UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the quarterly period ended March 31,
2010
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OR
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o
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TRANSITION
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the transition period from
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to
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Commission file number
0-26420
Ambassadors
Group, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or Other Jurisdiction of
Incorporation or
Organization)
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91-1957010
(I.R.S.
Employer
Identification
No.)
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Dwight
D. Eisenhower Building
2001
South Flint Road
Spokane,
WA
(Address of Principal
Executive Offices)
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99224
(Zip
Code)
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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.
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).
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
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o
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Large
Accelerated filer
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þ
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Accelerated
filer
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o
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Non-Accelerated
filer (Do not check if a smaller reporting company)
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o
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
number of shares outstanding of the registrant’s Common Stock, $0.01 par value,
as of April 23, 2010 was 19,073,554.
AMBASSADORS GROUP, INC.
FORM
10-Q QUARTERLY REPORT
TABLE OF CONTENTS
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Page
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PART I – FINANCIAL
INFORMATION
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Item 1. Financial Statements
(Unaudited)
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Consolidated Balance Sheets
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1
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Consolidated Statements of
Operations
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2
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Consolidated Statements of Comprehensive
Income
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3
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Consolidated Statements of Cash
Flows
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4
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Notes to Consolidated Financial
Statements
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5
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Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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16
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Item 3. Quantitative and Qualitative
Disclosures About Market Risk
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22
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Item 4. Controls and
Procedures
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22
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PART II – OTHER INFORMATION
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Item 1. Legal
Proceedings
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23
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Item 1A. Risk Factors
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23
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Item 6. Exhibits
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23
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SIGNATURES
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24
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EXHIBIT
INDEX
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PART I
FINANCIAL
INFORMATION
Item 1. FINANCIAL
STATEMENTS
AMBASSADORS
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
March 31,
2010 and December 31, 2009
(dollars
in thousands, except share and per share data)
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March
31,
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December
31,
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2010
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2009
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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26,258
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$
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7,656
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Available-for-sale
securities and other
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85,764
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73,528
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Foreign
currency exchange contracts
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345
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1,076
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Prepaid
program costs and expenses
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12,417
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3,175
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Accounts
receivable
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5,335
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2,020
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Deferred
tax asset
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—
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25
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Total
current assets
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130,119
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87,480
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Property
and equipment, net
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29,022
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29,376
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Available-for-sale
securities
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1,248
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1,397
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Intangibles
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2,970
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2,822
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Goodwill
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6,911
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6,911
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Other
long-term assets
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311
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109
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Total
assets
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$
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170,581
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$
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128,095
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LIABILITIES
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Current
liabilities:
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Accounts
payable and accrued expenses
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$
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6,120
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$
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5,188
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Participants’
deposits
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81,546
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31,137
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Deferred
tax liability
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73
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—
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Other
liabilities
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110
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112
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Total
current liabilities
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87,849
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36,437
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Deferred
tax liability
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96
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652
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Total
liabilities
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87,945
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37,089
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Commitments
and Contingencies (Note 8)
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STOCKHOLDERS’
EQUITY
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Preferred
stock, $.01 par value; 2,000,000 shares authorized; none issued and
outstanding
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—
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—
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Common
stock, $.01 par value; 50,000,000 shares authorized;
19,073,554 and 19,006,265 shares issued and outstanding,
respectively
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188
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188
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Additional
paid-in capital
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3,268
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2,314
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Retained
earnings
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78,817
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87,461
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Accumulated
other comprehensive income
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363
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1,043
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Stockholders’
equity
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82,636
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91,006
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Total
liabilities and stockholders’ equity
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$
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170,581
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$
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128,095
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The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
For the
three months ended March 31, 2010 and 2009
(dollars
in thousands, except per-share amounts)
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2010
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2009
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Net
revenue, non-directly delivered programs
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$
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203
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$
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429
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Gross
revenue, directly delivered programs
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1,779
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8,704
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Gross
revenue, internet and advertising
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754
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873
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Total
revenue
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2,736
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10,006
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Cost
of sales, directly delivered programs
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1,033
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4,627
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Cost
of sales, internet and advertising
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110
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98
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Gross
margin
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1,593
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5,281
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Operating
expenses:
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Selling
and marketing
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9,629
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8,872
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General
and administrative
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3,467
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3,369
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Total
operating expenses
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13,096
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12,241
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Operating
loss
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(11,503
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)
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(6,960
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)
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Other
income (expense):
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Interest
and dividend income
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411
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514
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Foreign
currency and other expense
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(14
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)
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(961
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)
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Total
other income (expense)
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397
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(447
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)
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Loss
before income tax benefit
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(11,106
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)
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(7,407
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)
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Income
tax benefit
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3,617
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2,153
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Net
loss
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$
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(7,489
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)
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$
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(5,254
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)
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Net
loss per share – basic and diluted
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$
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(0.39
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)
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$
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(0.28
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)
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Weighted-average
common shares outstanding – basic and diluted
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19,271
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19,071
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The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the
three months ended March 31, 2010 and 2009
(dollars
in thousands)
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2010
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2009
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Net
loss
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$
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(7,489
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)
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$
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(5,254
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)
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Unrealized
loss on foreign currency exchange contracts,
net
of income tax benefit of $256 and $16
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(475
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)
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(29
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)
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Unrealized
loss on available-for-sale securities,
net
of income tax benefit of $110 and $30
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(205
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)
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(57
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)
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Comprehensive
loss
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$
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(8,169
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)
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$
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(5,340
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)
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The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the
three months ended March 31, 2010 and 2009
(dollars in
thousands
)
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2010
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2009
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Cash
flows from operating activities:
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Net
loss
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$
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(7,489
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)
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$
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(5,254
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)
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Adjustments
to reconcile net loss to net cash provided by operating
activities:
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Depreciation
and amortization
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1,135
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1,010
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Deferred
income tax (benefit) provision
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(92
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)
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95
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Stock-based
compensation
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507
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465
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Excess
tax benefit from stock-based compensation
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(106
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)
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(2
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)
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(Gain)
loss on sale of assets
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12
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(1
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)
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Writedown
of property, plant, and equipment
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243
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—
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Loss
on foreign currency contracts
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—
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962
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Change
in assets and liabilities:
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Accounts
receivable and other current assets
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(3,315
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)
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(2,760
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)
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Prepaid
program costs and expenses
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(9,444
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)
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(10,998
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)
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Accounts
payable, accrued expenses, and other current liabilities
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1,311
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977
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Participants’
deposits
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50,409
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51,802
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Net
cash provided by operating activities
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33,171
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36,296
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Cash
flows from investing activities:
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Proceeds
from sale of available-for-sale securities
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7,397
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12,626
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Purchase
of available for sale securities
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(19,774
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)
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(8,818
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)
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Purchase
and construction of property and equipment
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(1,244
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)
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(1,365
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)
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Purchase
of intangibles
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(239
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)
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(140
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)
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Net
cash (used in) provided by investing activities
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(13,860
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)
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2,303
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Cash
flows from financing activities:
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Dividend
payment to shareholders
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(1,156
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)
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(1,145
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)
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Repurchase
of common stock
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—
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(409
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)
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Proceeds
from exercise of stock options
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341
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148
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Excess
tax benefit from stock-based compensation
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106
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2
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Capital
lease payments and other
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—
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(11
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)
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Net
cash used in financing activities
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(709
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)
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(1,415
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)
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Net
increase in cash and cash equivalents
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18,602
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37,184
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Cash
and cash equivalents, beginning of period
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7,656
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|
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6,989
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Cash
and cash equivalents, end of period
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$
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26,258
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$
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44,173
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The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
Organization
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Ambassadors
Group, Inc. (“Ambassadors,” “Company,” “we,” “us,” or “our,”) is a leading
educational company that organizes and promotes worldwide international
and domestic educational travel programs for students, athletes and
professionals, and provides over 8 million pages of online research
content through www.bookrags.com. These consolidated financial statements
include the accounts of Ambassadors Group, Inc. and our wholly owned
subsidiaries, Ambassador Programs, Inc. (“Ambassador Programs”), BookRags,
Inc. (“BookRags”), World Adventures Unlimited, Inc. (“World Adventures
Unlimited”), Ambassadors Unlimited, LLC and Marketing Production Systems,
LLC. All significant intercompany accounts and transactions, which are of
a normal recurring nature, are eliminated in consolidation.
