UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file number 0-26420
-------
AMBASSADORS INTERNATIONAL, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1688605
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Dwight D. Eisenhower Building
110 South Ferrall Street
Spokane, Washington 99202
------------------------------- -----------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (509) 534-6200
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
----- -----
Indicate number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common shares outstanding as of July 31, 1999: 9,727,390
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1999 and December 31,
1998
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the Three
and Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,110,939 $ 55,289,580
Restricted cash equivalents 152,000 152,000
Investments 80,180,333 37,659,994
Accounts receivable 8,024,500 4,371,898
Prepaid program costs and expenses 21,528,530 4,637,121
Other assets 41,024 159,158
------------ ------------
Total current assets 135,037,326 102,269,751
Property, plant and equipment, net 4,733,668 4,199,889
Other investments 3,156,806 462,500
Goodwill, net of $1,778,541 and
$1,285,950 of accumulated
amortization 26,905,208 20,401,794
Covenants-not-to-compete, net of
$476,172 and $370,047 of
accumulated amortization 248,828 254,953
Other assets 141,140 142,897
------------ ------------
Total assets $170,222,976 $127,731,784
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited), Continued
June 30, 1999 and December 31, 1998
June 30, December 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,695,556 $ 2,348,759
Accrued expenses 15,398,520 942,047
Participants' deposits 41,279,939 15,742,697
Customer advances 739,760 744,077
Note payable, current portion 95,795 185,851
Foreign currency exchange contracts 375,325 289,322
Deferred income taxes 264,836 284,957
------------ ------------
Total current liabilities 60,849,731 20,537,710
Notes payable, due after one year 180,948 145,243
------------ ------------
Total liabilities 61,030,679 20,682,953
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value;
2,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding, 9,728,351
and 9,915,534 shares 97,283 99,155
Additional paid-in capital 86,894,065 90,043,060
Retained earnings 22,448,664 17,088,888
Accumulated other comprehensive loss (247,715) (182,272)
------------ ------------
Total stockholders' equity 109,192,297 107,048,831
------------ ------------
Total liabilities and stock-
holders' equity $170,222,976 $127,731,784
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Income (Unaudited)
for the three and six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $22,017,516 $19,363,531 $17,037,516 $16,342,817
----------- ----------- ----------- -----------
Operating expenses:
Selling and tour promotion 7,791,080 6,653,455 3,848,606 3,908,330
General and administrative 8,876,656 6,279,898 4,469,850 3,473,546
----------- ----------- ----------- -----------
16,667,736 12,933,353 8,318,456 7,381,876
----------- ----------- ----------- -----------
Operating income 5,349,780 6,430,178 8,719,060 8,960,941
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (21,625) (14,798) (21,302) (9,430)
Interest and dividend income 2,077,344 1,498,628 1,122,363 1,183,256
Realized and unrealized loss on
investments (1,251) (25,787) -- (189,350)
Other, net 713,413 (171) 119,403 (57)
----------- ----------- ----------- -----------
2,767,881 1,457,872 1,220,464 984,419
----------- ----------- ----------- -----------
Income before income taxes 8,117,661 7,888,050 9,939,524 9,945,360
Provision for income taxes 2,757,885 2,916,554 3,399,438 3,677,716
----------- ----------- ----------- -----------
Net income $ 5,359,776 $ 4,971,496 $ 6,540,086 $ 6,267,644
=========== =========== =========== ===========
Net income per share - basic $ 0.55 $ 0.63 $ 0.68 $ 0.70
=========== =========== =========== ===========
Weighted-average common shares out-
standing - basic 9,759,765 7,949,868 9,687,857 8,999,573
=========== =========== =========== ===========
Net income per share - diluted $ 0.55 $ 0.61 $ 0.67 $ 0.67
=========== =========== =========== ===========
Weighted-average common shares out-
standing - diluted 9,822,181 8,213,676 9,743,741 9,293,804
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 5,359,776 $ 4,971,496 $ 6,540,086 $ 6,267,644
Unrealized gains (losses)
on foreign currency
exchange contracts, net
of tax (65,443) -- 45,343 --
----------- ----------- ----------- -----------
Comprehensive income $ 5,294,333 $ 4,971,496 $ 6,585,429 $ 6,267,644
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1999 and 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 5,359,776 $ 4,971,496
