering, in August 1995, Ambassadors
reincorporated in Delaware and changed its name from "International
Ambassador Programs, Inc." to "Ambassadors International, Inc."
Subsequent to the reincorporation, Ambassadors contributed all of its
assets and liabilities to API. The Former Stockholders, at the time
of the offering, sold 760,000 shares of common stock, leaving them
with 536,000 shares of common stock. The transactions discussed above
are collectively referred to herein as the "Reorganization."
During 1996, all of the business conducted by the Performance Group
was conducted through Helin. AP Improvement was formed in October
1996 and, on December 23, 1996, AP Improvement acquired all of the
issued and outstanding capital stock of Bitterman & Associates, Inc.
("Bitterman"). Concurrently therewith, Bitterman was merged into AP
Improvement. The Bitterman acquisition is discussed below under
"RECENT ACQUISITIONS."
<PAGE>
Business
--------
THE TRAVEL GROUP
The Travel Group organizes, markets and operates international
educational travel programs for students and adults. Since its
founding in 1967, the Company has offered its programs to both
students and adults through its "Student Ambassador Programs" and
"Citizen Ambassador Programs." Since February 1996, through the
acquisition of certain assets of Mr. Marc L. Bright, the Company also
offers programs through its "American People Ambassador Programs" and
"Missions in Understanding." See "RECENT ACQUISITIONS" discussed
below. The Company's Student Ambassador Programs provide an
opportunity for high school and junior high school students to visit
one or more foreign countries to learn about the politics, economy and
culture of such countries. The Company's Citizen Ambassador Programs
provide adults with common interests the opportunity to travel abroad
to meet and exchange ideas with foreign citizens that have similar
backgrounds, interests or professions. The Company believes that its
programs provide participants with enriching experiences and deeper
understandings of foreign cultures and peoples than visits arranged
independently or through travel agencies.
A substantial percentage of the Company'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. Over its history, eight U.S. presidents
have served as Honorary Chairmen 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. The Company is currently the only travel
provider with the right to develop and conduct programs for adults
using the People to People name pursuant to a 10-year agreement that
the Company entered into in January 1995. 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 and officials and foreign
institutions. The Company is able to organize travel programs for its
student and adult ambassadors featuring events and speakers which have
been made available to the Company by virtue of its association with
People to People.
Student Ambassador Program delegations depart during the summer and
generally travel for 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 generally assist
<PAGE>
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 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 throughout the
United States recognize the Company's programs with credit, including
Stanford University, University of California at Los Angeles, and
Georgetown University.
The Citizen Ambassador Program, unlike the Student Ambassador Program,
operates year-round and is generally designed to provide a more
specialized adult educational experience. Adult programs generally
last from 10 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 Travel Group also operates other adult professional programs, that
last from two to three weeks, and involve delegations of professionals
from the United States or from other countries traveling abroad for
the purpose of participating in counterpart meetings of professional
or occupational interest.
The Travel Group operates worldwide, but its principal place of
business is located in Spokane, Washington.
THE PERFORMANCE GROUP
The Performance Group is dedicated to developing, marketing and
managing performance improvement programs for corporate clients that
utilize merchandise awards, consumer promotions and incentive travel.
The Performance Group's employees have substantial experience in
merchandise programs, marketing/communication programs and business
meetings. The Performance Group's principal offices are located in
Minneapolis, Minnesota and Newport Beach, California but its clients
are located throughout the United States.
The Performance Group follows a very organized strategy aimed at
developing and implementing a unique performance improvement program
for each of its clients. First, the Company's employees meet with its
clients and potential clients to determine their business
<PAGE>
objectives and their performance enhancement opportunities. The next
step involves working with the client's employees to develop the
program concepts and parameters in terms of purpose, costs, time,
employee participation, etc. Then, the Company's employees research
and develop a completely customized improvement program that falls
within the parameters set by the client.
The Company's employees participate in all aspects of the program
development. The staff of creative writers and graphic designers
deliver promotional campaigns that are complete from concept through
production, including printing, collating, labeling, and mailing. The
Company provides each client with computerized lists generated by
internally-designed software programs, which track the program
participants and enable the client to know instantaneously the status
of each participant at any time. Additionally, the Company provides a
program coordinator to formulate, maintain, and finalize each and
every aspect of the client's event.
The Company also arranges air transportation to each event. Its air
specialists can geographically analyze and arrange the most practical
flights according to the client's program schedule, negotiate
preferred airline rates, and provide participants with their
individual seating requirements and boarding passes. In-house central
reservation systems provide current flight availability, the lowest
fares between cities, and immediate issuance of airline tickets and
flight itineraries.
Finally, when the program begins, the Company's Travel Directors are
on-site to provide concierge levels of service and attempt to insure
that the program runs according to schedule. For all of these
services, the Company is reimbursed for all of its expenses and, in
addition, receives as its compensation a percentage markup of the
different items including, but not limited to, air and ground
transportation, promotional gifts, meals, and hotel accommodations.
The Company coordinates with the client's employees to best determine
the type of program that complements and furthers the client's image.
The Company believes that it is essential that it keeps costs in mind
when reviewing different options and finds the best locations and
services given the amount budgeted by the client. In this regard, the
Company takes advantage of the relationships it has with hotels,
airlines, and visiting bureaus.
BUSINESS STRATEGY
-----------------
The Company believes that high quality programs and excellent customer
service are vital to the Company's future 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 scope and efficiency of its student travel program
marketing efforts, (ii) develop new adult travel programs designed to
appeal to a broader customer base and to expand its existing
specialized adult programs, (iii) further develop and improve upon its
<PAGE>
travel incentive programs, and (iv) selectively acquire travel and
travel related businesses which are either compatible with the
Company's existing business or represent a developing specialty travel
segment not currently addressed by the Company's operations. See
below "RECENT ACQUISITIONS."
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 other companies that provide similar
educational travel programs for students as well as independent
programs organized and sponsored by local teachers with the assistance
of local travel agents and with semester or year-long out-bound
university programs designed to provide college age students an
opportunity to study abroad. 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 with tour operators 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 companies engaged in the
travel business, although not currently competing directly with the
Company, 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 and program cost.
The Company believes that its connection with People to People, as
well as its years of experience organizing student educational
programs and established connections with public officials,
organizations and residents in countries in which it provides
programs, allows the Company to provide an educational opportunity
that is not easily duplicated by competitors' programs.
The Performance Group also competes in a segment of the travel
industry that is highly competitive. It competes with companies which
are larger and have greater resources than the Company and which
specialize in the corporate promotions market. The Company believes
that it is not selling a commodity and, in fact, is selling a unique
service. It further believes that although some potential clients
will focus on price alone, other clients will also be interested in
the quality and uniqueness of the programs developed by the
Performance Group and customer service. The Company believes that its
years of experience in developing performance improvement programs,
its commitment to work with the client's employees to determine the
best program for each client and be involved with each program through
to completion, and its vendor relations, allow it to provide programs
that are not easily duplicated by competitors.
<PAGE>
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, subject
to certain exceptions related to adult travel programs in connection
with those persons who permanently reside in and travel outside of
Russia and/or CIS countries, to the names "American People Ambassador
Programs" and "Missions in Understanding." See "RECENT ACQUISITIONS"
discussed below. 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 $5.0 million professional
liability policy and a $5.0 million umbrella policy. The Company also
maintains a $5.0 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.
