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EX-31.2 - EXHIBIT 31.2 - AMBASSADORS GROUP INCex31_2.htm



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
 
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
     
þ
 
QUARTERLY report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

     
   
For the quarterly period ended June 30, 2011
 
OR
 
     
o
 
TRANSITION report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

     
   
For the transition period from _________________     to  _______________.
 
Commission file number 0-33347
 
Ambassadors Group, Inc.
 (Exact name of registrant as specified in its charter)
 
     
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
91-1957010
(I.R.S. Employer
Identification No.)

     
Dwight D. Eisenhower Building
2001 South Flint Road
Spokane, WA
(Address of Principal Executive Offices)
 
99224
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (509) 568-7800
 

 
 

 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
þ
 
Yes
o
 
No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ
 
Yes
o
 
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

o
 
Large accelerated  filer
þ
 
Accelerated filer
o
 
Non-accelerated filer (Do not check if a smaller reporting company)
o
 
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o
 
Yes
þ
 
No
 
The number of shares outstanding of the registrant’s Common Stock, $0.01 par value, as of July 25, 2011 was 17,703,567.
 




 
 

 

 
AMBASSADORS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
 
 
TABLE OF CONTENTS
 
   
Page
PART I – FINANCIAL INFORMATION
   
Item 1. Financial Statements (Unaudited)
   
Consolidated Balance Sheets
 
1
Consolidated Statements of Operations
 
2
Consolidated Statements of Comprehensive Income
 
3
Consolidated Statements of Cash Flows
 
4
Notes to Consolidated Financial Statements
 
5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
23
Item 4. Controls and Procedures
 
23
     
PART II – OTHER INFORMATION
   
Item 1. Legal Proceedings
 
24
Item 1A. Risk Factors
 
24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
24
Item 6. Exhibits
 
25
     
SIGNATURES
 
26
     
EXHIBIT INDEX
   







 
 

 


 
PART I
FINANCIAL INFORMATION
 
 
Item 1. FINANCIAL STATEMENTS
 
AMBASSADORS GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2011 and December 31, 2010
(in thousands, except share and per share data)
 

   
UNAUDITED
   
AUDITED
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 5,617     $ 6,838  
Available-for-sale securities and other
    84,360       72,540  
Foreign currency exchange contracts
    1,608       1,864  
Prepaid program costs and expenses
    23,815       3,230  
Accounts receivable
    1,262       1,976  
       Total current assets
    116,662       86,448  
Property and equipment, net
    27,104       27,625  
Available-for-sale securities
    719       1,250  
Intangibles
    3,361       3,367  
Goodwill
    9,781       9,781  
Other long-term assets
    89       85  
      Total assets
  $ 157,716     $ 128,556  
                 
LIABILITIES
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 10,651     $ 5,954  
Participants’ deposits
    61,757       34,436  
Deferred tax liability
    290       668  
Other liabilities
    81       107  
      Total current liabilities
    72,779       41,165  
Deferred tax liability
    1,218       1,353  
      Total liabilities
    73,997       42,518  
                 
Commitments and Contingencies (Note 9)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding
    -       -  
Common stock, $.01 par value; 50,000,000 shares authorized; 17,712,836 and 18,255,557 shares issued and outstanding, respectively
    174       180  
Retained earnings
    82,383       84,825  
Accumulated other comprehensive income
    1,162       1,033  
      Stockholders’ equity
    83,719       86,038  
      Total liabilities and stockholders’ equity
  $ 157,716     $ 128,556  
 
The accompanying notes are an integral part of the consolidated financial statements.
 

 
-1-

 
 
AMBASSADORS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three and six months ended June 30, 2011 and 2010
(in thousands, except per-share amounts)

 
      
   
Six months ended
   
Three months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net revenue, non-directly delivered programs
  $ 30,580     $ 31,236     $ 30,615     $ 31,033  
Gross revenue, directly delivered programs
    5,221       8,649       4,527       6,870  
Gross revenue, internet and advertising
    1,917       1,515       914       761  
    Total revenue
    37,718       41,400       36,056       38,664  
Cost of sales, directly delivered programs
    3,565       5,081       3,079       4,048  
Cost of sales, internet and advertising
    262       217       129       107  
    Gross margin
    33,891       36,102       32,848       34,509  
Operating expenses:
                               
     Selling and marketing
    19,534       18,383       9,439       8,981  
     General and administrative
    8,503       7,106       4,120       3,412  
Total operating expenses
    28,037       25,489       13,559       12,393  
    Operating income
    5,854       10,613       19,289       22,116  
Other income (expense):
                               
     Interest and dividend income
    751       874       416       463  
     Foreign currency and other income (expense)
    171       (14)       (10)       -  
Total other income
    922       860       406       463  
    Income before income tax provision
    6,776       11,473       19,695       22,579  
Income tax provision
    (2,074)       (3,779)       (6,264)       (7,396)  
    Net income
  $ 4,702     $ 7,694     $ 13,431     $ 15,183  
                                 
Weighted-average common shares outstanding - basic
    17,841       19,112       17,672       19,187  
Weighted-average common shares outstanding - diluted
    18,010       19,346       17,824       19,410  
                                 
Net income per share - basic
  $ 0.26     $ 0.40     $ 0.76     $ 0.79  
Net income per share - diluted
  $ 0.26     $ 0.40     $ 0.75     $ 0.78  
 
The accompanying notes are an integral part of the consolidated financial statements.

 

 
-2-


AMBASSADORS GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the three and six months ended June 30, 2011 and 2010
(in thousands)

 
Six months ended June 30,
   
Three months ended June 30,
 
 
2011
   
2010
   
2011
   
2010
 
Net income
  4,702       7,694       13,431       15,183  
Unrealized loss on foreign currency exchange contracts, net of income tax benefit of $95, $718, $536, and $462
  (177 )     (1,333 )     (996 )     (858 )
Unrealized gain (loss) on available-for-sale securities, net of income tax (provision) benefit of  ($165), $174, ($183) and $64
  306       (324 )     339       (118 )
Comprehensive income
$ 4,831     $ 6,037     $ 12,774     $ 14,207  
 
The accompanying notes are an integral part of the consolidated financial statements.
 

 
-3-

 

 AMBASSADORS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2011 and 2010
(dollars in thousands)
 
         
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 4,702     $ 7,694  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,364       2,341  
Stock-based compensation
    938       1,023  
Deferred income tax benefit
    (582)       (300)  
Gain on foreign currency exchange contracts
    (20)       -  
Loss on disposition of property and equipment
    66       266  
Excess tax benefit from stock-based compensation
    (15)       (125)  
Change in assets and liabilities:
               
    Accounts receivable and other assets
    714       820  
    Prepaid program costs and expenses
    (20,585)       (23,022)  
    Accounts payable, accrued expenses, and other current liabilities
    4,792       8,975  
    Participants’ deposits
    27,321       35,845  
Net cash provided by operating activities
    19,695       33,517  
                 
Cash flows from investing activities:
               
Purchase of available for sale securities
    (47,881)       (52,814)  
Proceeds from sale of available-for-sale securities
    37,142       25,847  
Purchase and construction of property and equipment
    (1,895)       (2,498)  
Proceeds from sale of property and equipment
    19       -  
Purchase of intangibles
    (213)       (474)  
Net cash used in investing activities
    (12,828)       (29,939)  
                 
Cash flows from financing activities:
               
Repurchase of Common Stock
    (6,091)       (1,791)  
Dividend payment to shareholders
    (2,143)       (2,314)  
Proceeds from exercise of stock options
    131       389  
Excess tax benefit from stock-based compensation
    15       125  
Net cash used in financing activities
    (8,088)       (3,591)  
                 
Net decrease in cash and cash equivalents
    (1,221)       (13)  
Cash and cash equivalents, beginning of period
    6,838       7,656  
Cash and cash equivalents, end of period
  $ 5,617     $ 7,643  
 
The accompanying notes are an integral part of the consolidated financial statements.


