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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, 2014
 
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
o
 
Accelerated filer
o
 
Non-accelerated filer (Do not check if a smaller reporting company)
þ
 
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 28, 2014 was 17,039,992.
 



 
 

 


 
 
AMBASSADORS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
 
 
TABLE OF CONTENTS
 
   
Page
PART I – FINANCIAL INFORMATION
   
   
Consolidated Balance Sheets
 
1
Consolidated Statements of Operations
 
2
Consolidated Statements of Comprehensive Income (Loss)
 
3
Consolidated Statements of Cash Flows
 
4
Notes to Consolidated Financial Statements
 
5
 
19
 
26
     
PART II – OTHER INFORMATION
   
 
27
 
27
     
SIGNATURES
 
28
     
EXHIBIT INDEX
   
     
     

 
 

 


 
PART I
FINANCIAL INFORMATION
 
 
Item 1. FINANCIAL STATEMENTS
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2014 and December 31, 2013
(in thousands, except share and per share data)
 
 
 
 
UNAUDITED
 
AUDITED
 
June 30,
 
December 31,
 
2014
 
2013
ASSETS
     
Current assets:
     
Cash and cash equivalents
$ 10,412   $ 9,473
Available-for-sale securities and other
  47,088     36,174
Foreign currency exchange contracts
  60     -
Prepaid program costs and expenses
  17,918     7,069
Accounts receivable
  1,421     1,792
Deferred tax assets
  -     1,295
       Total current assets
  76,899     55,803
Property and equipment, net
  14,633     18,452
Available-for-sale securities
  729     719
Intangibles
  3,462     3,522
Goodwill
  70     9,781
Other long-term assets
  85     82
      Total assets
$ 95,878   $ 88,359
           
LIABILITIES
         
Current liabilities:
         
Accounts payable and accrued expenses
$ 7,145   $ 3,587
Participants’ deposits
  41,043     26,362
Foreign currency exchange contracts
  -     244
Deferred tax liabilities
  77     -
Other liabilities
  103     119
      Total current liabilities
  48,368     30,312
Participants’ deposits
  1,822     -
Foreign currency exchange contracts
  -     52
Deferred tax liabilities
  19     2,087
      Total liabilities
  50,209     32,451
           
Commitments and Contingencies (Note 15)
         
           
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; 17,038,508 and 17,040,724 shares issued and outstanding, respectively
  170     170
Additional paid-in capital
  1,284     411
Retained earnings
  44,140     55,876
Accumulated other comprehensive gain (loss)
  75     (549
      Stockholders’ equity
  45,669     55,908
      Total liabilities and stockholders’ equity
$ 95,878   $ 88,359
           
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
 
-1-

 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three and six months ended June 30, 2014 and 2013
(in thousands, except per share amounts)
 
 
Three months ended
   
Six months ended
 
 
June 30,
   
June 30,
 
 
2014
   
2013
   
2014
   
2013
 
Net revenue, non-directly delivered programs
$ 18,092     $ 21,183     $ 18,208     $ 21,183  
Gross revenue, directly delivered programs
  3,565       2,270       3,838       4,164  
Gross revenue, internet and advertising
  1,055       1,029       2,063       2,028  
Total revenue
  22,712       24,482       24,109       27,375  
Cost of sales, directly delivered programs
  2,234       1,553       2,443       2,925  
Cost of sales, internet and advertising
  118       126       250       255  
Cost of sales, program merchandise markdown
  554       -       554       -  
Gross margin
  19,806       22,803       20,862       24,195  
Operating expenses:
                             
     Selling and marketing
  6,159       7,323       13,152       15,842  
     General and administrative
  3,510       2,938       6,650       8,604  
     Restructuring costs
  11,664       -       11,772       -  
     Asset impairments
  2,000       -       2,000       -  
Total operating expenses
  23,333       10,261       33,574       24,446  
Operating income (loss)
  (3,527 )     12,542       (12,712 )     (251 )
Other income:
                             
     Interest and dividend income
  142       160       273       287  
     Foreign currency and other income
  5       1       8       21  
Total other income
  147       161       281       308  
Income (loss)  before income tax benefit (provision)
  (3,380 )     12,703       (12,431 )     57  
Income tax benefit (provision)
  (805 )     (4,611 )     695       (24 )
Net Income (Loss)
$ (4,185 )   $ 8,092     $ (11,736 )   $ 33  
                               
Weighted-average common shares outstanding - basic
  16,823       16,960       16,789       16,980  
Weighted-average common shares outstanding - diluted
  16,823       16,960       16,789       16,980  
                               
Net income (loss) per share - basic
$ (0.25 )   $ 0.48     $ (0.70 )   $ 0.00  
Net income (loss) per share - diluted
$ (0.25 )   $ 0.48     $ (0.70 )   $ 0.00  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
 
-2-

 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the three and six months ended June 30, 2014 and 2013
(in thousands)
 
Three months ended June 30,
   
Six months ended June 30,
 
 
2014
   
2013
   
2014
   
2013
 
Net income (loss)
$ (4,185 )   $ 8,092     $ (11,736 )   $ 33  
Unrealized gain (loss) on foreign currency exchange contracts, net of income tax benefit of $69, $163, $0 and $437
  229       (302 )     357       (811 )
Unrealized gain (loss) on available-for-sale securities, net of income tax benefit of $62, $126, $0 and $100
  153       (235 )     267       (186 )
Comprehensive income (loss)
$ (3,803 )   $ 7,555     $ (11,112 )   $ (964 )

 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
 
 
-3-

 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2014 and 2013
(in thousands)
 
 
Six months ended June 30,
 
 
2014
   
2013
 
Cash flows from operating activities:
         
Net income (loss)
$ (11,736 )   $ 33  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
             
Depreciation and amortization
  2,977       2,711  
Stock-based compensation
  1,168       1,957  
Deferred income tax benefit
  (805 )     (275 )
Loss on disposition and impairment of property and equipment
  2,000       7  
Loss on impairment of goodwill
  9,711       -  
Program merchandise writedown
  554       -  
Excess tax shortfall from stock-based compensation
  109       2,095  
Change in assets and liabilities:
             
Accounts receivable and other assets
  368       (53 )
Prepaid program costs and expenses
  (11,403 )     (9,189 )
Accounts payable, accrued expenses, and other current liabilities
  3,542       2,406  
Participants’ deposits
  16,503       23,723  
Net cash provided by operating activities
  12,988       23,415  
               
Cash flows from investing activities:
             
Purchase of available-for-sale securities
  (24,517 )     (26,844 )
Proceeds from sale of available-for-sale securities
  13,861       7,329  
Purchase of property and equipment
  (952 )     (1,799 )
Purchase of intangibles
  (146 )     (164 )
Net cash used in investing activities
  (11,754 )     (21,478 )
               
Cash flows from financing activities:
             
Repurchase of common stock
  (186 )     (486 )
Dividend payment to shareholders
  -       (1,017 )
Proceeds from exercise of stock options
  -       5  
Excess tax shortfall from stock-based compensation
  (109 )     (2,095 )
Net cash used in financing activities
  (295 )     (3,593 )
               
Net increase (decrease) in cash and cash equivalents
  939       (1,656 )
Cash and cash equivalents, beginning of period
  9,473       6,150  
Cash and cash equivalents, end of period
$ 10,412     $ 4,494  

 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
-4-

 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
1. The Company
 
Ambassadors Group, Inc. (the “Company”, “we”, “us” or “our”) is an educational company primarily engaged in organizing and promoting differentiated worldwide travel programs for students and professionals.  In addition, we operate an education oriented research website, called BookRags.com, which provides study guides, lesson plans and other educational resources to students and teachers. These consolidated financial statements include the accounts of Ambassadors Group, Inc., and our wholly owned subsidiaries, Ambassador Programs, Inc., World Adventures Unlimited, Inc., Ambassadors Unlimited, LLC, AGI Hong Kong Limited, Beijing People to People Education Consultation Co., Ltd, Marketing Production Systems LLC, and BookRags, Inc. (“BookRags”). All significant intercompany accounts and transactions, which are of a normal recurring nature, are eliminated in consolidation.
 
