Filed with the SEC from May 26 to June 01:
Ambassadors Group (EPAX)
Mill Road Capital disclosed that it owns 902,588 shares (5.1% of all voting shares). The fund group bought its stake for $8.78 million, or approximately $9.73 per share.
Ambassadors Group, Inc. (âAmbassadors,â âCompany,â âwe,â âusâ or âourâ) is a leading educational company. Our primary operations focus is on organizing and promoting worldwide travel programs for students, athletes and professionals. Our programs seek to educate, inspire intellectual exchange, and develop the cultural intelligence of our participants. In addition, we operate an online education oriented research site called BookRags that provides millions of pages of content to students and teachers focused on literature.
We were founded in 1967 and reincorporated in Delaware in 1995. We operated as Ambassadors Education Group, a wholly owned subsidiary of Ambassadors International, Inc. (âInternationalâ) until February 2002. Effective February 28, 2002, Ambassadors spun off from International through a special stock dividend to Internationalâs shareholders (the âDistributionâ). Beginning March 1, 2002, we began operating as an independent stand-alone company. Since that time we have traded our common stock on the NASDAQ Stock Market under the symbol âEPAX.â Our principal offices are located in Spokane, Washington, USA.
Our travel business consists of several specialized private-label educational travel programs. Our leading program is People to People Student Ambassador Programs (â Student Ambassador Programs â), which provide opportunities for grade school, middle school and high school students to visit foreign destinations to learn about the history, government, economy and culture of such countries.
In addition, we operate three other programs under our core People to People offering. People to People Sports Ambassador Programs (â Sports Ambassador Programs â), provides opportunities for middle school and high school athletes to participate in international sports challenges. The âPeople to People Leadership Summitâ and âWorld Leadership Forumâ (â Leadership Programs â), provide domestic travel experiences for grade school, middle school and high school students emphasizing leadership, community involvement, and government education. Lastly, People to People Citizen Ambassador Programs (â Citizen Ambassador Programs â ) provides foreign travel experiences for professionals with emphasis on meetings and seminars between delegates and persons in similar professions abroad.
We operate these four programs using the People to People brand. People to People International (âPeople to Peopleâ) is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. We license from them the exclusive right to develop and conduct student programs for kindergarten through high school students using the People to People name. We also have the non-exclusive right to develop, market and operate programs for professionals, college students and athletes using the People to People name.
Ambassadors and its predecessor companies have operated People to People travel programs since 1967. In that time we have organized programs for nearly 500,000 students, athletes, and adults. Our educational travel programs feature visits abroad, including, but not limited to, Antarctica, Australia, Belgium, China, France, Germany, Great Britain, Italy, Ireland, Netherlands, Switzerland and Wales. In 2010, 26,657 delegates, including students from 90 different countries, traveled on our programs to 45 countries on all seven continents. Our current agreements with People to People expire in 2020 with potential for renewal. Our travel programs under the People to People brand drive our corporate mission: to bridge cultural and political borders through education and exchange, making the world a better place for future generations.
We believe that our 44 years of continuous experience and relationships arising from organizing travel programs provide the foundation for our Company. This foundation allows us to develop and maintain strong strategic alliances and a competitive edge in the educational and travel industries at a competitive program cost. This foundation also allows us to provide high-quality and unique educational programs and customer service. We intend to continue to grow our business internally through marketing enhancements, new programs and strategic alliances, and seeking selective acquisitions of or joint ventures with travel, education, and direct marketing related businesses.
In 2009 we began a start-up student travel venture under our subsidiary World Adventures Unlimited, Inc. (âWorld Adventures Unlimitedâ). It operates under the name Discovery Student Adventures (âDSAâ) and provides opportunities for grade school, middle school and high school students to visit destinations with an emphasis on adventure and scientific exploration. We traveled our first full travel season for DSA in 2010. Start-up costs have been consolidated into our results of operations since January 15, 2009.
We operate this business under an exclusive license from Discovery Education, Inc. (âDiscovery Educationâ). Under the agreement we develop and conduct international student programs for kindergarten through high school students using the Discovery Education marks. Currently all of our destinations are to foreign locations, however we have the first right of refusal to develop, market and operate programs for students to domestic destinations as well. These agreements with Discovery Education expire in 2014 with potential for renewal.
On May 15, 2008, we acquired 100 percent of the stock in the educational website BookRags, Inc. (âBookRagsâ) ( www.BookRags.com ). BookRags, founded in 1999, was initially started as a source for online book summaries and notes, and has grown to include a wide variety of content, including lesson plans, film summaries, biographies, and literary criticisms. The BookRagsâ demographic is similar in nature to that of Ambassador Programs, Inc. (âAmbassador Programsâ) and although it is not travel related, BookRags is a complementary fit to our educational travel model in relation to marketing opportunities, as well as the seasonality of our travel business. BookRags has been consolidated into our results of operations since May 15, 2008.
The following presents more detailed information about our business lines and operations:
Student Ambassador Programs
Our Student Ambassador Programs provide an educational opportunity for students in grade school, middle school and high school to travel to one or more foreign countries, and to learn about the history, government, economy and culture of such countries. We market our Student Ambassador Programs predominantly through a combination of direct mail and local informational meetings primarily from August through February. Our representatives review candidate applications and conduct selection interviews throughout the country. Accepted applicants participate in orientation meetings to prepare for their educational travel programs.
