UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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 | 91-1957010 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
2001 South Flint Road Spokane, WA |
99224 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (509) 568-7800 | |
Securities registered pursuant to Section 12(b) of the Act: | |
Common Stock, $0.01 Par Value | The NASDAQ Stock Market |
(Title of Class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: | |
None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes | ☒ No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes | ☒ No |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ 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).
☒ Yes | o No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | (Do not check if a smaller | Smaller reporting company | ☒ |
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 | ☒ No |
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sales price of the registrant’s common stock on the NASDAQ Stock Market on June 30, 2014, was $48.2 million. Shares of the registrant’s common stock held by each executive officer and director, and by each individual and entity that owns 5 percent or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 23, 2015, was 17,285,992.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.
TABLE OF CONTENTS
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K of Ambassadors Group, Inc., which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements include, without limitation, all statements that relate to expectations concerning matters that may or might occur in the future, and include all statements in this report that are not historical facts. Words such as projects, believes, anticipates, plans, expects, intends, and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements reflect our beliefs or current expectations with respect to, among other things, trends in the travel and education industry, our business and growth strategies, our use of technology, and fluctuations in our results of operations.
Forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include factors generally affecting the travel and education industry, interruptions in our business resulting from natural disasters or international unrest, competition, the value and right to use established brand names, dependence on key personnel and vendor relationships, the results of our marketing efforts, fluctuations in foreign currency exchange rates, the international scope of our operations, the outcome of our cost cutting initiatives, our ability to protect customer data, and a variety of other factors including the risk factors set forth in Item 1A and other factors as may be identified from time to time in our filings with the Securities and Exchange Commission (SEC) or in our press releases. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward-looking statements.
PART I
Item 1. | Business |
Company Background
Ambassador Programs, Inc., a wholly owned subsidiary of Ambassadors Group, Inc. (Ambassadors, Company, we, us or our), is a leading provider of educational travel experiences primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer marketing model. We operate student and adult travel programs using the People to People International brand under a long-term 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 the brand and experience in the educational travel industry gives us both a strong awareness in the market and a high level of credibility.
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., until we were spun off in February 2002. Beginning March 1, 2002, we began operating as an independent stand-alone company. Since that time our common stock on the NASDAQ Stock Market has traded under the symbol EPAX. Our principal office is located in Spokane, Washington, USA.
Educational Travel Programs
Our educational travel programs offer both domestic U.S. destinations as well as international travel destinations, including, but not limited to Europe, Australia, China, Japan, South Africa, India, Costa Rica, and Antarctica. This direct to consumer travel business consists of specialized educational travel programs that seek to educate, inspire intellectual exchange, and develop the cultural and global intelligence of our participants. In 2014, 16,092 students traveled on our programs.
We license from People to People International the exclusive right to develop and conduct programs for grade school through high school students using the People to People International brand 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 International brand name. People to People International is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. Our current agreements with People to People International expire in 2020. We operate these programs under three categories:
Student Ambassador Programs
Our flagship program, Student Ambassador Programs, which traveled over 75 percent of our total delegate count during 2014, provides educational opportunities for students in grade school, middle school, high school and
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college to visit one or more foreign destinations to learn about its history, government, economy and culture. We market our Student Ambassador Programs direct to families through an integrated multi-channel program that includes leads and enrollments generated by direct mail invitations, search engine marketing, social media, webinars, tele-sales, and local in-person informational meetings. Information meetings typically occur in the fall months preceding summer travel the following year. Student Ambassador Program delegations travel on programs from seven to twenty-four days primarily taking place in June and July, with a small number of programs also available in the winter months. Each delegation typically consists of 30 to 45 students and several teachers usually from the same geographical area, and is accompanied by local guides and service providers in each country to assist for the duration of each program.
Programs are designed by a staff of international planners to provide both an educational and exciting travel experience.
Leadership Ambassador Programs
We provide domestic travel experiences to grade school, middle school and high school students through our People to People Leadership Summit and People to People World Leadership Forum programs (Leadership Ambassador Programs). Leadership Ambassador Programs are focused on leadership development, community involvement, civics education and college preparation. On these four to ten day programs, typically delivered throughout the year during school break periods, delegates engage in specially designed leadership curriculum, team-building and personal development exercises, through group discussions, workshops, educational meetings and other social and recreational activities. We market our Leadership Ambassador Programs predominantly through teacher referrals and direct mail. We directly organize and operate all aspects of these domestic programs, including the arrangement of speakers, program facilitators, curriculum, activities, accommodations and transportation.
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 on seven to ten day programs and have the option of adding other cultural exchange activities prior to or following many programs. Citizen Ambassador Programs have been conducted in such areas as agriculture, economics, education, law, medicine and science. We market our Citizen Ambassador Programs primarily through professional association relationships. As a part of many of our professional programs, continuing education credits are offered.
Discontinued Operations
From May 2008 to September 2014, we operated the online educational study guide business BookRags. BookRags originally began as a source for online book summaries and grew to include a wide variety of additional content. Most of BookRags’ revenues were earned during the traditional school year, or the months of September through June. During the third quarter of 2014, we sold BookRags for $5.0 million. See Note 8, Discontinued Operations, in our Consolidated Financial Statements in this Form 10-K for further information.
