UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-26420
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AMBASSADORS INTERNATIONAL, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1688605
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Dwight D. Eisenhower Building
110 South Ferrall Street
Spokane, Washington 99202
------------------------------- -----------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (509) 534-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common shares outstanding as of October 30, 1998: 9,911,911
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997
Consolidated Statements of Income and Comprehensive
Income for the Nine and Three Months Ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 61,809,885 $ 22,870,546
Investments 33,199,708
Restricted cash equivalents 120,000 125,000
Accounts receivable 2,494,992 1,753,369
Prepaid program costs and expenses 9,395,566 2,004,995
Deferred income taxes 31,229 31,229
Other assets 88,411 498,129
------------ ------------
Total current assets 107,139,791 27,283,268
Property, plant and equipment, net 3,548,496 2,148,305
Investment in joint venture 464,000 462,500
Goodwill and covenant-not-to-compete,
net of $1,437,577 and $470,196 of
accumulated amortization 21,210,681 4,442,734
Other assets 133,069 85,573
Deferred income taxes 26,608 26,608
------------ ------------
Total assets $132,522,645 $ 34,448,988
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited), Continued
September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,144,531 $ 1,616,120
Accrued expenses 3,349,658 724,008
Participants' deposits 17,621,241 7,397,924
Customer advances 633,755 980,834
Notes payable, current portion 86,808 171,241
Unrealized loss on foreign currency
exchange contracts 338,343 674,625
------------ ------------
Total current liabilities 24,174,336 11,564,752
Notes payable, due after one year 376,896 328,696
------------ ------------
Total liabilities 24,551,232 11,893,448
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value;
2,000,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding, 9,911,911
and 6,768,223 shares 99,119 67,682
Additional paid-in capital 89,913,144 13,760,963
Retained earnings 18,172,306 8,726,895
Accumulated other comprehensive loss (213,156)
------------ ------------
Total stockholders' equity 107,971,413 22,555,540
------------ ------------
Total liabilities and stock-
holders' equity $132,522,645 $ 34,448,988
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
for the nine months and three months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $33,651,957 $23,247,371 $14,285,212 $ 9,532,271
----------- ----------- ----------- -----------
Operating expenses:
Selling and tour promotion 11,276,307 7,367,535 4,622,852 3,322,905
General and administrative 10,264,754 5,673,691 3,984,856 1,959,022
----------- ----------- ----------- -----------
21,541,061 13,041,226 8,607,708 5,281,927
----------- ----------- ----------- -----------
Operating income 12,110,896 10,206,145 5,677,504 4,250,344
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (19,884) (648) (5,086) (265)
Interest and dividend income 2,737,494 1,274,483 1,238,866 411,430
Realized and unrealized loss on
investments (25,787) (508,432) (36,286)
Other, net (12,717) 647 (12,546)
----------- ----------- ----------- -----------
2,679,106 766,050 1,221,234 374,879
----------- ----------- ----------- -----------
Income before income taxes 14,790,002 10,972,195 6,898,738 4,625,223
Provision for income taxes 5,472,301 3,939,057 2,552,533 1,634,895
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 9,317,701 7,033,138 4,346,205 2,990,328
Cumulative effect of change in accounting
principle, net of income taxes 127,710 127,710
----------- ----------- ----------- -----------
Net income 9,445,411 7,033,138 4,473,915 2,990,328
Other comprehensive loss:
Change in unrealized gains and losses
in foreign exchange contracts, net
of income taxes (213,156) (213,156)
----------- ----------- ----------- -----------
Comprehensive income $ 9,232,255 $ 7,033,138 $ 4,260,759 $ 2,990,328
=========== =========== =========== ===========
</TABLE>
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Income and Comprehensive Income, Continued
(Unaudited)
for the nine months and three months ended September 30, 1998 and 1997
<TABLE>
<CAPTION> Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings per share - basic:
Income per share before cumulative
effect of change in accounting
principle $ 1.08 $ 1.04 $ 0.44 $ 0.44
Cumulative effect of accounting change 0.02 -- 0.01 --
----------- ----------- ----------- -----------
Net income per share $ 1.10 $ 1.04 $ 0.45 $ 0.44
=========== =========== =========== ===========
Weighted average common shares outstanding 8,610,455 6,756,090 9,910,087 6,761,586
=========== =========== =========== ===========
Earings per share - diluted:
Income per share before cumulative
effect of change in accounting
principle $ 1.05 $ 1.03 $ 0.43 $ 0.43
Cumulative effect of accounting change 0.01 -- 0.01 --
