Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2009
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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 __________ to
_________
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Commission
file number: 0-33347
Ambassadors
Group, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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91-1957010
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S.
Employer
Identification
No.)
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Dwight
D. Eisenhower Building
2001
South Flint Road
Spokane,
WA
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99224
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (509) 568-7800
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Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $.01 Par Value
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The
NASDAQ Stock Market
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(Title
of Class)
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(Name
of each exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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o
Yes
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No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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o
Yes
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No
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.
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Yes
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o
No
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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).
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o
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Yes
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o
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No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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o
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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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company o
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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).
o
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Yes
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No
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The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the Common Stock on the NASDAQ
Stock Market on June 30, 2009, was $117.9 million. Shares of Common Stock held
by each executive officer and director, and by each individual and entity that
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The
number of shares of the registrant’s Common Stock, $0.01 par value, outstanding
as of February 18, 2010 was 19,018,865.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement relating to the 2010 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K to the extent stated herein.
TABLE OF CONTENTS
Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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9
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Item 1B.
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Unresolved
Staff Comments
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13
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Item 2.
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Properties
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14
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Item 3.
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Legal
Proceedings
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14
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Item 4.
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Reserved | 14 |
PART II
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Item 5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Item 6.
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Selected Financial
Data
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18
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and
Results
of Operation
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19
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Item 7A.
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Quantitative and Qualitative
Disclosures About Market Risk
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31
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Item 8.
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Financial Statements and
Supplementary Data
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31
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Item 9.
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Changes
in and Disagreements With Accountants on Accounting and
Financial
Disclosure
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31
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Item 9A.
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Controls and
Procedures
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31
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Item
9B.
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Other
Information
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34
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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34
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Item 11.
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Executive
Compensation
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34
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
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34
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Item 13.
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Certain Relationships and Related
Transactions, and Director Independence
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34
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Item 14.
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Principal Accountant Fees
and Services
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34
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PART IV
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Item 15.
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Exhibits, Financial Statement
Schedules
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35
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Signatures
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II-1
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Forward-Looking
Statements
Statements
contained in this Annual Report on Form 10-K of Ambassadors Group, Inc., 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 that relate to expectations
concerning matters that are not historical facts. Words such as
“projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and
similar words and expressions are intended to identify forward-looking
statements. These forward-looking statements reflect our beliefs or current
expectations with respect to, among other things, trends in the travel and
education industry, our business and growth strategies, our use of technology,
our ability to integrate acquired businesses, and fluctuations in our results of
operations.
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 set forth in Item 1A and other
factors as may be identified from time to time in our filings with the
Securities and Exchange Commission (the “SEC”) or in our press releases. 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.
Ambassadors
Group, Inc. (“Ambassadors,” “Company,” “we,” “us” or “our”) is a leading
educational company that organizes and promotes worldwide travel programs for
students, athletes and professionals, and provides over 8 million pages of
online research content through www.BookRags.com. We were founded in 1967,
reincorporated in Delaware in 1995, and operated as Ambassadors Education Group,
a wholly owned subsidiary of Ambassadors International, Inc. (“International”)
until February 2002. Effective February 28, 2002, Ambassadors spun off from
International by virtue of a special stock dividend to International’s
shareholders of all of the outstanding shares of our Company that International
owned (the “Distribution”). Beginning March 1, 2002, we began operating as
an independent stand-alone company. Trading of our Common Stock on the NASDAQ
Stock Market began on March 1, 2002 under the symbol “EPAX.” Our principal
offices are located in Spokane, Washington, USA.
Our
travel business consists of several specialized private-label educational travel
programs, including (i) the “People to People Student Ambassador Programs”
(“Student Ambassador Programs”), which provide opportunities for grade school,
middle school and high school students to visit domestic and foreign
destinations to learn about the history, government, economy and culture of such
countries, (ii) the “People to People Sports Ambassador Programs” (“Sports
Ambassador Programs”), which provide opportunities for middle school and high
school athletes to participate in international sports challenges, (iii) the
“People to People Leadership Summit,” and “World Leadership Forum” (“Leadership
Programs”), which provide domestic travel experiences for grade school, middle
school and high school students emphasizing leadership, community involvement,
and government education, (iv) the “People to People Citizen Ambassador
Programs” (“Citizen Ambassador Programs”), which provide foreign travel
experiences for professionals, with emphasis on meetings and seminars between
delegates and persons in similar professions abroad and (v) “Discovery Student
Adventures”, which provide opportunities for grade school, middle school and
high school students to visit foreign destinations with an emphasis on adventure
and scientific exploration.
Since 1995, we have
expanded our travel operations primarily through internal growth and three
acquisitions of educational or travel related businesses. Since 1963, we have
organized programs for nearly 515,000 students, athletes, and adults. Our
educational travel programs feature visits abroad, including, but not limited
to, Antarctica, Australia, China, France, Germany, Great Britain, Italy, New
Zealand, and South Africa. In 2009, 34,248 delegates, including students from 95
different countries, traveled on our programs to 47 countries on seven
continents.
We have
the exclusive right from People to People International (“People to People”) to
develop and conduct student programs for kindergarten through high school
students using the People to People name. We also have the non-exclusive right
to develop, market and operate programs for professionals, college students and
athletes using the People to People name. At the present time, we are the only
entity that has been given this right by People to People. These rights, granted
pursuant to agreements with People to People, expire in 2020. People to People
is a private, non-profit organization dedicated to the promotion of world
peace through cultural exchange. We also have the exclusive right from Discovery
Education, Inc. (“Discovery Education”) to develop and conduct international
student programs for kindergarten through high school students using the
Discovery Education marks and the name “Discovery Student Adventures.” In
addition, we have the first right of refusal to develop, market and operate
programs for students to domestic destinations. These rights, granted pursuant
to agreements with Discovery Education, expire in 2014.
People to
People was founded by President Dwight D. Eisenhower in 1956 and was originally
administered by the U.S. State Department. Eight U.S. presidents since
President Eisenhower have served as the honorary chairman of People to People.
Mary Eisenhower, the president and chief executive officer of People to People,
also continues her grandfather’s legacy by serving the
organization.
We
believe that our 43 years of continuous experience, relationships arising
from organizing travel programs, and our association with People to People have
provided the foundation for our Company. This foundation allows us to develop
and maintain strong strategic alliances and a competitive edge in the
educational and travel industries at a competitive program cost. This foundation
also allows us to provide high-quality and unique educational programs and
customer service. We intend to continue to grow our business internally through
marketing enhancements, new programs and strategic alliances, and may make
selective acquisitions of and/or joint agreements with travel, education, and
direct marketing related businesses.
On May 15, 2008, we acquired 100
percent of the stock in the educational website BookRags, Inc. (“BookRags”)
(www.BookRags.com). BookRags was founded in 1999. It
initially started as a source for online book summaries and notes, and has grown
to include a wide variety of content, including lesson plans, film summaries,
biographies, and literary criticisms. The BookRags’ demographic is similar in
nature to that of Ambassador Programs, Inc.(“Ambassador Programs”) and although
it is not travel related, BookRags is a complementary fit to our business model
in relation to marketing opportunities, as well as the seasonality of our travel
business. The results of BookRags have been consolidated into our results of
operations since May 15, 2008.
On
January 15, 2009, our subsidiary, World Adventures Unlimited, Inc. (“WAU”) (fka
‘Ambassadors Specialty Group, Inc.’), signed a five year license agreement with
Discovery Education. The agreement grants us the exclusive right to license
all-inclusive land based group travel packages for students in kindergarten
through twelfth grade to destinations outside of North America using the
Discovery Education marks and the name “Discovery Student Adventures". Pilot
programs were operated in the summer of 2009 in preparation for Discovery
Student Adventures’ inaugural 2010 travel season. Costs of operating the pilot
programs, as well as general start-up costs, have been consolidated into our
results of operations since January 15, 2009.
Student
Ambassador Programs
Our
Student Ambassador Programs provide an educational opportunity for students in
grade school, middle school and high school to travel to one or more foreign
countries or domestically, and to learn about the history, government, economy
and culture of such countries. We market our Student Ambassador Programs
predominantly through a combination of direct mail and local informational
meetings primarily from August through February. Our representatives review
candidate applications and conduct selection interviews throughout the country.
Accepted applicants participate in orientation meetings to prepare for their
educational travel programs.
Our
Student Ambassador Program delegations depart primarily during the summer
months, June through August, and generally travel for approximately
fourteen to twenty-three days, during which time each delegation visits one
or more countries. Each delegation generally consists of approximately 30 to 40
students and is accompanied by several teachers and local guides in each country
who assist the delegations for the duration of each program. Teachers and
students composing a delegation generally come from the same
locale.
Programs
are designed by our staff of international planners and researchers to provide
an educational and entertaining travel experience by exposing students to the
history, government, economy and culture of the country or countries visited. We
have contracts with program coordinators to provide day-to-day coordination and
oversight of the programs. In many instances, we also provide students with the
opportunity for a brief stay with a host family, which gives students a glimpse
of daily life in the visited country.
Eligible
students who complete certain written assignments and other projects can receive
high school and university credit for their participation in the program.
Universities recognizing academic credit include, but are not limited to:
Stanford University; Princeton University; Yale University; the University of
California, Los Angeles; the University of Washington; MIT (Massachusetts
Institute of Technology); Brown University; Johns Hopkins University; Columbia
University; Cornell University; Dartmouth College and Georgetown University. In
addition, high school students who successfully complete the program may be
eligible to receive service-learning credits, which have become a high
school graduation requirement in many curricula countrywide.
Sports
Ambassador Programs
Our
Sports Ambassador Programs provide an opportunity for student athletes in middle
school and high school to explore the host country’s culture and most
participate in international tournaments with teams from across the world in
different sports. We market our Sports Ambassador Programs through a combination
of direct mail and local informational meetings. We have also partnered with key
organizations to promote our programs at local and national
tournaments. Interested athletes apply to the program and are
interviewed by our representatives, after which the selected athletes are
accepted for the program.
Delegates
in the Sports Ambassador Programs depart during the summer months,
June through August, and travel for approximately nine to
fourteen days. Teams are formed based on gender and age, and most teams
comprise athletes from several different states. During a three- to four-day
training camp, athletes competing in tournaments participate in an individual
skill assessment, after which rosters are formed to ensure balanced and
competitive teams. After the formation of rosters, the rest of the training camp
focuses on team practice and fundamentals in preparation for the ensuing
tournament competition. In each tournament, we have contracts with overseas
tournament organizers to provide day-to-day coordination and oversight of the
programs. Additionally, athletes participate in sports nutrition, psychology,
leadership, physical training and international cultural
excursions.
Eligible
athletes who complete certain written assignments and projects can receive
university credit for their participation in the program. Universities
recognizing academic credit include, but are not limited to: Stanford
University; Princeton University; Yale University; the University of California,
Los Angeles; the University of Washington; MIT (Massachusetts Institute of
Technology); Brown University; Johns Hopkins University; Columbia University;
Cornell University; Dartmouth College and Georgetown University.
Leadership
Programs
Our
Leadership Programs provide the opportunity for motivated students with academic
promise, leadership potential and a desire to serve their communities to travel
domestically and internationally to exchange ideas with renowned speakers, field
specific experts, professional educators and their peers. These programs are
specifically designed for students in fifth through twelfth grades. In addition
to the academic coursework, delegates engage in specially designed leadership
study, team-building and leadership-building exercises.
We market
the Leadership Programs through direct-mail marketing and online efforts
throughout the year. Students travel throughout the year for approximately five
to ten days. Leadership Programs include group discussions, workshops,
educational meetings and other social and recreational activities. Programs
originate from our internal marketing and research staff, who identify academic
topics, speakers and facilitators. We organize and operate all activities
of most of our Leadership Programs, including speakers, facilitators,
events, accommodations and transportation.
Delegates
traveling on our Leadership Summit programs, grades nine through twelve, may be
eligible to receive transferable high school or university credits as part of
the academic program. Universities recognizing academic credit include, but are
not limited to: Stanford University; Princeton University; Yale University; the
University of California, Los Angeles; the University of Washington; MIT
(Massachusetts Institute of Technology); Brown University; Johns Hopkins
University; Columbia University; Cornell University; Dartmouth College and
Georgetown University. In addition, students who successfully complete the
program may be eligible to receive service-learning credits, which have
become a high school graduation requirement in many curricula
countrywide.
Citizen
Ambassador Programs
Our
Citizen Ambassador Programs provide professionals with common interests the
opportunity to travel abroad to meet and exchange ideas with foreign citizens
who have similar backgrounds, interests or professions. Citizen Ambassador
Programs are developed and travel throughout the year. Direct-mail invitations
are sent to candidate delegates approximately six to eight months prior to the
travel period for the delegation. Each program is designed to meet the interests
of the individual delegates, and travels for eight to twelve days, with an
optional additional cultural exchange following each program. Programs originate
from our internal development and research staff, who identify potential
delegation topics and leaders. Professional programs have been conducted in such
areas as agriculture, economics, education, law, medicine and science. Many of
our professional programs provide continuing educational credit for the
delegates as part of the program experience. Continuing education credits are
granted through alliances with professional and academic institutions, including
the Wilderness Medical Society, the University of Pittsburgh, the American Bar
Association, many state bar associations and other professional associations and
societies.
We
believe that our Citizen Ambassador Programs provide delegates with enriching
experiences and deeper understandings of foreign cultures and people than visits
arranged independently or through travel agencies. Unlike travel programs
provided by travel agencies, these professional exchanges are intended largely
as working programs, with a significant amount of the participant’s time
involved in organized meetings, seminars and round-table discussions with their
foreign counterparts; visits to significant foreign facilities and institutions;
and informal gatherings with foreign counterparts. Each program is led by a
delegation leader based upon his or her recognition in the field and expertise
regarding the special focus of the particular program.
Discovery
Student Adventures
Discovery
Student Adventures provide students age ten through eighteen and their teachers
an opportunity to feed their curiosity about the world and experience rare and
adventurous activities. As is suited to programs associated with Discovery
Education, the trips provide immersive education in the sciences and personal
access to researchers and experts in biology, ecology, geology, and other
fields.
Trips are
seven to sixteen days in length and take place each spring and summer to
destinations from the Arctic to South Africa. Invitations are sent throughout
the year to kindergarten through twelfth grade educators to lead travel groups
and expand their students’ education. Pilot programs were operated in the summer
of 2009 in preparation for Discovery Student Adventures’ inaugural 2010 travel
season.
Educators
leading the trips may be eligible for continuing education credit, and students
in grades nine through twelve may choose to earn transferable high school credit
as part of the academic program.
BookRags
The
BookRags’ website, www.BookRags.com, is
an educational website that attracts millions of users and advertisers each
month. Students and teachers are able to “research anything” through over 8
million pages of content, including BookRags-created material, licensed
material, user-generated content, and other third party content. BookRags
provides book summaries, critical essays, as well as online study guides,
biographies and references to encyclopedia articles. Due to the nature of this
business and the users of the website, most of BookRags’ revenues are earned
during the months of September through June.
Segment
Information
Historically,
our operations were organized into one operating segment, consisting of
out-of-classroom educational travel services to students, professionals and
athletes through multiple itineraries within various travel program types. The
five types of travel programs have been aggregated as a single reporting segment
based on the similarity of their economic characteristics and services provided.
Beginning May 15, 2008, with the acquisition of BookRags, our operations were
organized into two operating segments, which have been determined to be two
reporting segments. These two reporting segments are (1) Ambassador Programs and
Other, representing our travel programs and (2) BookRags, an internet research
site housing content sales and advertising revenue. The acquisition of BookRags
aligns with our mission of bridging cultural and political borders through
education See Note 15, Segment
Reporting, in our consolidated financial statements in this Form 10-K for
further segment information.
Academic
Accreditation
Since
2004, we have been academically accredited through the Northwest Association of
Accredited Schools. We developed the Washington School of World Studies to
provide an opportunity for high school students to earn academic credit through
their participation in the Student Ambassador Programs, Sports Ambassador
Programs, Leadership Programs, or Discovery Student Adventures. The
courses offered by the Washington School of World Studies emphasize the total
learning experience of the participant while preparing for and participating in
the selected program. In addition to elective academic credit, students are
eligible to earn service-learning credits on select programs after successfully
completing the course requirements. Since inception, the Washington School of
World Studies has granted approximately 182,000 academic and service-learning
credits.
Since
2007, we have been able to provide teacher leaders with continuing education
units from their study and work as leaders through the International Association
for Continuing Education and Training (“IACET”). As an authorized
IACET provider, we have granted approximately 2,500 continuing education
units.
Our
delegates and teacher leaders are also able to earn academic credit through
Eastern Washington University’s Eisenhower Center (“EWU”). Student Ambassadors
in grades nine through twelve may enroll in EWU courses and earn up to 12
credits. In addition, Student Ambassadors in grades seven and eight are eligible
to earn one credit per course. Teacher leaders many enroll in EWU courses and
earn up to five credits. Between 1980 and 2009, Student Ambassadors transferred
more than 42,500 college credits from EWU to universities of their choice. Since
2006, teacher leaders have earned more than 1,950 college credits from
EWU.
Strategic
Alliances
Alliances
with Students on Ice, Inc. and Full On (Europe) Limited provide adventure and
quality for our Student and Citizen Ambassador Programs. These agreements
prescribe the nature, scope and pricing of the travel services provided to our
delegates. An alliance with Safe Passage Travel I, LLC, provides safety
awareness to support the education and support of safe travel
practices.
We have
also entered into alliances with the American College of Medical Quality, the
American Bar Association and the University of Pittsburgh to provide continuing
education credits for our Citizen Ambassador Programs.
Service
and Trademarks
We have
registered or applied for a variety of service and trademarks, including, but
not limited to, the names “People to People Ambassador Programs,” “People to
People Student Ambassador Programs,” “People to People Sports Ambassador
Programs,” “People to People Citizen Ambassador Programs,” “People to People
Leadership Programs,” “BookRags” and “Society for Global Citizens.” In addition,
we have the right, subject to certain exceptions, to use the People to People
and Discovery Education name, service mark and logo for use in our marketing. We
believe that the strength of our service and trademarks is valuable to our
business and intend to continue to protect and promote our marks as appropriate.
We believe that our business is not overly dependent upon any one trademark or
service mark.
Insurance
We
maintain insurance coverage that we believe is adequate for our business,
including, but not limited to, professional and general liability insurance. We
also maintain insurance coverage on our leased real property and personal
property on a replacement cost basis. There is no assurance that the insurance
maintained by us will be adequate in the event of a claim, that such insurance
will cover a claim or loss, or continue to be available in the
future.
Employees
On
December 31, 2009, we employed 251 employees, of which 244 were full-time
employees. Of our full-time employees, 223 are located in Spokane, Washington,
six are located in Seattle, Washington, seven are located in Washington, D.C,
and eight are located in various states across the United States to serve as
local field representatives. We have 154 full-time employees engaged in selling
and marketing and 90 full-time employees in general and administrative
positions. We also employ a temporary workforce on a seasonal basis to assist
with our direct marketing efforts in recognition of the fact that our travel
programs are seasonal in nature. None of our employees are subject to collective
bargaining agreements or are represented by a union. We believe that our labor
relations are good.
