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 June 30, 2013 |
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 July 30, 2013 was 16,983,331.
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 | 2 | |
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 | 25 | |
Item 4. Controls and Procedures | 25 | |
PART II – OTHER INFORMATION | ||
Item 1. Legal Proceedings | 26 | |
Item 1A. Risk Factors | 26 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |
Item 5. Other Information | 26 | |
Item 6. Exhibits | 26 | |
SIGNATURES | 27 | |
EXHIBIT INDEX |
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2013 and December 31, 2012
(in thousands, except share and per share data)
UNAUDITED | AUDITED | |||||||
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,494 | $ | 6,150 | ||||
Available-for-sale securities and other | 51,358 | 32,122 | ||||||
Foreign currency exchange contracts | - | 837 | ||||||
Prepaid program costs and expenses | 26,354 | 17,217 | ||||||
Accounts receivable | 905 | 850 | ||||||
Deferred tax assets | 583 | 221 | ||||||
Total current assets | 83,694 | 57,397 | ||||||
Property and equipment, net | 25,656 | 26,344 | ||||||
Available-for-sale securities | 716 | 723 | ||||||
Intangibles | 3,540 | 3,565 | ||||||
Goodwill | 9,781 | 9,781 | ||||||
Other long-term assets | 83 | 85 | ||||||
Total assets | $ | 123,470 | $ | 97,895 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 6,668 | $ | 4,238 | ||||
Participants’ deposits | 47,785 | 25,735 | ||||||
Foreign currency exchange contracts | 358 | - | ||||||
Other liabilities | 77 | 111 | ||||||
Total current liabilities | 54,888 | 30,084 | ||||||
Participants’ deposits | 1,673 | - | ||||||
Foreign currency exchange contracts | 53 | - | ||||||
Deferred tax liabilities | 4,333 | 2,688 | ||||||
Total liabilities | 60,947 | 32,772 | ||||||
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; 16,986,843 and 17,047,470 shares issued and outstanding, respectively | 170 | 170 | ||||||
Retained earnings | 62,986 | 64,589 | ||||||
Accumulated other comprehensive gain (loss) | (633 | ) | 364 | |||||
Stockholders’ equity | 62,523 | 65,123 | ||||||
Total liabilities and stockholders’ equity | $ | 123,470 | $ | 97,895 |
The accompanying notes are an integral part of the consolidated financial statements.
-1-
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three and six months ended June 30, 2013 and 2012
(in thousands, except per share amounts)
Three months ended | Six months ended | ||||||||||
June 30, | June 30, | ||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||
Net revenue, non-directly delivered programs | $ | 21,183 | $ | 27,754 | $ | 21,183 | $ | 27,843 | |||
Gross revenue, directly delivered programs | 2,270 | 3,047 | 4,164 | 4,225 | |||||||
Gross revenue, internet and advertising | 1,029 | 1,005 | 2,028 | 2,203 | |||||||
Total revenue | 24,482 | 31,806 | 27,375 | 34,271 | |||||||
Cost of sales, directly delivered programs | 1,553 | 2,013 | 2,925 | 2,899 | |||||||
Cost of sales, internet and advertising | 126 | 133 | 255 | 303 | |||||||
Gross margin | 22,803 | 29,660 | 24,195 | 31,069 | |||||||
Operating expenses: | |||||||||||
Selling and marketing | 7,323 | 6,483 | 15,842 | 15,170 | |||||||
General and administrative | 2,938 | 4,384 | 8,604 | 8,591 | |||||||
Total operating expenses | 10,261 | 10,867 | 24,446 | 23,761 | |||||||
Operating income (loss) | 12,542 | 18,793 | (251) | 7,308 | |||||||
Other income (expense): | |||||||||||
Interest and dividend income | 160 | 618 | 287 | 859 | |||||||
Foreign currency and other income | 1 | (5) | 21 | (3) | |||||||
Total other income | 161 | 613 | 308 | 856 | |||||||
Income before income tax provision | 12,703 | 19,406 | 57 | 8,164 | |||||||
Income tax provision | (4,611) | (5,208) | (24) | (1,872) | |||||||
Net Income | $ | 8,092 | $ | 14,198 | $ | 33 | $ | 6,292 | |||
Weighted-average common shares outstanding - basic | 16,960 | 17,602 | 16,980 | 17,600 | |||||||
Weighted-average common shares outstanding - diluted | 16,960 | 17,602 | 16,980 | 17,600 | |||||||
Net income per share - basic | $ | 0.48 | $ | 0.81 | $ | 0.00 | $ | 0.36 | |||
Net income per share - diluted | $ | 0.48 | $ | 0.81 | $ | 0.00 | $ | 0.36 |
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three and six months ended June 30, 2013 and 2012
(in thousands)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | 8,092 | 14,198 | 33 | 6,292 | ||||||||||||
Unrealized gain (loss) on foreign currency exchange contracts, net of income tax benefit (provision) of $163, $75, $437 and ($399) | (302 | ) | (192 | ) | (811 | ) | 740 | |||||||||
Unrealized loss on available-for-sale securities, net of income tax benefit of $126, $70, $100 and $14 | (235 | ) | (135 | ) | (186 | ) | (27 | ) | ||||||||
Comprehensive income (loss) | $ | 7,555 | $ | 13,871 | $ | (964 | ) | $ | 7,005 |
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2013 and 2012
