The Company also leases approximately 900 square feet of office space in Winnebago, Illinois for a monthly rental of approximately $600 pursuant to a lease that expires in August 2002.
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, 2001, 2000, 	1999, 1998, and 1997 was $116.3 million, 	$107.8 million, $71.6 million, $67.4 million, and 	$60.2 million.
Cash and cash equivalents and available-for-sale 	securities include restricted cash equivalents of a nominal 	amount for the period ended December 31, 2001 and the 	amount of $112,000 for the periods
ended December 31, 2000 and 1999. For the 	periods ended December 31, 1998 and 1997, cash, cash 	equivalents, and available-for-sale securities include 	restricted cash equivalents in the amounts of $152,000 and 	$125,000, respectively.
The following discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto in this Report. Certain statements contained herein that are not related to historical results, including, without limitation, statements regarding the Company’s business strategy and objectives, future financial position, expectations about pending litigation and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, and involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements.
The Company is engaged primarily in promoting and organizing international educational travel programs for students, athletes, and professionals. These programs provide the opportunities for grade school, junior, and senior high school students to visit foreign countries to learn about the history, government, economy and culture of such countries, as well as provide opportunities for junior and senior high school athletes to participate in domestic and international sports challenges. The Company’s professional programs emphasize meetings and seminars between participants and persons in similar professions abroad.
The Company was founded in 1967 and was reincorporated in Delaware in 1995, when it was purchased and consolidated with Ambassadors. Since Ambassador’s initial public offering in August 1995, the Company has expanded its operations primarily through internal growth and acquisitions of businesses within the travel industry. These acquisitions included a February 1996 acquisition of certain assets of Marc L. Bright and Associates and a June 1999 acquisition of certain assets of Travel Dynamics, Inc. Both of these acquisitions were accounted for under the purchase method of accounting. Therefore, the results of operations of the acquired businesses are included in the Company’s results of operations since their respective dates of acquisition.
The Company’s businesses are seasonal. The majority of the Company’s travel programs occur in June and July of each year. The Company has historically earned more than three-quarters of its annual revenues in the second and third quarters, which the Company anticipates will continue for the foreseeable future. Historically, these seasonal revenues have more than offset operating losses incurred during the rest of the year. The Company’s annual results would be adversely affected if the Company’s revenues were to be substantially below seasonal norms during these periods. The Company’s operating results may fluctuate as a result of many factors, including the mix of student, sport, and professional programs, the mix of programs and program destinations offered by the Company and its competitors, the introduction and acceptance of new programs and program enhancements by the Company and its competitors, timing of program completions, cancellation rates, competitive conditions in the industry, marketing expenses, extreme weather conditions, international conflicts, timing of and costs relating to acquisitions, changes in relationships with certain travel providers, economic factors and other considerations affecting travel.
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including cash and cash equivalents, available-for-sale securities, investments, intangible assets, income taxes, derivative financial instruments, and contingencies and litigation.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Comparison of Year Ended December 31, 	2001 to Year Ended December 31, 2000
Gross program receipts increased to $116.3 million in the year ended December 31, 2001 from $107.8 million in the same period of 2000. The $8.5 million or 8% increase is primarily the result of an increase in traveled participants. The Company traveled over 25,800 participants during 2001 as compared to approximately 25,300 participants during 2000.
Net revenue increased to $43.4 million in the year ended December 31, 2001 from $40.3 million in the same period of 2000. This increase is the result primarily of reductions in program pass through expenses, combined with the effects of increased participants. Gross margins (revenue as a percentage of gross program receipts) remained consistent during the years ended December 31, 2001 and 2000 at 37%.
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 $17.2 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, causing in a delay of the expenses being incurred. The Company also experienced a reduction in force during the fourth quarter of 2001 as a result of the downturn of the travel industry, which produced cost savings.
General and administrative expenses increased to $9.7 million in the year ended December 31, 2001 from $7.8 million during the comparable period in 2000. The $1.9 million increase is due to a number of factors, included but not limited to professional fees and personnel costs.
During the fourth quarter of 2001, the Company incurred a $5.9 million impairment expense 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 have had on domestic and international air travel, and the travel industry in general.
During 2001, the Company earned operating income of $12.6 million in comparison to the operating income of $15.3 million in 2000. Excluding the impairment of intangibles charges during 2001, operating income would have been $18.5 million. Changes in operating income from 2000 to 2001 are the result of changes as described above.
Selling and tour promotion expenses increased to $17.2 million during the year ended December 31, 2000 from $11.4 million for the year ended December 31, 1999, an increase of $5.8 million. The majority of this increase is attributable to increased professional program marketing expenses supporting additional professional participant volume, combined with a full year of sports selling and marketing expenses during the year ended December 31, 2000 from Group’s June 1999 acquisition.
General and administrative expenses increased during the year ended December 31, 2000 to $7.8 million from $6.0 million for the year ended December 31, 1999, an increase of $1.9 million. This increase is primarily the result of a full year of sports administrative expenses during the year ended December 31,2000 from Group’s June 1999 acquisition and increased administrative expenses to support increased participant volume.
As a result of the foregoing, the Company’s operating income during the year ended December 31, 2000 increased to $15.3 million from $9.2 million for the year ended December 31, 1999.