Competition
The
travel industry and the educational segment within the travel industry are
highly competitive. Our Student Ambassador Programs, Sports Ambassador Programs,
Leadership Programs and Discovery Student Adventures compete with similar
educational travel programs operated by other individuals and organizations, as
well as independent programs organized and sponsored by local teachers with the
assistance of local travel agents. Our Sports Ambassador Programs also compete
with independent organizations, which coordinate and travel already intact teams
for international competition. Citizen Ambassador Programs compete with
independent professional associations and educational institutions, which
sponsor and organize their own travel programs through the assistance of local
travel agents, and other organizations that design travel programs and
continuing professional education for adults.
We
believe that the principal basis of competition in the educational travel
segment of the market is the quality and uniqueness of the educational program
offered, customer service, safety, reputation and program cost. We believe that
our 43 years of experience organizing student and professional educational
programs and established relationships with public officials, organizations and
residents in countries where we provide programs, as well as our agreements with
People to People and Discovery Education, allow us to provide an educational
opportunity that is not easily duplicated by competitors’ programs.
We
believe the barriers to entry are relatively low for any future competitors.
Certain organizations engaged in the travel business could have substantially
greater financial, marketing and sales resources than we do. There can be no
assurance that our present or future competitors will not exert significant
competitive pressures on us in the future.
In
addition to competition we face in the travel industry, we also face significant
competition from a wide variety of content and media Web properties with
companies throughout the world. Content and advertising on the internet are
intensely competitive and have been rapidly evolving with converging
technologies. We compete with many larger Web properties that have larger staff
dedicated towards selling and advertising and have more traffic to offer
potential advertisers. We anticipate that this competition will increase over
time as Internet usage continues to grow. We believe that the
internet still offers a more attractive and measurable advertising option than
traditional off-line media including television, radio, billboard, magazine, and
newspaper.
Available
Information
We are
subject to the informational requirements of the Exchange Act that require us to
file reports, proxy and information statements, and other information with the
SEC. The public may read and copy our filings at the SEC’s Public Reference
Room, 100 F. Street, N.E., Washington, D.C. 20549. The SEC maintains an Internet
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
www.sec.gov. Similarly, we maintain a website at www.AmbassadorsGroup.com,
where we make available our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practical after, or on the same day as, such material is
electronically filed with or furnished to the SEC. We make these available free
of charge.
BUSINESS
STRATEGY
We
believe that high-quality programs and exceptional customer service are and will
remain key elements of our success. Our strategy is to maintain our high quality
and unique out-of-classroom educational experiences while increasing the volume
of business. To grow the business, we intend to (i) introduce new and
expand existing marketing channels and to increase volume of current educational
travel programs, (ii) introduce new educational travel programs
independently and through strategic alliances, (iii) further develop our
internet presence, and (iv) pursue acquisition opportunities.
Expand
the Marketing and Travel Volume
U.S.
Census data projects that there will be more than 42.8 million people in
the 10- to 19-year-old age range by 2015, from 41.1 million people in 2010. We
believe that a large number of qualified students in this age group are not
aware of our youth travel programs. In light of these factors, we intend to
further develop our marketing techniques by making greater use of referrals from
teachers, parents and past student travelers, targeting strategic
partnerships, and expanding and refining our extensive databases of
potential customers using more precise business intelligence
techniques.
According
to U.S. Census data, the number of Americans 45 to 74 years old is expected
to grow substantially, increasing to more than 110.4 million people in
2015, from 102.3 million people in 2010. We expect this trend to benefit
our program growth, as this population segment historically has been the most
likely to participate in one of our professional travel programs. In addition,
we believe that American adults interested in traveling abroad will increasingly
seek convenient and unique experiences. Consequently, we believe that the
opportunity exists to expand the professional educational travel programs by
continuing to increase the quality and number of specialty professional
programs, including professional education credit opportunities, and by
exploring new country destinations. We continue to look for alliances with
partners that have strong brand recognition and access to well-defined customer
segments.
Introduce
New Programs
We
continually seek to develop and introduce additional innovative and educational
experiences. We intend to maintain our contacts with foreign governmental
agencies and officials and utilize these and other foreign contacts to organize
opportunities for our program delegates that other travel programs do not
currently offer. In addition, we may develop new youth travel programs organized
around common extracurricular activities such as science, nature and
music.
Expand
Website Traffic
According
to the U.S. Census, there will be over 48 million people in the United States by
2015 between the ages of 14 and 24. Worldwide, there will be almost 1.4 billion
people between the ages of 15 and 24. According to internetworldstats.com,
worldwide penetration of the Internet is below 26% at the end of 2009, but is
rapidly growing. As we continue to add content, resources, tools and
functionality to our websites, we anticipate increasing our appeal to and
penetration of these ages as well as other age groups.
Pursue
Acquisition Opportunities
We consider the travel and youth
education industries encompassed by our business to be large and fragmented,
which present attractive acquisition opportunities. We believe acquisitions of
businesses that are either compatible with our current business or represent a
developing specialty segment may be an opportunity for future
growth.
Item 1A.
Risk
Factors
The
following risk factors could materially and adversely affect our future
operating results and could cause actual results to differ materially from those
predicted in forward-looking statements we make about our business.
A
decline in the travel industry could adversely affect our results of
operations.
Our
results of operations will depend upon factors affecting the travel industry in
general. Our enrollments and resulting revenues and earnings are especially
sensitive to events that affect domestic and international air travel and the
level of hotel reservations. A number of factors, including a rise in fuel
prices or other travel costs, excessive inflation, currency fluctuations within
the global market, the strength of the dollar, foreign taxation changes, extreme
weather conditions and concerns about passenger safety could result in a
temporary or longer-term overall decline in demand for our programs. Also,
demand for our products and services may be significantly affected by the
general level of economic activity and employment levels in the United States
and key international markets. Therefore, the economic downturn or a recession
in the United States or these other markets could have a material adverse effect
on our business, financial condition, cash flows and results of operations.
Currently, the United States and other markets are facing these conditions which
has impacted the travel industry, the markets in which we operate, our
operations and profitability. We expect these conditions will continue to impact
our operations and profitability.
Business
interruption due to adverse weather conditions or natural disasters,
international political climate, armed conflicts, terrorist and threats thereof,
and other world events or other incidents affecting the health, safety, security
and/or program satisfaction of individuals could have an adverse affect on our
profitability.
Demand
for our travel programs may be adversely affected by natural occurrences such as
hurricanes, earthquakes, epidemics or other disease outbreaks such as influenza,
and flooding in geographic regions in which we conduct travel programs. The
occurrence of any of the events described above or other unforeseen developments
in one or more of these regions would have a material adverse effect on our
business, financial condition, cash flows, and results of
operations.
Our
operations are subject to special risks inherent in doing business
internationally, as a substantial portion of our travel programs are conducted
outside the United States. Historically, gross program receipts from programs to
Europe, the South Pacific (Australia and New Zealand) and China have accounted
for a majority of our receipts. Risks inherent in doing business internationally
include potential adverse effects on operations from war, U.S. military
deployments, international and domestic terrorism, civil disturbances, political
instability, foreign currency exchange rates, governmental activities and
deprivation of contract rights.
Periods
of international and domestic unrest have reduced demand for our travel programs
and could have a material adverse effect on our business and results of
operations. Examples of such past events include, but are not limited to, war in
Iraq in 2003 and various terrorist attacks, such as the attempted airliner
terrorist attack on December 25, 2009, the attacks that occurred in India
on November 26 through 29, 2008, London on July 7 and 21, 2005, and in the
United States on September 11, 2001. A continued U.S. military response and
other acts of violence or war have and will affect the travel industry
generally, the markets in which we operate, and our operations and
profitability. Further terrorist attacks against the United States or U.S.
businesses and citizens at home and abroad may occur. The September 11 attacks
had a very negative impact on domestic and international air travel and the
travel industry in general. The potential long-term effects of these events are
uncertain for our customers, the market for our Common Stock, the markets for
our services and the U.S. economy. The consequences of any terrorist attacks, or
any armed conflicts including war which may result, are unpredictable, and we
may not be able to foresee events that could have an adverse effect on our
business or operations. Historically, we have experienced increased
cancellations for our travel programs during such times.
Our
financial results are subject to fluctuations due to the seasonality of our
business.
Our
business is highly seasonal. The majority of our travel programs are scheduled
in June and July of each year, mildly complemented by the majority of content
sales which occur during the school year, primarily September to June. We
anticipate that this trend will continue for the foreseeable future. We
recognize gross program receipts, revenues and program pass-through expenses
upon the departure of our program delegates for the majority of our programs.
Substantially all of our operating income is generated in the second and third
quarters, which historically has offset the operating losses incurred during the
rest of the year. Annual results would be adversely affected if our revenues
were to be substantially below seasonal norms during the second and third
quarters of the year. Furthermore, our operating results may fluctuate as a
result of many factors, including the mix among five different travel programs
and program destinations offered by us and our competitors, the introduction and
acceptance of new programs and program enhancements by us and our competitors,
timing of program completions, cancellation rates, competitive conditions in the
industry, marketing expenses, extreme weather conditions, international or
domestic conflicts, timing of and costs related to acquisitions, changes in
relationships with certain travel providers, economic factors and other
considerations affecting travel. As a result of the foregoing, annual or
quarterly operating results may be below the expectations of public market
analysts and investors. In such event, the price of our Common Stock could be
materially and adversely affected.
Competition
in the travel and education industries could impact our results of
operations.
The
travel industry in general and the educational segment of the travel industry
are highly competitive and have relatively low barriers to entry. We compete
with other companies that provide similar educational travel programs for
students and athletes, as well as independent programs organized and sponsored
by local teachers and coaches with the assistance of local travel agents. People
to People, under the terms of its agreement with us, reserves the right to offer
programs to college students for studies abroad and to grant to other
individuals or entities, the right to use the People to People name in
connection with People to People’s professional education and sports programs.
In general, our Citizen Ambassador Programs compete with independent
professional organizations that sponsor and organize their own travel programs
through the assistance of local travel agents, and other organizations that
offer travel programs and continuing education credits for adults. Some of our
competitors are larger and have greater brand-name recognition and financial
resources than we do. In addition to competition we face in the travel industry,
we also face significant competition from a wide variety of content and media
Web properties with companies throughout the world. Content and advertising on
the internet are intensely competitive and have been rapidly evolving with
converging technologies. We compete with many larger Web properties that have
larger staff and more traffic to offer potential advertisers. There can be no
assurance that we will be able to compete successfully, and the failure to
compete successfully may have a material adverse effect on our business,
financial condition, cash flows and results of operations.
Our
inability to use established brands, such as the “People to People” and
“Discovery Education” names, could significantly impact our success in
attracting future travelers.
Our
agreements with People to People give us the exclusive right to develop and
conduct programs for kindergarten through high school students using the People
to People name, and the non-exclusive right to develop and conduct programs for
professionals, college students and athletes using the People to People name.
Our agreements with People to People, however, allow People to People to
continue to conduct college and professional seminars and internship programs
and to develop other sports and professional programs. Our agreements with
People to People expire in 2020. Our agreement with Discovery Education gives us
the exclusive right to license all-inclusive programs for kindergarten through
high school students using the Discovery Education marks and the name “Discovery
Student Adventures." We believe that we derive benefit from our ability to
market our programs using the People to People and Discovery Education names. If
our agreements with People to People and Discovery Education were terminated or
if we were unable to use the branded names to market new programs or
destinations, this could have a material adverse effect on our business,
financial condition, cash flows and results of operations. Similarly, if our
relationship with People to People or Discovery Education is disrupted or is
adversely impacted because People to People or Discovery Education experiences
interruption, delay or ceases operations in the future for any reason, our
business could be harmed and our stock price may decline.
Our
dependence on travel suppliers could delay the delivery of our products and
services, which would impact our reputation and could reduce our
profitability.
We are
dependent upon travel suppliers for access to their products and services.
Travel suppliers include airlines, hotels, bus lines, overseas coordinators and
other participants in the travel industry. Consistent with industry practices,
we currently have no long-term agreements with travel suppliers that obligate
such suppliers to sell services or products through us on an ongoing basis.
Therefore, the travel suppliers generally can cancel or modify their agreements
with us upon relatively short notice. In addition, any decline in the quality of
travel products and services provided by these suppliers, or a perception by our
delegates of such a decline, could adversely affect our reputation. The loss of
contracts, changes in our pricing agreements, commission schedules or incentive
override commission arrangements, more restricted access to travel suppliers’
products and services or less favorable public opinion of certain travel
suppliers, resulting in low demand for the products and services of such travel
suppliers and loss of deposits with travel suppliers that could go bankrupt
could all have a material adverse effect on our business, financial condition,
cash flows and results of operations.
We
depend on our ability to attract and retain our key personnel.
Our
performance is substantially dependent on the continued services and
performances of our senior management and certain other key personnel. The loss
of the services of any of our executive officers or other key employees could
have a material adverse effect on our business, financial condition and results
of operations. Our future success also depends on our ability to identify,
attract, hire, train, retain and motivate other highly skilled managerial,
marketing and customer service personnel. The failure to retain and attract
necessary managerial, sales, marketing and customer service personnel could have
a material adverse effect on our business, financial condition, cash flows and
results of operations.
We
depend on the effectiveness of marketing to obtain individuals to travel on our
programs and to use our website.
Our
performance in our travel programs is substantially dependent on the
effectiveness of our direct and indirect marketing efforts, including but not
limited to, names sources used to identify potential participants for our
programs, direct mail, online presence and local informational meetings. Failure
or underperformance of our marketing efforts, including changes in the
direct-mail environment and the Company’s reputation with teachers could have a
material adverse effect on our business, financial condition, cash flows and
results of operations. Such changes in the direct-mail environment could
include, but are not limited to, a threat of disease or bioterrorism within the
mail environment and new or different regulatory schemes or changes in costs or
services by the United States Postal Service. In addition, the performance of
our research segment is dependent on advertising rates. Changes affecting
advertising fees and reduced traffic could have an impact on
operations.
Government
regulation and taxation may adversely affect the travel industry and thus
increase our operating expenses.
Many
travel suppliers, particularly airlines, are subject to extensive regulation by
federal, state and foreign governments. In addition, the travel industry is
subject to certain seller of travel laws of certain states and special taxes by
federal, state, local and foreign governments, including but not limited to
hotel bed taxes, car rental taxes, airline excise taxes and airport taxes and
fees. New or different regulatory schemes or changes in tax policy could have an
adverse impact on the travel industry in general and could have a material
adverse effect on our business, financial condition, cash flows and results of
operations.
Fluctuations
in foreign currency exchange rates could affect our results of
operations.
Many of
our arrangements with our foreign-based suppliers require payment to be made in
foreign currencies. Any decrease in the value of the U.S. dollar in relation to
foreign currencies has the effect of increasing the cost of the services to be
provided. Since late 1993, we generally have purchased forward contracts and
options with less than two years’ maturity to help manage program costs and
hedge against foreign currency valuation increases. While the ability to utilize
forward contracts for the delivery of foreign currencies can mitigate the effect
of increased program costs and foreign currency exchange fluctuations, there can
be no assurance that increased program costs relating to such currency
fluctuations will not be substantial in future periods. There can also be no
assurance our hedging strategy will mitigate longer-term foreign exchange
valuation trends. Depending on the strength of the U.S. dollar at the time the
forward contracts and options are entered into and its strength throughout the
contracted period, we could end up in an over-hedged position, which may result
in a gain or loss that must be recognized in our financial statements
immediately. Our contract with delegates in our travel programs provides us the
option of passing along to delegates any increase in program costs resulting
from currency fluctuations. Although we have exercised this option in the past,
there can be no assurance that we will be able to increase program prices to
offset any such cost increases in the future and any failure to do so could have
a material adverse effect on our business, financial condition, cash flows and
results of operations.
Litigation
may subject us to significant litigation costs, judgments, fines and penalties
that may not be covered by or may be in excess of available insurance coverage,
and may divert management’s attention and resources from our
business.
Due to
the nature of our business and being a publicly held company, we may be subject
to liability claims arising out of perceived wrong doing related to management’s
decisions, securities claims, governmental investigations, business operations,
or accidents or disasters causing injury to delegates on our programs, including
claims for serious personal injury or death. We believe that we have adequate
liability insurance for risks arising in the normal course of our business.
Although we have experienced no claims for which we did not have adequate
insurance coverage, there can be no assurance that insurance coverage will be
sufficient to cover one or more large claims or that the applicable insurer will
be solvent at the time of any covered loss. Further, there can be no assurance
that we will be able to obtain insurance coverage at acceptable levels and cost
in the future. Successful assertion against us of one or a series of large
uninsured claims, or of one or a series of claims exceeding any insurance
coverage could have a material adverse effect on our business, financial
condition, cash flows and results of operations. In addition, liability claims
asserted against us may also divert management’s attention and resources from
our business to participation in the litigation process and defense of these
asserted claims. See Note 10, Commitments and
Contingencies, to the consolidated financial statements for a description
of the claims that have been made against us.
If
we are unable to successfully manage the growth in our business, our prospects
may be limited and our future profitability will be decreased.
Our
performance is dependent on our ability to grow our business and expand the
marketing and volume of our educational travel programs, increase the number of
website visitors and unique users, and develop our brands. In addition, our
ability to grow is dependent on our ability to find and integrate acquisitions
or strategic alliances. Failure to meet growth strategies or any
minimum volume requirements pertaining to vendor or strategic alliance
agreements could have a material adverse effect on our business, financial
condition, cash flows and results of operations.
We
are exposed to concentration of credit risk that could affect our results of
operations.
Cash,
cash equivalents and available-for-sale securities are exposed to concentrations
of credit risk. We place our cash and temporary cash investments with high
credit quality institutions. At times, such balances may be in excess of the
federal depository insurance limit or may be on deposit at institutions which
are not covered by this insurance. If such institutions were to become
insolvent while holding our cash, cash equivalents or
available-for-sale securities in excess of the insurance limit, we could suffer
losses or it could be necessary to obtain credit financing to operate our travel
programs.
Our
short-term investments primarily consist of municipal bonds and our long-term
investments consist of auction rate securities ("ARS"). The credit markets are
currently experiencing significant uncertainty, however our investments are in
high-quality, tax-exempt municipal obligations and our ARS are insignificant
compared to our total investment portfolio. See Note 4, Investments and Fair Value
Measurements, in
our consolidated financial statements in this Form 10-K for further
information.
If
we are unable to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Substantially
all of our publications are protected by copyright, held either in our name, in
the name of the author of the work, or in the name of the sponsoring
professional society. Such copyrights protect our exclusive right to publish the
work in the United States and in many countries abroad for specified periods.
Our ability to obtain and continue to obtain access to existing and new content,
as well as our ability to continue to achieve expected results depends, in part,
upon our ability to protect our intellectual property rights. Our results may be
adversely affected by lack of legal or technological protections for our
intellectual property in some jurisdictions and markets that we operate
in.
We
depend on our ability to successfully integrate key acquisitions.
One of
our growth strategies is to acquire businesses that complement our existing
businesses. Target acquisitions may have an impact on costs, revenues, cash
flows, and our financial position, such as the acquisition of BookRags, on
May 15, 2008. Acquisitions involve risks and uncertainties, including
difficulties in integrating acquired operations and in realizing expected
opportunities, diversions of management resources and loss of key employees,
challenges with respect to operating new businesses, and other unanticipated
risks and liabilities.