----------- ----------- ----------- -----------
Net income per share $ 1.06 $ 1.03 $ 0.44 $ 0.43
=========== =========== =========== ===========
Weighted average common shares outstanding 8,877,509 6,837,092 10,162,795 6,922,609
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and 1997
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 9,445,411 $ 7,033,138
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,470,664 651,288
Deferred income tax benefit (7,017)
Loss on investments 25,787 508,432
Loss on sale of property, plant
and equipment 13,857 12,373
Change in assets and liabilities,
net of effects of purchases of
subsidiaries:
Restricted cash 5,000 10,000
Accounts receivable 1,794,954 (16,799)
Prepaid program costs and
expenses (6,971,954) 174,436
Other assets 288,695 42,589
Accounts payable and accrued
expenses 388,852 2,555,051
Participants' deposits 3,338,659 (2,447,446)
Customer advances (347,079) (571,157)
----------- -----------
Net cash provided by
operating activities 9,452,846 7,944,888
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (1,348,003) (890,235)
Investment in joint venture (1,500)
Purchase of investments (33,199,708)
Net cash paid for acquisitions of
subsidiaries (6,316,323) (311,229)
Payment for covenant not-to-compete (200,000) (117,293)
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited), Continued
for the nine months ended September 30, 1998 and 1997
1998 1997
----------- -----------
Cash flows from investing activities,
Continued:
Maturity of investments $ 345,732
Payments received on (issuance of)
notes receivable, net $ 149,455 (162,102)
----------- -----------
Net cash used in investing
activities (40,916,079) (1,135,127)
----------- -----------
Cash flows from financing activities:
Cash received from exercise of stock
options 142,209 119,470
Payments of notes payable (87,608) (201,146)
Net proceeds from sale of common stock 70,347,971
----------- -----------
Net cash provided by (used in)
financing activities 70,402,572 (81,676)
----------- -----------
Net increase in cash and cash
equivalents 38,939,339 6,728,085
Cash and cash equivalents, beginning
of period 22,870,546 18,281,433
----------- -----------
Cash and cash equivalents, end of
period $61,809,885 $25,009,518
=========== ===========
Non-cash investing and financing
activities:
Common shares issued for acquisition
of subsidiaries $ 5,693,438
===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by Ambassadors International, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed
or omitted as permitted by such rules and regulations. The Company
believes the disclosures included herein are adequate; however,
these consolidated statements should be read in conjunction with
the financial statements and the notes thereto for the year ended
December 31, 1997 previously filed with the Securities and Exchange
Commission on Form 10-K.
In the opinion of management, these unaudited, consolidated
financial statements contain all of the adjustments (normal and
recurring in nature) necessary to present fairly the consolidated
financial position of the Company at September 30, 1998, the
consolidated results of operations for the nine- and three-month
periods ended September 30, 1998 and 1997 and the consolidated cash
flows for the nine-month periods ended September 30, 1998 and 1997.
The results of operations for the periods presented may not be
indicative of those which may be expected for the full year.
2. PRINCIPLES OF CONSOLIDATION
The Company was incorporated in the state of Washington in 1967 and
was reincorporated on August 4, 1995 in the state of Delaware. The
consolidated financial statements include the accounts of
Ambassadors International, Inc. and its wholly owned operating
subsidiaries, Ambassadors Education Group, Inc. (AEG) and
Ambassadors Performance Group, Inc. (APG). AEG has two wholly
owned operating subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
3. 1998 ACQUISITIONS
During the nine months ended September 30, 1998, the Company made
five acquisitions as described below:
In February 1998, the Company acquired certain assets of a company
engaged in providing comprehensive housing reservation,
registration and travel services for meetings, conventions,
expositions and trade shows. That company is located in Boston,
Massachusetts. In February 1998, the Company also acquired all of
the outstanding stock of a performance incentives and meeting
management company located in Westlake Village, California. In
April 1998, the Company acquired all of the outstanding stock of
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 1998 ACQUISITIONS, CONTINUED
a performance incentives and meeting management company located in
Laguna Hills, California. In May 1998, the Company acquired
certain assets of a specialized golf tour company located in
Burbank, California. In July 1998, the Company acquired certain
assets of a company engaged in providing comprehensive housing
reservation, registration and travel services for meetings,
conventions, expositions and trade shows. That company is located
in Atlanta, Georgia.