 
-4-

 


AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company
 
Ambassadors Group, Inc., is a leading educational company that organizes and promotes worldwide educational travel programs for students, athletes and professionals, and provides millions of pages of online research content through www.BookRags.com. These unaudited consolidated financial statements include the accounts of Ambassadors Group, Inc. and our wholly owned subsidiaries, Ambassador Programs, Inc. (“Ambassador Programs”), BookRags, Inc. (“BookRags”), World Adventures Unlimited, Inc. (“World Adventures Unlimited”), Ambassadors Unlimited, LLC and Marketing Production Systems, LLC. All significant intercompany accounts and transactions, which are of a normal recurring nature, are eliminated in consolidation.
 
Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel programs to students, professionals, and athletes through multiple itineraries within five travel program offerings and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.
 
2. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being materially misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2011 are not indicative of the results that may be expected for the year ending December 31, 2011.
 
For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Certain reclassifications from 2010 amounts have been made to conform to the three and six months ended June 30, 2011 financial statement presentation with no effect on previously reported net income, retained earnings, or cash flow from operations.
 
3. Investments and Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

Our financial instruments are measured and recorded at fair value. Our non-financial assets, (including: property and equipment; intangible assets; and goodwill), are measured at fair value upon acquisition and are assessed if there is an indicator of impairment. An adjustment is made to record non-financial assets at fair value only when an impairment charge is recognized.




 
-5-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Fair value is determined for assets and liabilities and grouped into a three-tiered value hierarchy, based upon significant levels of inputs as follows:

-  
Level 1 – Quoted prices in active markets for identical assets or liabilities.

-  
Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

-  
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.


The following tables detail the amortized cost, unrealized gains (losses) and fair value of available-for-sale securities by contractual maturity at June 30, 2011 and December 31, 2010 (in thousands):


     
Classification on Balance Sheet
       
June 30, 2011
   
Amortized
 Cost
   
Unrealized
Gains (Losses)
   
Aggregate Fair Value
   
Cash and cash equivalents
 
Short-term available-for-
sale securities
   
Long-term available-for-
sale securities
Auction rate securities (“ARS”), less than one year
    $ 600       $ (69 )     $ 531     $ -   $ -     $ -
ARS, greater than one year
      1,000         (281 )       719       -     531       719
Money market funds, ninety days or less
      3,375         -         3,375       3,375     -       -
Municipal securities1
                                                 
One year or less
      282         (0 )       282       -     282       -
After one year through three years
      52,456         60         52,516       -     52,516       -
Greater than three years through five years
      30,537         494         31,031       -     31,031       -
Total
    $ 88,250       $ 204       $ 88,454     $ 3,375   $ 84,360     $ 719
                                                   
                                                   
                                 
Classification on Balance Sheet
 
                                     
December 31, 2010
   
Amortized
Cost
   
Unrealized Gains (Losses)
   
Aggregate Fair Value
   
Cash and cash equivalents
 
Short-term available-for-sale securities
   
Long-term available-for-sale securities
ARS, greater than one year
    $ 1,600       $ (350 )     $ 1,250     $ -   $ -     $ 1,250
Money market funds,  ninety days or less
      2,076         -         2,076       2,076     -       -
Municipal securities1
                                                 
One year or less
      17,081         (19 )       17,062       -     17,062       -
After one year through three years
      53,334         59         53,393       -     53,393       -
Greater than three years through five years
      2,041         44         2,085       -     2,085       -
Total
    $ 76,132       $ (266 )     $ 75,866     $ 2,076   $ 72,540     $ 1,250

1Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties

 

 
-6-

 

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 June 30, 2011 and December 31, 2010 (in thousands):
 
         
Fair Value Measurements at Reporting Date Using
June 30, 2011
 
Fair Market Value
   
Quoted Prices
 in Active Markets for Identical
Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Other Unobservable Inputs (Level 3)
   
Losses on Impairment
Financial assets:
 
 
   
 
   
 
   
 
   
 
ARS
  $ 1,250     $ -     $ -     $ 1,250     $ -
Money market funds
    3,375       3,375       -       -       -
Municipal securities1
    83,829       83,829       -       -       -
Foreign currency exchange contracts
    1,669       -       1,669       -       -
Total financial assets
  $ 90,123     $ 87,204     $ 1,669     $ 1,250     $ -
Financial liabilities:
                                     
Foreign currency exchange contracts
    57       -       57       -       -
Total financial liabilities
  $ 57     $ -     $ 57     $ -     $ -
 
 
 
       
Fair Value Measurements at Reporting Date Using
December 31, 2010
 
Fair Market Value
   
Quoted Prices
 in Active
Markets for Identical Assets (Level 1)
     
Significant
Other
Observable
 Inputs
(Level 2)
     
Significant
Other Unobservable Inputs
 (Level 3)
   
Losses on Impairment
Financial assets:
                                     
ARS
  1,250     $ -     $ -     $ 1,250     $ -
Money market funds
    2,076       2,076       -       -       -
Municipal securities1
    72,540       72,540       -       -       -
Foreign currency exchange contracts
    1,974       -       1,974       -       -
    Total financial assets
  77,840     $ 74,616     $ 1,974     $ 1,250     $ -
Financial liabilities:
                                     
Foreign currency exchange contracts
    110       -       110       -       -
    Total financial liabilities
  110     $ -     $ 110     $ -     $ -
                                       
Non-financial assets:
                                     
Property and equipment
    165       -       165       -       0.8
    Total non-financial assets
  165     $ -     $ 165     $ -     $ 0.8

 
1 At June 30, 2011 and December 31, 2010, municipal securities consisted of a 72/28 split between municipal revenue bonds and municipal general obligation bonds, respectively. In addition, the underlying credit rating of the municipal securities at June 30, 2011 and December 31, 2010 were A+, A1 or better as defined by S&P 500 and Moody’s.

Money market funds and municipal securities are classified as Level 1 assets because market prices are readily available for these investments. Level 2 financial assets and liabilities represent the fair value of our foreign currency exchange contracts that were valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curve, option volatility and currency rates. Level 2 non-financial assets represent the fair value of property and equipment, which are valued based on quoted prices and sales of identical assets in an inactive market. 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.