Our operations are organized in two reporting segments, 1) “Ambassador Programs and Other,” which provides educational travel services to students and professionals through multiple itineraries and corporate overhead, and 2) “BookRags,” which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.
 
2. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being materially misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2014 are not indicative of the results that may be expected for the year ending December 31, 2014.
 
These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.
 
3. Recent Accounting Pronouncements
 
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). This ASU relates to discontinued operations reporting for disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on the entity’s operations and financial results. The standard expands disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. This ASU is not expected to have an impact on our financial statements or disclosures.
 
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.
 
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
 
 
 
 
 
 
-5-

 
 
 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
4. Restructuring Costs
 
During the third quarter of 2013, we initiated a corporate restructuring plan aimed at streamlining our cost structure and focusing our business on our core Student Ambassador programs in order to promote the long-term health of the organization. This plan included the restructuring of operations and programs associated with Discovery Student Education and terminating the operations associated with our Beijing office. During 2013, we recorded $2.2 million to restructuring costs.
 
During the second quarter of 2014, we took additional measures intended to continue to streamline the organization and continue our business focus on our Student Ambassador programs.  As previously announced, we completed a workforce reduction during the second quarter of 2014 that resulted in a restructuring expense of $1.6 million.  Under the terms of executive separation agreements, we will continue to pay each terminated executive bi-weekly during the executive’s severance period until the terms have been met, the future payments having been accrued and reflected in the below table as outstanding liabilities at June 30, 2014.
 
At the date of our most recent annual impairment test of December 1, 2013, the estimated fair value of BookRags exceeded its carrying value by less than five percent.  Due to business changes as well as the narrow margin results of our most recent annual impairment test, we re-evaluated the carrying value of BookRags at June 30, 2014 and determined that its fair value was lower than its carrying value.  The significant assumptions used to determine fair value included projected operating revenues and expenses, growth rates, terminal value, discount rates, future cash flows and capital expenditures.  We estimated fair value weighing the results from the income approach and market approach.  As required by the impairment test, we calculated the implied fair value of the goodwill compared to its carrying value.  Our test resulted in a goodwill impairment of $9.7 million that was recorded as a restructuring cost at June 30, 2014.
 
Other costs recorded as restructuring during the second quarter of 2014 included accelerated depreciation of assets scheduled for replacement within the next year as well as continued transition costs from the termination of operations of our Beijing office.
 
We anticipate all restructuring expenses to be recognized within twelve months of the initial implementation of the restructuring plan.
 
The following table summarizes costs incurred as part of the restructuring plan and balance of the restructuring cost liability as of June 30, 2014 (in thousands).
 
 
 
 
-6-

 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
Restructuring Costs
 
Ambassador Programs and other
 
BookRags
 
Consolidated
Contract termination fees
$ 1,550   $ -   $ 1,550
Separation payments
  900     402     1,302
Goodwill impairment
  -     9,711     9,711
Equity compensation expenses
  377     120     497
Other transition costs
  924     -     924
Accumulated expense at June 30, 2014
  3,751     10,233     13,984
less: cash payments
  2,878     33     2,911
less: non-cash expenses
  377     9,831     10,208
Total restructuring liabilities at June 30, 2014
$ 496   $ 369   $ 865
                 
 
5. Asset Impairments

In April 2012, our Board of Directors approved the listing for sale of our corporate headquarters building located in Spokane, Washington. The Company intends to relocate our headquarters to a new leased location in Spokane within a year after sale. The initial listing price for the building and underlying land was $13.3 million. During the quarter ended September 30, 2013, the listing price was lowered to $11.9 million and recorded an impairment charge of $4.5 million.

Subsequent to June 30, 2014, a purchase and sale agreement was executed for the corporate headquarters building for $8.8 million.  During the second quarter of 2014, we lowered the carrying value further and recorded approximately $2.0 million in impairment charges to reflect the fair value of the building and other related assets before the effect of income taxes. These costs are classified in our consolidated statements of operations under asset impairments.

6. Investments and Fair Value Measurements

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

Our financial instruments are measured and recorded at fair value. Our non-financial assets, including property and equipment, intangible assets and goodwill, are measured at fair value upon acquisition, reviewed at least annually for impairment, and are fully assessed if there is an indicator of impairment. An adjustment would be made to the fair value of non-financial assets if an impairment charge is recognized.

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

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

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

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

 
-7-

 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
The following tables summarize the composition of our investments at June 30, 2014 and December 31, 2013 (in thousands):
 
     
Classification on Balance Sheet
               
June 30, 2014
 
Amortized Cost
 
Unrealized Gains
 (Losses)
 
Aggregate Fair Value
 
Cash and cash equivalents
 
Short-term available-for-sale securities
 
Long-term available-for-sale securities
Auction rate securities (“ARS”), greater than one year
  $ 1,000   $ (271 )   $ 729   $ -   $ -   $ 729
Money market funds, ninety days or less
    3,597     -       3,597     3,597     -     -
Municipal securities1
                                     
Short term municipal securities funds2
    40,717     18       40,735     -     40,735     -
One year or less
    921     3       924     -     924     -
After one year through three years
    2,716     11       2,727     -     2,727     -
Greater than three years
    2,735     (33 )     2,702     -     2,702     -
Total
  $ 51,686   $ (272 )   $ 51,414   $ 3,597   $ 47,088   $ 729
 
 
          Classification on Balance Sheet
December 31, 2013
 
Amortized Cost
 
Unrealized Gains
 (Losses)
   
Aggregate Fair Value
 
Cash and cash equivalents
    Short-term available-for-sale securities  
Long-term available-for-sale securities
ARS, greater than one year
  $ 1,002   $ (283 )   $ 719   $ -   $ -   $ 719
Money market funds, ninety days or less
    488     -       488     488     -     -
Municipal securities1
                                     
Short term municipal securities funds2
    27,493     (143 )     27,350     -     27,350     -
One year or less
    952     3       955     -     955     -
After one year through three years
    3,132     20       3,152     -     3,152     -
Greater than three years
    4,854     (137 )     4,717     -     4,717     -
Total
  $ 37,921   $ (540 )   $ 37,381   $ 488   $ 36,174   $ 719
 
1Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

2Amounts include short-term municipal security funds that do not have a set maturity date.






