The total purchase price for these acquisitions was $11.7 million
and 277,927 shares of the Company's restricted common stock and
certain contingent consideration. The common stock issued to
effect the transactions was recorded at fair value. The contingent
consideration to be paid is dependent upon the success of the
acquired companies' programs. 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.
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 and
comprehensive income since their respective dates of acquisition.
As of the date of this report, the Company is engaged in informal
acquisition discussions with several other companies; however,
other than the acquisitions described above, the Company is not
currently a party to any additional agreements.
4. EARNINGS PER SHARE
Net income per share - basic is computed by dividing net income by
the weighted-average number of common shares outstanding during the
period. Net income per share - diluted is computed by increasing
the weighted-average number of common shares outstanding by the
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.
The following table presents a reconciliation of the numerators and
denominators used in the basic and diluted earnings per share
computations.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Income before cumulative
effect of change in
accounting principle $9,317,701 $7,033,138 $4,346,205 $2,990,328
Cumulative effect of account-
ing change 127,710 -- 127,710 --
---------- ---------- ---------- ----------
Net income for basic and
diluted earnings per share $9,445,411 $7,033,138 $4,473,915 $2,990,328
========== ========== ========== ==========
Denominator:
Weighted-average shares
outstanding - basic 8,610,455 6,756,090 9,910,087 6,761,586
Effect of dilutive common
stock options 267,054 81,002 252,708 161,023
---------- ---------- ---------- ----------
Weighted-average shares
outstanding - diluted 8,877,509 6,837,092 10,162,795 6,922,609
========== ========== ========== ==========
Earnings per share - basic:
Income before cumulative
effect of change in
accounting principle $ 1.08 $ 1.04 $ 0.44 $ 0.44
Cumulative effect of account-
ing change 0.02 -- 0.01 --
---------- ---------- ---------- ----------
$ 1.10 $ 1.04 $ 0.45 $ 0.44
========== ========== ========== ==========
Earnings per share - diluted:
Income before cumulative
effect of change in
accounting principle $ 1.05 $ 1.03 $ 0.43 $ 0.43
Cumulative effect of account-
ing change 0.01 -- 0.01 --
---------- ---------- ---------- ----------
$ 1.06 $ 1.03 $ 0.44 $ 0.43
========== ========== ========== ==========
</TABLE>
5. SECONDARY OFFERING
On April 29, 1998, the Company completed a public offering of
2,838,700 shares of the Company's common stock. The net proceeds
of approximately $70.3 million have been used for acquisitions
related to performance improvement companies and will be used for
additional acquisitions of educational travel and performance
improvement companies and related businesses. These proceeds will
also be used for general corporate purposes.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, which requires reporting of comprehensive income.
Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. There was no
effect of implementing this statement on January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures About Segments for an Enterprise and Related
Information." This Statement requires presentation of segment
information in reports to shareholders, including disclosures
about the products and services an entity provides and its major
customers. The disclosure required by this statement will be
provided in the Company's 1998 annual financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" was issued. The Statement is effective
for all fiscal quarters of all fiscal years beginning after
June 15, 1999. The Company has elected to implement the Statement
early on July 1, 1998. The Statement requires that all derivative
instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For
cash-flow hedge transactions in which the Company is hedging the
variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value
of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges will be recognized in
current-period earnings. The adoption of the Statement on July 1,
1998 resulted in the cumulative effect of an accounting change of
$127,710, net of income tax, being recognized as income in the
statement of income.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking
statements. A forward-looking statement may contain words such as
"will continue to be," "will be," "continue to," "expect to,"
"anticipates that," "to be" or "can impact." Management cautions that
forward-looking statements are subject to risks and uncertainties that
could cause the Company's actual results to differ materially from
those projected in forward-looking statements.
During 1998, the Company and its subsidiaries acquired five companies
which operate housing reservation, incentive management and travel
programs. Although these companies contributed to the gross program
receipts and revenues of the consolidated group in the first nine
months of 1998, due to the timing of the acquisitions and future
changes which management plans to make to the operations of these
companies, management believes that the future contribution of these
five acquisitions will further increase the Company's gross program
receipts and revenues.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997
GROSS PROGRAM RECEIPTS AND REVENUES
-----------------------------------
Gross program receipts increased to $37.6 million in the third quarter
of 1998 from $29.0 million in the third quarter of 1997. This
increase is attributed to five acquisitions during 1998 as well as
growth in APG's existing businesses. AEG also increased its business,
recording revenues from 5,228 program participants in the third
quarter of 1998 versus 4,199 in the same period of 1997.