(in thousands)
Six months ended June 30, | |||||||
2013 | 2012 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 33 | $ | 6,292 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 2,711 | 2,412 | |||||
Stock-based compensation | 1,957 | 720 | |||||
Deferred income tax benefit | (275 | ) | (80 | ) | |||
Loss on disposition and impairment of property and equipment | 7 | - | |||||
Excess tax shortfall from stock-based compensation | 2,095 | 232 | |||||
Change in assets and liabilities: | |||||||
Accounts receivable and other assets | (53 | ) | (161 | ) | |||
Prepaid program costs and expenses | (9,189 | ) | (11,526 | ) | |||
Accounts payable, accrued expenses, and other current liabilities | 2,406 | 3,865 | |||||
Participants’ deposits | 23,723 | 26,931 | |||||
Net cash provided by operating activities | 23,415 | 28,685 | |||||
Cash flows from investing activities: | |||||||
Purchase of available-for-sale securities | (26,844 | ) | (69,537 | ) | |||
Proceeds from sale of available-for-sale securities | 7,329 | 29,734 | |||||
Purchase of property and equipment | (1,799 | ) | (2,704 | ) | |||
Purchase of intangibles | (164 | ) | (293 | ) | |||
Net cash used in investing activities | (21,478 | ) | (42,800 | ) | |||
Cash flows from financing activities: | |||||||
Repurchase of Common Stock | (486 | ) | - | ||||
Dividend payment to shareholders | (1,017 | ) | (2,110 | ) | |||
Proceeds from exercise of stock options | 5 | - | |||||
Excess tax shortfall from stock-based compensation | (2,095 | ) | (232 | ) | |||
Net cash used in financing activities | (3,593 | ) | (2,342 | ) | |||
Net decrease in cash and cash equivalents | (1,656 | ) | (16,457 | ) | |||
Cash and cash equivalents, beginning of period | 6,150 | 19,519 | |||||
Cash and cash equivalents, end of period | $ | 4,494 | $ | 3,062 |
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 an 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.com, which 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., World Adventures Unlimited, Inc., Ambassadors Unlimited, LLC, AGI Hong Kong Limited, Beijing People to People Education Consultation Co., Ltd, Marketing Production Systems LLC, and BookRags, Inc (“BookRags”). 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 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. |
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 six months ended June 30, 2013 are not indicative of the results that may be expected for the year ending December 31, 2013. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. 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. 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 travel programs begin. For directly delivered programs in which we organize and operate all activities, we recognize the gross revenue and cost of sales of these 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 for the year ended December 31, 2012 on March 11, 2013. |
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 at least annually for impairment, and are fully assessed if there is an indicator of impairment. An adjustment would be made to the fair value of non-financial assets if 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 June 30, 2013 and December 31, 2012 (in thousands):
Classification on Balance Sheet | |||||||||||||||||||
June 30, 2013 | 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 | $ | (284 | ) | $ | 716 | $ | - | $ | - | $ | 716 | ||||||
Money market funds, ninety days or less | 50 | - | 50 | 50 | - | - | |||||||||||||
Municipal securities1 | |||||||||||||||||||
One year or less2 | 43,093 | (109 | ) | 42,984 | - | 42,984 | - | ||||||||||||
After one year through three years | 2,517 | 2 | 2,519 | - | 2,519 | - | |||||||||||||
Greater than three years | 6,019 | (164 | ) | 5,855 | - | 5,855 | - | ||||||||||||
Total | $ | 52,679 | $ | (555 | ) | $ | 52,124 | $ | 50 | $ | 51,358 | $ | 716 | ||||||
Classification on Balance Sheet | |||||||||||||||||||
December 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 | |||||||||||||
ARS, greater than one year | $ | 1,000 | $ | (277 | ) | $ | 723 | $ | - | $ | - | $ | 723 | ||||||
Money market funds, ninety days or less | 1,150 | - | 1,150 | 1,150 | - | - | |||||||||||||
Municipal securities1 | |||||||||||||||||||
One year or less2 | 26,885 | (1 | ) | 26,884 | - | 26,884 | - | ||||||||||||
After one year through three years | 1,345 | 7 | 1,352 | - | 1,352 | - | |||||||||||||
Greater than three years | 3,884 | 2 | 3,886 | - | 3,886 | - | |||||||||||||
Total | $ | 34,264 | $ | (269 | ) | $ | 33,995 | $ | 1,150 | $ | 32,122 | $ | 723 |
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.
2Amounts include short-term municipal security funds that do not have a set maturity date. The aggregate fair value of short-term municipal securities was $42.1 million and $26.1 million as of June 30, 2013, and December 31, 2012, respectively.