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,175,552 874,384
Loss on investments 1,251 25,787
Loss on disposal of property and
equipment 30,035 --
Compensation expense on stock
grants 98,437 98,437
Change in assets and liabilities,
net of effects of purchases of
subsidiaries:
Accounts receivable (2,353,609) 1,823,142
Prepaid program costs and
expenses (16,202,911) (12,302,696)
Other assets 118,134 228,367
Accounts payable and accrued
expenses 14,640,370 7,985,317
Participants' deposits 19,952,278 16,975,980
Customer advances (4,317) (124,203)
----------- -----------
Net cash provided by
operating activities 22,814,996 20,556,011
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (963,542) (751,991)
Purchase of available-for-sale
securities (63,872,009) --
Proceeds from sale of available-for-
sale securities 21,350,858 --
Purchase of other investments (2,655,035) --
Cash paid for acquisitions of
subsidiaries, net of cash received (2,901,730) (4,090,385)
Payment for covenant-not-to-compete (100,000) (112,500)
Payments received on note receivable -- 162,237
Change in other assets 1,757 --
----------- -----------
Net cash used in investing
activities (49,139,701) (4,792,639)
----------- -----------
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited), Continued
for the six months ended June 30, 1999 and 1998
1999 1998
------------ ------------
Cash flows from financing activities:
Payment of notes payable $ (54,351) $ (138,597)
Cash received from exercise of
stock options 117,915 109,865
Net proceeds from sale of common
stock -- 70,347,971
Purchase and retirement of common
stock (3,917,500) --
------------ ------------
Net cash provided by
(used in) financing
activities (3,853,936) 70,319,239
------------ ------------
Net increase (decrease) in cash and
cash equivalents (30,178,641) 86,082,611
Cash and cash equivalents, beginning
of period 55,289,580 22,870,546
------------ ------------
Cash and cash equivalents, end of
period $ 25,110,939 $108,953,157
============ ============
Noncash investing and financing
activities:
Common shares issued for
acquisition of subsidiaries $ 800,000 $ 5,693,438
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by Ambassadors International, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have
been condensed or omitted as permitted by such rules and
regulations. The Company believes the disclosures included herein
are adequate; however, these consolidated financial statements
should be read in conjunction with the financial statements and
the notes thereto for the year ended December 31, 1998 previously
filed with the Securities and Exchange Commission on Form 10-K.
In the opinion of management, these unaudited, consolidated
financial statements contain all of the adjustments (normal and
recurring in nature) necessary to present fairly the consolidated
financial position of the Company at June 30, 1999, the
consolidated results of operations and comprehensive income for
the three- and six-month periods ended June 30, 1999 and 1998 and
the consolidated cash flows for the six-month periods ended June
30, 1999 and 1998. The results of operations for the periods
presented may not be indicative of those which may be expected for
the full year.
2. PRINCIPLES OF CONSOLIDATION
The Company was founded in 1967 and was reincorporated in Delaware
in 1995. The Company's Education Group represented the entire
operations of the Company until 1996 when the Performance Group
commenced operations.
The consolidated financial statements include the accounts of
Ambassadors International, Inc. (the Company) and its
subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
3. 1999 ACQUISITIONS
In June 1999, the Company acquired certain assets of a company
primarily engaged in providing youth sports travel programs. The
total purchase price for this company consisted of cash and shares
of the Company's restricted common stock and certain contingent
consideration. The common stock issued to effect the transaction
was recorded at estimated fair value.
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 1999 ACQUISITIONS, CONTINUED
The contingent consideration to be paid is dependent upon the
success of the acquired company's 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.
The acquisition was accounted for using the purchase method of
accounting. The results of operations of the acquisition have
been included in the consolidated statement of income since the
date of acquisition.
4. EARNINGS PER SHARE
Net income per share - basic is computed by dividing net income by
the weighted-average number of common shares outstanding during
the period. Net income per share - diluted is computed by
increasing the weighted-average number of common shares
outstanding by the additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued.
