SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K/A
Amendment No. 2
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Date of Report (Date of Earliest Event Reported): May 22, 1998
AMBASSADORS INTERNATIONAL, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
-----------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-26420 91-1688605
------------------------ -------------------
(Commission File Number) (I.R.S. Employer
Identification No.)
Dwight D. Eisenhower Building, 110 So. Ferrall St.,
Spokane, Washington 99202
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(509) 534-6200
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
---------------------------------------------------
(Former Name or Former Address, if Changed
Since Last Report)
<PAGE>
The undersigned Registrant hereby amends, as and to the extent set
forth below, the following items, financial statements, exhibits or
other portions of the Current Report on Form 8-K for an event which
occurred on May 22, 1998:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
This item has not been amended and has been included herein for
convenience of reference only.
On May 22, 1998 (the "Closing Date"), Ambassador Performance Group,
Inc., a Delaware corporation ("APG"), a wholly owned subsidiary of
Ambassadors International, Inc. (the "Company"), acquired all of the
outstanding shares of common stock (the "Shares") of Incentive
Associates, Inc., a California corporation ("IAI"), pursuant to a
certain Agreement and Plan of Merger dated May 22, 1998 by and among
APG, the Company, IAI, Wayne Wright and Russ Medevic (the latter two
individuals collectively referred to as the "Selling Shareholders").
The Shares were acquired for $4,300,000 as follows: $1,800,000 paid
in cash (subject to adjustment as described below) and $2,500,000
delivered in the form of 85,672 shares of the Company's common stock.
The Selling Shareholders were granted certain "piggyback" registration
rights with respect to the shares they received.
For each of the twelve-month periods ending March 31, 1999, 2000,
2001, and 2002, the Company will be required to make additional
payments to the Selling Shareholders in the following amounts: (i) for
the first year, an amount equal to 80% of IAI's revenues from clients,
prospects and account executives as of the Closing Date, less program
costs ("Gross Profits"), between $2,000,000 and $3,200,000, 50% of the
Gross Profits between $3,200,000 and $4,000,000, and 15% of the Gross
Profits in excess of $4,000,000; and (ii) for each of the second,
third and fourth years, 60% of the Gross Profits between $2,200,000
and $3,000,000, 50% of the Gross Profits between $3,000,000 and
$4,000,000, and 15% of the Gross Profits in excess of $4,000,000. Each
such additional payment will be paid one-half in cash and one-half in
the Company's common stock at its market value on the date of such
payment.
The cash portion of the purchase price is subject to adjustment as
follows. Within six months after the Closing Date, a determination
will be made, as of April 1, 1998, as to the difference between (i)
the sum of cash, prepaid expenses and collected accounts receivable of
IAI and (ii) the sum of the liabilities and deposits of IAI. If the
amount calculated in (i) exceeds the amount calculated in (ii), the
Company will pay the difference to the Selling Shareholders; if the
amount calculated in (ii) exceeds the amount calculated in (i), the
Selling Shareholders will pay the difference to the Company. Of the
$1,800,000 cash portion of the purchase price required to be paid by
the Company on the Closing Date, there was a "holdback" of $50,000
until the above calculations are finalized.
<PAGE>
The purchase price for the Shares was arrived at through arms' length
negotiations between the Company and the Selling Shareholders, neither
of whom is an affiliate of the Company. The cash portion of the
purchase price came from funds raised in previous public offerings of
the Company's common stock.
IAI has been in the business of providing travel incentive, business
meeting and conference planning services from its offices in Orange
County, California. Its operations will be consolidated with those of
APG in Newport Beach, California.
The Selling Shareholders have each entered into five-year employment
agreements and non-competition agreements with APG, pursuant to which,
among other things, each was granted, as of the Closing Date, options
to purchase 7,500 shares of the Company's Common Stock, and the
opportunity to receive further options based on achievement of certain
incentive targets.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
EXHIBIT INDEX
99.1 Audited financial statements of Incentive Associates
Inc. as of and for the year ended March 31, 1998.