Our
operations are organized in two reporting segments, 1) “Ambassador
Programs and Other”, which provides educational travel services to
students, professionals, and athletes through multiple itineraries within
five travel program types, and 2) “BookRags”, which provides online
research capabilities through book summaries, critical essays, online
study guides, biographies, and references to encyclopedia
articles.
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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, or 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 misleading. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2010, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010.
The
balance sheet at December 31, 2009, has been derived from the audited
financial statements at that date, but does not include all of the information
and disclosures required by GAAP for complete financial statements. For further
information, refer to the financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31,
2009.
Certain
reclassifications from 2009 amounts have been made to conform to the three
months ended March 31, 2010 financial statement presentation with no effect on
previously reported net loss or retained earnings.
3.
Net Loss and Dividends per Share
On
January 1, 2009, we adopted an accounting provision which clarified that
unvested share-based payment awards that contain nonforfeitable rights to
receive dividends or divided equivalents (whether paid or unpaid) are
participating securities, and thus, should be included in the two-class method
of computing earnings per share (“EPS”). Participating securities under
this statement include our unvested employee restricted stock awards with
time-based vesting and common stock granted in the acquisition of BookRags that
will be issued in the second quarter of 2010 when escrow conditions are known,
which receive nonforfeitable dividend payments. As a result of this new
provision, all prior period EPS data have been adjusted
retrospectively.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table presents a reconciliation of basic and diluted EPS computations
(in thousands, except per share amounts):
|
Three
months ended March 31,
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
Net
loss
|
$
|
(7,489
|
)
|
|
|
(5,254
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
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|
Weighted-average
shares outstanding
|
|
18,772
|
|
|
|
18,619
|
|
Effect
of unvested restricted stock awards
considered participating securities
|
|
499
|
|
|
|
452
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|
Weighted-average
shares outstanding – basic
|
|
19,271
|
|
|
|
19,071
|
|
Effect
of dilutive common stock options
|
|
0(A
|
)
|
|
|
0(A
|
)
|
Weighted-average
shares outstanding – diluted
|
|
19,271
|
|
|
|
19,071
|
|
|
|
|
|
|
|
|
|
Losses
per share – basic and diluted:
|
|
|
|
|
|
|
|
Net
loss per share – basic
|
$
|
(0.39
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share – diluted
|
$
|
(0.39
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
$
|
0.06
|
|
|
$
|
0.06
|
|
(A)
|
For
the three months ended March 31, 2010 and 2009, respectively, the effects
of approximately 808,000 and 941,000 stock options have been excluded from
the calculation of diluted earnings per share because their effect would
be anti-dilutive.
|
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 in which we would transact, 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, plant and equipment; intangible assets; and
goodwill), are measured at fair value when there is an indicator of impairment
and recorded at fair value only when an impairment charge is
recognized.
Fair
value is determined for assets and liabilities and establishes a three-tiered
value hierarchy into which these assets and liabilities must be grouped, 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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the
composition of our investments at March 31, 2010 and December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
on Balance Sheet
|
March
31, 2010
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Aggregate
Fair Value
|
|
|
Cash
and cash equivalents
|
|
|
Short-term
available-for-sale securities
|
|
|
Long-term
available-for-sale securities
|
Auction
rate securities (“ARS”)
|
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
352
|
|
|
$
|
1,248
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,248
|
Money
market funds
|
|
|
17,478
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,478
|
|
|
|
17,478
|
|
|
|
—
|
|
|
|
—
|
Municipal
securities
|
|
|
85,191
|
|
|
|
573
|
|
|
|
—
|
|
|
|
85,764
|
|
|
|
—
|
|
|
|
85,764
|
|
|
|
—
|
|
|
$
|
104,269
|
|
|
$
|
573
|
|
|
$
|
352
|
|
|
$
|
104,490
|
|
|
$
|
17,478
|
|
|
$
|
85,764
|
|
|
$
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
on Balance Sheet
|
December
31, 2009
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Aggregate
Fair Value
|
|
Cash
and cash equivalents
|
|
|
Short-term
available-for-sale securities
|
|
|
Long-term
available-for-sale securities
|
ARS
|
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
203
|
|
|
$
|
1,397
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,397
|
Money
market funds
|
|
|
5,703
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,703
|
|
|
5,703
|
|
|
|
—
|
|
|
|
—
|
Municipal
securities
|
|
|
72,789
|
|
|
|
739
|
|
|
|
—
|
|
|
|
73,528
|
|
|
—
|
|
|
|
73,528
|
|
|
|
—
|
|
|
$
|
80,092
|
|
|
$
|
739
|
|
|
$
|
203
|
|
|
$
|
80,628
|
|
$
|
5,703
|
|
|
$
|
73,528
|
|
|
$
|
1,397
|
The amortized cost and fair value of
the available-for-sale securities at March 31, 2010, by contractual maturity
were as follows (in thousands):
|
|
Amortized
Cost
|
|
|
Fair
Value
|
ARS
|
|
$
|
1,600
|
|
|
$
|
1,248
|
Money
market funds and municipal securities
|
|
|
|
|
|
|
|
One
year or less
|
|
|
7,256
|
|
|
|
7,274
|
After
one year through three years
|
|
|
76,654
|
|
|
|
77,181
|
Greater
than three years through five years
|
|
|
1,256
|
|
|
|
1,309
|
|
|
$
|
86,766
|
|
|
$
|
87,012
|
Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table details the fair value measurements of assets and liabilities
within the three levels of the fair value hierarchy at March 31, 2010 and
December 31, 2009 (in thousands):
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
March 31,
2010
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Other Unobservable Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
ARS
|
|
$
|
1,248
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,248
|
Money
market funds
|
|
|
17,478
|
|
|
|
17,478
|
|
|
|
—
|
|
|
|
—
|
Municipal
securities
|
|
|
85,764
|
|
|
|
85,764
|
|
|
|
—
|
|
|
|
—
|
Foreign
currency exchange contracts
|
|
|
345
|
|
|
|
—
|
|
|
|
345
|
|
|
|
—
|
Total
financial assets
|
|
$
|
104,835
|
|
|
$
|
103,242
|
|
|
$
|
345
|
|
|
$
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
December 31,
2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Other Unobservable Inputs
(Level
3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
ARS
|
|
$
|
1,397
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,397
|
Money
market funds
|
|
|
5,703
|
|
|
|
5,703
|
|
|
|
—
|
|
|
|
—
|
Municipal
securities
|
|
|
73,528
|
|
|
|
73,528
|
|
|
|
—
|
|
|
|
—
|
Foreign
currency exchange contracts
|
|
|
1,076
|
|
|
|
—
|
|
|
|
1,076
|
|
|
|
—
|
Total
financial assets
|
|
$
|
81,704
|
|
|
$
|
79,231
|
|
|
$
|
1,076
|
|
|
$
|
1,397
|
At March
31, 2010, we classified money market funds and municipal securities as
Level 1 assets because market prices are readily available for these
investments. Level 2 financial assets 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
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.