From 2009 to the summer of 2013, we operated Discovery Student Adventures (DSA) programs for grade school, middle school and high school aged students. DSA programs were marketed through a teacher-recruited and digital model, and emphasized adventure and scientific exploration travel experiences. They were operated internationally and domestically using the Discovery Education trademark. During the fourth quarter of 2013, we terminated our existing licensing agreement with Discovery Education Inc. (Discovery Education), as this business model did not prove to be financially viable. See Note 7, Restructuring Costs, in our consolidated financial statements in this Form 10-K for further information.
Business Strengths
We believe that our more than 50 years of experience organizing student and professional educational programs and establishing substantial relationships in countries where we provide the programs, as well as our agreements with People to People International, allow us to provide an educational opportunity that is of value to our customers. We believe that the high-quality, education focused, differentiated nature of our programs, industry-leading safety profile
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and relationship-based customer service model are and will remain key elements to success. Our customer satisfaction is high, as evidenced by our Net Promoter Scores, a metric used to gauge customer loyalty and advocacy, which we believe underscores the value of the travel experiences we offer to participants and their families.
Employees
As of December 31, 2014, we employed 155 full-time employees. Of these, over 85 percent are located in Spokane, Washington, with the remaining located in various states across the United States to serve as local field representatives or work remotely. None of our employees are subject to collective bargaining agreements or are represented by a union. We believe that our labor relations are good. As discussed in Note 17, Subsequent Events, in our Consolidated Financial Statements in this Form 10-K, subsequent to year end we initiated a significant reduction in work force. As of May 2015, we anticipate we will employ approximately 90 full-time employees.
Available Information
We are subject to the informational requirements of the Exchange Act that require us to file reports, proxy and information statements, and other information with the SEC. The public may read and copy our filings at the SEC’s Public Reference Room, 100 F. Street, N.E., Washington, D.C. 20549. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Similarly, we maintain a website at www.AmbassadorsGroup.com, where we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practical after, or on the same day as, such material is electronically filed with or furnished to the SEC. We make these available free of charge.
Item 1A. | Risk Factors |
You should carefully consider the risk factors set forth below and the other information contained in this Form 10-K as these are important factors, among others, that could materially and adversely affect our future operating results and share price, and could cause actual results to differ materially from expected or historical results. There may be additional risks that we consider not to be material, or which are not known, and any of these risks could have effects similar to those set forth below. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a cautionary discussion regarding forward-looking statements. These risk factors should be read in conjunction with the other information set forth in this Annual Report, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, including the related Notes to Consolidated Financial Statements.
The travel industry and specifically the educational segment within the travel industry are highly competitive. If we are unable to compete effectively in these markets, our financial condition and results of operations could be affected.
The travel industry in general and the educational segment of the travel industry in particular are highly competitive and have relatively low barriers to entry. We compete with other companies that provide similar educational travel programs, professional travel and adult continuing education programs, activity camps and summer camps, as well as independent programs organized and sponsored by local teachers with the assistance of local travel agents.
People to People International, under the terms of its agreement with us, reserves the right to offer programs to college students for studies abroad and to grant to other individuals or entities the right to use the People to People International name in connection with professional education and sports programs. In the event companies with similar operations to us are granted the right to use the People to People International name, our operations and competitive position in the industry could be significantly and adversely impacted.
Certain organizations engaged in the travel business may have substantially greater brand-name recognition and financial, marketing and sales resources than we do, and may offer an educational travel experience at a lower price. We cannot assure you that we will be able to compete successfully against our present or future competitors. If we are unable to compete successfully, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Our financial results may suffer if we cannot successfully implement our restructuring plans and or cost cutting objectives aimed at right-sizing our operations to match revenue streams.
We have described elsewhere in this report our ongoing plan to terminate or realign certain operations and to take other cost cutting measures that are intended to strengthen our business by right-sizing our operations to match
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revenue streams. We also described various impairment and restructuring charges related to this plan. If we fail to complete our restructuring plans timely and successfully, or if we fail to achieve the intended cost structure, our financial condition, results of operations and cash flows may be further impacted. This plan also may have an adverse impact upon the morale or motivation of our employees and may result in further distractions to our management. Cost cutting initiatives may also reduce selling and marketing or other operating capabilities reducing our ability to respond to market demand.
Our business may decline if we cannot successfully update our marketing strategy in light of changes in customer behavior.
Our traditional marketing model depended on direct mail, which has been declining in effectiveness, and as a result our marketing strategy has struggled as our target customers have shifted away from responding to direct mail and in-person informational meetings. As a part of our restructuring initiatives, we are adopting a new customer acquisition model in an effort to deliver sustainable profits. Our marketing strategy may fail to reach the intended market and may not be successful in generating travelers. This could result in a continued or accelerated reduction in travelers. Any such outcome, alone or in combination with other events or circumstances, may adversely affect our operating results.
