Ambassadors (EPAX) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

OR

o 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 0-33347

Ambassadors Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization) 91-1957010 (I.R.S. Employer Identification No.)

Dwight D. Eisenhower Building 2001 South Flint Road Spokane, WA (Address of Principal Executive Offices) 99224 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (509) 568-7800

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.

þ Yes

o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes

o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated  filer

þ Accelerated filer

o Non-accelerated filer (Do not check if a smaller reporting company)

o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes

þ No

The number of shares outstanding of the registrant’s Common Stock, $0.01 par value, as of April 27, 2012 was 17,575,722.

AMBASSADORS GROUP, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets	1
Consolidated Statements of Operations	1
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 6. Exhibits	25
SIGNATURES	26
EXHIBIT INDEX

PART I

FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2012 and December 31, 2011

(in thousands, except share and per share data)

	UNAUDITED		AUDITED
	March 31,		December 31,
	2012		2011
ASSETS
Current assets:
Cash and cash equivalents	$	10,040	$	19,519
Available-for-sale securities and other		73,659		39,128
Prepaid program costs and expenses		23,053		13,299
Accounts receivable		4,112		1,395
Deferred tax assets		142		668
Total current assets		111,006		74,009
Property and equipment, net		25,734		26,104
Available-for-sale securities		703		700
Foreign currency exchange contracts		164		-
Intangibles		3,440		3,421
Goodwill		9,781		9,781
Other long-term assets		85		85
Total assets	$	150,913	$	114,100
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses	$	5,335	$	5,858
Participants’ deposits		73,449		27,396
Foreign currency exchange contracts		531		1,671
Other liabilities		104		112
Total current liabilities		79,419		35,037
Participants’ deposits		326		-
Foreign currency exchange contracts		-		102
Deferred tax liability		1,918		2,004
Total liabilities		81,663		37,143

Commitments and Contingencies (Note 9)

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding		-		-
Common stock, $.01 par value; 50,000,000 shares authorized; 17,575,722 and 17,588,088 shares issued and outstanding, respectively		172		172
Additional paid-in capital		526		314
Retained earnings		68,530		77,489
Accumulated other comprehensive income (loss)		22		(1,018	)
Stockholders’ equity		69,250		76,957
Total liabilities and stockholders’ equity	$	150,913	$	114,100

The accompanying notes are an integral part of the consolidated financial statements.

-1-

AMBASSADORS GROUP, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the three months ended March 31, 2012 and 2011

(in thousands, except per-share amounts)

	Three months ended
	March 31,
	2012			2011
Net revenue (loss), non-directly delivered programs	$	89		$	(35	)
Gross revenue, directly delivered programs		1,178			694
Gross revenue, internet and advertising		1,198			1,003
Total revenue		2,465			1,662
Cost of sales, directly delivered programs		886			486
Cost of sales, internet and advertising		170			133
Gross margin		1,409			1,043
Operating expenses:
Selling and marketing		8,687			10,095
General and administrative		4,207			4,383
Total operating expenses		12,894			14,478
Operating loss		(11,485	)		(13,435	)
Other income:
Interest and dividend income		241			335
Foreign currency and other income		2			181
Total other income		243			516
Loss before income tax benefit		(11,242	)		(12,919	)
Income tax benefit		3,336			4,190
Net loss	$	(7,906	)	$	(8,729	)
Weighted-average common shares outstanding - basic		17,576			18,025
Weighted-average common shares outstanding - diluted		17,576			18,025
Net loss per share - basic	$	(0.45	)	$	(0.48	)
Net loss per share - diluted	$	(0.45	)	$	(0.48	)

The accompanying notes are an integral part of the consolidated financial statements.

-2-

AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

For the three months ended March 31, 2012 and 2011

(in thousands)

	Three months ended March 31,
	2012			2011
Net loss		(7,906	)		(8,729	)
Unrealized gain on foreign currency exchange contracts, net of income tax provision of ($474) and ($441)		933			819
Unrealized gain (loss) on available-for-sale securities, net of income tax benefit (provision) of  ($55) and $18		107			(33	)
Comprehensive loss	$	(6,866	)	$	(7,943	)

The accompanying notes are an integral part of the consolidated financial statements.

-3-

 AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the three months ended March 31, 2012 and 2011

(dollars in thousands)

	2012			2011
Cash flows from operating activities:
Net loss	$	(7,906	)	$	(8,729	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,181			1,153
Stock-based compensation		350			553
Deferred income tax benefit		(89	)		(391	)
Gain on foreign currency exchange contracts		-			(183	)
Loss on disposition and impairment of property and equipment		-			4
Excess tax benefit from stock-based compensation		137			-
Change in assets and liabilities:
Accounts receivable and other assets		(2,717	)		(3,345	)
Prepaid program costs and expenses		(9,754	)		(25,594	)
Accounts payable, accrued expenses, and other current liabilities		(647	)		396
Participants’ deposits		46,379			52,572
Net cash provided by operating activities		26,934			16,436
Cash flows from investing activities:
Purchase of available for sale securities		(37,764	)		(19,808	)
Proceeds from sale of available-for-sale securities		3,393			9,355
Purchase and construction of property and equipment		(719	)		(915	)
Purchase of intangibles		(132	)		(114	)
Net cash used in investing activities		(35,222	)		(11,482	)
Cash flows from financing activities:
Repurchase of Common Stock		-			(5,327	)
Dividend payment to shareholders		(1,054	)		(1,080	)
Proceeds from exercise of stock options		-			21
Excess tax benefit from stock-based compensation		(137	)		-
Net cash used in financing activities		(1,191	)		(6,386	)
Net decrease in cash and cash equivalents		(9,479	)		(1,432	)
Cash and cash equivalents, beginning of period		19,519			6,838
Cash and cash equivalents, end of period	$	10,040		$	5,406

The accompanying notes are an integral part of the consolidated financial statements.

