CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
September
30, 2007 and December 31, 2006
(dollars
in thousands, except share and per share data)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14,382
|
|
|
$
|
36,784
|
|
Available-for-sale
securities
|
|
|
71,791
|
|
|
|
96,350
|
|
Foreign
currency exchange contracts
|
|
|
2,929
|
|
|
|
2,571
|
|
Prepaid
program costs and expenses
|
|
|
6,527
|
|
|
|
3,786
|
|
Other
assets
|
|
|
550
|
|
|
|
675
|
|
Total
current assets
|
|
|
96,179
|
|
|
|
140,166
|
|
Property
and equipment, net
|
|
|
27,895
|
|
|
|
12,267
|
|
Deferred
tax asset
|
|
|
1,743
|
|
|
|
1,328
|
|
Other
long-term assets
|
|
|
171
|
|
|
|
192
|
|
Total
assets
|
|
$
|
125,988
|
|
|
$
|
153,953
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,779
|
|
|
$
|
2,941
|
|
Accrued
expenses
|
|
|
8,031
|
|
|
|
3,922
|
|
Deferred
tax liability
|
|
|
705
|
|
|
|
737
|
|
Other
liabilities
|
|
|
—
|
|
|
|
1,268
|
|
Participants’
deposits
|
|
|
21,624
|
|
|
|
60,651
|
|
Capital
lease
|
|
|
199
|
|
|
|
191
|
|
Total
current liabilities
|
|
|
39,338
|
|
|
|
69,710
|
|
Long
term liabilities:
|
|
|
|
|
|
|
|
|
Capital
lease
|
|
|
46
|
|
|
|
196
|
|
Total
liabilities
|
|
|
39,384
|
|
|
|
69,906
|
|
|
|
|
|
|
|
|
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; 19,593,843
and
20,599,170 shares issued and outstanding, respectively
|
|
|
195
|
|
|
|
205
|
|
Additional
paid-in capital
|
|
|
6,091
|
|
|
|
15,619
|
|
Retained
earnings
|
|
|
78,359
|
|
|
|
66,587
|
|
Accumulated
other comprehensive income
|
|
|
1,959
|
|
|
|
1,636
|
|
Total
stockholders’ equity
|
|
|
86,604
|
|
|
|
84,047
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
125,988
|
|
|
$
|
153,953
|
|
|
|
|
|
|
|
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, 2007 and 2006
(dollars
in thousands, except per-share amounts)
|
|
|
Nine
months ended
|
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
revenue, non-directly delivered programs
|
|
$
|
80,997
|
|
|
$
|
65,222
|
|
|
$
|
42,571
|
|
|
$
|
33,174
|
|
Gross
revenue, directly delivered programs
|
|
|
27,185
|
|
|
|
17,789
|
|
|
|
9,567
|
|
|
|
5,532
|
|
Total
Revenue
|
|
|
108,182
|
|
|
|
83,011
|
|
|
|
52,138
|
|
|
|
38,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, directly delivered programs
|
|
|
15,916
|
|
|
|
10,233
|
|
|
|
6,169
|
|
|
|
3,613
|
|
Gross
Margin
|
|
|
92,266
|
|
|
|
72,778
|
|
|
|
45,969
|
|
|
|
35,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
29,066
|
|
|
|
22,925
|
|
|
|
10,185
|
|
|
|
9,176
|
|
General
and administrative
|
|
|
9,503
|
|
|
|
6,707
|
|
|
|
3,479
|
|
|
|
2,399
|
|
Total
Operating Expenses
|
|
|
38,569
|
|
|
|
29,632
|
|
|
|
13,664
|
|
|
|
11,575
|
|
Operating
Income
|
|
|
53,697
|
|
|
|
43,146
|
|
|
|
32,305
|
|
|
|
23,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,337
|
|
|
|
3,626
|
|
|
|
1,000
|
|
|
|
1,263
|
|
Income
before income taxes
|
|
|
57,034
|
|
|
|
46,772
|
|
|
|
33,305
|
|
|
|
24,781
|
|
Income
tax provision
|
|
|
18,565
|
|
|
|
14,654
|
|
|
|
10,801
|
|
|
|
7,682
|
|
Net
income
|
|
$
|
38,469
|
|
|
$
|
32,118
|
|
|
$
|
22,504
|
|
|
$
|
17,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share — basic
|
|
$
|
1.98
|
|
|
$
|
1.56
|
|
|
$
|
1.16
|
|
|
$
|
0.83
|
|
Weighted-average
common shares outstanding — basic
|
|
|
19,423
|
|
|
|
20,559
|
|
|
|
19,394
|
|
|
|
20,609
|
|
Net
income per share — diluted
|
|
$
|
1.91
|
|
|
$
|
1.50
|
|
|
$
|
1.12
|
|
|
$
|
0.80
|
|
Weighted-average
common shares outstanding — diluted
|
|
|
20,172
|
|
|
|
21,390
|
|
|
|
20,125
|
|
|
|
21,418
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For
the
three and nine months ended September 30, 2007 and 2006
(dollars
in thousands)
|
|
|
|
Nine
months ended
|
|
|
|
Three
months ended
|
|
|
|
|
|
September
30,
|
|
|
|
September
30,
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Net
income
|
|
$
|
38,469
|
|
|
$
|
32,118
|
|
|
$
|
22,504
|
|
|
$
|
17,099
|
|
|
Unrealized
gain (loss) on foreign currency exchange contracts, net of income