99.2 Unaudited condensed pro forma combined balance sheet of
Ambassadors International, Inc. and Incentive Associates
Inc. as of March 31, 1998 and condensed pro forma
combined statements of operations for the year ended
December 31, 1997 and three months ended March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized.
AMBASSADORS INTERNATIONAL, INC.
Date: August 5, 1998 /s/John A. Ueberroth
-------------- -----------------------------------
John A. Ueberroth, President
<PAGE>
EXHIBIT 99.1
------------
[PricewaterhouseCoopers LLP - Spokane, Washington letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
August 3, 1998
Board of Directors and Shareholders
Incentive Associates, Inc.
In our opinion, the accompanying balance sheet and the related
statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of
Incentive Associates, Inc. at March 31, 1998, and the results of its
operations and its cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
<PAGE>
Incentive Associates, Inc.
Balance Sheet
March 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 2,358,226
Investments, at fair value 1,004,765
Accounts receivable 1,459,303
Employee accounts receivable 8,269
Deferred income taxes 186,023
Prepaid program costs 788,538
Other prepaid expenses 5,121
-----------
Total current assets 5,810,245
Property and equipment, net 188,717
-----------
Total assets $ 5,998,962
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 925,375
Accrued compensation 684,786
Accrued expenses 171,519
Customer deposits 3,800,230
-----------
Total current liabilities 5,581,910
Deferred income taxes 10,848
-----------
Total liabilities 5,592,758
-----------
Commitments (Note 4)
Shareholders' equity:
Common stock, $2 par value, 1,000 shares
authorized, 720 shares issued and outstanding 1,440
Additional paid-in capital 57,252
Retained earnings 347,512
-----------
Total shareholders' equity 406,204
-----------
Total liabilities and shareholders' equity $ 5,998,962
===========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
INCENTIVE ASSOCIATES, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
for the year ended March 31, 1998
Sales $11,174,043
Cost of sales 8,514,295
-----------
Gross profit 2,659,748
-----------
Operating expenses:
Selling 966,032
General and administrative 2,190,825
-----------
3,156,857
-----------
Operating loss (497,109)
-----------
Other income (expense):
Interest expense (4,954)
Interest and dividend income 147,423
Loss on disposal of equipment (8,603)
Other, net 129,182
-----------
263,048
-----------
Loss before income taxes (234,061)
Income tax benefit 84,786
-----------
Net loss (149,275)
Retained earnings, beginning of year 496,787
-----------
Retained earnings, end of year $ 347,512
===========
The accompanying notes are an integral part of the financial
statements.
<PAGE>
INCENTIVE ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
for the year ended March 31, 1998
Cash flows from operating activities:
Net loss $ (149,275)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 81,724
Distribution of Company assets for employee
compensation 437,268
Purchase of trading investments (1,004,765)
Deferred income tax benefit (144,774)
Loss on sale of equipment 8,603
Change in assets and liabilities:
Accounts receivable (371,848)
Prepaid program costs 401,126
Employee accounts receivable 3,196
Prepaid expenses 2,678
Accounts payable and accrued expenses 259,498
Customer deposits 1,793,164
-----------
Net cash provided by operating activities 1,316,595
-----------
Cash flows from investing activities:
Purchase of property and equipment (156,020)
Proceeds from sale of property and equipment 400
Proceeds from notes receivable 31,696
-----------
Net cash used in investing activities: (123,924)
-----------
Net increase in cash and cash equivalents 1,192,671
Cash and cash equivalents, beginning of year 1,165,555
-----------
Cash and cash equivalents, end of year $ 2,358,226
===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 4,954
Cash paid for income taxes 24,804
Noncash investing activities:
Vehicles, life insurance and note receivable
contributed to employees as compensation 437,268
The accompanying notes are an integral part of the financial
statements.
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
------------
Incentive Associates, Inc. (the Company) was incorporated on
May 13, 1983 in the state of California. The Company develops,
markets and manages performance improvement programs nationwide
for corporate clients that utilize merchandise awards, consumer
promotions and incentive travel. The Company also provides
comprehensive housing, registration and travel services for
meetings and conventions.
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's investments are with pseudo-governmental agencies,
and therefore, the Company believes its credit risk exposure is
limited. The Company believes that its primary trade accounts
receivable credit risk exposure is limited as incentive program
customers are required to pay for their entire program costs
prior to the program convening.