-4-

AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

Ambassadors Group, Inc. is a socially conscious educational company primarily engaged in organizing and promoting differentiated worldwide travel programs for students and professionals.  In addition, we operate an education oriented research website called BookRags that provides study guides, lesson plans and other educational resources to students and teachers.  These consolidated financial statements include the accounts of Ambassadors Group, Inc., and our wholly owned subsidiaries, Ambassador Programs, Inc., BookRags, Inc., World Adventures Unlimited, Inc., Ambassadors Unlimited, LLC, AGI Hong Kong Limited, Beijing People to People Education Consultation Co., Ltd, and Marketing Production Systems, LLC. All significant intercompany accounts and transactions, which are of a normal recurring nature, are eliminated in consolidation.

Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel services to students and professionals through multiple itineraries within five travel program types and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being materially misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not indicative of the results that may be expected for the year ending December 31, 2012.

For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

3. Investments and Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

Our financial instruments are measured and recorded at fair value. Our non-financial assets, including property and equipment, intangible assets and goodwill, are measured at fair value upon acquisition, reviewed annually, and are fully assessed if there is an indicator of impairment. An adjustment would be made to record non-financial assets at fair value only when an impairment charge is recognized.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Fair value is determined for assets and liabilities using a three-tiered hierarchy, based upon significant levels of inputs as follows:

-   Level 1 – Quoted prices in active markets for identical assets or liabilities.

-   Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

-   Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following tables summarize the composition of our investments at March 31, 2012 and December 31, 2011 (in thousands):

								Classification on Balance Sheet
March 31, 2012	Amortized  Cost		Unrealized  Gains (Losses)			Aggregate Fair Value		Cash and cash equivalents		Short-term available-for-sale securities		Long-term available-for-sale securities
Auction rate securities (“ARS”), greater than one year	$	1,000	$	(297	)	$	703	$	-	$	-	$	703
Money market funds, ninety days or less		3,320		-			3,320		3,320		-		-
Municipal securities1
One year or less		34,958		(17	)		34,941		-		34,941		-
After one year through three years		17,414		142			17,556		-		17,556		-
Greater than three years through five years		20,613		549			21,162		-		21,162		-
Total	$	77,305	$	377		$	77,682	$	3,320	$	73,659	$	703

								Classification on Balance Sheet
December 31, 2011	Amortized  Cost		Unrealized Gains (Losses)			Aggregate Fair Value		Cash and cash equivalents		Short-term available-for-sale securities		Long-term available-for-sale securities
ARS, greater than one year	$	1,000	$	(300	)	$	700	$	-	$	-	$	700
Money market funds,  ninety days or less		14,503		-			14,503		14,503		-		-
Municipal securities1
One year or less		3,639		(1	)		3,638		-		3,638		-
After one year through three years		16,679		118			16,797		-		16,797		-
Greater than three years through five years		18,295		398			18,693		-		18,693		-
Total	$	54,116	$	215		$	54,331	$	14,503	$	39,128	$	700

1Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table details the fair value measurements of assets and liabilities within the three levels of the fair value hierarchy at March 31, 2012 and December 31, 2011 (in thousands):

			Fair Value Measurements at Reporting Date Using
March 31, 2012	Fair Market Value		Quoted Prices  in Active Markets for Identical Assets (Level 1)		Significant  Other  Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Losses on Impairment
Financial assets:
ARS	$	703	$	-	$	-	$	703	$	-
Money market funds		3,320		3,320		-		-		-
Municipal securities1		73,659		73,659		-		-		-
Foreign currency exchange contracts		398		-		398		-		-
Total financial assets	$	78,080	$	76,979	$	398	$	703	$	-
Financial liabilities:
Foreign currency exchange contracts		765		-		765		-		-
Total financial liabilities	$	765	$	-	$	765	$	-	$	-

			Fair Value Measurements at Reporting Date Using
December 31, 2011	Fair Market  Value		Quoted Prices  in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Losses on Impairment
Financial assets:
ARS	$	700	$	-	$	-	$	700	$	-
Money market funds		14,503		14,503		-		-		-
Municipal securities1		39,128		39,128		-		-		-
Foreign currency exchange contracts		115		-		115		-		-
Total financial assets	$	54,446	$	53,631	$	115	$	700	$	-
Financial liabilities:
Foreign currency exchange contracts		1,888		-		1,888		-		-
Total financial liabilities	$	1,888	$	-	$	1,888	$	-	$	-

1 At March 31, 2012, municipal securities consisted of a 47/45/8 percent split between holdings in short-term municipal security funds, municipal revenue bonds and municipal general obligation bonds, respectively. As part of our investment policy, during the first  quarter of 2012, we began investing in debt funds comprised of short-term municipal securities. At December 31, 2011, municipal securities consisted of an 83/17 split between municipal revenue bonds and municipal general obligation bonds, respectively, and no short-term municipal funds. In addition, the underlying credit rating of the municipal securities at March 31, 2012 and December 31, 2011 were A+, A1 or better as defined by S&P 500 and Moody’s respectively.