The following table presents a reconciliation of basic and diluted
earnings per share (EPS) computations.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and
diluted earnings per share $5,359,776 $4,971,496 $6,540,086 $6,267,644
========== ========== ========== ==========
Denominator:
Weighted-average shares
outstanding - basic 9,759,765 7,949,868 9,687,857 8,999,573
Effect of dilutive common
stock options 62,416 263,808 55,884 294,231
---------- ---------- ---------- ----------
Weighted-average shares
outstanding - diluted 9,822,181 8,213,676 9,743,741 9,293,804
========== ========== ========== ==========
Earnings Per Share:
Net income per share - basic $ 0.55 $ 0.63 $ 0.68 $ 0.70
========== ========== ========== ==========
Net income per share -
diluted $ 0.55 $ 0.61 $ 0.67 $ 0.67
========== ========== ========== ==========
</TABLE>
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BUSINESS SEGMENTS:
The Company operates the Education Group segment and the
Performance Group segment. Corporate and other consists of general
corporate and other activities which are not directly related to
the Education or Performance Groups. Selected financial
information related to these segments is as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Education Group $12,242,613 $12,552,577 $11,983,453 $11,751,021
Performance Group 9,658,526 6,797,878 4,959,712 4,578,720
Corporate and Other 116,377 13,076 94,351 13,076
----------- ----------- ----------- -----------
Total $22,017,516 $19,363,531 $17,037,516 $16,342,817
=========== =========== =========== ===========
Operating Income (Loss):
Education Group $ 5,859,885 $ 6,591,397 $ 8,795,706 $ 8,577,094
Performance Group 869,228 1,035,324 559,990 1,020,075
Corporate and Other (1,379,333) (1,196,543) (636,636) (636,228)
----------- ----------- ----------- -----------
$ 5,349,780 $ 6,430,178 $ 8,719,060 $ 8,960,941
=========== =========== =========== ===========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking
statements. A forward-looking statement may contain words such as
"will continue to be," "will be," "continue to," "expect to,"
"anticipates that," "to be" or "can impact." Management cautions that
forward-looking statements are subject to risks and uncertainties that
could cause the Company's actual results to differ materially from
those projected in forward-looking statements.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS
ENDED JUNE 30, 1998
In 1998, the Company acquired five companies. In February 1998,
Ambassadors Performance Group (APG or the Performance Group) acquired
certain of the assets of Rogal America Co. and also merged with Travel
Incentives, Inc. APG and Incentive Associates, Inc. merged in April
1998, and APG also acquired the assets of Destination, Inc. in July
1998. All of these acquisitions were included in the Performance
Group's results of operations as of their respective dates of
acquisition.
In May 1998, Ambassadors Specialty Group acquired the assets of
International Golf Safaris and included the acquisition in the
Company's results of operations as of the date of acquisition.
In June 1999, Ambassadors Sports Group acquired the assets of Travel
Dynamics, Inc. and included the acquisition in the Company's results
of operations as of the date of acquisition.
GROSS PROGRAM RECEIPTS
----------------------
Gross program receipts increased to $56.9 million in the second
quarter of 1999 from $49.5 million in the second quarter of 1998.
This $7.4 million increase is primarily the result of the
establishment of new sales offices during 1998 resulting in 1999
revenue combined with a decrease in gross program receipts from the
Ambassadors Education Group (AEG or the Education Group) as a result
of concerns over the military action in Kosovo as well as
international unrest exemplified by the State Department's warnings on
travel to China.
NET REVENUE
-----------
Net revenue increased to $17.0 million in the second quarter of 1999
from $16.3 million in 1998. This $0.7 million increase is due to the
effect of increased programs and revenue from the Company's
acquisitions during 1998, as well as maintaining consistently
strong gross margins of 36% of net revenues in 1999 and 35% of net
revenues in 1998 within the Education Group.
<PAGE>
SELLING AND TOUR PROMOTION EXPENSES
-----------------------------------
The Company's policy is to expense all selling and tour promotion
costs as they are incurred. Selling and tour promotion expenses
remained relatively flat at $3.8 million in the quarter ended June 30,
1999 in comparison to $3.9 million in the comparable quarter of 1998.
This minor decrease is the result of efficiencies achieved from
incorporating the prior acquisitions into the Company's operations.
GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses increased to $4.5 million in the
second quarter of 1999 from $3.5 million during the quarter ended
June 30, 1998. This increase is primarily due to the acquisitions in
1998 and the assumption of the related general and administrative
expenses associated with supporting an increased number of programs.
OTHER INCOME/EXPENSE
--------------------
Other income in 1999 consisted primarily of interest income generated
by cash and cash equivalents. The Company realized interest income of
$1.1 million in the second quarter of 1999, compared to $1.2 million
in the comparable quarter of 1998.