The
following table presents a reconciliation for the three months ended March 31,
2010, of assets and liabilities measured at fair value on a recurring basis
using Level 3 inputs (in thousands):
|
|
ARS
|
|
|
|
|
December
31, 2009
|
|
$
|
1,397
|
Total
realized / unrealized losses:
|
|
|
|
Included
in earnings
|
|
|
—
|
Included
in other comprehensive income
|
|
|
(149)
|
Purchases,
sales, issuances, and settlements, net
|
|
|
—
|
Transfers
into Level 3, net
|
|
|
—
|
March
31, 2010
|
|
$
|
1,248
|
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
credit markets are experiencing uncertainty, and some of this uncertainty has
impacted and may continue to impact the markets where our ARS would be offered.
Over the past year and a half, we experienced several failed ARS auctions and
one successful ARS auction. During the first quarter of 2010, we experienced
another failed ARS auction, representing principal of $1.0 million. Our second
ARS will go to auction in the third quarter of 2010, which represents principal
of $0.6 million. Due to the longer term nature of the next auctions and the
continued uncertainty in the financial markets, these ARS values have been
classified as long-term assets. We have determined that there is no
other-than-temporary impairment on these securities, since we do not intend and
are not required to sell these securities before we have recovered the amortized
cost basis. We will continue to reassess the 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 whether the current financial recession will have an impact on the
fair value of the bond and ARS investments, we considered the individual ratings
of each bond and ARS held. With regard to bonds, we considered the following:
the underlying rating of the issuer irrespective of the insurance; the
performance of the issuer; the term of the bond; the quality of bond insurance
provided by the rating of the bond insurer; and the fair value as of each
reporting date. With regard to ARS, we considered the underlying credit quality
of student loan portfolios and federal government backing of its collateral as a
basis of its valuation. At the reporting dates and in the future, we recognize
that these investments are subject to general credit, liquidity, market and
interest rate risks, which have been accentuated by the current global financial
crisis. The fair value of these investments accordingly will continue to change,
and we will continue to evaluate their carrying values.
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.
Our processes include a program to provide a hedge against certain of these
foreign currency risks, and we use forward contracts that allow us to acquire
the foreign currency at a fixed price for a specified period of time. All of the
derivatives are cash flow hedges and at March 31, 2010 all of the 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 accumulated other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction is recognized in
earnings, which is typically when our student and sports travel programs occur
during the second and third quarters of the year. Gains or losses representing
either hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings.
At
March 31, 2010, the following forward contracts were outstanding (in
thousands):
|
|
|
Notional
Amount
|
Matures
|
Forward
contracts:
|
Australian
dollar
|
|
|
4,300
|
|
May
2010
|
British
pound
|
|
|
2,409
|
|
June
2010
|
Euro
|
|
|
8,737
|
|
May
2010 – June 2010
|
Japanese
yen
|
|
|
150,000
|
|
April
2010
|
New
Zealand dollar
|
|
|
739
|
|
June
2010
|
Forward
contracts with variable option:
|
Australian
dollar
|
|
|
7,000
|
|
April
2010
|
British
pound
|
|
|
3,000
|
|
May
2010
|
Euro
|
|
|
13,000
|
|
April
2010 – June 2010
|
New
Zealand dollar
|
|
|
1,400
|
|
April
2010 – May 2010
|
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair
values of derivatives are as follows (in thousands):
|
March
31, 2010
|
|
Derivates
designated as hedging instruments
|
|
|
Derivatives
not
designated
as hedging instruments
|
|
|
Total
(Net)
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
Forward
contracts
|
$
|
825
|
|
|
$
|
608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
217
|
Forward
contracts with variable option
|
|
398
|
|
|
|
270
|
|
|
|
—
|
|
|
|
—
|
|
|
|
128
|
Total
|
$
|
1,223
|
|
|
$
|
878
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
345
|
|
December
31, 2009
|
|
Derivates
designated as hedging instruments
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
Total
(Net)
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
Forward
contracts
|
$
|
864
|
|
|
$
|
172
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
692
|
Forward
contracts with variable option
|
|
595
|
|
|
|
211
|
|
|
|
—
|
|
|
|
—
|
|
|
|
384
|
Total
|
$
|
1,459
|
|
|
$
|
383
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,076
|
The net
asset derivative is reported in the balance sheet as ‘foreign currency exchange
contracts’.
Following
is an analysis of the changes in the net gain or loss on cash flow hedges
included in accumulated other comprehensive income (loss) (in
thousands):
|
March
31,
|
|
|
2010
|
|
Balance,
December 31, 2009
|
$
|
698
|
|
Net
loss for the period
|
|
(475
|
)
|
Effective
portion gain/(loss) transferred to earnings
|
|
—
|
|
Ineffective
portion gain/(loss) transferred to earnings
|
|
—
|
|
Balance,
March 31, 2010
|
$
|
223
|
|
Unrealized
gains on forward contracts recorded in accumulated other comprehensive income at
March 31, 2010, which are expected to be reclassified to net revenue during the
next twelve months is approximately $0.2 million.
For the
three months ended March 31, 2010 and 2009, respectively, no gains or losses
were recognized in the income statement for derivatives designated as hedging
instruments.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the
three months ended March 31, 2010 and 2009, respectively, the amount of gains or
losses recognized in the income statement for derivatives not designated as
hedging instruments (and their locations) are as follows (in
thousands):
|
|
|
|
Amount
of Loss
|
Derivative
not designated as
hedging
instruments
|
|
Location
of Loss Recognized in
Income
on Derivative
|
|
March
31,
2010
|
|
March
31,
2009
|
Forward
contracts
|
|
Foreign
currency and other expense
|
$
|
—
|
$
|
(631)
|
Forward
contracts with variable options
|
|
Foreign
currency and other expense
|
|
—
|
|
(331)
|
Total
|
|
|
$
|
—
|
$
|
(962)
|
We do not
typically enter into derivatives that are not designated as hedging instruments.