Money market funds and municipal securities are classified as Level 1 assets because market prices are readily available for these investments. Level 2 financial assets and liabilities represent the fair value of our foreign currency exchange contracts that were valued using pricing models that take into account the contract terms, as well as multiple inputs where applicable, such as equity prices, interest rate yield curve, option volatility and currency rates. Level 2 non-financial assets represent the fair value of property and equipment, which are valued based on quoted prices and sales of identical assets in an inactive market. Level 3 financial assets represent the fair value of our ARS, which were valued using a pricing model that takes into account the average life of the underlying collateral, the rate of return, and the spread used for similar issuances.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Fair value measurements on a recurring basis using Level 3 inputs only consist of available-for-sale ARS.  The following table presents a reconciliation for the three months ended March 31, 2012 and 2011, of available-for-sale ARS measured at fair value on a recurring basis using Level 3 inputs (in thousands):

	Three months ended  March 31,
	2012		2011
Beginning balance	$	700	$	1,250
Total realized / unrealized losses:
Included in earnings		-		-
Included in OCI		3		(1	)
Purchases, sales, issuances, and settlements, net		-		-
Ending balance	$	703	$	1,249

The credit markets have experienced uncertainty which may continue to impact the markets where our ARS would be offered. During the three months ended March 31, 2012, we experienced one failed ARS auction, representing principal of $1.0 million. This remaining ARS continues to be classified as a long-term asset due to the high probability that the ARS may fail in future auctions. The next scheduled auction for this ARS is March 7, 2013. We have determined that there is no other-than-temporary impairment on this security, since we do not intend and are not required to sell this security before we have recovered the amortized cost basis, there has been no further deterioration of the credit rating of this investment, interest payments at coupon rate continue to be received and we expect to recover the amortized cost basis of this security. We will continue to reassess liquidity in future reporting periods based on several factors, including the success or failure of future auctions, possible failure of the investment to be redeemed, deterioration of the credit rating of the investment, market risk and other factors.

In determining the fair value of bond and ARS investments, we consider the individual ratings of each holding. With regard to bonds, we consider the following: the underlying rating of the issuer irrespective of the insurance; the performance of the issuer; the term of the bond; and the quality of bond insurance provided by the rating of the bond insurer. With regard to valuation of our ARS, we consider the underlying credit quality of comparable student loan portfolios, the average life of the underlying student loan assets, and apply a discount related to the illiquidity of our ARS due to past failed auctions. Based on these inputs, we have applied a discount of 355-basis points  to the London interbank offered rate resulting in a valuation of $0.7 million from a costs basis of $1.0 million as of March 31, 2012. At the reporting dates and in the future, we recognize that this investment is subject to general credit, liquidity, market and interest rate risks, which have been exacerbated by the current global financial environment. The fair value of this investment accordingly will continue to change, and we will continue to evaluate its carrying value.

The following table summarizes the balances of accumulated other comprehensive income (“AOCI”) and the gain (loss) recognized in other comprehensive income (“OCI”) related to unrealized gains and losses for available-for-sale securities in the periods indicated (in thousands):

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Accumulated Other Comprehensive Income (Loss)
	Available-for-sale securities
	2012		2011
Balance, January 1,	$	135	$	(177	)
Other comprehense income (loss), net of income taxes		107		(34	)
Balance, March 31,	$	242	$	(211	)

4. Derivative Financial Instruments

The majority of our travel programs take place outside of the United States and most foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to foreign currency risk relative to changes in foreign currency exchange rates between those currencies and the U.S. dollar for our non-directly delivered programs. We use forward contracts that allow us to acquire the foreign currency at a fixed price for a specified point in time, to provide a hedge against foreign currency risk,. All of our derivatives are cash flow hedges and at March 31, 2012, all contracts qualified for cash flow hedge accounting.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings, which is primarily during the second and third quarters of the year when our student travel programs occur. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

At March 31, 2012, the following forward contracts were outstanding (in thousands):

	Notional Amount	Matures
Forward contracts:
Australian dollar	7,550	April 2012 - July 2013
British pound	3,700	April 2012 - July 2013
Euro	20,550	April 2012 - April 2013
New Zealand dollar	690	May 2012 - July 2013
Canadian dollar	1,050	Apr 2012 - Jun 2012

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value of our forward contracts were as follows (in thousands):

	March 31, 2012
	Derivatives designated as hedging instruments				Derivatives not designated as hedging instruments				Total Net
	Assets		Liabilities		Assets		Liabilities		Liabilities
Forward contracts	$	398	$	765	$	-	$	-	$	367
	December 31, 2011
	Derivatives designated as  hedging instruments				Derivatives not designated as hedging instruments				Total Net
	Assets		Liabilities		Assets		Liabilities		Liabilities
Forward contracts	$	115	$	1,888	$	-	$	-	$	1,773

The net liabilities and asset derivatives at March 31, 2012 and December 31, 2011 are reported in the consolidated balance sheet as current and long-term ‘foreign currency exchange contracts.’

The following table summarizes the gain (loss) recognized in OCI for derivatives designated as hedging instruments  (in thousands):

	Accumulated Other  Comprehensive Income (Loss)
	Foreign currency exchange  contracts
	2012			2011
Balance, January 1,	$	(1,153	)	$	1,210
Other comprehense income, net of income taxes		933			819
Balance, March 31,	$	(220	)	$	2,029

Unrealized losses on forward contracts recorded in AOCI at March 31, 2012, which are expected to be realized in net revenue during the next 12 months, is approximately $0.3 million. This amount was computed using the fair value of the cash flow hedges at March 31, 2012, and may change before actual reclassification from AOCI.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the three months ended March 31, 2012 and 2011, there were no gains or losses recognized in the income statement for derivatives designated as hedging instruments. For the three months ended March 31, 2012 and 2011, the amount of gains or losses recognized in the income statement for derivatives not designated as hedging instruments are as follows (in thousands):

		Amount of Gain
Derivative not designated as  hedging  instruments	Location of Gain Recognized in  Income on Derivative	Three months ended  March 31, 2012		Three months ended  March 31, 2011
Forward contracts	Foreign currency and other expense	$	2	$	183

5.   Stock-Based Compensation

Under the Equity Participation Plan (the “Plan”), we have outstanding options to purchase shares of our Common Stock and restricted stock awards held by eligible employees, non-employee directors and consultants as granted by the Compensation Committee of the Board of Directors (the “Compensation Committee”).