Our Student Ambassador Program delegations depart mostly during the summer months, June through August, and generally travel for approximately fourteen to twenty-three days, during which time each delegation visits one or more countries. Each delegation generally consists of 30 to 40 students and is accompanied by several teachers and local guides in each country who assist the delegations for the duration of each program. Teachers and students composing a delegation usually come from the same geographic area.
Programs are designed by a staff of international planners and researchers to provide an educational and entertaining travel experience by exposing students to the history, government, economy and culture of the country or countries visited. We have contracts with program coordinators to provide day-to-day coordination and oversight of the programs. In many instances, we also provide students with the opportunity for a brief stay with a host family, which gives students a glimpse of daily life in the visited country.
Eligible students who complete certain written assignments and other projects can receive high school and university credit for their participation in the program. Universities recognizing academic credit include, but are not limited to: Stanford University; Princeton University; Yale University; the University of California, Los Angeles; the University of Washington; Massachusetts Institute of Technology; Brown University; Johns Hopkins University; Columbia University; Cornell University; Dartmouth College and Georgetown University. In addition, high school students who successfully complete the program may be eligible to receive service-learning credits, which have become a high school graduation requirement in many curricula countrywide.
Other Travel Programs
Sports Ambassador Programs
Our Sports Ambassador Programs provide an opportunity for student athletes in middle school and high school to explore the host countryâs culture and participate in international tournaments with teams from across the world in the sport of soccer. We market our Sports Ambassador Programs by establishing a local presence through ongoing relationship building with associations, recruiting events and online efforts throughout the year. We have also partnered with key organizations to promote our programs during their national conventions and at local and national tournaments. Athletes depart during the summer months, June through August, and travel for approximately fourteen days. Athletes compete in tournaments and participate in sports nutrition, psychology, leadership, physical training and international cultural excursions. Eligible athletes who complete certain written assignments and projects can receive university credit for their participation in the program. Universities recognizing academic credit include those listed previously in the âStudent Ambassador Programsâ section above.
Our Leadership Programs provide the opportunity for motivated students in fifth through twelfth grades from over 80 countries with academic promise, leadership potential and a desire to serve their communities to travel domestically to exchange ideas with renowned speakers, field specific experts, professional educators and their peers. In addition to the academic coursework, delegates engage in specially designed leadership study, team-building and leadership-building exercises. Students travel throughout the year for approximately five to ten days. Leadership Programs include group discussions, workshops, educational meetings and other social and recreational activities. We organize and operate all activities of most of our Leadership Programs, including speakers, facilitators, events, accommodations and transportation. Delegates traveling on our Leadership Summit programs, grades nine through twelve, may be eligible to receive transferable high school or university credits as part of the academic program. Universities recognizing academic credit include those listed previously in the âStudent Ambassador Programsâ section above. In addition, students who successfully complete the program may be eligible to receive service-learning credits, which have become a high school graduation requirement in many curricula countrywide.
Citizen Ambassador Programs
Our Citizen Ambassador Programs provide professionals with common interests the opportunity to travel abroad to meet and exchange ideas with foreign citizens who have similar backgrounds, interests or professions. Citizen Ambassador Programs travel throughout the year and for eight to twelve days, with an optional additional cultural exchange prior to or following each program. Professional programs have been conducted in such areas as agriculture, economics, education, law, medicine and science. Many of our professional programs provide continuing educational credit for the delegates as part of the program experience. Continuing education credits are granted through alliances with professional and academic institutions, including the Wilderness Medical Society, the American Bar Association, various State Bar Associations, the University of Pittsburgh, and other professional associations and societies.
Discovery Student Adventures
Discovery Student Adventures is currently in the early stages of its life cycle as compared to our other program offerings. This program provides students age ten through eighteen and their teachers an opportunity to feed their curiosity about the world and experience rare and adventurous activities. As is suited to programs associated with Discovery Education, the trips provide immersive education in the sciences and personal access to researchers and experts in biology, ecology, geology, and other fields. Trips are seven to sixteen days in length and take place each spring and summer to destinations from the Arctic to South Africa. Educators leading the trips may be eligible for continuing education credit, and students in grades nine through twelve may choose to earn transferable high school credit as part of the academic program. In addition, students who successfully complete the program may be eligible to receive service-learning credits, which have become a high school graduation requirement in many curricula countrywide.
The BookRagsâ website, www.BookRags.com , is an educational website that provides book summaries, critical essays, online study guides, lesson plans, biographies and references to encyclopedia articles. The site attracts millions students and teachers each month to its millions of pages of content, including BookRags-created material, licensed material, user-generated content, and other third party content. Due to the nature of this business and the users of the website, most of BookRagsâ revenues are earned during the traditional school year or the months of September through June.
Our operations are organized in two reporting segments, 1) âAmbassador Programs and Other,â which provides educational travel services to students, professionals, and athletes through multiple itineraries within five travel program types and corporate overhead, and 2) âBookRags,â which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles. See Note 14, â Segment Reporting ,â in our consolidated financial statements in this Form 10-K for further segment information.
Since 2004, we have been academically accredited through the Northewest Accreditation Commission ("NWAC"), formerly known as the Northwest Association of Accredited Schools. Our Washington School of World Studies provides an opportunity for high school students to earn academic credit through their participation in the youth travel programs. The courses offered by the Washington School of World Studies emphasize the total learning experience of the participant while preparing for and participating in the selected program. In addition to elective academic credit, students are eligible to earn service-learning credits on select programs after successfully completing the course requirements. Since inception, the Washington School of World Studies has granted approximately 195,000 academic and service-learning credits.