 
-7-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
The following table presents a reconciliation for the six months ended June 30, 2011 and 2010, of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):
 
   
   
Six months ended June 30,
   
Three months ended June 30,
   
2011
   
2010
   
2011
   
2010
Beginning balance
  $ 1,250     $ 1,397     $ 1,249     $ 1,248
Total realized / unrealized losses:
                             
    Included in earnings
    -       -       -       -
    Included in OCI
    -       (150)       1       (1)
Purchases, sales, issuances, and settlements, net
    -       -       -       -
Transfers into Level 3, net
    -       -       -       -
Ending balance
  $ 1,250     $ 1,247     $ 1,250     $ 1,247

The credit markets have experienced uncertainty and some of this uncertainty has impacted and may continue to impact the markets where our ARS would be offered. During the six months ended June 30, 2011, we experienced two failed ARS auctions, representing principal of $1.6 million for the two ARS we own. At June 30, 2011, one ARS was classified in short term available-for-sale securities because of the high probability its July 1, 2011 auction would be successful. The investment was sold at par of $0.6 million on July 1, 2011. The remaining ARS continues to be classified as a long-term asset due to the high probability that the ARS may fail in future auctions. We have determined that there is no other-than-temporary impairment on this security, since we do not intend and are not required to sell this security before we have recovered the amortized cost basis and there has been no further deterioration of the credit rating of this investment. We will continue to reassess the liquidity in future reporting periods based on several factors, including the success or failure of future auctions, possible failure of the investment to be redeemed, deterioration of the credit rating of the investment, market risk and other factors.
 
 
In determining the fair value of bond and ARS investments, we consider the individual ratings of each bond and ARS held. With regard to bonds, we consider the following: the underlying rating of the issuer irrespective of the insurance; the performance of the issuer; the term of the bond; and the quality of bond insurance provided by the rating of the bond insurer. With regard to ARS, we consider 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 exacerbated by the current global financial environment. The fair value of these investments accordingly will continue to change, and we will continue to evaluate their carrying values.

4. 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 exchange rates between those currencies and the U.S. dollar. To mitigate this risk, we use forward contracts to acquire foreign currency at a fixed price to pay vendors during a specified period of time. All of the derivatives are cash flow hedges, and at June 30, 2011, the majority of the contracts qualified for cash flow hedge accounting.
 
The majority of our derivative instruments are designated and qualify as a cash flow hedge and the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings, which is typically when our student travel programs occur during the second and third quarters of the year.

 
-8-

 

AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
 
At June 30, 2011, the following forward contracts were outstanding (in thousands):
 
   
Amount
     
Matures
Forward contracts: 
             
Australian dollar
   
           5,530
     
July 2011 - July 2012
British pound
   
           3,800
     
July 2011 - July 2012
Euro
   
         13,765
     
July 2011 - July 2012
Japanese yen
   
                -
     
July 2011
New Zealand dollar
   
              125
     
July 2011 - August 2011
 
The fair values of derivatives are as follows (in thousands):
 
June 30, 2011
 
     
 
Derivates designated as
hedging instruments
   
Derivatives not designated as
hedging instruments
   
Total Net
 
 
Assets
   
Liabilities
   
Assets
   
Liabilities
   
Assets
 
Forward contracts
$ 1,644     $ 51     $ 26     $ 6     $ 1,612  
 
  December 31, 2010  
     
 
Derivates designated as
 hedging instruments
   
Derivatives not designated as
 hedging instruments
   
Total Net
 
 
Assets
   
Liabilities
   
Assets
   
Liabilities
   
Assets
 
Forward contracts
$ 1,974     $ 110     $ -     $ -     $ 1,864  
 

The net asset derivatives at June 30, 2011 and December 31, 2010 are reported in the balance sheet as current ‘foreign currency exchange contracts’ and ‘other long-term assets’.





 
-9-

 

AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
The following table summarizes the net gain (loss) recognized in OCI and the gain (loss) reclassified from AOCI into the income statment for derivatives designated as hedging instruments (and their loctions) (in thousands):
 
   
Gain (loss) recognized in OCI (effective portion)
 
Location of gain (loss) reclassed
from AOCI (effective portion)
 
Gain (loss) reclassed from
AOCI (effective portion)
   
Six months ended June 30,
             
Six months ended June 30,
   
2011
 
2010
             
2011
 
2010
Forward contracts
 
$
             (177)
 
$
          (1,333)
 
 Net revenue, non-directly delivered programs
 
$
           1,559
 
$
           (269)
   
Three months ended June 30,
             
Three months ended June 30,
   
2011
 
2010
             
2011
 
2010
Forward contracts
 
$
            (996)
 
$
            (858)
 
 Net revenue, non-directly delivered programs
 
$
           1,559
 
$
           (269)

Unrealized gains on forward contracts recorded in AOCI at June 30, 2011, which are expected to be reclassified to net revenue during the next 12 months, was approximately $1.0 million. This amount was computed using the fair value of the cash flow hedges at June 30, 2011, and will change before actual reclassification from AOCI to net revenue during the three and six months ended June 30, 2012.
 
For the three and six months ended June 30, 2011 and 2010, the amount of gains recognized in the income statement for derivatives not designated as hedging instruments (and their locations) are as follows (in thousands):
 
       
Amount of Gain
 
Derivative not designated as  hedging 
instruments
 
 Location of Gain Recognized in Income on     Derivative
 
Three & Six
 months ended
June 30, 2011
 
Three & Six
months ended
June 30, 2010
Forward contracts
 
Foreign currency and other expense
  $ 183     $ -
 
We do not typically enter into derivatives that are not designated as hedging instruments. Our policy is to achieve a position of being 80 to 100 percent hedged for our forecasted cash flow needs for the following year. During the six months ended June 30, 2011, we recognized a gain of $0.2 million as a result of the de-designation of our Japanese yen forward contracts associated vendor payments for 2011 summer travel. Due to the catastrophic events that have occurred, management has suspended all 2011 travel programs to Japan and has re-routed the majority of these delegates to other destinations throughout the world.

5.   Stock-Based Compensation

Under the Equity Participation Plan (the “Plan”), we may grant stock-based incentive compensation awards to eligible officers and employees, 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.

 
-10-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Under the terms of the Plan, options to purchase shares of our Common Stock are granted at a price set by the Compensation Committee of the Board of Directors (the “Compensation Committee”), not to be less than the par value of a share of Common Stock, and if granted as performance-based compensation or as incentive stock options, not to be less than the fair market value of the stock on the date of grant. The Compensation Committee establishes the vesting period of the awards, which is generally set at 25 percent per year for four years. Options may be exercised any time after they vest for a period up to 10 years from the grant date.

Under the terms of the Plan, restricted stock awards are granted at a price set by the Compensation Committee on the same terms as options. The Compensation Committee also establishes the vesting period of the awards, which is generally set at 100 percent at the conclusion of one to four years. Our key employees who have been awarded restricted stock and are full time employees are subject to a four year vesting period, while our Board of Directors who have been awarded restricted 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. Option valuation models require the input of estimate based on management assumptions, particularly expected term, stock price volatility, and forfeiture rate. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Our employee stock options do not trade on a secondary exchange; therefore, employees do not derive benefit from holding stock options unless there is an appreciation in the market price of our stock above the exercise price. Such an increase in stock price would benefit all shareholders commensurately.