 
-8-

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


The following tables detail the fair value measurements of assets and liabilities within the three levels of the fair value hierarchy at June 30, 2014 and December 31, 2013 (in thousands):

       
Fair Value Measurements at Reporting Date Using
June 30, 2014
 
Fair Market Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
ARS
  $ 729   $ -   $ -   $ 729
Money market funds
    3,597     3,597     -     -
Municipal securities1
    47,088     41,237     5,851     -
Foreign currency exchange contracts
    89     -     89     -
Total financial assets
  $ 51,503   $ 44,834   $ 5,940   $ 729
Financial liabilities:
                       
Foreign currency exchange contracts
    29     -     29     -
Total financial liabilities
  $ 29   $ -   $ 29   $ -
                         
                         
         
Fair Value Measurements at Reporting Date Using
December 31, 2013
 
Fair Market Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
                       
ARS
  $ 719   $ -   $ -   $ 719
Money market funds
    488     488     -     -
Municipal securities1
    36,174     27,350     8,824     -
Foreign currency exchange contracts
    253     -     253     -
Total financial assets
  $ 37,634   $ 27,838   $ 9,077   $ 719
Financial liabilities:
                       
Foreign currency exchange contracts
    549     -     549     -
Total financial liabilities
  $ 549   $ -   $ 549   $ -
                         
 

1 At June 30, 2014, municipal securities consisted of an 86/7/6/1 percent split between holdings in short-term municipal security funds, municipal revenue bonds, municipal general obligation bonds and certificates of deposit, respectively. At December 31, 2013, municipal securities consisted of a 76/13/11 split between holdings in short-term municipal security funds, municipal revenue bonds and municipal general obligation bonds, respectively. The underlying credit rating of the municipal securities at June 30, 2014 and December 31, 2013 were A+, A1 or better as defined by S&P 500 and Moody’s, respectively.

Money market funds and municipal securities are classified as Level 1 assets because market prices are readily available for these investments. Level 2 financial assets and liabilities represent the fair value of our municipal bonds and 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 rates, volatility and currency rates. Level 3 financial assets represent the fair value of our one auction-rate security (“ARS”), which was 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.




 
-9-

 


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

 
The following table details the fair value measurements of assets measured on a non-recurring basis within the three levels of the fair value hierarchy at June 30, 2014 and December 31, 2013 (in thousands):

     
Fair Value Measurements at Reporting Date Using
 
Total Loss
June 30, 2014
Fair Market Value
 
Qouted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
 
Three months ended June 30, 2014
Non-financal assets:
                         
Property and equipment, net
$ 8,750     $ -     $ -     $ 8,750     $ 2,000
Goodwill
$ -     $ -     $ -     $ -     $ 9,711
                                     
       
Fair Value Measurements at Reporting Date Using
 
Total Loss
December 31, 2013
Fair Market Value
 
Qouted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
 
Year ended December 31, 2013
Non-financal assets:
                                   
Property and equipment, net
$ 11,000     $ -     $ -     $ 11,000     $ 4,544

 

Fair value measurements on a recurring basis using Level 3 inputs consist of one available-for-sale ARS. The following table presents a reconciliation for the three and six months ended June 30, 2014 and 2013, of available-for-sale ARS measured at fair value on a recurring basis using Level 3 inputs (in thousands):

 
Three months ended
   
Six months ended
 
 
June 30,
   
June 30,
 
 
2014
 
2013
   
2014
 
2013
 
Beginning balance
$ 723   $ 729     $ 719   $ 723  
Total realized / unrealized losses:
                         
Included in OCI
  6     (13 )     10     (7 )
Ending balance
$ 729   $ 716     $ 729   $ 716  

 
During the six months ended June 30, 2014, we experienced one failed ARS auction, representing principal of $1.0 million. This ARS continues to be classified as a long-term asset due to the high probability that the ARS may fail in future auctions. The next scheduled auction for this ARS is March 6, 2015. We have determined that there is no other-than-temporary impairment on this security, since we do not intend and are not required to sell this security before we have recovered the amortized cost basis, there has been no further deterioration of the credit rating of this investment, interest payments at coupon rate continue to be received, and we expect to recover the amortized cost basis of this security. We will continue to reassess liquidity in future reporting periods based on several factors, including the success or failure of future auctions, possible failure of the investment to be redeemed, deterioration of the credit rating of the investment, market risk, and other factors.

In determining the fair value of bond and ARS investments we consider the individual ratings of each holding. With regard to bonds, we consider the following: the underlying rating of the issuer irrespective of the insurance; the performance of the issuer; the term of the bond; and the quality of bond insurance provided by the rating of the bond insurer. With regard to valuation of our ARS, which is comprised of student loans, we consider the underlying credit quality of comparable student loan portfolios and the average life of the underlying student loan assets and apply a discount related to the illiquidity of our ARS due to past failed auctions. Based on these inputs, we have applied a discount of 321.0-basis points to the London interbank offered rate resulting in a valuation of $0.7 million from a costs basis of $1.0 million as of June 30, 2014. At the reporting dates and in the future, we recognize that this investment is subject to general credit, liquidity, market and interest rate risks. The fair value of this investment accordingly will continue to change and we will continue to evaluate its carrying value.

 
-10-

 


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

7. Derivative Financial Instruments
 
The majority of our travel programs take place outside of the United States, and most foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to foreign currency risk relative to changes in foreign currency exchange rates between those currencies and the U.S. dollar for our non-directly delivered programs. We use forward contracts that allow us to acquire foreign currency at a fixed price for a specified point in time to provide a hedge against foreign currency risk. All of our derivatives are cash flow hedges and at June 30, 2014, all contracts qualified for cash flow hedge accounting.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings; this is primarily during the second and third quarters of the year when our student travel programs occur. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

At June 30, 2014, the following forward contracts were outstanding (in thousands):
 
   
Notional Amount
 
Matures
Forward contracts: 
         
     Australian dollar
   
                       3,200
 
July 2014 - May 2015
     Euro
   
                       2,860
 
July 2014
     British pound
   
                          200
 
July 2014

 


The fair value of our forward contracts were as follows (in thousands):

 
June 30, 2014
 
Derivatives designated as hedging instruments
 
Total Net
 
Assets
 
Liabilities
 
Assets
Forward contracts
$ 89   $ 29     $ 60
                   
 
December 31, 2013
 
Derivatives designated as hedging instruments
 
Total Net
 
Assets
 
Liabilities
 
Liabilities
Forward contracts
$ 253   $ 549     $ 296
                   
 
The net asset and liability derivatives at June 30, 2014 and December 31, 2013 are reported in the consolidated balance sheet as current and long-term foreign currency exchange contracts.




 
-11-

 

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

 
8. Accumulated Other Comprehensive Income (Loss)

Unrealized gains or losses related to derivative securities are recorded in accumulated other comprehensive income (“AOCI”). The change in unrealized gains or losses related to derivative securities are recorded in other comprehensive income net of income taxes in the period the change occurred. When derivative securities designated as cash flow hedges are used to pay vendors, the effective portion of the hedge is reclassified into the income statement and recorded in net revenue, non-directly delivered programs.