NET REVENUE
-----------
Net revenues increased to $14.3 million in the third quarter of 1998
from $9.5 million in the comparable 1997 quarter. This increase in
net revenue was driven by increases in the gross receipts as well as
increases in gross margins, from 33% in the third quarter of 1997 to
39% in the 1998 third quarter. The increase in net revenue was driven
by internal growth in both AEG and APG, as well as acquisitions made
by APG. The margin increase was primarily driven by AEG.
SELLING AND TOUR PROMOTION EXPENSES
-----------------------------------
The Company's policy is to expense all selling and tour promotion
costs as they are incurred.
Selling and tour promotion expenses increased to $4.6 million in the
quarter ended September 30, 1998 from $3.3 million in the comparable
quarter in 1997. This increase is a result of the acquisitions during
1998 within APG.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses increased to $4.0 million during
the quarter ended September 30, 1998 from $2.0 million during the
quarter ended September 30, 1997. This increase is primarily due to
the acquisitions in 1998 within APG as well as increases within APG's
existing businesses.
OTHER INCOME/EXPENSE
--------------------
Other income includes foreign currency gains or losses, interest
income, and interest expense. For the third quarter ended
September 30, 1998, other income increased to $1.2 million from $0.4
million in the comparable 1997 period. This increase was due to
interest income from cash management practices on secondary offering
proceeds. Net proceeds of approximately $70.3 million were received
from this offering in April 1998. The Company is investing the
offering proceeds in short-term, interest-bearing investments pending
use of the proceeds.
INCOME TAXES
------------
The Company has recorded an income tax provision of $2.6 million for
the third quarter of 1998, which represents an effective tax rate of
37%, compared to a $1.6 million income tax provision during the third
quarter of 1997 or a 35% effective tax rate. Income tax provisions
have been recorded based upon the estimated effective income tax rate
applied to the pre-tax income.
NET INCOME AND EARNINGS PER SHARE
---------------------------------
Net income for the third quarter of 1998 increased to $4.5 million
from $3.0 million for the third quarter of 1997. Net income increased
$1.5 million although the 47% increase in diluted weighted average
number of shares outstanding resulted in diluted earnings per share of
$0.44 compared to $0.43 in the same quarter of 1997. This small
increase was the result of the additional number of shares of stock
issued in the secondary offering in April 1998. Basic earnings per
share were $0.45 in the third quarter of 1998 and $0.44 in the third
quarter of 1997. The increase in the diluted and basic shares
outstanding is due to the secondary offering in April 1998.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
GROSS PROGRAM RECEIPTS
----------------------
Gross program receipts increased to $96.5 million in the nine-month
period ended September 30, 1998 from $72.3 million in the same period
of 1997. This increase is primarily attributed to five acquisitions
during the first nine months of 1998 as well as development within
APG's existing business. AEG's growth in gross receipts also
contributed to this increase as more program participants have
traveled in the first nine months 1998 than in the comparable period
of 1997.
<PAGE>
NET REVENUE
-----------
Net revenues increased to $33.7 million in the nine months ended
September 30, 1998 from $23.2 million in the comparable 1997 period.
This increase in net revenue was driven by greater business volume
from both internal growth and acquisitions as well as improvements in
gross margins. The increase in gross margins from 32% during the nine
months ended September 30, 1997 to 35% in the comparable 1998 period
was primarily driven by AEG. This $10.4 million increase is a result
of the aforementioned acquisitions made in 1998 as well as increased
AEG participants and net revenue per participant.
SELLING AND TOUR PROMOTION EXPENSES
-----------------------------------
The Company's policy is to expense all selling and tour promotion
costs as they are incurred.
Selling and tour promotion expenses increased during the nine-month
period ended September 30, 1998 when compared to the same period in
1997, to $11.3 million from $7.4 million. This increase is primarily
due to the acquisitions during 1998 and the assumption of their
additional costs within APG, coupled with an increase in marketing
campaigns within AEG.
GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses increased in the 1998 nine-month
period to $10.3 million from $5.7 million in the comparable 1997
period. This increase is also primarily due to the acquisitions in
1998 in APG and increases within the existing businesses.