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months ended March 31, 2012 and 2011.

		Three months  ended		Three months ended
		March 31, 2012		March 31, 2011
Expected dividend yield		4.25	%	2.11	%
Expected stock price volatility		65.52	%	63.89	%
Risk-free interest rate		1.99	%	2.35	%
Expected life of options		4.67	Years	4.80	Years
Estimated fair value per option granted	$	2.30		$5.10

The dividend yield is based on expected quarterly cash dividends paid to our shareholders. Expected stock price volatility is based on historical volatility of our stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Additionally, an annualized forfeiture rate of 12.5 percent is used as a best estimate of future forfeitures based on our historical forfeiture experience. The stock-based compensation expense is adjusted in later periods if the actual forfeiture rate is different from the estimate.

Total stock-based compensation expense recognized in the consolidated statement of operations for the quarter ended March 31, 2012 was $0.4 million before income taxes. Of the total stock-based compensation expense during the quarter, stock option expense was $0.2 million, restricted stock award expense was $0.2 million, and the related total deferred tax benefit was $0.1 million.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents information about outstanding common stock options and restricted grants as of March 31, 2012:

	Options and Awards Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted-Average Remaining Contractual Life (years)	Weighted- Average Exercise Price			Shares	Weighted- Average Exercise Price
Restricted Stock Awards
$0.00	362,516	2.36		N/A		N/A		N/A
Stock Options
$4.52   -  6.93	264,426	9.50	$	4.57		4,000	$	6.21
6.94  -  10.39	302,389	5.14		9.09		224,946		9.19
10.40 -  13.86	462,165	7.82		11.52		185,088		11.66
13.87  - 17.32	284,834	4.12		16.90		284,834		16.90
17.33  - 20.79	7,328	6.11		18.41		5,496		18.41
20.80  - 24.25	16,000	0.35		21.09		16,000		21.85
24.26  - 27.72	184,146	3.93		27.08		184,146		27.08
27.73  - 31.18	6,937	4.55		29.48		6,937		29.48
31.19  - 34.65	5,448	4.18		34.65		5,448		34.65
Total Stock Options	1,533,673	6.31	$	13.01		916,895	$	16.24
Combined	1,896,189	5.56	$	13.01		916,895	$	16.24

At March 31 2012, the aggregate intrinsic value of outstanding stock options and restricted stock was $2.1 million, and the aggregate intrinsic value of exercisable stock options and restricted stock was zero based on our $5.35 closing stock price at March 31, 2012. As of March 31, 2012, total unrecognized stock-based compensation expense related to non-vested stock options and non-vested restricted stock awards was approximately $3.5 million, which is expected to be recognized over approximately 3.61 years. During the quarter ended March 31, 2012, there were no stock options exercised, and the total fair value of options which vested was $36 thousand.

The following table presents information about stock option and restricted stock activity during the three months ended March 31, 2012:

	Restricted Stock Awarded	Weighted- Average Grant Date Fair  Value		Stock  Options	Weighted- Average Exercise Price
Balance at December 31, 2011	374,957	$	8.82	1,962,321	$	11.56
Granted	2,212		5.65	5,435		5.65
Forfeited	(14,653)		9.53	(434,083)		6.37
Vested	-		-	N/A		N/A
Exercised	N/A		N/A	-		-
Balance at March 31, 2012	362,516	$	8.77	1,533,673	$	13.01

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6. Net Loss and Dividends per Share

The following table presents a reconciliation of basic and diluted loss per share computations (in thousands, except per share data and anti-dilutive stock option counts):

	Three months ended March 31,
	2012			2011
Numerator:
Net loss	$	(7,906	)	$	(8,729	)
Denominator:
Weighted-average shares outstanding		17,213			17,684
Effect of unvested restricted stock awards      considered participating securities		363			341
Weighted-average shares outstanding – basic		17,576			18,025
Effect of dilutive common stock options		-			-
Weighted-average shares outstanding – diluted		17,576			18,025
Net loss per share – basic	$	(0.45	)	$	(0.48	)
Net loss per share – diluted	$	(0.45	)	$	(0.48	)
Cash dividends declared per share	$	0.06		$	0.06
Stock options excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive		1,552,000			1,095,000

7. Segment Reporting

Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel services to students and professionals through multiple itineraries within four travel program types and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.

Ambassador Programs and Other’s gross margin is comprised of gross receipts less direct program costs, including accommodations, transportation, speakers, facilitators, and event costs. BookRags’ gross margin is comprised of content and subscription and advertising revenues via www.BookRags.com, less commissions and amortization of intangible assets directly associated with sales.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Segment information for the three months ended March 31, 2012 and 2011 were as follows (in thousands):

	Three months ended March 31, 2012								Three months ended March 31, 2011
	Ambassador Programs and Other (1)								Ambassador Programs and Other (1)
				BookRags		Consolidated						BookRags			Consolidated
Total revenue	$	1,267		$	1,198	$	2,465		$	659		$	1,003		$	1,662
Gross margin	$	381		$	1,028	$	1,409		$	173		$	870		$	1,043
Depreciation and amortization	$	1,039		$	142	$	1,181		$	1,034		$	119		$	1,153
Operating income (loss)	$	(11,962	)	$	477	$	(11,485	)	$	(13,813	)	$	378		$	(13,435	)
Income tax provision (benefit)	$	(3,481	)	$	145	$	(3,336	)	$	4,315		$	(125	)	$	4,190
Net income (loss)	$	(8,248	)	$	342	$	(7,906	)	$	(8,991	)	$	262		$	(8,729	)
Total additions to property, plant, and equipment	$	597		$	102	$	699		$	860		$	55		$	915
Total additions to goodwill and intangible assets	$	-		$	132	$	132		$	-		$	114		$	114
Intangible assets, excluding goodwill	$	-		$	3,440	$	3,440		$	-		$	3,369		$	3,369
Total assets	$	134,039		$	16,874	$	150,913		$	152,200		$	15,545		$	167,745

(1)   Ambassador Programs and Other include all travel programs offered by Ambassador Programs and World Adventures Unlimited as well as corporate overhead.