A decline or disruption in the travel industry could adversely affect our results of operations.
Our performance depends upon factors affecting the travel industry in general. Our earnings are especially sensitive to events that affect domestic and international air travel and availability and cost of lodging and transportation. A number of such factors could negatively affect our business including:
• | Air fare increases resulting from a rise in fuel prices or a reduction of airline capacity; |
• | Increases in the price of lodging; |
• | Travel-related strikes or labor unrest; |
• | Bankruptcies or liquidations by airlines or other travel industry companies; and |
• | Travel-related accidents or the grounding of aircraft due to safety concerns. |
Such concerns could reduce the demand for our travel program offerings. Any such decrease in demand, depending on its scope and duration, together with any future issues affecting travel safety, could result in a temporary or longer-term decline in demand and adversely affect our results.
Deterioration of and volatility in general economic conditions could result in reduced consumer spending and a decline in the number of people willing to purchase our premium travel products.
Demand for our products and services may be significantly affected by the general level of economic activity, level of discretionary spending and employment levels in the United States and key international markets. Therefore, global economic downturns or a recession could have a material adverse effect on our business, cash flows and our results of operations. Our business could also be adversely impacted by other global economic conditions including excessive inflation, currency fluctuations within the global market, the strength of the U.S. dollar, and foreign taxation changes.
For example, economic conditions deteriorated rapidly in the United States and many other countries in 2008 resulting in a reduction in household budgets for potential travelers. These conditions slowed spending on travel and on the services we provide.
While there have been positive indications that the economies of the United States and other world markets have improved over the last few years, future economic weakness and uncertainty may result in significantly decreased spending on our services, which may have a material adverse impact on our business and financial performance. We may continue to face economic conditions which could further impact demand for premium travel products in the industry and the markets in which we operate.
Natural disasters, international political or terrorist threats and activities, and other world events or incidents affecting the health, safety, security, program interest and/or program satisfaction of actual and potential program participants could have an adverse effect on our results.
Most of our travel programs are conducted outside of the United States. Demand for our travel programs may be adversely affected by natural occurrences such as hurricanes, tsunamis, earthquakes, extreme flooding, and epidemics
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or other disease outbreaks such as influenza in geographic regions in which we conduct travel programs. In addition, other international incidents such as war, U.S. military deployments, international and domestic terrorism, civil disturbances, and political instability may occur. These natural occurrences and other events may impact our customers’ willingness to travel to these destinations or our ability to deliver planned programs.
The consequences of these types of events are unpredictable and the occurrence of any of the events described above, or other unforeseen developments in one or more of the regions in which we travel, could have a material adverse effect on our ability to acquire, and/or retain travel enrollments, which would substantially impact cash flows, and results of operations. Historically, we have experienced increased cancellations for our travel programs during such times and if these business interruptions occur during the peak travel season, the impact to our financial results could be magnified.
If we are unable to use our established brands such as the People to People name, or if the value of our name, image or brand diminishes, our ability in attracting future travelers could be significantly impacted and our business would be harmed.
Our brand names and trademarks are integral to our marketing efforts. Our agreements with People to People International, currently scheduled to expire in 2020, give us the exclusive right to develop and conduct programs for grade school through high school students using the People to People International name, and the non-exclusive right to develop and conduct programs for professionals, college students and athletes using the People to People International name. If our agreement with People to People International were terminated or if we were unable to use the branded name to market our programs or destinations, this could have a material adverse effect on our ability to acquire participants for our programs and consequently affect our results of operations.
We invest considerable resources in maintaining these brands and trademarks to retain and expand our client base. We have registered a variety of service and trademarks including, but not limited to, the names People to People Ambassador Programs, People to People Student Ambassador Programs, Citizen Ambassador Programs, and People to People Leadership Ambassador Programs. In addition, we have the right, subject to certain exceptions, to use the People to People service, trademarks and logos in our marketing.
In addition, our ability to attract and enroll new delegates to travel with us depends on the value of the brands we associate with and our reputation with potential customers. If negative news coverage or other negative public relation matters occur in the student travel industry or specifically related to us, our business could experience adverse effects impacting our volume and profitability.
If we are unable to attract and retain effective key personnel with industry specific knowledge, our ability to market and conduct our travel programs would be diminished.
Our performance is dependent on the continued services and performance of senior management and certain other key personnel with specialized knowledge of our industry. The loss of the services of any of our senior management or other key employees could have an adverse effect on our business operations, along with the ability to grow our business, generate innovative ideas, remain strategic, and recruit and maintain highly functional teams. We do not maintain any key person life insurance policies. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled managerial, sales, marketing and customer service personnel. Our inability to do so could have an adverse effect on our business, cash flows and results of operations.
If we are unable to develop and maintain relationships with quality prospects and/or are ineffective in our marketing efforts, our future growth and profitability could be impacted.
