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 September 30, 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 October 25, 2012 was 17,615,754.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| 1 | ||
| 2 | ||
| 3 | ||
| 4 | ||
| 5 | ||
| 19 | ||
| 26 | ||
| 26 | ||
| PART II – OTHER INFORMATION | ||
| 27 | ||
| 27 | ||
| 27 | ||
| 27 | ||
| SIGNATURES | 28 | |
| EXHIBIT INDEX |
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and December 31, 2011
(in thousands, except share and per share data)
| BALANCE SHEET | ||||||||
| UNAUDITED | AUDITED | |||||||
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,930 | $ | 19,519 | ||||
| Available-for-sale securities and other | 45,860 | 39,128 | ||||||
| Foreign currency exchange contracts | 403 | - | ||||||
| Prepaid program costs and expenses | 12,773 | 13,299 | ||||||
| Accounts receivable | 819 | 1,395 | ||||||
| Deferred tax assets | 129 | 668 | ||||||
| Total current assets | 63,914 | 74,009 | ||||||
| Property and equipment, net | 27,195 | 26,104 | ||||||
| Available-for-sale securities | 719 | 700 | ||||||
| Intangibles | 3,541 | 3,421 | ||||||
| Goodwill | 9,781 | 9,781 | ||||||
| Other long-term assets | 85 | 85 | ||||||
| Total assets | $ | 105,235 | $ | 114,100 | ||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 7,772 | $ | 5,858 | ||||
| Participants’ deposits | 7,393 | 27,396 | ||||||
| Foreign currency exchange contracts | - | 1,671 | ||||||
| Other liabilities | 101 | 112 | ||||||
| Total current liabilities | 15,266 | 35,037 | ||||||
| Foreign currency exchange contracts | - | 102 | ||||||
| Deferred tax liabilities | 2,279 | 2,004 | ||||||
| Total liabilities | 17,545 | 37,143 | ||||||
| Commitments and Contingencies (Note 10) | ||||||||
| 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; 17,615,754 and 17,588,088 shares issued and outstanding, respectively | 172 | 172 | ||||||
| Additional paid-in capital | 1,220 | 314 | ||||||
| Retained earnings | 86,100 | 77,489 | ||||||
| Accumulated other comprehensive loss | 198 | (1,018 | ) | |||||
| Stockholders’ equity | 87,690 | 76,957 | ||||||
| Total liabilities and stockholders’ equity | $ | 105,235 | $ | 114,100 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three and nine months ended September 30, 2012 and 2011
(in thousands, except per share amounts)
| Nine months ended | Three months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net revenue, non-directly delivered programs | $ | 44,589 | $ | 51,253 | $ | 16,746 | $ | 20,673 | ||||||||
| Gross revenue, directly delivered programs | 9,008 | 10,357 | 4,783 | 5,135 | ||||||||||||
| Gross revenue, internet and advertising | 3,106 | 2,851 | 903 | 934 | ||||||||||||
| Total revenue | 56,703 | 64,461 | 22,432 | 26,742 | ||||||||||||
| Cost of sales, directly delivered programs | 6,172 | 6,913 | 3,273 | 3,347 | ||||||||||||
| Cost of sales, internet and advertising | 421 | 406 | 118 | 144 | ||||||||||||
| Gross margin | 50,110 | 57,142 | 19,041 | 23,251 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and marketing | 26,459 | 31,406 | 11,289 | 11,872 | ||||||||||||
| General and administrative | 12,113 | 12,427 | 3,522 | 3,924 | ||||||||||||
| Total operating expenses | 38,572 | 43,833 | 14,811 | 15,796 | ||||||||||||
| Operating income | 11,538 | 13,309 | 4,230 | 7,455 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest and dividend income | 1,454 | 1,090 | 595 | 339 | ||||||||||||
| Foreign currency and other income (expense) | (5 | ) | 156 | (2 | ) | (15 | ) | |||||||||
| Total other income | 1,449 | 1,246 | 593 | 324 | ||||||||||||
| Income before income tax benefit (provision) | 12,987 | 14,555 | 4,823 | 7,779 | ||||||||||||
| Income tax benefit (provision) | (1,210 | ) | (3,801 | ) | 662 | (1,727 | ) | |||||||||
| Net income | $ | 11,777 | $ | 10,754 | $ | 5,485 | $ | 6,052 | ||||||||
| Weighted-average common shares outstanding - basic | 17,595 | 17,750 | 17,613 | 17,611 | ||||||||||||
| Weighted-average common shares outstanding - diluted | 17,595 | 17,896 | 17,613 | 17,693 | ||||||||||||
| Net income per share - basic | $ | 0.67 | $ | 0.61 | $ | 0.31 | $ | 0.34 | ||||||||
| Net income per share - diluted | $ | 0.67 | $ | 0.60 | $ | 0.31 | $ | 0.34 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
-2-CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three and nine months ended September 30, 2012 and 2011
(in thousands)
| Nine months ended September 30, | Three months ended September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net income | 11,777 | 10,754 | 5,485 | 6,052 | ||||||||||||
| Unrealized gain (loss) on foreign currency exchange contracts, net of income tax benefit (provision) of ($762), $1,081, ($363), $986 | 1,414 | (2,008 | ) | 674 | (1,831 | ) | ||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of income tax benefit (provision) of $107, ($259), $92, ($94) | (198 | ) | 481 | (171 | ) | 175 | ||||||||||
| Comprehensive income | $ | 12,993 | $ | 9,227 | $ | 5,988 | $ | 4,396 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2012 and 2011
(in thousands)
| 2012 | 2011 | ||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 11,777 | $ | 10,754 | |||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Depreciation and amortization | 3,786 | 3,573 | |||||
| Stock-based compensation | 1,166 | 1,294 | |||||
| Deferred income tax provision (benefit) | 159 | (619 | ) | ||||
| Loss on disposition and impairment of property and equipment | - | 123 | |||||
| Excess tax benefit (shortfall) from stock-based compensation | 260 | (27 | ) | ||||
| Change in assets and liabilities: | |||||||
| Accounts receivable and other assets | 576 | 836 | |||||
| Prepaid program costs and expenses | 526 | (10,716 | ) | ||||