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.
Investments
-----------
The Company classifies its investments in Federal Home Loan
Mortgage Notes and Federal Farm Credit Bank Notes as trading
securities. These securities are carried at fair value. The
investments held at March 31, 1998 matured in May 1998.
Realized and unrealized gains and losses on these securities
are recognized in the statement of operations. Realized gains
and losses on the sale of investments are recognized on a
specific identification basis in the statement of operations in
the period the investments are sold.
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
Accounts Receivable and Sales Concentration
-------------------------------------------
The Company's sales are concentrated in a limited number of
large companies, principally located in the western United
States. During the year ended March 31, 1998, 83% of the
Company's revenues were derived from incentive programs in
North America.
Sales to three customers comprised 45%, 12% and 9% of total
revenues for the year ended March 31, 1998. At March 31, 1998,
these customers represented approximately 30%, 22% and 16%,
respectively, of total accounts receivable.
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.
Revenue Recognition
-------------------
For incentive programs, the Company bills customers in advance
and records such amounts as customers' deposits. Additionally,
the Company pays for certain direct program costs such as
airfare, hotel and other program costs in advance of the
departure and records these amounts as prepaid program costs.
The Company recognizes revenue and related costs associated
with its programs when the program convenes.
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.
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
New Accounting Pronouncement
----------------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income",
was issued. This Statement requires that comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. This Statement
does not require a specific format for the financial statement,
but requires that an enterprise display net income as a
component of comprehensive income in the financial statement.
Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. The
classifications of comprehensive income under current
accounting standards include foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses
on certain investments in debt and equity securities. 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 financial statements.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at March 31,
1998:
Office furniture $ 129,120
Computer equipment 201,401
Leasehold improvements 24,241
---------
354,762
Less accumulated depreciation and
amortization (166,045)
---------
$ 188,717
=========
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INCOME TAXES:
The provision (benefit) for income taxes for the year ended
March 31, 1998 consisted of the following:
Current:
Federal $ 44,890
State 15,098
Deferred:
Federal (119,118)
State (25,656)
---------
$ (84,786)
=========
Components of the deferred tax assets and liabilities as of
March 31, 1998 are as follows:
Assets Liabilities Total
-------- ----------- --------
Accrued vacation $ 11,950 $ 11,950
Depreciation $(10,848) (10,848)
Accrued bonus 174,073 174,073
-------- -------- --------
$186,023 $(10,848) $175,175
======== ======== ========
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 generation of taxable
income. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset
will be utilized.
The income tax benefit for the year ended March 31, 1998 differs
from that computed using the federal statutory rate applied to
loss before income taxes as follows:
Amount %
-------- -------
Benefit at the federal statutory rate $(79,580) (34.0)%
State income tax benefit, net of
federal effect (15,692) (6.7)
Officers' life insurance 7,834 3.4
Other 2,652 1.1
-------- -----
$(84,786) (36.2)%
======== =====
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS:
At March 31, 1998, the Company leased its office building from a
shareholder of the Company. In connection with the sale of the
Company (see Note 8), the lease was terminated without penalty
effective August 31, 1998. For the year ended March 31, 1998, the
Company incurred rent expense of approximately $112,000 under this
lease. The Company also leases a storage facility under a
noncancelable operating lease. Total rent expense for the year
ended March 31, 1998 for the lease was approximately $14,000.
At March 31, 1998, future noncancelable lease commitments for both
of these facilities, after considering the August 1998 termination
of the office facility lease, is approximately $55,000 for the year
ending March 31, 1999.
5. RELATED-PARTY TRANSACTIONS:
In addition to the related-party transaction described in Note 4,
during the year ended March 31, 1998, the Company had an
outstanding loan to a shareholder for $267,897. This loan, bearing
interest at 8.5%, was paid in full on March 31, 1998. The Company
recognized approximately $23,000 of interest income from the loan
during fiscal 1998.