We rely on our ability to attract and retain travelers through our direct and digital marketing and retention efforts. The effectiveness of these marketing efforts is highly dependent on our ability to integrate a multi-channel direct and digital marketing strategy, which requires us to manage several priorities: identifying and obtaining productive sources of prospects; executing direct mail strategies; securing attendance and conversion at our local informational meetings; increasing our digital presence and converting those leads into travelers; and retaining enrolled travelers. We may fail to adequately develop these marketing efforts due to a variety of factors including adverse changes in the direct-mail environment, the inability to convert our business to an integrated multi-channel direct mail and digital marketing approach, adverse changes to laws applicable to our sources of prospects, or changes to our reputation with potential participants and teachers. If we fail to fully develop or utilize our marketing efforts to attract and retain our customers, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
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Our dependence on travel suppliers could delay or otherwise impair the delivery of our products and services, which would impact our reputation and could reduce our profitability.
We could be harmed by the activities of third parties that we do not control. We engage travel suppliers who provide certain products and services for us that we package to deliver our travel programs to our customers. These travel suppliers include airlines, hotels, bus lines, overseas coordinators and other travel industry participants. Consistent with industry practices, we currently have no long-term agreements with travel suppliers that obligate them to sell services or products through us on an ongoing basis. As a result, these travel suppliers generally can cancel or modify their agreements with us upon relatively short notice. In addition, there may be an actual decline in the quality of travel products and services provided by these suppliers, or the perception of such a decline by our participants, which could adversely affect our reputation and profitability. Any such decline in quality could also make it difficult for us to operate some aspects of our business, or expose us to liability for the actions of third party suppliers, which could have an adverse impact on our business and financial performance.
In addition, the loss of contracts, changes in our pricing agreements or commission arrangements, more restricted access to travel suppliers’ products and services, less favorable public opinion of certain travel suppliers, or loss of deposits with travel suppliers that could go bankrupt, could all have a material adverse effect on our business, financial condition, cash flows and results of operations. Likewise, if these third-party providers cease operations, temporarily or permanently, face financial distress or other business disruption, we could suffer increased costs and delays in our ability to provide similar services until an equivalent provider could be found, which could also have an adverse impact on our business and financial performance.
Fluctuations in foreign currency exchange rates affect the amount we pay for services received from foreign vendors and could adversely affect our gross margin results.
The majority of our travel programs are internationally based and many of our arrangements with our foreign-based suppliers require payment to be made in foreign currencies. Fluctuations in the value of the U.S. dollar in relation to foreign currencies will impact the cost of the services we provide. We generally enter into forward contracts for the delivery of foreign currencies and other financial instruments with less than two years’ maturity to help manage program costs and hedge against foreign currency valuation changes. While these forward contracts can mitigate the effect on program costs and foreign currency exchange fluctuations, our program costs may nonetheless be impacted significantly in future periods by currency fluctuations. There can also be no assurance our hedging strategy will mitigate longer-term foreign exchange valuation trends. Depending on the strength of the U.S. dollar at the time the forward contracts or other financial instruments are entered into, its strength throughout the contracted period, and the accuracy of our projected enrollment volume, we could experience over-hedged positions, which may result in a gain or loss that must be recognized immediately in our consolidated financial statements.
Our international operations involve additional risks.
We operate in a number of jurisdictions outside of the United States. In addition to the risks outlined elsewhere in this section, our international operations are also subject to a number of other risks, including:
• | Regulatory requirements, including the Foreign Corrupt Practices Act; |
• | Potentially weaker enforcement of our contractual rights; |
• | Increased payment and fraud risk; and |
• | The application of international transactional taxes such as sales, use and occupancy taxes. |
Our failure to adequately manage these risks could adversely affect our growth in these international markets or could otherwise negatively impact our operations and financial results.
Failure to comply with the applicable rules and regulatory standards or maintain the security of internal or customer data could adversely affect our reputation and subject us to substantial fines and penalties.
Our business requires that we collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information. This information is processed, summarized and reported by our various information systems and those of our service providers. The integrity and protection of all customer, employee, and company data is critical to us. We devote substantial time and incur costs to ensure proper compliance and safe guarding of such data. Our customers and employees expect that we will adequately protect their personal information.
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Furthermore, there are numerous laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other consumer data. The scope of these laws is increasingly demanding and, in some cases, evolving in a manner which may make laws and rules inconsistent between countries or in a way that may conflict with other rules. While we endeavor to comply with all applicable laws and other rules and codes relating to privacy and data protection, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another.
A theft, loss or fraudulent use of customer personal or credit card information, employee, or company data could adversely impact our reputation and performance, and could result in significant remedial and other costs, fines and litigation. Any failure by us or our partners or other third parties to comply with the privacy policies, privacy-related obligations to our customers or other third parties, or privacy related legal obligations may result in governmental enforcement actions, litigation or loss of our reputation and could cause our customers and others to lose trust in us, which could have an adverse effect on our business.
We could be negatively impacted by a security breach, through cyber-attack, cyber intrusion or otherwise.
