UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-26420
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AMBASSADORS INTERNATIONAL, INC.
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(Exact Name of Registrant As Specified In Its Charter)
Delaware 91-1688605
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Dwight D. Eisenhower Building
110 S. Ferrall Street
Spokane, WA 99202
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, Including Area Code: (509) 534-6200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
--------------------------------
Common Stock, $.01 Par Value
<PAGE>
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the Registrant, based upon the closing sales
price of the Common Stock on the Nasdaq Stock Market on March 16,
1998, was $82,249,629.
The number of shares of the registrant's Common Stock outstanding as
of March 16, 1998 was 7,012,029.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to
the 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. BUSINESS
OVERVIEW
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Ambassadors International, Inc., a Delaware corporation, is a leading
educational travel, travel services and performance improvement
company, which, through its wholly owned subsidiaries, is engaged
primarily in the business of (i) organizing, marketing and operating
international educational travel programs on a worldwide basis for
students and adults (the "Education Group"); and (ii) developing,
marketing and managing performance improvement programs for a
nationwide roster of corporate clients that utilize merchandise awards
and incentive travel, providing business meeting management services,
and providing comprehensive housing reservation, registration and
travel services for meetings, conventions, expositions and trade shows
(the "Performance Group").
The Education Group is comprised of the Company's wholly owned
subsidiary, Ambassador Education Group, Inc., a Delaware corporation
("AEG"), and AEG's wholly owned subsidiaries, Ambassador Programs,
Inc., a Delaware corporation ("API"), and Ambassador Specialty Group,
Inc., a Delaware corporation. The Performance Group is comprised of
the Company's wholly owned subsidiaries, Ambassador Performance Group,
Inc., a Delaware corporation ("APG"), and The Helin Organization, a
California corporation ("Helin"). References to the Company herein
includes Ambassadors International, Inc. and its subsidiaries, unless
the context otherwise requires.
EDUCATION GROUP
The Company's Education Group has been active since the Company's
founding in 1967. The Education Group consists of several specialized
private-label travel programs, including (i) the "People to People
Student Ambassador Programs" ("Student Ambassador Programs"), which
provide opportunities for junior high and high school students to
visit foreign countries to learn about the politics, economy and
culture of such countries and (ii) the "People to People Ambassador
Programs" ("Adult Ambassador Programs"), which provides foreign travel
experiences for adults, with emphasis on meetings and seminars between
participants and persons in similar jobs abroad. See "Business--
Education Group."
Since 1983, the Company has organized programs for more than 70,000
students and 45,000 adults in more than 35 countries on 5 continents.
In 1997, the Company's educational travel programs featured visits to
such countries as Australia, China, France, Germany, Great Britain,
India, Italy and New Zealand. In 1997, approximately 14,000
participants traveled on the Company's educational programs.
A majority of the Education Group's programs are organized in
connection with People to People International ("People to People"), a
private, non-profit organization dedicated to the promotion of world
<PAGE>
peace through cultural exchange. People to People was founded by
President Dwight D. Eisenhower in 1956 and was originally administered
by the U.S. State Department. Seven Presidents since President
Eisenhower have served as Honorary Chairman of People to People,
including President Bill Clinton, who currently holds that position.
Subject to certain exceptions, the Company's agreements with People to
People give the Company the exclusive right to develop and conduct
programs for kindergarten through college age students using the
People to People name and the non-exclusive right to develop and
conduct programs for adults using the People to People name. The
Company believes that its long association with People to People has
been a major factor in its ability to provide quality educational
student and adult travel programs, and that this relationship provides
the Company with greater access to foreign governmental agencies,
officials and institutions. The Company also believes that its
association with the People to People programs and the recent efforts
of management have provided the foundation for the Company to develop
strategic alliances with Eddie Bauer, Inc., Yosemite National
Institutes and the American Youth Soccer Organization.
PERFORMANCE GROUP
During 1996, the Company commenced operations of its Performance Group
through the acquisition of two existing entities engaged in this
business. See "Business--Performance Group." In February 1998,
through its acquisition of the assets of Rogal America, Co. ("Rogal"),
the Company further expanded its Performance Group to include
comprehensive housing reservation, registration and travel services
for meetings, conventions, expositions and trade shows. See "Recent
Acquisitions."
The Performance Group develops, markets and manages performance
improvement programs for a nationwide roster of clients. The programs
offer services in three principal areas: (i) performance improvement
programs, (ii) business meeting management services and (iii)
comprehensive housing reservation, registration and travel services.
The Company's performance improvement programs utilize merchandise
awards and travel incentives designed to help clients achieve sales
goals, improve productivity and attract and retain qualified
employees. The Company's business meeting management services assist
clients in planning, coordinating and producing business meetings and
conferences. The Company also provides comprehensive housing
reservation, registration and travel services for meetings,
conventions, expositions and trade shows. These services include hotel
booking, guest registration, confirmation, and on-site services.
The Performance Group's clients include both small and large
businesses and organizations, including several Fortune 500 companies
and nationally recognized trade and professional associations.
The Company intends to continue its strategy of growth by making
selective acquisitions of travel and travel-related businesses which
are either compatible with the Company's existing businesses or
represent a developing specialty travel or travel-related segment not
currently addressed by the Company's operations.
<PAGE>
The Company was originally incorporated in the State of Washington in
1967 under the name International Ambassador Programs, Inc. to provide
international educational travel programs for students and adults.
The Company was reincorporated in the State of Delaware in 1995. The
Company's principal executive offices are located at Dwight D.
Eisenhower Building, 110 S. Ferrall Street, Spokane, Washington
99202, and its telephone number is (509) 534-6200.
BUSINESS
--------
EDUCATION GROUP
Through its Education Group, the Company organizes, markets and
operates educational travel programs for students and adults,
principally using the People to People name. The Company has the
exclusive right to develop and conduct programs for kindergarten
through college age students using the People to People name. The
Company also has the non-exclusive right to develop, market and
operate programs for adults using the People to People name; however,
at the present time the Company is the only entity that has been given
this right by People to People. These rights have been granted
pursuant to agreements with People to People, which expire in 2005.
The agreements will be automatically renewed for an additional ten
years unless either party elects otherwise. The principal offices of
the Company's Education Group are located in Spokane, Washington.
STUDENT AMBASSADOR PROGRAMS. The Company's Student Ambassador
Programs provide an opportunity for students in the sixth through
twelfth grades to visit one or more foreign countries to learn about
the politics, economy and culture of such countries. The Company
markets its Student Ambassador Programs through a combination of
direct mail and local informational meetings. Representatives of the
Company review candidate applications and conduct informational
meetings throughout the country from September through April, after
which selected applicants register to participate in the program.
Student Ambassador Program delegations depart during the summer and
generally travel for approximately 21 days, during which time each
delegation visits one or more foreign countries. Each delegation
generally consists of approximately 35 students and several teachers,
who act as the delegation's leaders. Teachers and students comprising
a delegation generally come from the same locale. Local guides assist
the delegation in their travels.
Programs are designed by the Company's staff of international planners
and researchers to provide an educational and entertaining travel
experience by exposing students to the history, government, economy
and culture of the country or countries visited. In each country the
Company contracts with overseas program coordinators to provide day-
to-day oversight of the programs. Additionally, a guide trained by
the Company accompanies the group throughout the duration of its
program. In most instances, the Company also arranges to provide
students the opportunity for a "homestay" (a brief stay with a host
<PAGE>
family), which gives students a glimpse of daily life in the visited
country.
Students who complete certain written assignments and other projects
can receive high school and university credit for their participation
in the program. Universities which recognize academic credit include
Stanford University, University of California at Los Angeles, and
Georgetown University.
ADULT AMBASSADOR PROGRAMS. The Company's Adult Ambassador Programs
provide adults with common interests the opportunity to travel abroad
to meet and exchange ideas with foreign citizens who have similar
backgrounds, interests or professions. The Company markets its Adult
Ambassador Programs through a direct mail marketing effort throughout
the year. Programs originate from the Company's internal marketing
and research staff who identify potential delegation topics and
leaders. Adult programs have been conducted in such areas as
agriculture, economics, education, medicine and science.
The Company believes that its Adult Ambassador Programs provide
participants with enriching experiences and deeper understandings of
foreign cultures and peoples than visits arranged independently or
through travel agencies. The Adult Ambassador Programs operate
year-round and are generally designed to provide a more specialized
adult educational experience. Adult Ambassador Programs generally
last from ten days to two weeks and are designed to provide adults
with similar backgrounds or common interests the opportunity to
exchange information and ideas with their counterparts in other
countries. Unlike travel programs provided by travel agencies, these
professional exchanges are intended largely as working trips, with a
significant amount of the participant's time involved in organized
meetings, seminars and round-table discussions with their foreign
counterparts, inspection visits to major foreign facilities and
institutions and informal gatherings with foreign counterparts. Each
program is led by a delegation leader chosen by the Company based upon
his or her recognition in the field and expertise regarding the
special focus of the particular program.