tax
benefit (provision) of $(125), $(908), $(565), and $14
|
|
|
233
|
|
|
|
1,675
|
|
|
|
1,049
|
|
|
|
(25
|
)
|
|
Unrealized
gain (loss) on available-for-sale securities, net of income tax
(provision) of $(49), $(42), $(86), and $(86)
|
|
|
90
|
|
|
|
95
|
|
|
|
159
|
|
|
|
160
|
|
|
Comprehensive
income
|
|
$
|
38,792
|
|
|
$
|
33,888
|
|
|
$
|
23,712
|
|
|
$
|
17,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007 and 2006
(dollars
in
thousands
)
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
38,469
|
|
|
$
|
32,118
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,632
|
|
|
|
1,083
|
|
|
Stock-based
compensation
|
|
|
1,450
|
|
|
|
1,561
|
|
|
Write-down
of property and equipment
|
|
|
336
|
|
|
|
—
|
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(2,696
|
)
|
|
|
(1,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
program costs and expenses
|
|
|
(2,741
|
)
|
|
|
(4,331
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
12,128
|
|
|
|
3,537
|
|
|
Participants’
deposits
|
|
|
(39,027
|
)
|
|
|
(17,946
|
)
|
|
Other
current assets
|
|
|
(98
|
)
|
|
|
(699
|
)
|
|
Net
cash provided by operating activities
|
|
|
9,453
|
|
|
|
13,620
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Net
change in available-for-sale securities
|
|
|
24,698
|
|
|
|
(4,593
|
)
|
|
Purchase
of property and equipment and other
|
|
|
(18,726
|
)
|
|
|
(4,318
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
5,972
|
|
|
|
(8,911
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Dividend
payment to shareholders
|
|
|
(6,712
|
)
|
|
|
(5,278
|
)
|
|
Repurchase
of common stock
|
|
|
(35,621
|
)
|
|
|
(2,984
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
1,952
|
|
|
|
1,397
|
|
|
Excess
tax benefit from stock-based compensation
|
|
|
2,696
|
|
|
|
1,703
|
|
|
Capital
lease payments and other
|
|
|
(142
|
)
|
|
|
(134
|
)
|
|
Net
cash used in financing activities
|
|
|
(37,827
|
)
|
|
|
(5,296
|
)
|
|
Net
decrease in cash and cash equivalents
|
|
|
(22,402
|
)
|
|
|
(587
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
36,784
|
|
|
|
26,916
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
14,382
|
|
|
$
|
26,329
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
1. Organization
and Basis of Presentation
|
|
|
Ambassadors
Group, Inc. is a leading educational travel company that organizes
and
promotes international and domestic educational travel and sports
programs
for youth, athletes and professionals. These consolidated financial
statements include the accounts of Ambassadors Group, Inc. and
our wholly
owned subsidiaries.
We
have a single operating segment consisting of the educational travel
and
sports programs for students, athletes and professionals. These
programs
have similar economic characteristics, offer comparable products
to
participants and utilize similar processes for program
marketing.
Revenue
from non-directly delivered programs is presented as net revenue
and
recognized as the program convenes. For these non-directly delivered
programs, we do not actively manage the operations of each program,
and
our remaining performance obligation for these programs after they
convene
is perfunctory. For directly delivered programs, however, we organize
and
operate all activities including speakers, facilitators, events,
accommodations and transportation. As such, we recognize the gross
revenue
and cost of sales of these directly delivered programs over the
period the
programs are being delivered.
|
|
|
In
our opinion, the consolidated financial statements contain all
adjustments
necessary to present fairly our financial position at September
30, 2007
and December 31, 2006, our results of operations for the three
and nine
months ended September 30, 2007 and 2006, and our cash flows for
the nine
months ended September 30, 2007 and 2006.
|
|
|
2. Income
Per Share
|
|
|
Net
income per share — basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the
period.