INCOME TAXES
------------
The Company has recorded an income tax provision of approximately $3.4
million for the quarter ended June 30, 1999 in comparison to a $3.7
million tax provision for the quarter ended June 30, 1998. Income tax
provisions have been recorded based upon the estimated effective
income tax rate applied to the pre-tax income.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED
JUNE 30, 1998
GROSS PROGRAM RECEIPTS
----------------------
Gross program receipts increased to $73.3 million in the six-month
period ended June 30, 1999 from $58.8 million in the same period of
1998. This $14.5 million increase is primarily the result of the
establishment of new sales offices during 1998 resulting in 1999
revenue combined with reduced gross program receipts from the
Education Group as a result of concerns over the military action in
Kosovo as well as international unrest exemplified by the State
Department's warnings on travel to China.
<PAGE>
NET REVENUE
-----------
Net revenue increased to $22.0 million in the six-month period ended
June 30, 1999 from $19.4 million in the same period of 1998. This
$2.6 million increase is due to the effect of increased programs and
revenue from the Company's acquisitions during 1998 as well as the
establishment of new sales offices in 1998 resulting in 1999 revenue.
SELLING AND TOUR PROMOTION EXPENSES
-----------------------------------
The Company's policy is to expense all selling and tour promotion
costs as they are incurred.
Selling and tour promotion expenses increased to $7.8 million in the
six-month period ended June 30, 1999 from $6.7 million in the
comparable period of 1998. This increase is primarily the result of
the 1998 acquisitions and the assumption of the marketing and selling
expenses of those companies to support an increased customer and
revenue base.
GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses increased to $8.9 million in the
six-month period ended June 30, 1999 from $6.3 million during the same
period of 1998. This increase is primarily due to the acquisitions in
1998 and the assumption of the related general and administrative
expenses associated with supporting an increased number of programs.
OTHER INCOME/EXPENSE
--------------------
Other income in 1999 consisted primarily of interest income generated
by cash and cash equivalents. As of June 30, 1999, the Company had
$105.3 million in cash, cash equivalents and short term investments.
These interest earning assets exist primarily as a result of the
Company's secondary offering of common stock in April 1998, in which
the Company realized net proceeds of $70.3 million. As a result of
these investments, the Company realized interest income of $2.1
million in the six-month period ended June 30, 1999, compared to $1.5
million in the comparable period of 1998, an increase of $0.6 million.
Other income also included unrealized foreign currency gains or losses
during 1998. The Company enters into forward foreign exchange
contracts and foreign currency option contracts to offset certain
operational exposures from changes in foreign currency exchange rates.
These foreign exchange contracts and options are entered into to
support normal recurring purchases, and accordingly are not entered
into for speculative purposes. Forward foreign exchange contracts are
utilized to manage the risk associated with currency fluctuations on
certain purchase commitments. Beginning July 1, 1998, the Company
adopted the provisions of Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." Therefore, the effective portion of any unrealized gains
<PAGE>
or losses on foreign exchange contracts are no longer recorded in
other income, but are recorded as other comprehensive income and are
accumulated as a component of stockholders' equity. Realized gains
and losses on these contracts are recorded as a cost of the related
travel program when the contracts mature and are utilized. Prior to
July 1, 1998, all unrealized gains and losses on foreign exchange
contracts and options were recorded in the statement of operations as
other income or expense.
In January 1999, the Company purchased a minority interest in a joint
venture in connection with the acquisition by that joint venture of
all of the capital stock of Scheduled Airlines Traffic Offices, Inc.
The Company received a consulting fee related to this transaction.
The Company also entered into a management agreement as part of this
purchase, whereby the Company receives quarterly management consulting
fees. The consulting fee and quarterly management consulting fee have
been included in other income.
INCOME TAXES
------------
The Company has recorded an income tax provision of approximately $2.8
million for the six-month period ended June 30, 1999 in comparison to
a $2.9 million tax provision for the period ended June 30, 1998.
Income tax provisions have been recorded based upon the estimated
effective income tax rate applied to the pre-tax income.
SEASONALITY
-----------
Due to the seasonality of the Education Group's business, the first
quarter of the fiscal year has significantly fewer programs traveling
then the other quarters of the year. Accordingly, the Company's
revenues, operating income and cash flow are lower during the first
quarter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's business is not capital intensive. However, the Company
does retain funds for operating purposes in order to conduct sales and
marketing efforts for future programs and to facilitate acquisitions
of other companies.
Net cash provided by operations for the six months ended June 30, 1999
and 1998 was approximately $22.8 million and $20.6 million,
respectively. The increase in operating cash flows from 1998 to 1999
can be attributed to the advanced timing and increased volume of cash
receipts from Education Group participants and the increase in program
participation from companies which the Performance Group acquired in
1998.