We face the risk of a security breach, whether through cyber-attack or cyber intrusion over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, or other significant disruption of our information technology networks and related systems. Although we make significant efforts to maintain the security and integrity of these types of information and information technology networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. We may need to expend significant resources to protect against these security breaches. A security breach or other significant disruption involving our information technology networks and related systems could cause harmful consequences:
• | Disruption of the proper functioning of these networks and systems and therefore our operations; |
• | Unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information, which could harm us directly and indirectly, including if others use such information to compete against us; |
• | Diversion of significant management attention and resources; |
• | Contractual and other claims against us; and |
• | Damage to our reputation. |
Security breaches could also cause travelers and potential users to lose confidence in our security, which would have a negative effect on the value of our brands. Any or all of these consequences could have a negative impact on our results of operations, financial condition and cash flows.
Litigation or other claims of liability may subject us to significant costs, judgments, fines and penalties that may not be covered by or may be in excess of available insurance coverage, may divert management’s attention and resources from our business, and may result in adverse publicity.
Due to the nature of our business as well as being a publicly held company, we may be subject to liability claims related to management’s decisions, securities claims, governmental investigations, business operations, or accidents or disasters causing injury to travelers on our programs, including claims for serious personal injury or death. We maintain liability insurance coverage for risks arising from the normal course of our business, including, but not limited to, professional and general liability insurance. There is no assurance that the insurance that we maintain will be sufficient to cover one or more claims that might arise in the future, that such insurance will cover any particular claim or loss, that our existing insurance or coverage amounts will continue to be available in the future, or that the applicable insurer will be solvent at the time we make a claim for any covered loss. Further, we cannot assure you that we will be able to obtain insurance coverage at acceptable levels and cost in the future. If someone successfully asserts one or more large uninsured claims against us, or one or more claims that exceed our insurance coverage, it could have a material adverse effect on our business, financial condition, and cash flows. In addition to the potential impact on our profitability and public perception, liability claims asserted against us could divert management’s attention and our financial resources by requiring that management participate in the litigation process and defend the asserted claims. We have been the subject of such claims historically and have paid substantial amounts related
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to these claims that exceeded our recoveries under our insurance policies. There can be no assurance such claims will not occur in the future. See Note 12, Commitments and Contingencies, to the Consolidated Financial Statements in this Form 10-K for further information.
We experience significant fluctuations in our financial results from quarter to quarter related to the seasonality of our business and the timing differences between expenses and revenue which could impact investor confidence and cause share price volatility.
Our business is highly seasonal and we anticipate that this trend will continue. The majority of our travel programs occur during the months of June and July each year, although we offer a limited number of travel programs throughout the remainder of the year. Revenue is recognized upon travel.
In contrast, the majority of our sales and marketing costs related to these travel programs have traditionally been highest in the third and fourth quarters, since the costs are typically incurred nine to twelve months prior to travel. While we are transitioning to a year-round sales and marketing approach which would spread our costs more evenly throughout the year, we continue to experience a long lead time between incurring sales and marketing costs and the receipt of traveler payments and the recording of associated revenue. This delay may result in operating results for a particular period that do not match the expectations of public market analysts and investors. Depending on their understanding of this aspect of our business, history with our company, and confidence in our business plans, our share price could be materially and adversely affected and may lead to higher volatility in our stock price. It is difficult for us to evaluate the degree to which this seasonality and cyclicality may affect our stock price or business in future periods.
We are exposed to credit risk and interest rate risk that could affect our results of operations.
A large percentage of our balance sheet consists of cash, cash equivalents and available-for-sale securities which are exposed to concentrations of credit and interest rate risk. Although we place our cash and temporary cash investments with high credit quality institutions, at times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by this insurance. If such institutions were to become insolvent while holding our cash, cash equivalents or available-for-sale securities in excess of the insurance limit, we could suffer losses or it could be necessary to obtain credit financing to operate our travel programs. Additionally, if interest rates were to fluctuate sharply, the value of our available-for-sale securities could be adversely affected. There is no assurance that we could respond timely enough to avoid losses and a swift, material change in these markets could have an adverse effect on our cash flow.
Our stock price is highly volatile.
The market price of our common stock has been subject to significant fluctuations and could continue to experience volatility in response to factors such as the following, some of which are out of our control:
• | Variations in our operating and financial results; |
• | Operating and financial results that are significantly different than analysts’ and investors’ expectations; |
• | Loss of our relationship with one of our worldwide partners or suppliers; |
• | Speculation in the press or investment community; |
• | A shift in the investment focus of our institutional shareholders; |
• | Additions or departures of key personnel; |
• | The limited trading volumes of our common stock; and |
• | Price and volume fluctuations in stock markets in general. |
This stock price volatility could also make us less attractive to certain investors.
Failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, financial performance or results of operations.
Our business and financial performance could be adversely affected by changes in or interpretations of existing laws, rules and regulations or the adoption of new laws, rules and regulations, including those relating to licensing,
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consumer protection, competition, and privacy. Unfavorable changes or interpretations could decrease demand for our products and services, limit marketing methods and capabilities, affect our profitability as a result of increased costs and/or subject us to additional liabilities.
