UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-26420
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AMBASSADORS INTERNATIONAL, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1688605
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Dwight D. Eisenhower Building
110 South Ferrall Street
Spokane, Washington 99202
------------------------------- -----------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (509) 534-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common shares outstanding as of October 31, 1999: 9,772,817
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998
Consolidated Statements of Income for the Nine and
Three Months Ended September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income
for the Nine and Three Months Ended September 30,
1999 and 1998
Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,407,531 $ 55,289,580
Restricted cash equivalents 152,000 152,000
Investments 65,308,219 37,659,994
Accounts receivable 10,429,731 4,371,898
Prepaid program costs and expenses 5,070,535 4,637,121
Other assets 29,029 159,158
------------ ------------
Total current assets 103,397,045 102,269,751
Property, plant and equipment, net 4,770,801 4,199,889
Other investments 3,212,036 462,500
Goodwill, net of $2,105,270 and
$1,285,950 of accumulated amortization 28,047,874 20,401,794
Covenants-not-to-compete, net of
$540,035 and $370,047 of
accumulated amortization 1,356,039 254,953
Other assets 113,687 142,897
------------ ------------
Total assets $140,897,482 $127,731,784
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Balance Sheets (Unaudited), Continued
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,253,209 $ 2,348,759
Accrued expenses 6,281,416 942,047
Participants' deposits 15,863,349 15,742,697
Customer advances 858,717 744,077
Notes payable, current portion 392,871 185,851
Foreign currency exchange contracts -- 289,322
Deferred income taxes 430,012 284,957
------------ ------------
Total current liabilities 26,079,574 20,537,710
Notes payable, due after one year 402,776 145,243
------------ ------------
Total liabilities 26,482,350 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, 9,772,742
and 9,915,534 shares 97,727 99,155
Additional paid-in capital 86,919,202 90,043,060
Retained earnings 27,321,932 17,088,888
Accumulated other comprehensive
income (loss) 76,271 (182,272)
------------ ------------
Total stockholders' equity 114,415,132 107,048,831
------------ ------------
Total liabilities and stock-
holders' equity $140,897,482 $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 nine and three months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $38,457,283 $33,651,957 $16,439,767 $14,285,212
----------- ----------- ----------- -----------
Operating expenses:
Selling and tour promotion 13,579,587 11,276,307 5,788,507 4,622,852
General and administrative 13,393,066 10,264,754 4,516,410 3,984,856
----------- ----------- ----------- -----------
Total operating expenses 26,972,653 21,541,061 10,304,917 8,607,708
----------- ----------- ----------- -----------
Operating income 11,484,630 12,110,896 6,134,850 5,677,504
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (26,918) (19,884) (5,293) (5,086)
Interest and dividend income 2,940,935 2,737,494 863,591 1,238,866
Realized and unrealized loss on
investments -- (25,787) -- --
Other, net 875,388 (12,717) 163,226 (12,546)
----------- ----------- ----------- -----------
3,789,405 2,679,106 1,021,524 1,221,234
----------- ----------- ----------- -----------
Income before income taxes 15,274,035 14,790,002 7,156,374 6,898,738
Provision for income taxes 5,040,991 5,472,301 2,283,106 2,552,533
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 10,233,044 9,317,701 4,873,268 4,346,205
Cumulative effect of change in accounting
principle, net of income taxes -- 127,710 -- 127,710
----------- ----------- ----------- -----------
Net income $10,233,044 $ 9,445,411 $ 4,873,268 $ 4,473,915
=========== =========== =========== ===========
</TABLE>
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Income, Continued
(Unaudited)
for the nine and three months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings per share - basic:
Income per share before cumulative
effect of change in accounting
principle $ 1.05 $ 1.08 $ 0.50 $ 0.44