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 June 30, 2013 and December 31, 2012 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||
June 30, 2013 | 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 | $ | 716 | $ | - | $ | - | $ | 716 | ||||
Money market funds | 50 | 50 | - | - | ||||||||
Municipal securities1 | 51,358 | 51,358 | - | - | ||||||||
Foreign currency exchange contracts | 36 | - | 36 | - | ||||||||
Total financial assets | $ | 52,160 | $ | 51,408 | $ | 36 | $ | 716 | ||||
Financial liabilities: | ||||||||||||
Foreign currency exchange contracts | 447 | - | 447 | - | ||||||||
Total financial liabilities | $ | 447 | $ | - | $ | 447 | $ | - | ||||
Fair Value Measurements at Reporting Date Using | ||||||||||||
December 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) | ||||||||
Financial assets: | ||||||||||||
ARS | $ | 723 | $ | - | $ | - | $ | 723 | ||||
Money market funds | 1,150 | 1,150 | - | - | ||||||||
Municipal securities1 | 32,122 | 32,122 | - | - | ||||||||
Foreign currency exchange contracts | 952 | - | 952 | - | ||||||||
Total financial assets | $ | 34,947 | $ | 33,272 | $ | 952 | $ | 723 | ||||
Financial liabilities: | ||||||||||||
Foreign currency exchange contracts | 115 | - | 115 | - | ||||||||
Total financial liabilities | $ | 115 | $ | - | $ | 115 | $ | - |
1 At June 30, 2013, municipal securities consisted of an 82/11/7 percent split between holdings in short-term municipal security funds, municipal revenue bonds and municipal general obligation bonds, respectively. At December 31, 2012, municipal securities consisted of an 82/12/6 split between holdings in short-term municipal security funds, municipal revenue bonds and municipal general obligation bonds, respectively. The underlying credit rating of the municipal securities at June 30, 2013 and December 31, 2012 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.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Six months ended | Three months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Beginning balance | $ | 723 | $ | 700 | $ | 729 | $ | 703 | ||||||
Total realized / unrealized losses: | ||||||||||||||
Included in earnings | - | - | - | - | ||||||||||
Included in OCI | (7 | ) | 14 | (13 | ) | 11 | ||||||||
Sales and settlements | - | - | - | - | ||||||||||
Ending balance | $ | 716 | $ | 714 | $ | 716 | $ | 714 |
During the six months ended June 30, 2013, we experienced one failed ARS auction, representing principal of $1.0 million. This 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 6, 2014. 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, which is made up of student loans, 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 343-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 June 30, 2013. At the reporting dates and in the future, we recognize that this investment is subject to general credit, liquidity, market and interest rate risks. The fair value of this investment accordingly will continue to change, and we will continue to evaluate its carrying value.
Unrealized gains or losses related to available-for-sale securities are recorded in accumulated other comprehensive income (“AOCI”). When securities are sold and a realized gain or loss is recognized, the amount is reclassified from AOCI to the income statement. For the three and six months ended June 30, 2013 and 2012, the amounts of net realized gains recognized in the income statement for the sale of investments were as follows (in thousands):
Location of gain reclassed from AOCI | Gain reclassed from AOCI | |||||
Three and six months ended June 30, | ||||||
2013 | 2012 | |||||
Interest and dividend income | $ | 8 | $ | 239 |
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the balances of 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 | ||||||||
2013 | 2012 | |||||||
Balance, January 1, | $ | (180 | ) | $ | 135 | |||
Other comprehensive income, net of income taxes | (186 | ) | (27 | ) | ||||
Balance, June 30, | $ | (366 | ) | $ | 108 |
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 to provide a hedge against foreign currency risk. All of our derivatives are cash flow hedges and at June 30, 2013, 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 June 30, 2013, the following forward contracts were outstanding (in thousands):
Notional Amount | Matures | ||||
Forward contracts: | |||||
Euro | 4,300 | July 2013 - March 2014 | |||
Australian dollar | 4,210 | July 2013 - July 2014 | |||
British pound | 1,120 | July 2013 - June 2014 | |||
Canadian dollar | 810 | August 2013 - June 2014 | |||
New Zealand dollar | 40 | 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):
June 30, 2013 | ||||||||
Derivatives designated as hedging instruments | Total Net | |||||||
Assets | Liabilities | Liabilities | ||||||
Forward contracts | $ | 36 | $ | 447 | $ | 411 | ||
December 31, 2012 | ||||||||
Derivatives designated as hedging instruments | Total Net | |||||||
Assets | Liabilities | Assets | ||||||
Forward contracts | $ | 952 | $ | 115 | $ | 837 |
The net derivative assets at June 30, 2013 and December 31, 2012 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 | ||||||||
2013 | 2012 | |||||||
Balance, January 1, | $ | 544 | $ | (1,153 | ) | |||
Other comprehensive income (loss), net of income taxes | (811 | ) | 740 | |||||
Balance, June 30, | $ | (267 | ) | $ | (413 | ) |
Unrealized losses on forward contracts recorded in AOCI at June 30, 2013, which are expected to be realized in net revenue during the next 12 months, were approximately $0.4 million. This amount was computed using the fair value of the cash flow hedges at June 30, 2013, and may change before actual reclassification from AOCI.
For the three and six months ended June 30, 2013 and 2012, the amount of gains and 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 and six months ended June 30, | ||||||||
2013 | 2012 | |||||||
Net revenue, non-directly delivered programs | $ | 76 | $ | (607 | ) |
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 six months ended June 30, 2013 and 2012.
Six months ended | Six months ended | Three months ended | Three months ended | ||||||||||||
June 30, 2013 | June 30, 2012 | June 30, 2013 | June 30, 2012 | ||||||||||||
Expected dividend yield1 | 1.37 | % | 4.39 | % | - | % | 4.72 | % | |||||||
Expected stock price volatility | 54.66 | % | 60.85 | % | 52.68 | % | 60.61 | % | |||||||
Risk-free interest rate | 2.08 | % | 1.79 | % | 2.10 | % | 1.89 | % | |||||||
Expected life of options | 4.56 | Years | 4.47 | Years | 4.53 | Years | 4.46 | Years | |||||||
Estimated fair value per option granted | $1.63 | $1.89 | $1.61 | $1.83 |
1The Company suspended quarterly dividend payments during the three months ended June 30, 2013.