Our
revenues and results of operations may fluctuate unexpectedly from quarter to
quarter, which may cause our stock price to decline.
The
market price of our Common Stock could be subject to significant fluctuations.
Some of the factors that could affect our stock price include:
|
•
Quarterly variations in operating
results;
|
|
•
Changes in revenue or earnings estimates or publication of research
reports by analysts;
|
|
•
Speculation in the press or investment
community;
|
|
•
Strategic actions by us or our competitors, such as acquisitions or
restructurings;
|
|
•
Actions by institutional
shareholders;
|
|
•
General market conditions;
|
|
•
Fair value adjustments associated with impairment of investments,
goodwill, intangible assets or fixed
assets;
|
|
•
Change in key employees;
|
|
•
Domestic or international social and economic factors unrelated to our
performance;
|
|
•
Terrorist activities, and
|
|
•
Limited shares of Common Stock available for
trading
|
The stock
markets have experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the trading price of our Common Stock. In particular, we
cannot make assurances that our stock will sell at any particular price, or at
all.
Item 1B.
Unresolved Staff
Comments
None.
Item 2.
Properties
We own an
office building, approximating 132,000 square feet, in which our headquarters
are located in Spokane, Washington. Our facilities are well maintained, in good
operating condition and provide adequate capacity for our needs. We have the
ability to expand our capacity for growth if we should need to in the future. At
December 31, 2009, Ambassadors Group, Inc. and its subsidiaries are the
occupants of this property.
We also
occupy two additional office spaces. One space totals approximately 2,400
square feet in Arlington, Virginia, pursuant to a lease which expires April 30,
2011 and is occupied by Ambassador Programs. The other totals
approximately 2,200 square feet in Seattle, Washington, pursuant to a lease
which expires on February 28, 2011 and is occupied by both Ambassador Programs
and BookRags. Both facilities are well maintained, in good operating condition
and provide adequate capacity for our needs.
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”). On October 22, 2009, the
Court appointed International Brotherhood of Electrical Workers Local 351 (“IBEW
351)” as lead plaintiff. On November 23, 2009, lead plaintiff IBEW 351 filed a
motion to withdraw as lead plaintiff and sought appointment of Plumbers Union as
substitute lead plaintiff. On January 7, 2010, a hearing was held and
the Court appointed Plumbers Union as lead plaintiff and required any amended
complaint shall be served and filed on or before January 11,
2010. Plumbers Union filed its 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. 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, the Company was informed by the SEC that it had issued a
formal order of investigation with respect to trading in the Company's
securities. The Company believes that the investigation is for the period August
through December, 2007. In connection with the investigation, the Company,
certain of its officers, directors and employees, as well as other persons, have
received subpoenas from the SEC requesting information. The SEC has indicated
that the investigation should not be construed as an indication that any
violation of law has occurred or as an adverse reflection upon any person,
entity or security. The Company intends to cooperate fully with the
investigation.
Other
than the disclosed, 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
operations.
Not
applicable.
PART
II
Item 5.
Market for the
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
|
|
Market
Information
Our
Common Stock has been traded on the NASDAQ Stock Market under the symbol “EPAX”
since March 1, 2002.
As of
February 18, 2010, the last reported sale
price of our Common Stock was $11.44. The following table sets forth the high
and low sale prices of a share of our Common Stock as reported on the NASDAQ
Stock Market on a quarterly basis for our fiscal years ended December 31,
2009 and 2008.
High
|
Low
|
||||||
Quarter
ended March 31, 2009
|
$ | 11.47 | $ | 6.20 | |||
Quarter
ended June 30, 2009
|
$ | 14.06 | $ | 7.56 | |||
Quarter
ended September 30, 2009
|
$ | 17.29 | $ | 12.01 | |||
Quarter
ended December 31, 2009
|
$ | 17.09 | $ | 11.28 | |||
Quarter
ended March 31, 2008
|
$ | 20.80 | $ | 16.40 | |||
Quarter
ended June 30, 2008
|
$ | 20.42 | $ | 14.90 | |||
Quarter
ended September 30, 2008
|
$ | 19.99 | $ | 13.31 | |||
Quarter
ended December 31, 2008
|
$ | 16.35 | $ | 7.42 |
Performance
Graph
The
following graph compares our cumulative total shareholder return with the NASDAQ
Stock Market Index and the Russell 2000 Index. The graph assumes that $100 was
invested on December 31, 2004 in our Common Stock and in each of the indexes
mentioned above and that all dividends were reinvested.
The
performance graph is being furnished by us and shall not be deemed “filed” for
purposes of Section 18 of the Exchange Act, or otherwise subject to the
liabilities of that section, nor shall it be deemed to be incorporated by
reference in any filing under the Act, or the Exchange Act.
Holders
of Record
As of
February 18, 2010, there were approximately 54 holders of record of our
Common Stock, according to our registrar. This number does not include
beneficial owners holding shares through nominee or street name.
Dividends
In
November 2003, the Board of Directors initiated a dividend policy, payable
on a quarterly basis. Each quarter, our Board of Directors reviews the dividend
payment, assessing the amount, timing and alignment with its strategic
direction.
On August
12, 2005, our Board of Directors declared a two-for-one stock split of our
Common Stock in the form of a 100-percent common stock dividend, payable on
September 15, 2005, to shareholders of record on August 31, 2005.
During
2008 and 2009, and through February 2010, our Board of Directors declared the
following dividend payments:
Declaration Date
|
Record Date
|
Payment Date
|
DividendPer Share
|
||
February
13, 2008
|
February
27, 2008
|
March
12, 2008
|
$ | 0.115 | |
May
8, 2008
|
May
22, 2008
|
June
5, 2008
|
$ | 0.115 | |
August
26, 2008
|
September
9, 2008
|
September
23, 2008
|
$ | 0.115 | |
November
13, 2008
|
November
26, 2008
|
December
10, 2008
|
$ | 0.115 | |
February
26, 2009
|
March
12, 2009
|
March
26, 2009
|
$ | 0.06 | |
May
7, 2009
|
May
21, 2009
|
June
4, 2009
|
$ | 0.06 | |
August
13, 2009
|
August
27, 2009
|
September
10, 2009
|
$ | 0.06 | |
November
12, 2009
|
November
25, 2009
|
December
9, 2009
|
$ | 0.06 | |
February
16, 2010
|
March
2, 2010
|
March
16, 2010
|
$ | 0.06 |
Transfer
Agent and Registrar
BNY
Mellon Shareowner Services serves as transfer agent and registrar of our Common
Stock.
Equity
Compensation Plan Information
The
following tables provide information as of December 31, 2009 about our Common
Stock that may be issued upon the exercise of options, warrants and rights under
all of our existing equity compensation plans.
(a)
|
(b)
|
(c)
|
|||||||||
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
(excluding
securities
reflected
in column (a))
|
||||||||
Equity
compensation
plans
approved
by
security holders
|
2,018,896 | $ | 11.17 | 1,077,675 | |||||||
Equity
compensation
plans
not
approved
by
security
holders
|
N/A | N/A | N/A | ||||||||
Total
|
2,018,896 | $ | 11.17 | 1,077,675 |
Issuer
Purchases of Equity Securities
Between
May 2004 and December 2006, our Board of Directors authorized the repurchase of
up to $25.0 million of our Common Stock in the open market or through private
transactions. On November 8, 2007, our Board of Directors increased the
authorized Common Stock repurchase plan amounts to $45.0 million. On November
13, 2008, our Board of Directors, again, increased the authorized Common Stock
repurchase plan amounts to $55.0 million. There is no expiration date to
repurchase Common Stock. During the quarter ended December 31, 2009, we
repurchased 16,337 shares of our Common Stock for $0.2 million. Since inception
through December 31, 2009, we have repurchased approximately 1,902,550 shares of
our Common Stock, adjusted to reflect the effect of our two-for-one stock split
of our Common Stock, for an approximate total of $35.9 million. As of December
31, 2009, approximately $19.1 million remained available for repurchase under
the plan. Subsequent to December 31, 2009, no Common Stock has been repurchased.
The following is a summary of issuer purchases of equity securities during the
quarter ended December 31, 2009:
Period
|
Total
Number of Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
|
Maximum Number (or Approximate Dollar Value) of
Shares that May Yet Be Purchased Under the Plans or
Program
|
|||||||||||
Available
for repurchase at September 30, 2009
|
$ | 19,297,975 | |||||||||||||
October 1
– October 31, 2009
|
— | — | — | 19,297,975 | |||||||||||
November 1
– November 30, 2009
|
16,337 | $ | 12.25 | 16,337 | 19,097,847 | ||||||||||
December 1
– December 31, 2009
|
— | — | — | 19,097,847 | |||||||||||
16,337 | $ | 12.25 | 16,337 | $ | 19,097,847 |
Independent
of this share repurchase plan, during the first quarter of 2007, our Board of
Directors approved a single repurchase of 1.2 million shares of common stock for
approximately $33.0 million.
Recent
Sales of Unregistered Securities
During
the fiscal year ended December 31, 2009, we sold no equity securities that were
not registered under the Act.
Item 6.
Selected Financial
Data
This
section presents our historical financial data, which should be read
carefully with the financial statements included in this Form 10-K,
including the notes to the consolidated financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations. The
statement of operations data for each of the years in the three-year period
ended December 31, 2009, and the consolidated balance sheet data as of
December 31, 2009 and 2008 have been derived from audited consolidated
financial statements included elsewhere in this Form 10-K. The consolidated
statement of operations data for the years ended December 31, 2006 and 2005
and the consolidated balance sheet data as of December 31, 2007, 2006 and
2005 have been derived from the audited consolidated financial statements, which
are not included in this Form 10-K. Historical results are not necessarily
indicative of future results.
December
31,
|
||||||||||||||||||||
2009 (C)(D) (E) | 2008 (C) (D) | 2007 | (C) | 2006 | (C) | 2005 | ||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||||||
Statement
of Operations data:
|
||||||||||||||||||||
Net
revenue, non-directly delivered programs (A)
|
$ | 69,279 | $ | 65,656 | $ | 84,512 | $ | 69,554 | $ | 64,321 | ||||||||||
Gross
revenue, directly delivered programs (A)
|
$ | 26,036 | $ | 30,374 | $ | 30,021 | $ | 19,401 | $ | 4,969 | ||||||||||
Internet
content and advertising revenue
|
$ | 3,300 | $ | 1,897 | $ | — | $ | — | $ | — | ||||||||||
Total
revenue
|
$ | 98,615 | $ | 97,927 | $ | 114,533 | $ | 88,955 | $ | 69,290 | ||||||||||
Cost
of sales, directly delivered programs
|
$ | 14,422 | $ | 18,856 | $ | 18,488 | $ | 11,473 | $ | 2,841 | ||||||||||
Cost
of sales, internet content and advertising
|
$ | 389 | $ | 192 | $ | — | $ | — | $ | — | ||||||||||
Gross
margin
|
$ | 83,804 | $ | 78,879 | $ | 96,045 | $ | 77,482 | $ | 66,449 | ||||||||||
Selling
and marketing expenses
|
$ | 39,021 | $ | 40,842 | $ | 38,943 | $ | 31,638 | $ | 27,574 | ||||||||||
General
and administrative expenses
|
$ | 14,604 | $ | 12,568 | $ | 15,274 | $ | 11,721 | $ | 8,185 | ||||||||||
Operating
income
|
$ | 30,179 | $ | 25,469 | $ | 41,828 | $ | 34,123 | $ | 30,690 | ||||||||||
Operating
margin
|
36 | % | 32 | % | 44 | % | 44 | % | 46 | % | ||||||||||
Net
income
|
$ | 20,337 | $ | 18,546 | $ | 31,047 | $ | 26,692 | $ | 22,410 | ||||||||||
Earnings
per share – basic (B)
|
$ | 1.06 | $ | 0.97 | $ | 1.58 | $ | 1.29 | $ | 1.10 | ||||||||||
Earnings
per share – diluted (B)
|
$ | 1.05 | $ | 0.95 | $ | 1.53 | $ | 1.24 | $ | 1.05 | ||||||||||
Balance
sheet data:
|
||||||||||||||||||||
Cash,
cash equivalents and short-term available-for-sale
securities
|
$ | 81,184 | $ | 74,425 | $ | 84,994 | $ | 133,134 | $ | 116,604 | ||||||||||
Total
assets
|
$ | 128,095 | $ | 124,277 | $ | 121,704 | $ | 153,953 | $ | 125,046 | ||||||||||
Total
stockholders’ equity
|
$ | 91,006 | $ | 67,233 | $ | 72,400 | $ | 84,047 | $ | 66,502 | ||||||||||
Other
key financial measures:
|
||||||||||||||||||||
Cash
flow from operating activities (C)
|
$ | 16,138 | $ | 24,732 | $ | 16,436 | $ | 37,207 | $ | 37,792 | ||||||||||
Cash
flow provided by (used in) investing activities
|
$ | (11,200 | ) | $ | (16,181 | ) | $ | 9,677 | $ | (12,923 | ) | $ | (15,592 | ) | ||||||
Cash
flow used in financing activities (C)
|
$ | (4,271 | ) | $ | (18,843 | ) | $ | (45,616 | ) | $ | (14,416 | ) | $ | (6,320 | ) | |||||
Cash
dividends declared and paid
|
$ | (4,581 | ) | $ | (8,801 | ) | $ | (8,940 | ) | $ | (7,655 | ) | $ | (5,729 | ) | |||||
Cash
dividends declared and paid,
per
common share
|
$ | 0.24 | $ | 0.46 | $ | 0.46 | $ | 0.37 | $ | 0.28 | ||||||||||
Return on stockholders' equity (F) | 26 | % | 27 | % | 40 | % | 35 | % | 39 | % |
(A)
|
Net
revenues are a function of gross program receipts from non-directly
delivered programs, less program pass-through expenses from non-directly
delivered programs. Program pass-through expenses include all direct costs
associated with our programs, including, but not limited to, costs related
to airfare, hotels, meals, ground transportation, guides, professional
exchanges and changes in currency exchange rates. Gross revenues, directly
delivered programs are a function of the gross program receipts for those
programs we directly organize and operate, including all activities such
as speakers, facilitators, events, accommodations and transportation.
Gross receipts for both directly delivered programs, non-directly
delivered programs and internet content and advertising revenue during the
years ended December 31, 2009, 2008, 2007, 2006 and 2005 were $203.7
million, $229.2 million, $277.3 million, $219.5 million, and $180.0
million, respectively. Gross margin as a percent of gross program receipts
during the years ended December 31, 2009, 2008, 2007, 2006, and 2005 was
41%, 34%, 35%, 35%, and 37%,
respectively.
|
|
|
(B)
|
During
September 2005, we implemented a two-for-one stock split in the form of a
100-percent stock dividend. The earnings per share
("EPS") calculations for all periods presented reflect the increase
in the number of shares of Common Stock outstanding as a result of the
stock split. On January 1, 2009, we adopted a new accounting principle,
which requires the inclusion of participating securities in
the two class method of computing earnings per share. Participating
securities are unvested share-based payment awards that contain
nonforfeitable rights to receive dividends or divided equivalents (whether
paid or unpaid). 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
2010. As a result of this adoption, all prior period EPS data have been
adjusted retrospectively. The effect of this adoption was a decrease in basic EPS of
$0.02, $0.02, $0.01 and $0.00 for 2008, 2007, 2006 and 2005, respectively,
and a decrease in
diluted EPS of $0.02, $0.02, $0.02 and $0.00 for 2008, 2007, 2006, and
2005, respectively.
|
|
|
(C)
|
We
adopted accounting principles relating to stock based compensation as of
January 1, 2006. During 2009, 2008, 2007, and 2006 stock option expense
was $0.9 million, $0.9 million, $1.0 million, and $1.3 million. In
addition to stock option expenses we recorded expense related to
restricted stock grants in all years presented. Short-fall (excess) tax
benefit from stock-based compensation is included in net cash provided by
operating activities and net cash used in financing activities of $(0.1)
million, $0.1 million, $(2.7) million, and $(2.4) million for
2009, 2008, 2007, and 2006
respectively.
|
(D)
|
We
acquired BookRags on May 15, 2008, therefore our 2008 and 2009
consolidated financial data includes BookRags’ results of operations since
this date.
|
(E)
|
We
entered into a license agreement with Discovery Education during the first
quarter of 2009. Pilot programs were operated in the summer of 2009,
therefore no revenue was generated, and costs associated with those
programs and start-up costs are included in the 2009 consolidated
financial data.
|
|
(F)
|
Calculated
as net income divided by average stockholders'
equity.
|
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is designed to provide a reader of our consolidated financial
statements with a narrative from the perspective of our management on our
financial condition, results of operations, liquidity and certain other factors
that may affect our future results. Our MD&A is presented in ten
sections:
-
|
Executive
Overview
|
-
|
Results
of Operations
|
-
|
Results
of Operations by Segment
|
-
|
Key
Performance Non-GAAP Financial
Indicators
|
-
|
Liquidity
and Capital Resources
|
-
|
Contractual
Obligations
|
-
|
Off-Balance-Sheet
Arrangements
|
-
|
Market
Risk
|
-
|
Critical
Accounting Estimates
|
-
|
Recent
Accounting Pronouncements
|
Our
MD&A should be read in conjunction with the other sections of this annual
report on Form 10-K, including Part I, “Item 1A: Risk Factors”; Part II,
“Item 6: Selected
Financial Data”; and Part II, “Item 8: Financial Statements and
Supplementary Data.” The various sections of this MD&A contain a
number of forward-looking statements, all of which are based on our current
expectations and could be affected by the uncertainties and risk factors
described throughout this filing.
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 the core business
which has been established for over forty years. Discovery Student Adventures
provides adventure based travel packages for students, kindergarten through
twelfth grade, primarily to destinations outside of North America.
The
acquisition of BookRags in May of 2008, which aligns with our mission of
bridging cultural and political borders through education, was made for the
purpose of owning a profitable business that attracts millions of similar
customers. BookRags is a thriving young business and is a complementary revenue
stream to the seasonal nature of the student travel industry. However, we do not
expect this business to perform at the level of our core travel
programs.
Our
subsidiary World Adventures Unlimited entered into an exclusive agreement with
Discovery Education in January of 2009, and provides adventure based travel
branded as “Discovery Student Adventures.” This section of our travel offering
is in its infancy stages, but we are excited about the future opportunities it
brings to offer a premium, adventure based product to a new group of
educators.
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; net enrollments; financial ratios; free cash flow;
deployable cash; leverage as shown on our consolidated balance sheet; various
website metrics including monthly page views, website visitors, and unique
users; and financial ratios. Net enrollments, free cash flow, and deployable
cash 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; and military actions.
Because
our operating results depend primarily on income from our travel programs,
delegate acquisition and retention costs influence our operating results.
Additionally, the level of expenses required to promote and operate our programs
will impact our operating results. We incur significant expenses to promote the
upcoming travel year (during the current fiscal year). This relationship between
expense and associated revenue is pertinent to understanding our financial
model.