Since 2007, we have been able to provide teacher leaders with continuing education units from their study and work as leaders through the International Association for Continuing Education and Training (âIACETâ). As an authorized IACET provider, we have granted approximately 2,900 continuing education units.
Our delegates and teacher leaders are also able to earn academic credit through Eastern Washington Universityâs Eisenhower Center (âEWUâ). Student Ambassadors in grades nine through twelve may enroll in EWU courses and earn up to 12 credits. In addition, Student Ambassadors in grades seven and eight are eligible to earn one credit per course. Teacher leaders many enroll in EWU courses and earn up to five credits. Between 1980 and 2010, Student Ambassadors transferred more than 42,700 college credits from EWU to universities of their choice. Since 2006, teacher leaders have earned more than 2,000 college credits from EWU.
Continuing education credits for our Citizen Ambassador Programs are offered through alliances with the Wilderness Medical Society for the provision of CME credits for physicians, the University of Pittsburgh School of Nursing for CNE credits for nurses, various State Bar Associations for CLE credits for lawyers, and through credit hours individually approved through associations such as the National Association of Social Workers, American Counseling Association, American Occupational Therapy Association, and the Society for Human Resource Management.
An alliance with Full On (Europe) Limited provides adventure and quality for our Student Ambassador Programs. This agreement prescribes the nature, scope and pricing of the travel services provided to our delegates.
We have initiated an alliance with the Cultural Intelligence Center to research and assess the impact on youth that our Student Ambassador Programs provide, using an academically validated tool.
A partnership alliance with the National Teacher of the Year Program (a project of the Council of Chief State School Officers) allows People to People Ambassador Programs to support to the most recognized teachers in the United States and its territories as part of our education leadership platform.
Our Citizen Ambassador Programs have also entered into alliances and collaborative relationships with various professional associations for the purpose of developing and providing professional exchange programs that suit the needs of their members. Such professional associations include the American Speech-Language-Hearing Association, the Society for Human Resource Management, the National Association of Social Workers, the Air and Waste Management Association, the American College of Physician Executives, the American College of Sports Medicine, the American Dental Hygienists' Association, the American Organization of Nurse Executives, the American Public Works Association, the American Society of Safety Engineers, the Financial Planning Association, the American Association on Intellectual and Development Disabilities, ASCD (formerly the Association for Supervision and Curriculum Development), and the Healthcare Financial Management Association.
Service and Trademarks
We have registered or applied for a variety of service and trademarks including, but not limited to, the names âPeople to People Ambassador Programs,â âPeople to People Student Ambassador Programs,â âPeople to People Sports Ambassador Programs,â âPeople to People Citizen Ambassador Programs,â âPeople to People Leadership Programs,â âBookRagsâ and âSociety for Global Citizens.â In addition, we have the right, subject to certain exceptions, to use the âPeople to Peopleâ and âDiscovery Education,â service, trademarks and logos for use in our marketing. We believe that the strength of our service and trademarks is valuable to our business and intend to continue to protect and promote our marks as appropriate.
We maintain insurance coverage that we believe is adequate for our business, including, but not limited to, professional and general liability insurance and leased real property and personal property insurance on a replacement cost basis. There is no assurance that the insurance maintained by us will be adequate in the event of a claim, that such insurance will cover a claim or loss, or continue to be available in the future.
On December 31, 2010, we employed 221 employees, of which 212 were full-time employees. Of our full-time employees, 186 are located in Spokane, Washington, 11 are located in Seattle, Washington, five are located in Portland, Oregon, six are located in Washington, D.C, and four are located in various states across the United States to serve as local field representatives. We also employ a temporary workforce throughout the year to assist with the seasonal needs of our business, which has been as high as 30 individuals during the last year. None of our employees are subject to collective bargaining agreements or are represented by a union. We believe that our labor relations are good.
The travel industry and specifically the educational segment within the travel industry are highly competitive. Our Student Ambassador Programs, Sports Ambassador Programs, Leadership Programs and Discovery Student Adventures compete with similar educational travel programs operated by other individuals and organizations, as well as independent programs organized and sponsored by local teachers with the assistance of local travel agents. Our Citizen Ambassador Programs compete with independent professional associations and educational institutions, which sponsor and organize their own travel programs through the assistance of local travel agents, and other organizations that design travel programs and continuing professional education for adults.
We believe that the principal basis of competition in the educational travel segment of the market is the quality and uniqueness of the educational program offered, approach to safety, customer service, and reputation as a premium price program. We believe that our 44 years of experience organizing student and professional educational programs and established relationships with public officials, organizations and residents in countries where we provide programs, as well as our agreements with People to People and Discovery Education, allow us to provide an educational opportunity that is not readily duplicated by competitorsâ programs.
We believe the barriers to entry are relatively low for any future competitors. Certain organizations engaged in the travel business could have substantially greater financial, marketing and sales resources than we do. There can be no assurance that our present or future competitors will not exert significant competitive pressures on us in the future.
In addition to competition we face in the travel industry, we also face significant competition from a wide variety of content and media Web properties with companies throughout the world. Content and advertising on the internet are intensely competitive and have been rapidly evolving with converging technologies. We compete with many larger Web properties that have larger staff dedicated towards selling and advertising and have more traffic to offer potential advertisers. We anticipate that this competition will increase over time as online usage continues to grow. We believe that the internet still offers a more attractive and measurable advertising option than traditional off-line media including television, radio, billboard, magazine, and newspaper.