The Company acquired additional People to People adult business
through an acquisition in February 1996, which included, among other
things, the right to operate adult educational and exchange travel
programs under the tradenames "American People Ambassador Programs"
and "Missions in Understanding" and rights under an agreement with
People to People to operate additional travel programs. See "Recent
Acquisitions."
The Company also operates travel programs pursuant to alliances with
Eddie Bauer, Inc., a direct mail and retail company, and Yosemite
National Institutes, a non-profit organization with operations in
Yosemite National Park, Olympic National Park and Golden Gate National
Recreation Area. Under its agreement with Eddie Bauer, Inc., the
Company recently began to offer outdoor recreational travel
experiences under the name "Eddie Bauer Travel." The agreement with
Yosemite National Institutes is exclusive, except that Yosemite
<PAGE>
National Institutes may conduct its own programs. The Company also
has an agreement with the American Youth Soccer Organization to
provide international travel for its players. The initial program
includes travel to Paris, London and Amsterdam to play soccer matches
against local teams.
PERFORMANCE GROUP
The Performance Group develops, markets and manages performance
improvement programs for a nationwide roster of clients. The programs
offer services in three principal areas: (i) performance improvement
programs, (ii) business meeting management services, and (iii)
comprehensive housing reservation, registration and travel services.
The Performance Group commenced operations through a series of
acquisitions commencing in 1996. The principal offices of the
Performance Group are located in Newport Beach, California.
In offering performance improvement programs and business meeting
management services, the Performance Group follows a strategy aimed at
developing and implementing programs tailored to each client's
objectives. The Company's employees first meet with existing or
potential clients to determine their business objectives and their
performance enhancement opportunities. Once a client agrees to pursue
a program, the Company works with the client to determine the scope of
the program by identifying concepts and parameters in terms of
purpose, costs, time and employee participation. Subsequently, the
Company's employees develop and provide customized services that fall
within the identified parameters.
Performance Group employees participate in various aspects of a
client's program development. The staff of creative writers and
graphic designers often delivers promotional campaigns and materials
that are complete from concept through production, including design,
printing, collating, labeling and mailing. The Company has developed
computerized monitoring systems and provides each client with lists
generated by internally-designed software programs which track the
program participants and enable the client to know the status of each
participant at any time. Additionally, the Company provides a program
coordinator to formulate, maintain and finalize each aspect of the
client's event.
For its services, the Company is usually paid a percentage markup of
the program components including air and ground transportation,
promotional gifts, meals and hotel accommodations. In addition, the
Company is reimbursed for expenses incurred in organizing the program.
The Company also provides comprehensive housing reservation,
registration and travel services for meetings, conventions,
expositions and trade shows. The contracts for these services
generally cover an annual meeting or event and may be for a term of
one to several years. Pursuant to these agreements, the Company
provides a wide range of services associated with booking hotel space
and guest registration, including securing sufficient and appropriate
hotel room inventories, coordinating blocking and booking of all hotel
<PAGE>
rooms, monitoring the status and volume of reservations, accepting
individual and group reservations, mailing reservation confirmations
and providing an on-site housing services desk at a meeting site to
coordinate attendees' housing needs. For providing these and other
services, the Company generally receives a fixed commission, which is
paid directly by the hotels.
RECENT ACQUISITIONS
In January 1996, the Company acquired all of the capital stock of
Helin, a company engaged in the performance incentives and meeting
management businesses.
In February 1996, API completed the acquisition of certain assets from
Marc L. Bright, d/b/a M.L. Bright Associates ("MLB"), American People
Ambassador Programs and Missions in Understanding. MLB operated adult
educational and exchange travel programs under the "People to People"
name.
In December 1996, APG acquired all of the issued and outstanding
shares of capital stock of Bitterman & Associates Inc. ("Bitterman"),
a merchandise incentive and performance improvement company.
In September 1997, APG acquired certain of the assets of Debol &
Associates, a company engaged in the performance incentives and
meeting management businesses.
On February 5, 1998, APG acquired certain of the assets (the "Rogal
Assets") of Rogal. Rogal provides comprehensive housing reservation,
registration and travel services for meetings, conventions,
expositions and trade shows. The Rogal Assets include two office
leases for premises in Massachusetts and Virginia, computer equipment
and Rogal's existing client service contracts. The Company intends to
continue to service the existing client contracts of Rogal and to
expand further this area of its business. Additional information
regarding this transaction is included in the Company's Current Report
on Form 8-K dated February 12, 1998 (as amended on Form 8-K/A dated
April 2, 1998), which report is incorporated herein by reference.
On February 20, 1998, the Company further expanded the operations of
its Performance Group through the acquisition by APG of the capital
stock of Travel Incentives, Inc. ("TII"), a company engaged in the
performance incentives and meeting management businesses.
BUSINESS STRATEGY
The Company believes that high quality programs and exceptional
customer service are and will remain key elements of the Company's
success. The Company's strategy is to maintain its quality standards
while increasing its volume of business. To increase its business,
the Company intends to (i) expand the marketing and tour volume of its
existing student travel programs, (ii) introduce new student travel
programs and strategic alliances, (iii) broaden its adult travel
programs, (iv) expand the scope of services and increase the market
<PAGE>
penetration of the Performance Group, and (v) pursue selective
acquisitions of travel and performance improvement businesses.
COMPETITION
The travel industry in general, and the educational segment of the
travel industry in particular, is highly competitive. The Company's
student programs compete with similar educational travel programs
operated by other individuals and organizations, as well as
independent programs organized and sponsored by local teachers with
the assistance of local travel agents. The Company's adult programs
also compete with independent professional associations that sponsor
and organize their own travel programs through the assistance of local
travel agents, and other organizations that design travel programs for
adults.
The Company believes that the barriers to entry for any future
competitors are relatively low. Certain organizations engaged in the
travel business have substantially greater financial, marketing and
sales resources than the Company. There can be no assurance that the
Company's present competitors or competitors that choose to enter the
marketplace in the future will not exert significant competitive
pressures on the Company.
The Company believes that the principal bases of competition in the
educational segment of the market are the quality and uniqueness of
the educational program offered, customer service, reputation and
program cost. The Company believes that its agreements with People to
People, as well as its years of experience organizing student
educational programs and established relationships with public
officials, organizations and residents in countries in which it
provides programs, allow the Company to provide an educational
opportunity that is not easily duplicated by competitors' programs.
The Performance Group also competes in segments of the travel industry
that are highly competitive. In the meeting management and incentives
businesses, the Company competes with companies which are larger and
have greater resources than the Company. The Company believes that,
although some potential clients will focus on price alone, other
clients will also be interested in the quality of the programs
developed by the Performance Group and customer service. The Company
believes that its programs are not easily duplicated by its
competitors.
SERVICEMARKS
The Company has registered a variety of service and trademarks,
including the names "High School Student Ambassador Program" and
"Citizen Ambassador Program." In addition, the Company has the right,
subject to certain exceptions, to use People to People's name,
servicemark and logo for use in marketing student and adult programs.
In February 1996, the Company acquired the exclusive rights to the
names "American People Ambassador Programs" and "Missions in
Understanding." The Company believes that the strength of its service
<PAGE>
and trademarks is valuable to its business and intends to continue to
protect and promote its marks as appropriate. However, the Company
believes that its business is not dependent upon any trademark or
servicemark.
INSURANCE
The Company maintains insurance coverage in amounts it believes are
adequate for its business, including a $5 million professional
liability policy and a $5 million umbrella policy. The Company also
maintains a $1 million general liability and property coverage policy.
The Company has not experienced difficulty in obtaining adequate
insurance coverage. There is no assurance that the insurance
maintained by the Company will be adequate in the event of a claim, or
that such insurance will continue to be available in the future.
EMPLOYEES
At February 28, 1998 the Company had approximately 302 employees, of
which 288 were full-time employees. Of the Company's total employees,
118 are located in Spokane, Washington, 17 are located in Newport
Beach, California, 3 are located in Winnebago, Illinois, 50 are
located in Minneapolis, Minnesota, 86 are located in Watertown,
Massachusetts, 5 are located in Alexandria, Virginia, and 23 are
located in Westlake, California. The Company has 76 full-time
employees engaged in marketing and sales and 226 in operations,
administration and finance. The Company also occasionally employs
temporary labor on a seasonal basis to assist it with its direct
marketing efforts in recognition of the fact that the Company's
student travel programs are seasonal in nature. None of the Company's
employees is subject to collective bargaining agreements or is
represented by a union. The Company believes that its labor relations
are good.