For grants in the three and six months ended June 30, 2011 and 2010, we used the following weighted-average assumptions to determine the fair value of the grants:

   
Six months ended
      Six months ended     Three months ended  
Three months ended
   
June 30, 2011
   
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Expected dividend yield
 
             2.16
 
%
   
             1.89
 
%
 
             2.17
 
%
 
             1.82
 
%
Expected stock price volatility
 
           62.01
 
%
   
           61.22
 
%
 
           63.60
 
%
 
           54.60
 
%
Risk-free interest rate
 
             1.95
 
%
   
             2.30
 
%
 
             1.89
 
%
 
             2.27
 
%
Expected life of options
 
             5.27
 
Years
   
             5.95
 
Years
 
             4.75
 
Years
 
             8.25
 
Years
Estimated fair value per option granted
 
$4.69
       
$5.64
     
$4.59
     
$6.06
   
 
The dividend yield is based on expected annual 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 life 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 9.69 percent is used as a best estimate of future forfeitures based on our historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

Total stock-based compensation expense recognized in the consolidated statement of operations for the quarter ended June 30, 2011 was $0.4 million before income taxes. Of the total stock-based compensation expense during the quarter, stock option expense was $0.2 million, restricted stock award expense was $0.2 million, and the related total deferred tax benefit was $0.1 million. Total stock-based compensation expense recognized in the consolidated statement of operations for the six months ended June 30, 2011 was $0.9 million before income taxes. Of the total stock-based compensation expense during 2011 year to date, stock option expense was $0.5 million, restricted stock award expense was $0.4 million, and the related total deferred tax benefit was $0.3 million.

 
-11-

 
The following table presents information about restricted stock awards and options to purchase shares of Common Stock as of June 30, 2011:
 
     
Options and Awards Outstanding
 
Options Exercisable
 
Range of Exercise Prices
 
Shares
 
Weighted-
Average
Remaining
Contractual
 Life (years)
 
Weighted-
Average
 Exercise Price
 
Shares
 
Weighted-
Average
 Exercise Price
 
Restricted Stock Awards
                       
  $     0.00  
       328,213
 
             2.18
   
 N/A
 
 N/A
   
 N/A
 
Stock Options
                       
  $     3.47 - 6.93  
       431,588
 
             0.67
 
$
             6.00
 
       431,588
 
$
             6.00
        6.94 - 10.39  
       308,079
 
             5.90
   
             9.22
 
       187,444
   
             9.26
        10.40 - 13.86  
       546,031
 
             8.61
   
            11.49
 
         92,686
   
            11.82
        13.87 - 17.32  
       294,927
 
             4.83
   
           16.88
 
       257,777
   
           16.84
        17.33 - 20.79  
         10,534
 
             5.98
   
            18.41
 
           8,244
   
            18.41
        20.80 - 24.25  
         16,000
 
             4.12
   
           21.09
 
         16,000
   
           21.09
        24.26 - 27.72  
        194,146
 
             4.57
   
           27.10
 
        194,146
   
           27.10
        27.73 - 31.18  
           9,895
 
             4.78
   
           29.28
 
           9,895
   
           29.28
        31.19 - 34.65  
           6,922
 
             5.23
   
           34.65
 
           6,922
   
           34.65
  Total Stock Options
      1,818,122
 
             5.13
 
$
           12.65
 
    1,204,702
 
$
           13.32
  Combined
    2,146,335
 
             4.68
 
$
           12.65
 
    1,204,702
 
$
           13.32
 
The aggregate intrinsic value of outstanding stock options and restricted stock was $4.2 million and the aggregate intrinsic value of exercisable stock options and restricted stock was $1.3 million at June 30, 2011, before applicable income taxes, based on our $8.83 closing stock price at June 30, 2011. This intrinsic value would have been realized by the holders of such restricted stock and options had all restricted stock been vested and all stock options been exercised on that date. As of June 30, 2011, total unrecognized stock-based compensation expense related to non-vested stock options and non-vested restricted stock awards was approximately $4.5 million, which is expected to be recognized over approximately 3.9 years. During the quarter ended June 30, 2011, the total intrinsic value of stock options exercised was $0.1 million, and the total fair value of options which vested was $0.1 million. During the six months ended June 30, 2011, the total intrinsic value of stock options exercised was $0.1 million and the total fair value of options which vested was $0.2 million. During the quarter ended and six months ended June 30, 2011, the total fair value of restricted stock awards which vested was $0.1 million.

Restricted stock and stock option transactions during the six months ended June 30, 2011 were as follows:

 
Restricted
Stock
 Awarded
   
Weighted-
Average Grant
Date Fair Value
   
Stock
 Options
 
Weighted-
Average
 Exercise Price
Balance at December 31, 2010
       337,918
   
$
            11.83
   
      1,851,851
 
$
           12.64
Granted
         17,263
     
            10.12
   
         37,515
   
            10.12
Forfeited
        (19,760)
     
           12.04
   
       (50,762)
   
            12.81
Vested
         (7,208)
     
            12.14
   
 N/A
   
 N/A
Exercised
 N/A
     
 N/A
   
       (20,482)
   
             6.37
Balance at June 30, 2011
       328,213
   
$
            11.72
   
      1,818,122
 
$
           12.65


 

 

 

 

 
 
-12-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


6. Net Income and Dividends per Share

The following table presents a reconciliation of basic and diluted loss per share (“EPS”) using the two-class method (in thousands, except per-share amounts):

 
Six months ended June 30,
   
Three months ended June 30,
 
2011
   
2010
   
2011
   
2010
Numerator:
                     
   Net income
  $ 4,702     $ 7,694     $ 13,431     $ 15,183
                               
Denominator:
                             
   Weighted-average shares outstanding
    17,513       18,849       17,344       18,924
     Effect of unvested restricted stock awards
     considered participating securities
    328       263       328       263
   Weighted-average shares outstanding – basic
    17,841       19,112       17,672       19,187
     Effect of dilutive common stock options
    169       234       152       223
   Weighted-average shares outstanding – diluted
    18,010       19,346       17,824       19,410
                               
   Net income per share – basic
  $ 0.26     $ 0.40     $ 0.76     $ 0.79
                               
   Net income per share – diluted
  $ 0.26     $ 0.40     $ 0.75     $ 0.78
                               
Cash dividends declared per share
  $ 0.12     $ 0.12     $ 0.06     $ 0.06
                               
Stock options excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive
    1,105,954       811,500       1,201,527       814,300

 
7. Segment Reporting

Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel programs to students, professionals, and athletes through multiple itineraries within five travel program offerings and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.

Ambassador Programs and Others’ gross margin is comprised of gross revenue 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 amortization of intangible assets directly associated with sales.