6. EMPLOYEE BENEFIT PLAN:
The Company has an employee savings plan under Section 401(k) (the
Plan) of the Internal Revenue Code. Substantially all employees
are eligible to participate in the plan subject to certain
restrictions. Employees may contribute up to the maximum
contribution allowed by the Internal Revenue Service, which was
$9,500 for the calendar year 1997. The Company matches employees'
contributions up to 3% of their salaries. Employees are 100%
vested in their contributions and vest in Company matching
contributions equally over six years. During the year ended
March 31, 1998, the Company contributed approximately $46,000 to
the Plan.
<PAGE>
INCENTIVE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. LINE-OF-CREDIT AND LETTER OF CREDIT AGREEMENTS:
At March 31, 1998, the Company had a $370,000 line-of-credit
agreement with a bank. Any amounts outstanding under the agreement
bear interest at a variable rate of prime plus 1.0% (9.5% at
March 31, 1998). The Company also had a $70,000 letter of credit
available to support airfare purchase agreements. These agreements
expire in March 1999. At March 31, 1998, no amounts were
outstanding under either of these agreements.
8. SUBSEQUENT EVENT:
In May 1998, all of the outstanding shares of common stock of the
Company were sold to Ambassador Performance Group, Inc., a wholly
owned subsidiary of Ambassadors International, Inc. (AII) for
$1,800,000, an amount equal to "cash book value", (as defined),
85,672 shares of AII's common stock and additional consideration.
The additional consideration is contingent upon the Company's
achieving certain pre-established levels of earnings. If gross
profits are $4 million for each of the years ending March 31, 1999,
2000, 2001 and 2002, the additional consideration would be $4.3
million. However, the amounts will be reduced if gross profits are
less than $4 million. AII is a publicly traded company that
organizes, markets and operates international travel programs and
also engages in corporate incentive travel programs.
<PAGE>
EXHIBIT 99.2
------------
CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION
The following condensed pro forma combined balance sheet and condensed
pro forma combined statement of operations, collectively, the "Pro
Forma Financial Statements", were prepared by Ambassadors
International, Inc. ("Ambassadors") to illustrate the estimated
effects of the business combination to be accounted for as a purchase
under generally accepted accounting principles. Accordingly, the
financial information of Ambassadors and Incentive Associates Inc.
("Incentive") has been combined as if the acquisition occurred at the
beginning of the period presented for purposes of the condensed pro
forma combined statements of operations, and as of March 31, 1998, for
purposes of the condensed pro forma combined balance sheet. There are
no differences between Ambassadors' and Incentive's accounting
policies which are expected to have a material impact on the pro forma
combined financial statements. The Pro Forma Financial Statements do
not purport to represent what the combined financial position or
results of operations would have been if the combination had occurred
at the beginning of the period or to project the combined financial
position or results of operations for any future date or period.
The Pro Forma Financial Statements should be read in conjunction with
the historical consolidated financial statements, including the notes
thereto, of Ambassadors, which are included in Ambassadors'
Form 10-K/A for the year ended December 31, 1997, Ambassadors' Form
10-Q for the three months ended March 31, 1998 and of Incentive, which
are included elsewhere in this document.
The Pro Forma Financial Statements are presented utilizing the
purchase method of accounting whereby the excess of the total purchase
price over the fair value of the assets acquired and liabilities
assumed of Incentive is recorded as goodwill. The combined pro forma
results of operations presented herein are not necessarily indicative
of the future results of operations.