Item 2. PROPERTIES
The principal executive offices of the Company, consisting of
approximately 41,000 square feet, are located in Spokane, Washington
and are occupied pursuant to a lease dated January 3, 1995 that
expires December 31, 2004. The lease currently provides for monthly
rental payments of $36,992. The Company may cancel the lease without
penalty (upon one year's prior notice) and also may extend the term of
the lease for an additional ten year period upon providing written
notice to the Lessor of its intention to exercise such option at least
six months prior to the end of the initial term. If the Company
elects to exercise the extension option, the monthly rental during the
renewal period will be the fair market rental value of the leased
premises as of the date the option is exercised (as determined based
on market rentals of similar properties in the Spokane, Washington
area). The owner of the premises is a partnership consisting of two
former principals of the Company, who subsequently sold their interest
in the Company in January 1995.
<PAGE>
In March 1998, the Company entered into a new lease for general
administrative offices in Newport Beach, California. The lease
commences on or about June 15, 1998 and is for a term of seven years.
The initial base rental is $28,346 per month. The premises consist of
approximately 26,996 square feet.
The Company also leases 900 square feet of office space in Winnebago,
Illinois pursuant to a lease that expires in August 2000. The Company
also leases 4,500 square feet of office space in Newport Beach,
California. The lease expires in June 2000, and currently provides
for monthly rental payments of $4,742. In addition, the Company
leases approximately 10,690 square feet of office and warehouse space
in Plymouth, Minnesota, pursuant to a lease which expires in 1999 and
provides for current monthly rental payments of $9,101.
In February 1998, the Company assumed two additional leases for office
space in connection with its acquisition of the Rogal Assets. One
lease is for approximately 15,900 square feet in Watertown,
Massachusetts, with a current monthly rental of $15,640, which lease
expires in 2003, and a second lease is for approximately 1,805 square
feet in Alexandria, Virginia, with a currently monthly rental of
$2,074, which lease expires in November 1998; however, the Company has
an option to extend the term for three years.
In February 1998, the Company assumed a month-to-month lease for
office space in connection with its acquisition of TII. The lease is
for approximately 4,841 square feet with a current monthly rental of
$6,051.
Management believes that its existing facilities are sufficient to
meet its present needs and anticipated needs for the foreseeable
future. However, additional facilities may be required in connection
with future business acquisitions.
Item 3. LEGAL PROCEEDINGS
On September 22, 1997, Sarah Buffington and certain other individuals,
for themselves and on behalf of their children, six teenage students
(the "Plaintiffs"), filed a lawsuit in the District Court of Harris
County, Texas, against People to People and three individual tour
leaders. In February 1998, the lawsuit was amended to include the
Company (the original named defendants and the Company are
collectively referred to as the "Defendants"). The basis for the
Plaintiffs' claim is their allegation that, while the six teenagers
were in Europe in June 1997 as part of a tour involving 31 students,
three of the tour leaders behaved in an inappropriate manner toward
the six teenagers. The Plaintiffs allege breach of contract,
negligence, negligent hiring and retention of the tour leaders,
slander, intentional infliction of emotional distress, and assault and
battery. The Plaintiffs seek at least $15,000,000 in punitive and
exemplary damages against the Defendants, together with unspecified
actual damages, attorneys' fees, court costs and other incidental
costs. The Company intends to defend vigorously the lawsuit. The
Company believes it has meritorious defenses to this lawsuit and
intends to defend itself vigorously.
<PAGE>
Except for the foregoing, the Company is not a party to any material
pending legal proceedings other than ordinary routine litigation
incidental to its business, the outcome of which the Company believes
will not have a material adverse effect on its business, financial
condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK MARKET AND OTHER INFORMATION
The Company's common stock has been traded on the Nasdaq National
Market under the symbol "AMIE" since August 3, 1995. Prior to such
date, there was no public trading market for the Company's equity
securities. As of March 31, 1998, there were approximately 48 holders
of record of the Company's Common Stock. This number does not include
beneficial owners holding shares through nominee or "street" name.
The following table sets forth the high and low sale prices of a share
of the Company's Common Stock as reported on the Nasdaq National
Market on a quarterly basis for the Company's fiscal years ended
December 31, 1996 and December 31, 1997.
High Low
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1996:
Quarter ended March 31, 1996 $13.25 $ 8.50
Quarter ended June 30, 1996 $16.13 $ 9.88
Quarter ended September 30, 1996 $14.25 $ 7.88
Quarter ended December 31, 1996 $11.00 $ 8.00
1997:
Quarter ended March 31, 1997 $12.50 $ 9.00
Quarter ended June 30, 1997 $13.75 $ 8.75
Quarter ended September 30, 1997 $22.00 $12.25
Quarter ended December 31, 1997 $26.75 $17.25
<PAGE>
DIVIDEND POLICY
The Company has not paid any dividends since the consummation of its
initial public offering of securities in 1995 and intends to continue
to retain its earnings for use in the operation and expansion of its
business and therefore does not anticipate declaring any cash
dividends in the foreseeable future. The payment of dividends in the
future will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board
of Directors, in its discretion, deems relevant.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services of Los Angeles, California serves as
transfer agent and registrar of the Company's Common Stock.
CHANGES IN SECURITIES
In February 1998, the Company issued 140,187 shares of its Common
Stock in connection with its acquisition of the Rogal Assets, and
52,068 shares of its Common Stock in connection with its acquisition
of TII.
In August 1997, in connection with the employment of Ronald L.
Merriman, the Company agreed to issue to Mr. Merriman an aggregate of
50,000 shares of Common Stock, which vest in four equal annual
installments commencing January 1, 1998.
In December 1996, the Company issued 137,857 shares of its Common
Stock in connection with the acquisition of Bitterman.
In January 1996, the Company issued 80,000 shares of its Common Stock
in exchange for all of the issued and outstanding shares of Helin in
connection with the Company's acquisition of Helin.
Each of the foregoing issuances was made directly by the officers and
directors of the Company and no underwriting discounts or commissions
were paid. Each of the foregoing transactions was exempt from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof for issuances of
securities not involving a public offering and exempt from
registration under applicable state securities laws.
Each of the persons with whom the Company's Common Stock was issued
represented to the Company, substantially as follows: that he or it
acquired the securities for his or its own account, for investment
purposes only and not with a view to or for sale in connection with
any distribution thereof. Certificates evidencing the Common Stock
issued in these transactions bear restrictive legends to such effect
and state further that the securities have not been registered under
the Securities Act or state securities laws and may not be sold,
pledged or otherwise transferred without registration under the
Securities Act or an exemption therefrom.
<PAGE>
USE OF PROCEEDS
The Company's Registration Statement for its initial public offering
of securities (File No. 33-93586) became effective on August 3, 1995.
Of the total net proceeds to the Company from the offering in the
amount of $11,983,103, the following amounts were used from the date
of the offering through the date of this report.
Category of Use Amount
---------------------------------------------- -----------
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and
equipment 0
Purchase of real estate 0
Acquisition of other businesses 9,850,000
Repayment of indebtedness 0
Working capital 1,385,000
Temporary investments in Bank of America money
market and investment accounts 748,103
Other purposes 0
-----------
Total $11,983,103
===========
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income
Data (A):
Operating revenues $ 26,541 $ 18,843 $ 17,133 $ 16,990 $ 14,334
Operating expenses:
Selling and tour
promotion 9,826 8,420 8,694 9,407 8,361
General and
administrative 8,210 5,770 4,676 5,380 4,983
Operating income 8,505 4,653 3,763 2,203 990
Net income 5,637 3,947 5,157 2,127 1,142
Pro forma net income (B) -- -- 3,179 3,152 --
Net income per share -
basic (B) $ 0.83 $ 0.60 $ 0.57 $ 0.63 (C)
Net income per share -
diluted (B) $ 0.82 $ 0.59 $ 0.56 $ 0.63 (C)
Balance Sheet Data (D):
Cash and cash equivalents $ 22,871 $ 18,281 $ 12,974 $ 6,634 $ 674
Total current assets 27,283 21,950 14,857 7,415 4,239
Total assets 34,449 27,269 16,016 9,637 6,247
Long-term debt 329 -- 6 17 25
Total liabilities (includ-
ing current portion) 11,893 10,486 4,881 7,877 4,418
Total stockholders' equity 22,556 16,783 11,135 1,829 1,829
</TABLE>
<PAGE>
(A) Since 1995, the Company has made several acquisitions which have
been accounted for under the purchase method of accounting.