 
-13-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Segment information for the three and six months ended June 30, 2011 and 2010 were as follows (in thousands):

 
Six months ended June 30, 2011
 
Six months ended June 30, 2010
                   
   
Ambassador
 Programs and
 Other (1)
   
BookRags
   
Consolidated
   
Ambassador
 Programs
and Other (1)
 
BookRags
   
Consolidated
Total revenue
  $ 35,801     $ 1,917     $ 37,718     $ 39,885   $ 1,515     $ 41,400
Gross margin
  $ 32,236     $ 1,655     $ 33,891     $ 34,804   $ 1,298     $ 36,102
Depreciation and amortization
  $ 2,124     $ 240     $ 2,364     $ 2,139   $ 202     $ 2,341
Operating income
  $ 5,219     $ 635     $ 5,854     $ 10,055   $ 558     $ 10,613
Income tax provision
  $ 1,874     $ 200     $ 2,074     $ 3,597   $ 182     $ 3,779
Net income
  $ 4,246     $ 456     $ 4,702     $ 7,317   $ 377     $ 7,694
Total additions to property, plant, and equipment
  $ 1,767     $ 128     $ 1,895     $ 2,498   $ -     $ 2,498
Total additions to goodwill and intangible assets
  $ -     $ 213     $ 213     $ -   $ 3,344     $ 3,344
Intangible assets, excluding goodwill
  $ -     $ 3,361     $ 3,361     $ -   $ 3,107     $ 3,107
Total assets
  $ 142,278     $ 15,438     $ 157,716     $ 164,225   $ 14,966     $ 179,191
                                             
                                             
 
Three months ended June 30, 2011
 
Three months ended June 30, 2010
                       
   
Ambassador
 Programs and
Other (1)
   
BookRags
   
Consolidated
   
Ambassador
Programs and
Other (1)
 
BookRags
   
Consolidated
Total revenue
  $ 35,142     $ 914     $ 36,056     $ 37,903   $ 761     $ 38,664
Gross margin
  $ 32,063     $ 785     $ 32,848     $ 33,855   $ 654     $ 34,509
Depreciation and amortization
  $ 1,090     $ 121     $ 1,211     $ 1,102   $ 104     $ 1,206
Operating income
  $ 19,032     $ 257     $ 19,289     $ 21,863   $ 253     $ 22,116
Income tax provision
  $ 6,189     $ 75     $ 6,264     $ 7,313   $ 83     $ 7,396
Net income
  $ 13,237     $ 194     $ 13,431     $ 15,012   $ 171     $ 15,183
 
 
 
(1)  
Ambassador Programs and Other include all travel programs offered by Ambassador Programs and World Adventures Unlimited as well as corporate overhead.

Any intercompany sales, which are rare, or services provided are eliminated. Intercompany expenses paid for on behalf of another subsidiary are recorded as intercompany receivables and payables and eliminated upon consolidation. Our subsidiaries have entered into operating agreements pursuant to which Ambassador Programs provides our other subsidiaries accounting, human resources, technology support, and travel services. In addition, these operating agreements may include the terms on which one of our subsidiaries may perform lead generation on behalf of another for marketing purposes.

8. Supplemental Disclosures of Consolidated Statements of Cash Flows

Our non-cash investing and financing activities during the six months ended June 30, 2011 and 2010, were as follows (in thousands):
 
   
June 30, 2011
   
June 30, 2010
 
Unrealized loss on foreign currency exchange contracts
  $ (276 )   $ (2,051 )
Unrealized gain (loss) on available-for-sale securities
  $ 471     $ (498 )
Purchase of property and equipment
  $ (106 )   $ (274 )
Purchase price allocation for goodwill
  $ -     $ (2,870 )
Repurchase of common stock
  $ -     $ 640  


 
-14-

 
 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 

 
9.  Commitments and Contingencies

On July 14, 2009, a securities class action was filed against us and certain of our executive officers on behalf of all persons or entities who purchased our Common Stock between February 8, 2007 and October 23, 2007, in the United States District Court for the Eastern District of Washington. On March 11, 2010, we, and certain of our executive officers, moved to dismiss the class action. On June 2, 2010, the Court issued an order denying these motions to dismiss.  The current 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.  On March 17, 2011, the Class was certified for persons who purchased our Common Stock between July 24, 2007 and October 23, 2007. The parties had commenced discovery when, on April 14, 2011, an agreement was reached to settle the action following a mediation before a retired federal judge.  Under the terms of the settlement, our insurance carriers have agreed to pay the settlement amount of $7.5 million, in complete settlement of all claims, without any admission of wrongdoing or liability by the Company or any party in the action. Throughout the litigation, the Company and the individual defendants have denied, and continue to deny, the allegations made against them. We agreed with the insurance carriers to settle the action on these terms, because it was in the best interests of the Company to avoid the burdens, risk, uncertainties and expense that would be inherent in continued litigation. The settlement agreement, which includes a release for all defendants and other provisions common in such agreements, was submitted to the Court on July 13, 2011 for preliminary approval, which will then be followed by notice to all class members. Whether or not the settlement receives final court approval depends on various factors, including but not limited to the number of and reasons for any potential objections to the settlement or the number of class members excluding themselves from the class action settlement. The settlement will be subject to final Court approval following a public hearing. As the settlement is covered by the Company’s insurance carrier, the settlement is not expected to have a material adverse effect on our business, financial condition or results of operations.

On October 27, 2009, we were informed by the Securities and Exchange Commission (“SEC”) that it had issued a formal order of investigation with respect to trading in the Company’s securities. We believe that the investigation is for the period August through December, 2007. In connection with the investigation, the Company, certain of its officers, 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 U.S. Department of Justice is involved in the investigation and has served subpoenas upon various employees to appear before the federal grand jury to which the matter has been assigned. We will continue to cooperate fully with the investigation.

Other than as disclosed herein, we are not a party to any other material pending legal proceedings other than ordinary routine litigation incidental to our business, the outcome of which we believe will not have a material adverse effect on our business, financial condition, cash flows or results of operations. These matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Adverse outcomes in some or all of the matters described in this section may result in significant monetary damages or injunctive relief against us that would adversely affect our results of operations.

We are subject to the possibility of various loss contingencies, including claims, suits and complaints, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Under our Bylaws, our directors and officers have certain rights to indemnification by us against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which covers certain liabilities arising from our obligation to indemnify our directors and officers and former directors in certain circumstances. No material indemnification liabilities were accrued at June 30, 2011.



 
-15-

 
AMBASSADORS GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


10.  Recently Issued Accounting Pronouncements
 
 
In January 2010, the Financial Accounting Standards Board (“FASB”) issued a new accounting principle that requires new disclosures and clarifies existing disclosures about fair value measurements. The new principle is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which will be effective for the fiscal year beginning after December 15, 2010, and for the interim periods within those fiscal years. The adoption of this new principle did not have a material impact on our consolidated financial statements.