RECENT ACQUISITIONS
-------------------
M.L. BRIGHT ASSOCIATES, AMERICAN PEOPLE AMBASSADOR PROGRAMS, AND
MISSIONS IN UNDERSTANDING
In February 1996, API completed the acquisition of certain assets from
Marc L. Bright, doing business as M.L. Bright Associates, American
People Ambassador Programs, and Missions in Understanding
(collectively referred to herein as "MLB") pursuant to an agreement
dated February 6, 1996 (the "MLB Agreement"). MLB operated adult
educational and exchange travel programs under the tradenames
"American People Ambassador Programs" and "Missions in Understanding"
pursuant to a General Contract between MLB and People to People dated
July 1, 1995 (the "General Contract"). The General Contract expires
June 30, 2005.
Pursuant to the MLB Agreement, API acquired the following assets from
MLB: (i) its inventory; (ii) its furniture, equipment, and fixtures;
(iii) its goodwill including, but not limited to, its customer lists
and files, and all of MLB's right, title, and interest in and to the
names "American People Ambassador Programs" and "Missions in
Understanding;" (iv) an assignment of MLB's rights under the General
Contract; and (v) all rights to and contracts and prospective
contracts with persons who wish to travel from and after April 1,
1996. Additionally, Mr. Bright entered into a five year employment
agreement with API as well as a covenant not to compete. Additional
<PAGE>
information regarding the MLB Agreement is included in the Company's
Form 8-K dated February 9, 1996, which is incorporated herein by
reference.
The Agreement with Mr. Bright prohibits the Company from operating
adult travel programs in connection with those persons who permanently
reside in and travel outside of Russia and/or CIS countries.
THE HELIN ORGANIZATION, INC.
In January 1996, the Company completed its acquisition of all of the
issued and outstanding shares of capital stock of The Helin
Organization, Inc., a California corporation ("Helin"), from Michael
E. Helin, Helin's sole shareholder. In connection with such
acquisition, Mr. Helin entered into an employment agreement that
terminated on December 31, 1996. However, Mr. Helin continues to work
with the Company as an at-will employee. Furthermore, Mr. Helin
entered into a covenant not to compete. Additional information
regarding this acquisition is included in the Company's Form 8-K dated
January 23, 1996, which is incorporated herein by reference.
BITTERMAN & ASSOCIATES, INC.
In December 1996, the Company merged Bitterman & Associates, Inc.
("Bitterman") with and into its wholly-owned subsidiary, AP
Improvement. In connection with this acquisition, the Company entered
into a consulting agreement that expires on December 31, 2004 and a
non-competition agreement that expires on December 19, 2004.
Additional information regarding this acquisition is included in the
Company's Form 8-K dated January 3, 1997, which is incorporated herein
by reference.
Bitterman, based in Minnesota, is a corporate incentive/performance
improvement company. It designs programs for corporations aimed at
increasing the performance of their personnel.
EMPLOYEES
As of December 31, 1996, the Company had approximately 177 employees,
of which 173 were full-time employees. 116 of the Company's employees
are presently located in Spokane, Washington, 11 are located in
Newport Beach, California, 2 are located in Winnebago, Illinois, and
48 are located in Minnesota. The Company has 60 full-time employees
engaged in marketing and sales and 113 in finance, administration and
operations. The Company also occasionally employs temporary labor on
a seasonal basis to assist it with its direct marketing efforts.
Helin's employees all work out of Newport Beach, California. None of
the Company's employees is subject to collective bargaining agreements
or is represented by a union. The Company believes its labor relations
are good.
<PAGE>
Item 2. Description of Property
--------------------------------
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 provides for monthly rental
payments of $36,992. The Company may cancel the lease without penalty
after the first three years (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 of the Former Stockholders.
The Company also leases 900 square feet of office space in Winnebago,
Illinois pursuant to a lease that expires in July, 1997. The Company,
through its wholly-owned subsidiary, Helin, also leases 4,500 square
feet of office space in Newport Beach, California. The lease expires
in June, 2000 and provides for monthly rental payments of $4,500. The
Company, through its wholly-owned subsidiary, Bitterman & Associates
leases 10,690 square feet of office and warehouse space in Plymouth,
Minnesota, and office space in LaCrosse, Wisconsin. The Plymouth,
Minnesota lease expires in 1999 and provides for monthly rental
payments of $9,101. The LaCrosse, Wisconsin lease requires monthly
rental payments of $2,200 and expires in 1998.
Management believes that its existing facilities are sufficient to
meet its present needs and anticipated needs for the foreseeable
future. However, additional facilities may be required in connection
with future business acquisitions.
Item 3. Legal Proceedings
--------------------------
The Company is not a party to any legal proceedings. It is
anticipated that from time to time it will be subject to claims, suits
and complaints that arise in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
STOCK MARKET AND OTHER INFORMATION
----------------------------------
The Company's common stock is traded on the NASDAQ National Market
(the "NASDAQ") under the symbol "AMIE" and has been so traded since
August 3, 1995. Prior to such date, there was no public trading
market for the Company's equity securities. As of March 20, 1997,
there were 50 holders of record of the Company's common stock.
The following table sets forth the high ask and low bid prices of a
share of the Company's common stock as reported by the NASDAQ for the
third quarter ended September 30, 1995 through the year ended December
31, 1996 (the only periods in which the Company's securities were
publicly traded). The prices reported represent prices between
dealers but do not include retail markups, markdowns, or commissions
and do not necessarily represent actual transactions.
High Ask Low Bid
1995:
Third Quarter ended September 30, 1995
(since August 3, 1995) $12.75 $10.63
Fourth Quarter ended December 31, 1995 $11.25 $ 7.75
1996:
First Quarter ended March 31, 1996 $13.25 $ 8.50
Second Quarter ended June 30, 1996 $16.13 $ 9.88
Third Quarter ended September 30, 1996 $14.25 $ 7.88
Fourth Quarter ended December 31, 1996 $11.00 $ 8.00
PRIOR S CORPORATION STATUS
--------------------------
From January 1, 1994 until early August, 1995, the Company was treated
for federal and state income tax purposes as an S Corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended. The
Company terminated its S Corporation status in early August 1995 (the
"Termination Date") in connection with the Reorganization and initial
public offering of its common stock in August 1995. Accordingly, the
Company's earnings from such date through the day preceding the
Termination Date were taxed for federal and state income tax purposes
directly to the Company's stockholders rather than to the Company.
The Company has previously distributed approximately $2.1 million,
representing the Company's 1994 net income, to the Former
Stockholders. The Company also made an additional distribution to the
Ueberroths and the Former Stockholders (the "Distribution") of
approximately $6 million, representing the Company's net income for
the period from January 1, 1995 to the Termination Date (the
"Distribution Amount"). The Distribution Amount was paid out of the
<PAGE>
cash balances of the Company. After payment of the Distribution, no
further S Corporation distributions were or will be made. Subsequent
to the Termination Date, the Company is no longer an S Corporation
and, accordingly, is subject to federal and state income taxes.
DIVIDEND POLICY
---------------
The Company intends to retain 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 deem relevant.
TRANSFER AGENT AND REGISTRAR
----------------------------
Chemical Mellon Shareholder Services of Los Angeles, California serves
as transfer agent and registrar of the Company's common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto
appearing elsewhere in this Form 10-KSB. 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 and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the
"Securities Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that
such assumptions will prove to be accurate and 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, regulation, regulatory policies in
the United States and other countries, foreign currency fluctuations,
competition from other travel-related businesses, and market and
general economic factors. All forward-looking statements contained in
this Form 10-KSB are qualified in their entirety by this cautionary
statement.