Our policy is to achieve a position of being 80 to 100 percent hedged for our
forecasted cash flow for the following year.
6. Stock-Based
Compensation
Under the
our Equity Participation Plan (the “Plan”), we may grant stock-based incentive
compensation awards to eligible employees (including officers), non-employee
directors and consultants in the form of distribution equivalent rights,
incentive stock options, non-qualified stock options, performance share awards,
performance unit awards, restricted stock awards, restricted stock units awards,
stock appreciation rights, tandem stock appreciation rights, unrestricted stock
awards or any combination of the foregoing, as may be best suited to the
circumstances of the particular employee, director or consultant.
Under the
terms of the Plan, options to purchase shares of our Common Stock are granted at
a price set by the Compensation Committee of the Board of Directors (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.
Under the
terms of the Plan, restricted stock awards are granted at a price set by the
Compensation Committee on the same terms as options. The Compensation Committee
also establishes the vesting period of the awards, which is generally set at 100
percent at the conclusion of one to four years. Our key employees who have been
awarded stock and are full time employees are subject to a four year vesting
period, while our Board of Directors who have been awarded stock are subject to
a one year vesting period.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of options. Option valuation
models require the input of highly subjective assumptions, particularly expected
term, stock price volatility, and forfeiture rate. The assumptions used to
calculate the fair value of options granted are evaluated and revised, as
necessary, to reflect market conditions and our experience. Our employee stock
options do not trade on a secondary exchange; therefore, employees do not derive
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.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the three months ended March 31, 2010 and
2009.
|
Three
months
ended
March
31, 2010
|
|
Three
months
ended
March
31, 2009
|
Expected
dividend yield
|
|
1.92
|
|
%
|
|
|
2.84
|
|
%
|
Expected
stock price volatility
|
|
64.62
|
|
%
|
|
|
50.48
|
|
%
|
Risk-free
interest rate
|
|
2.32
|
|
%
|
|
|
2.07
|
|
%
|
Expected
life of options
|
|
4.77
|
|
Years
|
|
|
4.63
|
|
Years
|
Estimated
fair value per option granted
|
$
|
5.42
|
|
|
|
$
|
2.48
|
|
|
The
dividend yield is based on expected quarterly cash dividends paid to our
shareholders. Expected stock price volatility is based on historical volatility
of our stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
The expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Additionally, an annualized forfeiture rate of 8.4
percent is used as a best estimate of future forfeitures based on our historical
forfeiture experience. The stock-based compensation expense will be adjusted in
later periods if the actual forfeiture rate is different from the
estimate.
Total
stock-based compensation expense recognized in the consolidated statement of
operations for the quarter ended March 31, 2010 was $0.5 million before income
taxes. Of the total stock-based compensation expense during the quarter, stock
option expense was $0.3 million, restricted stock award expense was $0.2
million, and the related total deferred tax benefit was $0.2
million.
The
following table presents information about our Common Stock options and
restricted awards as of March 31, 2010:
|
|
|
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
|
|
|
|
265,000
|
|
|
|
2.60
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.47 - 6.93
|
|
|
|
501,456
|
|
|
|
1.92
|
|
|
$
|
5.98
|
|
|
|
501,456
|
|
|
$
|
5.98
|
|
6.94 - 10.39
|
|
|
|
302,365
|
|
|
|
6.97
|
|
|
|
9.03
|
|
|
|
148,506
|
|
|
|
9.28
|
|
10.40
- 13.86
|
|
|
|
314,822
|
|
|
|
9.38
|
|
|
|
11.87
|
|
|
|
13,050
|
|
|
|
11.67
|
|
13.87 -
17.32
|
|
|
|
305,783
|
|
|
|
6.27
|
|
|
|
16.86
|
|
|
|
222,594
|
|
|
|
16.80
|
|
17.33
- 20.79
|
|
|
|
12,824
|
|
|
|
8.11
|
|
|
|
18.41
|
|
|
|
3,206
|
|
|
|
18.41
|
|
20.80 -
24.25
|
|
|
|
16,000
|
|
|
|
5.37
|
|
|
|
21.09
|
|
|
|
16,000
|
|
|
|
21.09
|
|
24.26 -
27.72
|
|
|
|
197,146
|
|
|
|
6.09
|
|
|
|
27.11
|
|
|
|
174,021
|
|
|
|
27.06
|
|
27.73 -
31.18
|
|
|
|
10,874
|
|
|
|
6.46
|
|
|
|
29.15
|
|
|
|
8,154
|
|
|
|
29.15
|
|
31.19 -
34.65
|
|
|
|
9,659
|
|
|
|
7.09
|
|
|
|
34.65
|
|
|
|
4,826
|
|
|
|
34.65
|
Total
Stock Options
|
|
|
|
1,670,929
|
|
|
|
5.67
|
|
|
$
|
12.68
|
|
|
|
1,091,813
|
|
|
$
|
12.62
|
Combined
|
|
|
|
1,935,929
|
|
|
|
5.25
|
|
|
$
|
10.95
|
|
|
|
1,091,813
|
|
|
$
|
12.62
|
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
aggregate intrinsic value of outstanding stock options and restricted stock was
$6.1 million and exercisable stock options and restricted stock was $2.8 million
at March 31, 2010, before applicable income taxes, based on our $11.05 closing
stock price at March 31, 2010. This intrinsic value would have been received by
the optionees had all restricted stock been vested and all stock options been
exercised on that date. As of March 31, 2010, total unrecognized stock-based
compensation expense related to non-vested stock options and restricted stock
awards was approximately $4.4 million, which is expected to be recognized over
approximately 3.88 years. During the quarter ended March 31, 2010, the total
intrinsic value of stock options exercised was $0.3 million and the total fair
value of options which vested was $0.04 million.
Stock
option and restricted stock transactions during the three months ended March 31,
2010 were as follows:
|
Restricted
Stock
Awarded
|
|
Weighted-Average
Grant Date Fair Value
|
|
Stock
Options
|
|
Weighted-
Average
Exercise
Price
|
Balance
at December 31, 2009
|
252,959
|
|
$
|
14.15
|
|
1,765,937
|
|
$
|
12.77
|
Granted
|
12,191
|
|
|
11.34
|
|
32,081
|
|
|
11.34
|
Forfeited
|
(150)
|
|
|
9.19
|
|
(71,841)
|
|
|
19.31
|
Vested
|
—
|
|
|
—
|
|
—
|
|
|
—
|
Exercised
|
—
|
|
|
—
|
|
(55,248)
|
|
|
6.18
|
Balance
March 31, 2010
|
265,000
|
|
$
|
14.03
|
|
1,670,929
|
|
$
|
12.68
|
7.
Segment Information
Our
operations are organized in two reporting segments, 1) “Ambassador Programs and
Other”, which provides out of classroom educational travel services to students,
professionals, and athletes through multiple itineraries within five travel
program types, and 2) “BookRags”, an internet research site housing content
sales and advertising revenue.