The adoption of new laws, rules and regulations, or new interpretations of existing laws, rules and regulations, that restrict or unfavorably impact the ability or manner in which we provide travel services could require us to change certain aspects of our business or operations to ensure compliance, which could decrease demand for services, reduce revenues, increase costs and/or subject us to additional liabilities.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our corporate headquarters in Spokane, Washington is located in a building that we owned prior to its sale in November 2014 and that we now occupy under a short-term lease that is anticipated to end March 2015. We will relocate our corporate headquarters to a leased facility in a multi-tenant building in Spokane, Washington. We also maintain two additional office leases in Arlington, Virginia, and Seattle, Washington under leases which expire on December 31, 2015, and September 30, 2016, respectively.
We believe that all facilities are well maintained, in good operating condition and provide adequate capacity for our needs. We maintain insurance coverage that we believe is adequate for our business, including general liability insurance and leased property and personal property insurance on a replacement cost basis.
Item 3. | Legal Proceedings |
The information contained in Note 12, Commitments and Contingencies, to our Consolidated Financial Statements is incorporated by reference.
Item 4. | Mine Safety Disclosures |
Not applicable
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PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock has been traded on the NASDAQ Stock Market under the symbol EPAX since March 1, 2002.
As of March 23, 2015, the last reported sale price of our common stock was $2.50. The following table sets forth the high and low sale prices of a share of our common stock as reported on the NASDAQ Stock Market on a quarterly basis for our fiscal years ended December 31, 2014 and 2013.
High |
Low |
|||||
Quarter ended March 31, 2014 | $ | 5.27 | $ | 3.55 | ||
Quarter ended June 30, 2014 | $ | 5.00 | $ | 3.55 | ||
Quarter ended September 30, 2014 | $ | 4.80 | $ | 3.65 | ||
Quarter ended December 31, 2014 | $ | 3.74 | $ | 2.14 | ||
Quarter ended March 31, 2013 | $ | 5.28 | $ | 4.11 | ||
Quarter ended June 30, 2013 | $ | 4.32 | $ | 3.18 | ||
Quarter ended September 30, 2013 | $ | 3.64 | $ | 3.37 | ||
Quarter ended December 31, 2013 | $ | 5.34 | $ | 3.40 |
Holders of Record
As of March 23, 2015 there were approximately 107 holders of record of our common stock, according to our registrar. This number does not include beneficial owners holding shares through nominee or street name.
Dividends
During the second quarter of 2013, our Board of Directors suspended our quarterly dividend. The Board’s decision was based on a number of factors including financial performance, earnings from operations, available cash resources, and cash requirements. There can be no assurance that the Board of Directors will or will not declare dividends in the future.
During 2013 our Board of Directors declared the following dividend payment:
Declaration Date
|
Record Date
|
Payment Date
|
Dividend Per Share
|
February 13, 2013 | February 27, 2013 | March 13, 2013 | $0.06 |
Transfer Agent and Registrar
Computershare serves as transfer agent and registrar of our common stock.
11
Equity Compensation Plan Information
The following tables provide information as of December 31, 2014 about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans.
(a) |
(b) |
(c) |
|||||||
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
||||||
Equity compensation plans approved by security holders | 551,409 | $ | 6.11 | 1,720,263 | |||||
Equity compensation plans not approved by security holders | N/A | N/A | N/A | ||||||
Total | 551,409 | $ | 6.11 | 1,720,263 |
Issuer Purchases of Equity Securities
On various dates between May 2004 and October 2012, our Board of Directors authorized the repurchase of up to an aggregate of $72.7 million of our common stock in the open market or through private transactions (the Repurchase Plan). The Repurchase Plan does not expire as of any particular date. Since inception through December 31, 2014, we have repurchased approximately 4,506,542 shares of our common stock for an approximate total of $59.6 million. As of December 31, 2014, approximately $13.1 million remained available for repurchase under the Repurchase Plan.
The following is a summary of issuer purchases of equity securities during the quarter ended December 31, 2014:
Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Program |
||||||||
October 1 - October 31, 2014 | — | $ | — | — | $ | 13,073,565 | ||||||
November 1 - November 30, 2014 | 5,767 | $ | 2.53 | — | $ | 13,073,565 | ||||||
December 1 - December 31, 2014 | — | $ | — | — | $ | 13,073,565 | ||||||
Total | 5,767 | — | ||||||||||
(1) | In November 2014, we acquired and cancelled 5,767 shares of common stock surrendered by employees to pay income taxes due upon the vesting of restricted stock. |
Recent Sales of Unregistered Securities
During the fiscal year ended December 31, 2014, we did not sell any equity securities that were not registered under the Act.
Item 6. | Selected Financial Data |
Not required.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative perspective from our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with the other sections of this annual report on Form 10-K, including Part I, Item 1A: Risk Factors; Part II, Item 6: Selected Financial Data; and Part II, Item 8: Financial Statements and Supplementary Data.
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 Act and Section 21E of the Securities 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.
Introduction
Ambassadors Group, Inc. is a leading provider of educational travel experiences primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer marketing model. We operate student and adult travel programs using the People to People International brand under a long-term license agreement. We have been traveling students on People to People programs for over 50 years and have over 500,000 alumni.