Therefore, the results of operations of these acquired entities
are included in the results of operations of the Company since
their respective dates of acquisition. The statement of income
data for the years ended December 31, 1995, 1994 and 1993 only
reflects the Education Group. During 1996, the Company commenced
operations of its Performance Group through the acquisition of
two existing entities engaged in this business. Due to the
timing of these acquisitions, the results of operations for one
of these entities are included in the Company's results of
operations for the year ended December 31, 1996. The results of
operations of the second acquisition are included in the
financial presentation for the year ended December 31, 1997. The
results of operations for the year ended December 31, 1997 also
include the acquisition in September 1997 of a third company in
the Performance Group.
(B) In connection with the Company's change in ownership and
reincorporation in 1995, certain compensation agreements between
the Company and certain stockholders were terminated and new
employment agreements were executed. Also, notes receivable from
certain stockholders were repaid. Therefore, the pro forma net
income for the year ended December 31, 1994 reflects adjustments
to (i) reduce certain incentive compensation costs and (ii)
eliminate interest income on the repayment of notes receivable.
The pro forma net income for the years ended December 31, 1995
and 1994 reflects an adjustment to record income taxes which
would have been paid by the Company as a C Corporation rather
than as an S Corporation.
(C) Historical net income per share for the year ended December 31,
1993 has not been presented due to the Company's change in
ownership and reincorporation in 1995.
(D) All of the Company's acquisitions have been accounted for under
the purchase method of accounting. Therefore, the balance sheet
data include the accounts of the acquired entities as of their
respective dates of acquisition. Since one of the acquisitions
occurred effective December 31, 1996, the balance sheet data
includes the accounts of this entity as of December 31, 1996;
however, the results of operations of this entity are not
included in the statement of income data until the year ended
December 31, 1997.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto
incorporated by reference in this Annual Report on Form 10-K. Certain
statements contained herein that are not related to historical
results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934,
as amended, and involve risks and uncertainties. Actual results could
differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and
under "Risk Factors." All forward-looking statements contained in
this Annual Report on Form 10-K are qualified in their entirety by
this statement.
General
-------
The Company is engaged primarily in (i) organizing, marketing and
operating international educational travel programs on a worldwide
basis for students and adults and (ii) developing, marketing and
managing performance improvement programs that utilize merchandise
awards and incentive travel, providing business meeting management
services and providing comprehensive housing reservation, registration
and travel services for meetings, conventions, expositions and trade
shows.
Since its initial public offering in August 1995, the Company has
expanded its operations primarily through internal growth and a series
of acquisitions of businesses within the travel and performance
improvement industries. Prior to 1996, the Company's business was
conducted through its Education Group.
In January 1996, the Company completed the acquisition of The Helin
Organization and commenced operations of the Performance Group. This
acquisition was followed in February 1996 by the acquisition of
certain assets of Marc L. Bright & Associates, which expanded the
business of the Company's already existing Education Group. In
December 1996, the Company acquired Bitterman & Associates, Inc.; in
September 1997, the Company acquired certain of the assets of Debol &
Associates; and in February 1998, the Company acquired certain of the
assets of Rogal America, Co. and the stock of Travel Incentives, Inc.,
further expanding its Performance Group. All of these acquisitions
were accounted for under the purchase method of accounting.
Therefore, the results of operations of the acquired businesses are
included in the Company's results of operations since their respective
dates of acquisition.
<PAGE>
Gross program receipts reflect the total payments received by the
Company from Education Group participants and Performance Group
clients. Gross program receipts less program pass-through expenses
constitute the Company's revenues. Program pass-through expenses
include all direct costs associated with the Company's programs,
including costs related to airfare, ships, hotels, meals, ground
transportation, guides, professional exchanges, changes in currency
exchange rates and merchandise costs. The Company recognizes gross
program receipts, pass-through expenses and revenues upon the
departure of the program participant or as the Performance Group
service is rendered. Operating expenses, which are expensed by the
Company as incurred, are the costs related to the creation of
programs, promotional materials and marketing costs, salaries, rent,
other general and administrative expenses and all of the Company's
ordinary expenses. The Company's policy is to obtain payment for
substantially all travel services prior to entering into commitments
for incurring expenses relating to such travel.
The Company's businesses are highly seasonal. The majority of the
Company's travel programs occur in May through July and October of
each year. Substantially all of the Company's operating income is
generated in these periods, which historically has offset the
operating losses incurred during the rest of the year. The Company
anticipates that this trend will continue for the foreseeable future.
The Company's annual results would be adversely affected if the
Company's revenues were to be substantially below seasonal norms
during these periods. The Company's operating results may fluctuate
as a result of many factors, including the mix of Education Group and
Performance Group programs and services, the mix of programs and
program destinations offered by the Company and its competitors, the
introduction and acceptance of new programs and program enhancements
by the Company and its competitors, timing of program completions,
cancellation rates, competitive conditions in the industry, marketing
expenses, extreme weather conditions, international conflicts, timing
of and costs relating to acquisitions, changes in relationships with
certain travel providers, economic factors and other considerations
affecting travel.
The substantial majority of the Company's programs takes place outside
the United States and most foreign suppliers require payment in local
currency rather than U.S. dollars. Accordingly, the Company is
exposed to foreign currency risks in certain countries as foreign
currency exchange rates between those currencies and the U.S. dollar
fluctuate. To manage these risks, the Company enters into forward
foreign exchange contracts and foreign currency option contracts.
These foreign exchange contracts and options are entered into to
support normal recurring purchases, and accordingly, are not entered
into for speculative purposes. 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
<PAGE>
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 Company records its forward foreign
exchange contracts at market value on a quarterly basis. Unrealized
and realized gains and losses on these securities are recognized in
the statement of income.
Results of Operations
---------------------
The following table sets forth, for the periods indicated, the
relative percentages that certain income and expense items bear to
revenues.
Year Ended December 31,
------------------------
1995 1996 1997
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Selling and tour promotion 50.7 44.7 37.0
General and administrative 27.3 30.6 31.0
----- ----- -----
Total operating expenses 78.0 75.3 68.0
----- ----- -----
Operating income 22.0 24.7 32.0
----- ----- -----
Other income (expense) 6.1 7.0 1.8
Income before income taxes 28.1 31.7 33.8
Income tax provision (benefit) (2.0) 10.8 12.6
----- ----- -----
Net income 30.1% 20.9% 21.2%
===== ===== =====
Pro forma information:(1)
Income before income taxes 28.1%
Pro forma income tax provision 9.5
-----
Pro forma net income 18.6%
=====
(1) The pro forma net income for the year ended December 31, 1995
reflects an adjustment to record income taxes which would have
been paid by the Company as a C Corporation rather than as an S
Corporation for such year. The Company's S Corporation status
terminated in 1995.
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1996
The Company is organized in two operating divisions: the Education
Group and the Performance Group. For the year ended December 31, 1997,
the Education Group increased its productivity by growth within the
core product lines while realizing efficiencies through the sales and
marketing process. The Performance Group contribution resulted from
its acquisitions and additional sales of incentive travel programs and
business meeting management services.
Gross program receipts increased 42% in 1997 over 1996, from $56.7
million to $80.3 million, and net revenue increased 41% from $18.8
million in 1996 to $26.5 million in 1997. These increases were driven
by an increase in the number of Education Group program participants,
the addition of new acquisitions, and improved cross-selling in the
Performance Group.
The overall gross margins (revenues as a percentage of gross program
receipts) for the 1997 year remained consistent with the prior year at
33%. This reflects a strengthening of the Education Group margins,
combined with the margins achieved by the new acquisitions in the
Performance Group. Gross margins of the Performance Group are expected
to be slightly lower than those achieved in the Education Group.
Selling and tour promotion expenses increased during 1997 when
compared to 1996 by $1.4 million, or 17%. Most of this increase
results from an acquisition in late 1996 within the Performance Group.
As a percentage of revenues, selling and tour expenses decreased to
37% in 1997 from 45% in 1996, as a result of sales and marketing
efficiencies and the benefits of a cost management program.
General and administrative expenses increased from $5.8 million to
$8.2 million between 1996 and 1997. Most of this increase is due to
the assumption of continuing expenses associated with the Performance
Group acquisitions.
Operating income increased 83% in the year ended December 31, 1997
compared to the year ended December 31, 1996.