| Accounts payable, accrued expenses, and other current liabilities | 1,653 | 5,519 | |||||
| Participants’ deposits | (20,003 | ) | (25,422 | ) | |||
| Net cash used in operating activities | (100 | ) | (14,685 | ) | |||
| Cash flows from investing activities: | |||||||
| Purchase of available-for-sale securities | (70,333 | ) | (48,674 | ) | |||
| Proceeds from sale of available-for-sale securities | 63,277 | 75,121 | |||||
| Purchase of property and equipment | (4,589 | ) | (2,536 | ) | |||
| Proceeds from sale of property and equipment | - | 49 | |||||
| Purchase of intangibles | (418 | ) | (357 | ) | |||
| Net cash provided by (used in) investing activities | (12,063 | ) | 23,603 | ||||
| Cash flows from financing activities: | |||||||
| Repurchase of Common Stock | - | (7,590 | ) | ||||
| Dividend payment to shareholders | (3,166 | ) | (3,203 | ) | |||
| Proceeds from exercise of stock options | - | 227 | |||||
| Excess tax shortfall (benefit) from stock-based compensation | (260 | ) | 27 | ||||
| Net cash used in financing activities | (3,426 | ) | (10,539 | ) | |||
| Net decrease in cash and cash equivalents | (15,589 | ) | (1,621 | ) | |||
| Cash and cash equivalents, beginning of period | 19,519 | 6,838 | |||||
| Cash and cash equivalents, end of period | $ | 3,930 | $ | 5,217 | |||
The accompanying notes are an integral part of the consolidated financial statements.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. The Company |
Ambassadors Group, Inc. (the “Company”, “we”, “us” or “our”) 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 and nine months ended September 30, 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. Summary of Significant Accounting Policies Revenue Recognition We invoice delegates in advance of travel and payments made are recorded as deferred liabilities for participant deposits. The use of cash collected from participant deposits is not restricted by agreement or law, and therefore is not reported as restricted cash. We also pay for certain program costs in advance of travel, including but not limited to airfare, hotel, and transportation services. Those advanced payments are recorded as prepaid program costs. Revenue and the related costs of sales are then recognized at the time of travel as follows: For non-directly delivered programs, we do not actively manage the operations of each program, and therefore, recognize revenue and anticipated costs from these programs on a net basis when the program convenes. For directly delivered programs in which we organize and operate all activities, we recognize the gross revenue and cost of sales of these directly delivered programs over the period the programs operate. We charge administrative fees under our withdrawal policy for any delegate who enrolls on our programs but does not ultimately travel. The amount of the administrative fee will vary depending on when the withdrawal occurs. We recognize withdrawal fees concurrent with the revenue recognition from the related programs. |
Internet content is recognized at the point of sale while advertising revenues are recognized in conjunction with an advertisement being viewed on the BookRags site. Revenue from annual subscriptions for content access to the website is deferred and recognized monthly over the term of the subscription. Cost of internet content sales include amortization of intangible assets and licensing agreement costs.
For a more complete discussion, 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.
4. 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.
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. |
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the composition of our investments at September 30, 2012 and December 31, 2011 (in thousands):
| Classification on Balance Sheet | |||||||||||||||||||
| September 30, 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 | $ | (281 | ) | $ | 719 | $ | - | $ | - | $ | 719 | ||||||
| Money market funds, ninety days or less | 71 | - | 71 | 71 | - | - | |||||||||||||
Municipal securities1 | |||||||||||||||||||
| One year or less | 33,861 | 129 | 33,990 | - | 33,990 | - | |||||||||||||
| After one year through three years | 9,620 | 48 | 9,668 | - | 9,668 | - | |||||||||||||
| Greater than three years through five years | 2,188 | 14 | 2,202 | - | 2,202 | - | |||||||||||||
| Total | $ | 46,740 | $ | (90 | ) | $ | 46,650 | $ | 71 | $ | 45,860 | $ | 719 | ||||||
| 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.
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 September 30, 2012 and December 31, 2011 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| September 30, 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) | ||||||||
| Financial assets: | ||||||||||||
| ARS | $ | 719 | $ | - | $ | - | $ | 719 | ||||
| Money market funds | 71 | 71 | - | - | ||||||||
Municipal securities1 | 45,860 | 45,860 | - | - | ||||||||
| Foreign currency exchange contracts | 707 | - | 707 | - | ||||||||
| Total financial assets | $ | 47,357 | $ | 45,931 | $ | 707 | 719 | |||||
| Financial liabilities: | ||||||||||||
| Foreign currency exchange contracts | 304 | - | 304 | - | ||||||||
| Total financial liabilities | $ | 304 | $ | - | $ | 304 | $ | - | ||||
| 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) | ||||||||
| 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 September 30, 2012, municipal securities consisted of a 75/18/7 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 September 30, 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 3 financial assets represent the fair value of our auction-rate securities (“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.