Net income per share — diluted is computed by increasing the
weighted-average number of common shares outstanding by the additional
common shares that would have been outstanding if the dilutive
potential
common shares had been issued.
The
following table presents a reconciliation of basic and diluted
earnings
per share (“EPS”) computations and the number of dilutive securities
(stock options and grants) that were not included in the dilutive
EPS
calculation because they were anti-dilutive (in thousands, except
per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
Three
months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted
earnings
per share
|
|
$
|
38,469
|
|
|
$
|
32,118
|
|
|
$
|
22,504
|
|
|
$
|
17,099
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding – basic
|
|
|
19,423
|
|
|
|
20,559
|
|
|
|
19,394
|
|
|
|
20,609
|
|
Effect
of dilutive common stock options
|
|
|
665
|
|
|
|
781
|
|
|
|
638
|
|
|
|
753
|
|
Effect
of dilutive common stock grants
|
|
|
84
|
|
|
|
50
|
|
|
|
93
|
|
|
|
56
|
|
Weighted
average shares outstanding – diluted
|
|
|
20,172
|
|
|
|
21,390
|
|
|
|
20,125
|
|
|
|
21,418
|
|
Net
income per share – basic
|
|
$
|
1.98
|
|
|
$
|
1.56
|
|
|
$
|
1.16
|
|
|
$
|
0.83
|
|
Net
income per share - diluted
|
|
$
|
1.91
|
|
|
$
|
1.50
|
|
|
$
|
1.12
|
|
|
$
|
0.80
|
AMBASSADORS
GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
For
the
three months ended September 30, 2007 and 2006, and for the nine months ended
September 30, 2007 the effects of a negligible number of stock options have
been
excluded from the calculation of diluted earnings per share because their
effect
would be anti-dilutive. For the nine months ended September 30, 2006, the
effects of approximately 116,000 stock options have been excluded from the
calculation of diluted earnings per share because their effect would be
anti-dilutive.
3.
Accounting for Stock-Based Compensation
Effective
November 2001, we adopted our 2001 Equity Participation Plan (the “Plan”).
The Plan provides for the grant of stock options, awards of restricted stock,
performance or other awards or stock appreciation rights to our directors,
key
employees and consultants. The maximum number of shares which may be awarded
under the Plan is 3.6 million shares, and approximately 0.8 million shares
remain available for future issuance as of September 30, 2007.
Under
the
terms of the Plan, restricted stock grants follow the same grant price
parameters as options. The Compensation Committee of the Board of Directors
(the
“Compensation Committee”) also establishes the vesting period of the grants,
which is generally set at 100 percent at the conclusion of one to four years.
Our key employees who have been awarded stock grants and are full time employees
are subject to a four year vesting period, while members of our Board of
Directors who have been awarded stock grants are subject to a one year vesting
period. During the three months ended September 30, 2007 and 2006, 1,400
and no
restricted stock grants were granted to our Board of Directors or key employees,
and during the nine months ended September 30, 2007 and 2006, approximately
3,900 and 3,100 restricted stock grants were granted to our Board of Directors
or key employees, respectively.
Under
the
terms of the Plan, options to purchase shares of our common stock are granted
at
a price set by the Compensation Committee, not to be less than the par value
of
a share of common stock and if granted as performance-based compensation
or as
incentive stock options, not to be less than the fair market value of the
stock
on the date of grant. The Compensation Committee establishes the vesting
period
of the awards, which is generally set at 25 percent per year for four years.
Options may be exercised any time after they vest for a period up to
10 years from the grant date. The fair value of each stock option granted
is estimated on the date of grant using the Black-Scholes option-pricing
model.
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and our
experience as of the date of grant.
Total
stock-based compensation expense recognized in the consolidated statement
of
operations for the quarter ended September 30, 2007 was $0.5 million before
income taxes. Of the total stock-based compensation expense during the quarter,
stock option expense was $0.2 million, restricted stock grant expense was
$0.2
million, and the related total tax benefit was $0.1 million. Total stock-based
compensation expense recognized in the consolidated statement of operations
for
the nine months ended September 30, 2007 was $1.4 million before income taxes.
Of the total stock-based compensation expense during this time period, stock
option expense was $0.7 million, restricted stock grant expense was $0.7
million, and the related total tax benefit was $0.4 million.