<PAGE>
RESULTS OF OPERATIONS
---------------------
The following table sets forth the Company's historical and pro forma
results of operations for the periods indicated (in millions):
HISTORICAL RESULTS OF OPERATIONS:
Years Ended December 31,
------------------------
1996 1995 1994
----- ----- -----
Gross program receipts $56.7 $46.7 $44.9
Revenues 18.8 17.1 17.0
Operating expenses:
Selling and tour promotions 8.4 8.7 9.4
General and administrative 5.7 4.6 5.4
----- ----- -----
Total operating expenses 14.1 13.3 14.8
----- ----- -----
Operating income 4.7 3.8 2.2
Other income (expense) 1.3 1.0 (0.1)
----- ----- -----
Income before income taxes 6.0 4.8 2.1
Income tax provision (benefit) 2.0 (0.4) -
----- ----- -----
Net income $ 4.0 $ 5.2 $ 2.1
===== ===== =====
PRO FORMA RESULTS OF OPERATIONS:
Years Ended December 31,
------------------------
1996 1995 1994
----- ----- -----
Gross program receipts $56.7 $46.7 $44.9
Revenues 18.8 17.1 17.0
Operating expenses:
Selling and tour promotions 8.4 8.7 7.1
General and administrative 5.7 4.6 4.9
----- ----- -----
Total operating expenses 14.1 13.3 12.0
----- ----- -----
Operating income 4.7 3.8 5.0
Other income (expense) 1.3 1.0 (0.2)
----- ----- -----
Income before income taxes 6.0 4.8 4.8
Income tax provision 2.0 1.6 1.6
----- ----- -----
Net income $ 4.0 $ 3.2 $ 3.2
===== ===== =====
The pro forma results of operations reflect income tax provisions as
if the Company were taxed as a C corporation rather than as a S
Corporation for 1994 and 1995 and to eliminate other costs incurred by
the Company in 1994 that did not recur in 1995 as a result of the
Company's initial public offering.
<PAGE>
OVERVIEW
--------
In 1996, pro forma net income increased 24%, gross program receipts
increased 21%, revenues increased 10%, earnings per share increased
from $0.57 per share to $0.60 per share, despite an 18% increase in
the number of weighted average shares outstanding.
In 1997, the Educational Travel Group is set to meet or exceed their
goals. In 1996, our student division traveled 9,733 participants, a
17% increase over 1995. In 1997, we expect 11,500 students to travel.
Additionally, the adult division is expected to increase participation
by 15% in 1997. In addition to increasing our number of participants,
we also plan to increase the profitability and program quality by
better managing our relationships with our overseas vendors. This
continued improvement of our program quality will aid our already
strong word-of-mouth marketing.
The Company integrated four companies into its operations during 1996.
American People Ambassador Programs was successfully integrated into
our Educational Travel Group in Spokane, Washington. The other three
companies, The Helin Organization, Bitterman & Associates, and The
P.E. Aussem Company are being consolidated and integrated into a full
service sales incentive and meeting management group, AP Improvement.
The companies within AP Improvement offer a broad range of products
and services including merchandise awards, consumer promotions,
training programs and incentive travel programs.
COMPARISON OF YEAR ENDED DECEMBER 31,1996 TO YEAR ENDED DECEMBER 31,
1995
--------------------------------------------------------------------
REVENUES
The expansion of our programs in 1996 resulted in a 24% increase in
the number of participants from 11,635 in 1995 to 14,377 in 1996,
which increased our gross program receipts 21%, from $46.7 million in
1995 to $56.7 million in 1996. Revenues also increased to $18.8
million or 10% over 1995 revenues.
The Company maintained a 33% gross margin for the year. The margins
in the Educational Travel Group remain strong at 34%. As expcted, the
addition of the incentive business, with a gross margin of 25%,
decreased the overall margin for the Company in comparison to the
prior year.
SELLING AND TOUR PROMOTION EXPENSES
Selling and tour promotion expenses decreased approximately $0.3
million in 1996 when compared to 1995. Our marketing efforts continue
to be more effective and efficient than in prior years. This more
targeted effort contributed to the increase in revenues for 1996.
Company policy is to expense all promotional expenses as they are
incurred.
In 1996, these expenses included our integration of American People
Ambassador Programs, the Helin Organization, and the developmental
costs related to Eddie Bauer Travel.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $4.6 million in
1995 to $5.7 million in 1996 primarily due to the acquisitions of the
Helin Organization and American People Ambassador Programs in early
1996.
OTHER INCOME/EXPENSE
Other income includes interest income and foreign currency gains or
losses. During 1996, other income increased 26% from $1.0 million to
$1.3 million. This increase was due to improved cash management
systems, as well as a full year's benefit of investing the proceeds
from the initial public offering. These two factors increased
interest income from $0.8 million in 1995 to $1.1 million in 1996.
Also included in other income are gains from foreign currency
contracts and options which are marked to market. 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. The face
amount of forward foreign exchange contracts outstanding as of
December 31, 1996, was $6.7 million.
INCOME TAXES
The Company has recorded an income tax provision of $2.0 million for
1996 which represents an effective tax rate of 34%. The income tax
benefit of $0.4 million in 1995 reflected the benefit of the net
operating loss incurred by the Company which was generated after the
Company became a C Corporation in mid-1995.
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, 1994,
1995 and 1996, respectively, was approximately $8.2 million, $1.8
million and $6.1 million. The increase in cash flow from 1995 to 1996
can be attributed to the increase in cash receipts from participants
in 1996 and the payment of approximately $2.4 million of incentive
compensation in 1995.
Capital expenditures of approximately $0.3 million were funded from
operations. The Company does not have any material capital
expenditure commitments for the ensuing year. However, the Company is
continuing to pursue further acquisitions of related travel businesses
that will require some of its available cash and cash equivalents.
The Company had no significant long or short-term debt as of
December 31, 1996.
<PAGE>
The Company has a credit facility available with Seafirst Bank for
$15.0 million U.S. dollars for foreign currency purchases and forward
contracts.
At December 31, 1996, the Company had approximately $18.3 million of
cash and cash equivalents. Management believes existing cash and cash
equivalents and cash flows from operations will be sufficient to fund
the Company's anticipated operating needs, capital expenditures and
acquisitions for the ensuing year.
FOREIGN CURRENCY; HEDGING POLICY
The substantial majority of the Company's programs take place outside
of the United States and most foreign suppliers require payment in
their own 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. In 1993, the Company initiated a program to hedge against
these foreign currency risks in the currencies of countries in which
the largest amount of program pass through expenses are denominated in
foreign currency. To hedge against foreign currency risks, the
Company has used forward contracts which allow the Company to acquire
the foreign currency at a fixed price for a specified period of time.
The Company also 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 sold. Additionally, in 1994
and 1995, the Company purchased futures contracts to similarly hedge
its foreign currency risk. The Company is exposed to credit risk
under the forward contracts and options to the extent that the
counterparty is unable to perform under the agreement. The Company
anticipates hedging the majority of its foreign currency risk in
future periods. There can be no assurance that the Company's hedging
strategies will be successful in mitigating the impact of foreign
currency fluctuations.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31,
1994
---------------------------------------------------------------------
REVENUES
Gross program receipts increased from $44.9 million in 1994 to $46.7
million in 1995 or 4%. This increase can be principally attributed to
the increase in the number of program participants. The number of
program participants increased from 11,236 in 1994 to 11,635 in 1995.
This increase in program participants resulted in a 1% increase in
revenues for the year and an 18% increase for the fourth quarter of
1995 compared to the fourth quarter of 1994.
The average program price for the Company increased from $4,000 in
1994 to $4,020 in 1995. Total pass through expenses increased $1.7
million from $27.9 million to $29.6 million in direct correlation to
the increase in gross program receipts.
<PAGE>
SELLING AND TOUR PROMOTION EXPENSES
Historical selling and tour promotion expenses decreased from the
prior year due to the accrued compensation bonuses paid to the former
shareholders in 1994 that were not paid in 1995. As this compensation
would not recur due to new employment agreements, it was included in
the pro forma adjustments and decreased pro forma selling and tour
promotion expenses from $9.4 million to $7.1 million.