-8-
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 and nine months ended September 30, 2012 and 2011, of available-for-sale ARS measured at fair value on a recurring basis using Level 3 inputs (in thousands):
Nine months ended September 30, | Three months ended September 30, | ||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||||||
| Beginning balance | $ | 700 | $ | 1,250 | $ | 714 | $ | 1,250 | |||||||||
| Total realized / unrealized losses: | |||||||||||||||||
| Included in earnings | - | 69 | - | 69 | |||||||||||||
| Included in OCI | 19 | (16 | ) | 5 | (16 | ) | |||||||||||
| Sales | - | (600 | ) | - | (600 | ) | |||||||||||
| Ending balance | $ | 719 | $ | 703 | $ | 719 | $ | 703 | |||||||||
The credit markets have experienced uncertainty, which may continue to impact the markets where our ARS would be offered. During the nine months ended September 30, 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 t hat 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 and 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 341-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 September 30, 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.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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):
Accumulated Other Comprehensive Income (Loss) | ||||||
| Available-for-sale securities | ||||||
| 2012 | 2011 | |||||
| Balance, January 1, | $ | 135 | $ | (177) | ||
| Other comprehensive income (loss), net of income taxes | (198) | 481 | ||||
| Balance, September 30, | $ | (63) | $ | 304 | ||
5. 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 and to provide a hedge against foreign currency risk. All of our derivatives are cash flow hedges and at September 30, 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 September 30, 2012, the following forward contracts were outstanding (in thousands):
| Notional Amount | Matures | |||||
| Forward contracts: | ||||||
| Euro | 12,950 | October 2012 - July 2013 | ||||
| Australian dollar | 4,730 | January 2013 - July 2013 | ||||
| British pound | 2,400 | January 2013 - July 2013 | ||||
| Canadian dollar | 2,380 | February 2013 - June 2013 | ||||
| New Zealand dollar | 490 | March 2013 - July 2013 | ||||
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value of our forward contracts were as follows (in thousands):
| September 30, 2012 | ||||||||
| Derivatives designated as hedging instruments | Total Net | |||||||
| Assets | Liabilities | Assets | ||||||
| Forward contracts | $ | 707 | $ | 304 | $ | 403 | ||
| December 31, 2011 | ||||||||
| Derivatives designated as hedging instruments | Total Net | |||||||
| Assets | Liabilities | Liabilities | ||||||
| Forward contracts | $ | 115 | $ | 1,888 | $ | 1,773 | ||
The net liabilities and asset derivatives at September 30, 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 balances of AOCI and 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 comprehensive income (loss), net of income taxes | 1,414 | (2,008) | ||||
| Balance, September 30, | $ | 261 | $ | (798) | ||
Unrealized gains on forward contracts recorded in AOCI at September 30, 2012, which are expected to be realized in net revenue during the next 12 months, were approximately $0.3 million. This amount was computed using the fair value of the cash flow hedges at September 30, 2012, and may change before actual reclassification from AOCI.
-11-
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the three and nine months ended September 30, 2012 and 2011, the amount of gains or losses recognized in the income statement for derivatives designated as hedging instruments were as follows (in thousands):
Location of gain (loss) reclassed from AOCI (effective portion) | Gain (loss) reclassed from AOCI (effective portion) | |||||||||
| Three months ended September 30, | ||||||||||
| 2012 | 2011 | |||||||||
| Net revenue, non-directly delivered programs | $ | (441) | $ | 1,036 | ||||||
Location of gain (loss) reclassed from AOCI (effective portion) | Gain (loss) reclassed from AOCI (effective portion) | |||||||||
| Nine months ended September 30, | ||||||||||
| 2012 | 2011 | |||||||||
| Net revenue, non-directly delivered programs | $ | (1,048) | $ | 2,595 | ||||||
6. Stock-Based Compensation
Under our 2009 Equity Participation 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 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 and nine months ended September 30, 2012 and 2011.
Nine months ended | Nine months ended | Three months ended | Three months ended | ||||||||||||||||
September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | ||||||||||||||||
| Expected dividend yield | 4.40 | % | 2.20 | % | 4.44 | % | 2.30 | % | |||||||||||
| Expected stock price volatility | 60.75 | % | 62.53 | % | 60.41 | % | 63.76 | % | |||||||||||
| Risk-free interest rate | 1.74 | % | 1.67 | % | 1.58 | % | 1.02 | % | |||||||||||
| Expected life of options | 4.47 | Years | 5.07 | Years | 4.47 | Years | 4.60 | Years | |||||||||||
| Estimated fair value per option granted | $1.90 | $4.21 | $1.93 | $3.10 | |||||||||||||||
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 12.8 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 September 30, 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 $0.2 million. Total stock-based compensation expense recognized in the consolidated statement of operations for the nine months ended September 30, 2012 was $1.2 million before income taxes. Of the total stock-based compensation expense recognized in 2012, stock option expense was $0.6 million, restricted stock award expense was $0.6 million and the related total deferred tax benefit was $0.4 million.