2009
Overview
Our focus
in 2009 has been to scrutinize spending in this challenging economy, optimize
contract renegotiations, and invest wisely in positioning our Company for the
pending economic recovery. Our methods to achieve this have been to improve
margin through effective program cost management; attempt to increase net
enrollments for 2009 and 2010 travel programs; enhance marketing and retention
strategies; manage operating expenses; maximize utilization of cash; develop our
websites; increase efficiency through improved business processes and
automation; improve brand recognition; investigate and capitalize on growth
opportunities, such as our launch of the Discovery Student Adventures programs.
We will continue to seek opportunities to improve our performance and add
complementary revenue streams, such as the addition of Discovery Student
Adventures during the first quarter of 2009 and the acquisition of BookRags in
2008.
Some of
our 2009 key financial measures include the following:
·
|
Gross
margin increased 6 percent and operating income increased 18 percent
despite traveling 18 percent fewer delegates during the
year.
|
·
|
Other
income decreased $1.2 million or 53 percent due to lower prevailing
interest rates.
|
·
|
Deployable
cash increased 60 percent from $29.9 million to $47.9 million
primarily due to the 30 percent decline in participant funds year over
year and a 10 percent increase in cash and cash
equivalents.
|
·
|
Free
cash flow decreased 48 percent from $19.7 million to $10.3
million.
|
·
|
BookRags
achieved 10 percent revenue growth during the current economic
conditions.
|
·
|
Completed
our Discovery Student Adventures pilot programs in the summer of
2009.
|
2010
Outlook
In 2010
we will continue to seek the right balance of expense management and the
appropriate investment in 2011. Our focus will continue to include: increasing
net enrollments for 2010 from current indicatiors and increase enrolled revenue
for 2011, optimizing margin, investigating growth opportunities, managing
expenses, cultivating new business ventures, increasing efficiency through
improved business processes and automation, developing our websites, and
improving brand recognition. Please see “2010 Net Enrollments” below for further
discussion of our 2010 outlook on delegate registrations.
Some
of our 2010 initiatives include the following:
·
|
Increase
enrollments for 2010 and 2011travel through traditional means in
addition to a variety of new avenues, such as offering a job loss
insurance called “Peace of Mind”, various pricing tests, and new social
media strategies.
|
·
|
Continued
negotiations with program delivery vendors to ensure optimization of
margin.
|
·
|
Continued
scrutiny of expenses.
|
·
|
Improve
customer satisfaction ratings utilizing a new approach called Net
Promoter, which is both a loyalty metric and a discipline for using
customer feedback to fuel profitable growth in our
business.
|
·
|
Outsource
our print production processes.
|
·
|
Integrating
key new hires which include a new senior vice president of product
management for Ambassador Programs and a new president for
BookRags.
|
·
|
Execute
first travel season for Discovery Student
Adventures.
|
Results
of Operations
The
following table sets forth the consolidated financial results and change in
dollars and percentages for the periods indicated:
Comparison
of Year Ended December 31, 2009 to Year Ended December 31,
2008
Year
Ended December 31,
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Total
revenue
|
$ | 98,615 | $ | 97,927 | $ | 688 | 1 | % | ||||||||
Cost
of goods sold
|
14,811 | 19,048 | (4,237 | ) | (22 | %) | ||||||||||
Gross
margin
|
83,804 | 78,879 | 4,925 | 6 | % | |||||||||||
Selling
and marketing
|
39,021 | 40,842 | (1,821 | ) | (4 | %) | ||||||||||
General
and administrative expenses
|
14,604 | 12,568 | 2,036 | 16 | % | |||||||||||
Operating
income
|
30,179 | 25,469 | 4,710 | 18 | % | |||||||||||
Other
income
|
1,051 | 2,246 | (1,195 | ) | (53 | %) | ||||||||||
Income
before tax
|
31,230 | 27,715 | 3,515 | 13 | % | |||||||||||
Income
tax provision
|
10,893 | 9,169 | 1,724 | 19 | % | |||||||||||
Net
Income
|
$ | 20,337 | $ | 18,546 | $ | 1,791 | 10 | % |
In late
2008, we announced that 2009 results of operations would be down from 2008.
Based on a 20 percent decline in net enrollments at that time, travelers for
2009 were projected to be lower than 2008. This reduction was primarily
attributable to an uncertain economic outlook across the nation resulting in
lower enrollments in our programs. In response to this challenge, we increased
our marketing efforts to find new lead sources and increased our delegate
retention efforts, which resulted in reducing the year over year gap of
estimated 20 percent lower enrollments to 18 percent lower actual
travelers.
During
2009, we traveled 34,248 delegates compared to 41,929 delegates in 2008. In
2009, total revenue increased 1 percent to $98.6 million from $97.9 million and
gross margin increased 6 percent, to $83.8 million from $78.9 million,
respectively. The $0.7 million increase in total revenue and $4.9 million
upsurge in gross margin are primarily due to an overall increase in program
prices established in 2008, a larger percentage of higher revenue generating
Student Ambassadors travelers versus Leadership travelers in 2009 as compared to
2008, and lower program component costs. Specifically, international air costs
and land components decreased during the summer of 2009 in comparison to the
previous year due to purchase opportunities presented by the downturn in the
economy, which significantly increased gross margin. In addition,
BookRags’ revenue and gross margin was $3.3 million and $2.9 million in 2009,
respectively and $1.9 million and $1.7 million in 2008, respectively. This
year-over-period increase in revenue and gross margin is largely due to
including a full year of BookRags operations in 2009.
Selling
and marketing expenses were $39.0 million and $40.8 million for the years
ended December 31, 2009 and 2008, respectively. The $1.8 million decrease
is attributable to $1.0 million lower print expense associated with the
elimination of less effective marketing pieces and higher utilization of our
websites, $1.3 million decrease in personnel expenses primarily related to
headcount reductions made in January 2009 and lower incentive payouts in 2009,
offset by a $0.7 million increase of expenses as a result of asset
retirements related to system replacements performed throughout 2009. As a
percent of gross margin, selling and marketing expenses were 47 percent and 52
percent during 2009 and 2008, respectively. The 10 percent improvement is
predominantly related to our response to the reduction in expected
travelers.
General
and administrative expenses increased to $14.6 million for the year ended
December 31, 2009 from $12.6 million for the year ended December 31,
2008. The $2.0 million increase is primarily the result of $1.6 million increase
in legal and professional fees, and $0.6 million increase in depreciation
expense and asset retirement expense related to the new software capitalized in
2009 and 2008. This increase is offset by approximately $0.4 million in
personnel savings associated with headcount reductions made in January 2009 and
lower incentive payouts in 2009. As a percent of gross margin, general and
administrative expenses were consistently 17 percent and 16 percent in 2009 and
2008, respectively.
During
the year ended December 31, 2009, our operating income increased to
$30.2 million from $25.5 million for the year ended
December 31, 2008. Operating income as a percent of gross margin was 36
percent and 32 percent for 2009 and 2008, respectively primarily due to our
ability to capitalize on program savings and control our costs.
Other
income consisted primarily of interest income generated by our cash, cash
equivalents and available-for-sale securities offset by foreign currency losses.
We realized interest and dividend income of $2.0 million in the year ended
December 31, 2009, compared to $3.1 million in the year ended
December 31, 2008. The decrease in interest income is largely attributable
to lower prevailing interest rates on our average cash and investment balances.
In addition, we realized a $1.0 million foreign currency loss in 2009 compared
to a $0.8 million loss in 2008 due to being over-hedged in our foreign currency
contracts connected to the 2009 travel year.
We
recorded an income tax provision of approximately $10.9 million for the year
ended December 31, 2009, in comparison to $9.2 million for the year
ended December 31, 2008. The increase is due to higher pre-tax income and
an overall increase in our effective tax rate. Our effective tax rate was 34.9
percent and 33.0 percent for the years ended December 31, 2009 and 2008,
respectively. The increase is primarily due to the decline in tax exempt
interest income year over year.
Comparison
of Year Ended December 31, 2008 to Year Ended December 31,
2007
Year
Ended December 31,
|
|||||||||||||||||
2008
|
2007
|
$
Change
|
%
Change
|
||||||||||||||
Total
revenue
|
$ | 97,927 | $ | 114,533 | $ | (16,606 | ) | (14 | %) | ||||||||
Cost
of goods sold
|
19,048 | 18,488 | 560 | 3 | % | ||||||||||||
Gross
margin
|
78,879 | 96,045 | (17,166 | ) | (18 | %) | |||||||||||
Selling and marketing
|
40,842 | 38,943 | 1,899 | 5 | % | ||||||||||||
General
and administrative expenses
|
12,568 | 15,274 | (2,706 | ) | (18 | %) | |||||||||||
Operating
income
|
25,469 | 41,828 | (16,359 | ) | (39 | %) | |||||||||||
Other
income
|
2,246 | 4,172 | (1,926 | ) | (46 | %) | |||||||||||
Income
before tax
|
27,715 | 46,000 | (18,285 | ) | (40 | %) | |||||||||||
Income
tax provision
|
9,169 | 14,953 | (5,784 | ) | (39 | %) | |||||||||||
Net
Income
|
$ | 18,546 | $ | 31,047 | $ | (12,501 | ) | (40 | %) |
In late
2007, our Company announced that 2008 results of operations would be down from
2007. Based on a 30 percent decline in net enrollments at that time, travelers
for 2008 were projected to be lower than 2007. This reduction was primarily
attributable to the underperformance of one name source and an uncertain
economic outlook across the nation. In response to these events, we increased
our marketing efforts to find new lead sources and increased our delegate
retention efforts, which resulted in reducing the year over year gap of 30
percent lower enrollments to 20 percent lower actual travelers.
During
2008, we traveled 41,929 delegates compared to 52,661 delegates in 2007. In
2008, total revenue decreased 14 percent to $97.9 million from $114.5 million
and gross margin decreased 18 percent, to $78.9 million from $96.0 million,
respectively. The $16.6 million total revenue and $17.2 million gross margin
decreases are primarily due to the 20 percent decrease in delegates traveled
during the year, which was partially offset by the change in delegate mix of
more Student Leaders and fewer Student Ambassadors. Additionally, international
air costs increased during the summer of 2008 in comparison to the previous
year, which reduced gross margin. Gross receipts and gross margin in 2008
include $1.9 million and $1.7 million from BookRags, respectively, which we
acquired in May 2008.
Selling
and marketing expenses were $40.8 million and $38.9 million for the years
ended December 31, 2008 and 2007, respectively. The $1.9 million increase
is primarily the net result of $1.0 million increase of marketing and retention
efforts, combined with $0.7 million in additional namelist purchases for 2009
travel programs, $0.9 million increase in personnel expenses related to
strategic new hires in product development, sales, and safety, and $0.7 million
decrease of operating expenses as a result of expense management measures
implemented throughout 2008. As a percent of gross margin, selling and marketing
expenses were 52 percent and 41 percent during 2008 and 2007, respectively. The
11 percent increase is predominantly related to our response to the reduction in
expected travelers.
General
and administrative expenses decreased to $12.6 million for the year ended
December 31, 2008 from $15.3 million for the year ended December 31,
2007. The $2.7 million decrease is primarily the result of $1.6 million decrease
in personnel incentive pay and reduction of employee headcount, $0.3 million of
reduced travel and conference expenses, and $0.8 million of overhead savings as
a result of expense management measures implemented throughout 2008. As a
percent of gross margin, general and administrative expenses were consistently
16 percent in 2008 and 2007.
During
the year ended December 31, 2008, our operating income decreased to
$25.5 million from $41.8 million for the year ended
December 31, 2007. Operating income as a percent of gross margin was 32
percent and 44 percent for 2008 and 2007, respectively.
Other
income consisted primarily of interest income generated by our cash, cash
equivalents and available-for-sale securities and foreign currency losses. We
realized interest and
dividend
income of $3.1 million in the year ended December 31, 2008, compared to
$4.4 million in the year ended December 31, 2007. The decrease in interest
and dividend income is due to lower interest rates on lower average cash and
investment balances, which are primarily the result of Common Stock repurchases
approximating $10.2 million, dividends paid to shareholders of $8.8 million and
the $9.4 million acquisition of BookRags during 2008. In 2008 and 2007, the
average rate of return was 3.3 percent and 3.6
percent, respectively. In addition, we realized a $0.8 million foreign currency
loss in 2008 due to being over-hedged in our foreign currency contracts. At the
end of every year, it is our policy to be 80 to 100 percent hedged for our
forecasted cash flow for the following year. As of December 31, 2008, we
were approximately 20 percent over-hedged, primarily in euro, British
pound, and Australian dollar on foreign currency contracts, purchased in the
spring and summer of 2008 for 2009 travel expenditures. The over-hedged
position and the resulting foreign currency loss is due to the decline in
net enrollments for 2009 travel programs combined with lower than expected
program costs and the strengthening of the U.S. dollar at the end of 2008 in
comparison to foreign currency contracted rates.
We
recorded an income tax provision of approximately $9.2 million for the year
ended December 31, 2008, in comparison to $15.0 million for the year
ended December 31, 2007. The decrease is due to lower pre-tax income. Our
effective tax rate was 33.0 percent and 32.5 percent for the years ended
December 31, 2008 and 2007, respectively. Our effective tax rate was lower
than the statutory tax rate due to tax-exempt interest income.
Results
of Operations by Segment
With the
acquisition of BookRags on May 15, 2008, we changed from having one reporting
segment to having two reporting segments, consisting of
(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 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 year ended December 31, 2009 and 2008 are as
follows (in thousands):
December
31, 2009
|
December
31, 2008
|
||||||||||||||||||||||
Ambassador
Programs and Other(1)
|
BookRags
(2)
|
Consolidated
|
Ambassador
Programs and Other(1)
|
BookRags
(2)
|
Consolidated
|
||||||||||||||||||
Total
revenue
|
$ | 95,315 | $ | 3,300 | $ | 98,615 | $ | 96,030 | $ | 1,897 | $ | 97,927 | |||||||||||
Cost
of goods sold
|
14,422 | 389 | 14,811 | 18,856 | 192 | 19,048 | |||||||||||||||||
Gross
margin
|
80,893 | 2,911 | 83,804 | 77,174 | 1,705 | 78,879 | |||||||||||||||||
Selling
and marketing
|
38,288 | 733 | 39,021 | 40,404 | 438 | 40,842 | |||||||||||||||||
General
and administrative expenses
|
14,269 | 335 | 14,604 | 12,443 | 125 | 12,568 | |||||||||||||||||
Operating
income
|
28,336 | 1,843 | 30,179 | 24,327 | 1,142 | 25,469 | |||||||||||||||||
Other
income
|
1,048 | 3 | 1,051 | 2,227 | 19 | 2,246 | |||||||||||||||||
Income
before tax
|
29,384 | 1,846 | 31,230 | 26,554 | 1,161 | 27,715 | |||||||||||||||||
Income
tax provision
|
10,239 | 654 | 10,893 | 8,784 | 385 | 9,169 | |||||||||||||||||
Net
income
|
$ | 19,145 | $ | 1,192 | $ | 20,337 | $ | 17,770 | $ | 776 | $ | 18,546 |
1)
|
Ambassador Programs and Other include all travel programs offered by
Ambassador Programs and World Adventures Unlimited as well as corporate
overhead. World Adventures Umlimited had no revenue in 2009, however they
did have expenses related to the pilot porgrams that were operated during
the summer of 2009 and start -up
expenses.
|
(2)
|
BookRags
was acquired on May 15, 2008. Therefore the year ended December 31, 2008
does not represent a full year as it does in 2009 and is not comparable to
the year ended December 31, 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 generally accepted accounting principles (“GAAP”) as well as on
a non-GAAP operating, cash flow and liquidity basis referred to below as
“non-GAAP operating results” or “non-GAAP cash flows and liquidity measures.”
These measures and related discussions are presented as supplementary
information in this analysis to enhance the readers’ understanding of, and
highlight trends in, our core financial results. Any non-GAAP financial measure
used by us should not be considered in isolation or as a substitute for measures
of performance or liquidity prepared in accordance with GAAP.
2010
Net Enrollments
Net
enrollments consist of all participants who have enrolled in our programs less
those who have already withdrawn. As of February 1, 2010, we had 28,981 net
enrolled participants for our 2010 travel programs, compared to 36,534 net enrolled participants
as of the same date last year for our 2009 travel programs. The 21
percent decrease in net enrollments for our 2010 programs is likely 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 implementing new enrollment strategies, increasing
retention efforts toward 2010 travel through focus on improving the delegate
experience, and seeking out new strategic alliances to increase leads. 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), participant
deposits and the current portion of long-term capital lease. 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) | ||||||||||||
December
31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash,
cash equivalents and short-term available-for-sale
securities
|
$ | 81,184 | $ | 74,425 | $ | 84,994 | ||||||
Prepaid
program cost and expenses
|
3,175 | 4,160 | 3,624 | |||||||||
Less:
Participants’ deposits
|
(31,137 | ) | (44,166 | ) | (42,723 | ) | ||||||
Less:
Accounts payable/accruals/other liabilities
|
(5,300 | ) | (4,473 | ) | (5,474 | ) | ||||||
Deployable
cash
|
$ | 47,922 | $ | 29,946 | $ | 40,421 |
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, plant, equipment and intangibles.
Management believes this non-GAAP measure is useful to investors in
understanding the cash generated within a calendar year for future use in
operations.
Free Cash Flow Reconciliation (in thousands) | |||||||||
December
31,
|
|||||||||
2009
|
2008
|
2007
|
|||||||
Cash
flow from operations as reported
|
$
|
16,138
|
$
|
24,732
|
$
|
16,436
|
|||
Purchase
of property, plant, equipment and intangibles
|
(5,883)
|
(5,042)
|
(19,271
|
)
|
|||||
Free
cash flow
|
$
|
10,255
|
$
|
19,690
|
$
|
(2,835
|
)
|
Liquidity
and Capital Resources
Liquidity
At
December 31, 2009, we had approximately $81.2 million of cash, cash
equivalents, and short-term available-for-sale securities, which included
program participant deposits of approximately $31.1 million. At
December 31, 2008, we had approximately $74.4 million of cash and cash
equivalents and available-for-sale securities, which included program
participant deposits of $44.2 million. In addition to our cash and
short-term investments, at December 31, 2009 and 2008, respectively, we had $1.4
million and $2.1 million of ARS which have been classified as long-term
investments.
Net cash
provided by operations for the years ended December 31, 2009 and 2008 was
approximately $16.1 million and $24.7 million, respectively. The $8.6
million decrease in operating cash flows between the years ending
December 31, 2009 and 2008 primarily results from a $14.5 million decrease
in cash flows for participant deposits year over year, offset by a $1.8 million
increase in earnings and a $3.3 million improvement in working
capital.
Net cash
used in investing was $11.2 million and $16.2 million for the years ended
December 31, 2009 and 2008, respectively. This $5.0 million fluctuation was due
to $9.4 million of cash used for the acquisition of BookRags during the year
ended December 31, 2008 but not in 2009 balanced with a net increase of $3.7
million used to purchase short-term investments and $0.5 million used to
purchase intangible assets.
Net cash
used in financing activities was $4.3 million in the year ending December 31,
2009 and $18.8 million during the year ending December 31, 2008. The net change
in financing activities was a result of a $9.6 million decrease in cash used for
the repurchase of our Common Stock; a $4.2 million decrease in cash dividends
paid, a $0.2 million increase in tax provision from stock-based compensation,
and a $0.4 million increase in proceeds from exercise of stock options. During
2009, we paid $4.6 million in cash dividends and used $0.6 million for stock
repurchases.