Ambassador
Programs and Others’ gross margin is comprised of gross receipts less direct
program costs, including accommodations, transportation, speakers, facilitators,
and event costs. BookRags’ gross margin is comprised of content and subscription
and advertising revenues via
www.bookrags.com
,
less commissions and amortization of intangible assets directly associated with
sales.
Segment
information for the three months ended March 31, 2010 and 2009 were as follows
(in thousands):
|
|
Three
months ended March 31, 2010
|
|
|
Three
months ended March 31, 2009
|
|
|
|
Ambassador
Programs and Other (1)
|
|
|
BookRags
|
|
|
Consolidated
|
|
|
Ambassador
Programs and Other (1)
|
|
|
BookRags
|
|
|
Consolidated
|
|
Total
revenue
|
|
$
|
1,982
|
|
|
$
|
754
|
|
|
$
|
2,736
|
|
|
$
|
9,133
|
|
|
$
|
873
|
|
|
$
|
10,006
|
|
Gross
margin
|
|
|
949
|
|
|
|
644
|
|
|
|
1,593
|
|
|
|
4,506
|
|
|
|
775
|
|
|
|
5,281
|
|
Depreciation
and amortization
|
|
|
1,037
|
|
|
|
98
|
|
|
|
1,135
|
|
|
|
940
|
|
|
|
70
|
|
|
|
1,010
|
|
Operating
income (loss)
|
|
|
(11,808
|
)
|
|
|
305
|
|
|
|
(11,503
|
)
|
|
|
(7,465
|
)
|
|
|
505
|
|
|
|
(6,960
|
)
|
Income
tax benefit (provision)
|
|
|
3,716
|
|
|
|
(99
|
)
|
|
|
3,617
|
|
|
|
2,320
|
|
|
|
(167
|
)
|
|
|
2,153
|
|
Net
income (loss)
|
|
|
(7,695
|
)
|
|
|
206
|
|
|
|
(7,489
|
)
|
|
|
(5,592
|
)
|
|
|
338
|
|
|
|
(5,254
|
)
|
Total
additions to property, plant, and equipment
|
|
|
1,244
|
|
|
|
—
|
|
|
|
1,244
|
|
|
|
1,379
|
|
|
|
5
|
|
|
|
1,384
|
|
Total
additions to goodwill and intangible assets
|
|
|
—
|
|
|
|
239
|
|
|
|
239
|
|
|
|
—
|
|
|
|
140
|
|
|
|
140
|
|
Intangible
assets, excluding goodwill
|
|
|
—
|
|
|
|
2,970
|
|
|
|
2,970
|
|
|
|
—
|
|
|
|
2,474
|
|
|
|
2,474
|
|
Total
assets
|
|
$
|
158,717
|
|
|
$
|
11,864
|
|
|
$
|
170,581
|
|
|
$
|
160,189
|
|
|
$
|
10,845
|
|
|
$
|
171,034
|
|
(1)
|
Ambassador
Programs and Other include all travel programs offered by Ambassador
Programs and World Adventures Unlimited as well as corporate overhead.
World Adventures Unlimited had no revenue in 2009, however they did have
start-up expenses and expenses related to the pilot programs that were
operated during the summer of 2009.
|
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Any
intercompany sales, which are rare, or services provided are eliminated.
Intercompany expenses paid for by Ambassador Programs on behalf of another
subsidiary are recorded as intercompany receivables and payables and eliminated
upon consolidation. Operating agreements between subsidiaries exist to outline
the agreed upon charges for services provided by Ambassador Programs to the
other subsidiaries for accounting, human resources, technology support, and
travel services. In addition, if applicable, the terms in which two companies
can perform lead generation for marketing purposes are also
defined.
8. Commitments
and Contingencies
On July
14, 2009, a securities class action was filed against us and certain
of our executive officers on behalf of all persons or entities who
purchased our Common Stock between February 8, 2007 and October
23, 2007. The class action was filed in the United States District
Court for the Eastern District of Washington by plaintiff Plumbers Union Local
No. 12 Pension Fund (“Plumbers Union”). The Plumbers Union filed an amended
complaint on January 11, 2010. The amended complaint alleges that the
defendants violated federal securities laws by making untrue statements of
material fact and/or omitting to state material facts, thereby artificially
inflating the price of our Common Stock. We have reviewed the
amended complaint and deny the allegations contained therein. On
March 11, 2010, we, and certain of our executive officers, filed a motion to
dismiss the Plumbers Union’s amended complaint. We anticipate the Court will
issue a ruling on our motion to dismiss after May 20, 2010. We have tendered our
defense and indemnity under applicable insurance coverage and defense counsel in
Seattle, Washington has been retained to represent us. We believe that the
likelihood that our Company will ultimately incur a loss in connection with this
litigation is remote.
We cannot
estimate the possible loss to our Company, if any, at this time. The actual cost
to resolve this case will depend upon many factors such as the outcome of
mediation, pre-trial motions, trial and any appeals. However, we believe any
loss incurred will not have a material adverse effect on our business, financial
condition, cash flows or results of operations. We intend to vigorously defend
this lawsuit and any alleged claims for damages.
On
October 27, 2009, we were informed by the Securities and Exchange Commission
(“SEC”) that it had issued a formal order of investigation with respect to
trading in the Company’s securities. We believe that the investigation is for
the period August through December, 2007. In connection with the investigation,
the Company, certain of its officers, director and employees, as well as other
persons, have received subpoenas from the SEC requesting information. The SEC
has indicated that the investigation should not be construed as an indication
that any violation of law has occurred or as an adverse reflection upon any
person, entity or security. The Company will continue to cooperate fully with
the investigation.
Other
than as disclosed herein, we are not a party to any other material pending legal
proceedings other than ordinary routine litigation incidental to our business,
the outcome of which we believe will not have a material adverse effect on our
business, financial condition, cash flows or results of operations. These
matters are subject to inherent uncertainties and management’s view of these
matters may change in the future. Adverse outcomes in some or all of the matters
described in this section may result in significant monetary damages or
injunctive relief against us that would adversely affect our results of
operations.
We are
subject to the possibility of various loss contingencies, including claims,
suits and complaints, arising in the ordinary course of business. We consider
the likelihood of loss or impairment of an asset or the incurrence of a
liability, as well as our ability to reasonably estimate the amount of loss, in
determining loss contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has been incurred and
the amount of loss can be reasonably estimated. We regularly evaluate current
information available to us to determine whether such accruals should be
adjusted and whether new accruals are required.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 may
cover certain liabilities arising from our obligation to indemnify our directors
and officers and former directors in certain circumstances. No material
indemnification liabilities were accrued at March 31, 2010.
9. Recently
Issued Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued a new
accounting principle that requires new disclosures and clarifies existing
disclosures about fair value measurements. The new principle is effective for
interim and annual periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements in the rollforward
of activity in Level 3 fair value measurements, which will be effective for the
fiscal year beginning after December 15, 2010 and for the interim periods within
those fiscal years. The adoption of this new principle will not have a material
impact on our consolidated financial statements.