The dividend yield is based on expected quarterly cash dividends paid to our shareholders as of the date of grant. 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 12.3 percent is used as an 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 June 30, 2013 was approximately $0.2 million before income taxes. Of the total stock-based compensation expense during the quarter, stock option expense was approximately $0.1 million and restricted stock award expense was approximately $0.1 million. Total stock-based compensation expense recognized in the consolidated
statement of operations for the six months ended June 30, 2013 was $2.0 million before income taxes. Of the total stock-based compensation expense recognized in 2013, stock option expense was $1.0 million and restricted stock
award expense was $1.0 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 June 30, 2013:
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 | 245,822 | 2.41 | N/A | N/A | N/A | |||||||
Stock Options | |||||||||||||
$ | 4.50 - 6.93 | 558,865 | 9.18 | $ | 4.53 | 558,865 | $ | 4.81 | |||||
6.94 - 10.39 | 59,603 | 5.82 | 8.50 | 59,603 | 8.56 | ||||||||
10.40 - 13.86 | 129,354 | 6.33 | 11.40 | 129,354 | 11.47 | ||||||||
13.87 - 17.32 | 22,464 | 2.65 | 16.78 | 22,464 | 16.78 | ||||||||
17.33 - 20.79 | 5,496 | 4.86 | 18.41 | 5,496 | 18.41 | ||||||||
20.80 - 24.25 | 1,000 | 2.12 | 21.09 | 1,000 | 21.09 | ||||||||
24.26 - 27.72 | 6,500 | 2.60 | 26.95 | 6,500 | 26.95 | ||||||||
27.73 - 31.18 | 5,958 | 3.38 | 29.74 | 5,958 | 29.74 | ||||||||
31.19 - 34.65 | 3,711 | 3.85 | 34.65 | 3,711 | 34.65 | ||||||||
Total Stock Options | 792,951 | 8.11 | $ | 6.92 | 792,951 | $ | 11.33 | ||||||
Combined | 1,038,773 | 6.76 | $ | 5.29 | 792,951 | $ | 11.33 |
At June 30, 2013, the aggregate value of restricted stock was $0.9 million and the aggregate intrinsic value of outstanding and exercisable stock options was zero based on our $3.55 closing stock price at June 30, 2013. The intrinsic value is the amount that would have been received by the optionees had all restricted stock been vested and all stock options been exercised on that date. As of June 30, 2013, total unrecognized stock-based compensation expense related to non-vested stock options and non-vested restricted stock awards was approximately $1.7 million, which is expected to be recognized over approximately 3.93 years.
The following table presents information about stock option and restricted stock activity during the six months ended June 30, 2013:
Restricted Stock Awarded | Weighted- Average Grant Date Fair Value | Stock Options | Weighted- Average Exercise Price | ||||||
Balance at December 31, 2012 | 446,946 | $ | 7.24 | 1,877,500 | $ | 11.02 | |||
Granted | 54,907 | 3.84 | 129,119 | 3.89 | |||||
Forfeited | (6,924) | 6.64 | (1,212,547) | 12.95 | |||||
Vested | (249,107) | 7.97 | N/A | N/A | |||||
Exercised | N/A | N/A | (1,121) | 4.52 | |||||
Balance at June 30, 2013 | 245,822 | $ | 5.75 | 792,951 | $ | 6.92 |
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):
Six months ended June 30, | Three months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Numerator: | |||||||||||||||
Net income | $ | 33 | $ | 6,292 | $ | 8,092 | $ | 14,198 | |||||||
Denominator: | |||||||||||||||
Weighted-average shares outstanding | 16,683 | 17,215 | 16,727 | 17,217 | |||||||||||
Effect of unvested restricted stock awards considered participating securities | 297 | 385 | 233 | 385 | |||||||||||
Weighted-average shares outstanding – basic | 16,980 | 17,600 | 16,960 | 17,602 | |||||||||||
Effect of dilutive common stock options | - | - | - | - | |||||||||||
Weighted-average shares outstanding – diluted | 16,980 | 17,600 | 16,960 | 17,602 | |||||||||||
Net income per share – basic | $ | 0.00 | $ | 0.36 | $ | 0.48 | $ | 0.81 | |||||||
Net income per share – diluted | $ | 0.00 | $ | 0.36 | $ | 0.48 | $ | 0.81 | |||||||
Cash dividends declared per share1 | $ | 0.06 | $ | 0.12 | $ | - | $ | 0.06 | |||||||
Stock options excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive | 1,635,000 | 1,403,000 | 1,395,000 | 1,253,000 |
1The Company suspended quarterly dividend payments during the three months ended June 30, 2013.