Pro forma selling and tour promotion expenses increased in comparison
to the prior year due to a concerted effort to increase future sales
through expanded direct mail marketing efforts. Company policy is to
expense all such costs as they are incurred. Accordingly, the
majority of direct mail expenses related to 1996 travel were expensed
in the fall of 1995. In an effort to increase 1996 revenues, the
Company mailed 5.4 million pieces of mail in 1995 in comparison to 5.0
million pieces in 1994. This increase in direct mail pieces is
expected to result in an increased number of program participants in
1996.
GENERAL AND ADMINISTRATIVE EXPENSES
Historical general and administrative expenses decreased from $5.4
million in 1994 to $4.6 million in 1995. This decrease is principally
due to non-recurring professional fees and newly implemented cost
control procedures within the Company during 1995.
Pro forma general and administrative expenses decreased from $4.9
million in 1994 to $4.6 million in 1995. As part of the transition
from a privately-held company to a publicly-held company, Ambassadors
International, Inc. has implemented certain management and budget
controls which resulted in a small decrease in 1995 costs.
OTHER INCOME/EXPENSE
Other income includes foreign currency gains or losses and interest
income. Other income increased $1.1 million in comparison to 1994.
The majority of this increase can be attributed to the interest income
earned on cash received from the initial public offering. The Company
realized $0.8 million in interest and dividend income during 1995 in
comparison to $0.6 million in 1994. Additionally, the Company
recognized a $0.3 million gain on its foreign currency financial
instruments in 1995 as compared to non-recurring marketable equity
securities losses of $0.6 million in 1994.
The 1995 gain is primarily due to the Company's forward foreign
currency contracts which are marked to market. 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. The
Company is exposed to credit risk under the forward contracts and
<PAGE>
options to the extent that the counterparty is unable to perform under
the agreement. The Company anticipates hedging the majority of its
foreign currency risk in future periods. There can be no assurance
that the Company's hedging strategies will be successful in mitigating
the impact of foreign currency fluctuations. The face amount of
forward foreign exchange contracts outstanding at December 31, 1995
was $7.8 million.
INCOME TAXES
Due to the change in status from a S Corporation to a C Corporation in
1995, the Company has recorded an income tax benefit of approximately
$0.3 million for the year ended December 31, 1995, in comparison to
zero income tax expense for the year ended December 31, 1994. The
1995 income tax benefit is primarily due to the recognition of the
benefit of the Company's net operating loss carryforward which was
generated after the Company became a C Corporation. Pro forma income
tax expense assuming the Company were a C Corporation throughout the
entire year is reflected at the federal statutory 34% tax rate.
Item 7. Financial Statements
-----------------------------
The Financial Statements of the Company are submitted as a separate
section of this Form 10-KSB on pages F-1 through F-23.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
--------------------------------------------------------------------
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
----------------------------------------------------------------------
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, 1996, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about
April 14, 1997.
Item 10. 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, 1996, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about
April 14, 1997.
<PAGE>
Item 11. 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, 1996, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about
April 14, 1997.
Item 12. 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, 1996, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about
April 14, 1997.
Item 13. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
----- ----------------------------------------------------
2.1 Form of Reincorporation Agreement(1)
2.2 Rescission Agreement(1)
2.3 Stock Purchase Agreement(1)
2.4 Redemption Agreement(1)
3.1 Certificate of Incorporation of Ambassadors International,
Inc.(1)
3.2 By-Laws of Ambassadors International, Inc.(1)
4.1 Specimen Stock Certificate(1)
10.1 People to People Contract - Student Ambassador Program(1)
10.2 People to People Contract - Citizen Ambassador Program(1)
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(1)
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.(1)
10.8 Form of Employment Agreement with Executive Officers(1)
10.9 Form of Note between the Company and the Ueberroths relating
to the Distribution(1)
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)
<PAGE>
(a) Exhibits
----- ----------------------------------------------------
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)
21.1 Subsidiaries of Ambassadors International, Inc.(4)
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Powers of Attorney and certified copy of the related
resolutions of the board of directors.(4)
27.1 Financial Data Schedule(4)
99.1 The Company's Form 8-K dated January 23, 1996(5)
99.2 The Company's Form 8-K dated February 9, 1996(6)
99.3 The Company's Form 8-K dated January 3, 1997(3)
(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.
(3) Filed with the Securities and Exchange Commission on Form 8-K
dated January 3, 1997.
(4) Filed herewith.
(5) Filed with the Securities and Exchange Commission on Form 8-K
dated January 23, 1996.
(6) Filed with the Securities and Exchange Commission on Form 8-K
dated February 9, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ending
December 31, 1996.
<PAGE>
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 27, 1997 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.
Date: March 27, 1997 /s/ John A. Ueberroth
--------------------------------------
John A. Ueberroth, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1997 * Peter V. Ueberroth
--------------------------------------
Peter V. Ueberroth, Chairman and
Director
Date: March 27, 1997 /s/ Jeffrey D. Thomas
--------------------------------------
Jeffrey D. Thomas, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: March 27, 1997 * James L. Easton
--------------------------------------
James L. Easton, Director
Date: March 27, 1997 * Richard D. C. Whilden
--------------------------------------
Richard D.C. Whildenm Director
Date: March 27, 1997 * John C. Spence
--------------------------------------
John C. Spence, Director
Date: March 27, 1997 * Rafer Johnson
--------------------------------------
Rafer Johnson, Director
* By: /s/ John A. Ueberroth
---------------------
John A. Ueberroth,
Attorney-in-Fact
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Ambassadors International, Inc.