We are subject to the informational requirements of the Exchange Act that require us to file reports, proxy and information statements, and other information with the SEC. The public may read and copy our filings at the SECâs Public Reference Room, 100 F. Street, N.E., Washington, D.C. 20549. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Similarly, we maintain a website at www.AmbassadorsGroup.com, where we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practical after, or on the same day as, such material is electronically filed with or furnished to the SEC. We make these available free of charge.
Daniel G. Byrne has served as a director of the Company since May 2005. Since 1983, Mr. Byrne has served as executive vice presidentâfinance, chief financial officer and assistant secretary of Sterling Financial Corporation. On January 31, 2011, Daniel G. Byrne became the director of corporate development of Sterling Financial Corporation. He is also the assistant secretary of Golf Savings Bank. Before joining Sterling, Mr. Byrne was employed by the accounting firm of Coopers & Lybrand in Spokane, Washington. He is a past lieutenant governor of Kiwanis International. Mr. Byrne is a past member of the Board of Trustees, its Executive Committee and the Finance Committee for Gonzaga Preparatory School. He is also president of the Board of Directors of Spokane Community Mental Health. He serves as a member of the American Institute of Certified Public Accountants, the Washington Society of Certified Public Accountants, the Financial Managerâs Society and the American Community Bankers Association and its Accounting Committee. Mr. Byrne is a certified public accountant and graduated from Gonzaga University in 1977 with a bachelorâs degree in Accounting. Mr. Byrne was selected to serve as a member of our Board of Directors because of his vast experience in the banking industry, his professional background and experience in business administration, accounting, operational management, and risk management. This experience lends much support to his leadership and oversight of the products and services offered by the Company. In addition, Mr. Byrneâs guidance and expertise on accounting, financial and investment matters qualifies him well to perform the audit committeeâs oversight role and provides valuable insight to the Companyâs various business functions.
Rafer L. Johnson has served as a director of the Company since November 2001 and as a director of Ambassadors International, Inc. since 1995. Mr. Johnson is a world and Olympic record holder in the decathlon. Mr. Johnson devotes a substantial amount of his time to intellectually and physically disabled children and adults. He has been associated with California Special Olympics since its inception in 1969, served as the president of its board of directors for 11 years, and currently is chairman of its board of governors. He has been appointed to national and international foundations and presidential commissions, with a concentration on youth development. Mr. Johnson also is national head coach for Special Olympics International and a member of its board of directors. In addition, Mr. Johnson serves on a variety of special boards and committees in the worlds of sports and community services. In the early 1960s, Mr. Johnson became affiliated with the international peace movement of âPeople to Peopleâ and was instrumental in establishing chapters on college campuses nationwide. Mr. Johnson has spent many years before and after his Olympic triumph spreading the message of peace as an international ambassador of goodwill and in 1984 he received the distinctive honor of lighting the Olympic flame at the games in Los Angeles, California. Mr. Johnson was selected to serve as a member of our Board of Directors because he brings to the board over 40 years of diverse experience in the Special Olympics and athletic industry. His extensive understanding of these challenging aspects of this industry, together with his demonstrated leadership and management ability at senior levels, provides the Company with valuable industry-specific awareness and experience. In addition, Mr. Johnsonâs early leadership and development with the international peace movement of People to People provides him with an important perspective and oversight to the Companyâs core brand, foundations, youth and education development for the products and services offered by the Company. Mr. Johnsonâs service on other special boards and committees in the worlds of sports and community service adds a depth of knowledge and essential insight and his subsequent civic capacities are a valuable asset to the Company.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 âKey Performance Non-GAAP Financial Indicatorsâ below. Key macro-economic factors and non-financial indicators that affect our financial condition and operating performance are: economic stability; consumer confidence; unemployment rates; currency fluctuations; interest rates; airline practices; political climates; terrorism; military actions; and natural disasters.
As further discussed below , our operating results depend primarily on the revenue we earn from our travel programs and costs associated with providing these programs. Our business is highly cyclical. The majority of our sales and marketing expenses are incurred during the third and fourth quarter of the current year in order to acquire customers that result in revenue recognized in the subsequent second and third quarters of the next fiscal year. More specifically, we will not recognize the majority of the revenue generated by our 2010 sales and marketing efforts until the second and third quarters of 2011.
Our focus in 2010 has been to utilize new and existing sales and marketing strategies to develop growth in our 2011 enrollments, specifically in our core program, the Student Ambassador product line, develop customer service effectiveness, retain and safely travel enrolled delegates, cultivate new business opportunities, manage expenses, increase efficiency through improved business processes and automation, develop our websites and associated traffic, make the best use of our cash, and improve brand recognition. Although 2010 financial performance was substandard, we are pleased to be experiencing growth, although modest, and will be working to build upon the momentum we have started.
Some of our 2010 highlights include the following:
Ended year with $8.1 million in net income, or $0.42 diluted earnings per share in a challenging economic environment.
2010 gross margin held strong at 40.8 percent on gross revenue of $162.0 million compared to 41.1 percent on gross revenue of $203.7 million in 2009.
Operating expenses for 2010 up $2.4 million to $56.0 million from $53.6 million in 2009 as the Company drives revenue generating activities and positions for economic recovery.
Successfully accomplished our outsourcing initiative related to our print and production facilities, which will allow us greater agility in meeting direct marketing demands. This operational change added $1.6 million of expense to 2010 results in the form of equipment impairment, loss on disposal, and separation payments.
Completed fall and winter marketing campaigns for 2011 travel season; resulting in growth in overall enrolled revenue for 2011 travel programs compared to one year ago.