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 September 30, 2012:
| Options and Awards Outstanding | Options Exercisable | ||||||||||||
| Range of Exercise Prices | Shares | Weighted- Average Remaining Contractual Life (years) | Weighted- AverageExercise Price | Shares | Weighted- Average Exercise Price | ||||||||
| Restricted Stock Awards | |||||||||||||
| $0.00 | 394,467 | 2.00 | N/A | N/A | N/A | ||||||||
| Stock Options | |||||||||||||
| $4.52 - 6.93 | 397,331 | 9.24 | $ | 4.77 | 4,000 | $ | 6.21 | ||||||
| 6.94 - 10.39 | 270,813 | 4.92 | 9.18 | 205,304 | 9.29 | ||||||||
| 10.40 - 13.86 | 440,825 | 7.44 | 11.52 | 179,888 | 11.66 | ||||||||
| 13.87 - 17.32 | 275,734 | 3.69 | 16.90 | 275,734 | 16.90 | ||||||||
| 17.33 - 20.79 | 7,328 | 5.61 | 18.41 | 7,328 | 18.41 | ||||||||
| 20.80 - 24.25 | 1,000 | 2.87 | 21.09 | 1,000 | 21.09 | ||||||||
| 24.26 - 27.72 | 176,146 | 3.54 | 27.08 | 176,146 | 27.08 | ||||||||
| 27.73 - 31.18 | 6,937 | 4.05 | 29.48 | 6,937 | 29.48 | ||||||||
| 31.19 - 34.65 | 4,448 | 4.59 | 34.65 | 4,448 | 34.65 | ||||||||
| Total Stock Options | 1,580,562 | 6.33 | $ | 12.28 | 860,785 | $ | 16.23 | ||||||
| Combined | 1,975,029 | 5.47 | $ | 9.82 | 860,785 | $ | 16.23 | ||||||
At September 30, 2012, the aggregate intrinsic value of outstanding stock options and restricted stock was $2.4 million, and the aggregate intrinsic value of exercisable stock options and restricted stock was zero based on our $5.40 closing stock price at September 30, 2012. As of September 30, 2012, total unrecognized stock-based compensation expense related to non-vested stock options and non-vested restricted stock awards was approximately $3.0 million, which is expected to be recognized over approximately 3.84 years. During the quarter and nine months ended September 30, 2012, there were no stock options exercised.
The following table presents information about stock option and restricted stock activity during the nine months ended September 30, 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 | 55,271 | 5.16 | 150,046 | 5.16 | |||||
| Forfeited | (27,730) | 8.97 | (531,805) | 7.63 | |||||
| Vested | (8,031) | 9.34 | N/A | N/A | |||||
| Exercised | N/A | N/A | - | - | |||||
| Balance at September 30, 2012 | 394,467 | $ | 8.28 | 1,580,562 | $ | 12.28 | |||
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
7. Net Income and Dividends per Share
The following table presents a reconciliation of basic and diluted income per share computations (in thousands, except per share data and anti-dilutive stock option counts):
Nine months ended September 30, | Three months ended September 30, | ||||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||||
| Numerator: | |||||||||||||||
| Net income | $ | 11,777 | $ | 10,754 | $ | 5,485 | $ | 6,052 | |||||||
| Denominator: | |||||||||||||||
| Weighted-average shares outstanding | 17,201 | 17,440 | 17,219 | 17,301 | |||||||||||
Effect of unvested restricted stock awards considered participating securities | 394 | 310 | 394 | 310 | |||||||||||
| Weighted-average shares outstanding – basic | 17,595 | 17,750 | 17,613 | 17,611 | |||||||||||
| Effect of dilutive common stock options | - | 146 | - | 82 | |||||||||||
| Weighted-average shares outstanding – diluted | 17,595 | 17,896 | 17,613 | 17,693 | |||||||||||
| Net income per share – basic | $ | 0.67 | $ | 0.61 | $ | 0.31 | $ | 0.34 | |||||||
| Net income per share – diluted | $ | 0.67 | $ | 0.60 | $ | 0.31 | $ | 0.34 | |||||||
| Cash dividends declared per share | $ | 0.18 | $ | 0.18 | $ | 0.06 | $ | 0.06 | |||||||
| Stock options excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive | 1,345,728 | 1,182,000 | 1,209,016 | 1,304,000 | |||||||||||
8. Segment Reporting
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 affiliate commissions and amortization of intangible assets directly associated with sales.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Segment information for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):
| Three months ended September 30, 2012 | Three months ended September 30, 2011 | ||||||||||||||||||||||
| Ambassador Programs and Other (1) | Ambassador Programs and Other (1) | ||||||||||||||||||||||
| BookRags | Consolidated | BookRags | Consolidated | ||||||||||||||||||||
| Total revenue | $ | 21,529 | $ | 903 | $ | 22,432 | $ | 25,808 | $ | 934 | $ | 26,742 | |||||||||||
| Gross margin | $ | 18,256 | $ | 785 | $ | 19,041 | $ | 22,461 | $ | 790 | $ | 23,251 | |||||||||||
| Depreciation and amortization | $ | 1,236 | $ | 138 | $ | 1,374 | $ | 1,085 | $ | 125 | $ | 1,210 | |||||||||||
| Operating income | $ | 3,991 | $ | 239 | $ | 4,230 | $ | 7,229 | $ | 226 | $ | 7,455 | |||||||||||
| Income tax provision (benefit) | $ | (569 | ) | $ | (93 | ) | $ | (662 | ) | $ | 1,695 | $ | 32 | $ | 1,727 | ||||||||
| Net income | $ | 5,131 | $ | 354 | $ | 5,485 | $ | 5,852 | $ | 200 | $ | 6,052 | |||||||||||
| Nine months ended September 30, 2012 | Nine months ended September 30, 2011 | ||||||||||||||||||||||
| Ambassador Programs and Other (1) | Ambassador Programs and Other (1) | ||||||||||||||||||||||
| BookRags | Consolidated | BookRags | Consolidated | ||||||||||||||||||||
| Total revenue | $ | 53,597 | $ | 3,106 | $ | 56,703 | $ | 61,610 | $ | 2,851 | $ | 64,461 | |||||||||||
| Gross margin | $ | 47,425 | $ | 2,685 | $ | 50,110 | $ | 54,697 | $ | 2,445 | $ | 57,142 | |||||||||||
| Depreciation and amortization | $ | 3,373 | $ | 413 | $ | 3,786 | $ | 3,209 | $ | 364 | $ | 3,573 | |||||||||||
| Operating income | $ | 10,480 | $ | 1,058 | $ | 11,538 | $ | 12,449 | $ | 860 | $ | 13,309 | |||||||||||
| Income tax provision | $ | 1,110 | $ | 100 | $ | 1,210 | $ | 3,570 | $ | 231 | $ | 3,801 | |||||||||||