Other income includes interest income and unrealized foreign currency
gains or losses. Other income decreased from $1.3 million in 1996 to
$0.5 million in 1997. The cash component of other income, interest
income, increased to $1.6 million from $1.1 million, a 47% increase on
a 25% increase in year-end cash balances. This increase in interest
income is the effect of improved cash management practices implemented
in 1997. The overall net decrease in other income can be attributed to
the non-cash component of other income, unrealized foreign exchange
losses. In 1997, the Company incurred $0.7 million of net unrealized
losses compared to an insignificant amount in 1996. The face amount of
forward foreign exchange contracts outstanding at December 31, 1997,
was $17.4 million.
<PAGE>
The Company's income before taxes in 1997 increased 50% over 1996 as a
result of the foregoing factors. The Company has recorded an income
tax provision of $3.3 million for 1997 which represents an effective
tax rate of 37%. The tax provision has increased over the prior year's
provision of $2.0 million due to the effect of certain non-deductible
expenses as well as the increase in state income taxes with the
expansion of the Company through acquisitions.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31,
1995
The expansion of the Company's 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 the Company's 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, even with the
addition of the expected lower margins of the Performance Group.
Selling and tour promotion expenses decreased approximately $0.3
million in 1996 when compared to 1995. The Company's marketing efforts
were 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 the integration of American People
Ambassador Programs, The Helin Organization, and the developmental
costs related to Eddie Bauer Travel.
General and administrative expenses increased from $4.7 million in
1995 to $5.8 million in 1996 primarily due to the acquisitions of The
Helin Organization and American People Ambassador Programs in early
1996.
Other income includes interest income and foreign currency gains or
losses. During 1996, other income increased 26% from $1.1 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.
<PAGE>
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 $0.3 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 working capital purposes in order to conduct
sales and marketing efforts for future programs and services.
Net cash provided by operations for the years ended December 31, 1995,
1996 and 1997 was $1.8 million, $6.1 million and $6.2 million,
respectively. The increase in cash flow from operations between 1996
and 1997 resulted primarily from the increase in net income. The
increase from 1995 to 1996 can be attributed to the increase in cash
receipts from Education Group participants in 1996 and the payment in
1995 of approximately $2.4 million of incentive compensation for the
1994 year to previous owners of the Company.
Net cash used in investing activities for the years ended December 31,
1995, 1996 and 1997 was $0.4 million, $0.8 million and $1.5 million,
respectively. The investing activities during 1997 were due primarily
to leasehold improvements in the corporate headquarters facilities as
well as the purchase of a company in the third quarter of the year.
The $0.4 million increase from 1995 to 1996 was due to the acquisition
of subsidiaries and purchase of other investments. The Company does
not have any material capital expenditure commitments for 1998.
However, the Company is continuing to pursue further acquisitions of
related travel and performance improvement businesses that may require
the use of cash and cash equivalents. The Company had no significant
long- or short-term debt as of December 31, 1996; however, at
December 31, 1997, the Company had $0.3 million in long-term debt as a
result of an acquisition during 1997. Subsequent to December 31, 1997,
the Company utilized $7.5 million in cash to fund acquisitions.
Net cash provided by financing activities in 1995 was $5.0 million as
a result of the reorganization of the Company and the initial public
offering. Net cash used in financing activities in 1996 and 1997 was
insignificant.
The Company has a credit facility available with Seafirst Bank for up
to $23.0 million U.S. dollars for foreign currency purchases and
forward contracts. Although this facility expires in July 1998, the
Company expects it to be renewed.
At December 31, 1997, the Company had approximately $22.9 million of
cash and cash equivalents, including participant deposits of $7.4
million. Under the Company's cancellation policy, a participant may be
entitled to a refund of a portion of his or her deposit (less certain
fees) depending on the time of cancellation. Management believes that
<PAGE>
existing cash and cash equivalents and cash flows from operations,
together with the net proceeds of its recently completed public
offering of common stock, which closed on April 29, 1998, will be
sufficient to fund the Company's anticipated future acquisitions,
operating needs and capital expenditures at least through 1998.
YEAR 2000 ISSUES
The nature of the Company's business systems is such that the year
2000 is expected to have a minimal impact on the Company's operations
or financial performance. However, there can be no assurance that the
systems of other parties upon which the Company's businesses also rely
will address the year 2000 problem adequately.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," was issued. SFAS No. 128 established
standards for computing and presenting earnings per share ("EPS"). It
requires the dual presentation and a reconciliation of basic and
diluted EPS. The Company adopted the provisions of SFAS No. 128 in
1997, which had no effect on EPS as previously reported.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, which requires the reporting of comprehensive income.
Comprehensive income is defined as the change in equity of a business
enterprise arising from non-owner sources. This Statement is effective
for fiscal years beginning after December 15, 1997. Management does
not believe that the implementation of SFAS No. 130 will have a
material impact on the presentation of its consolidated financial
statements.
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 stockholders, including disclosures about
the products and services an entity provides and its major customers.
The Statement is effective for fiscal years beginning after
December 15, 1997. Management of the Company has not determined the
disclosure to be made upon implementation of SFAS No. 131.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company are submitted as a separate
section of this Form 10-K on pages F-1 through F-26.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1997, which Proxy Statement was filed
with the Securities and Exchange Commission on April 14, 1998.
Item 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1997, which Proxy Statement was filed
with the Securities and Exchange Commission on April 14, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1997, which Proxy Statement was filed
with the Securities and Exchange Commission on April 14, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by
reference from the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 1997, which Proxy Statement was filed
with the Securities and Exchange Commission on April 14, 1998.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of Report
(1) FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31,
1997 and 1996 F-2
Consolidated Statements of Income for the
years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Changes in Share-
holders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES INCLUDED IN ITEM 8:
No financial statement schedules are presented as the
required information is either not applicable or included in
the Consolidated Financial Statements or notes thereto.
(3) EXHIBITS
The exhibits listed on the accompanying Exhibit Index are
filed as part of this Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
<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: May 6, 1998 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.
<TABLE>
<CAPTION>
Signature Title Date
--------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ John A. Ueberroth President and Chief Executive Officer May 6, 1998
---------------------------- (Principal Executive Officer)
John A. Ueberroth
* Chairman of the Board of Directors May 6, 1998
----------------------------
Peter V. Ueberroth
/s/ Jeffrey D. Thomas Chief Financial Officer May 6, 1998
---------------------------- (Principal Financial and Accounting
Jeffrey D. Thomas Officer)
* Director May 6, 1998
----------------------------
James L. Easton
* Director May 6, 1998
----------------------------
Richard D.C. Whilden
* Director May 6, 1998
----------------------------
John C. Spence
</TABLE>
<PAGE>
SIGNATURES, CONTINUED
<TABLE>
<CAPTION>
Signature Title Date
--------------------------------- ------------------------------------- --------------
<S> <C> <C>
* Director May 6, 1998
----------------------------
Rafer L. Johnson
*By: /s/ John A. Ueberroth Attorney-in-Fact May 6, 1998
----------------------------
John A. Ueberroth
</TABLE>
<PAGE>
INDEX TO 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)
10.11 Agreement and Plan of Merger, effective as of December 11,
1996 by and among Ambassadors International, Inc., a
Delaware corporation, Ambassadors Performance Improvement,
Inc., a Delaware corporation and wholly owned subsidiary of
Ambassadors, Bitterman & Associates, Inc., a Minnesota
corporation, and Michael H. Bitterman.(3)
10.12 Asset Purchase Agreement dated as of February 5, 1998
by and among the company, Ambassador Performance Group, Inc.,
Rogal America, Co. and Andrew Rogal.(4)
10.13 Lease dated December 20, 1996 between Rogal America, Inc. and
Ark-Les Corp.(5)
10.14 Industrial Lease dated ________, 19__ between the Company
and the Irvine Company (5)
21.1 Subsidiaries of Ambassadors International, Inc.(5)
23.1 Consent of Coopers & Lybrand L.L.P.(5)
24.1 Powers of Attorney and certified copy of the related
resolutions of the board of directors.(5)
27.1 Financial Data Schedule--1997(5)
27.2 Financial Data Schedule--1996(5)
99.1 Item 2 of the Company's Current Report on Form 8-K dated
February 20, 1998.(6)
<PAGE>
(1) Filed as an exhibit of the same number to the Company's
Registration Statement on Form S-1 (Registration No. 33-93586)
and incorporated herein by reference.
(2) Filed as an exhibit of the same number to the Company's Form
10-KSB for the year ended December 31, 1995 and incorporated
herein by reference.
(3) Filed with the Securities and Exchange Commission as Exhibit
2.5 to Form 8-K dated January 3, 1997, and incorporated herein
by reference.
(4) Filed with the Securities and Exchange Commission as Exhibit
2.6 to Form 8-K dated February 12, 1998 (as amended on
Form 8-K/A dated April 2, 1998), and incorporated herein by
reference.
(5) Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, which
was filed with the Securities and Exchange Commission on
March 31, 1998.