Spokane, Washington
We have audited the accompanying consolidated balance sheets of
Ambassadors International, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Ambassadors International, Inc. as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company
changed its method of accounting for impairment of long-lived assets
in 1996 and investments in certain debt and equity securities in 1994.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
February 11, 1997
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $18,281,433 $12,974,252
Restricted cash equivalents 55,000 45,000
Investments:
Trading securities 275,488
Available-for-sale securities 590,111
Accounts receivable (including
$14,167 and $33,218 from officers
and employees) 1,469,053 679,600
Inventory 157,234
Prepaid program costs and expenses 1,359,950 425,530
Deferred income taxes 24,584 454,666
Other assets 12,892 2,334
----------- -----------
Total current assets 21,950,257 14,856,870
Property and equipment, net 1,575,486 1,122,494
Investment in joint venture 262,500
Goodwill, net of $115,567 accumulated
amortization 3,338,224
Covenant-not-to-compete, net of $19,209
accumulated amortization 105,791
Other assets 36,792 36,447
----------- -----------
Total assets $27,269,050 $16,015,811
=========== ===========
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
December 31, 1996 and 1995
1996 1995
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,764,002 $ 1,143,587
Accrued expenses 822,927 143,973
Participants' deposits 5,138,772 3,462,350
Customer advances 2,396,578
Notes payable 201,146 11,138
----------- -----------
Total current liabilities 10,323,425 4,761,047
Deferred income taxes 163,044 113,958
Notes payable due after one year 5,760
----------- -----------
Total liabilities 10,486,469 4,880,765
Commitments and contingencies
(Notes 6, 7 and 12)
Shareholders' 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,
6,753,887 and 6,535,030 shares 67,539 65,350
Additional paid-in capital 13,625,279 11,926,468
Retained earnings (accumulated deficit) 3,089,763 (856,772)
----------- -----------
Total shareholders' equity 16,782,581 11,135,046
----------- -----------
Total liabilities and shareholders'
equity $27,269,050 $16,015,811
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $18,843,422 $17,132,920 $16,990,028
----------- ----------- -----------
Operating expenses:
Selling and tour promotion 8,420,151 8,693,600 9,407,304
General and administrative 5,769,874 4,676,494 5,379,663
----------- ----------- -----------
14,190,025 13,370,094 14,786,967
----------- ----------- -----------
Operating income 4,653,397 3,762,826 2,203,061
----------- ----------- -----------
Other income (expense):
Interest expense (1,515) (2,404) (14,337)
Interest and dividend income 1,079,855 785,561 545,012
Realized and unrealized gain (loss)
on investments 290,253 278,471 (554,995)
Other, net (41,060) (7,868) (52,051)
----------- ----------- -----------
1,327,533 1,053,760 (76,371)
----------- ----------- -----------
Income before income taxes 5,980,930 4,816,586 2,126,690
Income tax provision (benefit) 2,034,395 (340,708)
----------- ----------- -----------
Net income $ 3,946,535 $ 5,157,294 $ 2,126,690
=========== =========== ===========
Unaudited pro forma information:
Operating income before pro forma
adjustments $ 4,653,397 $ 3,762,826 $ 2,203,061
Pro forma adjustments 2,757,284
----------- ----------- -----------
Operating income 4,653,397 3,762,826 4,960,345
----------- ----------- -----------
Other income (expense), net, before
pro forma adjustment 1,327,533 1,053,760 (76,371)
Adjustment to eliminate interest
income on note receivable (108,039)
----------- ----------- -----------
Other income (expense), net 1,327,533 1,053,760 (184,410)
----------- ----------- -----------
Income before income taxes 5,980,930 4,816,586 4,775,935
Income tax provision 2,034,395 1,637,639 1,623,818
----------- ----------- -----------
Net income $ 3,946,535 $ 3,178,947 $ 3,152,117
=========== =========== ===========
Net income per share $ 0.60 $ 0.57 $ 0.63
=========== =========== ===========
Shares used in pro forma calculation 6,618,454 5,623,688 4,995,030
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Receivables
------------------------- Paid-In (Accumulated from
Shares Amount Capital Deficit) Shareholders Total
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 6,636 $ 6,636 $ 133,540 $ 1,688,539 $ 1,828,715
Distributions to shareholders (2,126,690) (2,126,690)
Net income 2,126,690 2,126,690
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1994 6,636 6,636 133,540 1,688,539 1,828,715
Origination of receivables
from shareholders $(1,820,000) (1,820,000)
Redemption and retire-
ment of common stock (2,823) (2,823) (133,540) (1,683,637) 1,820,000
Contribution of S corporation
retained earnings with change
to C corporation status 4,902 (4,902)
Effect of reorganization and
sale of common stock, net
of issuance costs 6,531,217 61,537 11,921,566 11,983,103
Distributions to shareholders (6,014,066) (6,014,066)
Origination of notes receivable
from shareholders (2,000,000) (2,000,000)
Repayment of notes receivable
from shareholders 2,000,000 2,000,000
Net income 5,157,294 5,157,294
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 6,535,030 65,350 11,926,468 (856,772) 0 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 $ 0 $16,782,581
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,946,535 $ 5,157,294 $ 2,126,690
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 392,403 227,039 206,192
Deferred tax provision (benefit) 458,235 (340,708)
(Gain) loss on investments (290,253) (278,401) 622,779
(Gain) loss on sale of property
and equipment 880 (70) (62,500)
Gain on note receivable (5,284)
Stock dividends (148,184)
Investment distributed as
compensation 3,371
Purchase of investments (1,005,000) (8,859,069)
Proceeds from sale of investments 564,812 1,076,575 10,835,600
Change in assets and liabilities,
net of effects of purchase
of subsidiaries:
Restricted cash (10,000) (5,000) (40,000)
Accounts receivable 882,787 (468,126) 99,435
Federal income tax refund
receivable 426,196
Prepaid program costs and
expenses 62,447 (159,397) (130,133)
Accounts payable and accrued
expenses (564,821) (695,502) 314,318
Accrued incentive
compensation (2,403,600) 2,403,600
Participants' deposits 684,834 697,937 427,341
----------- ----------- -----------
Net cash provided by
operating activities 6,127,859 1,803,041 8,220,352
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (338,072) (454,778) (541,996)
Proceeds from sale of property and
equipment 1,220 2,500
Investment in joint venture (262,500)
Cash paid for acquisition of subsidi-
aries, net of cash received (105,340)
Payment for covenant-not-to-compete
agreement (125,000)
Redemption of life insurance 28,950 212,275
Change in other assets 19,766 2,147 22,488
Payments on sale of building 244,530
Purchase of property held for sale (47,500)
Proceeds from sale of property held
for sale 73,500
----------- ----------- -----------
Net cash used in
investing activities (809,926) (421,181) (36,703)
----------- ----------- -----------
</TABLE>
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments of long-term debt (10,752) (9,596) (7,349)
Net proceeds from initial public
offering 11,983,103
Redemption and retirement of common
stock (923,937)
Shareholder distributions (6,090,756) (2,050,000)
Repayments of notes receivable
from shareholders 2,000,000
Origination of notes receivable
from shareholders (2,000,000)
Net change in loans on cash value
of life insurance (166,331)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities (10,752) 4,958,814 (2,223,680)
----------- ----------- -----------
Net increase in cash and cash equivalents 5,307,181 6,340,674 5,959,969
Cash and cash equivalents, beginning
of year 12,974,252 6,633,578 673,609
----------- ----------- -----------
Cash and cash equivalents, end of year $18,281,433 $12,974,252 $ 6,633,578
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 1,515 $ 2,404 $ 14,337
Cash paid for income taxes 1,440,000
Noncash investing and financing
activities:
Issuance of stock for acquisi-
tion of subsidiaries 1,701,000
Net reduction of assets and
liabilities associated
with deferred sale of land
and building through
redemption of common stock 896,063
Shareholder distribution
declared 76,690
Origination of note for sale
of land 36,500
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
------------
On August 4, 1995, Ambassadors International, Inc. (the
Company), was reincorporated in the state of Delaware and
changed its name from International Ambassador Programs, Inc.
(see Note 10). The Company's predecessor, International
Ambassadors Programs, Inc., was incorporated in the state of
Washington in 1967. Subsequent to the reincorporation, the
Company contributed all of its assets and liabilities to
Ambassador Programs, Inc., a wholly owned subsidiary.
The Company organizes, markets and operates international
educational travel programs for adults and students. Through
the Company's acquisition of other businesses in 1996 (see Note
12), the Company also provides a wide array of performance
improvement tools, including merchandise awards programs,
marketing communications and solutions, and training and
learning applications. During the years ended December 31,
1996, 1995 and 1994, the Company's revenues as a percentage of
total revenues were derived from travel programs in the
following geographic areas:
1996 1995 1994
---- ---- ----
Europe 41% 38% 27%
South Pacific 28% 32% 35%
China 11% 19% 26%
Russia 4% 10%
The consolidated financial statements include the accounts of
Ambassadors International, Inc., and its subsidiaries,
Ambassador Programs, Inc. (API), The Helin Organization (Helin)
and Ambassador Performance Improvement, Inc. (APII). During
1996, the Company acquired Helin, Bitterman & Associates, Inc.
(B&A) and the assets of American People Ambassador Programs
(APAP) (see Note 12). 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 FDIC 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 program participants are required to pay for
their entire program costs prior to the program departure.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 held by three airline companies as
collateral for airfare purchase agreements. The certificates of
deposit are issued in the Company's name with the respective
airline company listed as the beneficiary.
Inventory
---------
Merchandise inventory that is used in connection with the
Company's merchandise award programs is stated at the lower of
cost, as determined by the first-in, first-out method, or net
realizable value.
Investments
-----------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities," as of
January 1, 1994. There was no cumulative effect of adopting
SFAS No. 115.