AMBASSADORS
GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ending September 30, 2007
and
2006. No stock options were granted during the three months ended September
30,
2007 or 2006.
|
|
|
Nine
months ended
September
30, 2007
|
|
Nine
months ended
September
30, 2006
|
|
Expected
dividend yield
|
|
1.47
|
|
%
|
|
1.23
|
|
%
|
|
Expected
stock price volatility
|
|
37.70
|
|
%
|
|
37.09
|
|
%
|
|
Risk-free
interest rate
|
|
4.63
|
|
%
|
|
5.11
|
|
%
|
|
Expected
life of options
|
|
4.55
|
|
years
|
|
8.89
|
|
years
|
|
Estimated
fair value per option granted
|
|
$11.01
|
|
|
|
$12.99
|
|
|
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. 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. We have also included our anticipated dividend yield based on quarterly
cash dividends paid to our shareowners during 2007 and 2006. Additionally,
an annualized forfeiture rate of 8.0 percent is used as a best estimate of
future forfeitures based on our historical forfeiture experience. Under the
true-up provisions of Statement of Financial Accounting Standard No. 123,
“Share-Based Payment” (“SFAS 123(R)”), the stock-based compensation expense will
be adjusted in later periods if the actual forfeiture rate is different from
the
estimate.
The
Black-Scholes option-pricing model was developed for use in estimating the
fair
value of options. In addition, option valuation models require the input
of
highly subjective assumptions, particularly for the expected term and stock
price volatility. Our employee stock options do not trade on a secondary
exchange, therefore employees do not derive a benefit from holding stock
options
unless there is an appreciation in the market price of our stock above the
grant
price. Such an increase in stock price would benefit all shareholders
commensurately.
Stock
option and restricted stock transactions during the nine months ended September
30, 2007 were as follows:
|
|
|
Number
|
|
|
Weighted
Average
|
|
|
Weighted
Average Remaining
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Life
|
|
|
(in
thousands)
|
|
Outstanding,
December 31, 2006
|
|
|
1,753,363
|
|
|
$
|
9.79
|
|
|
|
|
|
|
|
Granted
|
|
|
33,586
|
|
|
|
28.69
|
|
|
|
|
|
|
|
Exercised
|
|
|
(289,483
|
)
|
|
|
6.74
|
|
|
|
|
|
|
|
Canceled
|
|
|
(11,491
|
)
|
|
|
26.68
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2007
|
|
|
1,485,975
|
|
|
$
|
10.70
|
|
|
|
5.22
|
|
|
$
|
40,722
|
|
Exercisable,
September 30, 2007
|
|
|
940,293
|
|
|
$
|
7.96
|
|
|
|
4.73
|
|
|
$
|
28,345
|
The
aggregate intrinsic value in the table above is before applicable income
taxes,
based on our $38.10 closing stock price at September 30, 2007, which would
have
been received by the optionees had all options been exercised on that date.
As
of September 30, 2007, total unrecognized stock-based compensation expense
related to non-vested stock options and restricted stock grants was
approximately $3.4 million, which is expected to be recognized over a period
of
approximately 3.7 years. During the three and nine months ended September
30,
2007, the total intrinsic value of stock options exercised was $2.0 million
and
$7.9 million, and the total fair value of options vested was $0.2 million
and
$0.4 million, respectively.
AMBASSADORS
GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents information about our common stock options and
restricted grants as of September 30, 2007:
|
|
Options
and Grants Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.00 - $3.47
|
|
172,066
|
|
|
1.79
|
|
|
$
|
-
|
|
|
2,566
|
|
|
$
|
3.11
|
|
|
3.48 - 6.93
|
|
688,143
|
|
|
4.07
|
|
|
|
5.62
|
|
|
688,143
|
|
|
|
5.62
|
|
|
6.94
- 10.40
|
|
134,885
|
|
|
5.80
|
|
|
|
9.20
|
|
|
101,035
|
|
|
|
9.02
|
|
|
10.41
- 13.86
|
|
51,575
|
|
|
6.19
|
|
|
|
11.76
|
|
|
31,875
|
|
|
|
11.82
|
|
|
13.87
- 17.33
|
|
149,292
|
|
|
7.21
|
|
|
|
16.65
|
|
|
70,299
|
|
|
|
16.65
|
|
|
20.80
- 24.26
|
|
53,000
|
|
|
7.87
|
|
|
|
21.09
|
|
|
17,500
|
|
|
|
21.09
|
|
|
24.27
- 27.72
|
|
207,746
|
|
|
8.59
|
|
|
|
27.11
|
|
|
27,411
|
|
|
|
26.80
|
|
|
27.73
- 31.19
|
|
15,609
|
|
|
9.06
|
|
|
|
29.48
|
|
|
1,464
|
|
|
|
27.89
|
|
|
31.20
- 34.65
|
|
13,659
|
|
|
9.60
|
|
|
|
34.65
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,485,975
|
|
|
5.22
|
|
|
$
|
10.55
|
|
|
940,293
|
|
|
$
|
7.96
|
4.