Any intercompany sales or services provided are eliminated upon consolidation.

8. Supplemental Disclosures of Consolidated Statements of Cash Flows

Our non-cash investing and financing activities during the three months ended March 31, 2012 and 2011, were as follows (in thousands):

	March 31, 2012			March 31, 2011
Unrealized gain on foreign currency exchange contracts	$	1,406		$	1,260
Unrealized gain (loss) on available-for-sale securities	$	162		$	(52	)
Property and Equipment	$	(21	)	$	(34	)

9.  Commitments and Contingencies

On July 14, 2009, a securities class action was filed against us and certain of our executive officers on behalf of all persons or entities who purchased our Common Stock between February 8, 2007 and October 23, 2007, in the United States District Court for the Eastern District of Washington. On February 11, 2010, we, and certain of our executive officers, moved to dismiss the class action. On June 2, 2010, the Court issued an order denying these motions to dismiss.  The current amended complaint alleges that the defendants violated federal securities laws by making untrue statements of material fact and/or omitting to state material facts, thereby artificially inflating the price of our Common Stock.  On March 17, 2011, the class was certified for persons who purchased our Common Stock between July 24, 2007 and October 23, 2007. The parties had commenced discovery when, on April 14, 2011, an agreement was reached to settle the action following a mediation before a retired federal judge.  Under the terms of the settlement, our insurance carriers have agreed to pay the settlement amount of $7.5 million, in complete settlement of all claims, without any admission of wrongdoing or liability by the Company or any party in the action. Throughout the litigation, the Company and the individual defendants have denied, and continue to deny, the allegations made against them. We agreed with the insurance carriers to settle the action on these terms, because it was in the best interests of the Company to avoid the burdens, risk, uncertainties and expense that would be inherent in continued litigation. The settlement agreement, which includes a release for all defendants and other provisions common in such agreements, was preliminarily approved by the Court on September 6, 2011 and notice was provided to all class members. The Court held a hearing to consider final approval of the settlement, the plan of allocation, and the motion for the award of plaintiffs’ attorneys’ fees on November 30, 2011, but delayed ruling on these matters pending submission of additional materials by the lead plaintiff. The lead plaintiff submitted the requested additional materials on December 30, 2011, January 17, 2012, and March 19, 2012, and final action with regard to approval of the settlement and related matters is pending with the Court. As the settlement is covered and was funded by the Company’s insurance carrier, the settlement is not expected to have a material adverse effect on our business, financial condition or results of operations.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On October 27, 2009, we were informed by the Securities and Exchange Commission (“SEC”) that it had issued a formal order of investigation with respect to trading in the Company’s securities. We believe that the investigation is for the period August through December 2007. In connection with the investigation, the Company, certain of its officers, directors and employees, as well as other persons, have received subpoenas from the SEC requesting information. The SEC has indicated that the investigation should not be construed as an indication that any violation of law has occurred or as an adverse reflection upon any person, entity or security. The U.S. Department of Justice is involved in the investigation and has served subpoenas upon various employees to appear before the federal grand jury to which the matter has been assigned. The Company will continue to cooperate fully with the investigation.

Other than as disclosed herein, we are not a party to any other material pending legal proceedings other than ordinary routine litigation incidental to our business; the outcome of which we believe will not have a material adverse effect on our business, financial condition, cash flows or results of operations. These matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Adverse outcomes in some or all of the matters described in this section may result in significant monetary damages or injunctive relief against us that would adversely affect our results of operations.

We are subject to the possibility of various loss contingencies, including claims, suits and complaints, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Under our Bylaws, our directors and officers have certain rights to indemnification by us against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which covers certain liabilities arising from our obligation to indemnify our directors and officers and former directors in certain circumstances. No material indemnification liabilities were accrued at March 31, 2012.

10.  Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that provides a consistent definition of fair value and common requirements of and disclosure about fair value between GAAP and International Financial Reporting Standards. The guidance states the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets. Enhanced disclosure requirements will require companies to disclose quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements for recurring Level 3 fair value measurements. For assets and liabilities not recorded at fair value but where fair value is disclosed, companies must report the level in the fair value hierarchy of assets and liabilities. This new guidance became effective for interim and annual periods beginning January 1, 2012, which did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This update, effective for interim and annual reporting periods beginning after December 15, 2011, requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This update does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. Effective December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to Presentation Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. This deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. We adopted the new guidance as of March 31, 2012, and it did not have a material effect on our consolidated financial statements.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In September 2011, the FASB issued new accounting guidance regarding the performance of the two-step quantitative impairment testing of goodwill.  Under the guidance, companies would be allowed to assess on a qualitative basis whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount before performing quantitative tests. If after performing appropriate qualitative assessments the company determines the reporting unit’s fair value is more likely than not to exceed its carrying value, then no further quantitative testing will need to be performed. This new guidance became effective for annual and interim periods after December 15, 2011, and did not have a material impact on our consolidated financial statements.