Developed new marketing and retention initiatives centered around more personal touch points, enhanced lead management, and better tools for teachers.
Net promoter scores for Ambassador Programs in 2010 increased 5 percent to about 65 from 62 in 2009, an indicator that our travelers associate their experience with us and our programs with world-class service organizations such as Apple and Starbucks. Discovery Student Adventures operated their inaugural travel season and received a net promoter score of 66 from students and teachers, ranking them among best in class companies for customer satisfaction.
BookRags launched its new direct advertising model to capitalize the changing internet advertising landscape and build upon its traditional revenue sources. While returning revenue slower than originally anticipated the action is having a positive impact in 2011.
Distributed $18.0 million back to our shareholders in the form of dividends and an active share repurchase program.
Continued financial health evident by our strong balance sheet with quality assets, no debt outstanding and adequate liquidity.
Going forward, we will continue to focus on growing our business while strategically managing costs. We will be working to achieve growth through traditional program offerings, exploring new program offerings, and developing our direct advertising revenue through BookRags. We plan to deliver on these plans through maximizing our marketing campaigns with the assistance of our third-party vendors, enhanced retention efforts, and directing energy to innovation, quality, customer service, and financial discipline.
Our focal points include the following:
Increase enrollments for future travel seasons through enhanced sales and marketing initiatives as we incorporate benefits of outsourcing our print and production processes and leverage our current cost structure.
Continue to improve retention of current enrollments through improving the delegate experience, educating delegates and teachers regarding fundraising, and maintaining the customerâs emotional excitement between enrollment and travel.
Realize operating margin improvement through steady revenue growth, leverage of fixed cost structure, and responsible deployment of variable operating expenses.
Maintain or improve upon high quality and the Net Promoter customer satisfaction ratings received on our travel programs.
Maximize capital allocation strategies and shareholder return.
Key Performance Non-GAAP Financial Indicators
We analyze our performance on a net income, cash flow and liquidity basis in accordance with generally accepted accounting principles (âGAAPâ) as well as on a non-GAAP operating, cash flow and liquidity basis referred to below as ânon-GAAP operating resultsâ or ânon-GAAP cash flows and liquidity measures.â These measures and related discussions are presented as supplementary information in this analysis to enhance the readersâ 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 on a forward looking basis consist of all participants who have enrolled in our programs less those that have already withdrawn. As of February 6, 2011, we had 28,158 net enrolled participants for our 2011 travel programs, compared to 29,307 net enrolled participants as of the same date last year for our 2010 travel programs. Despite the 3.9 percent decline in net enrollments, the associated enrolled revenue for 2011 increased 1.4 percent primarily due to a 6.6 percent increase in our core Student Ambassador Programs. We believe the growth in our core Student Ambassador Programs is related to our concentrated sales and marketing efforts coupled with the continued benefit from the value proposition of an international program and how it can prepare students for global competition. This non-GAAP measure relates to our travel programs only and does not include anticipated revenue for BookRags.
During 2010, 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 maintaining a current ratio greater than 1.5, deployable cash greater than zero, tangible net worth greater than $40.0 million and net income after taxes greater than $4.0 million. At December 31, 2010, 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. For additional information regarding our line of credit, see Note 8, â Line of Credit ,â to the consolidated financial statements in this Form 10-K
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 this Form 10-K.
We classify our marketable debt investments as available-for-sale securities, which are carried at fair value. Unrealized gains and losses on available-for-sale securities are excluded from operations and reported as accumulated other comprehensive income, net of deferred income taxes. Realized gains and losses on the sale of available-for-sale securities are recognized on a specific identification basis in the consolidated statement of operations in the period the investments are sold.
We evaluate investment securities for other-than-temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other-than-temporary, then the amount of other-than-temporary impairment recognized in the consolidated statement of operations depends on whether we intend to sell the investment securities or more likely than not will be required to sell the investment securities before recovery of the amortized cost. There were no investment securities that management identified to be other-than-temporarily impaired during the year ended December 31, 2010. We do not intend and are not required to sell the debt securities before we have recovered the amortized cost basis of the securities, we expect to recover the entire amortized cost basis of the securities and we continue to receive interest at the coupon rate. Realized losses could occur in future periods due to a change in our intent to hold the investments until recovery of the amortized cost, a change in our assessment of credit risk, or a change in regulatory or accounting requirements. Significant increases or decreases in the aggregate fair value of our available for-sale securities may affect our liquidity and capital resources, although we believe the credit ratings of the investments held substantiate this risk as low.
In determining whether the current financial environment will have an impact on the fair value of these investments, we considered the following for each bond and ARS held: the individual ratings of the investment, the underlying rating of the issuer irrespective of the insurance; the performance of the issuer; the term of the bond; the quality of bond insurance provided by the rating of the bond insurer; and the fair value as of each reporting date. At the reporting dates and in the future, we recognize that these investments are subject to general credit, liquidity, market and interest rate risks. The fair value of these investments accordingly will continue to change, and we will continue to evaluate their carrying values.
For additional information regarding our investments, see Note 4, â Investments and Fair Value Measurement,â to the consolidated financial statements in this Form 10-K.
Foreign Currency Exchange Contracts
The majority of our travel programs take place outside of the United States and most foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to foreign currency risk relative to changes in foreign currency exchange rates between those currencies and the U.S. dollar. Our processes include a program to provide a hedge against certain of these foreign currency risks, and we use forward contracts that allow us to acquire the foreign currency at a fixed price for a specified point in time. All of the derivatives are cash flow hedges and qualify for cash flow hedge accounting at December 31, 2010.