| Net income | $ | 10,767 | $ | 1,010 | $ | 11,777 | $ | 10,098 | $ | 656 | $ | 10,754 | |||||||||||
| Total additions to property, plant, and equipment | $ | 4,290 | $ | 289 | $ | 4,579 | $ | 2,362 | $ | 174 | $ | 2,536 | |||||||||||
| Total additions to goodwill and intangible assets | $ | - | $ | 418 | $ | 418 | $ | - | $ | 357 | $ | 357 | |||||||||||
| Intangible assets, excluding goodwill | $ | - | $ | 3,541 | $ | 3,541 | $ | - | $ | 3,398 | $ | 3,398 | |||||||||||
| Total assets | $ | 87,940 | $ | 17,295 | $ | 105,235 | $ | 92,554 | $ | 16,363 | $ | 108,917 | |||||||||||
| (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.
9. Supplemental Disclosures of Consolidated Statements of Cash Flows
Our non-cash investing and financing activities during the nine months ended September 30, 2012 and 2011 were as follows (in thousands):
| September 30, 2012 | September 30, 2011 | |||||||
| Unrealized gain (loss) on foreign currency exchange contracts | $ | 2,176 | $ | (3,089 | ) | |||
| Unrealized gain (loss) on available-for-sale securities | $ | (305 | ) | $ | 687 | |||
| Property and equipment | $ | (10 | ) | $ | 73 | |||
10. 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. As previously disclosed by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on April 18, 2011, an agreement was reached to settle the securities class action. Under the terms of the settlement, our insurance carriers have paid 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. 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. On June 28, 2012, the Court entered a final order approving the settlement and related matters. On October 9, 2012, the Court entered an order directing entry of judgment and dismissal of the complaint and the claims therein with prejudice. 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.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On October 27, 2009, we were informed by the SEC that it had issued a formal order of investigation with respect to trading in the Company’s securities. We believe that the investigation was for the period August through December 2007. The SEC 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. In August of 2012, the Company was informed that the U.S. Department of Justice, which had been involved in the investigation, and the SEC closed their investigations and are not taking enforcement action against the Company or any of its officers, directors or employees.
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 September 30, 2012.
11. Listing of Corporate Headquarters for Sale
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 may 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 $16.0 million and is recoverable as an asset held for use. However, the Company will continue to 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.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. Subsequent Events
On October 9, 2012, in regard to the securities class action discussed in Note 10, “Commitments and Contingencies”, the Court entered an order directing entry of judgment and dismissal of the complaint and the claims therein with prejudice. 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.
On October 18, 2012, the Company’s Board of Directors approved an additional $2.7 million share repurchase plan to supplement the existing $13.5 million authorization. In addition, a special dividend of $0.50 per share corresponding to approximately $8.8 million was declared payable in November 2012.
13. 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.
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.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. The revised standard allows an entity first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. If it is more likely than not that the asset is impaired, the entity must calculate the fair value of the asset, compare the fair value to its carrying amount, and record an impairment charge, if the carrying amount exceeds fair value. However, if an entity concludes that it is not more likely than not that the asset is impaired, no further action is required. The qualitative assessment is not an accounting policy election. An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. Moreover, an entity can bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test, and then choose to perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
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.
Certain 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. 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 educational 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 have been traveling students on People to People programs for over 50 years and with over 500,000 alumni. We believe that our association with that brand and our own 45 years of experience in the educational 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.
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 airfare, 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 second quarter is typically our highest period for gross revenue and cost of sales 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.
Executive Summary
Our strategy is to maintain our high quality and unique out-of-classroom educational experiences while increasing our volume of business through multi-channel marketing. In order to grow the business, our operating plans include the following: further integrating digital and social marketing into our approach, introducing new conversion channels while refining existing ones; building and preserving high quality customer relationships; and introducing new educational travel programs and experiences independently and through strategic alliances.