The Company classifies its investments as trading or available-
for-sale based upon the Company's intent relative to the
eventual disposition of the securities. Trading securities
consist of currency futures and forward contracts which are
carried at fair value. Under the provisions of SFAS No. 115,
realized and unrealized gains and losses on these securities
are recognized in the statement of income.
The Company's debt and equity securities are classified as
available-for-sale. Accordingly, the investments are recorded
at market value. Unrealized gains and losses are excluded from
operations and reported as a separate component of
shareholders' equity, net of deferred income taxes.
Realized gains and losses on the sale of investments are
recognized on a specific identification basis in the statement
of income in the period the investments are sold.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Investments, Continued
----------------------
The Company acquired a 15% interest in a joint venture for
$262,500. The joint venture's purpose is the acquisition of
preferred stock (which represents 18.4% of the total
outstanding stock) of a private company. The investment is
reported at cost.
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.
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 income.
Goodwill and Covenant-Not-to-Compete
------------------------------------
Goodwill recorded in connection with the Company's acquisition
of other businesses is being amortized using the straight-line
method over 10 years. Costs associated with obtaining a
covenant-not-to-compete are amortized using the straight-line
method over the term of the agreement (4.5 years).
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets or Long-Lived Assets to be Disposed Of," was
issued. SFAS No. 121 requires certain long-lived assets, such
as the Company's property and equipment and goodwill, be
reviewed for impairment in value whenever events or
circumstances indicate that the carrying value of an asset may
not be recoverable. In performing the review, if expected
future undiscounted cash flows from the use of the asset or the
fair value, less selling costs, from the disposition of the
asset is less than its carrying value, an impairment loss is to
be recognized. There was no material effect on the Company's
results of operations, financial condition or cash flows of
adopting SFAS No. 121 on January 1, 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Revenue Recognition
-------------------
For travel programs, the Company bills travel participants in
advance and records such deposits as participants' deposits.
Additionally, the Company pays for certain direct program costs
such as airfare, hotel, rail passes and other program costs in
advance of the departure and records these amounts as prepaid
program costs and expenses. The Company recognizes revenue and
related costs associated with its programs when travel
convenes.
The Company also recognizes revenue from the sale of
merchandise, printing and administration of customer incentive
programs. The Company issues certificates for the redemption of
merchandise related to customer incentive programs. Depending
on the type of program, the Company is paid for certificates
when they are issued (bill on issuance) or redeemed (bill on
redemption). The Company records a liability for certificates
billed on issuance as customer advances. Revenue related to
customer advances is recognized when the Company's obligations
associated with the certificate has been fulfilled. Revenues
related to certificates that are billed on redemption are
recognized when the merchandise is shipped to the participant.
Revenues are recognized from printing and administration based
upon the percentage of completion of the related program.
Amounts reported as customer advances are subject to change due
to estimates made by management related to the ultimate
obligation associated with the unredeemed prepaid certificates.
Estimates are based upon historical trends of issued and
redeemed certificates. Due to uncertainties inherent in the
estimation process, it is reasonably possible that changes
could occur in the near term which could materially affect the
estimated obligation.
Selling and Tour Promotion Expenses
-----------------------------------
The Company expenses all selling and tour promotion expenses as
incurred.
Net Income Per Share
--------------------
Historical net income per share for the years ended
December 31, 1995 and 1994 has not been presented as it is not
meaningful in the presentation of these financial statements.
Pro forma weighted average common shares outstanding have been
calculated for the years ended December 31, 1995 and 1994,
using common shares outstanding after the reorganization and
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Net Income Per Share, Continued
-------------------------------
for 1995, including certain shares issued in connection with
the initial public offering (see Notes 10 and 11). For the
years ended December 31, 1996 and 1995, the effects of common
stock equivalents (stock options) have also been considered to
the extent they were dilutive.
Accounting for Stock Options
----------------------------
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No.
123 encourages all entities to adopt a fair value based method
of accounting, but allows an entity to continue to measure
compensation cost for those plans using the intrinsic value
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company adopted the disclosure only provisions of SFAS No. 123
on January 1, 1996.
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.
2. INVESTMENTS:
Trading Securities:
-------------------
At December 31, 1996, the Company has forward exchange
contracts to purchase foreign currencies. There was no cost or
unrealized gain or loss associated with these contracts at
December 31, 1996.
At December 31, 1995, the Company had foreign currency forward
and future contracts and foreign currency call options. The
cost and fair values of these securities were as follows:
Cost $ 5,000
Gross unrealized gains 270,488
--------
Fair value (carrying value) $275,488
========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS:
Trading Securities:
-------------------
The fair value of the Company's investments in foreign currency
forward and futures contracts is based upon the spot price of
these currencies at December 31, 1995.
Net realized gains (losses) on investments of $290,253, $7,746
and $(554,995) for the years ended December 31, 1996, 1995 and
1994, respectively, were included in the determination of net
income.
Available-for-Sale Securities
-----------------------------
At December 31, 1996, the Company's available-for-sale
investments were all obtained through the acquisition of B&A
(see Note 12). Since the acquisition was accounted for using
the purchase method of accounting, cost and market value are
the same at December 31, 1996. The amortized cost and carrying
value of the Company's debt and equity investments are as
follows:
Taxable fixed income securities $224,315
Equity securities 365,796
--------
$590,111
========
The amortized cost and market value of fixed income securities
at December 31, 1996, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities
because borrowers may have the right to recall or prepay
obligations with or without call or prepayment penalties.
Due in one year or less $220,815
Due after five years 3,500
--------
$224,315
========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31,
1996 and 1995:
1996 1995
---------- ----------
Office furniture, fixtures and
equipment $1,312,516 $ 927,473
Computer equipment 2,014,779 1,765,416
Leasehold improvements 161,301 68,680
---------- ----------
3,488,596 2,761,569
Less accumulated depreciation and
amortization (1,913,110) (1,639,075)
---------- ----------
$1,575,486 $1,122,494
========== ==========
4. NOTES PAYABLE:
At December 31, 1996, the Company's subsidiary had $40,000
outstanding under a line-of-credit agreement with a bank. The
line of credit bore interest at 3.00% above the prime rate
(11.25% at December 31, 1996) and was unsecured. The Company's
subsidiary also had $155,000 outstanding on a separate line-of-
credit agreement. The line of credit bore interest at the prime
rate (8.25% at December 31, 1996) and was collateralized by the
assets of the subsidiary. Borrowings under both of these lines of
credit were repaid in full in 1997 and the agreements were not
renewed.
Additionally, at December 31, 1996, the Company has $6,146
remaining balance on a note payable that is collateralized by
real property. Monthly payments of $1,000, including interest at
10%, are payable on the note.
5. INCOME TAXES:
Effective January 1, 1994, the Company elected to be treated as a
small business (Subchapter S) corporation for federal income tax
purposes. As a result, the Company's earnings for the year ended
December 31, 1994 were taxed at the shareholders' level.