<PAGE>
Condensed Pro Forma Combined Balance Sheet
at March 31, 1998
<TABLE>
<CAPTION>
Ambassadors Incentive Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $30,027,666 $ 2,358,226 $(2,028,335) (A) $30,357,557
Restricted cash 125,000 125,000
Investments 1,004,765 1,004,765
Accounts receivable 1,743,305 1,467,572 3,210,877
Inventory 79,501 79,501
Prepaid program costs and
expenses 5,025,226 793,659 5,818,885
Deferred income taxes 31,229 186,023 217,252
Other assets 423,478 423,478
----------- ----------- ----------- -----------
Total current assets 37,455,405 5,810,245 (2,028,335) 41,237,315
Property and equipment, net 2,508,735 188,717 2,697,452
Other investments 462,500 462,500
Goodwill 15,598,699 3,872,131 (B) 19,470,830
Other assets 118,442 118,442
Deferred income taxes 26,608 26,608
----------- ----------- ----------- -----------
Total assets $56,170,389 $ 5,998,962 $ 1,843,796 $64,013,147
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities:
Accounts payable $ 2,024,727 $ 925,375 $ 2,950,102
Accrued expenses 483,597 856,305 1,339,902
Participants' deposits 27,038,978 3,800,230 30,839,208
Customer advances 892,142 892,142
Notes payable, current
portion 145,201 145,201
Unrealized loss on foreign
currency exchange contracts 511,808 511,808
----------- ----------- ----------- -----------
Total current liabilities 31,096,453 5,581,910 36,678,363
Notes payable due after one year 357,239 357,239
Deferred income taxes 10,848 10,848
----------- ----------- ----------- -----------
Total liabilities 31,453,692 5,592,758 37,046,450
----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 69,773 1,440 $ (1,440) (A) 70,630
Common stock 857 (A)
Additional paid-in capital 17,216,061 57,252 (57,252) (A) 19,465,204
Additional paid-in capital 2,249,143 (A)
Retained earnings 7,430,863 347,512 (347,512) 7,430,863
----------- ----------- ----------- -----------
Total shareholders'
equity 24,716,697 406,204 1,843,796 26,966,697
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $56,170,389 $ 5,998,962 $ 1,843,796 $64,013,147
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this condensed
pro forma combined balance sheet.
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET
The following adjustments were made to reflect the combination of
Ambassadors and Incentive as if it occurred March 31, 1998:
(A) All of the outstanding shares of common stock of Incentive were
acquired for a total purchase price of $1,800,000 cash, an amount
equal to "cash book value" (as defined) and 85,672 shares of
common stock. The fair value of the common stock was determined
to be $2,250,000. The value represented a 10% discount from the
average closing price for the 10 days preceding the close of the
transaction due to the restricted nature of the stock.
Additionally, each of the two shareholders of Incentive were
granted options to purchase 7,500 shares of Ambassadors' stock.
(B) Goodwill was recorded for the excess of the purchase price over
the fair value of the assets acquired and liabilities assumed of
Incentive as follows:
Total purchase price $ 4,278,335
Fair value of assets acquired (5,998,962)
Fair value of liabilities assumed 5,592,758
-----------
$ 3,872,131
===========
For each of the twelve-month periods ending March 31, 1999, 2000,
2001, and 2002, the Company will make additional payments to the
Selling Shareholders in the following amounts: (i) for the first
year, an amount equal to 80% of IAI's revenues from clients,
prospects and account executives as of the Closing Date, less
program costs ("Gross Profits"), between $2,000,000 and $3,200,000,
50% of the Gross Profits between $3,200,000 and $4,000,000, and 15%
of the Gross Profits in excess of $4,000,000; and (ii) for each of
the second, third and fourth years, 60% of the Gross Profits between
$2,200,000 and $3,000,000, 50% of the Gross Profits between
$3,000,000 and $4,000,000, and 15% of the Gross Profits in excess of
$4,000,000. Each such additional payment will be paid one-half in
cash and one-half in the Company's common stock at its market value
on the date of such payment.