In light
of the current economic conditions, we have taken steps to ensure our liquidity
remains a strong aspect of our Company. We continue to aggressively execute our
expense management plan, which we began in 2008, and to take advantage of cost
savings available during the economic downturn. See ‘Deployable Cash’ and ‘Free
Cash Flow’ above for further information on our liquidity.
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
2009, we had an unused line of credit in the amount of $20.0 million. The line
of credit covenants include a current ratio greater than 1.5, deployable cash
greater than zero, tangible net worth greater than $40.0 million and net income
after taxes greater than $4.0 million. At December 31, 2009, we were in
compliance with all covenants and do not expect to be out of compliance through
any additional financial undertakings. Additionally, we have no plans to draw
any of these funds in the immediate future.
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 2010 that were not already
presented within our December 31, 2009 consolidated 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 this Form 10-K.
Contractual
Obligations
We have
no long-term debt or purchase obligations as of December 31,
2009.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we had no off-balance sheet arrangements, as defined in Item
303(a)(4) of Regulation S-K promulgated by the SEC.
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 amont of other than temporary impariment recognized in the statement of
operations depends on whether we intend to sell the investment secutities or
more likely than not will be required to sell the investment secutities before
recovery of the amortized cost. There were no investment securities that
management identified to be other-than-temporarily impaired during the year
ended December 31, 2009, 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. In addition, the amount of the decline is not severe, currently at
15 percent of the assets fair value, nor has it been in an unrealized loss
position for a long duration of time. 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.
In
determining whether the current financial crisis will have an impact on the fair
value of these investments, we considered the individual ratings of each bond
and ARS held. With regards 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
regards 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.
See Note
4, Investments and
Fair Value
Measurements, to the consolidated financial statements in this Form
10-K.
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 point in time. All of the
derivatives are cash flow hedges and qualify for cash flow hedge accounting at
December 31, 2009.
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 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 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.
The table
below provides information about our derivative financial instruments that are
sensitive to foreign currency exchange rates. For foreign currency forward
exchange agreements, the table presents the notional amounts and weighted
average exchange rates. All contracts held as of December 31, 2009 mature
in 2010. These notional amounts generally are used to calculate the contractual
payments to be exchanged under the contract. None of these contracts is entered
into for trading purposes.
At
December 31, 2009 and 2008, we had outstanding forward contracts as follows
(in thousands):
Notional
Amount
|
U.S.
Dollar
Average
Contractual
Exchange
Rate
|
||||
December 31,
2009
|
|||||
Forward
contracts (pay $U.S./receive foreign currency):
|
|||||
Australian
dollar
|
4,300 | $ | 0.78 | ||
British
pound
|
2,000 | $ | 1.70 | ||
Euro
|
6,500 | $ | 1.39 | ||
Japanese
yen
|
150,000 | $ | 0.01 | ||
New
Zealand dollar
|
500 | $ | 0.63 | ||
Forward
contracts with variable option (pay $U.S./receive foreign
currency):
|
|||||
Australian
dollar
|
7,000 | $ | 0.78 | ||
British
pound
|
3,000 | $ | 1.70 | ||
Euro
|
13,000 | $ | 1.39 | ||
New
Zealand dollar
|
1,400 | $ | 0.63 | ||
December 31,
2008
|
Notional
Amount
|
U.S.
Dollar
Average
Contractual
Exchange
Rate
|
|||
Forward
contracts (pay $U.S./receive foreign currency):
|
|||||
Australian
dollar
|
16,650 | $ | 0.85 | ||
British
pound
|
6,350 | $ | 1.84 | ||
Euro
|
16,995 | $ | 1.44 | ||
Japanese
yen
|
495,000 | $ | 0.01 | ||
New
Zealand dollar
|
1,550 | $ | 0.71 | ||
Forward
contracts with variable option (pay $U.S./receive foreign
currency):
|
|||||
Australian
dollar
|
10,500 | $ | 0.81 | ||
British
pound
|
5,400 | $ | 1.80 | ||
Euro
|
33,300 | $ | 1.45 | ||
New
Zealand dollar
|
3,710 | $ | 0.70 |
See Note
5, Derivative Financial
Instruments, to the consolidated financial statements in this Form
10-K.
Critical
Accounting Estimates
Our
significant accounting policies are described in Note 2, Summary of Significant Accounting
Policies, to the consolidated financial statements in this Form 10-K. As
described in Note 2, we are required to make estimates and assumptions that
affect the reported disclosures of assets, liabilities, revenue and expenses.
Our estimates are based on our experience and our interpretation of economic,
political, regulatory, and other factors that affect our business.
We
consider that our most critical accounting estimates are related to the
valuation of available for sale securities, valuation of goodwill and intangible
assets, income taxes, foreign currency, revenue recognition, stock-based
compensation and contingencies and litigation as they require us to make
assumptions that were highly uncertain at the time the accounting estimates were
made and changes in them are reasonably likely to occur from period to period.
In addition, there are other items within our consolidated financial statements
that require estimation, but are not deemed to be critical. However, changes in
estimates used in these and other items could have a material impact on our
consolidated financial statements.
Available-
for- Sale Securities
Management
evaluates available-for-sale 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 a loss could be recorded in the income statement. Key
components of this evaluation include knowledge of the underlying investment
security and the length of the decline in market price.
Intangible
Assets and Goodwill
Goodwill
and intangible assets deemed to have an indefinite life are not amortized and
are subject to impairment tests, at least annually, which compare the carrying
amount of the reporting unit to the fair value of the reporting unit. Intangible
assets with definite lives are subject to impairment tests whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable. Key components of this valuation include management’s
forecast of operating revenues, expense and capital expenditures and industry
factors to determine the weighted average cost of capital (“WACC”).
Income
Taxes
The asset
and liability approach is used to account for income taxes by recognizing
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities. We have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for a valuation
allowance.
Foreign
Currency
We use
foreign currency exchange contracts and options as part of an overall
risk-management strategy. Derivative instruments qualifying for hedge accounting
are recorded on the balance sheet at fair value. Management must determine the
fair value each period end using estimates and assumptions, including current
market rates, projected travelers and contractual vendor payment agreements and
timelines.
Revenue
Recognition
For
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. Therefore, revenue from these programs is presented
as net revenues and recognized as the program convenes. 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 operated.
We bill
travelers in advance of travel, payments of which are recorded as participants’
deposits. We also pay for certain program costs in advance of travel, including,
but not limited to, airfare, hotel, rail passes and other program costs, which
are recorded as prepaid program costs and expenses. Under our cancellation
policy, a program traveler may be entitled to a refund of a portion of his or
her payments, less certain fees, depending on the time of cancellation. We
recognize cancellation fees concurrent with the revenue recognition from the
related programs.
Internet
content and advertising revenues are recognized at the point of sale and
corresponding to an advertisement being viewed on the BookRags site,
respectively. Revenue from annual subscriptions for content access to the
website is deferred and recognized monthly over the term of the subscription.
Cost of internet content sales include amortization of intangible assets and
licensing agreement costs.
Accounting
for Stock Options and Restricted Grants
We
maintain an Equity Participation Plan under which we have granted non-qualified
stock options and restricted stock to employees, non-employee directors and
consultants. The fair value of the equity instruments granted are estimated on
the date of grant using the Black-Scholes pricing model, utilizing the
assumptions as described in Note 11, Stock-Based Compensation, to
the consolidated financial statements of this Form 10-K.
Contingencies
We are
subject to the possibility of various 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
gain or loss contingencies. An estimated 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.
Recent
Accounting Pronouncements
See Note
2, Summary of Significant
Accounting Policies, to the consolidated financial statements in this
Form 10-K.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
The
information contained in Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations –Market Risk”
is incorporated by reference into Item 7A.
Item 8.
Financial Statements and
Supplementary Data
Reference
is made to the Index to consolidated financial statements that appears on page
F-1 to this Annual Report. The Report of Independent Registered Public
Accounting Firm, the Consolidated Financial Statements and the Notes to the
consolidated financial statements listed in the Index to consolidated financial
statements, which appear beginning on page F-2 of this Form 10-K, are
incorporated by reference into this Item 8.
Item 9.
Changes in and Disagreements
With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
As of
December 31, 2009, the end of the period covered by this Form 10-K, 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 information required to be disclosed in our Form 10-K 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 in our 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.
Management’s
Report on Financial Statements and Practices
Our management is responsible for the
preparation and fair presentation of the financial statements included in this
Form 10-K. The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and reflect our management’s judgments and estimates
concerning effects of events and transactions that are accounted for or
disclosed.
Management’s
Report on Internal Control over Financial Reporting
We are responsible for establishing and
maintaining adequate
internal control over financial reporting. Our internal control over financial
reporting includes the policies and procedures that pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the registrant; to recording
transactions as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles; to making receipts and
expenditures only in accordance with authorizations of management and directors
of our company; and for prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements. We recognize that because of its
inherent limitation, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Accordingly, even effective internal
control over financial reporting can provide only reasonable assurance with
respect to financial statement preparation.
We conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2009. This evaluation was based on the framework in “Internal Control –
Integrated Framework” published by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our management concluded that we maintained effective internal
control over financial reporting as of December 31, 2009.
BDO
Seidman, LLP, an Independent Registered Public Accounting Firm, has issued an
attestation report on the effectiveness of our Company’s internal controls over
financial reporting as of December 31, 2009, pursuant to Item 308 of Regulation
S-K.
Changes
in Internal Control over Financial Reporting
For the
quarter ended December 31, 2009, 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.
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders
Ambassadors
Group, Inc.
Spokane,
Washington
We have
audited Ambassadors Group Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Ambassadors Group, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Controls and Procedures. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Ambassadors Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Ambassadors
Group, Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009 and our
report dated March 2, 2010 expressed an unqualified opinion
thereon.
BDO
Seidman, LLP
Spokane,
Washington
March 2,
2010
Item
9B. Other
Information
None.
PART
III
The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2009, to
be filed with the SEC on or about April 13, 2010.
The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2009, to
be filed with the SEC on or about April 13, 2010.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2009, to
be filed with the SEC on or about April 13, 2010.
The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2009, to
be filed with the SEC on or about April 13, 2010.
The
information called for by this item is hereby incorporated by reference from our
definitive Proxy Statement for the fiscal year ended December 31, 2009, to
be filed with the SEC on or about April 13, 2010.
PART
IV
Item 15.
Exhibits, Financial
Statement Schedules
|
(a) The
following documents are filed as part of this Annual Report:
(1) Financial Statements.
See the accompanying Index to Consolidated Financial Statements, which
appears on page F-1 of the Annual Report. The Report of Independent Registered
Public Accounting Firm, the consolidated financial statements and the Notes to
consolidated financial statements listed in the Index to consolidated financial
statements, which appear beginning on page F-2 of this report, are incorporated
by reference into Item 8 above.
(2) Financial Statement
Schedules. Financial Statement Schedules have been omitted because the
information required to be set forth therein is either not applicable or is
included in the consolidated financial statements or the notes
thereto.
(3) Exhibits. See Item
15(b) below.
(b) Exhibits. The
exhibits listed on the accompanying Exhibit Index immediately following
the
signature
page are filed as part of, or are incorporated by reference into, this Annual
Report on Form 10-K.
(c) Financial Statement
Schedules. Reference is made to Item 15(a)(2)
above.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated Balance
Sheets
|
F-3
|
|
Consolidated Statements of
Operations
|
F-4
|
|
Consolidated
Statements of Comprehensive Income
|
F-5
|
|
Consolidated Statements of
Changes in Stockholders’ Equity
|
F-6
|
|
Consolidated Statements of Cash
Flows
|
F-7
|
|
Notes to Consolidated Financial
Statements
|
F-8
|
|
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Ambassadors
Group, Inc.
Spokane,
Washington
We have
audited the accompanying consolidated balance sheets of Ambassadors Group, Inc.
as of December 31, 2009 and 2008 and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ambassadors Group, Inc. at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 13 to the consolidated financial statements, the Company
changed the manner in which it calculates earnings per share in accordance with
ASC 260 Earnings per
Share.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Ambassadors Group, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 2, 2010 expressed an
unqualified opinion thereon.
BDO
Seidman, LLP
Spokane,
Washington
March 2,
2010
AMBASSADORS
GROUP, INC.
(in
thousands, except share and per share data)
|
December
31,
|
||||||
2009
|
2008
|
||||||
Assets
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$ | 7,656 | $ | 6,989 | |||
Available-for-sale
securities
|
73,528 | 67,436 | |||||
Foreign
currency exchange contracts
|
1,076 | — | |||||
Prepaid
program cost and expenses
|
3,175 | 4,160 | |||||
Accounts
receivable
|
2,020 | 1,966 | |||||
Deferred
tax asset
|
25 | 2,780 | |||||
Total
current assets
|
87,480 | 83,331 | |||||
Property,
plant and equipment, net
|
29,376 | 29,148 | |||||
Available-for-sale
securities
|
1,397 | 2,100 | |||||
Deferred
tax asset
|
— | 241 | |||||
Intangibles
|
2,822 | 2,404 | |||||
Goodwill
|
6,911 | 6,935 | |||||
Other long term assets | 109 | 118 | |||||
Total
assets
|
$ | 128,095 | $ | 124,277 | |||
Liabilities
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable and accrued expenses
|
$ | 5,188 | $ | 4,342 | |||
Foreign
currency exchange contracts
|
— | 6,641 | |||||
Participants’
deposits
|
31,137 | 44,166 | |||||
Other
liabilities
|
112 | 131 | |||||
Total
current liabilities
|
36,437 | 55,280 | |||||
Deferred
tax liability
|
652 | — | |||||
Foreign
currency exchange contracts
|
— | 1,764 | |||||
Total
liabilities
|
37,089 | 57,044 | |||||
Commitments
and contingencies (notes 3, 5 and 10)
|
|||||||
Stockholders' Equity
|
|||||||
Preferred
stock, $.01 par value; 2,000,000 shares authorized; none
issued
and outstanding
|
— | — | |||||
Common
stock, $.01 par value; 50,000,000 shares authorized; 19,006,265 and
18,822,563 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
188 | 186 | |||||
Additional
paid-in capital
|
2,314 | 6 | |||||
Retained
earnings
|
87,461 | 71,705 | |||||
Accumulated
other comprehensive income (loss)
|
1,043 | (4,664 | ) | ||||
Stockholders’
equity
|
91,006 | 67,233 | |||||
Total
liabilities and stockholders’ equity
|
$ | 128,095 | $ | 124,277 |
The accompanying notes are
an integral part of the consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
Years
Ended December 31,
|
||||||||||||||
2009
|
2008
|
2007
|
||||||||||||
Net
revenue, non-directly delivered programs
|
$ | 69,279 | $ | 65,656 | $ | 84,512 | ||||||||
Gross
revenue, directly delivered programs
|
26,036 | 30,374 | 30,021 | |||||||||||
Internet
content and advertising revenue
|
3,300 | 1,897 | — | |||||||||||
Total
revenue
|
98,615 | 97,927 | 114,533 | |||||||||||
Cost
of sales, directly delivered programs
|
14,422 | 18,856 | 18,488 | |||||||||||
Cost
of sales, internet content and advertising
|
389 | 192 | — | |||||||||||
Gross
margin
|
83,804 | 78,879 | 96,045 | |||||||||||
Operating
expenses:
|
||||||||||||||
Selling
and marketing
|
39,021 | 40,842 | 38,943 | |||||||||||
General
and administrative
|
14,604 | 12,568 | 15,274 | |||||||||||
Total
operating expenses
|
53,625 | 53,410 | 54,217 | |||||||||||
Operating
income
|
30,179 | 25,469 | 41,828 | |||||||||||
Other
income (expense):
|
||||||||||||||
Interest
and dividend income
|
2,012 | 3,057 | 4,355 | |||||||||||
Foreign
currency and other expense
|
(961 | ) | (811 | ) | (183 | ) | ||||||||
Total
other income
|
1,051 | 2,246 | 4,172 | |||||||||||
Income
before income taxes
|
31,230 | 27,715 | 46,000 | |||||||||||
Income
tax provision
|
10,893 | 9,169 | 14,953 | |||||||||||
Net
income
|
$ | 20,337 | $ | 18,546 | $ | 31,047 | ||||||||
Earnings
per share — basic and diluted:
|
||||||||||||||
Net
income per share – basic
|
$ | 1.06 | $ | 0.97 | $ | 1.58 | ||||||||
Weighted-average
common shares outstanding — basic
|
19,105 | 19,184 | 19,607 | |||||||||||
Net
income per share – diluted
|
$ | 1.05 | $ | 0.95 | $ | 1.53 | ||||||||
Weighted-average
common shares outstanding — diluted
|
19,422 | 19,572 | 20,230 |
The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS GROUP,
INC.
(in
thousands)
Years
Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Net
income
|
$ | 20,337 | $ | 18,546 | $ | 31,047 | |||||
Unrealized
gain (loss) on foreign currency exchange contracts, net of income tax
(provision) benefit of ($3,060), $3,887, and ($311)
|
5,669 | (7,220 | ) | 579 | |||||||
Unrealized
gain on available-for-sale securities, net of income tax provision of $20,
$73, and $109
|
38 | 139 | 202 | ||||||||
Comprehensive
income
|
$ | 26,044 | $ | 11,465 | $ | 31,828 |
The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
(in
thousands)
Accumulated
|
||||||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||||||
Common
Stock
|
Paid-In
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Total
|
|||||||||||||||||||
Balances,
December 31, 2006
|
20, 599 | $ | 205 | $ | 15,619 | $ | 66,587 | $ | 1,636 | $ | 84,047 | |||||||||||||
Net
income
|
— | — | — | 31,047 | — | 31,047 | ||||||||||||||||||
Stock
options exercised
|
289 | 3 | 1,966 | — | — | 1,969 | ||||||||||||||||||
Stock–based
compensation expense
|
— | — | 1,952 | — | — | 1,952 | ||||||||||||||||||
Excess
tax benefit from stock-based compensation
|
— | — | 2,707 | — | — | 2,707 | ||||||||||||||||||
Stock
redemptions
|
(1,598 | ) | (16 | ) | (21,162 | ) | (19,985 | ) | — | (41,163 | ) | |||||||||||||
Restricted
stock grant
|
56 | — | — | — | — | — | ||||||||||||||||||
Dividend
to shareholders ($0.46 per share)
|
— | — | — | (8,940 | ) | — | (8,940 | ) | ||||||||||||||||
Other
comprehensive income, net of income taxes
|
— | — | — | — | 781 | 781 | ||||||||||||||||||
Balances,
December 31, 2007
|
19,346 | $ | 192 | $ | 1,082 | $ | 68,709 | $ | 2,417 | $ | 72,400 | |||||||||||||
Net
income
|
— | — | — | 18,546 | — | 18,546 | ||||||||||||||||||
Stock
options exercised
|
46 | — | 398 | — | — | 398 | ||||||||||||||||||
Stock–based
compensation expense
|
— | — | 2,061 | — | — | 2,061 | ||||||||||||||||||
Shortfall
tax benefit from stock-based compensation
|
— | — | (134 | ) | — | — | (134 | ) | ||||||||||||||||
Stock
redemptions
|
(645 | ) | (6 | ) | (3,401 | ) | (6,749 | ) | — | (10,156 | ) | |||||||||||||
Restricted
stock grant
|
76 | — | — | — | — | — | ||||||||||||||||||
Dividend
to shareholders ($0.46 per share)
|
— | — | — | (8,801 | ) | — | (8,801 | ) | ||||||||||||||||
Other
comprehensive loss, net of income taxes
|
— | — | — | — | (7,081 | ) | (7,081 | ) | ||||||||||||||||
Balances,
December 31, 2008
|
18,823 | $ | 186 | $ | 6 | $ | 71,705 | $ | (4,664 | ) | $ | 67,233 | ||||||||||||
Net
income
|
— | — | — | 20,337 | — | 20,337 | ||||||||||||||||||
Stock
options exercised
|
154 | 2 | 836 | — | — | 838 | ||||||||||||||||||
Stock–based
compensation expense
|
— | — | 1,989 | — | — | 1,989 | ||||||||||||||||||
Excess
tax benefit from stock-based compensation
|
— | — | 92 | — | — | 92 | ||||||||||||||||||
Stock
redemptions
|
(73 | ) | — | (609 | ) | — | — | (609 | ) | |||||||||||||||
Restricted
stock grant
|
102 | — | — | — | — | — | ||||||||||||||||||
Dividend
to shareholders ($0.24 per share)
|
— | — | — | (4,581 | ) | — | (4,581 | ) | ||||||||||||||||
Other
comprehensive income, net of income taxes
|
— | — | — | — | 5,707 | 5,707 | ||||||||||||||||||
Balances,
December 31, 2009
|
19,006 | $ | 188 | $ | 2,314 | $ | 87,461 | $ | 1,043 | $ | 91,006 |
The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS GROUP,
INC.