11. Subsequent Events

On April 4, 2012, the Company’s board of directors approved the listing for sale of the corporate headquarters building located in Spokane, Washington. Management intends to relocate its headquarters to a new leased location also in Spokane upon sale. The Company will continue to classify the building as an asset held for use until the sale is probable and it becomes unlikely that significant changes to the plan will be made. The initial listing price for the building itself and underlying land is $13.3 million. The asset has a total net carrying value, including all related assets, of approximately $16.1 million and is recoverable as an asset held for use. However, the Company will reassess the fair value of the building at each reporting period to determine whether the building qualifies as an asset held for sale and if the carrying value is recoverable as the proposed sale process continues. If the carrying value is not deemed to be recoverable based on current market conditions, the Company may be required to record impairment charges for these assets in the future.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Cerain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange act”). Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 12, 2012 and those factors set forth under Part II, Item 1A Risk Factors set forth in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Introduction

Ambassadors Group, Inc. is a socially conscious education company primarily engaged in organizing and promoting worldwide travel programs for students through a direct to consumer revenue model. We operate student travel programs primarily using the People to People brand under a long-term exclusive license agreement. We believe that our association with that brand and our own 45 years of experience in the student travel industry give us both a strong awareness in the market and a high level of credibility.

Our core program offering is an international destination trip for U.S. students in the 11 to 17 year old age group (“Student Ambassadors Program”). We also offer domestic destination travel programs for U.S. students and international students from over 60 countries focused on leadership and education (“Student Leadership Program”). During 2011, we began to expand our in-bound travel programs by establishing a Beijing office traveling Chinese students on U.S. destination trips (“People to People – China”).

In addition to our People to People student programs, we operate professional travel programs for adults under the People to People brand (“Citizen Ambassadors Program”) and a student travel operation under the Discovery Student Adventures brand (“DSA”).  Our DSA program is associated with Discovery Student Education and operates through a teacher recruited revenue model. Lastly, we operate BookRags (www.bookrags.com), an education oriented research website which provides study guides, lesson plans and other educational resources to students and teachers. The site attracts students and teachers each month to its millions of pages of content, which includes internally developed material, licensed material, and user-generated content.

Executive Overview

As further discussed below, our operating results depend on the number of travelers that attend our programs (“travelers” or “delegates”), the fees we are able to charge for each traveler (“gross revenue”), and the direct costs associated with the traveler’s itinerary including air fare, hotel charges, meal costs, event and location fees, chaperone costs, tour manager fees, and the cost of in-country travel (“cost of sales”). Our business is highly seasonal and the first quarter is typically a slow period for activity. The majority of sales and marketing expenses are incurred in the third and fourth quarters of the year to attract delegates, while the associated revenue is generally recognized in the second and third quarter of the following fiscal year.

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Overall, our gross revenue increased in the first quarter of 2012 compared to the same quarter of 2011, as more delegates traveled under our Student Leadership Programs due to the timing of school spring breaks year over year. Additionally, gross revenue for BookRags increased 19 percent during the first quarter of 2012 compared to the same period in 2011, driven by an increase in content sales.

Associated with this increase, gross margin increased $0.4 million during the first quarter of 2012 compared to 2011. Gross margin as a percentage of gross revenues declined to 52 percent in the first quarter of 2012 compared to 59 percent in 2011 due to a larger portion of total revenue coming from program travel as compared to revenue from BookRags, which typically delivers higher margins.

As planned, the implementation of several cost cutting initiatives, reduced operating expenses by $1.6 million, or 11 percent, during the first quarter of 2012 compared to 2011.  These reductions consisted mostly of lower marketing expenses related to travel campaigns and reduced personnel costs associated with a reduction in staffing and are in line with our strategies to reduce overall operating expenses and maximize profitability.

As we prepare for the 2012 travel season and begin the 2013 selling and marketing campaigns, we are focused on growing customer relationships through our high touch customer service model. We are engaging with our customers earlier than ever and have already secured enrolled delegates to travel in 2013.  We are focused on maintaining a successful, cost effective direct mail model and fall information campaign, while strengthening other lead generation and revenue channels. We believe our strategy will improve the productivity of our marketing efforts and ultimately improve our costs to acquire delegates.

Results of Operations

Comparison of the Three months ended March 31, 2012 to the Three months ended March 31, 2011

The following table sets forth the consolidated financial results and change in dollars and percentages for the periods indicated:

	Three Months Ended March 31,
	2012			2011			$ Change			% Change
Total revenue	$	2,465		$	1,662		$	803		48	%
Cost of goods sold		1,056			619			437		71	%
Gross margin		1,409			1,043			366		35	%
Selling and marketing expenses		8,687			10,095			(1,408	)	-14	%
General and administrative expenses		4,207			4,383			(176	)	-4	%
Operating loss		(11,485	)		(13,435	)		1,950		-15	%
Other income		243			516			(273	)	-53	%
Loss before income tax benefit		(11,242	)		(12,919	)		1,677		-13	%
Income tax benefit		3,336			4,190			(854	)	-20	%
Net loss	$	(7,906	)	$	(8,729	)	$	823		-9	%

During the three months ended March 31, 2012, we traveled 747 delegates compared to 320 delegates traveled during the same period in 2011. The increase in total revenue is due to resulting travel-related revenue combined with an increase in BookRag’s internet content revenue.

Selling and marketing expenses decreased in the first quarter of 2012 compared to 2011, primarily due to cost cutting initiatives related to travel program marketing campaigns. The decrease in general and administrative expenses is due to lower personnel costs mainly realized from the reduction in force performed in February 2012, offset slightly by increased legal and professional fee expenses.

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The decrease in other income is due to a lower interest income earned as a result of the lower cash balance duringthe first three months of 2012 as compared to the same period of 2011.  Additionally, during the first three months of 2011, we recognized a gain of $0.2 million as a result of de-designation of derivative contracts after exiting foreign currency positions following the tsunami in Japan.