In December 2010, the FASB issued a new accounting principle that modifies the two-step goodwill impairment testing process for entities that have a reporting unit with a zero or negative carrying amount. For those reporting units, an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment exists. The new guidance became effective on January 1, 2011, and did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued new accounting guidance that provides a consistent definition of fair value and common requirements of and disclosure about fair value between GAAP and International Financial Reporting Standards (“IFRS”). The guidance states the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets. Enhanced disclosure requirements will require companies to disclose quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements for recurring Level 3 fair value measurements. For assets and liabilities not recorded at fair value but where fair value is disclosed, companies must report the level in the fair value hierarchy of assets and liabilities. This new guidance is effective for interim and annual periods beginning January 1, 2012, and we do not anticipate a material impact on our consolidated financial statements.

In June 2011, the FASB issued a new accounting standard to make the presentation of items within OCI more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of stockholders’ equity. Reclassification adjustments between OCI and net income will be presented separately on the face of the financial statements. This new standard is effective as of the beginning of the fiscal year beginning January 1, 2012, and we do not anticipate a material impact on our consolidated financial statements.

 
-16-

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.
 
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 11, 2011 and those factors set forth under Part II, Item 1A Risk Factors set forth in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Executive Overview

The key financial indicators that we use in managing our business and in evaluating our financial condition and operating performance are: program operating results; gross margin; net operating income; operating margin; deployable cash; free cash flow; net enrollments; various website metrics including monthly page views, website visitors, unique users, and revenue per one thousand unique visitors; financial ratios; and leverage as shown on our consolidated balance sheet. Deployable cash, free cash flow and net enrollments are non-GAAP measurements we utilize and are defined and further described in the sections captioned “Key Performance Non-GAAP Financial Indicators” below. Key macro-economic factors and non-financial indicators that affect our financial condition and operating performance are: economic stability; consumer confidence; jobless rates; currency fluctuations; interest rates; airline practices; political climates; terrorism; military actions; and natural disasters.

Our focus in 2011 is growing our business while strategically managing costs. We continue to strive for growth through traditional program offerings, exploring new program offerings, and developing our direct advertising revenue channel through BookRags. We intend to deliver on these strategies through maximizing our marketing campaigns with the assistance of our third-party vendors, enhancing retention efforts, and directing efforts to innovation, quality, customer service, and financial discipline. Our core product line, Student Ambassador Programs, has experienced modest growth in 2011 for the first time since 2007. We believe this trend is a positive sign that our marketing efforts are gradually gaining momentum during the ongoing economic challenges we face regarding  consumer’s discretionary spending decisions. Our other traditional program offerings have continued to decline, which is having a negative impact on our overall results. We are working to address the trend with these products through implementing leadership changes and performing additional market research to determine next steps recognizing lead time and market conditions. We continue to develop our endeavor with Discovery Student Adventures and are experiencing growth, although in terms of the number of travelers, Discovery continues to be immaterial to our overall results. The BookRags segment continues to deliver year-over-year revenue growth at a high margin, has positive cash flow, and is developing new revenue channels.

Second quarter 2011 overview:
·  
Total reported revenue of $36.1 million compared to $38.7 million in second quarter last year.
·  
Net income of $13.4 million, or $0.75 per diluted share compared to $15.2 million, or $0.78 per diluted share, in second quarter last year.
·  
Gross margin of 37.7 percent compared to 41.5 percent in second quarter of last year.
·  
Total delegates travelled of 13,262 compared to 13,396 in second quarter of last year.
·  
Repurchased approximately 60,000 shares of common stock for $0.7 million during the second quarter and paid quarterly dividend of $0.06 per share.
·  
The Company’s board of directors authorized a $15.0 million increase in the funds which may be spent under the Company's stock repurchase plan.

 
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Our focal points for the remainder of 2011 continue to include the following:
·  
Increase enrollments for future travel seasons through an integrated sales and marketing model as we incorporate enhanced benefits of outsourcing our print and production processes and leverage our current cost structure.
·  
Address declines in our smaller traditional product offerings through implementing leadership changes and performing additional market research to determine the next steps.
·  
Continue to improve retention of current enrollments through improving the delegate experience, educating delegates and teachers about activities to pay their way, and maintaining the customer’s emotional excitement between enrollment and travel.
·  
Improve consolidated operating margin through steady revenue growth, leverage of fixed cost structure, and responsible deployment of variable operating expenses.
·  
Maintain and improve upon our high quality of product delivery and increase our Net Promoter customer satisfaction ratings received on our travel programs.
·  
Maximize capital allocation strategies and shareholder return.
 
Our business is highly seasonal and our operating results depend primarily on the revenue we earn from our travel programs and costs associated with providing these programs. Expenses associated with the majority of our sales and marketing efforts made to attract delegates are incurred during the third and fourth quarter; the revenue associated with these efforts is recognized in the second and third quarters of the following fiscal year. The timing of both our marketing efforts and the associated revenue and the cross over between fiscal years is an important component to keep in mind as you review our financial statements.
 
Results of Operations
 
The following table sets forth the consolidated financial results for the periods indicated:
 
Comparison of the Six months ended June 30, 2011 to the Six months ended June 30, 2010
 
   
Six Months Ended June 30,
 
   
2011
     
2010
     
$ Change
     
% Change
 
Total revenue
  $ 37,718       $ 41,400       $ (3,682 )       -9 %
Cost of goods sold
    3,827         5,298         (1,471 )       -28 %
Gross margin
    33,891         36,102         (2,211 )       -6 %
Selling and marketing expenses
    19,534         18,383         1,151         6 %
General and administrative expenses
    8,503         7,106         1,397         20 %
Operating income
    5,854         10,613         (4,759 )       -45 %
Other income
    922         860         62         7 %
Income before income tax provision
    6,776         11,473         (4,697 )       -41 %
Income tax provision
    (2,074 )       (3,779 )       1,705         -45 %
Net income
  $ 4,702       $ 7,694       $ (2,992 )       -39 %
 
During the six months ended June 30, 2011, we traveled 13,582 delegates compared to 14,199 delegates traveled during the same period in 2010. Total revenue decline of 9 percent is due to the decrease in delegates traveled and resulting travel-related revenue, which is partially offset by a 27 percent increase in internet content and advertising revenue related to BookRags. BookRags reported total revenue and gross margin for the six months ended June 30, 2011 of $1.9 million and $1.7 million, respectively. For the comparable period in 2010, BookRags reported $1.5 million and $1.3 million in total revenue and gross margin, respectively.
 
 
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Selling and marketing expenses increased $1.2 million year over year primarily due to the fully burdened cost associated with third party outsourcing of the print and production portion of our marketing campaigns as well as accelerated timing of certain components of our mail campaigns.
 
General and administrative expenses increased $1.4 million in the six months ended June 30, 2011 as compared to the same period in 2010. The increase is due to a $1.0 million increase in legal expenses, a $0.4 million increase in personnel costs related to filling open positions compared to the same period in 2010.
 
The increase in other income is due to a $0.2 million foreign currency de-designation gain relating to exiting positions on Japanese yen contracts, offset by a $0.1 million decrease in interest income resulting from the lower cash balance during the first six months of 2011 as compared to the same period of 2010.
 
For the six months ended June 30, 2011 and 2010, the income tax provision has been recorded based on a 30.6 percent and 32.9 percent estimated annual effective income tax rate applied to the pre-tax income, respectively. The difference from the statutory rate of 35 percent is primarily due to tax exempt interest income earned during the periods.
 