(6) Filed with the Securities and Exchange Commission as part of a
Current Report on Form 8-K on February 12, 1998 (as amended on
Form 8-K/A dated April 2, 1998), and incorporated herein by
reference.
<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,
1997 and 1996, 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, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 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.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
February 9, 1998, except for the first
paragraph of Note 12 as to which the
date is February 19, 1998
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $22,870,546 $18,281,433
Restricted cash equivalents 125,000 55,000
Available-for-sale investments 590,111
Accounts receivable 1,753,369 1,469,053
Inventory 76,033 157,234
Prepaid program costs and expenses 2,004,995 1,359,950
Deferred income taxes 31,229 24,584
Other assets 422,096 12,892
----------- -----------
Total current assets 27,283,268 21,950,257
Property and equipment, net 2,148,305 1,575,486
Other investments 462,500 262,500
Goodwill, net of $290,711 and $115,567
of accumulated amortization 4,247,219 3,308,224
Covenants-not-to-compete, net of
$179,485 and $19,209 of accumulated
amortization 195,515 135,791
Other assets 85,573 36,792
Deferred income taxes 26,608
----------- -----------
Total assets $34,448,988 $27,269,050
=========== ===========
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
December 31, 1997 and 1996
1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,616,120 $ 1,764,002
Accrued expenses 724,008 822,927
Participants' deposits 7,397,924 6,199,982
Customer advances 980,834 1,335,368
Notes payable, current portion 171,241 201,146
Unrealized loss on foreign currency
exchange contracts 674,625
----------- -----------
Total current liabilities 11,564,752 10,323,425
Deferred income taxes 163,044
Notes payable due after one year 328,696
----------- -----------
Total liabilities 11,893,448 10,486,469
----------- -----------
Commitments and contingencies
(Notes 6, 7, 8 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, 6,768,223
and 6,753,887 shares 67,682 67,539
Additional paid-in capital 13,760,963 13,625,279
Retained earnings 8,726,895 3,089,763
----------- -----------
Total shareholders' equity 22,555,540 16,782,581
----------- -----------
Total liabilities and
shareholders' equity $34,448,988 $27,269,050
=========== ===========
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, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Revenue $26,540,897 $18,843,422 $17,132,920
----------- ----------- -----------
Operating expenses:
Selling and tour promotion 9,825,916 8,420,151 8,693,600
General and administrative 8,210,378 5,769,874 4,676,494
----------- ----------- -----------
18,036,294 14,190,025 13,370,094
----------- ----------- -----------
Operating income 8,504,603 4,653,397 3,762,826
----------- ----------- -----------
Other income (expense):
Interest expense (9,535) (1,515) (2,404)
Interest and dividend income 1,588,408 1,079,855 785,561
Realized and unrealized gain
(loss) on investments (1,101,526) 290,253 278,471
Other, net 647 (41,060) (7,868)
----------- ----------- -----------
477,994 1,327,533 1,053,760
----------- ----------- -----------
Income before income taxes 8,982,597 5,980,930 4,816,586
Income tax provision (benefit) 3,345,465 2,034,395 (340,708)
----------- ----------- -----------
Net income $ 5,637,132 $ 3,946,535 $ 5,157,294
=========== =========== ===========
Unaudited proforma information:
Income before income taxes $ 4,816,586
Income tax provision 1,637,639
-----------
$ 3,178,947
===========
Net income per share -
basic $ 0.83 $ 0.60 $ 0.57
=========== =========== ===========
Weighted-average shares
outstanding - basic 6,759,541 6,618,454 5,623,688
=========== =========== ===========
Net income per share -
diluted $ 0.82 $ 0.59 $ 0.56
=========== =========== ===========
Weighted-average shares
outstanding - diluted 6,893,231 6,649,884 5,647,882
=========== =========== ===========
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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Receivables
---------------------- Paid-In (Accumulat- From
Shares Amount Capital ed Deficit Shareholders Total
--------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
Stock options exercised 14,336 143 135,684 135,827
Net income 5,637,132 5,637,132
--------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 6,768,223 $ 67,682 $13,760,963 $ 8,726,895 $ 0 $22,555,540
========= =========== =========== =========== =========== ===========
</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, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- ------------
Cash flows from operating
activities:
Net income $ 5,637,132 $ 3,946,535 $ 5,157,294
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 894,963 392,403 227,039
Deferred income tax
provision (benefit) (196,297) 458,235 (340,708)
(Gain) loss on
investments 1,101,526 (290,253) (278,471)
Loss on sale of prop-
erty and equipment 15,245 880
Purchase of trading
securities (6,699,420) (7,765,969) (1,005,000)
Proceeds from sale of
trading securities 6,225,946 8,330,781 1,076,575
Change in assets and
liabilities, net of
effects of purchase
of subsidiaries:
Restricted cash
equivalents (70,000) (10,000) (5,000)
Accounts
receivable (284,316) 882,787 (468,126)
Inventory 81,201
Prepaid program
costs and
expenses 179,635 62,447 (159,397)
Accounts payable
and accrued
expenses (246,801) (564,821) (695,502)
Accrued incentive
compensation (2,403,600)
Participants'
deposits (116,226) 684,834 697,937
Customer advances (354,534)
----------- ----------- -----------
Net cash
provided by
operating
activities 6,168,054 6,127,859 1,803,041
----------- ----------- -----------
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- ------------
Cash flows from investing
activities:
Purchase of property and
equipment $(1,032,040) $ (338,072) $ (454,778)
Proceeds from sale of
property and equipment 1,220 2,500
Proceeds from sale of
available-for-sale
securities 636,684
Purchase of other
investments (200,000) (262,500)
Cash paid for acquisition
of subsidiaries, net of
cash received (199,075) (105,340)
Payment for covenant-not-
to-compete agreement (220,000) (125,000)
Redemption of life
insurance 28,950
Change in other assets (295,631) 19,766 2,147
Issuance of note
receivable (162,354)
----------- ----------- -----------
Net cash used
in investing
activities (1,472,416) (809,926) (421,181)
----------- ----------- -----------
Cash flows from financing
activities:
Payments on long-term
debt (242,352) (10,752) (9,596)
Proceeds from exercise
of stock options 135,827
Net proceeds from initial
public offering 11,983,103
Redemption and retirement
of common stock (923,937)
Shareholder distributions (6,090,756)
Repayments of notes
receivable from
shareholders 2,000,000
Origination of notes
receivable from share-
holders (2,000,000)
----------- ----------- -----------
Net cash
provided by
(used in)
financing
activities (106,525) (10,752) 4,958,814
----------- ----------- -----------
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- ------------
Net increase in cash and
cash equivalents $ 4,589,113 $ 5,307,181 $ 6,340,674
Cash and cash equivalents,
beginning of year 18,281,433 12,974,252 6,633,578
----------- ----------- -----------
Cash and cash equivalents,
end of year $22,870,546 $18,281,433 $12,974,252
=========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 9,535 $ 1,515 $ 2,404
Cash paid for income
taxes 3,688,507 1,440,000
Noncash investing and
financing activities:
Issuance of stock
for acquisition
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
Origination of note payable
for acquisition of
subsidiary 541,143
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 AND BASIS OF CONSOLIDATION
---------------------------------------
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 consolidated financial statements include the accounts of
Ambassadors International, Inc., and its subsidiaries, Ambassador
Education Group, Inc. (AEG) and Ambassador Performance Group,
Inc. (APG). AEG and APG have several wholly owned operating
subsidiaries including those described in Note 12. All
significant intercompany accounts and transactions are eliminated
in consolidation. Through AEG, the Company organizes, markets and
operates international educational travel programs on a worldwide
basis for students and adults. Through APG, the Company develops,
markets and manages performance improvement programs for a
nationwide roster of corporate clients that utilize merchandise
awards, consumer promotions and incentive travel, as well as
provides comprehensive housing, registration and travel services
for major meetings, conventions, expositions and trade shows.
During the years ended December 31, 1997, 1996 and 1995, the
Company's revenues as a percentage of total revenues were derived
from travel programs in the following geographic areas:
1996 1997 1995
---- ---- ----
Europe 34% 41% 38%
South Pacific 24% 28% 32%
China 11% 11% 19%
Other 17% 19% 7%
CREDIT RISK
-----------
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents, investments and trade accounts receivable. The
Company places its cash and temporary cash investments with high
credit quality institutions. At times, such investments may be in
excess of the federal insurance limit or at institutions which
are not covered by this insurance. The Company believes that its
primary trade accounts receivable credit risk exposure is limited
as travel program participants are required to pay for their
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CREDIT RISK, CONTINUED
----------------------
entire program costs prior to the program departure and trade
accounts receivable for non-travel related programs are
principally with large credit-worthy corporations.