(in
thousands)
Year
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 20,337 | $ | 18,546 | $ | 31,047 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
4,364 | 3,426 | 2,532 | |||||||||
Deferred
income tax provision (benefit)
|
568 | 1,034 | (71 | ) | ||||||||
Stock-based
compensation expense
|
1,989 | 2,061 | 1,952 | |||||||||
Short-fall
(excess) tax benefit from stock-based compensation
|
(92 | ) | 134 | (2,707 | ) | |||||||
(Gain)
loss on disposal of property and equipment
|
428 | (25 | ) | 155 | ||||||||
Loss
on foreign currency contracts
|
962 | 759 | — | |||||||||
Change
in assets and liabilities, net of business acquisition:
|
||||||||||||
Accounts
receivable and other current assets
|
(45 | ) | (1,147 | ) | 34 | |||||||
Prepaid
program costs and expenses
|
985 | (533 | ) | 162 | ||||||||
Accounts
payable, accrued expenses, and other liabilities
|
(329 | ) | (966 | ) | 1,260 | |||||||
Participants’
deposits
|
(13,029 | ) | 1,443 | (17,928 | ) | |||||||
Net
cash provided by operating activities
|
16,138 | 24,732 | 16,436 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Proceeds
from sale of available-for-sale securities
|
52,716 | 137,385 | 263,255 | |||||||||
Purchase
of available-for-sale securities
|
(58,039 | ) | (138,995 | ) | (234,307 | ) | ||||||
Purchase
and construction of property and equipment
|
(5,138 | ) | (4,991 | ) | (19,271 | ) | ||||||
Purchase
of intangibles
|
(726 | ) | (207 | ) | — | |||||||
Adjustments
to goodwill
|
(13 | ) | — | — | ||||||||
Net
cash paid for acquisition
|
— | (9,373 | ) | — | ||||||||
Net
cash provided by (used in) investing activities
|
(11,200 | ) | (16,181 | ) | 9,677 | |||||||
Cash
flows from financing activities:
|
||||||||||||
Dividend
payment to shareholders
|
(4,581 | ) | (8,801 | ) | (8,940 | ) | ||||||
Repurchase
of common stock
|
(609 | ) | (10,156 | ) | (41,163 | ) | ||||||
Proceeds
from exercise of stock options
|
838 | 398 | 1,969 | |||||||||
(Short-fall)
excess tax benefit from stock-based compensation
|
92 | (134 | ) | 2,707 | ||||||||
Capital
lease payments and other
|
(11 | ) | (150 | ) | (189 | ) | ||||||
Net
cash used in financing activities
|
(4,271 | ) | (18,843 | ) | (45,616 | ) | ||||||
Net
increase (decrease) in cash and cash equivalents
|
667 | (10,292 | ) | (19,503 | ) | |||||||
Cash
and cash equivalents, beginning of year
|
6,989 | 17,281 | 36,784 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 7,656 | $ | 6,989 | $ | 17,281 |
See Note
14, Supplemental Disclosures
of Consolidated Statements of Cash Flows.
The
accompanying notes are an integral part of the consolidated financial
statements.
AMBASSADORS
GROUP, INC.
1.
|
The
Company
|
Ambassadors
Group, Inc. is a leading educational company that organizes and promotes
worldwide educational travel and sports 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., BookRags, Inc., World Adventures Unlimited, Inc.,
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 out-of-classroom 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.
All of
our assets are located in the United States. Revenues from our directly
delivered travel programs and our internet content and advertising are derived
from activity in the United States. Revenue from our non-directly delivered
programs is conducted internationally in the following geographic areas for the
years ended December 31, 2009, 2008, and 2007:
Years
Ended
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Europe
|
57 | % | 61 | % | 57 | % | ||||||
South
Pacific (primarily Australia and New Zealand)
|
19 | % | 16 | % | 24 | % | ||||||
Asia
(primarily China)
|
20 | % | 17 | % | 14 | % | ||||||
Other
|
4 | % | 6 | % | 5 | % |
2.
|
Summary
of Significant Accounting Policies
|
Credit
Risk
Our
financial instruments that are exposed to concentrations of credit risk consist
primarily of cash and cash equivalents, available for sale securities and
accounts receivable. We place our cash and temporary cash investments in high
quality instruments with high credit quality institutions. At times, such
balances may be in excess of the federal depository insurance limit or may be on
deposit at institutions which are not covered by this insurance. We believe that
our primary trade accounts receivable credit risk exposure is limited as
delegates are required to pay for their entire program tuition prior to the
program departure.
We use
foreign currency exchange contracts as part of an overall risk-management
strategy. These instruments are used as a means of mitigating exposure to
foreign currency risk connected to anticipated travel programs. In entering into
these contracts, we have assumed the risk that might arise from the possible
inability of counterparties to meet the terms of their contracts, but we do not
expect any losses as a result of counterparty defaults, as all contracts are
with a high quality institution.
Cash
and Cash Equivalents
We invest
cash in excess of operating requirements in short-term time deposits, money
market instruments, government mutual bond funds and other investments. We
consider investments with original maturities at date of purchase of three
months or less to be cash equivalents.
F-8
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative
Financial Instruments
We value
all derivative instruments on our 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 hedge the variability of
cash flows related to a forecasted transaction, changes in the fair value of
derivative instruments are reported in accumulated other comprehensive income,
net of deferred income taxes. The gains and losses on the derivative instruments
that are reported in accumulated other comprehensive income, net of deferred
income taxes, are reclassified into earnings in the periods in which the
forecasted transaction occurs. The ineffective portion of all hedges is
recognized in the statements of operations as other income (expense). Changes in
unrealized gains and losses on foreign currency exchange contracts that are not
qualifying cash flow hedges are recognized in the statements of operations as
other income (expense). At December 31, 2009 all of our outstanding
contracts qualified for cash flow hedge accounting, while at December 31, 2008
the majority of our outstanding foreign currency exchange contracts qualified
for cash flow hedge accounting.
Available-for-Sale
Securities
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 consolidated statement of operations in the period
the investments are sold.
Management
evaluates 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, the
securities will be written down to current market value, resulting in a loss
recorded in the statement of operations. There were no investment securities
that management identified to be other-than-temporarily impaired during the
years ended December 31, 2009, 2008 and 2007, because we do not intend and are
not required to sell these securities before we have recovered the amortized
cost basis, the amount of the decline is not severe, and the unrealized loss
position has not existed for a long duration of time. Realized losses could
occur in future periods due to a change in management’s intent to hold the
investments to maturity, a change in management’s assessment of credit risk, or
a change in regulatory or accounting requirements.
At
December 31, 2009 and 2008, we held $74.9 million and $69.5 million of
short-term and long-term available-for-sale securities consisting primarily of
municipal bonds, variable rate municipal demand notes and various ARS. Due to
the longer term nature of the next auctions and the continued uncertainty in the
financial markets, these ARS holdings totaling $1.4 million have been classified
as non-current assets.
Other
Investments
Companies
in which we own 20% or less are accounted for using the cost method while
companies we own at least 20% but less than 50% are accounted for using the
equity method. Companies in which we own greater than 50% are consolidated into
our financial statements and are listed in Note 1, The Company, to the
Consolidated Financial Statements in this Form 10-K.
In 2003,
we purchased a minority interest in a company, Full-On (Europe) Ltd. This
company provides a one-day development activity for our delegates traveling in
Europe and Australia. This investment is reported using the equity method.
Additionally, during August 2005, we made an investment in a safety awareness
firm to support the education of and support of safe travel practices, Safe
Passage Travel I, LLC. This investment is reported using the cost method. These
investments are included in other long-term assets on the consolidated balance
sheets.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation. Cost of
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently. Major additions and betterments are
capitalized. Depreciation and amortization are provided over the lesser of the
estimated useful lives of the respective assets or the lease term (excluding
extensions), using the straight-line method, generally three to seven years
for office furniture and computer equipment, and thirty-nine years for the
building.
We
perform reviews for the impairment of property, plant and equipment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When property, plant and equipment are sold or retired,
the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is recognized in the consolidated statement of
operations.
Intangible
Assets and Goodwill
Intangible
assets include goodwill, trademark, contract license agreements, content
copyrights, plagiarism software, non-compete agreements, and advertising
relationships. The majority of these assets were recorded in conjunction with
the acquisition of BookRags in May 2008. Intangible assets other than trademark
are amortized on a straight-line basis over a weighted average life of 12 years.
Goodwill and intangible assets deemed to have an indefinite life are not subject
to amortization but are subject to impairment tests, at least annually, which
compare the carrying amount of the reporting unit to the fair value of the
reporting unit. Intangible assets with definite lives are also subject to
impairment tests whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. An impairment loss is recognized if the
carrying amount of the goodwill or intangible asset is not recoverable and
exceeds its fair value. The impairment tests performed in 2009 and 2008
substantiated the carrying value of goodwill and intangible assets, and as such,
no write-downs in the carrying value were recorded.
Revenue
Recognition
For
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. Therefore, revenue and anticipated costs from these
programs is recognized when the program convenes. 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 operating.
We
invoice delegates in advance of travel, payments of which are recorded as
participants’ deposits. We also pay for certain direct program costs in advance
of travel, including but not limited to airfare, hotel, rail passes and other
program costs, which are recorded as prepaid program costs and expenses. Under
our withdrawal policy, a delegate may be entitled to a refund of a portion of
his or her deposit, less certain fees, depending on the time of withdrawal. We
recognize withdrawal fees concurrent with the revenue recognition from the
related programs.
Internet
content and advertising revenues are recognized at the point of sale and
corresponding to an advertisement being viewed on the BookRags site,
respectively. Revenue from annual subscriptions for content access to the
website is deferred and recognized monthly over the term of the subscription.
Cost of internet content sales include amortization of intangible assets and
licensing agreement costs.
Selling
and Marketing Expenses
We
expense all selling and marketing expenses as incurred.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income
Taxes
The asset
and liability approach is used to account for income taxes by recognizing
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities.
Earnings
Per Share
Earnings
per share — basic is computed using the two-class method by dividing net
income by the weighted-average number of common shares, including participating
securities, outstanding during the period. Earnings 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
potentially dilutive common shares had been issued. Participating securities
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
2010 when escrow conditions are known. These participating securities receive
nonforfeitable dividend payments.
Comprehensive
Income
Other
comprehensive income refers to revenues, expenses, gains and losses that under
accounting principles generally accepted in the United States are included in
comprehensive income, but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders’ equity, net of tax. Our
other comprehensive income is composed of unrealized gains and losses on foreign
currency exchange contracts and available-for-sale securities. At December 31,
2009, accumulated other comprehensive income comprised $0.7 million
unrealized gain from foreign currency contracts and $0.3 million unrealized gain
from available-for -sale securities. At December 31, 2008, accumulated other
comprehensive loss comprised $5.0 million unrealized loss from foreign currency
contracts and $0.3 million unrealized gain from available-for -sale
securities.
Accounting
for Stock Options and Restricted Grants
We
maintain an Equity Participation Plan under which we have granted non-qualified
stock options and restricted stock to employees, non-employee directors and
consultants. The fair value of the equity instruments granted are estimated on
the date of grant using the Black-Scholes pricing model, utilizing assumptions
as described in Note 11, Stock-Based
Compensation.
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. On an
on-going basis, we evaluate our estimates and judgments, including those
associated with investments, intangible assets, income taxes, foreign currency
exchange contracts, revenue recognition, stock based compensation, and
contingencies and litigation.
We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Contingencies
We are
subject to the possibility of various 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
gain or loss contingencies. An estimated 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)
Reclassifications
Certain
reclassifications from 2007 and 2008 amounts have been made to conform to the
year ended December 31, 2009 financial statement presentation with no effect on
previously reported net income, retained earnings, or cash flow from
operations.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued a new
accounting principle which changed the accounting for business combinations. The
new accounting principle requires an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. It also changed the accounting
treatment for certain specific items. Acquisition costs are generally expensed
as incurred, noncontrolling interests are valued at fair value at the
acquisition date, acquired contingent liabilities are recorded at fair value at
the acquisition date and subsequently measured at either the higher of such
amount or the amount determined under existing guidance for non-acquired
contingencies, in-process research and development are recorded at fair value as
an indefinite-lived intangible asset at the acquisition date, restructuring
costs associated with a business combination are generally expensed subsequent
to the acquisition date, and changes in deferred tax asset valuation allowances
and income tax uncertainties after the acquisition date generally affect income
tax expense. The new principle also includes a substantial number of new
disclosure requirements and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, or our first quarter
of 2009. The adoption of this principle had no effect on our consolidated
financial statements. Business acquisitions are not in our normal course of
business and, as necessary, we will comply with this standard.
In March
2008, the FASB issued a new accounting principle which
requires entities to provide qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The new
principle also requires entities to disclose more information about the location
and amounts of derivative instruments in financial statements; how derivatives
and related hedges are accounted for; and how the hedges affect
the entity's financial position, financial performance, and cash flows. The
adoption of this new principle on January 1, 2009 has been incorporated into the
notes to our consolidated financial statements.
In April
2008, the FASB issued a new accounting principle regarding the
factors an entity should consider in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. The new
principle applies to intangible assets that are acquired individually or with a
group of assets and intangible assets acquired in both business combinations and
asset acquisitions. It removes an existing provision, requiring an entity to
consider whether a contractual renewal or extension clause can be accomplished
without substantial cost or material modifications of the existing terms and
conditions associated with the asset. Instead, the new principle requires that
an entity consider its own experience in renewing similar arrangements. An
entity would consider market participant assumptions regarding renewal if no
such relevant experience exists. The adoption of this new principle on January
1, 2009 did not impact our consolidated financial statements.
In
June 2008, the FASB issued a new accounting principle which establishes
that unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents are participating securities,
and thus, should be included in the two-class method of computing EPS. It also
requires that all prior-period EPS data be adjusted retrospectively. We adopted
this new principle on January 1, 2009. See Note 13, Earnings Per Share, to the
consolidated financial statements in this Form 10-K for further discussion of
this adoption.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In April
2009, the FASB issued a new accounting principle that requires disclosure about
the fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The new
principle also requires those disclosures in summarized financial information at
interim reporting periods and is effective for interim periods ending after June
15, 2009, or our second quarter of 2009. The adoption of this new guidance on
April 1, 2009 has been incorporated into the notes to our consolidated financial
statements.
In April
2009, the FASB amended the other-than-temporary impairment guidance in the U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. It does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. The amendment is effective for interim and annual
reporting periods ending after June 15, 2009, or our second quarter of 2009. The
adoption of this amendment on April 1, 2009 has been incorporated into the notes
to our consolidated financial statements.
In April
2009, the FASB issued a new accounting principle that provides guidance for
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased and identifying circumstances indicating
that a transaction is not an orderly one. The new principle is effective for
interim and fiscal periods ending after June 15, 2009, or our second quarter of
2009. The adoption of this new principle on April 1, 2009 has been incorporated
into our consolidated financial statements.
In May
2009, the FASB issued a new accounting principle that establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. This new
principle is effective for interim and annual periods ending after June 15,
2009, or our second quarter of 2009 and has been incorporated into
the notes to our consolidated financial statements.
In January 2010, the 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 on January 1, 2010 will
not have a material impact our consolidated financial statements.
In
Februay 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.
On May
15, 2008, we acquired 100 percent of the outstanding common shares of BookRags.
BookRags is an educational website providing book summaries, critical essays,
online study guides, biographies and references to encyclopedia articles.
BookRags operates in an adjacent space to student travel and education.
BookRags’ core audiences of students, parents and teachers overlaps with our key
demographic and will enable us to expand our reach into new media and online
channels where this target audience continues to spend more and more time. These
reasons were considered in determining the purchase price which resulted in
goodwill being recorded for the acquisition.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
aggregate purchase price for BookRags is expected to be approximately $16.9
million, of which $9.4 million has been paid, including $8.5 million of cash to
the prior owners at inception, $0.6 million in tax payments made on the seller’s
behalf, and $0.3 million of acquisition expenses. The remaining estimated
purchase price comprised common stock valued at $4.5 million and future earn-out
provisions of up to $3.0 million. The $4.5 million value of the common stock
issued was determined based on a ten day average closing price of our common
stock prior to the date of the acquisition for the issuance of 233,584 shares
and is subject to change if escrow conditions are not met. In 2010, the escrow
conditions will be known and the actual number of shares to be issued will be
determined. Since the
acquisition was made prior to the adoption of FASB Accounting Standards
Codification (“ASC”) Topic 805, Business Combinations, the
estimated value of these contingent shares was not made at the time of
acquisition. When escrow conditions are met in 2010 the actual number of common
shares issued will be recorded at their fair value as an addition to
goodwill.. Therefore, the ultimate value of these shares may be higher or
lower than $4.5 million. These shares have been excluded from outstanding
stock Originally, the future payments pursuant to the earn-out agreements
were up to $5.0 million in 2009 and 2010. The earnings threshold for 2009 was
not met, therefore the remaining potential earn-out is up to $3.0 million in
2010. Any future payments will be added to goodwill when and if required earning
thresholds are met.
BookRags’
results of operations in 2007 and prior to May 15, 2008 were immaterial in
comparison to our results of operations as reported; therefore pro forma
financial information is not disclosed. BookRags’ results of operations since
May 15, 2008 are included in our consolidated financial statements.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed (in thousands):
Assets
|
|||
Current
assets
|
$ | 209 | |
Intangible
assets
|
2,359 | ||
Goodwill
|
6,841 | ||
Total
assets acquired
|
9,409 | ||
Liabilities
and net assets acquired
|
|||
Current
liabilities
|
163 | ||
Total
liabilities assumed
|
163 | ||
Net
assets acquired
|
$ | 9,246 |
The
difference between the total purchase price and the fair value of tangible and
intangible assets and liabilities was recorded as goodwill.
