Management believes that its existing facilities are sufficient to meet its present needs and anticipated needs for the foreseeable future. However, additional facilities may be required in connection with future business acquisitions.
This section presents the Company’s historical financial data which should be read carefully with the financial statements included in this Form 10-K, including the notes to the consolidated financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The statement of operations data for each of the years in the three-year period ended December 31, 2002, and the balance sheet data as of December 31, 2002 and 2001 have been derived from audited financial statements included elsewhere in this Form 10-K. The statement of operations data for the year ending December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and 1998 has been derived from the audited financial statements, which are not included in this Form 10-K. Historical results are not necessarily indicative of future results.
Net revenue is a function of gross program receipts less program pass through expenses. Program pass through expenses include all direct costs associated with the Company’s programs, including costs related to airfare, hotels, meals, ground transportation, guides, professional exchanges and changes in currency exchange rates. Gross program receipts during the years ended December 31, 2002, 2001, 2000, 1999, and 1998 were $97.1 million, $116.3 million, $107.8 million, $71.6 million, and $67.4 million, respectively.
Cash and cash equivalents and available-for-sale securities include restricted cash equivalents of a nominal amount for the period ended December 31, 2002 and 2001 and the amount of $112,000 for the periods ended December 31, 2000 and 1999. For the period ended December 31, 1998, cash, cash equivalents, and available-for-sale securities include restricted cash equivalents in the amount of $152,000.
The consolidated financial statements include the accounts of Ambassadors Group, Inc., and its wholly owned subsidiaries, Ambassador Programs, Inc., Ambassadors Sports Group, Inc., Ambassadors Specialty Group, Inc., and Ambassadors Unlimited, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Gross program receipts reflect total payments received by the Company. Gross program receipts less program pass-through expenses constitute the Company’s revenues. Program pass-through expenses include all direct costs associated with the Company’s programs, including but not limited to, costs related to airfare, hotels, meals, ground transportation, guides, professional exchanges, and changes in currency exchange rates. The Company recognizes gross program receipts, pass-through expenses and revenues upon the departure of the program. Operating expenses, which are expensed by the Company as incurred, are the costs related to the creation of programs, promotional materials and marketing costs, salaries, rent, other general and administrative expenses and all of the Company’s ordinary expenses. The Company’s policy is to obtain payment for substantially all travel services prior to entering into commitments for incurring expenses relating to such travel.
The substantial majority of the Company’s programs take place outside the United States and most foreign suppliers require payment in local currency rather than in U.S. dollars. Accordingly, the Company is exposed to foreign currency risks in certain countries as foreign currency exchange rates between those currencies and the U.S. dollar fluctuate. To manage these risks, the Company enters into forward foreign exchange contracts and forward contracts with synthetic options.
These foreign exchange contracts are entered into to support normal anticipated recurring purchases and, accordingly, are not entered into for speculative purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk.”
The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to consolidated revenues.
Excluding the effects of a write down of intangible assets during the year ended December 31, 2001, the relative percentages of operating income, income before tax, and net income to consolidated revenues would have been 43%, 48%, and 31%, respectively.
Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001
Gross program receipts decreased to $97.1 million in the year ended December 31, 2002 from $116.3 million in the same period of 2001. The $19.2 million or 16 percent decrease is primarily the result of a decrease in traveled participants. The Company traveled more than 21,000 participants during 2002 as compared to more than 25,000 participants during 2001.
Net revenue decreased to $36.1 million in the year ended December 31, 2002 from $43.4 million in the same period of 2001. This decrease is primarily the result of a decrease in traveled participants. Gross margins (revenue as a percentage of gross program receipts) remained comparable during the years ended December 31, 2002 and 2001 at 37 percent.
The Company’s policy is to expense all selling and tour promotion costs as they are incurred. Selling and tour promotion expenses decreased to $15.3 million from $18.4 million comparing the years ended December 31, 2002 and 2001, respectively. The decrease of $3.1 million or 17 percent is primarily the result of a series of personnel cost management controls implemented subsequent to September 11, 2001, including decreased levels of staffing, ceased hiring for majority of 2002, implemented a wage freeze, and cut some management wages. In addition, other cost management controls included limiting marketing efforts with certain programs.