Cumulative effect of accounting change -- 0.02 -- 0.01
----------- ----------- ----------- -----------
Net income per share - basic $ 1.05 $ 1.10 $ 0.50 $ 0.45
=========== =========== =========== ===========
Weighted average common shares outstanding 9,750,870 8,610,455 9,733,441 9,910,087
=========== =========== =========== ===========
Earnings per share - diluted:
Income per share before cumulative
effect of change in accounting
principle $ 1.04 $ 1.05 $ 0.50 $ 0.43
Cumulative effect of accounting change -- 0.01 -- 0.01
----------- ----------- ----------- -----------
Net income per share - diluted $ 1.04 $ 1.06 $ 0.50 $ 0.44
=========== =========== =========== ===========
Weighted average common shares outstanding -
diluted 9,809,429 8,877,509 9,779,580 10,162,795
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Comprehensive Income
for the nine and three months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $10,233,044 $ 9,445,411 $ 4,873,268 $ 4,473,915
Unrealized gains (losses)
on foreign currency
exchange contracts, net
of tax 258,543 (213,156) 323,986 (213,156)
----------- ----------- ----------- -----------
Comprehensive income $10,491,587 $ 9,232,255 $ 5,197,254 $ 4,260,759
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1999 and 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $10,233,044 $ 9,445,411
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,837,471 1,470,664
Loss on investments -- 25,787
Loss on sale of property, plant
and equipment 20,035 13,857
Compensation expense on stock grants 98,438 98,438
Other, net (52,615) --
Change in assets and liabilities,
net of effects of purchases of
subsidiaries:
Restricted cash -- 5,000
Accounts receivable (4,568,536) 1,794,954
Prepaid program costs and
expenses 255,084 (6,971,954)
Other assets 130,129 288,695
Accounts payable and accrued
expenses 5,059,668 388,852
Participants' deposits (5,464,312) 3,338,659
Customer advances 114,640 (347,079)
----------- -----------
Net cash provided by
operating activities 7,663,046 9,551,284
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (1,265,823) (1,348,003)
Purchase of available-for-sale
securities (77,067,741) (33,199,708)
Proceeds from sale and maturities of
available-for-sale securities 49,531,177 --
Purchase of investments (2,655,035) (1,500)
Cash paid for acquisitions of
subsidiaries, net of cash received (4,017,514) (6,414,761)
Payment for covenant not-to-compete (1,271,076) (200,000)
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Ambassadors International, Inc.
Consolidated Statements of Cash Flows (Unaudited), Continued
for the nine months ended September 30, 1999 and 1998
1999 1998
----------- -----------
Cash flows from investing activities,
Continued:
Payments received on notes receivable -- 149,455
Change in other assets 29,210 --
----------- -----------
Net cash used in investing
activities (36,716,802) (41,014,517)
----------- -----------
Cash flows from financing activities:
Cash received from exercise of stock
options 224,654 142,209
Payments of notes payable (135,447) (87,608)
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 (3,828,293) 70,402,572
----------- -----------
Net increase (decrease) in cash and cash
equivalents (32,882,049) 38,939,339
Cash and cash equivalents, beginning
of period 55,289,580 22,870,546
----------- -----------
Cash and cash equivalents, end of
period $22,407,531 $61,809,885
=========== ===========
Non-cash investing and financing
activities:
Common shares issued for acquisition
of subsidiaries $ 1,147,156 $ 5,693,438
=========== ===========
Note payable issued for acquisition
of subsidiary $ 600,000
===========
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 September 30, 1999, the
consolidated results of operations and comprehensive income for
the nine- and three-month periods ended September 30, 1999 and
1998 and the consolidated cash flows for the nine-month periods
ended September 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
restricted shares of the Company's 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.
In September 1999, the Company acquired all of the capital stock
of a company primarily involved in registration services for
conventions. The purchase price for this company consisted of
cash and a note payable.
