The principal executive offices of the Company, consisting of approximately 45,000 square feet, are located in Spokane, Washington and are occupied pursuant to a lease that expires December 31, 2004. The lease currently provides for monthly rental payments of approximately $37,000. The Company may cancel the lease without penalty (upon one year’s prior notice) and also may extend the term of the lease for an additional ten year period upon providing written notice to the Lessor of its intention to exercise such option at least six months prior to the end of the initial term in 2004. If the Company elects to exercise the extension option, the monthly rental during the renewal period will be the fair market rental value of the leased premises as of the date the option is exercised (as determined based on market rentals of similar properties in the Spokane, Washington area).
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, 2001, and the balance sheet data as of December 31, 2001 and 2000 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, 1998 and the balance sheet data as of December 31, 1999 and 1998, has been derived from the audited financial statements, which are not included in this Form 10-K. The balance sheet and statement of operations data as of and for the year ended December 31, 1997 have been derived from unaudited financial statements not included in this Form 10-K. The unaudited information has been presented on the same basis as the audited financial statements and has included all adjustments, consisting only of normal occurring adjustments that are considered necessary for a fair presentation of the Company’s financial position and operating results for these periods. Historical results are not necessarily indicative of future results.
In February 1996, the Company expanded its 	professional programs and in June 1999, the Company expanded its 	sports programs through the acquisitions of American People 	Ambassador Programs, Inc. and Travel Dynamics, Inc. These 	acquisitions are included in the Company’s statement of 	operations since the dates of acquisition.
Excluding the effects of a write down of 	intangible assets during the year ended December 31, 2001, 	operating income, net income after tax, and basic and diluted 	earnings per share would have been $18.4 million, 	$13.3 million, and $1.35, respectively.
All of the Company’s acquisitions have been 	accounted for under the purchase method of accounting. 	Therefore, the balance sheet data includes the accounts of the 	acquired entities as of their respective dates of acquisition.
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 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 participant. 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 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 Company owns minority investments in other operating companies and joint ventures. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value.
The Company values its goodwill and intangible assets using fair value on the date of an acquisition. The Company periodically assesses the recoverability of the recorded goodwill based upon the expected undiscounted cash flows of the business operations that generated the goodwill. As experienced during the fourth quarter of 2001, impacts of international unrest, terrorism, and the resulting economic downturn can influence the recoverability of the goodwill and intangible assets carrying value. During the fourth quarter of 2001, the Company recorded a charge related to management’s conclusion that the goodwill was impaired (see note 12 in the Consolidated Footnotes to the Financial Statements). The impact of external influences such as terrorism combined with the effects to the Company’s operations could result in future inability to recover the carrying value of the goodwill and intangible assets that may not be reflected in the assets’ carrying values.
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.
Other income in 2001 consisted primarily of interest income generated by cash, cash equivalents, and available-for-sale securities. During 2001, the Company issued a dividend to its parent company in the amount of $37.5 million. As of December 31, 2001, the Company had $39.8 million in cash, cash equivalents and available-for-sale securities, a decrease of $31.8 million from $71.5 million at December 31, 2000. As a result of decreased cash and lower rates of return of investments, the Company realized interest and dividend income of $2.1 million in the year ended December 31, 2001, compared to $3.1 million in the comparable period of 2000.
Net income decreased to $9.5 million in the year ended December 31, 2001 from $11.1 million in the comparable period of 2000. Excluding the write-down of intangible assets expense during 2001, net income would have been $13.6 million during the year ended December 31, 2001 in comparison to $11.1 million during the year ended December 31, 2000. These fluctuations are the result of changes as described above.
Comparison of Year Ended December 31, 	2000 to Year Ended December 31, 1999
The Company’s gross program receipts increased $36.3 million to $107.8 million during the year ended December 31, 2000, from $71.6 million for the year ended December 31, 1999, as a direct result of a 48% increase in participants. During the year ended December 31, 2000, approximately 25,300 participants traveled with the Company in comparison to approximately 17,150 participants traveling during 1999.
Net revenue increased 52% to $40.3 million for the year ended December 31, 2000 from $26.5 million for the year ended December 31, 1999. A substantial majority of the increase in net revenue is due to the 48% increase in traveled participants. Gross margins remained consistent at 37% between the years.
Net income increased to $11.1 million for the year ended December 31, 2000 from $6.7 million in the year ended December 31, 1999. The $4.4 million increase is the result of changes as described above.
Net cash provided by operations for years ended December 31, 2001 and 2000 was approximately $7.0 million and $25.4 million, respectively. The net $18.4 million decrease in operating cash flows from the year ending December 31, 2000 to the year ending December 31, 2001 primarily relates to decreased volume of participants’ deposits for future travel programs, compounded with an decrease in net income for the comparable time periods.
Net cash provided by operations for the years ended December 31, 2000 and 1999 was $25.4 million and $9.7 million, respectively. The increase in cash flow from operations between these two years is primarily due to enhanced collections of participant deposits and an increase in net income.
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 foreign exchange forward contracts. This facility would be drawn upon in the event the Company is unable to provide payment for such foreign currency purchases and foreign exchange forward contracts upon their maturity, and it cannot be used for operational or working capital purposes. This credit facility is renewable annually and expires in August 2002. Ambassadors has also agreed to provide a credit facility to the Company up to $20 million for on-going operations and potential acquisition needs. Ambassadors’ ability to fund the credit facility could be impaired due to a variety of factors including sudden capital expenditures, fluctuations in operating results, financing activities and receivables management. To the extent any one of these factors causes Ambassadors to be unable to fund all or part of the $20 million, the Company could be forced to seek and obtain alternative financing in the form of debt or equity. There can be no assurance that the Company would be successful in obtaining alternative financing on favorable terms, or at all. The Company’s failure to obtain such financing or to obtain such financing on favorable terms could have a material adverse effect on the Company’s business, financial condition and results of operations.
The following table summarizes the financial instruments other than derivative financial instruments held by the Company at December 31, 2001 and 2000, 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 (amounts in thousands):
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.
At December 31, 2001 and 2000, the Company had outstanding forward contracts as follows (amounts 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
In August 2001, the FASB approved SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”), which will be effective for the fiscal year beginning January 1, 2003. SFAS No. 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In October 2001, the FASB approved SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 121”) and the accounting and reporting provisions of APB. No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121, but resolves certain implementation issues associates with that Statement. SFAS No. 144 will be effective for the fiscal year beginning January 1, 2002. The Company does not anticipate that the adoption of SFAS No. 143 and SFAS No. 144 will have a material impact on its financial condition or results of operations.
Consolidated Financial Statements: See Part IV, Item 14 of this Form 10-K.