<PAGE>
Condensed Pro Forma Combined Statement of Operations
<TABLE>
<CAPTION>
Ambassadors Incentive
Historical Historical
(for the (for the
year ended year ended
December 31, March 31, Pro Forma Pro Forma
1997) 1998) Adjustments Combined
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $26,540,897 $ 2,659,748 $29,200,645
----------- ----------- ----------- -----------
Operating expenses:
Selling and tour promotion 9,825,916 966,032 10,791,948
General and administrative 8,210,378 2,190,825 $ 193,607 (A) 9,346,634
(1,248,176) (B)
----------- ----------- ----------- -----------
18,036,294 3,156,857 (1,054,569) 20,138,582
----------- ----------- ----------- -----------
Operating income (loss) 8,504,603 (497,109) 1,054,569 9,062,063
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (9,535) (4,954) (14,489)
Interest and dividend income 1,588,408 147,423 1,735,831
Realized and unrealized loss
on investments (1,101,526) (1,101,526)
Other, net 647 120,579 121,226
----------- ----------- ----------- -----------
477,994 263,048 741,042
----------- ----------- ----------- -----------
Income (loss) before income
taxes 8,982,597 (234,061) 1,054,569 9,803,105
Income tax provision
(benefit) 3,345,465 (84,786) 366,470 (C) 3,627,149
----------- ----------- ----------- -----------
Net income (loss) $ 5,637,132 $ (149,275) $ 688,099 $ 6,175,956
=========== =========== =========== ===========
Net income per share - basic $ 0.83 $ 0.90
=========== ===========
Weighted-average shares out-
standing - basic 6,759,541 6,845,213
=========== ===========
Net income per share - diluted $ 0.82 $ 0.88
=========== ===========
Weighted-average shares out-
standing - diluted 6,893,231 6,993,903
=========== ===========
</TABLE>
The accompanying notes are an integral part of this condensed
pro forma combined statement of operations.
<PAGE>
Condensed Pro Forma Combined Statement of Operations
for the three months ended March 31, 1998
<TABLE>
<CAPTION>
Ambassadors Incentive Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 3,020,714 $ 1,124,732 $ 4,145,446
----------- ----------- ----------- -----------
Operating expenses:
Selling and tour promotion 2,745,125 167,479 2,912,604
General and administrative 2,806,352 545,205 $ 48,402 (A) 3,108,476
(291,483) (B)
----------- ----------- ----------- -----------
5,551,477 712,684 (243,081) 6,021,080
----------- ----------- ----------- -----------
Operating income (loss) (2,530,763) 412,048 243,081 (1,875,634)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (5,367) (1,061) (6,428)
Interest and dividend income 315,372 55,653 371,025
Realized and unrealized loss
on investments 162,817 162,817
Other, net 747 61,672 62,419
----------- ----------- ----------- -----------
473,569 116,264 589,833
----------- ----------- ----------- -----------
Income (loss) before income
taxes (2,057,194) 528,312 243,081 (1,285,801)
Income (loss) tax provision
(benefit) (761,162) 195,476 89,939 (C) (475,747)
----------- ----------- ----------- -----------
Net income (loss) $(1,296,032) $ 332,836 $ 153,142 $ (810,054)
=========== =========== =========== ===========
Net income (loss) per share -
basic $ (0.19) $ 0.12
=========== ===========
Weighted-average shares out-
standing - basic 6,888,501 6,974,173
=========== ===========
Net income (loss) per share -
diluted $ (0.19) $ 0.12
=========== ===========
Weighted-averages shares out-
standing - diluted 6,888,501 6,989,173
=========== ===========
</TABLE>
The accompanying notes are an integral part of this condensed
pro forma combined statement of operations.
<PAGE>
NOTES TO CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following adjustments were made to reflect the combination of
Ambassadors and Incentive as if it occurred as of the beginning of the
periods presented. The combined pro forma results of operations
presented herein are not necessarily indicative of the future results
of operations of the combined companies.
(A) Represents the amortization of goodwill associated with the
Incentive business combination on a straight-line basis over 20
years. The purchase price includes contingent consideration (see
Note B to condensed pro forma combined balance sheet). If the
gross profit goal of $4,000,000 for the recognition of purchase
price is achieved for each of the twelve-month periods ending
March 31, 1999, 2000, 2001 and 2002, total additional payments
would be approximately $4,300,000. The additional payments would
increase the amortization expense related to goodwill and
decrease the annual income before taxes by approximately
$215,000, decrease net income by $135,000 and decrease basic and
diluted earnings per share by $0.02.
(B) Represents a reduction in the historical compensation due to
employment contracts entered into with the selling shareholders.
The former shareholders of Incentive have entered into employment
agreements with APG which provide for established base salaries
and a performance bonus payable based upon a minimum established
level of gross profit. The pro forma adjustment assumes the
bonus amount established under terms of the agreement is earned.
The Company may at its discretion pay an additional bonus.
(C) Represents estimated income taxes related to the pro forma
adjustments.
<PAGE>