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 six months ended June 30, 2013 and 2012 were as follows (in thousands):
Three months ended June 30, 2013 | Three months ended June 30, 2012 | |||||||||||||||||
Ambassador Programs and Other1 | Ambassador Programs and Other1 | |||||||||||||||||
BookRags | Consolidated | BookRags | Consolidated | |||||||||||||||
Total revenue | $ | 23,453 | $ | 1,029 | $ | 24,482 | $ | 30,801 | $ | 1,005 | $ | 31,806 | ||||||
Gross margin | $ | 21,900 | $ | 903 | $ | 22,803 | $ | 28,788 | $ | 872 | $ | 29,660 | ||||||
Depreciation and amortization | $ | 1,255 | $ | 131 | $ | 1,386 | $ | 1,096 | $ | 133 | $ | 1,229 | ||||||
Operating income | $ | 12,165 | $ | 377 | $ | 12,542 | $ | 18,451 | $ | 342 | $ | 18,793 | ||||||
Income tax provision | $ | 4,442 | $ | 169 | $ | 4,611 | $ | 5,160 | $ | 48 | $ | 5,208 | ||||||
Net income | $ | 7,884 | $ | 208 | $ | 8,092 | $ | 13,884 | $ | 314 | $ | 14,198 | ||||||
Six months ended June 30, 2013 | Six months ended June 30, 2012 | |||||||||||||||||
Ambassador Programs and Other1 | Ambassador Programs and Other1 | |||||||||||||||||
BookRags | Consolidated | BookRags | Consolidated | |||||||||||||||
Total revenue | $ | 25,347 | $ | 2,028 | $ | 27,375 | $ | 32,068 | $ | 2,203 | $ | 34,271 | ||||||
Gross margin | $ | 22,422 | $ | 1,773 | $ | 24,195 | $ | 29,169 | $ | 1,900 | $ | 31,069 | ||||||
Depreciation and amortization | $ | 2,419 | $ | 292 | $ | 2,711 | $ | 2,137 | $ | 275 | $ | 2,412 | ||||||
Operating income (loss) | $ | (960 | ) | $ | 709 | $ | (251 | ) | $ | 6,489 | $ | 819 | $ | 7,308 | ||||
Income tax provision (benefit) | $ | (265 | ) | $ | 289 | $ | 24 | $ | 1,679 | $ | 193 | $ | 1,872 | |||||
Net income (loss) | $ | (387 | ) | $ | 420 | $ | 33 | $ | 5,636 | $ | 656 | $ | 6,292 | |||||
Total additions to property and equipment, net | $ | 1,600 | $ | 189 | $ | 1,789 | $ | 3,283 | $ | 113 | $ | 3,396 | ||||||
Total additions to intangibles | $ | - | $ | 164 | $ | 164 | $ | - | $ | 293 | $ | 293 | ||||||
Intangibles | $ | - | $ | 3,540 | $ | 3,540 | $ | - | $ | 3,505 | $ | 3,505 | ||||||
Total assets | $ | 108,061 | $ | 15,409 | $ | 123,470 | $ | 132,802 | $ | 17,199 | $ | 150,001 |
1Ambassador 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 three and six months ended June 30, 2013 and 2012 were as follows (in thousands):
June 30, 2013 | June 30, 2012 | ||||||||
Unrealized gain (loss) on foreign currency exchange contracts | $ | (1,248 | ) | $ | 1,139 | ||||
Unrealized loss on available-for-sale securities | $ | (286 | ) | $ | (42 | ) | |||
Property and equipment | $ | (10 | ) | $ | 692 |
10. Commitments and Contingencies
On February 25, 2013, Jeffrey D. Thomas, our former President and Chief Executive Officer, and Margaret M. Thomas, our former Executive Vice President, tendered their resignations to our Board of Directors. In connection with Mr. and Ms. Thomas’ resignations, we entered into separation agreements effective February 25, 2013. Under the terms of the separation agreements, cash payouts of approximately $0.8 million and $0.4 million are to be made to Mr. and Ms. Thomas, respectively, which during the first quarter of 2013 was fully expensed. As of June 30, 2013, approximately $1.0 million in cash payments remained to be paid within the next nine months under the terms of the agreements. Additionally, the separation agreements called for immediate vesting of stock options and stock grants for both Mr. Thomas and Ms. Thomas.
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We are not a party to any 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.
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 June 30, 2013.
11. Listing of Corporate Headquarters for Sale
In April 2012, our Board of Directors approved the listing for sale of our corporate headquarters building located in Spokane, Washington. We intend to relocate our headquarters to a new leased location in Spokane upon sale. We will continue to classify the building as an asset held for use until the sale is probable within 12 months and it becomes unlikely that significant changes to the plan will be made. Dependent on the offers received for the building, our Board of Directors may elect not to sell the building and the planned sale could be withdrawn. 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 $15.6 million and is recoverable as an asset held for use. However, we 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, we may be required to record impairment charges for these assets in the future.
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.
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 11, 2013. 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 leading provider of educational travel experiences and online education research materials 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 have over 500,000 alumni. We believe that our association with that brand and 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 Ambassador Program”). We also offer domestic destination travel programs for U.S. students and international students from over 60 countries focused on leadership and education (“Leadership Ambassador 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 Ambassador Program”) and a student travel operation under the Discovery Student Adventures brand. Our Discovery Student Adventures programs are 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 net of pass-through expenses associated with non-directly delivered programs such as airfare and third-party tour operator fees (“total revenue”), and the direct costs associated with the traveler’s itinerary on directly delivered programs 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 and third quarters are typically our highest period for gross revenue and cost of sales activity. We are shifting our marketing strategy towards a year-round approach, which will mean our sales and marketing expenses will shift with it and not necessarily be incurred in the traditional third and fourth quarters of each fiscal year. Revenue associated with selling and marketing expenses are 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 our business, our operating plans include the following: further integrating digital and social marketing into our methodology, introducing new conversion channels while refining existing avenues; building and preserving high quality customer relationships; engaging our customers year-round while offering a wider range of product offerings; and managing our cost structure to protect profitability.