Effective August 5, 1995, the Company terminated its S
corporation status. From August 5, 1995, the Company's earnings
(losses) have been taxed as a C corporation and the resultant
income taxes have been reflected in the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
The provision (benefit) for income taxes for the years ended
December 31, 1996 and 1995 consisted of the following:
1996 1995
---------- ----------
Current $1,576,160
Deferred 458,235 $ (340,708)
---------- ----------
$2,034,395 $ (340,708)
========== ==========
Components of the net deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows:
December 31, 1996
-----------------------------------
Assets Liabilities Total
--------- ----------- ---------
Accrued vacation $ 51,380 $ 51,380
Depreciation $(163,044) (163,044)
Unrealized gain on
available-for-sale
investments (7,364) (7,364)
Net operating loss
carryforwards 279,180 279,180
Customer advances (295,248) (295,248)
Other 1,050 (4,414) (3,364)
--------- --------- ---------
Total temporary
differences and tax
attributes $ 331,610 $(649,454) $(138,460)
========= ========= =========
December 31, 1995
-----------------------------------
Assets Liabilities Total
--------- ----------- ---------
Accrued vacation $ 30,183 $ 30,183
Depreciation $(113,958) (113,958)
Unrealized gain on foreign
currency contracts (91,966) (91,966)
Net operating loss
carryforwards 516,449 516,449
--------- --------- ---------
Total temporary
differences and
tax attributes $ 546,632 $(205,924) $ 340,708
========= ========= =========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
The Company does not believe a valuation allowance is necessary
to reduce the deferred tax asset as this asset will more likely
than not be realized through the future reversal of temporary
taxable items. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax
asset will be utilized.
The income tax provision (benefit) for the years ended
December 31, 1996, 1995 and 1994 differ from that computed using
the federal statutory rate applied to income before income taxes
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision at the federal
statutory rate $2,033,516 34.0 $1,637,639 34.0 $ 723,075 34.0
Tax effect of income not
subject to federal tax
due to Subchapter S
election (2,062,273) (42.8) (723,075) (34.0)
Recognition of net
deferred tax liability
in connection with
S corporation termina-
tion 83,926 1.7
Other 879
---------- ----- ---------- ----- ---------- -----
$2,034,395 34.0 $ (340,708) (7.1) $ 0 0.0
========== ===== ========== ===== ========== =====
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
At December 31, 1996, the Company has acquired companies with
federal net operating loss carryforwards of approximately
$650,000, which can be used to offset future regular taxable
income. These carryforwards expire in 2011. The Company's
utilization of tax net operating loss carryforwards is currently
limited to approximately $140,000 annually, subject to earnings
from the acquired entity.
The Company also has state net operating loss carryforwards of
approximately $315,000 that may be offset against future taxable
income. These carryforwards expire beyond the year 2000.
6. COMMITMENTS AND CONTINGENCIES:
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
those currencies and the U.S. dollar. In 1993, the Company
initiated a program to 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 sold. Any gains or
losses associated with these hedging transactions are recognized
in the Company's operations currently based upon the fair value
of the instruments as the Company does not have firm commitments
to purchase goods and services denominated in foreign currencies.
The Company also purchases future contracts to similarly hedge
its foreign currency risk. The Company is exposed to credit risk
under the forward contracts to the extent that the counterparty
is unable to perform under the agreement. The Company has a
$15,000,000 credit facility through July 1997 to support foreign
currency purchases and foreign exchange forward contracts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS AND CONTINGENCIES, CONTINUED:
At December 31, 1996, the Company had outstanding forward
exchange contracts to purchase foreign currencies as follows:
Currency Amount Maturity Date
------------------ ---------- --------------------
Australian dollar $4,148,875 April-July 1997
French franc 898,780 April-July 1997
Netherland guilder 882,271 May-September 1997
Austrian schilling 220,806 April-July 1997
Spanish peseta 122,637 March-September 1997
Dutch krone 426,051 May-June 1997
----------
$6,699,420
==========
At December 31, 1996, there were no unrealized gains or losses
associated with these contracts. For the years ended December 31,
1995 and 1994, the Company recognized unrealized foreign currency
gains associated with these financial instruments of $270,488 and
$194,778, 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.
The Company leases office facilities under noncancelable
operating leases. At December 31, 1996, future noncancelable
lease commitments, including the lease described in Note 7, are
as follows:
Year Ended
December 31,
------------
1997 $ 647,489
1998 639,068
1999 521,260
2000 476,444
2001 443,904
Thereafter 1,331,712
----------
$4,059,877
==========
Total rent expense for the years ended December 31, 1996, 1995
and 1994 was approximately $503,000, $444,000 and $444,000,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. RELATED-PARTY TRANSACTIONS:
In 1992, the Company sold and leased back its office building and
land to a partnership formed by two shareholders of the Company,
who were also officers and directors. The Company provided the
financing for the sale by originating a note receivable from the
partnership in the amount of $1,355,000. This note was scheduled
to be repaid in equal monthly payments of $29,124 over a five-
year period and bore interest at 10.5% per annum. Interest income
earned on the note was approximately $108,000 for the year ended
December 31, 1994. Effective January 1, 1995, the Company
modified its lease to provide a 10-year lease cancelable with
notice after the initial three-year term. This lease is renewable
for an additional 10 years after the initial lease term. For each
of the years ended December 31, 1996, 1995 and 1994, the Company
incurred rent expense approximating $444,000 under this lease.
In March 1995, the Company loaned $1,000,000 each to Messrs. John
and Peter Ueberroth (the Ueberroths), Company shareholders, under
notes receivable bearing interest at 7.25% per annum. In June
1995, both notes were repaid in full, and the Company recognized
approximately $36,000 of interest income during 1995.
8. STOCK OPTIONS:
The Company adopted the 1995 Equity Participation Plan (the Plan)
during 1995 which 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 600,000 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.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has chosen to apply APB Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans. Had compensation
cost for the Company's plans been determined based on the fair
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCK OPTIONS, CONTINUED:
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:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------------- -----------------------
As Pro As Pro
Reported Forma Reported Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $3,946,535 $3,783,749 $3,178,947 $3,032,901
========== ========== ========== ==========
Net income per share $ 0.60 $ 0.57 $ 0.57 $ 0.54
========== ========== ========== ==========
</TABLE>
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 1996
and 1995, respectively: dividend yield of 0% in each year as
there has been no dividend payment history, expected volatility
of 84% in each year, risk-free interest rates of 6.40% to 6.44%
in 1996 and 5.57% to 5.65% in 1995; and expected option lives of
8 years.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Exercise
Number of Weighted Price Expiration
Shares Exercise Per Share Date
--------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 0
Options granted 319,800 $ 8.92 $ 8.25-9.00 2005
Options forfeited (42,750) 9.00 9.00
------- ------ -------------
Balance, December 31, 1995 277,050 8.90 8.25-9.00
Options granted 109,400 10.79 9.75-11.25 2006
Options forfeited (145,087) 9.06 9.00-11.00
-------- ------ -------------
Balance, December 31, 1996 241,363 $ 9.66 $ 8.25-11.25
======== ====== =============
Exercisable, December 31, 1996 36,688
========
</TABLE>
The weighted-average fair value of options granted during 1996
and 1995 were $7.95 per share and $8.41 per share, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. EMPLOYEE BENEFIT PLANS:
Effective January 1, 1993, the Company established a
noncontributory profit sharing plan which covers substantially
all employees. The plan provides full vesting upon eligibility
and permits employees to direct the investment of their
accounts. Contributions by the Company are determined at the
discretion of the Board of Directors. No contributions were made
to the plan during the year ended December 31, 1995. The Company
contributed approximately $228,000 to this plan during the year
ended December 31, 1994. 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 year ended December 31, 1996, the Company contributed
approximately $57,000 to the Plan.
10. REORGANIZATION AND INITIAL PUBLIC OFFERING:
On January 3, 1995, the shareholders sold 3,320 shares to new
shareholders (the Ueberroths). Simultaneously, the Company
redeemed the remaining 3,316 shares outstanding for $1,820,000.
The prior shareholders, all of whom were officers and directors
of the Company, resigned from the Board of Directors effective
January 3, 1995, and the Ueberroths were installed as the new
officers and directors. The prior shareholders were to continue
employment with the Company under employment contracts and
entered into an agreement not to compete with the Company for a
10-year period. The Company's obligations to the prior
shareholders under these agreements aggregated $1,700,000 per
year over the 10-year agreement terms. These transactions were
rescinded in entirety in connection with the Company's initial
public offering in August 1995. As a result of the rescission,
the Company recorded a receivable from shareholders for
$1,820,000 to reflect the reversal of the common stock
redemption.