Uncertainty of Income Taxes
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement 109, Accounting for Income Taxes
(“FIN
48”). This statement clarifies the criteria that an individual tax position
must
satisfy for some or all of the benefits of that position to be recognized
in a
company’s financial statements. FIN 48 prescribes a recognition threshold of
more-likely–than-not, and a measurement attribute for all tax positions taken or
expected to be taken on a tax return, in order for those tax positions to
be
recognized in the financial statements. Effective January 1, 2007, we
adopted the provisions of FIN 48. There was no material effect on the financial
statements, and as a result, there was no cumulative effect related to adopting
FIN 48. However, certain amounts have been reclassified in the statement
of
financial position in order to comply with the requirements of the
statement.
As
of
January 1, 2007, we provided a liability for approximately $164,000 of
unrecognized tax benefits, of which $163,000 was interest, related to various
federal and state income tax matters. The majority of unrecognized tax benefits
consisted of items that are offset by deferred tax assets and the federal
tax
benefit of state income tax items. Thus, the amount that would impact our
effective tax rate, if recognized, is insignificant. The liability decreased
to
zero and an insignificant amount of additional interest was recognized during
the quarter ended June 30, 2007 due to a settlement with the Internal
Revenue Service. No interest was recognized during the quarter ended September
30, 2007. No penalties were recognized during the three and nine
months ended September 30, 2007. Our policy is to account for interest and
penalties related to uncertain tax positions as part of income tax
expense.
We
file
tax returns in the U.S. federal jurisdiction and various state jurisdictions.
We
are currently open to audit under the statute of limitations by the Internal
Revenue Service for the year ending December 31, 2006. Our state income tax
returns are open to audit under the statute of limitations for the years
ending
December 31, 2002 through 2006.
5.
Recently Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements. Rather,
it
applies under other accounting pronouncements that require or permit fair
value
measurements.
AMBASSADORS
GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
provisions of this statement are to be applied prospectively as of the beginning
of the fiscal year in which this statement is initially applied, with any
transition adjustment recognized as a cumulative-effect adjustment to the
opening balance of retained earnings. The provisions of SFAS 157 are effective
for the fiscal years beginning after November 15, 2007. Therefore, we
anticipate adopting this standard as of January 1, 2008. We have not
determined the effect, if any, the adoption of this statement will have on
our
financial condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial
Assets and Financial Liabilities
(“SFAS 159”). SFAS 159 gives entities the
option to measure eligible financial assets and liabilities at fair value
on an
instrument by instrument basis, that are otherwise not permitted to be accounted
for at fair value under other accounting standards. The election to use the
fair
value option is available when an entity first recognizes a financial asset
or
financial liability. Subsequent changes in fair value must be recorded in
earnings. This statement is effective as of the beginning of a company’s first
fiscal year after November 15, 2007. Therefore, we anticipate adopting this
standard as of January 1, 2008. We have not determined the effect, if any,
the adoption of this statement will have on our financial condition or 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.
Statements
contained in this Quarterly Report on Form 10-Q, which are not historical
in
nature, 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”). These forward-looking statements include, without
limitation, statements in Item 2, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, regarding matters which are
not
historical fact, including our intent, belief or current expectations of
our
Company or our officers with respect to, among other things, trends in the
travel industry, business and growth strategies, use of technology, ability
to
integrate acquired businesses, future actions, future performance or results
of
operations, the outcome of contingencies such as legal
proceedings.
Forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from anticipated results. These risks and
uncertainties include factors affecting the travel industry generally,
competition, our ability to successfully integrate the operations of existing
or
acquired companies, and a variety of factors such as conflict in Iraq and
the
Middle East, periods of international unrest, the outbreak of disease, changes
in the direct-mail environment, recession, weather conditions and concerns
for
passenger safety that could cause a decline in travel demand, as well as
the
risk factors, and other factors as may be identified from time to time in
our
Securities and Exchange Commission filings or in our press releases. For
a more
complete discussion of these risks, please refer to Item 1A Risk Factors
disclosure in our Annual Report on Form 10-K filed on March 9, 2007 and
those factors set forth under Part II, Item 1A Risk Factors set forth in
this
Quarterly Report on Form 10-Q.
Executive
Overview
We
are a
leading educational travel company that organizes and promotes international
and
domestic programs for students, athletes and adults. Youth programs provide
opportunities for grade school, middle school and high school students to
learn
about the history, government, economy and culture of the foreign and domestic
destinations they visit as well as for athletes to participate in international
sports challenges. Our student leadership programs provide educational
opportunities for grade school, middle school and high school students to
learn
leadership, government, college admissions and community involvement skills
at
domestic and international destinations. Our adult programs emphasize meetings
and seminars between delegates and persons in similar professions
abroad.