In
February 2010, the FASB amended the subsequent events guidance issued in May
2009 to remove the requirement for SEC filers to disclose a date through which
subsequent events have been evaluated in both issued and revised financial
statements. The amendment is effective upon issuance and has been incorporated
into the notes of our consolidated financial statements.
10.
Subsequent Events
Subsequent
to the filing of our earnings release on April 21, 2010 and prior to the filing
of our 10-Q, we received information from our insurance carrier that resulted in
a change in estimate of our anticipated insurance recovery. This change related
to a portion of specific legal fees already incurred in connection with the
SEC’s formal order of investigation with respect to trading in the Company’s
securities. The Company plans to contest the position presented by the insurance
carrier. The insurance company’s position is not related to the outcome of this
investigation. We have incorporated this change into our March 31, 2010
consolidated financial statements. The impact was an increase to general and
administrative expenses of $1.1 million and an increase to our net loss of $0.7
million, resulting in a fully diluted per share loss of $0.39 for the quarter
ending March 31, 2010.
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.
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 (the “Act”) 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, and 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 and education industry generally, competition,
dependence on key personnel and vendor relationships, our ability to
successfully integrate the operations of existing or acquired companies, and a
variety of factors such as periods of international unrest, the outbreak of
disease, changes in the direct-mail environment, protection of intellectual
rights, unidentified taxation exposure, 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 SEC 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 2, 2010 and those factors set
forth under Part II, Item 1A Risk Factors set forth in this Quarterly Report on
Form 10-Q.
All
forward-looking statements are expressly qualified in their entirety by these
factors and all related cautionary statements. We do not undertake any
obligation to update any forward-looking statements.
Executive
Overview
We are a
leading educational company that (1) organizes and promotes worldwide
educational travel programs for students, athletes and professionals and (2)
provides over 8 million pages of online research content.
Ambassador
Programs provides worldwide travel programs for student ambassadors, sports
ambassadors, student leaders and professionals and represents our core business
which has been established for over forty years. World Adventures Unlimited is a
new business unit that was initiated in 2009 and provides adventure based travel
packages for students, kindergarten through twelfth grade, primarily to
destinations outside of North America. This portion of our travel offering is in
its infancy stages, but we are looking forward to the future opportunities it
brings to offer a premium, adventure based product to a new group of
educators.
BookRags
provides online research capabilities through book summaries, critical essays,
online study guides, biographies, and references to encyclopedia articles.
BookRags is a leader in its industry and is a complementary revenue stream to
the seasonal nature of our travel season. However, we do not expect this
business to perform at the same volume as our core travel programs. All
subsidiaries support our mission of bridging cultural and political borders
through educational venues.
The key
financial indicators that we use in managing our business and in evaluating our
financial condition and operating performance are: program operating results;
net operating income; deployable cash; free cash flow; net enrollments; various
website metrics including monthly page views, website visitors, and unique
users; financial ratios; and leverage as shown on our consolidated balance
sheet. Deployable cash, free cash flow, and net enrollments are non-GAAP
measurements we utilize and are defined and further described in the sections
captioned “Key Performance non-GAAP Financial Indicators” below. The key
macro-economic factors and non-financial indicators that affect our financial
condition and operating performance are: economic stability; consumer
confidence; currency fluctuations; interest rates; political climates;
terrorism; military actions; and natural disasters.
Because
our operating results depend primarily on income from our travel programs, our
ability to manage the expense to acquire and retain our travelers will influence
our operating results. Additionally, the level of expenses required to promote
and operate our programs will impact our operating results. More than 50 percent
of the sales and marketing expense incurred during the current fiscal year are
to promote the upcoming travel year. This relationship between expense and
associated revenue is pertinent to understanding our financial
model.
2010
Overview
In 2010,
we will continue to seek the right balance of expense management and the
investment to increase our financial performance in 2011. Our focus will
continue to include retaining and traveling enrolled individuals for 2010 and
increasing enrolled revenue for 2011, optimizing gross margin, managing
expenses, cultivating new business ventures, increasing efficiency through
improved business processes and automation, developing our websites, maximizing
cash utilization, and improving brand recognition. Please see “2010 Net
Enrollments” below for further discussion of our 2010 outlook on delegate
enrollments.
Some of
our 2010 initiatives include the following:
·
|
Increase
enrollments for future travel through traditional means of
direct marketing in addition to a variety of new avenues, involving
various pricing tests, and new selling and social media
strategies.
|
·
|
Continue
negotiations with program delivery vendors to ensure optimization of
margin.
|
·
|
Implement
new expense management initiatives, such as the outsourcing of our print
production processes.
|
·
|
Improve
customer satisfaction ratings utilizing the Net Promoter philosophy, which
is both a loyalty metric and a discipline for using customer feedback to
fuel the growth and profitability of our
business.
|
·
|
Maximize
our capital allocation strategies.
|
·
|
Execute
the first travel season for Discovery Student
Adventures.
|
·
|
Establish
a stonger growth rate for
BookRags.
|
Results
of Operations
The
following table sets forth the consolidated financial results and change in
dollars and percentages for the periods indicated:
Comparison
of the Three Months Ended March 31, 2010 to the Three Months Ended March 31,
2009
|
|
|
Three
Months Ended March 31,
|
|
|
2010
|
|
2009
|
|
$
Change
|
|
%
Change
|
Total
revenue
|
$
|
2,736
|
$
|
10,006
|
$
|
(7,270)
|
|
(73%)
|
Cost
of goods sold
|
|
1,143
|
|
4,725
|
|
(3,582)
|
|
(76%)
|
Gross
margin
|
|
1,593
|
|
5,281
|
|
(3,688)
|
|
(70%)
|
Selling
and marketing
|
|
9,629
|
|
8,872
|
|
757
|
|
9%
|
General
and administrative expenses
|
|
3,467
|
|
3,369
|
|
98
|
|
3%
|
Operating
loss
|
|
(11,503)
|
|
(6,960)
|
|
(4,543)
|
|
(65%)
|
Other
income (expense)
|
|
397
|
|
(447)
|
|
844
|
|
189%
|
Loss
before tax
|
|
(11,106)
|
|
(7,407)
|
|
(3,699)
|
|
(50%)
|
Income
tax benefit
|
|
3,617
|
|
2,153
|
|
1,464
|
|
68%
|
Net
loss
|
$
|
(7,489)
|
$
|
(5,254)
|
$
|
(2,235)
|
|
(43%)
|
During
the quarter ended March 31, 2010, we traveled 803 delegates, down from 3,492
delegates during the comparable 2009 quarter. The decrease in traveled delegates
is largely due to the impact of the presidential inauguration program that
traveled approximately 2,200 delegates in the first quarter of 2009, coupled
with lower attendance to our Spring World Leadership Forum programs . In the
first quarter of 2010, total revenue decreased $7.3 million to $2.7 million from
$10.0 million in the first quarter of 2009. Gross margin decreased to $1.6
million in the first quarter of 2010 compared to $5.3 million in the first
quarter in 2009. The decrease in gross receipts and gross margin is due to the
decline in the number of delegates traveling with us, predominantly due to the
2009 presidential inauguration program as previously mentioned. Gross receipts
and gross margin also include results of operations for
BookRags
of $0.8 million and $0.6 million in the first quarter of 2010, respectively, and
$0.9 million and $0.8 million in the first quarter of 2009,
respectively. Gross margin as a percent of gross receipts increased
from 51 percent to 52 percent for the quarter ending March 31, 2009 and March
31, 2010, respectively. This increase is attributable to the leverage
that BookRags had on the consolidated results.