Other income consisted primarily of interest income generated by cash, cash equivalents, and available-for-sale securities. As a result of a 44% decrease of the rate of return earned on investments, the Company realized interest and dividend income of $1.1 million in the year ended December 31, 2002, compared to $2.1 million in the year ended December 31, 2001.
Net income increased to $10.8 million in the year ended December 31, 2002 from $9.5 million in the comparable period of 2001. Excluding the impairment charge of $5.9 million during 2001, net income would have been $13.2 million during the year ended December 31, 2001. Changes in net income from 2002 to 2001 are the result of changes as described above.
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
The Company’s policy is to expense all selling and tour promotion costs as they are incurred. Selling and tour promotion expenses decreased to $18.4 million from $19.9 million when comparing the years ended December 31, 2001 and 2000, respectively. This decrease can be directly tied to the effects of the Company’s marketing emphasis after the terrorist attacks of September 11, 2001. All marketing ceased for a time period post September 11, 2001 resulting in a delay of the expenses being incurred. The Company also experienced a reduction in work force during the fourth quarter of 2001 as a result of the downturn of the travel industry, which produced cost savings.
During the fourth quarter of 2001, the Company incurred a $5.9 million impairment charge for intangible assets, incurred primarily as a result of the impact to operations of the terrorist acts that occurred on September 11, 2001, the response by the United States since October 7, 2001, and the resulting negative impact these events had on domestic and international air travel, and the travel industry in general.
Other income also included $1.6 million of unrealized losses on certain foreign currency contracts during the year ended December 31, 2000. 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 expectations. Certain of these contracts do not qualify for hedge accounting and, therefore, unrealized gains and losses related to these contracts are recorded in other income/expense.
The Company incurred an income tax provision of approximately $5.2 million for the year ended December 31, 2001 in comparison to $5.8 million for the comparable period in 2000. The income tax provision incurred was based upon the estimated annual effective income tax rate applied to the pre-tax income. The Company’s effective tax rate of 35.5% in 2001 increased from 34.4% in 2000 primarily due to an increase in state income taxes.
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.
Net cash provided by operations for years ended December 31, 2002 and 2001 was approximately $21.4 million and $7.0 million, respectively. The increase of $14.4 million in operating cash flows from the year ending December 31, 2001 to the year ending December 31, 2002 primarily relates to increased participants’ deposits for future travel programs.
Net cash used in financing activities for the year ended December 31, 2002 and 2001 was $9.7 million and $37.5 million, respectively. The decrease of $27.8 million in cash used in the year ended December 31, 2002 in comparison to the comparable period in 2001 is primarily due to activities between the Company and Ambassadors. During 2002, concurrent with the spin-off in February 2002 and in accordance with the terms of the Master Separation and Distribution Agreement, there was a calculation made which resulted in additional dividends approximating $20.5 million being paid to Ambassadors and a capital contribution to Group approximating $10.4 million from Ambassadors. During 2001, the Company paid a dividend of $37.5 million, representing past pre-tax earnings, to Ambassadors.
The terrorist attacks that occurred on September 11, 2001, and the response by the United States had a very negative impact on domestic and international air travel and the travel industry in general. Furthermore, the threat of and a possible war with Iraq has and will affect the travel industry, as well as the markets in which the Company operates. The potential and long-term effects of a possible war are uncertain for the Company’s customers, the market for the Company’s common stock, the markets for the Company’s services, the strength of the U.S. dollar and the U.S. economy. The consequences of a possible war with Iraq and or geopolitical unrest are unpredictable and the Company is not able to determine whether the impact will be material or highly material on the Company’s business, financial condition, cash flows and results of operations.
The following table summarizes the financial instruments other than derivative financial instruments held by the Company at December 31, 2002 and 2001, which are sensitive to changes in interest rates. This table presents principal cash flows for available-for-sale securities by contractual maturity date and the related average interest rate and fair value (in thousands):
At December 31, 2002 and 2001, the Company had outstanding forward contracts as follows (in thousands):
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations (SFAS 141). SFAS 141 establishes new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 141, use of the pooling-of-interest method is prohibited. The Company adopted this statement during the third quarter of fiscal 2001. The adoption of SFAS 141 did not have a material impact on the Company’s consolidated financial statements.
*The Company incurred an impairment charge of intangibles of approximately $5.9 million during the year ended December 31, 2001.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock- Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123” (FAS 148). This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company currently discloses the effects of stock-based employee compensation and is evaluating the alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based compensation.