We account for these foreign exchange contracts and options in accordance with GAAP, which requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. For qualifying cash-flow hedge transactions in which we are hedging the variability of cash flows related to a forecasted transaction, changes in the fair value of the derivative instrument are reported in other comprehensive income. The gains and losses on the derivative instruments that are reported in other comprehensive income are reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of hedged transactions is recognized in current period earnings. Unrealized gains and losses on foreign currency exchange contracts that are not qualifying cash-flow hedges are recorded in the statement of operations.
For additional information regarding our foreign currency exchange contracts, see Note 5, â Derivative Financial Instrument,â to the consolidated financial statements in this Form 10-K.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2, â Summary of Significant Accounting Policies ,â to the consolidated financial statements in this Form 10-K. As described in Note 2, we are required to make estimates and assumptions that affect the reported disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business.
We consider that our most critical accounting estimates are related to the valuation of available-for-sale securities, valuation of goodwill and intangible assets, 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.
Management evaluates available-for-sale securities for other-than-temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other-than-temporary, then a loss would be recorded in the income statement. Key components of this evaluation include knowledge of the underlying investment security and the length of the decline in market price.
Intangible Assets and Goodwill
Goodwill and intangible assets deemed to have an indefinite life are not amortized and are subject to impairment tests, at least annually, which compare the carrying amount of the reporting unit to the fair value of the reporting unit. Intangible assets with definite lives are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Key components of these valuations include managementâs forecast of operating revenues, expense, future cash flows and capital expenditures and industry factors to determine the weighted-average cost of capital (âWACCâ).
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 âKey Performance Non-GAAP Financial Indicatorsâ 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.
As further discussed below, our operating results depend primarily on the revenue we earn from our travel programs and costs associated with providing these programs. Our business is highly seasonal. The majority of our sales and marketing expenses are incurred during the third and fourth quarter in order to attract delegates; the associated revenue is recognized in the second and third quarters of the following fiscal year.
Our focus in 2011 will be on 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.
Some of our first quarter 2011 highlights include the following:
â˘ Total revenue of $1.7 million during seasonally slow first quarter, as expected.
â˘ Net loss of $8.7 million, or $0.48 per diluted share.
â˘ Gross margin of 58.6 percent compared to gross margin of 51.5 percent in first quarter of last year.
â˘ Executed $5.4 million in share repurchases during the quarter and paid quarterly dividend of $0.06 per share.
â˘ Increased retention efforts, reflecting a higher touch model with our delegates, reduced withdrawal rates since the fall of 2010.
â˘ Upon announcement of the critical safety concerns related to radiation, re-directed the majority of travelers from Japan to other destinations around the world.
Our focal points for the remainder of 2011 continue to include the following:
Increase enrollments for future travel seasons through effective sales and marketing initiatives as we incorporate enhanced benefits of outsourcing our print and production processes and leverage our current cost structure.
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 customerâs emotional excitement between enrollment and travel.
Improve 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 and increase our Net Promoter customer satisfaction ratings received on our travel programs.
Maximize capital allocation strategies and shareholder return.
Results of Operations by Segment
Our operations are organized in two reporting segments, 1) âAmbassador Programs and Other,â which provides educational travel programs to students, professionals, and athletes through multiple itineraries within five travel program offerings and corporate overhead, and 2) âBookRags,â which provides online research capabilities through book summaries, critical essays, online study guides, lesson plans, biographies, and references to encyclopedia articles.
Ambassador Programs and Othersâ gross margin is comprised of gross revenue less direct program costs, including air, accommodation, transportation, speakers, facilitators, and event costs. BookRagsâ gross margin is comprised of content, subscription, and advertising revenues via www.BookRags.com, less commissions and amortization of intangible assets directly associated with sales.
Thank you, Andrea. Good morning. On the call with me today is Jeff Thomas, President and Chief Executive Officer of Ambassadors Group; Peg Thomas, President of the Operating Subsidiary Ambassador Programs; Tony Dombrowik Chief Financial Officer of Ambassadors Group; Kristi Gravelle, Vice President of Finance and Accounting, Jim Kreyenhagen, President of BookRags; and Susannah Stoltz representing Discovery Student Adventures.
First, before we proceed into the call, I will read a Safe Harbor statement regarding forward-looking statements. Statements contained in this press conference and related comments by Ambassadors Group's Management, which are not historical in nature, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
These forward looking statements include without limitation, statements that relate to expectations concerning matters that are not historical facts. Word such as projects, believes, anticipates, plans, expects, intends, estimates and similar words and expressions are intended to identify forward-looking statements.
These forward-looking statements reflect our beliefs or current expectations with respect to among other things, trends in the travel industry, our business and growth strategies, our ability to integrate acquired businesses, future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies such as legal proceedings, financial results and fluctuations in our current results of operations.
Forward looking statements involve certain risk and uncertainties that could cause actual results to differ materially from anticipated results. These and other risks are discussed in greater detail in the Ambassadors Group's periodic reports filed with the SEC.
All forward looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward looking statements.
With that, I will hand the call over to Jeff.
Thank you. Good morning. Thank you for joining our call. Before discussing our results I'd like to talk about some of the people that we have on the phone this morning. First Kristi Gravelle, who has done a great job as serving as interim CFO for the past 11 months, will transition to Vice President Finance Accounting, where she will remain a critical member of our team. This is a promotion from her position as controller. Second our new CFO and Senior Vice President Tony Dombrowik is also on the call for starting with our company only three days ago. I am pretty sure that this will be the only call that Tony doesn't have a lot to say.