The Company reported $1.5 million of other income for the year ended December 31, 2000 in comparison to $0.8 million for the year ended December 31, 1999. Other income during the year ended
December 31, 2000 consisted primarily of $3.1 million in interest income generated by cash, cash equivalents and available-for-sale securities, netted with $1.6 million in unrealized foreign exchange losses on forward foreign exchange contracts and options. For the year ended December 31, 1999, the Company realized interest and dividend income of $0.8 million. The increase in interest and dividend income of $2.3 million resulted from greater cash balances combined with the Company’s cash management investment strategies into tax exempt securities. On December 31, 2000, the Company had $71.5 million in cash, cash equivalents and available-for-sale securities, compared to $39.9 million on December 31, 1999.
The Company’s effective income tax rate increased to 34% during the year ended December 31, 2000 from 33% during the year ended December 31, 1999. This increase is an effect of the Company’s increased tax base, combined with less of a tax benefit from tax exempt interest income reducing the tax rate. The Company recorded an income tax provision of $5.8 million for the year ended December 31, 2000 compared to $3.3 million for the year ended December 31, 1999.
Net cash provided by (used in) investing activities for the year ended December 31, 2001 and 2000 was $16.7 million and ($35.4) million, respectively. The $52.1 million increase from the year ending December 31, 2000 to the year ending December 31, 2001 is due to the proceeds received from the sale or maturity of available-for-sale securities and the purchase of available-for-sale securities. The net purchase of available-for-sale securities of $34.4 million during the year ended 2000 increased to a net receipt of $17.8 million in proceeds from the sale or maturity of available-for-sale securities during the year ended 2001.
Net cash used in investing activities for the years ended December 31, 2000 and 1999 was $35.4 million and $9.2 million, respectively. The investing activities during 2000 and 1999 primarily related to investing in available-for-sale securities.
The payment of dividends in the future will be at the discretion of the Board of Directors and will be dependent on the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors, in its discretion, deems relevant.
Net cash provided by financing activities for the years ended December 31, 2000 and December 31, 1999 totaling $7.2 million and $9.4 million, respectively, primarily relates to payments received as contributions from the Company’s parent.
At December 31, 2001, the Company had approximately $39.8 million of cash, cash equivalents including restricted cash, and available-for-sale securities, which included program participant funds of approximately $16.6 million. At December 31, 2000, the Company had approximately $71.5 million of cash and cash equivalents including restricted cash, and available-for-sale securities, which included program participant funds of $22.8 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. Should a greater number of participants cancel their travel in comparison to that which is part of the Company’s ongoing operations, due to circumstances such as international or domestic unrest, terrorism, or general economic downturn, the Company’s cash balances could be significantly reduced. Cash balances could also be reduced significantly if the financial institutions, which held balances beyond that federally insured, were to become insolvent.
The terrorist attacks that occurred on September 11, 2001, and the response by the United States on October 7, 2001 had a very negative impact on domestic and international air travel and the travel industry in general. As a result, the Company experienced a reduction in registrations and increased cancellations during the period October 1, 2001 to December 31, 2001, as compared to the same period in 2000. In October 2001, the Company undertook a reduction in force and enacted a pay reduction for senior management of the Company. The Company also adjusted and revised virtually all of its marketing plans for 2002. The Company believes the adverse impact of these events will be experienced in the summer of 2002 as a majority of its travel programs are scheduled in June and July of each year. Given the magnitude of these unprecedented events, the Company is not able to determine whether the impact will be material or highly material to the results of operations.
The Company used a significant amount of cash in 2002 toward its dividend payment to Ambassadors prior to its spin-off. The Company also received a capital contribution from Ambassadors concurrent with its spin-off. The Company does not have any material capital expenditure commitments for 2002. Management believes existing cash and cash equivalents and cash flows from operations, combined with the Company’s $20 million credit facility with Ambassadors will be sufficient to fund the Company’s anticipated operating needs, capital expenditures, and acquisitions through 2002.
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. Some of the Company’s forward contracts include a synthetic component if a pre-determined trigger occurs during the term of the contract.
The table below provides information about the Company’s derivative financial instruments that are sensitive to foreign currency exchange rates. For foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates. All contracts mature in 2002. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. None of these contracts is entered into for trading purposes.
At December 31, 2001 and 2000, the Company had unrealized foreign currency losses associated with these financial instruments of approximately $0.5 million, and $0.9 million, respectively.
After the unexpected events of September 11, 2001 and the resulting down turn in the travel industry, the Company took early exit of forward foreign exchange contracts aggregating $5.7 million as it was anticipated the such contracts would not be needed for the related travel season and the related forecasted transactions were no longer probable of occurring. The Company recorded a nominal gain as a result of the early termination of these contracts.
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.
On July 20, 2001, the FASB issued Statement No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment-only approach. Upon adoption of SFAS 142, goodwill and certain other intangible assets will be tested at the reporting unit annually and whenever events or circumstances occur indicating that goodwill and certain other intangible assets might be impaired. Amortization of goodwill and certain other intangible assets, including goodwill recorded in past business combinations, will cease. The Company expects that the adoption of SFAS No. 142 will result in a pre-tax increase to net earnings of a nominal amount for the fiscal year 2002 from the cessation of amortization of previously recorded goodwill and does not expect to recognize any impairments. The Company has nominal identifiable intangible assets as of December 31, 2001.