Operating
expenses were $13.1 million in the first quarter of 2010 compared to $12.2
million in the first quarter 2009, an increase of 7 percent. Selling and
marketing expenses increased $0.8 million due to additional efforts implemented
to grow our 2010 enrollments and acceleration of marketing activities for future
year travel programs that have historically taken place during the second
quarter. General and administrative expenses increased $0.1 million due to a
$0.1 increase in depreciation expense and $0.6 million increase in legal and
professional costs offset by $0.6 million of insurance proceeds received during
the quarter. For the first quarter 2010, our operating loss was $11.5 million,
compared to $7.0 million for the first quarter of 2009.
We realized other income of $0.4
million in the first quarter of 2010, compared to other expense of $0.4 million
in the first quarter of 2009. The $0.8 million increase in income is due to the
existence of a nonrecurring foreign currency loss of $1.0 million related to our
over-hedged foreign currency contracts in the first quarter of 2009 offset by a
$0.1 million decline in interest income earned during the first quarter of 2010
due to lower prevailing interest rates.
The
income tax benefit has been recorded based on a 32.6 percent and 29.1 percent
estimated annual effective income tax rate, applied to the pre-tax loss for the
quarters ended March 31, 2010 and 2009, respectively. The increase is due to
recording the liability related to an uncertain tax position in the first
quarter of 2009.
Results
of Operations by Segment
We have
two reporting segments, consisting of (1) “Ambassador Programs and Other”, which
provides educational travel services to students, professionals and athletes
through multiple itineraries within five travel program types, and (2)
“BookRags”, an internet research site housing content sales and advertising
revenue.
Ambassador
Programs and Others’ gross margin is comprised of gross receipts less direct
program costs, including accommodation, transportation, speakers, facilitators,
and event costs. BookRags’ gross margin is comprised of content, subscription,
and advertising revenues via
www.bookrags.com
,
less commissions and amortization of intangible assets directly associated with
sales.
Segment
results of operations for the quarters ended March 31, 2010 and 2009 are as
follows (in thousands):
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
Ambassador
Programs and Other (1)
|
|
|
BookRags
|
|
|
Consolidated
|
|
|
Ambassador
Programs and Other (1)
|
|
|
BookRags
|
|
|
Consolidated
|
|
Total
revenue
|
|
$
|
1,982
|
|
|
$
|
754
|
|
|
$
|
2,736
|
|
|
$
|
9,133
|
|
|
$
|
873
|
|
|
$
|
10,006
|
|
Cost
of goods sold
|
|
|
1,033
|
|
|
|
110
|
|
|
|
1,143
|
|
|
|
4,627
|
|
|
|
98
|
|
|
|
4,725
|
|
Gross
margin
|
|
|
949
|
|
|
|
644
|
|
|
|
1,593
|
|
|
|
4,506
|
|
|
|
775
|
|
|
|
5,281
|
|
Selling
and marketing
|
|
|
9,410
|
|
|
|
219
|
|
|
|
9,629
|
|
|
|
8,663
|
|
|
|
209
|
|
|
|
8,872
|
|
General
and administrative expenses
|
|
|
3,347
|
|
|
|
120
|
|
|
|
3,467
|
|
|
|
3,308
|
|
|
|
61
|
|
|
|
3,369
|
|
Operating
income (loss)
|
|
|
(11,808
|
)
|
|
|
305
|
|
|
|
(11,503
|
)
|
|
|
(7,465
|
)
|
|
|
505
|
|
|
|
(6,960
|
)
|
Other
income (loss)
|
|
|
397
|
|
|
|
—
|
|
|
|
397
|
|
|
|
(447
|
)
|
|
|
—
|
|
|
|
(447
|
)
|
Income
(loss) before tax
|
|
|
(11,411
|
)
|
|
|
305
|
|
|
|
(11,106
|
)
|
|
|
(7,912
|
)
|
|
|
505
|
|
|
|
(7,407
|
)
|
Income
tax benefit (provision)
|
|
|
3,716
|
|
|
|
(99
|
)
|
|
|
3,617
|
|
|
|
2,320
|
|
|
|
(167
|
)
|
|
|
2,153
|
|
Net
income (loss)
|
|
$
|
(7,695
|
)
|
|
$
|
206
|
|
|
$
|
(7,489
|
)
|
|
$
|
(5,592
|
)
|
|
$
|
338
|
|
|
$
|
(5,254
|
)
|
|
|
(1)
|
Ambassador
Programs and Other include all travel programs offered by Ambassador
Programs and World Adventures Unlimited as well as corporate overhead.
World Adventures Unlimited had no revenue in 2009, however, they did have
start-up expenses and expenses related to the pilot programs that
were operated during the summer of
2009.
|
See
‘Results of Operations’ above for a discussion of year over year variances for
Ambassador Programs and Other and details regarding the portion that was
contributed by BookRags.
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.
2010
Net Enrollments
Net
enrollments consist of all individuals traveled year to date plus those actively
enrolled for future travel. As of April 19, 2010, we had 27,274 net enrolled
participants for our 2010 travel programs, compared to 35,566
net enrolled participants
as of the same date last year for our 2009 travel programs. The 23
percent decrease in net enrollments for our 2010 programs is expected to
negatively impact our 2010 results. We believe the decline is caused primarily
by current economic conditions and high unemployment rates. We have taken and
will continue to take measures to mitigate these negative impacts, including,
but not limited to, increasing retention efforts toward 2010 travel through
focus on improving the delegate experience, and continuing negotiations with
vendors in an attempt to maintain similar gross margins realized in 2009.
However, there can be no assurances that any of these measures will have any
success, and if so, to what extent.
Deployable
Cash
Deployable
cash is a non-GAAP liquidity measure. Deployable cash 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. See the
‘
Liquidity
’ section
below for explanations of cash sources and uses.
Deployable
Cash Reconciliation (in thousands)
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term available-for-sale
securities
|
|
$
|
112,022
|
|
|
$
|
107,977
|
|
|
$
|
81,184
|
|
Prepaid
program cost and expenses
|
|
|
12,417
|
|
|
|
14,866
|
|
|
|
3,175
|
|
Less:
Participants’ deposits
|
|
|
(81,546
|
)
|
|
|
(95,968
|
)
|
|
|
(31,137
|
)
|
Less:
Accounts payable/accruals/other liabilities
|
|
|
(6,230
|
)
|
|
|
(5,376
|
)
|
|
|
(5,300
|
)
|
Deployable
cash
|
|
$
|
36,663
|
|
|
$
|
21,499
|
|
|
$
|
47,922
|
|
Free
Cash Flow
Free cash
flow is a non-GAAP cash flow measure. Free cash flow is calculated as cash flow
from operations less purchase of property, equipment and intangible assets.