Our core program offering under the People to People brand is international destination trips for U.S. students in the 10 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. In addition, under the People to People brand, we also offer Leadership Ambassador Programs, domestic destination travel programs for U.S. students and international students from all over the world focused on leadership and education. We also offer Citizen Ambassador Programs, professional travel programs for adults.
Prior to September 2014, we operated BookRags, an education oriented research website, which provided study guides, lesson plans and other educational resources to students and teachers. This wholly-owned subsidiary was sold in September 2014, and results of operations have been reflected as discontinued operations for all periods presented.
Our operating results depend primarily on the number of travelers who attend our programs (travelers), 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 is generally recognized upon travel in the second and third quarter of the following fiscal year. As a result of our seasonal business cycle, we are typically unprofitable in the first and fourth quarter of each year.
Executive Summary
During the year ended December 31, 2014, we traveled 16,092 travelers compared to 18,251 travelers during the same period in 2013, and our travel numbers have been steadily declining over the past several years. Gross margin from continuing operations of $33.3 million in 2014 decreased 17 percent from the $40.2 million in 2013, which declined by 16 percent from 2012. We expect revenue to decline again in 2015. In response to this trend we are shifting our marketing and customer acquisition strategy, but to date our efforts have experienced limited success and there is no assurance that these declines will reverse or become less severe.
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We remain highly committed to right-sizing our business to match our revenue stream by focusing on core People to People product offerings. During the third quarter of 2013, we implemented a restructuring plan to allow us to further direct our focus on our core, resulting in recognition of $2.2 million in restructuring expense during 2013 and an additional $1.9 million recorded during 2014. As a part of our restructuring plan, we sold our BookRags segment in September 2014. Over the last several years we have also significantly cut operating costs related to selling and marketing and general and administrative expenses, and we anticipate continued reductions into 2015.
Staying close to our customers through our high-engagement model is a high priority. We believe we offer a premium product with strong brand value as indicated by our high Net Promoter Scores. Through enhanced and consistent customer service based interaction with our customers, utilizing our multi-channel approach during the sales and marketing processes all the way through and continuing after travel, we believe we build a customer base of advocates for our brand.
Results of Operations
Financial results from continuing operations for the years ended December 31, 2014 and 2013 were as follows (in thousands):
Year Ended December 31, |
||||||||||||
2014 |
2013 |
$ Change |
% Change |
|||||||||
Total revenue | $ | 39,557 | $ | 47,220 | $ | (7,663 | ) |
-16 | % |
|||
Cost of goods sold | 6,273 | 7,046 | (773 | ) |
-11 | % |
||||||
Gross margin | 33,284 | 40,174 | (6,890 | ) |
-17 | % |
||||||
Selling and marketing expenses | 27,137 | 30,819 | (3,682 | ) |
-12 | % |
||||||
General and administrative expenses | 11,037 | 13,762 | (2,725 | ) |
-20 | % |
||||||
Restructuring costs | 1,928 | 2,212 | (284 | ) |
-13 | % |
||||||
Asset impairments | 2,517 | 6,466 | (3,949 | ) |
-61 | % |
||||||
Operating loss | (9,335 | ) |
(13,085 | ) |
3,750 | 29 | % |
|||||
Other income | 251 | 554 | (303 | ) |
-55 | % |
||||||
Loss before income tax provision | (9,084 | ) |
(12,531 | ) |
3,447 | 28 | % |
|||||
Income tax benefit (provision) | (178 | ) |
4,620 | (4,798 | ) |
-104 | % |
|||||
Net loss from continuing operations | $ | (9,262 | ) |
$ | (7,911 | ) |
$ | (1,351 | ) |
-17 | % |
During the year ended December 31, 2014, we traveled 16,092 delegates compared to 18,251 delegates during 2013, a 12 percent decline year-over-year. The prior year includes 917 Discovery Student Adventures and China traveled students affecting year-over-year comparability given our decision to not operate these programs in 2014. Total revenue from continuing operations of $39.6 million declined 16.2 percent from $47.2 million in the same period last year driven by the decline in travelers. Gross margin from continuing operations for 2014 was $33.3 million, down from $40.2 million in 2013, with gross margin percentage at 33.5 percent compared to the prior year at 35.8 percent. The lower 2014 gross margin percentage is reflective of higher land vendor program costs from higher foreign exchange rates, a higher ratio of teacher leaders to traveling students, and lower overall travelling group sizes negatively impacting fixed costs year-over-year, as well as a program merchandise write-down of $0.6 million in 2014.
Selling and marketing expenses declined approximately $3.7 million, or 12 percent, in 2014 compared to 2013. This decline reflects a decrease of approximately $1.7 million in personnel expenses in 2014 as compared to 2013 as a result of a reduction in staffing levels. Additionally, our marketing expenses decreased approximately $0.7 million in 2014 as compared to 2013 resulting from an overall reduction in marketing spend.