In connection with the Company's initial public offering, the
Ueberroths purchased 2,823 shares and the Company redeemed 2,823
shares of the Company's 6,636 shares of common stock held by the
shareholders for $1,820,000 effective January 1995. In
connection with the Company's reincorporation (see Note 1), the
Company increased the number of common shares to 4,995,030
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. REORGANIZATION AND INITIAL PUBLIC OFFERING, CONTINUED:
(1,310 shares of the new corporation for each share of the old
corporation). Also, the Company authorized 2,000,000 shares of
preferred stock which can be issued by the Board of Directors,
without shareholder authorization, with such preferences as
determined by the Board of Directors.
In August 1995, the Company completed an initial public offering
of its common stock whereby it sold 1,540,000 shares at $9 per
share. Proceeds, net of offering costs, were approximately
$11,983,000.
11. PRO FORMA STATEMENTS OF INCOME INFORMATION:
The pro forma statements of income for the years ended
December 31, 1995 and 1994 present the pro forma effects on the
historical information as described below. These adjustments
have been made as if they occurred at January 1, 1994.
In connection with the Company's reorganization, certain
compensation agreements between the Company and certain
shareholders were terminated and new employment agreements were
executed. Thus, compensation expense has been reduced for the
difference between actual 1994 base and incentive compensation
and the maximum amount of base and incentive compensation that
can be earned under the provisions of the new employment
agreements. Also, notes receivable from certain shareholders
have been repaid. Therefore, pro forma adjustments have been
made to reduce certain incentive compensation costs and
eliminate interest income on the repaid notes receivable. An
income tax provision has been recorded to reflect income taxes
as a C Corporation rather than an S Corporation.
The pro forma adjustments for the years ended December 31, 1995
and 1994 are as follows:
1996 1995
---------- ----------
Tax expense recorded at an effective
34% tax rate $1,978,347 $1,623,818
Reduction in compensation expense 2,256,100
Elimination of costs incurred in
connection with the rescinded
transaction 501,184
Elimination of interest income
related to shareholder note
receivable 108,039
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BUSINESS ACQUISITIONS:
On January 29, 1996, the Company acquired all of the outstanding
stock of Helin. Located in Newport Beach, California, Helin is a
meeting management and incentive travel company.
On February 7, 1996, the Company acquired the assets of APAP,
which has offices in Winnebago, Illinois and Birmingham, Alabama
and provides adult travel programs that are very similar to the
adult programs provided by the Company.
On December 23, 1996, the Company acquired all of the
outstanding common stock of B&A which is located in Minneapolis,
Minnesota, with sales offices in Chicago and Winnebago,
Illinois; Newport Beach and San Francisco, California;
Philadelphia, Pennsylvania; Fairway, Kansas; and Lacrosse,
Wisconsin. B&A administers incentive travel and merchandise
programs.
The total purchase price for the above acquisitions was
$1,450,000 plus 218,857 shares of the Company's restricted
common stock and certain contingent consideration. The common
stock, issued to effect the transaction, was recorded at quoted
market price less a discount to reflect the restricted nature of
the stock. The contingent consideration to be paid is dependent
upon the success of APAP's travel programs. A portion 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. Another portion of
the contingent consideration will be accounted for as
compensation expense when, and if, paid. In connection with the
acquisition of APAP, the Company also entered into a covenant-
not-to-compete with a key employee for a total of $300,000 to be
paid over 4.5 years.
These 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 following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
acquisitions had occurred at January 1, 1995:
1996 1995
----------- -----------
Revenue $22,616,552 $21,922,665
=========== ===========
Net income $ 3,690,375 $ 3,045,964
=========== ===========
Net income per share $ 0.55 $ 0.52
=========== ===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BUSINESS ACQUISITIONS, CONTINUED:
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.
13. 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 Statements." 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 and futures 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 and equity 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
NOTES PAYABLE - The fair value of notes payable is based on the
discounted value of contractual cash flows of the notes. The
discount rate is estimated using the rates currently offered
for debt with similar remaining maturities.
The estimated fair values of the following financial
instruments as of December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $18,281,433 $18,281,433 $12,974,252 $12,974,252
Investments 590,111 590,111 275,488 275,488
Other assets 35,513 35,513 38,781 38,781
Financial liabilities:
Notes payable 201,146 201,146 16,898 16,898
</TABLE>
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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18336
<SECURITIES> 590
<RECEIVABLES> 1469
<ALLOWANCES> 0
<INVENTORY> 157
<CURRENT-ASSETS> 21950
<PP&E> 3489
<DEPRECIATION> 1913
<TOTAL-ASSETS> 27269
<CURRENT-LIABILITIES> 10323
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 27202
<TOTAL-LIABILITY-AND-EQUITY> 27269
<SALES> 0
<TOTAL-REVENUES> 18843
<CGS> 0
<TOTAL-COSTS> 14190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 5981
<INCOME-TAX> 2034
<INCOME-CONTINUING> 3947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3947
<EPS-PRIMARY> .6
<EPS-DILUTED> .6
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF AMBASSADORS INTERNATIONAL, INC.
1. Ambassador Programs, Inc., a Delaware corporation
2. Ambassador Performance Improvement, Inc., a Delaware corporation
3. The Helin Organization, Inc., a California corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Ambassadors International, Inc. on Form S-8 of our
report, which includes an explanatory paragraph describing the changes
in the methods of accounting for impairment of long-lived assets in
1996 and investments in certain debt and equity securities in 1994,
dated February 11, 1997, on our audits of the consolidated financial
statements of Ambassadors International, Inc. as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994,
which report is included in this Annual Report on Form 10-KSB.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
March 27, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Ambassadors International, Inc.,
a Delaware corporation (the "Company"), and the undersigned officers
and directors of the Company, individually and in their respective
capacities indicated below, hereby make, constitute and appoint John
A. Ueberroth and Jeffrey D. Thomas, or either of them, its and their
true and lawful attorneys with power of substitution, to execute on
behalf of the Company, the Form 10-KSB, including all exhibits and any
and all amendments thereto; that John A. Ueberroth and Jeffrey D.
Thomas, or either of them, are each granted full power and authority
to do and perform each and every act and thing whatsoever as either
may deem necessary or advisable to the same extent and with the same
effect as the undersigned might or could do personally in their
respective capacities.
This Power of Attorney may be signed by the undersigned in as many
counterparts as may be necessary, each of which so signed shall be
deemed to be an original, and such counterparts together shall
constitute one and the same instrument and notwithstanding the date of
execution shall be deemed to bear the date as set forth below.
Furthermore, facsimile signatures shall be deemed to have the same
effect as original signatures.
Dated as of the 12th day of March, 1997.
AMBASSADORS INTERNATIONAL, INC.
Attest: /s/ Jeffrey D. Thomas By: /s/John A. Ueberroth
----------------------------- -------------------------
Jeffrey D. Thomas, Secretary John A. Ueberroth,
President and Chief
Executive Officer
(Principal Executive
Officer)
/s/ Peter V. Ueberroth /s/ Jeffrey D. Thomas
----------------------------- -------------------------
Peter V. Ueberroth, Chairman Jeffrey D. Thomas,
and Director (Principal Financial and
Accounting Officer)
/s/ John C. Spence /s/ Rafer L. Johnson
----------------------------- -------------------------
John C. Spence, Director Rafer L. Johnson,
Director
/s/ Richard D.C. Whilden /s/ James L. Easton
----------------------------- -------------------------
Richard D.C. Whilden, James L. Easton, Director
Director
<PAGE>