We
were
founded in 1967, were reincorporated in Delaware in 1995, and operated as
Ambassadors Education Group, a wholly owned subsidiary of Ambassadors
International, Inc. until February 2002, at which time we spun off to operate
as
an independent stand-alone company beginning in March, 2002. Since then,
our
common stock has traded on The NASDAQ Stock Market under the ticker symbol
“EPAX”. The consolidated financial statements include the accounts of
Ambassadors Group, Inc. and our wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
We
have a
single operating segment consisting of educational travel and sports programs
for students, athletes and professionals. These programs have similar economic
characteristics, offer comparable products to delegates, and utilize similar
processes for program marketing.
Our
Seasonality
Our
business is seasonal. The majority of our travel programs occur in June and
July of each year. We have historically earned more than 85 percent of our
annual revenues in the second and third quarters, which we anticipate will
continue for the foreseeable future. Historically, these seasonal revenues
have
more than offset operating losses incurred during the rest of the year. Our
annual results would be adversely affected if our revenues were to be
substantially below seasonal norms during these periods.
Our
Foreign Currency Exposure
The
majority of our programs take place outside the United States and most foreign
suppliers require payment in local currency rather than in U.S. dollars.
Accordingly, we are exposed to foreign currency risks in certain countries
as
foreign currency exchange rates between those currencies and the U.S. dollar
fluctuate. We generally hedge against certain of these foreign currency risks.
We use forward contracts and options that allow us to acquire the foreign
currency at a fixed price for a specified period of time. Some of our forward
contracts and options include a variable component if a pre-determined trigger
occurs during the term of the contract.
These
foreign exchange contracts and options are entered into in order to support
normal anticipated recurring purchases and, accordingly, are not entered
into
for speculative purposes.
Program
Revenue and Accounting Structure
The
majority of our revenue is from non-directly delivered programs and is presented
as net revenue and recognized as the program convenes. For these programs,
we do
not actively deliver the operations of each program, and our remaining
performance obligation for these programs after they convene is perfunctory.
For
directly delivered programs, however, we organize and operate all activities
including speakers, facilitators, events, accommodations and transportation.
As
such, we present gross revenue and cost of sales, and we recognize the gross
revenue and cost of sales of these directly delivered programs over the period
the programs are being delivered.
Our
policy is to obtain payment for substantially all travel services prior to
entering into commitments for incurring expenses relating to such travel.
Program pass-through and direct delivery expenses include all direct costs
associated with our programs, including, but not limited to, costs related
to
airfare, hotels, meals, ground transportation, guides, presenters, facilitators,
professional exchanges and changes in currency exchange rates.
Operating
expenses, which are expensed as incurred, are the costs related to the creation
of programs, promotional materials and marketing costs, salaries, rent, other
general and administrative expenses and all ordinary expenses.
Comparison
of the Three Months Ended September 30, 2007 to the Three Months Ended September
30, 2006
Total
revenue increased 35 percent to $52.1 million from $38.7 million, and gross
margin increased 31 percent to $46.0 million from $35.1 million during the
third
quarter 2007 in comparison to the third quarter 2006. The increase in total
revenue and gross margin was a direct result of traveling 24,475 delegates
in
the third quarter 2007 in comparison to 19,500 delegates in the third quarter
2006.
Selling
and marketing expenses were $10.2 million and $9.2 million during the third
quarters of 2007 and 2006, respectively. The $1.0 million increase was spent
primarily toward increased personnel to support higher business volumes during
2007 compared to 2006, as well as additional marketing expenses during 2007
for
our 2008 travel programs. General and administrative expenses increased $1.1
million to $3.5 million from $2.4 million as a result of higher business
volumes, increased personnel to support the increased delegates traveling
on our
programs, and planned investments in our organizational and technical
capabilities.
Other
income consists primarily of interest income generated by cash, cash equivalents
and available-for-sale securities. Interest income recognized decreased $0.3
million to $1.0 million from $1.3 million during the quarters ended September
30, 2007 and 2006, respectively. This decreased interest income was primarily
due to interest income on lower cash, cash equivalents and available-for-sale
security balances held during the quarter ended September 30, 2007 than those
held during the quarter ended September 30, 2006. These decreased balances
were
a result of $35.6 million expenditures on share repurchases and $18.7 million
on
capital expenditures primarily relating to our new office facility and new
equipment.
The
income tax provision has been recorded based on a 32.5 percent and 31.3 percent
estimated annual effective income tax rate, applied to the pre-tax income
for
the quarters ended September 30, 2007 and 2006, respectively. The difference
from the statutory rate of 35 percent is primarily due to tax exempt
interest.