We recorded income tax benefits using 29.7 percent and 32.4 percent estimated effective income tax rate applied to the pre-tax loss for the three months ended March 31, 2012 and 2011, respectively. The difference from our statutory rate of 34 percent and the decrease in the effective tax rate on a year over year basis is primarily due to the impact of tax exempt interest income earned during the periods in relation to net loss.

Results of Operations by Segment

Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel services to students and professionals through multiple itineraries within four travel program types and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.

Ambassador Programs and Other’s gross margin is comprised of gross receipts less direct program costs, including air, accommodation, transportation, speakers, facilitators, and event costs. BookRags’ gross margin is comprised of content, subscription, and advertising revenues via www.BookRags.com, less commissions and amortization of intangible assets directly associated with sales.

Segment results of operations for the three months ended March 31, 2012 and 2011 were as follows (in thousands):

	Three months ended March 31 2012,									Three months ended March 31 2011,
	Ambassador Programs and Other (1)									Ambassador Programs and Other (1)
				BookRags			Consolidated						BookRags			Consolidated
Total revenue	$	1,267		$	1,198		$	2,465		$	659		$	1,003		$	1,662
Cost of goods sold		886			170			1,056			486			133			619
Gross margin		381			1,028			1,409			173			870			1,043
Selling and marketing expenses		8,302			385			8,687			9,805			290			10,095
General and administrative expenses		4,041			166			4,207			4,181			202			4,383
Operating income (loss)		(11,962	)		477			(11,485	)		(13,813	)		378			(13,435	)
Other income		233			10			243			507			9			516
Income (loss) before income tax benefit (provision)		(11,729	)		487			(11,242	)		(13,306	)		387			(12,919	)
Income tax benefit (provision)		3,481			(145	)		3,336			4,315			(125	)		4,190
Net income (loss)	$	(8,248	)	$	342		$	(7,906	)	$	(8,991	)	$	262		$	(8,729	)

(1)   Ambassador Programs and Other include all travel programs offered by Ambassador Programs and World Adventures Unlimited as well as corporate overhead.

See ‘Results of Operations’ above for a discussion of year over year variances for Ambassador Programs and Other, as it represents the largest portion of our operating results.

BookRags total revenue and gross margin increased during the first quarter of 2012 as compared to the same period in 2011. The improvement achieved can be attributed to growth from our content sales channels.

Key Performance Non-GAAP Financial Indicators

We analyze our performance on a net income, cash flow and liquidity basis in accordance with generally accepted accounting principles (“GAAP”) as well as on a non-GAAP operating, cash flow and liquidity basis referred to below as “non-GAAP operating results” or “non-GAAP cash flows and liquidity measures.” These measures and related discussions are presented as supplementary information in this analysis to enhance the readers’ understanding of, and highlight trends in, our core financial results. Any non-GAAP financial measure used by us should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.

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2012 Net Enrollments

Net enrollments on a forward looking basis consist of all active participants, which we define as those who have enrolled in our programs less those who have already withdrawn for the travel year referenced, including travel that has already been completed. This is a point in time measurement that we use as an indication of future gross revenues for our travel programs. Enrolled revenue consists of estimated gross receipts to be recognized, in the future, upon travel of an enrolled participant and may not result in the actual gross receipts eventually recognized due both to withdrawals from our programs and expected future enrollments. We believe the decline in enrolled revenue will translate to lower gross revenue for 2012, compared to 2011, for our travel programs.  This non-GAAP measure relates to our travel programs only and does not include anticipated revenue for BookRags.

	As of April 22,
	Delegates
Enrollment detail for travel year	2012		2011		Change			% Change
Student Ambassadors		18,734		20,326		(1,592	)		-7.8	%
Total, all programs		22,686		24,974		(2,288	)		-9.2	%

Deployable Cash

Deployable cash is a liquidity measure which is calculated as the sum of cash, cash equivalents, short-term available-for-sale securities and prepaid program costs and expenses less the sum of accounts payable, accrued expenses and other short-term liabilities (excluding deferred taxes) and participant deposits. We believe the deployable cash measurement is useful in understanding cash available to deploy for current and future business opportunities, as it represents an estimate of excess cash available for strategic actions such as acquisitions. This non-GAAP measure is based on conservative assumptions, such as 100 percent of participants’ deposits being forfeited even though a portion is non-refundable and should not be construed as the maximum amount of cash sources available to run the business. See the ‘Liquidity’ section below for explanations of cash sources and uses.

Deployable Cash Reconciliation (in thousands)

	March 31,						December 31,
	2012			2011			2011
Cash, cash equivalents and short-term available-for-sale securities	$	83,699		$	88,348		$	58,647
Prepaid program cost and expenses		23,053			28,824			13,299
Less: Participants’ deposits		(73,775	)		(87,008	)		(27,396	)
Less: Accounts payable / accruals / other liabilities		(5,439	)		(6,528	)		(5,970	)
Deployable cash	$	27,538		$	23,636		$	38,580

Free Cash Flow

Free cash flow is calculated as cash flow from operations less purchase of property, equipment and intangible assets. Management believes this non-GAAP measure is useful to investors in understanding the cash generated or distributed within the current period for future use in operations. See the ‘Liquidity’ section below for explanations of cash sources and uses.

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Free Cash Flow Reconciliation (in thousands)

	Three months ended March 31,
	2012			2011			$ Change
Cash flow provided by operations	$	26,934		$	16,436		10,498
Purchase of property, equipment and intangibles		(851	)		(1,029	)	178
Free cash flow	$	26,083		$	15,407		10,676

Liquidity and Capital Resources

Liquidity

Total assets at March 31, 2012 were $150.9 million, of which 55.5 percent, or $83.7 million, were cash, cash equivalents and short-term available-for-sale securities. At March 31, 2011, total assets were $167.7 million, of which 52.7 percent, or $88.3 million, were cash, cash equivalents and short-term available-for-sale securities.