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 using 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.
|
F
-14
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
-
|
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.
|
Te The
following tables summarize the composition of our investments at December 31,
2009 and 2008 (in thousands):
Classification
on Balance Sheet
|
|||||||||||||||||||||||||||
December
31, 2009
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses (less than 12 months)
|
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 | $ | — | $ | 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 | ||||||||||||||
Classification
on Balance Sheet
|
|||||||||||||||||||||||||||
December
31, 2008
|
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)
|
$ | 2,100 | $ | — | $ | — | $ | 2,100 | $ | — | $ | — | $ | 2,100 | |||||||||||||
Money
market funds
|
4,375 | — | — | 4,375 | 4,375 | — | — | ||||||||||||||||||||
Municipal
securities
|
68,199 | 473 | — | 68,672 | 1,236 | 67,436 | — | ||||||||||||||||||||
$ | 74,674 | $ | 473 | $ | — | $ | 75,147 | $ | 5,611 | $ | 67,436 | $ | 2,100 |
Th
The
amortized cost and fair value of the available-for-sale securities at December
31, 2009, by contractual maturity were as follows (in
thousands):
we
Amortized
Cost
|
Fair
Value
|
||||||
Auction
rate securities (ARS)
|
$ | 1,600 | $ | 1,397 | |||
One
year or less
|
3,431 | 3,441 | |||||
After
one year through three years
|
68,084 | 68,754 | |||||
After
three years through five years
|
1,274 | 1,333 | |||||
$ | 74,389 | $ | 74,925 |
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 December 31, 2009 and
2008 (in thousands):
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:
|
|
|
|
|
|
|
|
|
|
||||
Auction
rate securities (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
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||||
|
December 31,
2008
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Other Unobservable Inputs
(Level
3)
|
|||||||||
|
|
||||||||||||
Assets/(liabilities):
|
|
|
|
|
|
|
|
|
|
||||
Auction
rate securities (ARS)
|
$
|
2,100
|
$
|
—
|
$
|
—
|
$
|
2,100
|
|||||
Money
market funds
|
4,375
|
4,375
|
—
|
||||||||||
Municipal
securities
|
68,672
|
68,672
|
—
|
—
|
|||||||||
Foreign
currency exchange contracts
|
(8,405)
|
—
|
(8,405)
|
—
|
|||||||||
Total
financial assets, net
|
|
$
|
66,742
|
|
$
|
73,047
|
|
$
|
(8,405)
|
$
|
2,100
|
At
December 31, 2009, 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 year ended December 31, 2009,
of assets and liabilities measured at fair value on a recurring basis using
Level 3 inputs (in thousands):
Auction
Rate
Securities
|
||||
December
31, 2008
|
$ | 2,100 | ||
Total
realized / unrealized gains (losses):
|
||||
Included
in earnings
|
— | |||
Included
in other comprehensive income (loss)
|
(203 | ) | ||
Purchases,
sales, issuances, and settlements, net
|
(500 | ) | ||
Transfers
into Level 3, net
|
— | |||
December
31, 2009
|
$ | 1,397 |
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table presents a reconciliation for the year ended December 31, 2008,
of assets and liabilities measured at fair value on a recurring basis using
Level 3 inputs (in thousands):
Auction
Rate
Securities
|
|||
December
31, 2007
|
$ | — | |
Total
realized / unrealized gains (losses):
|
|||
Included
in earnings
|
— | ||
Included
in other comprehensive income (loss)
|
— | ||
Purchases,
sales, issuances, and settlements, net
|
— | ||
Transfers
into Level 3, net
|
2,100 | ||
December
31, 2008
|
$ | 2,100 |
The
credit markets are experiencing significant uncertainty, and some of this
uncertainty has impacted and may continue to impact the markets where our ARS
would be offered. During 2008 and the first quarter of 2009, we experienced two
failed ARS auctions, representing principal of $1.6 million. However, in the
second quarter of 2009 we successfully re-offered our third ARS at par of $0.5
million. Due to the longer term nature of the next auctions and the continued
uncertainty in the financial markets, these two remaining ARS values have been
classified as non-current 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, the amount of the decline is not severe, currently at 15 percent of
the assets’ fair value, the unrealized loss position has not existed for a long
duration of time, the credit quality of the issuer and we continue to receive
interest at the coupon rate. 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.
5.
|
Derivative
Financial Instruments
|
The
majority of our travel programs take place outside of the United States and most
foreign suppliers require payment in currency other than the U.S. dollar.
Accordingly, we are exposed to foreign currency risk relative to changes in
foreign currency exchange rates between those currencies and the U.S. dollar
for
our non-directly delivered programs. 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 point in time. All of the derivatives are cash flow hedges and
at December 31, 2009 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 other comprehensive income and reclassified into earnings in the
same period during which the hedged transaction is recognized in earnings, which
is typically during the second and third quarters of the year when our student
and sports travel programs occur. Gains or losses representing either hedge
ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings.
At
December 31, 2009, the following forward contracts were outstanding (in
thousands):
Notional
Amount
|
Matures
|
|||
Forward
contracts:
|
||||
Australian
dollar
|
4,300 |
May
2010
|
||
British
pound
|
2,000 |
June
2010
|
||
Euro
|
6,500 |
May
2010 – June 2010
|
||
Japanese
Yen
|
150,000 |
April
2010
|
||
New
Zealand dollar
|
500 |
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
|
The fair
values of derivatives are as follows (in thousands):
December 31, 2009 | |||||||||||||||||||
Derivates
Designated
as
Hedging
Instruments
|
Derivates
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):
Balance,
January 1, 2009
|
$ | (4,970 | ) | |
Net
gain for the period
|
9,515 | |||
Effective
portion loss transferred to earnings
|
(3,847 | ) | ||
Ineffective
portion gain/(loss) transferred to earnings
|
— | |||
Balance,
December 31, 2009
|
$ | 698 |
Unrealized
gains on forward contracts recorded in accumulated other comprehensive income at
December 31, 2009, which are expected to be reclassified to net revenue during
the next twelve months is approximately $0.7 million.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the
year ended December 31, 2009, the amount of gains or losses recognized in the
income statement for derivatives designated as hedging instruments (and their
locations) are as follows (in thousands):
Derivates
Designated
as
Hedging
Instruments
|
Location
of Gain or (Loss) Recognized in
Income
on Derivative
|
Amount
of Gain
or
(Loss) Reclassified from AOCI into Income
(Effective
Portion)
|
|||
Forward
contracts
|
Net
revenue, non-directly delivered programs
|
$ | (2,789 | ) | |
Forward
contracts with variable options
|
Net
revenue, non-directly delivered programs
|
(1,058 | ) | ||
Total
|
$ | (3,847 | ) |
For the
year ended December 31, 2009, 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):
Derivates
Designated
as
Hedging
Instruments
|
Location
of Gain or (Loss) Recognized in Income on
Derivative
|
Amount
of Gain or (Loss)
|
|||
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 be 80 to 100 percent hedged for our forecasted cash flow for
the following year. At December 31, 2008, we were approximately 20 percent
over-hedged, primarily in euro, British pound, and Australian dollar on foreign
currency contracts purchased in the spring and summer of 2008 for 2009 travel
expenditures. The over-hedged position was due to the decline in net enrollments
for 2009 travel programs combined with lower than expected program costs and the
strengthening of the U.S. dollar at the end of 2008 in comparison to foreign
currency contracted rates. As a result, a $1.0 million and $0.8 million foreign
currency loss was recognized for the years ended December 31, 2009 and December
31, 2008, respectively. Also, the majority of the contracts at December 31, 2008
qualified for cash flow hedge accounting, while all contracts at December 31,
2009 qualified for cash flow hedge accounting.
6. Property,
Plant and Equipment
Property, plant and equipment and the
changes therein consist of the following (in thousands):
December 31,
|
|||||||
2009
|
2008
|
||||||
Land
|
$
|
1,817
|
$
|
1,817
|
|||
Building
|
16,198
|
16,198
|
|||||
Office
furniture, fixtures and equipment
|
8,889
|
8,925
|
|||||
Computer
equipment and software
|
14,559
|
12,384
|
|||||
Construction
in progress
|
1,689
|
103
|
|||||
43,152
|
39,427
|
||||||
Less
accumulated depreciation
|
(13,776
|
)
|
(10,279
|
)
|
|||
$
|
29,376
|
$
|
29,148
|
F-19
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
remaining cost of completion for construction in process is approximately $0.9
million at December 31, 2009.
Depreciation
and amortization expense on property and equipment of approximately $4.1
million, $3.3 million, and $2.5 million for the years ended December 31,
2009, 2008, and 2007, respectively, was included in the determination of net
income. During 2009, approximately $1.1 million in property, plant and equipment
was written off or sold for a net loss of $0.4 million. During 2008,
approximately $0.5 million in property, plant and equipment was written off or
sold for a net gain of $0.03 million. During 2007, approximately $3.1 million in
property, plant and equipment was written off for a net loss of $0.2
million.
|
7.
Intangible Assets
|
Identified intangible assets other than
goodwill and the changes therein consist of the following (in
thousands):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Content
license agreements
|
$ | 838 | $ | 838 | ||||
Content
copyrights
|
1,295 | 569 | ||||||
Advertising
Relationship
|
512 | 512 | ||||||
Other
|
130 | 130 | ||||||
Trademark
|
517 | 517 | ||||||
3,292 | 2,566 | |||||||
Less
accumulated amortization
|
(470 | ) | (162 | ) | ||||
$ | 2,822 | $ | 2,404 |
Amortization
expense on intangible assets of approximately $0.3 million and $0.2 million for
the years ended December 31, 2009 and 2008, respectively, was included in
the determination of net income.
Estimated
annual amortization expense for each of the next five years is as follows (in
thousands):
Years
Ended December 31,
|
||
2010
|
$ | 352 |
2011
|
$ | 324 |
2012
|
$ | 223 |
2013
|
$ | 179 |
2014
|
$ | 179 |
8.
|
Line
of Credit
|
On May
30, 2008, we entered into a $20.0 million unsecured revolving line of credit
(the “Revolving Credit Agreement”) with Wells Fargo Bank, National Association
(“Wells Fargo”). This Revolving Credit Agreement expires on May 21, 2011. In
addition, the Revolving Credit Agreement provides for the issue of letters of
credit not to exceed $2.5 million. Monthly interest only payments, if
applicable, are paid based on a pricing grid under which the interest rate
decreases or increases based on our ratio of funded debt to earnings before
interest, taxes, depreciation and amortization. We can elect to borrow utilizing
the offshore London Inter-Bank Offering Rate (“LIBOR”) plus an applicable spread
or the prime rate. The credit agreement contains certain quarterly financial
covenants, including current ratio greater than 1.50, deployable cash greater
than zero at all times, tangible net worth greater than $40.0 million, and net
income after taxes greater than $4.0 million for the trailing four quarters. At
December 31, 2009, we were in compliance with all of the financial covenants of
the credit agreement.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2009
and 2008, we had no amounts outstanding on the revolving line of credit. At
December 31, 2009 and 2008, the availability under the line of credit was $18.6
million, with $1.4 million of the line of credit issued in the form of letters
of credits to several airline companies.
9.
|
Income
Taxes
|
The
provision for income taxes consisted of the following (in
thousands):
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current:
|
1 | |||||||||||
Federal
|
$ | 9,302 | $ | 8,077 | $ | 14,929 | ||||||
State
|
1,023 | 58 | 95 | |||||||||
Deferred
|
568 | 1,034 | (71 | ) | ||||||||
Total income tax
provision
|
$ | 10,893 | $ | 9,169 | $ | 14,953 |
Components
of the net deferred tax assets and liabilities are as follows (in
thousands):
December 31, 2009 | ||||||||||||
Assets
|
Liabilities
|
Total
|
||||||||||
Amortization
of goodwill and other intangibles
|
$ | 753 | $ | — | $ | 753 | ||||||
Accrued
vacation and compensation
|
182 | — | 182 | |||||||||
Unrealized
gain on foreign currency exchange contracts
|
— | (383 | ) | (383 | ) | |||||||
Unrealized
gain on available-for-sale securities
|
— | (191 | ) | (191 | ) | |||||||
Depreciation
|
— | (2,912 | ) | (2,912 | ) | |||||||
Stock
options
|
1,388 | — | 1,388 | |||||||||
Restricted
stock grants
|
498 | — | 498 | |||||||||
State
tax deduction
|
258 | — | 258 | |||||||||
Non-compete
agreements
|
— | (251 | ) | (251 | ) | |||||||
Other
|
31 | — | 31 | |||||||||
Total
deferred tax assets (liabilities)
|
$ | 3,110 | $ | (3,737 | ) | $ | (627 | ) |
December 31,
2008
|
||||||||||||
Assets
|
Liabilities
|
Total
|
||||||||||
Amortization
of goodwill and non-compete agreement
|
$ | 833 | $ | — | $ | 833 | ||||||
Accrued
vacation and compensation
|
213 | — | 213 | |||||||||
Unrealized
loss on foreign currency exchange contracts
|
2,676 | — | 2,676 | |||||||||
Unrealized
gain on available-for-sale securities
|
— | (166 | ) | (166 | ) | |||||||
Depreciation
|
— | (2,165 | ) | (2,165 | ) | |||||||
Stock
options
|
1,032 | — | 1,032 | |||||||||
Restricted
stock grants
|
605 | — | 605 | |||||||||
Other
|
— | (7 | ) | (7 | ) | |||||||
Total
deferred tax assets (liabilities)
|
$ | 5,359 | $ | (2,338 | ) | $ | 3,021 |
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
income tax provision differs from that computed using the federal statutory rate
applied to income before income taxes as follows (in thousands):
Years
Ended December 31,
|
||||||||||||||||||||||||
2009
Amount
|
%
|
2008
Amount
|
%
|
2007
Amount
|
%
|
|||||||||||||||||||
Provision
at the federal statutory rate
|
$ | 10,931 | 35.0 | % | $ | 9,700 | 35.0 | % | $ | 16,100 | 35.0 | % | ||||||||||||
Tax-exempt
interest
|
(723 | ) | (2.3 | ) | (1,024 | ) | (3.7 | ) | (1,385 | ) | (3.0 | ) | ||||||||||||
State
income tax, net of federal benefit
|
669 | 2.1 | 38 | 0.1 | 95 | 0.2 | ||||||||||||||||||
Other
|
16 | 0.1 | 455 | 1.6 | 143 | 0.3 | ||||||||||||||||||
Total income tax
provision
|
$ | 10,893 | 34.9 | % | $ | 9,169 | 33.0 | % | $ | 14,953 | 32.5 | % |
As of
December 31, 2009, we have $573,000 of unrecognized tax benefits that have been
recorded as “accounts payable and accrued expenses” in our balance sheet, which
also would affect the annual effective tax rate if recognized. Our policy is to
account for interest and penalties related to uncertain tax positions as part of
income tax expense. During the year ended December 31, 2009, we
recognized $163,000 of income tax expense in our statement of
operations.
The
following summarizes the unrecognized tax benefits activity during 2009 and 2008
(in thousands).
2009
|
2008
|
|||||||
Gross
unrecognized tax benefit as of January 1,
|
$ | — | $ | 14 | ||||
Increases
in uncertain tax benefits as a result of tax positions taken during the
prior period
|
573 | 26 | ||||||
Settlements
with tax authorities
|
— | (40 | ) | |||||
Gross
unrecognized tax benefits as of December 31,
|
$ | 573 | $ | — |
It is
reasonably possible that our unrecognized tax benefits will decrease
between $250,000 and $573,000 pending the outcome of discussions with
certain tax jurisdictions regarding our activities in their
jurisdictions.
We file
tax returns in the U.S. federal jurisdiction and various state jurisdictions. We
may be subject to examination by the Internal Revenue Service for the years
after 2005. We may also be subject to examination by various state jurisdictions
for the years after 2004.
10.
|
Commitments
and Contingencies
|
On July
14, 2009, a securities class action was filed against us and certain
of our executive officers on behalf of all persons or entities who
purchased our Common Stock between February 8, 2007 and October
23, 2007. 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”). On October 22, 2009, the
Court appointed International Brotherhood of Electrical Workers Local 351 (“IBEW
351)” as lead plaintiff. On November 23, 2009, lead plaintiff IBEW 351 filed a
motion to withdraw as lead plaintiff and sought appointment of Plumbers Union as
substitute lead plaintiff. On January 7, 2010, a hearing was held and
the Court appointed Plumbers Union as lead plaintiff and required any amended
complaint shall be served and filed on or before January 11,
2010. Plumbers Union filed its 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. 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.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On
October 27, 2009, the Company was informed by the SEC that it had issued a
formal order of investigation with respect to trading in the Company's
securities. The Company believes that the investigation is for the
period August through December, 2007. In connection with the investigation, the
Company, certain of its officers, directors and employees, as well as other
persons, have received subpoenas from the SEC requesting
information. The SEC has indicated that the investigation should not
be construed as an indication that any violation of law has occurred or as an
adverse reflection upon any person, entity or security. The Company intends to
cooperate fully with the investigation.
Other
than the disclosed, 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
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. In the opinion of management and its legal
counsel, all matters are adequately covered by insurance or, if not covered, are
without merit or are of such nature, or involve such amounts as would not have a
material effect on our financial position, cash flows or results of
operations.
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 December 31, 2009.
11. Stock-Based
Compensation
In May
2009, our shareholders approved our 2009 Equity Participation Plan (the “2009
Plan”). The 2009 Plan replaces our 2001 Equity Participation Plan (the “Prior
Plan”). Under the 2009 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. The maximum aggregate number
of shares of Common Stock of the Company, par value $0.01 (“Common Stock”), that
may be issued under the 2009 Plan is 1,200,000 shares, plus any shares that were
available for issuance under the Prior Plan, which totaled 204,458 shares as of
May 7, 2009.
Under the
terms of the 2009 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.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Under the
terms of the 2009 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 for the
expected term and stock price volatility. 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 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.
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 years ended December 31, 2009, 2008, and
2007.
Years
Ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Expected
dividend yield
|
2.15 |
%
|
2.66 |
%
|
1.41 |
%
|
|||||
Expected
stock price volatility
|
54.45 |
%
|
49.48 |
%
|
43.40 |
%
|
|||||
Risk-free
interest rate
|
2.24 |
%
|
2.48 |
%
|
3.93 |
%
|
|||||
Expected
term of options
|
5.00 |
years
|
4.51 |
years
|
4.45 |
years
|
The
weighted-average fair value of options granted during 2009, 2008 and 2007 was
$4.70, $3.51, and $7.02, respectively.