Both acquisitions were accounted for using the purchase method of
accounting. The results of operations of the acquisitions have
been included in the consolidated statement of income since the
respective dates 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>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income before cumulative
effect of change in
accounting principle $10,233,044 $ 9,317,701 $ 4,873,268 $ 4,346,205
Cumulative effect of
change in accounting
principle, net of
income taxes -- 127,710 -- 127,710
----------- ----------- ----------- -----------
Net income for basic and
diluted earnings per
share $10,233,044 $ 9,445,411 $ 4,873,268 $ 4,473,915
=========== =========== =========== ===========
</TABLE>
<PAGE>
AMBASSADORS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Denominator:
Weighted-average shares
outstanding - basic 9,750,870 8,610,455 9,733,441 9,910,087
Effect of dilutive common
stock options (A) 58,559 267,054 46,139 252,708
----------- ----------- ----------- ----------
Weighted-average shares
outstanding - diluted 9,809,429 8,877,509 9,779,580 10,162,795
=========== =========== =========== ==========
Earnings per share - basic:
Income before cumulative
effect of change in
accounting principle $ 1.05 $ 1.08 $ 0.50 $ 0.44
Cumulative effect of change
in accounting principle,
net of income taxes -- 0.02 -- 0.01
---------- ---------- ---------- ----------
Net income per share - basic $ 1.05 $ 1.10 $ 0.50 $ 0.45
========== ========== ========== ==========
Earnings per share - diluted:
Income before cumulative
effect of change in
accounting principle $ 1.04 $ 1.05 $ 0.50 $ 0.43
Cumulative effect of change
in accounting principle,
net of income taxes -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Net income per share -diluted $ 1.04 $ 1.06 $ 0.50 $ 0.44
========== ========== ========== ==========
</TABLE>
(A) For the three months ended September 30, 1999 and 1998, 368,162
and 147,150 additional stock options were outstanding,
respectively. For the nine months ended September 30, 1999 and
1998, 291,674 and 147,150 additional stock options were
outstanding, respectively. The effects of the shares which would
be issued upon the exercise of these options have been excluded
from the calculation of diluted earnings per share because they
are anti-dilutive.
<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 segments 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>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Education Group $25,177,322 $22,336,118 $12,934,709 $ 9,783,541
Performance Group 13,143,819 11,172,781 3,485,293 4,374,903
Corporate and Other 136,142 143,058 19,765 126,768
----------- ----------- ----------- -----------
Total $38,457,283 $33,651,957 $16,439,767 $14,285,212
=========== =========== =========== ===========
Operating Income (Loss):
Education Group $13,393,130 $12,734,889 $ 7,533,245 $ 6,143,492
Performance Group 247,311 1,150,562 (621,917) 115,238
Corporate and Other (2,155,811) (1,774,555) (776,478) (581,226)
----------- ----------- ----------- -----------
$11,484,630 $12,110,896 $ 6,134,850 $ 5,677,504
=========== =========== =========== ===========
</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 SEPTEMBER 30, 1999 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
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, a subsidiary of AEG, acquired
the assets of Travel Dynamics, Inc. and included the acquisition in
the Company's results of operations as of the date of acquisition.
In September 1999, APG acquired Advanced Registration Systems, 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 $47.6 million in the third quarter
of 1999 from $37.6 million in the comparable quarter of 1998. This
$10.0 million increase is due primarily to an acquisition within AEG
combined with APG establishing new sales offices in 1998 that resulted
in increased 1999 gross program receipts.
NET REVENUE
-----------
Net revenue increased to $16.4 million in the third quarter of 1999
from $14.3 million in the comparable quarter of 1998. This $2.1
million increase is due primarily to an acquisition within AEG in
1999.
<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 increased to $5.8 million in the
third quarter of 1999 from $4.6 million in the comparable quarter of
1998. This $1.2 million increase is the result of assuming expenses
in conjunction with a 1999 acquisition as well as increased marketing
efforts within AEG.
GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
General and administrative expenses increased to $4.5 million in the
third quarter of 1999 from $4.0 million in the comparable quarter of
1998. This increase is primarily due to the 1998 and 1999 acquisi-
tions 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
$0.9 million in the third quarter of 1999, compared to $1.2 million in
the comparable quarter of 1998. The decrease is a result of cash used
in continued acquisition activity and the overall downturn of market
yields.