Unrealized gains or losses related to available-for-sale securities are recorded in AOCI. The change in unrealized gains or losses related to available-for-sale securities are recorded in other comprehensive income net of income taxes in the period the change occurred. When securities are sold and a realized gain or loss is recognized, the amount is reclassified from AOCI to the income statement and recorded in interest and dividend income. During the three and six months ended June 30, 2014 and 2013, the Company recognized net realized losses of $25 thousand and $67 thousand, respectively, due to the sale of investments.

For the three months ended June 30, 2014 and 2013, a summary of AOCI balances and gains (losses) recognized in OCI are as follows (in thousands):
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Derivative Securities
   
Available-for-sale securities
 
 
Three months ended
   
Three months ended
 
 
June 30,
   
June 30,
 
 
2014
   
2013
   
2014
   
2013
 
Balance, beginning of period
$ (65 )   $ 35     $ (243 )   $ (132 )
Change before reclassification
  185       (398 )     83       (368 )
Reclassification into net revenue, non-directly delivered programs
  (25 )     (67 )     -       -  
Reclassification into interest and dividend income
  -       -       8       8  
Effect of incomes taxes
  69       163       62       126  
Other comprehensive income (loss), net of income taxes
  229       (302 )     153       (234 )
Balance, end of period
$ 164     $ (267 )   $ (90 )   $ (366 )

 
For the six months ended June 30, 2014 and 2013, a summary of AOCI balances and gains (losses) recognized in OCI are as follows (in thousands):

 
Accumulated Other Comprehensive Income (Loss)
 
 
Derivative Securities
   
Available-for-sale securities
 
 
Six months ended
   
Six months ended
 
 
June 30,
   
June 30,
 
 
2014
   
2013
   
2014
   
2013
 
Balance, beginning of period
$ (192 )   $ 544     $ (357 )   $ (180 )
Change before reclassification
  381       (1,081 )     259       (294 )
Reclassification into net revenue, non-directly delivered programs
  (25 )     (167 )     -       -  
Reclassification into interest and dividend income
  -       -       8       8  
Effect of incomes taxes
  -       437       -       100  
Other comprehensive income (loss), net of income taxes
  356       (811 )     267       (186 )
Balance, end of period
$ 164     $ (267 )   $ (90 )   $ (366 )

 

 
-12-

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

9. Income Taxes

We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. A significant piece of objective negative evidence we evaluated was our cumulative loss incurred over the three-year period ended June 30, 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. As a result, we determined that the negative evidence outweighed the positive evidence as of June 30, 2014 and recorded a one-time, non-cash charge to income tax expense of approximately  $0.7 million to establish a valuation allowance against our total U.S. deferred tax assets, net of U.S. deferred tax liabilities. This accounting treatment has no effect on our  ability to utilize deferred tax assets such as loss carryforwards and tax credits to reduce future cash tax payments. We will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be adjusted accordingly.

10. Stock-Based Compensation

Under our Equity Participation Plan (the “Plan”), we may grant stock-based incentive compensation awards to eligible employees (including officers), non-employee directors and consultants in the form of distribution equivalent rights, incentive stock options, non-qualified stock options, performance share awards, performance unit awards, restricted stock awards, restricted stock units awards, stock appreciation rights, tandem stock appreciation rights, unrestricted stock awards or any combination of the foregoing.  As of June 30, 2014, we had 1,896,120 shares authorized under the Plan available for future stock-based compensation.

Stock Options

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”). The price is not to be less than the fair market value of the stock on the date of grant. The Compensation Committee establishes the vesting period of the awards, which is generally set at 25 percent per year for four years. Options may be exercised any time after they vest for a period up to 10 years from the grant date.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The 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 three and six months ended June 30, 2014 and 2013.
 
 
Three months ended 
June 30, 2014
 
Three months ended 
June 30, 2013
 
Six months ended 
June 30, 2014
 
Six months ended
 June 30, 2013
Expected dividend yield
-  
%
  -  
%
  -  
%
  1.37  
%
Expected stock price volatility
59.43  
%
  52.68  
%
  59.43  
%
  54.66  
%
Risk-free interest rate
2.02  
%
  2.10  
%
  2.02  
%
  2.08  
%
Expected life of options
4.64  
Years
  4.53  
Years
  4.64  
Years
  4.56  
Years
Estimated fair value per option granted
$1.68       $1.61       $1.68       $1.63    
                               

 

 
-13-

 
 
 
AMBASSADORS GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
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 15.2 percent is used as a best estimate of future forfeitures based on our historical forfeiture experience. Stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

A summary of option activity under the Plan as of June 30, 2014, and the changes during the six months then ended is presented below:
 
 
Stock Options
 
Weighted-Average
 Exercise Price
 
Weighted-Average
Remaining Contractual
Life (years)
Outstanding at December 31, 2013
     907,945
 
$
           6.54
   
Granted
       64,239
   
           3.76
   
Forfeited / Expired
    (113,012)
   
          7.60
   
Exercised
               -
   
               -
   
Outstanding at June 30, 2014
     859,172
 
$
           6.19
 
           4.24
Exercisable at June 30, 2014
     577,316
 
$
           6.99
 
           2.02
 
 
During the three and six months ended June 30, 2014, the total intrinsic value of stock options exercised was zero and the total fair value of options which vested was $0.7 million. During the three and six months ended June 30, 2013, the total intrinsic value of stock options exercised was zero and the total fair value of options which vested was $1.0 million. The aggregate intrinsic value of outstanding and exercisable stock options was $0.1 million, based on our $4.61 closing stock price at June 30, 2014. Compensation expense recognized in the consolidated statement of operations for stock options was $0.3 million and $0.1 million for the three months ended June 30, 2014 and 2013, respectively, before the effect of income taxes. Compensation expense recognized in the consolidated statement of operations for stock options was $0.4 million and $1.0 million for the six months ended June 30, 2014 and 2013, respectively, before the effect of income taxes. As of June 30, 2014, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $0.3 million, which is expected to be recognized over approximately 3.8 years.

Restricted Stock Grants

Restricted stock awards and restricted stock units may be granted under the Plan by the Compensation Committee. 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 for restricted stock awards. Restricted stock units generally vest pro rata at 25 percent each year over a four year vesting period. Our key employees who have been granted awards are typically subject to a four year vesting period, while members of our Board of Directors who have been granted awards are subject to a one year vesting period. The fair value of restricted stock awards and restricted stock units is based on the market price of our shares on the grant date.