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 four 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 classifies its marketable investments as trading or
available-for-sale. Trading securities consist of foreign
currency futures and forward contracts which are carried at fair
value. The Company uses foreign currency exchange contracts as
part of an overall risk-management strategy. These instruments
are used as a means of mitigating exposure to foreign currency
risk connected to anticipated travel programs. In entering into
these contracts, the Company has assumed the risk which might
arise from the possible inability of counterparties to meet the
terms of their contracts. The Company does not expect any losses
as a result of counterparty defaults. Realized and unrealized
gains and losses on these securities are recognized in the
statement of income.
Available-for-sale securities 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INVESTMENTS, CONTINUED
----------------------
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.
The Company owns a 20% interest in a company which provides
packaged tours primarily to Formula One, Indy Car and NASCAR
races. This investment is reported on the equity method. The
Company also owns a 15% interest in a joint venture. The joint
venture's purpose is the acquisition of preferred stock (which
represents 18.4% of the total outstanding stock) of a private
company. This investment is reported at the lower of cost or
estimated net realizable value.
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 operations.
GOODWILL AND COVENANTS-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 to 15 years. Costs associated with obtaining
covenants-not-to-compete are amortized using the straight-line
method over the term of the agreements, generally 5 to 10 years.
In 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets or Long-Lived Assets to be
Disposed Of." 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 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.
Revenues from the sale of merchandise are recognized when the
merchandise is shipped. Revenue from incentive programs is
deferred as customer advances until the Company's obligations are
fulfilled. Revenues are recognized from printing and
administration based upon the percentage of completion of the
related program.
Amounts reported as customer advances associated with prepaid
certificate-based merchandise incentive programs 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 costs as
incurred.
NET INCOME PER SHARE
--------------------
In February 1997, Statement of Financial Accounting Standards No.
128 (SFAS No. 128), "Earnings per Share" was issued. SFAS No. 128
established standards for computing and presenting earnings per
share (EPS). It requires the dual presentation and a
reconciliation of basic and diluted EPS. The Company adopted the
provisions of SFAS No. 128 in 1997, and all prior period EPS
calculations have been restated to conform with SFAS No. 128.
There was no effect of adopting SFAS No. 128 on EPS as previously
reported.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
NET INCOME PER SHARE, CONTINUED
-------------------------------
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.
Historical net income per share for the year ended December 31,
1995 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
year ended December 31, 1995, using common shares outstanding
after the reorganization and, including certain shares issued in
connection with the initial public offering (see Notes 10
and 11).
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.
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform with
the 1997 presentation. These reclassifications had no effect on
net income or retained earnings as previously reported.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
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. This
Statement is effective for fiscal years beginning after December
15, 1997. Management does not believe that the implementation of
SFAS No. 130 will have a material impact on the presentation of
its consolidated financial statements.
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 Statement is effective for fiscal
years beginning after December 15, 1997. Management of the
Company has not determined the disclosure to be made upon
implementation of SFAS No. 131.
2. INVESTMENTS:
TRADING SECURITIES
------------------
At December 31, 1997, the Company had foreign currency forward
contracts. The cost and fair values of these securities were as
follows:
Cost $ 0
Gross unrealized gains 374,775
Gross unrealized losses (1,049,400)
----------
Fair value (carrying value) $ (674,625)
==========
The fair value of the Company's investments in foreign currency
forward contracts is based upon the spot price of these
currencies at December 31, 1997.
There was no cost or unrealized gain or loss associated with the
Company's foreign currency contracts at December 31, 1996. Net
realized gains (losses) on investments of $(426,901), $290,253
and $7,983 for the years ended December 31, 1997, 1996 and 1995,
respectively, were included in the determination of net income.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
TRADING SECURITIES, CONTINUED
-----------------------------
AVAILABLE-FOR-SALE SECURITIES
-----------------------------
The Company's available-for-sale investments were all obtained
through the acquisition of a subsidiary on December 31, 1996 (see
Note 12). Since the acquisition was accounted for using the
purchase method of accounting, cost and market value were the
same at December 31, 1996 as follows:
Taxable fixed income securities $224,315
Equity securities 365,796
--------
$590,111
========
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31,
1997 and 1996:
1997 1996
---------- ----------
Office furniture, fixtures and
equipment $1,519,240 $1,312,516
Computer equipment 2,308,828 2,014,779
Leasehold improvements 676,065 161,301
---------- ----------
4,504,133 3,488,596
Less accumulated depreciation
and amortization (2,355,828) (1,913,110)
---------- ----------
$2,148,305 $1,575,486
========== ==========
Depreciation and amortization expense on property and equipment
of approximately $444,000, $327,000 and $227,000 for the years
ended December 31, 1997, 1996 and 1995, respectively, were
included in the determination of net income.
4. NOTE PAYABLE:
During 1997, in conjunction with one of the Company's
acquisitions, the Company agreed to pay $541,143 over three years
with quarterly principal and interest payments of $50,000. The
amount bears interest at 6.5% and the obligation is unsecured.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTE PAYABLE, CONTINUED:
At December 31, 1997, future maturities of the note payable are
as follows:
Year Ended
December 31,
------------
1998 $171,241
1999 182,808
2000 145,888
--------
$499,937
========
5. INCOME TAXES:
Effective August 4, 1995, the Company terminated its S
corporation status. As a result, the Company's earnings for the
period ended August 4, 1995 were taxed at the shareholders'
level. 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.
The provision (benefit) for income taxes for the years ended
December 31, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995
---------- ---------- ----------
Current:
Federal $3,356,949 $1,542,186
State 102,866 33,974
Deferred (114,350) 458,235 $ (340,708)
---------- ---------- ----------
$3,345,465 $2,034,395 $ (340,708)
========== ========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
Components of the net deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
December 31, 1997
-----------------------------------
Assets Liabilities Total
--------- ----------- ---------
Accrued vacation $ 44,051 $ 44,051
Depreciation $(199,614) (199,614)
Unrealized loss on
futures contracts 272,565 272,565
Amortization of good-
will and non-compete
agreements 31,782 31,782
Net operating loss
carryforwards 293,045 293,045
Customer advances (415,661) (415,661)
Inventory valuation 29,467 29,467
Other 2,202 2,202
--------- --------- ---------
Total temporary
differences and
tax attributes $ 673,112 $(615,275) $ 57,837
========= ========= =========
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 $(470,070) $(138,460)
========= ========= =========
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES, CONTINUED:
The income tax provision (benefit) for the years ended
December 31, 1997, 1996 and 1995 differ from that computed using
the federal statutory rate applied to income before income taxes
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision at the federal
statutory rate $3,054,083 34.0% $2,033,516 34.0% $1,637,639 34.0%
Tax effect of income not
subject to federal tax
due to Sub-chapter S
status (2,062,273)(42.8)
Recognition of net deferred
tax liability in
connection with S
corporation termination 83,926 1.7
Nondeductible goodwill 78,869 0.9
State income tax, net of
federal benefit 67,892 0.8
Adjustment of prior years'
taxes 104,144 1.2
Other 40,477 0.3 879
---------- ---- ---------- ---- --------- ----
$3,345,465 37.2% $2,034,395 34.0% $(340,708) (7.1)%
========== ==== ========== ==== ========= ====
</TABLE>
At December 31, 1997, the Company has acquired companies with
federal net operating loss carryforwards of approximately
$792,000, which can be used to offset future regular taxable
income. These carryforwards expire in 2011. The Company's
utilization of tax net operating loss carryforwards is currently
limited to approximately $133,000 annually, subject to earnings
from the acquired entity.
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. The Company has a program
to provide an economic 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS AND CONTINGENCIES, CONTINUED:
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 anticipated 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 $23,000,000 credit facility through July 1998
to support foreign currency purchases and foreign exchange
forward contracts.
At December 31, 1997, the Company had outstanding forward
exchange contracts to purchase foreign currencies as follows:
Currency Amount
-------- -----------
Australian dollar $ 5,273,570 (A)
French franc 1,011,638 (B)
New Zealand dollar 1,235,850 (C)
British pound 7,879,225 (B)
Australian dollar 2,036,925 (D)
-----------
$17,437,208
===========
(A) Matures in April-July 1998
(B) Matures in April-June 1998
(C) Matures in April-August 1998
(D) Matures in May 1999
At December 31, 1996, there were no unrealized gains or losses
associated with the Company's foreign currency contracts. For the
years ended December 31, 1997 and 1995, the Company recognized
unrealized foreign currency gains (losses) associated with these
financial instruments of $(674,625) and $270,488, 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. COMMITMENTS AND CONTINGENCIES, CONTINUED:
The Company leases office facilities and office equipment under
noncancelable operating leases. At December 31, 1997, future
noncancelable lease commitments, including the lease described
in Note 7, are as follows:
Year Ended
December 31,
------------
1998 $ 653,283
1999 536,131
2000 485,964
2001 449,605
2002 447,354
Thereafter 887,808
----------
$3,460,145
==========
Total rent expense for the years ended December 31, 1997, 1996
and 1995 was approximately $747,000, $503,000 and $444,000,
respectively.