INCOME TAXES
------------
The Company has recorded an income tax provision of approximately $2.3
million for the third quarter of 1999 in comparison to a $2.6 million
tax provision for the comparable quarter of 1998. Income tax
provisions have been recorded based upon the estimated effective
income tax rate applied to the pre-tax income.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
GROSS PROGRAM RECEIPTS
----------------------
Gross program receipts increased to $120.9 million in the nine-month
period ended September 30, 1999 from $96.5 million in the comparable
period of 1998. This $24.4 million increase is the result of a net
increase in gross program receipts from AEG and APG. In 1999, AEG's
gross program receipts increase was due to increased programs from an
acquisition partially offset by reduced program receipts caused by the
effect of concerns over the military action in Kosovo as well as
international unrest exemplified by the State Department's warnings on
travel to China. In addition, APG opened new sales offices in 1998
that resulted in increased 1999 gross program receipts.
<PAGE>
NET REVENUE
-----------
Net revenue increased to $38.5 million in the nine-month period ended
September 30, 1999 from $33.7 million in the comparable period of
1998. This $4.8 million increase is due primarily to an acquisition
within AEG in 1999 combined with APG establishing 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 $13.6 million in the
nine-month period ended September 30, 1999 from $11.3 million in the
comparable period of 1998. This $2.3 million increase is primarily
the result of the 1998 and 1999 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 $13.4 million in the
nine-month period ended September 30, 1999 from $10.3 million in the
comparable period of 1998. This $3.1 million increase is primarily
due to the 1998 and 1999 acquisitions 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 September 30, 1999, the Company
had $87.6 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
$2.9 million in the nine-month period ended September 30, 1999,
compared to $2.7 million in the comparable period of 1998, an increase
of $0.2 million.
<PAGE>
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
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 $5.0
million for the nine-month period ended September 30, 1999 in
comparison to a $5.5 million tax provision for the comparable period
ended September 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
and fourth quarters of the fiscal year has significantly fewer
programs traveling than the other quarters of the year. Accordingly,
the Company's revenues, operating income and cash flow are lower
during the first and fourth quarters.
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.
<PAGE>
Net cash provided by operations for the nine months ended
September 30, 1999 and 1998 was $7.7 million and $9.6 million,
respectively. The decrease in operating cash flows of $1.9 million
from 1998 to 1999 can be attributed to the timing of accounts
receivable collections and participant deposits.
Net cash used in investing activities for the nine months ended
September 30, 1999 and 1998 was $36.7 million and $41.0 million,
respectively. The net cash used in investing activities decreased in
1999 primarily due to the net decrease in investments.
The Company does not have any material capital expenditure commitments
for 1999. 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 Bank of America, 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 and as of September 30, 1999, the Company has
repurchased shares for approximately $4.0 million. Subsequent to
September 30, 1999, the Company repurchased shares for approximately
$3.4 million. The Company does not believe that any such repurchases
will have a significant impact on the Company's liquidity.
At September 30, 1999, the Company had approximately $87.6 million of
available-for-sale investments and cash and cash equivalents,
including program participant funds of $15.9 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.
<PAGE>
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.
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 hardware
and software which the Company uses, including all of its finance
software, has been certified as Year 2000 compliant. AEG's internally
generated client databases are Year 2000 compliant.
APG's hardware, operating systems, applications software and
internally generated data require additional assessment and
remediation for Year 2000 compliance. APG is currently in the
development of remediation and remediation phases. Voicemail software
at two of the Company's offices is not Year 2000 compliant; however,
this software will be replaced by December 31, 1999. The cost of
replacement is not expected to be material.
<PAGE>
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 testing 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.
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 program participants actually
travelling on 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. Although the Company has tested such third-party
products, the Company cannot be sure that its tests are adequate.
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.
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are not presented as they are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months
ended September 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: November 15, 1999 By: /s/Jeffrey D. Thomas
----------------- ------------------------------------
Jeffrey D. Thomas,
Chief Financial Officer
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