OTHER INCOME/EXPENSE
--------------------
Other income includes foreign currency gains or losses, interest
income, and interest expense. For the nine months ended September 30,
1998, other income increased to $2.7 million from $0.8 million in the
comparable 1997 period. This increase was due to interest income
earned on the $70.3 million of secondary offering proceeds received in
April 1998.
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 forward
contracts and options to the extent that the counter-party 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
<PAGE>
in mitigating the impact of foreign currency fluctuations. The face
amount of forward foreign exchange contracts outstanding at
September 30, 1998 was $4.3 million. At September 30, 1998, the cost
to the Company to terminate such forward exchange contracts with
counterparties was approximately $338,000.
INCOME TAXES
------------
The Company has recorded an income tax provision of $5.5 million for
the nine-month period ended September 30, 1998, which represents an
effective tax rate of 37%, in comparison to a $3.9 million income tax
provision for the comparable 1997 period at a 36% effective tax rate.
Income tax provisions have been recorded based upon the estimated
effective income tax rate applied to pre-tax income.
NET INCOME AND EARNINGS PER SHARE
---------------------------------
Net income for the nine-month period ended September 30, 1998
increased to $9.5 million from $7.0 million for the comparable 1997
period. Even with a 30% increase in diluted weighted average number
of shares outstanding, the increased net income resulted in diluted
earnings per share in the nine-month period ended September 30, 1998
of $1.06 compared to $1.03 for the comparable 1997 period. Basic
earnings per share also increased to $1.10 from $1.04 for the nine-
month period ended September 30, 1998 when compared to the nine-month
period ended September 30, 1997. The increase in the basic and
diluted shares outstanding is due to the secondary offering in April
1998.
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 nine-month period ended
September 30, 1998 increased to $9.5 million from $7.9 million for the
nine-month period ended September 30, 1997. The increased cash flow
from operations results primarily from the $2.4 million increase in
net income.
Net cash used in investing activities increased to $40.9 million for
the nine-month period ended September 30, 1998 from $1.1 million in
the 1997 comparable period. The increase is due to $6.3 million cash
used for business acquisitions and investments purchased with the
proceeds of the secondary offering in 1998.
The Company's financing activities generated $70.4 million during the
nine months ended September 30, 1998 compared to using $0.1 million
cash during the comparable 1997 period. The 1998 activity was
primarily due to the $70.3 million secondary offering in April 1998.
<PAGE>
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 educational travel and performance
improvement companies that will require some of its available cash and
cash equivalents. The Company's acquisitions of certain subsidiaries/
businesses include contingent consideration. The remaining contingent
consideration, which is dependent upon the success of the acquired
companies' businesses, will not have a significant effect on the
Company's cash flows.
The Company had $0.3 million in long-term debt at September 30, 1998.
The Company has a credit facility available with a bank for $25.0
million US dollars for foreign currency purchases and forward
contracts.
At September 30, 1998, the Company had approximately $95.0 million of
cash, cash equivalents and liquid investments. Management believes
existing cash, cash equivalents, investments and cash flows from
operations will be sufficient to fund the Company's anticipated
operating needs, capital expenditures and acquisitions for the
foreseeable future.
FOREIGN CURRENCY; HEDGING POLICY
---------------------------------
The substantial majority of the Company's programs takes place outside
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, the
Company purchases 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.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, which requires reporting of comprehensive income.
Comprehensive income is defined as the change in equity of a business
enterprise arising from non-owner sources. There was no effect of
implementing this statement on January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments for an Enterprise and Related
Information." This Statement requires presentation of segment
information in reports to shareholders, including disclosures about
the products and services an entity provides and its major customers.
The disclosure required by this statement will be provided in the
Company's 1998 annual financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. The Statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999; the
Company has elected to implement the Statement early on July 1, 1998.
The Statement requires that all derivative instruments be recorded on
the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on
the type of hedge transaction. For cash-flow hedge transactions in
which the Company is hedging the variability of cash flows related to
a variable-rate asset, liability, or a forecasted transaction, changes
in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted
by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current-period
earnings. The adoption of the Statement on July 1, 1998 resulted in
the cumulative effect of an accounting change of $127,710, net of
income tax, being recognized as income in the statement of income.