 
-14-

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

 
A summary of the activity of non-vested restricted stock awards and restricted stock units under the Plan as of June 30, 2014, and the changes during the six months then ended is presented below:
 
 
Restricted Stock Awards
 
Restricted Stock Units
 
Restricted Stock
Awards
 
Weighted-Average
Grant Date Fair Value
 
Weighted-Average
Remaining Contractual
 Life (years)
 
Restricted Stock
 Units
 
Weighted-Average
Grant Date Fair Value
 
Weighted-Average Remaining Contractual Life (years)
Balance at December 31, 2013
     285,435
 
$
           5.24
     
       28,123
 
$
           3.88
   
Granted
       51,704
   
           3.72
     
       28,398
   
           4.37
   
Forfeited
      (10,944)
   
           5.46
     
        (8,660)
   
           3.98
   
Vested
    (185,258)
   
           4.87
     
               -
   
               -
   
Balance at June 30, 2014
     140,937
 
$
           5.16
 
           1.82
 
       47,861
 
$
           4.15
 
           2.00
                           
 
 
At June 30, 2014, the aggregate value of non-vested restricted stock awards and restricted stock units was $0.6 million and $0.2 million, respectively, before applicable income taxes, based on a $4.61 closing stock price at June 30, 2014. During the three months ended June 30, 2014 and 2013, the weighted-average grant date fair value of restricted stock awards, which vested was $0.9 million and $0.1 million, respectively. During the six months ended June 30, 2014 and 2013, the weighted-average grant date fair value of restricted stock awards, which vested was $1.0 million and $2.0 million, respectively. Compensation expense recognized in the consolidated statement of operations for restricted stock awards and units was $0.5 million and $0.1 million for the three months ended June 30, 2014 and 2013, respectively, before the effect of income taxes. Compensation expense recognized in the consolidated statement of operations for restricted stock awards and units was $0.6 million and $1.0 million for the six months ended June 30, 2014 and 2013, respectively, before the effect of income taxes. As of June 30, 2014, total unrecognized stock-based compensation expense related to restricted stock awards and units was approximately $0.4 million and $0.2 million, respectively, which is expected to be recognized over approximately 3.8 years.

Performance Stock Awards

Under the terms of the Plan, performance stock awards may be granted by the Compensation Committee to key executive employees. Performance stock awards are based on achieving key internal metrics measured at the end of each fiscal year over a three year performance period. If performance objectives are achieved as determined by the Compensation Committee, common stock is granted. The fair value of these awards is determined on the date of grant based on our share price. Compensation expense related to performance stock units is evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period.

A summary of the activity of performance stock units under the Plan as of June 30, 2014, and the changes during the six months then ended is presented below:
 
 
 
Performance Stock
 Units
 
Weighted-Average
Grant Date Fair Value
 
Weighted-Average
 Remaining Contractual
Life (years)
Balance at December 31, 2014
                   114,560
 
$
                         4.41
   
Granted
                             -
   
                             -
   
Forfeited
                    (78,514)
   
                         4.41
   
Vested
                             -
   
                             -
   
Balance at June 30, 2014
                     36,046
 
$
                         4.41
 
                           2.51
             
 
During the three and six months ended June 30, 2014, no performance stock units were granted. Performance stock units outstanding on June 30, 2014 are payable upon the achievement of certain internal metrics over a performance period of January 1, 2014 through December 31, 2016. As of June 30, 2014, there was no unrecognized compensation expense related to performance share unit awards.


 
-15-

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



11. Net Income (Loss) per Share

The following table presents a reconciliation of basic and diluted income (loss) per share computations (in thousands, except per share data and anti-dilutive stock option counts):

 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2014
   
2013
 
2014
   
2013
Numerator:
                 
Net income (loss)
$ (4,185 )   $ 8,092   $ (11,736 )   $ 33
                           
Denominator:
                         
   Weighted-average shares outstanding
  16,823       16,727     16,789       16,683
     Effect of unvested restricted stock awards
     considered participating securities
  -       233     -       297
   Weighted-average shares outstanding – basic
  16,823       16,960     16,789       16,980
     Effect of dilutive common stock options
  -       -     -       -
   Weighted-average shares outstanding – diluted
  16,823       16,960     16,789       16,980
                           
Net income (loss) per share - basic
$ (0.25 )   $ 0.48   $ (0.70 )   $ 0.00
                           
Net income (loss) per share - diluted
$ (0.25 )   $ 0.48   $ (0.70 )   $ 0.00
                           
Cash dividends declared per share1
$ -     $ -   $ -     $ 0.06
                           
Stock options and restricted stock units excluded from the calculation of diluted earnings per share
 because their effect would have been anti-dilutive
  774,000       1,395,000     799,000       1,635,000
 
1The Company suspended quarterly dividend payments during the second quarter of 2013.



 
-16-

 

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

12. Segment Reporting

Ambassador Programs and Other’s gross margin is comprised of gross receipts less direct program costs, including accommodations, transportation, speakers, facilitators, and event costs. BookRags’ gross margin is comprised of content and subscription and advertising revenues via www.BookRags.com, less affiliate commissions and amortization of intangible assets directly associated with sales.

Segment information for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

 
Three months ended June 30, 2014
     
Three months ended June 30, 2013
 
 
Ambassador Programs and Other1
               
Ambassador Programs and Other1
           
                     
 
BookRags
   
Consolidated
       
BookRags
   
Consolidated
 
Total revenue
$ 21,657     $ 1,055     $ 22,712       $ 23,453       $ 1,029     $ 24,482  
Gross margin
$ 18,869     $ 937     $ 19,806       $ 21,900       $ 903     $ 22,803  
Depreciation and amortization
$ 1,490     $ 180     $ 1,670       $ 1,255       $ 131     $ 1,386  
Operating income (loss)
$ 6,304     $ (9,831 )   $ (3,527 )     $ 12,165       $ 377     $ 12,542  
Income tax benefit (provision)
$ (1,815 )   $ 1,010     $ (805 )     $ (4,442 )     $ (169 )   $ (4,611 )
Net income (loss)
$ 4,635     $ (8,820 )   $ (4,185 )     $ 7,884       $ 208     $ 8,092  
                                                   
 
   
Six months ended June 30, 2014
Six months ended June 30, 2013
 
 
Ambassador Programs and Other1
         
Ambassador Programs and Other1
   
                       
 
BookRags
   
Consolidated
   
BookRags
   
Consolidated
 
Total revenue
$ 22,046     $ 2,063     $ 24,109     $ 25,347     $ 2,028     $ 27,375  
Gross margin
$ 19,049     $ 1,813     $ 20,862     $ 22,422     $ 1,773     $ 24,195  
Depreciation and amortization
$ 2,624     $ 353     $ 2,977     $ 2,419     $ 292     $ 2,711  
Operating income (loss)
$ (3,217 )   $ (9,495 )   $ (12,712 )   $ (960 )   $ 709     $ (251 )
Income tax benefit (provision)
$ (259 )   $ 954     $ 695     $ 265     $ (289 )   $ (24 )
Net income (loss)
$ (3,196 )   $ (8,540 )   $ (11,736 )   $ (387 )   $ 420     $ 33  
Total additions to property and equipment, net
$ 711     $ 241     $ 952     $ 1,600     $ 189     $ 1,789  
Total additions to intangibles
$ -     $ 146     $ 146     $ -     $ 164     $ 164  
Intangibles
$ -     $ 3,462     $ 3,462     $ -     $ 3,540     $ 3,540  
Total assets
$ 89,360     $ 6,518     $ 95,878     $ 108,061     $ 15,409     $ 123,470  

 

1Ambassador Programs and Other include all travel programs as well as corporate overhead.

Any intercompany sales or services provided are eliminated upon consolidation.