Tony joins us from Red Lion Hotels Corporation, where he has been since 2003. He joined Red Lion Hotels as Director [counting], growing and expanding to executive roles of Senior Vice President Corporate Controller ultimately followed by a promotion to Senior Vice President and Chief Financial Office in 2008.
We are pleased that Tony and the Team look forward to his contributions. Regarding our business results, there are several key things that we want to cover on our call this morning. First we posted 7.1 million net income for Q3, 2010. In these challenging times we are pleased that we are reporting profits and continuing to strengthen our balance sheet, although our longer term goal is to renew our growth and achieve full financial recovery.
We completed in our summer travel season 2010 without major incident, our program quality saving is measured by net promoter scores improved across the board. The 2011 our Enrolled Revenue is up 7% as of October, 17 compared to last year at the same time. More importantly enrolled revenue for our largest most important product line Ambassadors is up 11% year-over-year. We attribute this increase in the Student Ambassadors enrolled revenue to continued incremental improvements and execution, while concentrated sales and marketing effort, and fewer negative economic impacts.
Although we are still early in the process, we are pleased with our current enrolled revenue position for 2011. As we have said before, since having this downturn our customers behavior has deferred from our prior [norms] which makes forecasting a challenge. We still several more reach mainly in our key application enrollment season than we need to maintain our momentum.
In addition we can show that we have successful retention program during the winter months. BookRags online study guide and research sites down slightly in gross receives and gross margin as we expected we had lower advertising revenue which was nearly offset by increases in content sales. Discovery Student Adventures has now completed its four year of travel operations. During the year we travel approximately 125 students.
The program for both students and teachers is very strong as expected and as it needs to be. The 2011 travel this point in time Discovery has generated twice as much business from interest from teachers and have drove nearly 150 seats for travel in 2011. This is what wasn't expected that significantly had a rush and had about 30 students enrolled. We continue to believe that Discovery brand distribution network and product content will benefit our shipments in the longer term.
Finally our balance sheet and the strength of the company. We remain debt free and have continued to generate cash. We have noticed our balance sheets great share owner value. For 2010 year-to-date we have returned approximately $8.3 million to our shareholders in the form of dividend and share repurchases, this represents more than 100% of operating cash flow.
Looking back over the downturn we have distributed just over $32 million to our shareholders in the form of dividends and share repurchases. Looking ahead we will continue to review our capital allocation each for make adjustment as market economic conditions change.
At this point I'll turn the call over to Peg Thomas.
Good morning and thank you for joining us this morning. With our Peak Travel season behind us I would like to focus on a few high points from the last quarter. We enjoyed many successes on our programs and our down economy. We continue to deliver high quality programs which by year end will explore 47 countries in all seven continents. We are traveling students on our programs from almost a 100 other countries. Our delegates will [load] over 200,000 service hours this year changing the globe with their own two hands, rebuilding homes and schools in New Orleans, visiting orphanages and delivering mails for the elderly are just a few examples.
We continue to be recognized as a leader in health and safety in our industry. Our net promotes scribes have continued to increase share every year as we continually strive to improve product quality and service to our customers.
Our quality scores have come in better than ever, in fact if you ask our parents what they think about programs 98% of our parents report that the people-to-people Student Ambassadors program was a valuable educational experience for their child. If ask our teachers the trial with students 91% of them agree that our program helped their students prepare for their next level of education which matches our other data that says that 84% of our alumni travelers get into their college of their first choice.
If you ask our students what they thought, besides having a great time over 90% agreed that they were more willing to try new things because there are people-to-people experience.
Our summer travel season went well, our comprehensive incident response plans have continued to improve every year. While we often have challenging student related incidences our number one priority is that every child be turned home safely there are no events to report for the third quarter.
In the summer 2009, we were pressed by issues regarding the H1N1 virus. This year we did not have this level of event occur. In the spring we are anticipating this year to be the year of the volcano. We track prepared and had continuously plans in place but unfortunately the volcanic activity subsided.
During the third quarter of 2010, we traveled 11,025 delegates a 15% decrease from the 12,967 that traveled in the same period one year ago. And year-to-date we have traveled 25,224 delegate in comparison the 32,454 at the same time period one year ago. This 22% decrease should [be bolt] of the continued economic slowdown over the past year.
For the remainder of 2010 we have approximately 1450 enrolled delegates in comparison to about 1800 for the remainder of 2009 at this time. I am looking forward to 2011 as Jeff talked about we are seeing signs of revenue improvement. Our current enrollment are relatively flat year-over-year, however the enrolled revenue from these enrollments is $124 compared to $116.5 million up 7% one year ago at this time.
The enrolled revenue from just core product is at 11% year-over-year, our other programs are flat or down when compared to last year. We have recently restructured these smaller product marketing teams for future success and anticipate these changes to impact revenue in the late 2011 and 2012.
Looking specifically at our core product we are pleased with the results of our solo marketing campaign. As a remainder our international program has a higher price point and a higher return to the bottom line so that is why enrolled revenues is up year-over-year but the numbers of travelers is flat.
We are constantly optimistic that these trends will hold, but want to remind you that we have seen [model] withdrawal rates over the past two years based on economic news. We have taken actions to minimize withdrawals that will not yet know how effective these will be until spring.