YEAR 2000 COMPLIANCE
--------------------
The Company has a comprehensive Year 2000 project designed to identify
and assess the risks associated with its information systems, products
operations and infrastructure, suppliers, and customers that are not
Year 2000 compliant, and to develop, implement, and test remediation
and contingency plans to mitigate these risks. The project comprises
four phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans, and (4)
implementation and testing. The Company's Year 2000 project is
currently in the assessment phase and, with respect to certain
information systems and products, is in the remediation phase. The
Company has been storing years as a four-digit field in all
<PAGE>
mission critical databases since 1995 and believes that its internal
master records are Year 2000 compliant. Most of the software which
the Company uses, including all of its finance software, has been
certified as Year 2000 compliant. In addition, the Company is in the
process of obtaining Year 2000 compliance statements from the
manufacturers of the Company's hardware and software products. These
compliance statements are expected to be obtained by the end of 1998.
AEG's internally generated client databases are Year 2000 compliant.
APG's hardware, operating systems, applications software and
internally-generated data requires additional assessment and
remediation for Year 2000 compliance. The assessment phase is
expected to be completed by February 1999. It is expected that APG's
remediation efforts will be greater than those required by AEG,
including the replacement of certain APG hardware, operating system
upgrades and a small amount of applications software upgrades. This
remediation is expected to be completed by June 1999. The Company's
voicemail software is not Year 2000 compliant. The Company intends to
upgrade this software to a Year 2000 compliant version by the end of
1998. The cost of this upgrade is not expected to be material.
The Company believes that its greatest potential risks are associated
with (i) its information systems and systems embedded in its
operations and infrastructure; and (ii) its reliance on Year 2000
compliance by the Company's vendors and suppliers. The Company is at
the beginning stage of assessments for its operations and
infrastructure and cannot predict whether significant problems will be
identified. The Company is asking its vendors and suppliers to
complete a Year 2000 survey by the end of 1998 to assess the status of
their compliance in order to assess the effect it could have on the
Company. The Company has not yet determined the full extent of
contingency planning that may be required. Based on the status of the
assessments made and remediation plans developed to date, the Company
is not in a position to state the total cost of remediation of all
Year 2000 issues. Costs identified to date have not been material.
The Company does not currently expect the total costs to be material,
and it expects to be able to fund the total costs through operating
cash flows. However, the Company has not yet completed its
assessments, developed remediation for all problems, developed any
contingency plans, or completely implemented or tested any of its
remediation plans.
Based on the Company's current analysis and assessment of the state of
its Year 2000 compliance, the Company's reasonably likely worst case
scenario involves booking delays of AEG and APG programs that would
take place later in 2000, and the more remote possibility of travel
interruptions for a small number of adult program participants
actually traveling on AEG millennium programs on and immediately after
January 1, 2000. Both of these types of delays and interruptions would
arise as a result of third-party Year 2000 noncompliance (e.g.,
computerized airline and hotel booking systems), rather than because
of the Company's internal Year 2000 compliance.
<PAGE>
As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement,
or test remediation or contingency plans, or may find that the costs
of these activities exceed current expectations and become material.
In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be
Year 2000 compliant. The Company plans to test such third-party
products by April 15, 1999, but cannot be sure that its tests will be
adequate or that, if problems are identified, they will be addressed
in a timely and satisfactory way. Because the Company uses a variety
of information systems and has additional systems embedded in its
operations and infrastructure, the Company cannot be sure that all of
its systems will work together in a Year 2000 compliant fashion.
Furthermore, the Company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems
or those of its customers or suppliers whose Year 2000 problems may
make it difficult or impossible for them to fulfill their commitments
to the Company. If the Company fails to satisfactorily resolve Year
2000 issues related to its products in a timely manner, it could be
exposed to liability to third parties. The Company is continuing to
evaluate Year 2000-related risks and will take such further corrective
actions as may be required.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not presented as they are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits: 27 - Financial Data Schedule
Reports on Form 8-K:
During the period covered by this Quarterly Report on
Form 10-Q, the Company filed (i) Amendments No. 1 and No. 2 to
a Current Report on Form 8-K originally filed on June 5, 1998,
with respect to the acquisition, by its wholly owned
subsidiary, APG, of the common stock of Incentive Associates,
Inc.; and (ii) a Current Report on Form 8-K with respect to
the acquisiton, by APG, of certain assets of Destination, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMBASSADORS INTERNATIONAL, INC.
Date: November 16, 1998 By: /s/Jeffrey D. Thomas
----------------- ----------------------------------
Jeffrey D. Thomas,
Chief Financial Officer
<PAGE>
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