Cash provided by operations was $26.9 million and $16.4 million during the three months ended March 31, 2012 and 2011, respectively. The increase in cash provided by operations is primarily due to a normalized level of prepaid program costs made during the first quarter of 2012 offset by lower participant deposits collected during the period compared to the first quarter of 2011 due primarily to lower delegate count volume year over year.

Cash used in investing activities was $35.2 million and $11.5 million during the three months ended March 31, 2012 and 2011, respectively. The increase in cash used in investing activities was primarily due to a net increase in cash used in the purchases of available-for-sale securities as a result of timing of our decision to transfer a portion of our investment portfolio to new account managers in an attempt to diversify our holdings.

Cash used in financing activities was $1.2 million and $6.4 million during the three months ended March 31, 2012 and 2011, respectively. The change in cash used in financing activities was a result of no cash being used for repurchase of our Common Stock in the first quarter of 2012.

Capital Resources

We maintain an unsecured revolving line of credit (the “Revolving Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), which at March 31, 2012, had an unused line of credit of $20.0 million. In order to utilize this line of credit, we must comply with certain covenants. These covenants were amended as of March 31, 2012, and include deployable cash greater than zero, tangible net worth greater than $40.0 million and net income after taxes for the current and previous three quarters of greater than $2.0 million through June 30, 2013, increasing to $4.0 million as of September 30, 2013 and each quarter thereafter. At March 31, 2012, we were in compliance with all covenants.

On February 23, 2012, one of our stockholders publicly announced that it will seek to have its own slate of three director candidates elected to our Board of Directors at our 2012 annual meeting of stockholders. In the customary sequence of our corporate governance process, the Board of Directors and its nominating committee will consider these candidates, along with existing board members that may decide to run for election or other potential candidates. A proxy contest has ensued, which has required the Company to incur additional expenses including legal and professional fees. We are unable to determine the impact of those potential costs on our earnings or our capital resources.

We continue to consider acquisitions of educational and travel businesses. An acquisition may require the use of cash and cash equivalents. Currently, there are no pending acquisitions 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 us.

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We do not have any material capital expenditure commitments for 2012. Our business is not capital intensive and we believe that existing cash and cash equivalents and cash flows from operations will be sufficient to fund our anticipated operating needs and capital expenditures through 2012. For a more complete discussion of these and other contractual factors, please refer to our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed on March 12, 2012.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business.  We consider that our most critical accounting estimates are related to the valuation of available-for-sale securities, valuation of goodwill and intangible assets, foreign currency exchange contracts, revenue recognition, and contingencies and litigation as they require us to make assumptions that may be highly uncertain at the time the accounting estimates were made and changes in them are reasonably likely to occur from period to period.  There are other items within our consolidated financial statements that require estimation, but are not deemed to be critical.  Changes in estimates used in these and other items could have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no significant change to market risk as discussed in ‘Market Risk,’ as part of Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ in our Annual Report on Form 10-K filed on March 12, 2012.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

As of March 31, 2012, the end of the period covered by this report, our chief executive officer and chief financial officer reviewed, evaluated and concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective.  These controls and procedures are designed to ensure information required to be disclosed in our From 10-Q filed or submitted under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and has been accumulated and communicated to our chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting

In the three months ended March 31, 2012, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The information contained in Note 9, “Commitments and Contingencies” to our consolidated financial statements is incorporated by reference.

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors, set forth in Item 1A “Risk Factors,” contained in our Annual Report on Form 10-K filed on March 12, 2012 with the SEC and those set forth below, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

Our business could be negatively affected as a result of a proxy contest and the actions of activist shareholders.

On February 23, 2012, one of our stockholders publicly announced that it will seek to have its own slate of three director candidates elected to our Board of Directors at our 2012 annual meeting of stockholders. A proxy contest has ensued, which could adversely affect our business because:

·   responding to proxy contests and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our management and employees;

·   perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners; and

·   if individuals are elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On various dates between May 2004 and May 2011, our Board of Directors authorized the repurchase of up to an aggregate of $70.0 million of our Common Stock in the open market or through private transactions (the “Repurchase Plan”). The Repurchase Plan does not expire as of any particular date. During the quarter ended March 31, 2012, we repurchased zero shares of our Common Stock. Since inception through March 31, 2012, we have repurchased approximately 3,840,000 shares of our Common Stock, adjusted to reflect the effect of a two-for-one stock split of our Common Stock in 2005, for an approximate total of $56.5 million.

Independent of the Repurchase Plan, during the first quarter of 2007, our Board of Directors approved a single repurchase of 1.2 million shares of our Common Stock for approximately $33.0 million.

The following is a summary of issuer purchases of equity securities during the quarter ended March 31, 2012:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total  Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Program
Available for repurchase at December 31, 2011		-		-		-	$	13,500,020
January 1 - January 31, 2012		-		-		-		13,500,020
February 1 - February 29, 2012		-		-		-		13,500,020
March 1 - March 31, 2012		-		-		-		13,500,020
Available for repurchase at March 31, 2012		-		-		-	$	13,500,020

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Item 6. Exhibits

31.1	Certification under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification under Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification under Section 906 of the Sarbanes-Oxley Act of 2002

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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 GROUP, INC.

Date: May 4, 2012	By:	/s/ JEFFREY D. THOMAS
		Jeffrey D. Thomas
		Chief Executive Officer
Date: May 4, 2012	By:	/s/ ANTHONY F. DOMBROWIK
		Anthony F. Dombrowik
		Senior Vice President, Chief Financial Officer

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EXHIBIT INDEX

31.1	Certification under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification under Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification under Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification under Section 906 of the Sarbanes-Oxley Act of 2002

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