We are nearing the completion of our primary summer travel season and while delegate counts are down, we have focused efforts on safely traveling our delegates while also adding and retaining delegates traveling later in the year and during the 2014 summer travel season. Our retention rates this travel season improved by 10 percent year over year, which we attribute to increased social media presence, digital engagement, and high touch customer service with our delegates and their families.
As part of our strategic focus, we are dedicated to a year-round marketing approach selling our services throughout the year. We began selling 2014 travel in February 2013 and launched our first-ever significant spring campaign in March 2013. As of June 30, 2013, we have generated a greater number of enrollments for the 2014 travel season compared to any other travel season in our history at this point in the year. We believe our multi-channel strategy, with an emphasis on cross-channel coordination of direct mail and digital, will enable us to be successful in our year-round approach and is playing a significant role in our initial results. While these early enrollments are likely a shift in the timing of enrollments that would have occurred during our fall campaign, we believe the longer customer engagement and payment periods offered to our early enrollments will help improve retention efforts with minimal additional cost. We believe the shift towards a year-round strategy better aligns us with consumer interest and demand, while potentially mitigating some of the risk associated with the historical reliance on the fall marketing campaign, as well as offsetting some of the seasonality inherent in our summer-focused travel business.
We continually monitor our costs against current revenue levels and look to structure our operations to both maximize profitability and shareholder value. We are attentive to rightsizing our cost structure to ensure meaningful profitability for the future. Our focus will continue to remain on our Student Ambassador Programs, which is our largest and most established brand. We plan to continue to evaluate the changes in our business and look to optimize our product offerings, while improving costs and operating efficiencies.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2013 with the Three and Six Months Ended June 30, 2012
Consolidated financial results for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):
Three Months Ended June 30, | ||||||||||||
2013 | 2012 | $ Change | % Change | |||||||||
Total revenue | $ | 24,482 | $ | 31,806 | $ | (7,324) | -23% | |||||
Cost of goods sold | 1,679 | 2,146 | (467) | -22% | ||||||||
Gross margin | 22,803 | 29,660 | (6,857) | -23% | ||||||||
Selling and marketing expenses | 7,323 | 6,483 | 840 | 13% | ||||||||
General and administrative expenses | 2,938 | 4,384 | (1,446) | -33% | ||||||||
Operating income | 12,542 | 18,793 | (6,251) | -33% | ||||||||
Other income | 161 | 613 | (452) | -74% | ||||||||
Income before income tax provision | 12,703 | 19,406 | (6,703) | -35% | ||||||||
Income tax provision | (4,611) | (5,208) | 597 | -11% | ||||||||
Net income | $ | 8,092 | $ | 14,198 | $ | (6,106) | -43% | |||||
Six Months Ended June 30, | ||||||||||||
2013 | 2012 | $ Change | % Change | |||||||||
Total revenue | $ | 27,375 | $ | 34,271 | $ | (6,896) | -20% | |||||
Cost of goods sold | 3,180 | 3,202 | (22) | -1% | ||||||||
Gross margin | 24,195 | 31,069 | (6,874) | -22% | ||||||||
Selling and marketing expenses | 15,842 | 15,170 | 672 | 4% | ||||||||
General and administrative expenses | 8,604 | 8,591 | 13 | 0% | ||||||||
Operating income (loss) | (251) | 7,308 | (7,559) | -103% | ||||||||
Other income | 308 | 856 | (548) | -64% | ||||||||
Income before income tax provision | 57 | 8,164 | (8,107) | -99% | ||||||||
Income tax provision | (24) | (1,872) | 1,848 | -99% | ||||||||
Net income | $ | 33 | $ | 6,292 | $ | (6,259) | -99% |
Total Revenue
The decrease in total revenue during the three and six months ended June 30, 2013 compared to 2012 was primarily due to an expected decline in delegate counts. During the three months ended June 30, 2013, we traveled 9,228 delegates compared to 12,042 during the same period of 2012. During the six months ended June 30, 2013, we traveled 9,800 delegates compared to 12,789 during the same period of 2012. The total revenue decline of approximately $7.3 million, or 23 percent, during the second quarter of 2013 compared to the same quarter of 2012 was driven by a 24 percent decline in travel related revenue offset by a two percent increase in revenue from BookRags due to an increase in online advertising revenue. The total revenue decline of approximately $6.9 million, or 20 percent, during the first six months of 2013 compared to the same period in 2012 was driven by a 21 percent decline in travel related revenue and an eight percent decline in BookRags revenue. The decline in BookRags revenue can be attributed to a decline in content revenue due to decreased traffic to the website experienced during the first six months of 2013.
Gross Margin
As a result of the decline in delegates traveled, gross margin decreased approximately $6.9 million during the three and six months ended June 30, 2013 compared to the same periods in 2012. For the three and six months ended June 30, 2013 gross margin as a percentage of gross revenues was 36.5 percent and 37.0 percent, respectively, and unchanged compared to the same periods in 2012. Despite the decline in delegate counts year-over-year, gross margin as a percentage of gross revenue remained flat.