We completed another summer travel season in August, having traveled just over 21,000 delegates through September 30, 2012 compared to 23,437 delegates during the first nine months of 2011. This represents a 10 percent decline year-over-year, primarily driven by fewer delegates traveled from our core product, Student Ambassadors Programs. Given this known decline, during 2012 we have actively implemented cost savings initiatives that have reduced our total operating expenses by $5.3 million, or 12 percent, compared to the first nine months of 2011. Net income increased $1.0 million, or 10 percent, to $11.8 million during the first nine months of 2012 compared to $10.8 million in the prior year period. With our peak travel season concluded, we are focused on delivering delegates for our 2013 travel season for all travel products.
Thus far into our fall marketing campaign, we are experiencing a reduction in anticipated 2013 travelers of approximately nine percent. While we are seeing signs of recovery in our non-core products, Student Leadership Programs and Discovery Student Adventures, our current 15 percent decline in Student Ambassador enrollments is driving the overall aggregate decline. We are experiencing a faster than expected decline in the performance of the stand-alone mail component of our integrated marketing strategy. In addition, while our in-person information meetings remain our strongest conversion channel and deliverer of student travelers, attendance, and the number of enrollments through this channel are down year-over-year.
We are taking steps to address this downward trend through the development of new conversion channels and are implementing additional marketing initiatives to confront the gap created against our 2013 enrollment expectations. To augment our existing campaign efforts, we are making adjustments to the balance of the 2013 campaign in an effort to counter the impact of the declining meeting attendance and recapture enrollments. We are accelerating our efforts to pilot alternative conversion channels to address consumers’ desire for on-demand engagement. We have implemented market-specific coordination of direct mail and digital advertising, and are rolling out these digital initiatives to additional key markets for the remainder of our campaign. Concurrently, we are re-addressing our cost structure to further align our expenses with anticipated revenue levels.
We are adjusting to the realities of our marketplace and plan to continue to evolve our multi-channel sales and marketing strategies to adapt to the needs and behaviors of our target audience. We plan to continue to refine our integrated multi-channel strategy with a heavier emphasis on digital reinforcement of the direct mail component. We believe we need to make multiple touch points available while our consumers are researching their decision to travel moving them toward the point of sale, which we anticipate will ultimately translate to stronger conversion for our programs.
As we continue to transition our business to a multi-channel approach, we believe it is important to right-size our balance sheet and return capital to shareholders while we continue to focus on our core business to position the Company for long-term success. With the financial flexibility we believe our balance sheet affords, the Board of Directors has approved approximately $2.7 million in additional share repurchases to augment the existing approximately $13.5 million authorization. In addition, a $0.50 per share special dividend was approved that is scheduled to be paid on or prior to November 22, 2012 to shareholders of record as of November 6, 2012. In aggregate, we plan to distribute approximately $25.0 million in capital back to shareholders.
Results of Operations
Consolidated financial results for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):
| Three Months Ended September 30, | |||||||||||
| 2012 | 2011 | $ Change | % Change | ||||||||
| Total revenue | $ | 22,432 | $ | 26,742 | $ | (4,310) | -16% | ||||
| Cost of goods sold | 3,391 | 3,491 | (100) | -3% | |||||||
| Gross margin | 19,041 | 23,251 | (4,210) | -18% | |||||||
| Selling and marketing expenses | 11,289 | 11,872 | (583) | -5% | |||||||
| General and administrative expenses | 3,522 | 3,924 | (402) | -10% | |||||||
| Operating income | 4,230 | 7,455 | (3,225) | -43% | |||||||
| Other income | 593 | 324 | 269 | 83% | |||||||
| Income before income tax benfit (provision) | 4,823 | 7,779 | (2,956) | -38% | |||||||
| Income tax benefit (provision) | 662 | (1,727) | 2,389 | -138% | |||||||
| Net income | $ | 5,485 | $ | 6,052 | $ | (567) | -9% | ||||
| Nine Months Ended September 30, | |||||||||||
| 2012 | 2011 | $ Change | % Change | ||||||||
| Total revenue | $ | 56,703 | $ | 64,461 | $ | (7,758) | -12% | ||||
| Cost of goods sold | 6,593 | 7,319 | (726) | -10% | |||||||
| Gross margin | 50,110 | 57,142 | (7,032) | -12% | |||||||
| Selling and marketing expenses | 26,459 | 31,406 | (4,947) | -16% | |||||||
| General and administrative expenses | 12,113 | 12,427 | (314) | -3% | |||||||
| Operating income | 11,538 | 13,309 | (1,771) | -13% | |||||||
| Other income | 1,449 | 1,246 | 203 | 16% | |||||||
| Income before income tax provision | 12,987 | 14,555 | (1,568) | -11% | |||||||
| Income tax provision | (1,210) | (3,801) | 2,591 | -68% | |||||||
| Net income | $ | 11,777 | $ | 10,754 | $ | 1,023 | 10% | ||||
During the three months ended September 30, 2012, we traveled 8,300 delegates compared to 9,855 during the third quarter of 2011. During the nine months ended September 30, 2012, we traveled 21,089 delegates compared to 23,437 delegates traveled during the same period in 2011. Overall, our gross revenue decreased during the three and nine months ended September 30, 2012 compared to the same periods in 2011, primarily due to the decrease in delegates traveled from our core Student Ambassadors Program. This expected decline in travel revenue was partially offset by an increase in revenue from BookRags during the first nine months of 2012 compared to the same period in 2011 reflecting increased content sales.