Net cash used in investing activities for the six months ended
June 30, 1999 and 1998 was $49.1 million and $4.8 million,
respectively. The net cash used in investing activities increased in
1999 primarily due to the net increase in investments. The Company
does not have any material capital expenditure commitments for 1999.
<PAGE>
However, the terms of the Company's acquisitions of certain businesses
include contingent consideration. Additionally, the Company is
continuing to pursue further acquisitions of related travel and
performance improvement businesses that may require the use of cash
and cash equivalents. No such acquisitions are currently pending and
no assurance can be given that definitive agreements for any such
acquisitions will be entered into, or, if they are entered into, that
they will be on terms favorable to the Company.
The Company has a credit facility available with Seafirst Bank, with a
current limit of up to $50.0 million for foreign currency purchases
and forward contracts. This credit facility is renewable annually.
In November 1998, the Board of Directors of the Company authorized the
repurchase of the Company's common stock (up to an approved amount) in
the open market or through private transactions. This repurchase
program is ongoing. The Company does not believe that any such
repurchases will have a significant impact on the Company's liquidity.
At June 30, 1999, the Company had approximately $105.3 million of cash
and cash equivalents, including program participant funds of $41.3
million. Under the Company's cancellation policy, a program
participant may be entitled to a refund of a portion of his or her
deposit, less certain fees, depending on the time of cancellation.
Management believes that existing cash and cash equivalents and cash
flows from operations will be sufficient to fund the Company's
anticipated operating needs, capital expenditures, stock repurchases
and acquisitions at least for the ensuing year.
FOREIGN CURRENCY; HEDGING POLICY
---------------------------------
The substantial majority of the Company's travel programs take place
outside the United States and most foreign suppliers require payment
in currency other than the U.S. dollar. Accordingly, the Company is
exposed to foreign currency risk relative to changes in foreign
currency exchange rates between those currencies and the U.S. dollar.
The Company has a program to provide a hedge against certain of these
foreign currency risks. The Company uses forward contracts which
allow the Company to acquire the foreign currency at a fixed price for
a specified period of time. Additionally, the Company uses foreign
currency call options which provide the Company with the option to
acquire certain foreign currencies at a fixed exchange rate and time
period. Concurrently with the purchase of a foreign currency call
option, the Company sells a foreign currency put option to minimize
the net premium paid for the call option. The strike prices on these
options generally straddle the exchange rate at the time the options
are purchased. The Company also purchases futures contracts to
similarly hedge its foreign currency risk. The Company is exposed to
credit risk under the foreign currency contracts and options to the
extent that the counterparty is unable to perform under the agreement.
The fair value of foreign currency exchange contracts is based on
quoted market prices and the spot rate of the foreign currencies
subject to contracts at year end. The fair value of the foreign
currency options is based on the estimated amount to terminate the put
and call contracts with the counterparties at period end.
<PAGE>
YEAR 2000 COMPLIANCE
--------------------
The Company has a comprehensive Year 2000 project designed to identify
and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers, and customers that
are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks. The
project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency
plans, and (4) remediation and testing. The Company's Year 2000
project is currently in the development of remediation and remediation
phases. The Company has been storing years as a four-digit field in
all mission critical databases since 1995 and believes that its
internal master records are Year 2000 compliant. Most of the software
which the Company uses, including all of its finance software, has
been certified as Year 2000 compliant. In addition, the Company is in
the process of obtaining Year 2000 compliance statements from the
manufacturers of the Company's hardware and software products. These
compliance statements are expected to be obtained by September 30,
1999. AEG's internally generated client databases are Year 2000
compliant.
APG's hardware, operating systems, applications software and
internally-generated data requires additional assessment and
remediation for Year 2000 compliance. The assessment phase has been
completed. It is expected that APG's remediation efforts will be
greater than those required by AEG, including the replacement of
certain APG hardware, operating system upgrades and a small amount of
applications software upgrades. This remediation is expected to be
completed by December 31, 1999. Voicemail software at one of the
Company's offices is not Year 2000 compliant; however, this software
is scheduled to be upgraded by December 31, 1999. The cost of this
upgrade is not expected to be material.