This
resulted in net income of $22.5 million and $17.1 million, and $1.12 and
$0.80
earnings per share being recorded during the third quarters of 2007 and 2006,
respectively.
Comparison
of the Nine Months Ended September 30, 2007 to the Nine Months Ended September
30, 2006
Total
revenue increased to $108.2 million from $83.0 million, and gross margin
increased to $92.3 million from $72.8 million in the first nine months of
2007
versus the same time period in 2006. The 27 percent increase in gross margin
was
a direct result of traveling 23 percent more delegates in the first nine
months
of 2007 than the same period of 2006. We traveled 49,900 delegates year to
date
in 2007 in comparison to 40,600 delegates year to date in 2006.
Selling
and marketing expenses were $29.1 million and $22.9 million year to date
2007 and 2006, respectively. The $6.1 million increase was spent primarily
toward increased personnel to support higher business volumes during 2007
compared to 2006, as well as additional marketing expenses during 2007 for
our
2008 travel programs. General and administrative expenses were $9.5 million
and
$6.7 million year to date 2007 and 2006, respectively. The $2.8 million increase
resulted from additional expenses supporting the increased number of delegates
traveling during 2007and planned investments in our organizational and technical
capabilities.
Other
income in the first nine months of 2007 and 2006 consists primarily of interest
income generated by cash, cash equivalents and available-for-sale securities.
Interest income decreased to $3.3 million from $3.6 million when comparing
the
nine months ending September 30, 2007 and 2006, due to lower cash, cash
equivalents and available-for-sale security balances held during the period
ended September 30, 2007.
The
income tax provision has been recorded based on a 32.5 percent and 31.3 percent
estimated annual effective income tax rate, applied to the pre-tax income
as of
the nine months ended September 30, 2007 and 2006, respectively.
This
resulted in net income of $38.4 million and $32.1 million, and $1.91 and
$1.50
earnings per share being recorded during the nine months ended September
30,
2007 and 2006, respectively.
Liquidity
and Capital Resources
Net
cash
provided by operations for the nine months ended September 30, 2007 and 2006
was
$9.5 million and $13.6 million, respectively. The $4.2 million decrease in
cash
flow from operations primarily resulted from the net effect of $6.4 million
increased year over year net income, $21.1 million decreased participant’s
deposits for future travel, and $8.7 million increased accounts payable and
accrued expenses.
Net
cash
provided by investing activities for the nine months ended September 30,
2007
was $6.0 million and the net cash used by investing activities for the nine
months ended September 30, 2006 was $8.9 million. The $14.9 million
fluctuation was primarily related to the timing of available-for-sale security
purchases and expenditures in 2007 related to the construction of a new office
facility.
Net
cash
used in financing activities for the nine months ended September 30, 2007
and
2006 was $37.8 million and $5.3 million, respectively. The net change
in financing activities primarily resulted from $1.4 million increased cash
dividends to our shareholders and $32.6 million increased activity in our
share
repurchase plan. During 2007, we paid $6.7 million in cash dividends and
$35.6
million in stock repurchases.
At
September 30, 2007, we had $86.2 million of cash, cash equivalents and
available-for-sale securities, including program participant funds of $21.6
million. At September 30, 2006, we had $120.7 million of cash, cash equivalents,
restricted cash and available-for-sale securities, including program participant
funds of $29.5 million.
Net
Enrollments
Net
enrollments consist of all individuals traveled year to date as of the most
recent quarter end plus those actively enrolled for future travel.
Net
Enrollments for 2007
As
of
October 16, 2007, we had 52,600 net enrolled participants for our 2007 travel
programs compared to 43,100 net enrolled participants as of the same date
last
year for our 2006 travel programs.
Net
Enrollments for 2008
As
of
October 16, 2007, we had 26,200 net enrolled participants for our 2008 travel
programs compared to 37,300 net enrolled participants as of the same date
last
year for our 2007 travel programs The decrease in enrollments is believed
to be
caused by inflationary pressures on 2008 program costs, an underperforming
name
source used to identify potential delegates, and the current economic
uncertainty. We believe the decrease in net enrollments for our 2008 programs
will negatively impact 2008 earnings; however, it is too early to assess
the
full extent of this impact. We have taken, and will continue to take, measures
to mitigate these negative impacts. However, there can be no assurances that
any
of these measures will have any success, and if so, to what extent.
Under
our
cancellation policy, a program delegate may be entitled to a refund of a
portion
of his or her deposit, less certain fees, depending on the time of cancellation.