Last year we introduced a piece of mind program that provides a full refund to parents who loose their job after their students are on our program that has yet to travel. We recognize that this is going to be uncertainty safety parents who are reluctant to connect to our program due to job insecurity.
We believe that this program speaks directly to those parents unless people know that we understand that the environment is tough and want to work with them so that their child can participate.
In addition this year we added an enhanced insurance policy that allows our families to withdraw for a broader range of reasons. We believe these two changes have partnershiply impacted our enrollment rates. We have yet to see how this flow change or impact our retention rates.
For 2011 revenue we were able to maintain our prices year-over-year, however we are not expecting the same growth margin percentages that we have seen in the past two years. The travel industry has tightened considerably in the last six months and the US dollar has hit substantial lows against the major currencies.
We anticipate our margins for 2011 to still be in the high 30s, but will continue to aggressively take steps to minimize the impact of these market conditions, including re-renegotiating with hotels and airlines on a group-by-group basis.
Thank you for your continued support. We are looking forward to a return of our core business as economic recovery continues. And with that I'll turn the call over to Kristi Gravelle, for a review of our financials.
Thank you Peg and good morning. Today I will begin with our third quarter result recap. Recap of our balance sheet and cash flows enclosed with our outlook for the remainder of 2010 and 2011. During the third quarter 2010, we traveled 11,025 delegates and recorded $65.7 million in growth receipts, 21% decline. However gross margin as a percent of gross receipts held steady at 39% compared to 40% reported during the third quarter of 2009.
Gross margin during the quarter of 2010 was $25.6 million, a $7.6 million decline from 2009. These results combined with the first and second quarters yield a year-to-date delegates traveled of 25,224 and gross receipts of $152 million. Gross margin as a percent of gross receipts for the nine-month period was 41% for both 2010 and 2009.
The consistency in gross margin percent is primarily attributable to continued benefits achieved from lower air and land costs, a result of negotiations made possible by the economic downturn. Gross margin per delegate improved slightly as of September 2010 as it was $5,930 per delegates as compared to $5,847 for the same period in 2009.
Total operating expense increased 8% or $1.2 million during the quarter and increased 5% or $1.8 million year-to-date when compared to 2009. Sales and marketing expense increased 8% during the third quarter and 6% year to date related to changes made to drive future enrollment. Nearly half of the increase is driven by targeted marketing and promotional activities, about $500,000 in higher personal cost for BookRags and Discovery as we ramp up new initiatives, and approximately $400,000 of expense related to the closing of our print and production facility.
General and administrative cost increased 2% during the first nine months of 2010 compared to 2009. For the third quarter of 2010, net income after tax was $7.1 million and fully diluted earnings per share was $0.37 down from $12.5 million or $0.64 per share reported in Q3, 2009. Year-to-date net income was $14.8 million and fully diluted earnings per share was $0.77 compared to $26.4 million and $1.37 per share reported for the first nine months of 2009.
On the balance sheet cash and short-term investments decreased $2.5 million or 3% down to $77.8 million which represents 60% of our total $129.5 million asset balance. Participant spends are lower by 8% just compared to the same period last year. Remember that participant funds represent cash received for travel yet to occur.
Our participant deposits for 2010 at this point are lower than last year as we are expecting fewer travelers in Q4 this year as compared to last year. At the same point, our participant deposits for the upcoming travel year are higher when compared to last year. This higher level of deposits is driven by the increase in the number of student ambassador enrollments. Year-to-date, we generated $4.7 million in free cash flow and allocated $8.3 million back to the shareholders in the form of dividends of $3.5 million and share repurchases of $4.8 million.
Deployable cash increased 3% to $55.5 million in September 2009 to $57 million in September of 2010. Total cash in investments per share was $4.11 while deployable cash per share was $3.01. Our third quarter results have us on track to achieve the lower end of our EPS guidance reported on our last quarter call.
For the full year 2010 we are revising our expectation for earnings per share to be in the range of $0.48 to $0.50. The change in the range is driven by a reduction in anticipated net revenue. This decrease was caused by a small increase in the projected withdrawal rate reducing the number of travelers initially expected to travel in Q3 and Q4 2010.
Moving forward to 2011, we are pleased to report a 7% growth in enrolled revenue for the upcoming travel year. To increase in enrolled revenue is larger than the increase in enrolled participants mainly due because of the growth of our student ambassador program line. Based on the total enrollments we have received so far for 2011 travel combined with a promising outlook for book rates and discovery student adventures, we are looking to deliver higher full year revenue than achieved in 2010. We do anticipate first quarter 2011 revenue to be much lower than first quarter 2010 related to the reduced number of projected delegates traveling on our student leadership program.
As we have discussed before, we are generally pleased with our gross margin performance in 2009 and 2010. In an environment when the volume of delegates traveled was down we were able to deliver gross margins in excess of 40% in comparison to the mid 30s in 2007 and 2008.
Looking ahead, we anticipate our ability to leverage air and land cost to weaken which we anticipate will impact our gross margin for 2011. Given this and the impact of the generally high margin business of BookRags, we expect to be able to deliver margins in the high 30s.
We also anticipate our operating margin to improve as we gain leverage on our core business through top line growth. We foresee a similar run rate for operating expense as we manage our fixed cost and continue to invest in the expansion of our revenue channels through BookRags, Discovery Student Adventures and social media. As the growth occurs, we are looking forward to a better leverage on these cost.
Thank you for your continued interest and attention this morning. I will now turn the call back over to Jeff.