13. Supplemental Disclosures of Consolidated Statements of Cash Flows

Our non-cash investing and financing activities during the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):
 
 
June 30, 2014
 
June 30, 2013
Unrealized income (loss) on foreign currency exchange contracts
$
                  356
 
$
              (1,248)
Unrealized income (loss) on available-for-sale securities
$
                  267
 
$
                 (286)
Property and equipment
$
                     -
 
$
                   (10)

14. Line of Credit

The Company's credit agreement with Wells Fargo expired on June 1, 2014 and was not renewed.



 
-17-

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

 
15.  Commitments and Contingencies

On May 7, 2014, Anthony F. Dombrowik, our former interim Chief Executive Officer and Chief Financial Officer, was terminated by the Board of Directors.  In connection with Mr. Dombrowik’s departure, we entered into a separation agreement effective May 7, 2014.  Under the terms of the separation agreement, cash payouts of approximately $0.4 million are to be made to Mr. Dombrowik, all of which was  fully expensed during the second quarter of 2014 although , approximately $0.4 million remained to be paid during the  8 months following June 30, 2014.  Additionally, the separation agreement called for the immediate vesting of stock options and stock grants for Mr. Dombrowik in the amount of $0.2 million.

We are not a party to any material pending legal proceedings other than ordinary routine litigation incidental to our business, the outcome of which we believe will not have a material adverse effect on our business, financial condition, cash flows or results of operations.

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

Under our Bylaws, our directors and officers have 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, 2014.
 
 
 
-18-

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.
 
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 27, 2014. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Introduction

Ambassadors Group, Inc. is a leading provider of educational travel experiences and online education research materials primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer revenue model. We operate student and adult travel programs primarily using the People to People brand under a long-term exclusive license agreement. We have been traveling students on People to People programs for over 50 years and have over 500,000 alumni. We believe that our association with that brand and experience in the educational travel industry give us both a strong awareness in the market and a high level of credibility.

Our core program offering under the People to People brand is international destination trips for U.S. students in the 11 to 17 year old age group (“Student Ambassador Program”). Student Ambassador Programs make up the majority of our program offerings and are the center of our strategic focus. However, under the People to People brand, we also offer domestic destination travel programs for U.S. students and international students focused on leadership and education (“Leadership Ambassador Program”), as well as professional travel programs for adults (“Citizen Ambassador Program”).

Lastly, we operate BookRags (www.bookrags.com), an education oriented research website, which provides study guides, lesson plans and other educational resources to students and teachers. The site attracts students and teachers each month to its millions of pages of content, which includes internally developed material, licensed material, and user-generated content.

Our operating results depend primarily on the number of travelers who attend our programs (“travelers” or “delegates”), the fees we are able to charge for each traveler, net of pass-through expenses associated with non-directly delivered programs such as airfare and third-party tour operator fees (“total revenue”), and the direct costs associated with the traveler’s itinerary on directly delivered programs including airfare, hotel charges, meal costs, event and location fees, chaperone costs, tour manager fees, and the cost of in-country travel (“cost of sales”). Our business is highly seasonal, and our gross revenue and cost of sales are typically at their highest levels in the second and third quarters. Our marketing and sales efforts are conducted year-round and expenses are recognized when incurred.  Revenue associated with these marketing and sales expenses are generally recognized in the second and third quarter of the following fiscal year upon delegate travel.


 
-19-

 

Executive Summary

Our strategy is to maintain our high quality and unique out-of-classroom educational experiences while increasing our volume of business through multi-channel marketing and sales initiatives. In order to grow our business, our operating plans include the following: further integrating digital and social marketing into our methodology, introducing new conversion channels while refining existing avenues; building and preserving high quality customer relationships; engaging our customers year-round while offering a wider range of product offerings; and managing our cost structure to protect profitability.

Our second quarter of 2014 results reflect several initiatives intended to streamline the organization and continue our business focus toward our core Student Ambassadors programs.  During the quarter we evaluated the carrying value of BookRags and determined that its fair value was lower than its carrying value, resulting in a goodwill impairment of $9.7 million that has been recorded in restructuring costs.  In addition, we recorded an expense of $1.6 million related to the workforce reduction previously announced, and took an additional impairment charge of $2.0 million on our corporate headquarters building.  A purchase and sale agreement relating to the building was executed subsequent to the balance sheet date; therefore, pending the finalization of the sale  the carrying value will be reclassed to an asset held for sale during the third quarter of 2014.

Our summer travel season was delivered successfully from a customer perspective, and customer satisfaction continues to be very high.  Our marketing season for 2015 travel is underway with significant digital marketing, direct mail and local meetings taking place from August to November of this year.  In order to grow our Student Ambassadors traveler base, we are focused on web-based services integration into our traditional direct marketing channels intended to drive higher attendance at our information meetings, the targeting of qualified prospects, the conversion of generated leads and in improving our retention rate.

We are driving changes to our business and to our infrastructure in order to deliver a more efficient cost structure and improved financial results.  We believe that these changes, as well as our strong People to People brand, will ultimately deliver profitability, a stronger balance sheet and long-term shareholder value.





 
-20-

 

 

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2014 with the Three and Six Months Ended June 30, 2013

Consolidated financial results for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

 
 
Three Months Ended June 30,
 
2014
 
2013
 
$ Change
 
% Change
Total revenue
$
                     22,712
 
$
                     24,482
 
$
                       (1,770)
 
-7%
Cost of goods sold
 
                       2,906
   
                       1,679
   
                         1,227
 
73%
Gross margin
 
                     19,806
   
                     22,803
   
                       (2,997)
 
-13%
   Selling and marketing expenses
 
                       6,159
   
                       7,323
   
                       (1,164)
 
-16%
General and administrative expenses
 
3,510
   
2,938
   
                            572
 
19%
Restructuring costs
 
11,664
   
                             -
   
                       11,664
 
100%
Asset impairments
 
                       2,000
   
                             -
   
                         2,000
 
100%
Operating income (loss)
 
                      (3,527)
   
                     12,542
   
                     (16,069)
 
-128%
Other income
 
                          147
   
                          161
   
                            (14)
 
-9%
Income (loss) before income tax provision
 
                      (3,380)
   
                     12,703
   
                     (16,083)
 
-127%
Income tax provision
 
                         (805)
   
                      (4,611)
   
                         3,806
 
-83%
Net income (loss)
$
                      (4,185)
 
$
                       8,092
 
$
                     (12,277)
 
-152%
                     
                     
 
Six Months Ended June 30,
 
2014
 
2013
 
$ Change
 
% Change
Total revenue
$
                     24,109
 
$
                     27,375
 
$
                       (3,266)
 
-12%
Cost of goods sold
 
                       3,247
   
                       3,180
   
                              67
 
2%
Gross margin
 
                     20,862
   
                     24,195
   
                       (3,333)
 
-14%
   Selling and marketing expenses
 
                     13,152
   
                     15,842
   
                       (2,690)
 
-17%
General and administrative expenses
 
6,650
   
8,604
   
                       (1,954)
 
-23%
Restructuring costs
 
11,772
   
                             -
   
                       11,772
 
100%
Asset impairments
 
                       2,000
   
                             -
   
                         2,000
 
100%
Operating loss
 
                    (12,712)
   