In addition to the above lease commitments, the Company entered
into a new lease agreement for one of its facilities commencing
in June 1998 for $28,346 per month for seven years.
Additionally, with an acquisition in February 1998 described in
Note 12, the Company assumed a lease for $15,640 per month until
2003.
7. RELATED-PARTY TRANSACTIONS:
In 1992, the Company sold, financed and leased back its office
building and land to a partnership formed by two shareholders of
the Company, who were also officers and directors. 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,
1997, 1996 and 1995, 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.
The Company owns a 15% interest in a joint venture whose
Chairman of the Board and Chief Executive Officer is also a
Director of the Company. Also, the President of the Company is
a director of the joint venture.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCK PLANS:
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
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 Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
---------------------- ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $5,637,132 $5,242,093 $3,946,535 $3,783,749 $3,178,947 $3,032,901
========== ========== ========== ========== ========== ==========
Net income
per share -
basic $ 0.83 $ 0.78 $ 0.60 $ 0.57 $ 0.57 $ 0.54
========== ========== ========== ========== ========== ==========
Net income
per share -
diluted $ 0.82 $ 0.76 $ 0.59 $ 0.57 $ 0.56 $ 0.54
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCK PLANS, CONTINUED:
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997,
1996 and 1995:
1997 1996 1995
---------- ------------ ------------
Dividend yield 0% 0% 0%
Expected volatility 63% 84% 84%
Risk free interest
rates 6.50% 6.40%-6.44% 5.57%-5.65%
Expected option lives 9.7 years 8 years 8 years
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Average Exercise
Number of Exercise Price Expiration
Shares Price Per Share Date
--------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 -
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 2005
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 2005-
2006
Options granted 269,950 10.84 8.75-15.25 2007
Options forfeited (49,925) 9.53 9.00-11.00
Options exercised (14,336) 9.47 9.00-11.25
------- ------ -------------
Balance, December 31, 1997 447,052 $10.39 $ 8.25-15.25 2005-
======= ====== ============= 2007
Exercisable, December 31, 1997 76,326 $ 9.34
======= ======
</TABLE>
The weighted-average fair value of options granted during 1997,
1996 and 1995 were $8.32 per share, $7.95 per share and $8.41 per
share, respectively.
In addition to the stock options above, during 1997, the Company
granted an executive 50,000 shares of the Company's stock which
vests over four years. The Company incurred compensation expense
of approximately $53,000 in 1997 related to these shares.
<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. During 1996, the assets
of the plan were transferred into a new 401(k) Profit-Sharing
Plan (the Plan).
Employees are eligible to participate in the Plan upon one year
of service and 21 years of age. Employees may contribute up to
15% of their salary, subject to the maximum contribution allowed
by the Internal Revenue Service. The Company's matching
contribution is discretionary based upon approval by management.
Employees are 100% vested in their contributions and vest in
Company matching contributions equally over four years. During
the years ended December 31, 1997 and 1996, the Company
contributed approximately $26,000 and $57,000 to the Plan,
respectively. No contributions were made to the Plan in 1995.
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 (1,310 shares
of the new corporation for each share of the old corporation).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. REORGANIZATION AND INITIAL PUBLIC OFFERING,CONTINUED:
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 STATEMENT OF INCOME INFORMATION:
The pro forma statement of income for the year ended December 31,
1995 presents the pro forma effects of recording an income tax
provision for the Company as a C corporation rather than an S
corporation. The total pro forma adjustment to the historical
information for the year ended December 31, 1995 was $1,978,347.
12. BUSINESS ACQUISITIONS:
In February 1998, the Company acquired certain assets of a
meeting management company specializing in comprehensive,
integrated hotel registration and related travel services for
major meetings, conventions and trade shows. The Company is
located in Boston, Massachusetts. In February 1998, the Company
acquired all of the outstanding stock of a meeting management and
incentive travel company located in Westlake, California. The
total purchase price for these acquisitions was $7,550,000 and
192,255 shares of the Company's restricted common stock and
certain contingent consideration. The common stock issued to
effect the transactions will be recorded at fair value.
In September 1997, the Company acquired the assets of a company
located in Waconia, Minnesota. The Company organizes and operates
travel and other incentive programs, professional meetings,
conventions and seminars for businesses. The results of
operations of this business for the year ended December 31, 1996
and for the 1997 period prior to being acquired by the Company
were immaterial to the consolidated operating results of the
Company. The total purchase price of this company was $500,000 in
cash, a $541,000 note payable and certain contingent
consideration as described below. Goodwill related to this
acquisition of approximately $1,054,000 is being amortized over
15 years.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BUSINESS ACQUISITIONS, CONTINUED:
In December 1996, the Company acquired all of the outstanding
common stock of a company which is located in Minneapolis,
Minnesota, with sales offices in Des Moines, Iowa; Newport Beach
and San Francisco, California; Philadelphia, Pennsylvania; and
Fairway, Kansas. The Company administers incentive travel and
merchandise programs. In connection with this acquisition, the
Company also entered into a ten-year covenant-not-to-compete
agreement for a total of $1,200,000. This amount will be paid in
equal annual payments over eight years.
In February 1996, the Company acquired the assets of a company
which has offices in Winnebago, Illinois and Birmingham, Alabama
and provides adult travel programs. In connection with the
acquisition, the Company also entered into a covenant-not-to-
compete agreement for a total of $300,000, to be paid over 4.5
years.
In January 1996, the Company acquired all of the outstanding
stock of a meeting management and incentive travel company
located in Newport Beach, California.
All of the above acquisitions have been accounted for using the
purchase method of accounting. The results of operations of these
companies have been included in the consolidated statement of
income since their respective dates of acquisition.
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the 1996
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 - basic $ 0.55 $ 0.52
=========== ===========
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
CASH AND CASH EQUIVALENTS - The carrying value of cash and
cash equivalents approximates fair value due to the nature of
the cash investments.
INVESTMENTS - The fair value of the Company's investments in
foreign currency forward contracts is based on quoted market
prices and the spot rate of the foreign currencies subject to
contracts at year end. The fair value of the Company's foreign
currency put and call options is based on the estimated amount
to terminate the put and call contracts with the
counterparties at year end. The fair value of the Company's
investment in debt 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.
OTHER INVESTMENTS - The fair value of other investments
approximates carrying value.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS,CONTINUED:
The estimated fair values of the following financial instruments
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $22,870,546 $22,870,546 $18,281,433 $18,281,433
Investments (674,625) (674,625) 590,111 590,111
Other assets 162,354 162,354 35,513 35,513
Other investments 462,500 462,500 262,500 262,500
Financial liabilities:
Notes payable 499,937 499,937 201,146 201,146
</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.
14. EARNINGS PER SHARE:
In accordance with SFAS No. 128, the following table presents a
reconciliation of the numerators and denominators used in the
basic and diluted EPS computations. Also shown is the number of
dilutive securities (stock options) that were included in the
dilutive EPS computation.
<TABLE>
<CAPTION>
1997
----------------------------------
Weighted-
Net Average Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income per share - basic $5,637,132 6,759,541 $ 0.83
========== ========= ======
Net income per share - diluted:
Net income $5,637,132
==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. EARNINGS PER SHARE, CONTINUED:
<TABLE>
<CAPTION>
1997
----------------------------------
Weighted-
Net Average Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Weighted-average shares outstanding 6,759,541
Effect of dilutive securities 133,690
---------
6,893,231 $ 0.82
========= ======
<CAPTION>
1996
----------------------------------
Weighted-
Net Average Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income per share - basic $3,946,535 6,618,454 $ 0.60
========== ========= ======
Net income per share - diluted:
Net income $3,946,535
==========
Weighted-average shares
outstanding 6,618,454
Effect of dilutive securities 31,430
---------
6,649,884 $ 0.59
========= ======
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------
Weighted-
Net Average Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net income per share - basic $3,178,947 5,623,688 $ 0.57
========== ========= ======
Net income per share - diluted:
Net income $3,178,947
==========
Weighted-average shares
outstanding 5,623,688
Effect of dilutive securities 24,194
---------
5,647,882 $ 0.56
========= ======
</TABLE>
<PAGE>