Comparison of the Three months ended June 30, 2011 to the Three months ended June 30, 2010
 
   
Three Months Ended June 30,
 
   
2011
     
2010
     
$ Change
     
% Change
 
Total revenue
  $ 36,056       $ 38,664       $ (2,608 )       -7 %
Cost of goods sold
    3,208         4,155         (947 )       -23 %
Gross margin
    32,848         34,509         (1,661 )       -5 %
Selling and marketing expenses
    9,439         8,981         458         5 %
General and administrative expenses
    4,120         3,412         708         21 %
Operating income
    19,289         22,116         (2,827 )       -13 %
Other income
    406         463         (57 )       -12 %
Income before income tax provision
    19,695         22,579         (2,884 )       -13 %
Income tax provision
    (6,264 )       (7,396 )       1,132         -15 %
Net income
  $ 13,431       $ 15,183       $ (1,752 )       -12 %
  
During the three months ended June 30, 2011, we traveled 13,262 delegates compared to 13,396 delegates traveled during the same period in 2010. During the quarter, we had a 7 percent increase in delegates traveling on the core Students Ambassador Programs and a modest increase in delegates traveling on the Citizens Ambassadors Programs partially related to timing of travel. This increase was offset by an expected reduction in delegates traveling on the Company’s Leadership Ambassador Programs. Total revenue declined 7 percent due to the decrease in delegates traveled and resulting travel-related revenue partially offset by a 20 percent increase in internet content and advertising revenue related to BookRags. BookRags reported total revenue and gross margin for the three months ended June 30, 2011 of $0.9 million and $0.8 million, respectively. For the comparable period in 2010, BookRags reported $0.8 million and $0.7 million in total revenue and gross margin, respectively.
 
Selling and marketing expenses increased $0.5 million quarter over quarter due to a $0.7 million increase to a fully burdened cost associated with third party outsourcing of the print and production portion of our marketing campaigns and integrated marketing efforts, offset by a decline of $0.2 million in personnel costs.
 
General and administrative expenses increased $0.7 million in the second quarter of 2011 as compared to the same period in 2010. The change is due to a $0.6 million increase in legal expenses and a $0.1 million increase related to general personnel costs.
 
 
-19-

 
 
The decrease in other income is due to a decline in interest income resulting from the lower cash balance during the three months ended June 30, 2011 as compared to the same period of 2010.
 
For the three months ended June 30, 2011 and 2010, the income tax provision has been recorded based on a 31.8 percent and 32.8 percent estimated annual effective income tax rate applied to the pre-tax income, respectively. The difference from the statutory rate of 35 percent is primarily due to tax exempt interest income earned during the periods.

Results of Operations by Segment

Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel programs to students, professionals, and athletes through multiple itineraries within five travel program offerings and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.

Ambassador Programs and Others’ gross margin is comprised of gross revenue less direct program costs, including air, accommodation, transportation, speakers, facilitators, and event costs. BookRags’ gross margin is comprised of content, subscription, and advertising revenues via www.BookRags.com, less amortization of intangible assets directly associated with sales.

Segment results of operations for the three and six months ended June 30, 2011 and 2010 are as follows (in thousands):
 
 
Six months ended June 30, 2011
   
Six months ended June 30, 2010
         
 
Ambassador Programs and
Other (1)
   
BookRags
   
Consolidated
   
Ambassador Programs and
Other (1)
   
BookRags
   
Consolidated
Total revenue
$ 35,801     $ 1,917     $ 37,718     $ 39,885     $ 1,515     $ 41,400
Cost of goods sold
  3,565       262       3,827       5,081       217       5,298
Gross margin
  32,236       1,655       33,891       34,804       1,298       36,102
Selling and marketing expenses
  18,886       648       19,534       17,955       428       18,383
General and administrative expenses
  8,131       372       8,503       6,794       312       7,106
Operating income
  5,219       635       5,854       10,055       558       10,613
Other income
  901       21       922       859       1       860
Income before income tax provision
  6,120       656       6,776       10,914       559       11,473
Income tax provision
  (1,874)       (200)       (2,074)       (3,597)       (182)       (3,779)
Net income
$ 4,246     $ 456     $ 4,702     $ 7,317     $ 377     $ 7,694
                                             
                                             
                                             
       
 
   
Three months ended June 30, 2011 
     
Three months ended June 30, 2010 
             
   
Ambassador Programs and Other (1)
   
BookRags
   
Consolidated
     
Ambassador Programs and Other (1)
   
BookRags
   
Consolidated
Total revenue
$ 35,142     $ 914     $ 36,056     $ 37,903     $ 761     $ 38,664
Cost of goods sold
  3,079       129       3,208       4,048       107       4,155
Gross margin
  32,063       785       32,848       33,855       654       34,509
Selling and marketing expenses
  9,081       358       9,439       8,772       209       8,981
General and administrative expenses
  3,950       170       4,120       3,220       192       3,412
Operating income
  19,032       257       19,289       21,863       253       22,116
Other income
  394       12       406       462       1       463
Income before income tax provision
  19,426       269       19,695       22,325       254       22,579
Income tax provision
  (6,189)       (75)       (6,264)       (7,313)       (83)       (7,396)
Net income
$ 13,237     $ 194     $ 13,431     $ 15,012     $ 171     $ 15,183
 
 
 
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(1)  
Ambassador Programs and Other include all travel programs offered by Ambassador Programs and World Adventures Unlimited as well as corporate overhead.

See ‘Results of Operations’ above for a discussion of year over year variances for Ambassador Programs and Other and details regarding the portion that was contributed by BookRags.

Key Performance Non-GAAP Financial Indicators

We analyze our performance on a net income, cash flow and liquidity basis in accordance with GAAP as well as on a non-GAAP operating, cash flow and liquidity basis. 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.

2011 Net Enrollments

Net enrollments consist of all participants traveled year to date plus those actively enrolled for future travel. As of July 24, 2011, we had 24,007 net enrolled participants for our 2011 travel programs, down 5 percent compared to 26,826 net enrolled participants as of the same date last year for our 2010 travel programs. Net enrollments for our core product, Student Ambassadors, are up 5 percent compared to the same date one year ago, however they do not offset a significant decline in our Leadership and Citizen Ambassador Programs. We continue to take additional steps to retain net enrollments for 2011 travel through focus on improving the delegate experience, educating delegates regarding activities to pay their way and offering new insurance options. However, there can be no assurances that any of these efforts will have any success, and if so, to what extent. This non-GAAP measure relates to our travel programs only and does not include anticipated revenue for BookRags.

Deployable Cash

We use deployable cash as a liquidity measure and it is calculated as the sum of cash, cash equivalents, short-term available-for-sale securities and prepaid program costs and expenses less the sum of accounts payable, accrued expenses and other short-term liabilities (excluding deferred taxes) and participant deposits. We believe the deployable cash measurement is useful in understanding cash available to deploy for current and future business opportunities. This non-GAAP measure is based on highly conservative assumptions. See the ‘Liquidity’ section below for explanations of cash sources and uses.
 