                         (251)
   
                     (12,461)
 
4965%
Other income
 
                          281
   
                          308
   
                            (27)
 
-9%
Income (loss) before income tax benefit (provision)
 
                    (12,431)
   
                            57
   
                     (12,488)
 
-21909%
Income tax benefit (provision)
 
                          695
   
                           (24)
   
                            719
 
-2996%
Net income (loss)
$
                    (11,736)
 
$
                            33
 
$
                     (11,769)
 
-35664%
 

During the second quarter of 2014, we traveled 8,720 delegates compared to 9,228 delegates during the prior year quarter primarily due to lower delegates traveled on our core Student Ambassadors programs.  The prior year period includes Discovery Student Adventures traveled students affecting year-over-year comparability given our decision during the third quarter of 2013 to no longer operate these programs in 2014. Total revenue of $22.7 million declined 7.2 percent from $24.5 million in the prior year quarter driven by lower travel-related revenue. Gross margin for the quarter was $19.8 million compared to $22.8 million in the second quarter of 2013, and gross margin percentage was 34.2 percent compared to 36.5 percent in the prior year period.  The lower current period gross margin percentage is reflective of higher foreign exchange rates negatively impacting land vendor program costs year-over-year, as well as an inventory write-down of $0.6 million in the current period.  Year-over-year, the Company experienced a decrease of approximately $1.2 million in Student Ambassadors program gross margin, excluding the impact of the decline in delegates traveled year-over-year, $0.8 million of which is due to unfavorable Euro and British Pound rates hedged for 2014 travel compared to hedged rates for 2013 travel.
 
During the six months ended June 30, 2014, we traveled 8,903 delegates compared to 9,800 delegates during the same period in the prior year.  Total revenue of $24.1 million declined 11.9 percent from $27.4 million in the same period last year driven by the decline in travel-related revenue.  Gross margin for the six months ended June 30, 2014 was $20.9 million, down from $24.2 million in the same period last year, with gross margin percentage at 35.1 percent compared to the prior year at 37.0 percent.  The lower current period gross margin percentage is reflective of higher foreign exchange rates as well as an inventory write-down in the current period.
 
 
-21-

 
Selling and marketing expenses decreased approximately $1.2 million during the three months ended June 30, 2014 compared to the same period in 2013 mainly due to a reduction in total personnel costs as a result of the June 2014 reduction in staffing levels, as well an overall reduction in marketing spend.  General and administrative expenses increased approximately $0.6 million during the three months ended June 30, 2014 compared to the same period in 2013, primarily due to incurred expenses related to the separation of a former executive in the second quarter of 2014.  Additionally, we incurred approximately $11.7 million in restructuring charges and $2.0 million in asset impairments during the three months ended June 30, 2014 as discussed above.

Selling and marketing expenses decreased approximately $2.7 million during the six months ended June 30, 2014 compared to the same period in 2013 due to a purposeful reduction in marketing spend reflecting primarily a smaller winter and spring marketing campaign compared to one year ago, as well as lower personnel expenditures. General and administrative expenses decreased approximately $2.0 million during the six months ended June 30, 2014 compared to the same period in 2013, primarily due to lower separation and other related benefit expenses year over year.  Additionally, we incurred approximately $11.8 million in restructuring charges and $2.0 million in asset impairments during the six months ended June 30, 2014.

During the second quarter of 2014, we recorded a valuation allowance against our  deferred tax asset due to the loss recorded during the first six months of 2014.  This allowance resulted in a net income tax benefit of  approximately $0.7 million recorded for the first six months of 2014.  For additional information, see Note 9 to Consolidated Financial Statement 8.  For the first six months of 2013, we recorded an income tax provision using an effective income tax rate of 42.1 percent applied to pre-tax income. The difference from the statutory rate of 34 percent during 2013 was primarily due to the impact of tax exempt interest income on projected net loss for the year ending December 31, 2013.





























 
-22-

 
Results of Operations by Segment

Segment results of operations for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

 
Three months ended June 30, 2014
   
Three months ended June 30, 2013
 
 
Ambassador Programs and Other1
               
Ambassador Programs and Other1
             
                         
 
BookRags
   
Consolidated
     
BookRags
   
Consolidated
 
Total revenue
$ 21,657     $ 1,055     $ 22,712     $ 23,453     1,029     $ 24,482  
Cost of goods sold
  2,788       118       2,906       1,553       126       1,679  
Gross margin
  18,869       937       19,806       21,900       903       22,803  
Selling and marketing expenses
  5,827       332       6,159       6,948       375       7,323  
General and administrative expenses
  3,307       203       3,510       2,787       151       2,938  
Restructuring costs
  1,431       10,233       11,664       -       -       -  
Asset impairments
  2,000       -       2,000       -       -       -  
Operating income (loss)
  6,304       (9,831 )     (3,527 )     12,165       377       12,542  
Other income
  146       1       147       161       -       161  
Income (loss) before income tax benefit (provision)
  6,450       (9,830 )     (3,380 )     12,326       377       12,703  
Income tax benefit (provision)
  (1,815 )     1,010       (805 )     (4,442 )     (169 )     (4,611 )
Net income (loss)
$ 4,635     $ (8,820 )   $ (4,185 )   $ 7,884     208     $ 8,092  
                                               
 
Six months ended June 30, 2014
   
Six months ended June 30, 2013
 
 
Ambassador Programs and Other1
     
Ambassador Programs and Other1
         
                   
 
BookRags
   
Consolidated
     
BookRags
   
Consolidated
 
Total revenue
$ 22,046     $ 2,063     $ 24,109     $ 25,347     2,028     $ 27,375  
Cost of goods sold
  2,997       250       3,247       2,925       255       3,180  
Gross margin
  19,049       1,813       20,862       22,422       1,773       24,195  
Selling and marketing expenses
  12,499       653       13,152       15,051       791       15,842  
General and administrative expenses
  6,228       422       6,650       8,331       273       8,604  
Restructuring costs
  1,539       10,233       11,772       -       -       -  
Asset impairments
  2,000       -       2,000       -       -       -  
Operating income (loss)
  (3,217 )     (9,495 )     (12,712 )     (960 )     709       (251 )
Other income
  280       1       281       308       -       308  
Income (loss) before income tax benefit (provision)
  (2,937 )     (9,494 )     (12,431 )     (652 )     709       57  
Income tax benefit (provision)
  (259 )     954       695       265       (289 )     (24 )
Net income (loss)
$ (3,196 )   $ (8,540 )   $ (11,736 )   $ (387 )   420     $ 33  

 
1Ambassador Programs and Other include all travel programs as well as corporate overhead.
 

Key Performance Non-GAAP Financial Indicators

We analyze our performance on a net income, cash flow and liquidity basis in accordance with GAAP as well as on a non-GAAP operating, cash flow and liquidity basis referred to below as “non-GAAP operating results” or “non-GAAP cash flows and liquidity measures.” These measures and related discussions are presented as supplementary information in this analysis to enhance the readers’ understanding of, and highlight trends in, our core financial results. Any non-GAAP financial measure used by us should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.