Operating Expenses
Selling and marketing expenses increased approximately $0.8 million during the three months ended June 30, 2013 compared to the same period in 2012 due mainly to higher personnel and depreciation expenses. General and administrative expenses decreased approximately $1.4 million during the three months ended June 30, 2013 compared to the same period in 2012 due mostly to a reduction in legal expenses of approximately $1.0 million incurred during 2012 related to a previously disclosed proxy contest.
During the six months ended June 30, 2013, selling and marketing expenses increased approximately $0.7 million compared to the same period in 2012 due to increased personnel, depreciation, and medical insurance expenses, offset partially by non-recurring legal fees incurred during 2012. During the six months ended June 30, 2013 general and administrative expenses remained flat compared to the same period in 2012. In the first quarter of 2013, we incurred approximately $2.7 million in expense related to separation agreements with former executives. Offsetting this increase in expense was a reduction in personnel expense of approximately $0.5 million related to the capitalization of compensation for capitalized technology projects and a reversal of approximately $0.6 million in expense related to reimbursement of legal fees previously expensed as part of a now closed SEC investigation. During the first six months of 2012, we incurred approximately $1.3 million in legal and professional fees associated with a previously disclosed proxy contest, approximately $0.2 million as part of a reduction in force, and approximately $0.1 million in expenses related to the SEC investigation.
Other Income
Other income decreased to $0.2 million during the three months ended June 30, 2013 from $0.6 million during the three months ended June 30, 2012, due to a decline in interest income earned on lower cash balances in 2013 and realized gains from the sale of investments earned during 2012. For these same reasons, other income decreased to $0.3 million during the six months ended June 30, 2013 from $0.9 million during the six months ended June 30, 2012.
Income Taxes
We recorded income tax provisions using effective income tax rates of 42.1 percent and 22.9 percent applied to pre-tax income for the six months ended June 30, 2013 and 2012, respectively. The difference from our statutory rate of 34 percent during 2013 was primarily due to the impact of tax exempt interest income on projected net loss for the year ending December 31, 2013. The difference from our statutory rate of 34 percent during 2012 was primarily due to the impact of tax exempt interest income earned in relation to projected net income for the year ended December 31, 2012.
Results of Operations by Segment
Segment results of operations for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):
Three months ended June 30, 2013 | Three months ended June 30, 2012 | ||||||||||||||||
Ambassador Programs and Other1 | Ambassador Programs and Other1 | ||||||||||||||||
BookRags | Consolidated | BookRags | Consolidated | ||||||||||||||
Total revenue | $ | 23,453 | $ | 1,029 | $ | 24,482 | $ | 30,801 | $ | 1,005 | $ | 31,806 | |||||
Cost of goods sold | 1,553 | 126 | 1,679 | 2,013 | 133 | 2,146 | |||||||||||
Gross margin | 21,900 | 903 | 22,803 | 28,788 | 872 | 29,660 | |||||||||||
Selling and marketing expenses | 6,948 | 375 | 7,323 | 6,164 | 319 | 6,483 | |||||||||||
General and administrative expenses | 2,787 | 151 | 2,938 | 4,173 | 211 | 4,384 | |||||||||||
Operating income | 12,165 | 377 | 12,542 | 18,451 | 342 | 18,793 | |||||||||||
Other income | 161 | - | 161 | 593 | 20 | 613 | |||||||||||
Income before income tax provision | 12,326 | 377 | 12,703 | 19,044 | 362 | 19,406 | |||||||||||
Income tax provision | (4,442) | (169) | (4,611) | (5,160) | (48) | (5,208) | |||||||||||
Net income | $ | 7,884 | $ | 208 | $ | 8,092 | $ | 13,884 | $ | 314 | $ | 14,198 | |||||
Six months ended June 30, 2013 | Six months ended June 30, 2012 | ||||||||||||||||
Ambassador Programs and Other1 | Ambassador Programs and Other1 | ||||||||||||||||
BookRags | Consolidated | BookRags | Consolidated | ||||||||||||||
Total revenue | $ | 25,347 | $ | 2,028 | $ | 27,375 | $ | 32,068 | $ | 2,203 | $ | 34,271 | |||||
Cost of goods sold | 2,925 | 255 | 3,180 | 2,899 | 303 | 3,202 | |||||||||||
Gross margin | 22,422 | 1,773 | 24,195 | 29,169 | 1,900 | 31,069 | |||||||||||
Selling and marketing expenses | 15,051 | 791 | 15,842 | 14,466 | 704 | 15,170 | |||||||||||
General and administrative expenses | 8,331 | 273 | 8,604 | 8,214 | 377 | 8,591 | |||||||||||
Operating income (loss) | (960) | 709 | (251) | 6,489 | 819 | 7,308 | |||||||||||
Other income | 308 | - | 308 | 826 | 30 | 856 | |||||||||||
Income before income tax provision | (652) | 709 | 57 | 7,315 | 849 | 8,164 | |||||||||||
Income tax benefit (provision) | 265 | (289) | (24) | (1,679) | (193) | (1,872) | |||||||||||
Net income (loss) | $ | (387) | $ | 420 | $ | 33 | $ | 5,636 | $ | 656 | $ | 6,292 |
1Ambassador 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, and a discussion of BookRags year over year variances where applicable.