Deployable Cash Reconciliation (in thousands)
 
   
June 30,
 
December 31,
   
2011
 
2010
 
2010
Cash, cash equivalents and short-term available-for-sale securities
  $ 89,977   $ 107,815   $ 79,378
Prepaid program cost and expenses
    23,815     26,196     3,230
Less: Participants’ deposits
    (61,757)     (66,982)     (34,436)
Less: Accounts payable / accruals / other liabilities
    (10,732)     (14,516)     (6,061)
Deployable cash
  $ 41,303   $ 52,513   $ 42,111
 
Free Cash Flow

Free cash flow is calculated as cash flow from operations less purchase of property, equipment and intangible assets. Management believes this non-GAAP measure is useful to investors in understanding the cash generated within the current period for future use in operations. See the ‘Liquidity’ section below for explanations of cash sources and uses.


 
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Free Cash Flow Reconciliation (in thousands)
 
 
Six months ended June 30,
 
2011
 
2010
 
$ Change
Cash flow from operations
$ 19,695   $ 33,517   (13,822)
Purchase of property, equipment and intangibles
  (2,108)     (2,972)   864
Free cash flow
$ 17,587   $ 30,545   (12,958)
 
 
Liquidity and Capital Resources
 
Liquidity
 
Total assets at June 30, 2011 were $157.7 million, of which 57 percent, or $90.0 million, were cash, cash equivalents and short-term available-for-sale securities. At December 31, 2010, total assets were $128.6 million, of which 62 percent, or $79.4 million, were cash, cash equivalents and short-term available-for-sale securities.
 
Cash provided by operations was $19.7 million and $33.5 million during the six months ended June 30, 2011 and 2010, respectively. The $13.8 million decrease is primarily due to a decline in participant deposits of $8.5 million, accounts payable and accrued expenses of $4.2 million and current period earnings of $3.0 million, offset by an increase in cash from prepaid program expenses of $2.4 million. All variances are mainly driven by a decline in delegates traveling in 2011 compared to 2010.
 
Cash used in investing activities was $12.8 million and $29.9 million during the six months ended June 30, 2011 and 2010, respectively. This $17.1 million difference was primarily due to a net increase in cash provided by the sale of available-for-sale securities.
 
Cash used in financing activities was $8.1 million and $3.6 million during the six months ended June 30, 2011 and 2010, respectively. The net change in financing activities was a result of $4.3 million increase in cash used for the repurchase of our Common Stock coupled with a $0.3 million decrease in proceeds from the exercise of stock options.
 
Capital Resources
 
As discussed in our current report on Form 8-k filed on May 31, 2011, we renewed our unsecured revolving line of credit with Wells Fargo. During the first six months of 2011, we had an unused line of credit in the amount of $20.0 million. In order to utilize this line of credit, we must comply with certain covenants, which include deployable cash greater than zero, tangible net worth greater than $50.0 million and net income after taxes for the current and previous three quarters of greater than $4.0 million. At June 30, 2011, we were in compliance with all covenants but there can be no assurance that we will be able to comply with all of the covenants in the future.

We continue to consider acquisitions of educational and travel businesses. An acquisition may require the use of cash and cash equivalents. Currently, there are no pending acquisitions and no assurance can be given that definitive agreements for any such acquisitions will be entered into, or, if they are entered into, that they will be on terms favorable to us.

We do not have any material capital expenditure commitments for 2011. Our business is not capital intensive and we believe that existing cash and cash equivalents and cash flows from operations will be sufficient to fund our anticipated operating needs and capital expenditures through 2011. For a more complete discussion of these and other contractual factors, please refer to our consolidated financial statements and the notes thereto included in our Annual Report Form 10-k filed on March 11, 2011.
 
 
 
-22-

 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We consider our policies associated with cash and cash equivalents, available-for-sale securities, valuation of goodwill and intangible assets, income taxes, foreign currency, revenue recognition, stock-based compensation and contingencies and litigation to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to our critical accounting policies and methodologies as discussed in our Annual Report on Form 10-K filed on March 11, 2011.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
There has been no significant change to market risk as discussed in ‘Market Risk,’ as part of Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ in our Annual Report on Form 10-K filed on March 11, 2011.
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures
 
As of June 30, 2011, the end of the period covered by this report, our chief executive officer and chief financial officer reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information we must disclose in our report filed or submitted under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and have concluded, based on that evaluation, that as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our chief executive officer and principal accounting officer as appropriate to allow timely decisions regarding required disclosure.
 
(b) Changes in internal control over financial reporting
 
In the three months ended June 30, 2011, 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.
 

 
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PART II
OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information contained in Note 9, “Commitments and Contingencies” to our consolidated financial statements is incorporated by reference.
 
Item 1A. Risk Factors
 
As of the date of this report, there have been no material changes to our risk factors, as discussed in Item 1A, ‘Risk Factors,’ contained in our Annual Report on Form 10-K filed on March 11, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On various dates between May 2004 and November 2008, our Board of Directors authorized the repurchase of up to an aggregate of $55.0 million of our Common Stock in the open market or through private transactions (the “Repurchase Plan”). At a Board meeting on May 12, 2011, our Board of Directors increased the authorized Repurchase Plan to $70.0 million. The Repurchase Plan does not expire as of any particular date. During the quarter ended June 30, 2011, we repurchased 60,579 shares of our Common Stock for $0.7 million pursuant to the Repurchase Plan. Since inception and through June 30, 2011, we have repurchased approximately 3,624,000 shares of our Common Stock, adjusted to reflect the effect of a two-for-one stock split of our Common Stock, for an approximate total of $55.0 million.
 
Independent of the Repurchase Plan, during the first quarter of 2007, our Board of Directors approved a single repurchase of 1.2 million shares of our Common Stock for approximately $33.0 million.
 
The following is a summary of issuer purchases of equity securities during the quarter ended June 30, 2011:

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 Programs
Available for repurchase at June 30, 2011
                $ 658,851
April 1 – April 30, 2011
      60,579     $ 10.88       60,579       7
May 1 – May 31, 2011
                        15,000,007
June 1 – June 30, 2011
                        15,000,007
Total
      60,579     $ 10.88       60,579     $ 15,000,007






 
-24-

 
 
Item 6. Exhibits

 
31.1  
Certification under Section 302 of the Sarbanes-Oxley Act of 2002
   
 
 
31.2  
Certification under Section 302 of the Sarbanes-Oxley Act of 2002
   
 
 
32.1  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002
   
 
 
32.2  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002
   

 
-25-

 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AMBASSADORS GROUP, INC.
 
Date: August 5, 2011 
By:  
/s/ JEFFREY D. THOMAS 
 
   
Jeffrey D. Thomas 
 
   
Chief Executive Officer 
 
 


 
-26- 

 


 
EXHIBIT INDEX
 
 
31.1  
Certification under Section 302 of the Sarbanes-Oxley Act of 2002
   
 
 
31.2  
Certification under Section 302 of the Sarbanes-Oxley Act of 2002
   
 
 
32.1  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002
   
 
 
32.2  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002