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 8.49
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 years ended 2009, 2008, and 2007 was $2.0 million, $2.1
million, $2.0 million, respectively, before income taxes. Of the total
stock-based compensation expense during 2009, stock option expense was $0.9
million and restricted stock grant expense was $1.1 million. Of the total
stock-based compensation expense during 2008, stock option expense was $0.9
million and restricted stock grant expense was $1.2 million. Of the total
stock-based compensation expense during 2007, stock option expense was $1.0
million and restricted stock grant expense was $0.9 million.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table presents information about the common stock options and
restricted grants as of December 31, 2009:
Options
and Restricted Stock 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 Grants
|
|||||||||||||||||||||
$ | 0.00 | 252,959 | 2.79 | $ | N/A | N/A | N/A | ||||||||||||||
Stock
Options
|
|||||||||||||||||||||
$ | 3.47 -6.93 | 542,346 | 2.07 | $ | 5.89 | 542,346 | $ | 5.89 | |||||||||||||
6.94 - 10.39 | 323,255 | 6.86 | 9.05 | 159,678 | 9.42 | ||||||||||||||||
10.40 - 13.86 | 292,166 | 9.30 | 11.92 | 22,475 | 11.61 | ||||||||||||||||
13.87 - 17.32 | 317,570 | 6.29 | 16.86 | 234,381 | 16.81 | ||||||||||||||||
17.33 - 20.79 | 12,824 | 8.35 | 18.41 | 3,206 | 18.41 | ||||||||||||||||
20.80 - 24.25 | 48,000 | 1.94 | 21.09 | 48,000 | 21.09 | ||||||||||||||||
24.26 - 27.72 | 204,508 | 6.11 | 27.11 | 181,383 | 27.06 | ||||||||||||||||
27.73 - 31.18 | 12,609 | 6.15 | 29.20 | 8,394 | 29.04 | ||||||||||||||||
31.19 - 34.65 | 12,659 | 7.34 | 34.65 | 6,326 | 34.65 | ||||||||||||||||
Total
Stock Options
|
1,765,937 | 5.48 | $ | 12.77 | 1,206,189 | $ | 12.72 | ||||||||||||||
Combined
|
2,018,896 | 5.14 | $ | 11.17 | 1,206,189 | $ | 12.72 |
At
December 31, 2008, there were 1,183,288 exercisable stock options at the
weighted-average exercise price of $10.89 per share.
At
December 31, 2009, the aggregate intrinsic value of outstanding stock options
and restricted stock was $9.1 million and exercisable stock options and
restricted stock was $4.6 million, before applicable income taxes, based on our
$13.26 closing stock price at December 31, 2009. 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. The weighted-average remaining
contractual life of stock options and restricted grants outstanding was 5.1
years and exercisable was 3.8 years. As of December 31, 2009, total unrecognized
stock-based compensation expense related to non-vested stock options and
restricted stock awards was approximately $4.6 million, which is expected to be
recognized over approximately 3.9 years. During the year ended December 31,
2009, the total intrinsic value of stock options exercised was $1.0 million and
the total fair value of options which vested was $1.2 million while the total
fair value of restricted stock awards which vested was $1.4
million.
At
December 31, 2008, the aggregate intrinsic value of outstanding stock options
and restricted stock was $4.3 million and exercisable stock options and
restricted stock was $2.4 million, before applicable income taxes, based on our
$9.20 closing stock price at December 31, 2008. 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. The weighted-average remaining
contractual life of stock options and restricted grants outstanding was 5.2
years and exercisable was 4.2 years. As of December 31, 2008, total unrecognized
stock-based compensation expense related to non-vested stock options and
restricted stock grants was approximately $4.2 million, which is expected to be
recognized over a period of approximately 3.9 years. During the year ended
December 31, 2008, the total intrinsic value of stock options exercised was $0.8
million, and the total fair value of options vested was $1.5 million while the
total fair value of restricted stock awards which vested was $0.2
million.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At
December 31, 2007, the aggregate intrinsic value of outstanding stock options
and restricted stock was $14.8 million and exercisable stock options and
restricted stock was $10.3 million, before applicable income taxes, based on our
$18.31 closing stock price at December 31, 2007. 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. The weighted average remaining
contractual life of stock options and restricted grants outstanding was 5.4
years and exercisable was 4.8 years. As of December 31, 2007, total unrecognized
stock-based compensation expense related to non-vested stock options and
restricted stock grants was approximately $4.6 million, which is expected to be
recognized over a period of approximately 3.9 years. During the year ended
December 31, 2007, the total intrinsic value of stock options exercised was $8.0
million, and the total fair value of options vested was $1.3 million while the
total fair value of restricted stock awards which vested was $0.1
million.
Stock
option and restricted stock grant transactions during 2009 were as
follows:
Restricted
|
Weighted-
|
Weighted-
|
|||||||
Stock
|
Average
Grant
|
Stock
|
Average
|
||||||
Grants
|
Date
Fair Value
|
Options
|
Exercise
Price
|
||||||
Balance
at December 31, 2008
|
205,585
|
$
|
18.33
|
1,639,874
|
$
|
12.34
|
|||
Granted
|
111,696
|
11.52
|
309,081
|
11.32
|
|||||
Forfeited
|
(9,374)
|
12.71
|
(28,529)
|
11.17
|
|||||
Vested
|
(54,948)
|
24.69
|
N/A
|
N/A
|
|||||
Exercised
|
N/A
|
N/A
|
(154,489)
|
5.41
|
|||||
Balance
December 31, 2009
|
252,959
|
$
|
14.15
|
1,765,937
|
$
|
12.77
|
12.
|
Employee
Benefit Plan
|
Effective March 2002, we
established a 401(k) Profit Sharing Plan (the “Sharing Plan”) for our employees.
Employees are eligible to participate in the Sharing Plan upon six months of
service and 18 years of age. Employees may contribute up to 92 percent of
their salary, subject to the maximum contribution allowed by the Internal
Revenue Service. Our matching contribution is discretionary based upon approval
by management. Employees are 100 percent vested in their contributions and vest
in our matching contributions after their initial four years of employment.
During the years ended December 31, 2009, 2008, and 2007, we contributed
approximately $0.02 million, $0.2 million, and $0.2 million to the Sharing Plan,
respectively.
F-26
13.
|
Earnings
Per Share
|
The
following table presents a reconciliation of basic and diluted EPS
computations (in thousands, except per share data):
Year
ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
|||||||||
Numerator:
|
|||||||||||
Net
income
|
$ | 20,337 | $ | 18,546 | $ | 31,047 | |||||
Denominator:
|
|||||||||||
Weighted-average
shares outstanding
|
18,618 | 18,745 | 19,385 | ||||||||
Effect
of unvested restricted stock awards
considered
participating securities
|
487 | 439 | 222 | ||||||||
Weighted-average
shares outstanding – basic
|
19,105 | 19,184 | 19,607 | ||||||||
Effect
of dilutive common stock options
|
317 | 388 | 623 | ||||||||
Weighted
average shares outstanding – diluted
|
19,422 | 19,572 | 20,230 | ||||||||
Earnings
per share – basic and diluted:
|
|||||||||||
Net
income per share – basic
|
$ | 1.06 | $ | 0.97 | $ | 1.58 | |||||
Net
income per share – diluted
|
$ | 1.05 | $ | 0.95 | $ | 1.53 | |||||
Cash
dividends declared per share
|
$ | 0.24 | $ | 0.46 | $ | 0.46 | |||||
Antidilutive options not included in diluted EPS | 608,770 | 609,192 | 12,659 |
On
January 1, 2009, we adopted a new accounting principle, which clarified that
unvested share-based payment awards that contain nonforfeitable rights to
receive dividends or dividend equivalents (whether paid or unpaid) are
participating securities, and thus, should be included in the two-class method
of computing “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 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. The effect of adopting this new accounting provision was a
decrease in basic and diluted EPS of $0.02 for both the years ending December
31, 2008 and 2007.
14.
|
Supplemental
Disclosures of Consolidated Statements of Cash
Flows
|
We paid
cash for taxes during 2009, 2008, and 2007 of approximately $9.9 million, $8.5 million, and $13.3
million, respectively.
Our
non-cash investing and financing activities during the years ended
December 31, 2009, 2008, and 2007, are as follows (in
thousands):
2009
|
2008
|
2007
|
||||||||||
Unrealized
gain (loss) on foreign currency exchange contracts
|
$ | (8,729 | ) | $ | (11,107 | ) | $ | 890 | ||||
Unrealized
gain on available-for-sale securities
|
58 | 213 | 311 | |||||||||
Property,
plant and equipment
|
426 | 22 | 1,397 | |||||||||
Capital
lease
|
— | 37 | — | |||||||||
Purchase
price allocation for goodwill
|
24 | — | — |
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15.
|
Segment
Reporting
|
Our
operations are organized into two reporting segments, consisting of (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.
Prior to
May 15, 2008, we only had one segment. Segment information as of and for the
years ended December 31, 2009 and 2008 are as follows (in
thousands):
Year
ended December 31, 2009
|
Year
ended December 31, 2008
|
||||||||||||||||||||||
Ambassador
Programs and Other (1)
|
BookRags
(2)
|
Consolidated
|
Ambassador
Programs and Other (1)
|
BookRags
(2)
|
Consolidated
|
||||||||||||||||||
Total
revenue
|
$ | 95,315 | $ | 3,300 | $ | 98,615 | $ | 96,030 | $ | 1,897 | $ | 97,927 | |||||||||||
Gross
margin
|
$ | 80,893 | $ | 2,911 | $ | 83,804 | $ | 77,174 | $ | 1,705 | $ | 78,879 | |||||||||||
Depreciation
and amortization
|
$ | 4,052 | $ | 312 | $ | 4,364 | $ | 3,264 | $ | 162 | $ | 3,426 | |||||||||||
Operating
income
|
$ | 28,336 | $ | 1,843 | $ | 30,179 | $ | 24,327 | $ | 1,142 | $ | 25,469 | |||||||||||
Income
tax provision
|
$ | 10,239 | $ | 654 | $ | 10,893 | $ | 8,784 | $ | 385 | $ | 9,169 | |||||||||||
Net
income
|
$ | 19,145 | $ | 1,192 | $ | 20,337 | $ | 17,770 | $ | 776 | $ | 18,546 | |||||||||||
Total
additions to property, plant, and equipment
|
$ | 5,078 | $ | 79 | $ | 5,157 | $ | 5,042 | $ | — | $ | 5,042 | |||||||||||
Total
additions to goodwill and intangible assets
|
$ | — | $ | 726 | $ | 726 | $ | — | $ | 9,431 | $ | 9,431 | |||||||||||
Intangible
assets, excluding goodwill
|
$ | — | $ | 2,822 | $ | 2,822 | $ | — | $ | 2,404 | $ | 2,404 | |||||||||||
Total goodwill | $ | 70 | $ | 6,841 | $ | 6,911 | $ | 70 | $ | 6,865 | $ | 6,935 | |||||||||||
Total
assets
|
$ | 116,334 | $ | 11,751 | $ | 128,095 | $ | 113,713 | $ | 10,564 | $ | 124,277 |
(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
expenses related to the pilot programs that were operated during the
summer of 2009 and start-up
expenses.
|
(2)
|
BookRags
was acquired on May 15, 2008. Therefore, the year ended December 31, 2008
does not represent a full year as it does in 2009 and is not comparable to
the year ended December 31, 2009.
|
Any
intercompany sales or services provided that exist are eliminated. Intercompany
expenses paid for by Ambassador Programs and Other on behalf of BookRags are
recorded as intercompany receivables and payables and eliminated upon
consolidation. On October 1, 2008, an operating agreement was entered into by
Ambassador Programs and BookRags. The operating agreement outlines the agreed
upon charges for services provided by Ambassador Programs to BookRags for
accounting, human resources, and technology support. In addition, it defines the
terms in which the two companies can perform lead generation for marketing
purposes.
AMBASSADORS
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
16.
|
Quarterly
Financial Data (unaudited)
|
Summarized
quarterly financial data for 2009, 2008, and 2007 is as follows (unaudited, and
in thousands except per share data). All adjustments necessary to fairly present
the interim results have been recorded:
Quarters
Ended
|
|||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
||||||||||||
2009
|
|||||||||||||||
Total
revenue
|
$ | 10,006 | $ | 46,176 | $ | 36,407 | $ | 6,026 | |||||||
Gross
margin
|
5,281 | 40,292 | 33,201 | 5,030 | |||||||||||
Selling
and marketing expense
|
8,872 | 9,258 | 11,281 | 9,610 | |||||||||||
General
and administrative expense
|
3,369 | 3,303 | 3,252 | 4,680 | |||||||||||
Income
(loss) before income taxes
|
(7,407 | ) | 28,305 | 19,169 | (8,837 | ) | |||||||||
Net
income (loss)
|
(5,254 | ) | 19,179 | 12,505 | (6,093 | ) | |||||||||
Earnings
(loss) per share-basic
|
(0.28 | ) | 1.01 | 0.66 | (0.32 | ) | |||||||||
Earnings
(loss) per share-diluted
|
(0.28 | ) | 0.99 | 0.64 | (0.32 | ) |
Gross
program receipts reflect total amounts charged for our goods and services. Gross
program receipts totaled $10.4 million, $99.3 million, $82.8 million and $11.2
million for the quarters ended March 31, June 30, September 30,
and December 31, 2009, respectively.
Quarters
Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
2008
|
||||||||||||||||
Total
revenue
|
$ | 7,880 | $ | 42,286 | $ | 40,119 | $ | 7,642 | ||||||||
Gross
margin
|
3,470 | 36,717 | 33,018 | 5,674 | ||||||||||||
Selling
and marketing expense
|
9,364 | 8,875 | 11,272 | 11,331 | ||||||||||||
General
and administrative expense
|
3,018 | 3,168 | 2,822 | 3,560 | ||||||||||||
Income
(loss) before income taxes
|
(8,009 | ) | 25,579 | 19,591 | (9,446 | ) | ||||||||||
Net
income (loss)
|
(5,474 | ) | 17,184 | 13,298 | (6,462 | ) | ||||||||||
Earnings
(loss) per share-basic
|
(0.29 | ) | 0.89 | 0.70 | (0.34 | ) | ||||||||||
Earnings
(loss) per share-diluted
|
(0.29 | ) | 0.87 | 0.68 | (0.34 | ) |
Gross
program receipts totaled $8.9 million, $104.0 million, $101.2 million and $15.1
million for the quarters ended March 31, June 30, September 30,
and December 31, 2008, respectively.
F-29
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMBASSADORS
GROUP, INC.
|
||||
By:
|
/s/
JEFFREY D. THOMAS
|
|||
Jeffrey
D. Thomas,
|
||||
President
and Chief Executive Officer
|
Date: March 1, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
JEFFREY D. THOMAS
|
President,
Chief Executive
Officer
and Director
(Principal
Executive Officer)
|
March 2,
2010
|
||
Jeffrey
D. Thomas
|
||||
/s/
JOHN A. UEBERROTH
|
Chairman
of the Board of Directors
|
March
2, 2010
|
||
John
A. Ueberroth
|
||||
/s/
KRISTI J. GRAVELLE
|
Chief
Financial Officer and Secretary
|
March
2, 2010
|
||
Kristi
J. Gravelle
|
(Principal Financial
and Accounting Officer)
|
|||
/s/
BRIGITTE M. BREN
|
Director
|
March
2, 2010
|
||
Brigitte
M. Bren
|
||||
/s/
DANIEL G. BYRNE
|
Director
|
March
2, 2010
|
||
Daniel
G. Byrne
|
||||
/s/
RAFER L. JOHNSON
|
Director
|
March
2, 2010
|
||
Rafer
L. Johnson
|
||||
/s/
JAMES M. KALUSTIAN
|
Director
|
March
2, 2010
|
||
James
M. Kalustian
|
||||
/s/
JOSEPH J. UEBERROTH
|
Director
|
March
2, 2010
|
||
Joseph
J. Ueberroth
|
/s/
RICARDO L. VALENCIA
|
Director
|
March
2, 2010
|
||
Ricardo
L. Valencia
|
||||
/s/
RICHARD D. C. WHILDEN
|
Director
|
March
2, 2010
|
||
Richard
D. C. Whilden
|
INDEX
TO EXHIBITS
Exhibit
Number
|
Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the registrant incorporated
by reference to the registrant’s Registration Statement on Form 10
filed on November 15, 2001.
|
|
3.2
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation of the
registrant incorporated by reference to the registrant’s Form 8-K filed on
May 17, 2005.
|
|
3.3
|
Bylaws
of the registrant incorporated by reference to the registrant’s
Registration Statement on Form 10 filed on November 15,
2001.
|
|
4.1
|
Form
of Common Stock Certificate of the registrant incorporated by reference to
the registrant’s Form 10-K filed on March 9, 2007.
|
|
10.1
|
2001
Equity Participation Plan incorporated by reference to the registrant’s
Registration Statement on Form 10 filed on January 7,
2002.
|
|
10.2
|
Form
of 2001 Equity Participation Plan Agreement incorporated by reference to
the registrant’s Registration Statement on Form 10 filed on
November 15, 2001.
|
|
10.3
|
Form
of Indemnification Agreement between the registrant and each of its
executive officers and directors incorporated by reference to the
registrant’s Registration Statement on Form 10 filed on January 25,
2002.
|
|
10.4
|
Commercial
Lease Agreement by and between Portolese & Sample Investments and the
registrant incorporated by reference to the registrant’s Form 8-K filed on
January 4, 2005.
|
|
10.5
|
AIA
Document A101, Standard Form of Agreement between Owner and Contractor by
and between the registrant and Graham Construction and Management, Inc.
incorporated by reference to registrant’s Form 8-K filed on September 29,
2006.
|
|
10.6
|
Employment
Agreement by and between the registrant and Jeffrey D. Thomas,
incorporated by reference to the registrant’s Form 8-K filed on October 3,
2006.
|
|
10.7 |
Stock
Purchase Agreement by and between the registrant and Invemed Catalyst
Fund, L.P. incorporated by reference to the registrant’s Form 8-K filed on
January 31, 2007.
|
|
10.8 | Stock Purchase Agreement incorporated by reference to the registrant’s Form 8-K filed on May 21, 2008. | |
10.9 | Credit Agreement by and between the registrant and Wells Fargo Bank, N.A. incorporated by reference to the registrant’s Form 8-K file on May 30, 2008. | |
10.10 |
Revolving
Line of Credit Note incorporated by reference to the registrant’s Form 8-K
filed May 30, 2008.
|
|
10.11
|
2009
Equity Participation Plan Agreement incorporated by reference to the
registrant’s Definitive Proxy Statement on Form 14A filed on April 6,
2009.
|
|
14.1
|
|
Code
of Ethics incorporated by reference from our definitive Proxy Statement
for the fiscal year ended December 31, 2009, to be filed with the SEC on
or about April 13, 2010.
|
21.1
|
List
of subsidiaries of the registrant as of December 31,
2009.*
|
|
23.1
|
Consent
of BDO Seidman, LLP, Independent Registered Public Accounting
Firm.*
|
|
31.1
|
Certification
by Chief Executive Officer required by Rule 13a-14(a) or Rule
15(d)-14(a).*
|
|
31.2
|
Certification
by Chief Financial Officer required by Rule 13a-14(a) or Rule
15(d)-14(a).*
|
|
32.1
|
Certification
by the Chief Executive Officer and Chief Financial Officer as required by
Rule 13a-14(b) or 15(d)-14(b) and Section 1350 of Chapter 63 of Title
13 of the United States Code (18 U.S.C.
§1350).*
|
* Filed
herewith
II -
3