Associated with the decrease in delegates traveled, gross margin decreased $4.2 million and $7.0 million, respectively, during the third quarter and first nine months of 2012 compared to 2011. Gross margin as a percentage of gross revenues declined to 35.5 percent during the third quarter of 2012 compared to 38.0 percent during the third quarter of 2011, primarily due to higher airfare expense associated with rising fuel costs and higher foreign exchange rates year-over-year increasing our land vendor payments. For those same reasons, gross margin as a percentage of gross revenue during the first nine months of 2012 was 36.4 percent compared to 38.0 percent during the first nine months of 2011.
The continuation of several cost cutting initiatives reduced operating expenses by $1.0 million and $5.3 million, respectively, during the third quarter and first nine months of 2012 compared to those same periods in 2011. In line with our strategy to reduce overall operating expenses to maximize profitability, these reductions consisted mainly of lower marketing expenses related to selected travel campaigns and reduced personnel costs associated with a reduction in staffing. In addition, we experienced lower legal expenses related to the SEC investigation that has now been closed, offset by costs incurred related to the previously disclosed proxy contest.
Other income increased $0.3 million and $0.2 million during the third quarter and first nine months of 2012 compared to the same periods in 2011, due primarily to realized gains from the sale of municipal bonds. The prior year nine-month period included a $0.2 million gain as a result of the de-designation of derivative contracts after exiting foreign currency positions following the tsunami in Japan.
We record income tax provisions using an effective income tax rate applied to pre-tax income for the three and nine months ended September 30, 2012 and 2011, respectively. The difference from our statutory rate of 34 percent and the decrease in our effective tax rate during both 2012 and 2011 is primarily due to the impact of tax exempt interest income earned during the periods in relation to net income. During the third quarter of 2012, we recorded an income tax benefit in relation to expected net income for 2012 due to an increase in the ratio of income from tax-exempt securities compared to net income before taxes.
In spite of the decline in delegate counts, our cost cutting initiatives discussed above helped increase profitability in the first nine months of 2012 compared to the same period in 2011. As a result, net income increased $1.0 million in the nine months ended September 30, 2012, compared to the same periods in 2011. The decrease in third quarter net income in 2012 compared to the same period in 2011 is primarily due to a 17 percent decline in travel-related revenue and an increase in air and land costs, offset by a decrease of $1.0 million, or six percent, in total operating expenses as well as a $2.4 million positive variance in income tax (benefit) provision.
Results of Operations by Segment
Segment results of operations for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):
| Three months ended September 30 2012, | Three months ended September 30 2011, | |||||||||||||||||
Ambassador Programs and Other (1) | Ambassador Programs and Other (1) | |||||||||||||||||
| BookRags | Consolidated | BookRags | Consolidated | |||||||||||||||
| Total revenue | $ | 21,529 | $ | 903 | $ | 22,432 | $ | 25,808 | $ | 934 | $ | 26,742 | ||||||
| Cost of goods sold | 3,273 | 118 | 3,391 | 3,347 | 144 | 3,491 | ||||||||||||
| Gross margin | 18,256 | 785 | 19,041 | 22,461 | 790 | 23,251 | ||||||||||||
| Selling and marketing expenses | 10,937 | 352 | 11,289 | 11,471 | 401 | 11,872 | ||||||||||||
| General and administrative expenses | 3,328 | 194 | 3,522 | 3,761 | 163 | 3,924 | ||||||||||||
| Operating income | 3,991 | 239 | 4,230 | 7,229 | 226 | 7,455 | ||||||||||||
| Other income | 571 | 22 | 593 | 318 | 6 | 324 | ||||||||||||
| Income before income tax benefit (provision) | 4,562 | 261 | 4,823 | 7,547 | 232 | 7,779 | ||||||||||||
| Income tax benefit (provision) | 569 | 93 | 662 | (1,695 | ) | (32 | ) | (1,727 | ) | |||||||||
| Net income | $ | 5,131 | $ | 354 | $ | 5,485 | $ | 5,852 | $ | 200 | $ | 6,052 | ||||||
| Nine months ended September 30 2012, | Nine months ended September 30 2011, | |||||||||||||||||
Ambassador Programs and Other (1) | Ambassador Programs and Other (1) | |||||||||||||||||
| BookRags | Consolidated | BookRags | Consolidated | |||||||||||||||
| Total revenue | $ | 53,597 | $ | 3,106 | $ | 56,703 | $ | 61,610 | $ | 2,851 | $ | 64,461 | ||||||
| Cost of goods sold | 6,172 | 421 | 6,593 | 6,913 | 406 | 7,319 | ||||||||||||
| Gross margin | 47,425 | 2,685 | 50,110 | 54,697 | 2,445 | 57,142 | ||||||||||||
| Selling and marketing expenses | 25,403 | 1,056 | 26,459 | 30,357 | 1,049 | 31,406 | ||||||||||||
| General and administrative expenses | 11,542 | 571 | 12,113 | 11,891 | 536 | 12,427 | ||||||||||||
| Operating income | 10,480 | 1,058 | 11,538 | 12,449 | 860 | 13,309 | ||||||||||||
| Other income | 1,397 | 52 | 1,449 | 1,219 | 27 | 1,246 | ||||||||||||
| Income before income tax provision | 11,877 | 1,110 | 12,987 | 13,668 | 887 | 14,555 | ||||||||||||
| Income tax provision | (1,110 | ) | (100 | ) | (1,210 | ) | (3,570 | ) | (231 | ) | (3,801 | ) | ||||||
| Net income | $ | 10,767 | $ | 1,010 | $ | 11,777 | $ | 10,098 | $ | 656 | $ | 10,754 | ||||||
| (1) | Ambassador Programs and Other include all travel programs offered by Ambassador Programs and World Adventures Unlimited as well as corporate overhead. |
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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2013 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. This non-GAAP measure relates to our travel programs only and does not include anticipated revenue for BookRags.