The Company believes that its greatest potential risks are associated
with (i) its information systems and systems embedded in its
operations and infrastructure; and (ii) its reliance on Year 2000
compliance by the Company's vendors and suppliers. The Company is in
the final stage of assessments for its operations and infrastructure
and no significant problems have been identified to date. However,
the Company cannot predict whether significant problems will be
identified in the future. The Company is asking its vendors and
suppliers to complete a Year 2000 survey to assess the status of their
compliance in order to assess the effect it could have on the Company.
At this time, the Company does not believe contingency planning will
be required because the Company's Year 2000 compliance program is
expected to be fully implemented by the end of 1999. Costs identified
to date have not been material. The Company does not currently expect
costs to be material, and it expects to be able to fund the total
costs through operating cash flows. However, the Company has not yet
completed all its assessments, developed remediation for all problems,
developed contingency plans, or completely implemented or tested all
of its remediation plans.
<PAGE>
Based on the Company's current analysis and assessment of the state of
its Year 2000 compliance, the Company's reasonably likely worst case
scenario involves booking delays of AEG and APG programs that would
take place later in 2000, and the more remote possibility of travel
interruptions for a small number of adult program participants
actually travelling on AEG millennium programs on and immediately
after January 1, 2000. Both of these types of delays and
interruptions would arise as a result of third-party Year 2000
noncompliance (e.g., computerized airline and hotel booking systems),
rather than because of the Company's internal Year 2000 compliance.
As the Year 2000 project continues, the Company may discover
additional Year 2000 problems, may not be able to develop, implement,
or test remediation or contingency plans, or may find that the costs
of these activities exceed current expectations and become material.
In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be
Year 2000 compliant. The Company plans to test such third-party
products by September 30, 1999, but cannot be sure that its tests will
be adequate or that, if problems are identified, they will be
addressed in a timely and satisfactory way. Because the Company uses
a variety of informational systems and has additional systems embedded
in its operations and infrastructure, the Company cannot be sure that
all of its systems will work together in a Year 2000 compliant
fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000
problems or those of its customers or suppliers whose Year 2000
problems may make it difficult or impossible for them to fulfill their
commitments to the Company. If the Company fails to satisfactorily
resolve the Year 2000 issues related to its products in a timely
manner, it could be exposed to liability to third parties. The
Company is continuing to evaluate Year 2000-related risks and will
take such further corrective actions as may be required.
PART II - OTHER INFORMATION
Items 1, 2, 3 and 5 are not presented as they are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareholders on May 14, 1999, the following
actions were taken:
1. Election of Directors (Class III Directors)
Name For Withheld
---------------- --------- --------
Rafer L. Johnson 8,500,434 800
John C. Spence 8,500,634 600
The terms of office of Class I Directors, Peter V. Ueberroth and
Richard D. C. Whilden, and Class II Directors, John A. Ueberroth
and James L. Easton, continued beyond the date of the 1999 Annual
Meeting of Shareholders.
<PAGE>
2. Approval of certain amendments to the Company's Amended and
Restated 1995 Equity Participation Plan
For 6,774,513
Against 1,319,537
Abstain 700
3. Ratification of PricewaterhouseCoopers LLP as independent auditors
for the year ending December 31, 1999
For 8,499,009
Against 2,025
Abstain 200
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.15 - The Amended and Restated 1995 Equity
Participation Plan of Ambassadors International,
Inc., as amended by the Company's shareholders at
the 1999 Annual Meeting of Shareholders held on
May 14, 1999, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8
(Registration No. 333-81023) and incorporated
herein by this reference.
27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months
ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMBASSADORS INTERNATIONAL, INC.
Date: August 12, 1999 By: /s/Jeffrey D. Thomas
------------------------------------
Jeffrey D. Thomas,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 25110939
<SECURITIES> 80180333
<RECEIVABLES> 8024500
<ALLOWANCES> 0
<INVENTORY> 11820
<CURRENT-ASSETS> 135037326
<PP&E> 8374177
<DEPRECIATION> (3640509)
<TOTAL-ASSETS> 170222976
<CURRENT-LIABILITIES> 60849731
<BONDS> 180948
0
0
<COMMON> 97283
<OTHER-SE> 109095014
<TOTAL-LIABILITY-AND-EQUITY> 170222976
<SALES> 22017516
<TOTAL-REVENUES> 22017516
<CGS> 16667736
<TOTAL-COSTS> 16667736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21625
<INCOME-PRETAX> 8117661
<INCOME-TAX> 2757885
<INCOME-CONTINUING> 5359776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5359776
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
</TABLE>