Management believes this non-GAAP measure is useful to investors in
understanding the cash generated within the current period for future use in
operations.
Free Cash Flow Reconciliation (in
thousands except)
|
March
31,
|
|
2010
|
|
2009
|
Cash
flow from operations as reported
|
$
|
33,171
|
|
$
|
36,296
|
Purchase
of property, equipment and intangibles
|
|
(1,483
|
)
|
(1,524)
|
Free
cash flow
|
$
|
31,688
|
|
$
|
34,772
|
Liquidity and Capital
Resources
Liquidity
Cash provided by operations was $33.2
million and $36.3 million during the quarters ended March 31, 2010 and 2009,
respectively. The $3.1 million decrease resulted from an increase in accounts
receivable of $0.6 million and decreases in participant deposits of $1.4
million, current period earnings of $2.2 million and foreign currency losses of
$0.9 million recorded in 2009, offset by a decrease in cash used for prepaid
program expenses of $1.6 million.
Cash used
in investing activities was $13.9 million for the quarter ended March 31, 2010
while cash provided by investing activities was $2.3 million for the quarter
ended March 31, 2009. This $16.2 million difference was primarily due to an
increase in cash used to purchase available-for-sale securities.
Cash used
in financing activities was $0.7 million and $1.4 million during the quarters
ended March 31, 2010 and 2009, respectively. During the quarter ended March 31,
2010, we distributed $1.2 million in cash dividends to our shareholders offset
by $0.3 million in proceeds from stock option exercises. During the quarter
ended March 31, 2009, we distributed $1.1 million in cash dividends to our
shareholders and repurchased $0.4 million of our common stock.
Total
assets at March 31, 2010 were $170.6 million, of which 66 percent, or $112.0
million, were cash, cash equivalents and short-term available-for-sale
securities.
At
December 31, 2009 total assets were $128.1 million, of which $81.2 million were
cash, cash equivalents and short-term available-for-sale
securities.
Capital
Resources
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.
During
the first quarter of 2010, we had an unused line of credit in the amount of
$20.0 million. The line of credit covenants include deployable cash greater than
zero, tangible net worth greater than $40.0 million and net income after taxes
for the current and previous three quarters of greater than $4.0 million. At
March 31, 2010, we were in compliance with all covenants. Additionally, we
currently have no plans to draw any of these funds in the immediate
future.
We
continue to consider potential acquisitions of educational, travel and youth
businesses. An acquisition may require the use of cash and cash equivalents.
Currently, there are no pending acquisitions and no assurance can be given
that definitive agreements for any such acquisitions will be entered into, or,
if they are entered into, that they will be on terms favorable to
us.
We do not
have any material capital expenditure commitments for 2010, not already
presented within our March 31, 2010 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 2010. For a more complete discussion of these and other contractual
factors, please refer to our consolidated financial statements and the notes
thereto included in our Annual Report on Form 10-K filed on March 2,
2010.
Market
Risk
Financial
Instruments
We
classify our marketable debt investments as available-for-sale securities, which
are carried at fair value. Unrealized gains and losses on available-for-sale
securities are excluded from operations and reported as accumulated other
comprehensive income, net of deferred income taxes. Realized gains and losses on
the sale of available-for-sale securities are recognized on a specific
identification basis in the statement of operations in the period the
investments are sold.
We
evaluate investment securities for other-than-temporary declines in fair value
on a quarterly basis. If the fair value of investment securities falls below
their amortized cost and the decline is deemed to be other-than-temporary, then
the amount of other-than-temporary impairment recognized in the statement of
operations depends on whether we intend to sell the investment securities or
more likely than not will be required to sell the investment securities before
recovery of the amortized cost. There were no investment securities that
management identified to be other-than-temporarily impaired during the quarter
ended March 31, 2010, because we do not intend and are not required to sell the
debt securities before we have recovered the amortized cost basis of the
securities. Realized losses could occur in future periods due to a change in our
intent to hold the investments until recovery of the amortized cost, a change in
our assessment of credit risk, or a change in regulatory or accounting
requirements. Significant increases or decreases in the aggregate fair value of
our available for-sale securities may affect our liquidity and capital
resources, although we believe the credit ratings of the investments held
substantiate this risk as low.
Foreign
Currency Exchange Contracts
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.
Our processes include a program to provide a hedge against certain of these
foreign currency risks, and we use forward contracts that allow us to acquire
the foreign currency at a fixed price for a specified period of time. All of the
derivatives are cash flow hedges and at March 31, 2010 all of the contracts
qualified for cash flow hedge accounting.
We
account for these foreign exchange contracts and options in accordance with GAAP
which 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 accumulated 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 accumulated other comprehensive income. The gains and losses on
the derivative instruments that are reported in accumulated 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 hedged transactions is recognized in current period
earnings. Unrealized gains and losses on foreign currency exchange contracts
that are not qualifying cash-flow hedges are recorded in the statement of
operations.
Critical
Accounting Policies and Estimates
The
preparation of our 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
available-for-sales securities, valuation of goodwill and intangible assets,
income taxes, foreign currency, revenue recognition, 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.
There have been no significant changes to our critical accounting policies and
methodologies as discussed in our Annual Report on Form 10-K filed March 2,
2010.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
There has
been no significant change to market risk as discussed in
Market Risk
, as part of Item
7,
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
in our 10-K
filed March 2, 2010.
Item 4. Controls and
Procedures
(a) Evaluation of
disclosure controls and procedures
As of
March 31, 2010, the end of the period covered by this report, our chief
executive officer and chief financial officer reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material
information we must disclose in our report filed or submitted under the Exchange
Act is recorded, processed, summarized, and reported on a timely basis, and have
concluded, based on that evaluation, that as of such date, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
accumulated and communicated to our chief executive officer and chief financial
officer as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in
internal control over financial reporting
In the
three months ended March 31, 2010, 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.
PART II
OTHER
INFORMATION
Item 1. Legal Proceedings
The
information contained in Note 8, “
Contingencies
” to our
consolidated financial statements is incorporated by reference.
Item
1A. Risk Factors
As of the
date of this report, there have been no significant changes to our risk factors,
as discussed in Item 1A,
Risk
Factors,
contained in our Annual Report on Form 10-K filed on March 2,
2010.
Item 6. Exhibits
|
31.1
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
Certification
under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2
|
Certification
under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, we have duly caused
this report to be signed on our behalf by the undersigned thereunto duly
authorized.
AMBASSADORS
GROUP, INC.
Date:
May 4, 2010
|
By:
|
/s/
JEFFREY D. THOMAS
|
|
|
|
Jeffrey
D. Thomas
|
|
|
|
Chief
Executive Officer
|
|
EXHIBIT INDEX
|
31.1
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
31.2
|
Certification
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.1
|
Certification
under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
32.2
|
Certification
under Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
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