Should a greater number of delegates cancel their travel in comparison to
that
which is part of our ongoing operations, due to circumstances such as
international or domestic unrest, terrorism or general economic downturn,
our
cash balances could be significantly reduced. Cash balances could also be
reduced significantly if the financial institutions, which held balances
beyond
that federally insured, were to become insolvent.
Deployable
Cash
Deployable
cash is a non-GAAP (generally accepted accounting principles) liquidity measure.
Deployable cash is calculated as the sum of cash and cash equivalents, 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), participant deposits and the current portion of long-term
capital lease. We believe this non-GAAP measure is useful in understanding
the
cash available to deploy for future business opportunities and is presented
as
supplementary information to enhance your understanding of, and highlight
trends
in, our financial position. Any
non-GAAP
financial measure used should not be considered in isolation or as a substitute
for measures of performance or liquidity prepared in accordance with
GAAP.
|
Deployable
Cash Reconciliation
(in
thousands)
|
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and available-for-sale securities
|
|
$
|
86,173
|
|
|
$
|
120,747
|
|
|
$
|
133,134
|
|
|
Prepaid
program cost and expenses
|
|
|
6,527
|
|
|
|
5,927
|
|
|
|
3,786
|
|
|
Less: Participants’
deposits
|
|
|
(21,624
|
)
|
|
|
(29,517
|
)
|
|
|
(60,651
|
)
|
|
Less: Accounts
payable/accruals/other liabilities
|
|
|
(16,810
|
)
|
|
|
(10,955
|
)
|
|
|
(8,131
|
)
|
|
Less: Current
portion of long term capital lease
|
|
|
(199
|
)
|
|
|
(188
|
)
|
|
|
(191
|
)
|
|
Deployable
cash
|
|
$
|
54,067
|
|
|
$
|
86,014
|
|
|
$
|
67,947
|
|
Our
business is not capital intensive. However, we do retain funds for operating
purposes in order to conduct sales and marketing efforts for future programs.
We
continue to consider acquisitions of educational, travel and youth businesses
that may require the use of cash and cash equivalents. No such acquisitions
are
currently pending and no assurance can be given that definitive agreements
for
any such acquisitions will be entered into, or, if they are entered into,
that
they will be on terms favorable to us.
We
do not
have any material capital expenditure commitments for 2007, not already
presented within our September 30, 2007 financial statements. 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 2007 and 2008. For a more complete discussion of these and other
contractual factors, please refer to our Annual Report on Form 10-K for the
year
ended December 31, 2006, along with our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K filed during 2007.
Foreign
Currency – Hedging Policy
A
majority of our travel programs take place outside of the United States and
most
foreign suppliers require payment in currency other than in U.S. dollars.
Accordingly, we are exposed to foreign currency risks relative to changes
in
foreign currency exchange rates between those currencies and the U.S. dollar.
We
have a program to provide a hedge against certain of these foreign currency
risks with less than two years maturity, and we use forward contracts and
options that allow us to acquire the foreign currency at a fixed price for
a
specified period of time. All of our derivatives are designated as cash-flow
hedges of forecasted transactions.
We
account for these foreign exchange contracts and options in accordance with
the
provisions of SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities
(“SFAS 133”)
.
The statement requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or
other comprehensive income, depending on whether a derivative is designated
as
part of a hedge transaction and, if it is, depending on the type of hedge
transaction. For qualifying cash-flow hedge transactions in which we are
hedging
the variability of cash flows related to a forecasted transaction, changes
in
the fair value of the derivative instrument are reported in other comprehensive
income. The gains and losses on the derivative instruments that are reported
in
other comprehensive income are reclassified as earnings in the periods in
which
earnings are impacted by the variability of the cash flows of the hedged
item.
The ineffective portion of all hedges is recognized in current period earnings.
Unrealized gains and losses on foreign currency exchange contracts that are
not
qualifying cash-flow hedges as defined by SFAS 133 are recorded in the statement
of operations.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities.
We
consider our policies associated with cash and cash equivalents,
available-for-sale securities, income
taxes,
derivative financial instruments, stock-based compensation and contingencies
and
litigation to be the most critical in understanding the judgments that are
involved in preparing our consolidated financial statements. With the adoption
of FIN 48 at the beginning of 2007, we have added to our existing income
tax
accounting policy, as follows:
Uncertainty
in Income Taxes
For
discussion of the uncertainty in income taxes critical accounting policies
and
estimates, please refer to footnote 4 in the Notes to the
Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
Recently
Issued Accounting Pronouncements
For
discussion of the recently issued accounting pronouncements,
please refer to footnote 5 in the Notes to the Consolidated Financial
Statements in this Quarterly Report
on
Form
10-Q.