 
-23-

 


Net Enrollments
 
Net enrollments on a forward looking basis consist of all active participants, which we define as those who have enrolled in our programs, including travel that has already been completed, less those who have already withdrawn for the travel year referenced. This is a point in time measurement that we use as an indication of expected future gross revenues for our travel programs.
 
     
As of July 28, 2014 and 2013
     
Delegates
Enrollment detail for travel year
   
2014
 
2013
Change
% Change
Student Ambassadors
   
                     12,256
 
                     13,849
                       (1,593)
-11.5%
Total, all programs
   
                     16,126
 
                     17,283
                       (1,157)
-6.7%

 

Deployable Cash

We use deployable cash as a liquidity measure, which is calculated as the sum of cash, cash equivalents, short-term available-for-sale securities and prepaid program costs and expenses, less the sum of accounts payable, accrued expenses and other short-term liabilities (excluding deferred taxes) and participant deposits. We believe the deployable cash measurement is useful in understanding cash available to deploy for current and future business opportunities, as it represents an estimate of excess cash available for capital deployment. This non-GAAP measure is based on conservative assumptions, such as all participants’ deposits being forfeited, and should not be construed as the maximum amount of cash sources available to run our business.

    Deployable Cash Reconciliation (in thousands)
 
June 30,
   
December 31,
 
 
2014
   
2013
   
2013
 
Cash, cash equivalents and short-term available-for-sale securities
$ 57,500     $ 55,852     $ 45,647  
Prepaid program cost and expenses
  17,918       26,354       7,069  
Less: Participants’ deposits
  (42,865 )     (49,458 )     (26,362 )
Less: Accounts payable / accruals / other liabilities
  (7,248 )     (6,745 )     (3,706 )
Deployable cash
$ 25,305     $ 26,003     $ 22,648  

 
Free Cash Flow

Free cash flow is calculated as cash flow from operations less the purchase of property, equipment and intangible assets. Management believes this non-GAAP measure is useful to investors in understanding the cash generated or distributed within the current period for future use in operations.

   Free Cash Flow Reconciliation (in thousands)
 
 
Six months ended June 30,
 
  2014     2013    
$ Change
 
Net cash provided by operating activities
$ 12,988     $ 23,415     (10,427 )
Purchase of property, equipment and intangibles
  (1,098 )     (1,963 )   865  
Free cash flow
$ 11,890     $ 21,452     (9,562 )





 
-24-

 

Liquidity and Capital Resources
 
Total assets at June 30, 2014 were $95.9 million, of which 60.0 percent, or $57.5 million, were cash, cash equivalents and short-term available-for-sale securities. At that date, we also had long-lived assets totaling $19.0 million primarily related to our office building, technology hardware and systems used to deliver our services, and intangible assets almost exclusively related to our BookRags segment.  During the second quarter of 2014, we recognized restructuring and other asset reduction charges that resulted in the impairment of goodwill recorded from the purchase of BookRags of $9.7 million, as well as an additional write-down of $2.0 million to the carrying value of our corporate headquarters building.  Total liabilities at June 30, 2014 were $50.2 million, including $42.9 million in participant deposits for future travel.
 
Net cash provided by operations was $13.0 million during the six months ended June 30, 2014 compared to net cash provided by operations of $23.4 million during the six months ended June 30, 2013. This $10.4 million decrease was primarily due to lower net income and a $7.2 million unfavorable change in participant deposits due to a lower delegate count compared to 2013.
 
Net cash used in investing activities was $11.8 million during the first six months of 2014 compared to $21.5 million during the first six months of 2013. The decline in cash used in investing activities during the current period was primarily due to a reduction in the net purchases of available-for-sale securities, as well as lower spend on capital projects.
 
Net cash used in financing activities was $0.3 million and $3.6 million during the six months ended June 30, 2014 and 2013, respectively.  The prior year period included excess tax benefits associated with the cancellation of expired stock compensation benefits and the repurchase of our common stock through buybacks and share surrenders of $2.6 million compared to $0.2 million in the current year period.  In addition, the prior year period included $1.0 million paid in stockholder dividends that did not recur in 2014.
 
On June 1, 2014, our credit agreement with Wells Fargo Bank, National Association, expired and was not renewed.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business.  We consider that our most critical accounting estimates are related to the valuation of available-for-sale securities, valuation of goodwill, intangible assets, and long-lived assets, foreign currency exchange contracts, revenue recognition, and contingencies and litigation as they require us to make assumptions that may be highly uncertain at the time the accounting estimates were made and changes in them are reasonably likely to occur from period to period.  There are other items within our consolidated financial statements that require estimation but are not deemed to be critical.  Changes in estimates used in these and other items could have a material impact on our consolidated financial statements. For a more complete discussion, please refer to our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed on March 27, 2014.
 

 
 

 
-25-

 
 
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures
 
As of June 30, 2014, the end of the period covered by this report, our interim chief executive officer and principal financial officer reviewed, evaluated and concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective.  These controls and procedures are designed to ensure information required to be disclosed in our Form 10-Q filed or submitted under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and has been accumulated and communicated to our management including our interim chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
(b) Changes in internal control over financial reporting
 
In the six months ended June 30, 2014, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
-26-

 
PART II
OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On various dates between May 2004 and May 2011, our Board of Directors authorized the repurchase of shares of our Common Stock in the open market or through private transactions (the “Repurchase Plan”). During the quarter ended June 30, 2014, there were no shares repurchased under the Repurchase Plan. As of June 30, 2014, approximately $13.1 million was available to repurchase shares of our Common Stock under the Repurchase Plan.

Item 6. Exhibits

   
10.1
Employment Agreement by and between the Company and Philip B. Livingston, incorporated by reference to the Company’s Form 8-K filed May 19, 2014.
   
            10.2
Real Property Purchase and Sale Agreement and Escrow Instructions by and between Ambassadors Group, Inc., Northwest Farm Credit Services, FLCA and First American Title Insurance Company dated as of August 6, 2014. (1)
 
31.1  
 
Certification under Section 302 of the Sarbanes-Oxley Act of 2002. (1)
 
31.2
Certification under Section 302 of the Sarbanes-Oxley Act of 2002. (1)
   
32.1  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002. (2)

(1) Filed herewith.

(2) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 
 
 
-27-

 

 
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 12, 2014
By:
/s/ PHILIP B. LIVINGSTON
   
Philip B. Livingston,
   
Interim Chief Executive Officer
(Principal Executive Officer)
   
 


 
-28- 

 
 
EXHIBIT INDEX
 
         
         
 
10.1
Employment Agreement by and between the Company and Philip B. Livingston, incorporated by reference to the Company’s Form 8-K filed May 19, 2014.
   
         
  10.2  Real Property Purchase and Sale Agreement and Escrow Instructions by and between Ambassadors Group, Inc., Northwest Farm Credit Services, FLCA and First American Title Insurance Company dated as of August 6, 2014. (1)    
         
 
31.1  
Certification under Section 302 of the Sarbanes-Oxley Act of 2002. (1)
   
 
 
32.1  
Certification under Section 906 of the Sarbanes-Oxley Act of 2002. (2)
   
 
(1) Filed herewith.
 
(2) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.