| As of October 22, 2012 and 2011 | |||||||||
| Delegates | |||||||||
| Enrollment detail for travel year | 2013 | 2012 | Change | % Change | |||||
| Student Ambassadors | 13,122 | 15,518 | (2,396) | -15.4% | |||||
| Total, all programs | 15,612 | 17,192 | (1,580) | -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 or return to shareholders. 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) |
| September 30, | December 31, | |||||||||||
| 2012 | 2011 | 2011 | ||||||||||
| Cash, cash equivalents and short-term available-for-sale securities | $ | 49,790 | $ | 52,615 | $ | 58,647 | ||||||
| Prepaid program cost and expenses | 12,773 | 13,946 | 13,299 | |||||||||
| Less: Participants’ deposits | (7,393 | ) | (9,014 | ) | (27,396 | ) | ||||||
| Less: Accounts payable / accruals / other liabilities | (7,873 | ) | (11,480 | ) | (5,970 | ) | ||||||
| Deployable cash | $ | 47,297 | $ | 46,067 | $ | 38,580 | ||||||
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Free Cash Flow
Free cash flow is calculated as cash flow from operations less the 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.
Free Cash Flow Reconciliation (in thousands)
| Nine months ended September 30, | ||||||||||
| 2012 | 2011 | $ Change | ||||||||
| Cash flow used in operations | $ | (100 | ) | $ | (14,685 | ) | 14,585 | |||
| Purchase of property, equipment and intangibles | (5,007 | ) | (2,893 | ) | (2,114 | ) | ||||
| Free cash flow | $ | (5,107 | ) | $ | (17,578 | ) | 12,471 | |||
Liquidity and Capital Resources
Total assets at September 30, 2012 were $105.2 million, of which 47.3 percent, or $49.8 million, were cash, cash equivalents and short-term available-for-sale securities. At September 30, 2011, total assets were $108.9 million, of which 48.3 percent, or $52.6 million, were cash, cash equivalents and short-term available-for-sale securities.
Net cash used in operations was $0.1 million and $14.7 million during the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash used in operations was primarily due to the timing of recurring prepaid program costs. Participant deposits were lower year-over-year due to the decline in 2013 travel season enrollments for our core product, Student Ambassadors Program, as well as due to a reduction in upcoming fourth quarter travel from our Citizen Ambassador Program compared the same period in 2011, as expected. This decrease was partially offset by an increase in participant deposits for 2013 travel from our Student Leadership Program and Discovery Student Adventures.
Net cash used in investing activities was $12.1 million during the first nine months of 2012 compared to cash provided by investing activities of $23.6 million during the nine months ended September 30, 2011. The increase in cash used in investing activities during the current period was primarily due to the timing of net purchases of available-for-sale securities, as well as an increase in cash used for the purchase of property and equipment.
Net cash used in financing activities was $3.4 million and $10.5 million during the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash used in financing activities was due to the fact that we did not repurchase any shares of our Common Stock during the first nine months of 2012.
We maintain an unsecured revolving line of credit with Wells Fargo Bank, National Association, which at September 30, 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 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 September 30, 2012, we were in compliance with all covenants.
Subsequent to the end of the reporting period, our Board of Directors authorized an approximately $8.8 million special dividend and approved an increase of approximately $2.7 million to the approximately $13.5 million remaining under our share repurchase program. In total, our Board of Directors has approved approximately $25 million in return of capital to shareholders.
Contractual Obligations
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 additional information related to our contractual obligations, 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. For a more complete discussion, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change to our market risks 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 September 30, 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 Form 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 management including 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 September 30, 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.
OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note 10, “Commitments and Contingencies” to our consolidated financial statements is incorporated by reference to this Item.
As of the date of this report, there have been no material changes to our risk factors, as discussed in Item 1A, ‘Risk Factors,’ contained in our Annual Report on Form 10-K filed on March 12, 2012.
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 shares of our Common Stock in the open market or through private transactions (the “Repurchase Plan”). As of September 30, 2012, approximately $13.5 million was available to repurchase shares of our Common Stock under the Repurchase Plan. During the three and nine months ended September 30, 2012, we did not repurchase any shares of our Common Stock.
Subsequent to the end of the current period, our Board of Directors authorized an additional approximately $2.7 million of Common Stock that may be purchased under the Repurchase Plan. In total, approximately $16.2 million is available to repurchase shares under the Repurchase Plan.
| 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 | |||
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: November 6, 2012 | By: | /s/ JEFFREY D. THOMAS | |
| Jeffrey D. Thomas | |||
Chief Executive Officer | |||
Date: November 6, 2012 | By: | /s/ ANTHONY F. DOMBROWIK | |
| Anthony F. Dombrowik | |||
Senior Vice President, Chief Financial Officer |
| 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 | |||