Key Performance Non-GAAP Financial Indicators
We analyze our performance on a net income, cash flow and liquidity basis in accordance with 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.
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. We anticipate a decline in enrolled revenue, which will translate to lower gross revenue in 2013 for our travel programs compared to 2012 travel. This non-GAAP measure relates to our travel programs only and does not include anticipated revenue for BookRags.
As of July 28, 2013 and 2012 | |||||||
Delegates | |||||||
Enrollment detail for travel year | 2013 | 2012 | Change | % Change | |||
Student Ambassadors | 13,841 | 17,362 | (3,521) | -20.3% | |||
Total, all programs | 18,197 | 21,151 | (2,954) | -14.0% |
Deployable Cash
We use deployable cash as a liquidity measure and it 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. This non-GAAP measure is based on conservative assumptions, such as all participants’ deposits being forfeited 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) |
June 30, | December 31, | |||||||||||
2013 | 2012 | 2012 | ||||||||||
Cash, cash equivalents and short-term available-for-sale securities | $ | 55,852 | $ | 81,937 | $ | 38,272 | ||||||
Prepaid program cost and expenses | 26,354 | 24,825 | 17,217 | |||||||||
Less: Participants’ deposits | (49,458 | ) | (54,327 | ) | (25,735 | ) | ||||||
Less: Accounts payable / accruals / other liabilities | (6,745 | ) | (10,759 | ) | (4,349 | ) | ||||||
Deployable cash | $ | 26,003 | $ | 41,676 | $ | 25,405 |
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)
Six months ended June 30, | ||||||||||||
2013 | 2012 | $ Change | ||||||||||
Net cash provided by operating activities | $ | 23,415 | $ | 28,685 | (5,270 | ) | ||||||
Purchase of property, equipment and intangibles | (1,963 | ) | (2,997 | ) | 1,034 | |||||||
Free cash flow | $ | 21,452 | $ | 25,688 | (4,236 | ) |
Liquidity and Capital Resources
Total assets at June 30, 2013 were $123.5 million, of which 45 percent, or $55.9 million, were cash, cash equivalents and short-term available-for-sale securities. At June 30, 2012, total assets were $150.0 million, of which 55 percent, or $81.9 million, were cash, cash equivalents and short-term available-for-sale securities.
Net cash provided by operations was $23.4 million and $28.7 million during the six months ended June 30, 2013 and 2012, respectively. The change was primarily due to lower net income and a decrease in participant deposits caused by declining delegate counts.
Net cash used in investing activities was $21.5 million during the first six months of 2013 compared to $42.8 million during the first six months of 2012. The decline in cash used in investing activities during the current period was partially due to a reduction in the net purchases of available-for-sale securities. In addition, we made more investment purchases and sales during the first six months of 2012 as part of a transfer of part of our portfolio to new account managers.
Net cash used in financing activities was $3.6 million and $2.3 million during the six months ended June 30, 2013 and 2012, respectively. The increase in cash used in financing activities was primarily due to excess tax benefits associated with the cancellation of expired stock compensation benefits and the repurchase of our common stock through buybacks and share surrenders. Offsetting this was a reduction in cash used for dividends resulting from the suspension of quarterly dividends paid to shareholders.
Effective June 30, 2013, we amended our credit agreement with Wells Fargo Bank, National Association, modifying the principal amount available under the credit agreement and changing certain covenants. At June 30, 2013, we maintain an unsecured revolving line of credit with Wells Fargo Bank with an unused line of credit of $12.5 million. This line of credit is limited to 50 percent of deployable cash as defined above in “Key Performance Non-GAAP Financial Indicators”. In order to utilize this line of credit, we must comply with certain covenants. These covenants include deployable cash greater than zero and tangible net worth greater than $40.0 million. At June 30, 2013, we were in compliance with all covenants. For additional information regarding our line of credit, please see our 8-K filed with the SEC on July 3, 2013.
Contractual Obligations
We do not have any material capital expenditure commitments for 2013. 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 2013. 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 11, 2013.
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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 11, 2013.
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 11, 2013.
(a) Evaluation of disclosure controls and procedures
As of June 30, 2013, the end of the period covered by this report, our interim 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 interim 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 six months ended June 30, 2013, 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.
Item 1A. Risk Factors
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 11, 2013.
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”). During the quarter ended June 30, 2013, there were no shares repurchased under the Repurchase Plan. As of June 30, 2013, approximately $13.1 million was available to repurchase shares of our Common Stock under the Repurchase Plan.
Item 5. Other Information
As previously disclosed in our Form 8-K filed with the Securities and Exchange Commission on July 31, 2013, Nilofer Merchant, a former director of the Company resigned as a member of the Board of Directors effective as of July 26, 2013. In connection with this resignation, effective August 5, 2013, pursuant to the Company’s Bylaws and a resolution adopted by the Board of Directors, the number of authorized directors of the Company has been reduced from eight (8) to seven (7).
Item 6. Exhibits
31.1 | Certification under Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | 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: August 6, 2013 | By: | /s/ ANTHONY F. DOMBROWIK |
Anthony F. Dombrowik, | ||
Interim Chief Executive Officer, Chief Financial Officer | ||
(Principal Executive Officer and Principal Financial Officer) |
31.1 | Certification under Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 | |||