General and administrative expenses decreased approximately $2.7 million, or 20 percent, in 2014 compared to 2013. The primary driver of this decrease was a decrease of $1.8 million in personnel expenses as a result of a reduction in staffing levels.
During the year ended December 31, 2014, we incurred approximately $1.9 million in restructuring costs as compared to approximately $2.2 million during the year ended December 31, 2013. The 2014 expense primarily was
14
the result of a reduction in force in personnel, with the prior period reflective of the wind down of our DSA operations, including a $1.6 million contract termination fee paid in 2013 to terminate our contract with Discovery Education, and the closing our People to People – China office.
During the year ended December 31, 2014, we incurred approximately $2.5 million in additional asset impairments related to our corporate headquarters. During the year ended December 31, 2013, we incurred approximately $6.5 million in asset impairments related to impairments of our corporate headquarters and other assets.
Other income declined $0.3 million, or 55 percent, in 2014 compared to 2013 primarily impacted by a realized loss from the sale of our last auction rate security, as well as a foreign exchange loss of approximately $0.1 million as we determined we were over hedged in certain currency positions during the months of January and February 2015.
During the year ended December 31, 2014, we recorded a valuation allowance against our deferred tax asset due to the loss recorded in 2014. This allowance resulted in net income tax provision from continuing operations of approximately $0.2 million recorded for the year ended December 31, 2014, resulting in an effective income tax rate of approximately 2 percent. The difference from the statutory rate of 34 percent during 2014 was primarily a result of the valuation allowance. For additional information, see Note 11 to Consolidated Financial Statements. For the year ended December 31, 2013, the income tax benefit recorded resulted in a 37 percent annual effective income tax rate applied to pre-tax loss from continuing operations. 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.
During the third quarter of 2014, we consummated the sale of our wholly-owned subsidiary BookRags. All activities related to BookRags are reflected as discontinued operations for all periods presented. Included in discontinued operations for 2014 is the $9.7 million goodwill impairment charge recorded during the second quarter of 2014.
Key Performance Non-GAAP Financial Indicators
We analyze our performance on a net income, cash flow and liquidity basis in accordance with accounting principles generally accepted in the United States of America (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.
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. Enrolled revenue consists of estimated gross receipts to be recognized in the future upon travel of an enrolled participant and may not result in the actual gross receipts eventually recognized due both to withdrawals from our programs and expected future enrollments.
As of February 8, |
||||||||||||
Delegates |
||||||||||||
Enrollment detail for travel year |
2015 |
2014 |
Change |
% Change |
||||||||
Student Ambassadors | 11,221 | 15,512 | (4,291 | ) |
-27.7 | % |
||||||
Total, all programs | 14,870 | 19,000 | (4,130 | ) |
-21.7 | % |
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 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. See the ‘Liquidity’ section below for explanations of cash sources and uses.
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Deployable Cash Reconciliation (in thousands)
December 31, |
||||||
2014 |
2013 |
|||||
Cash, cash equivalents and short-term available-for-sale securities | $ | 61,504 | $ | 45,647 | ||
Prepaid program cost and expenses | 1,335 | 7,069 | ||||
Less: Participants’ deposits | (23,161 | ) |
(26,362 | ) |
||
Less: Accounts payable / accruals / other liabilities | (2,794 | ) |
(3,706 | ) |
||
Deployable cash | $ | 36,884 | $ | 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. See the ‘Liquidity’ section below for explanations of cash sources and uses.
Free Cash Flow Reconciliation (in thousands)
December 31, |
||||||
2014 |
2013 |
|||||
Cash flow provided by operations GAAP | $ | 2,876 | $ | 14,755 | ||
Purchase of property, equipment and intangibles | (1,438 | ) |
(3,454 | ) |
||
Free cash flow non-GAAP | $ | 1,438 | $ | 11,301 |
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Total assets at December 31, 2014 were $66.5 million, of which 93 percent, or $61.5 million, was cash, cash equivalents and short-term available-for-sale securities. At that date, we also had long-lived assets totaling $2.6 million. Total liabilities at December 31, 2014 were $27.3 million, including $23.2 million in participant deposits for future travel, with no debt outstanding.
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 2015. As of December 31, 2014, we had no material commitments for capital expenditures. We are considering alternatives to return excess cash to our stockholders, but have made no decisions with respect to the structure, timing, size or other parameters of any such action.
Sources and Uses of Cash
Sources and uses of cash for the fiscal years ended December 31, 2014 and 2013 (in thousands):
Years Ended December 31, |
||||||
2014 |
2013 |
|||||
Net cash flows provided by (used in): |
||||||
Operating activities | $ | 2,876 | $ | 14,755 | ||
Investing activities | (10,035 | ) |
(7,774 | ) |
||
Financing activities | (312 | ) |
(3,658 | ) |
||
Net increase (decrease) in cash and cash equivalents | $ | (7,471 | ) |
$ | 3,323 |
Net cash provided by operations was $2.9 million and $14.8 million during the years ended December 31, 2014 and 2013, respectively. The year-over-year decrease in cash provided by operations of $11.9 million was primarily due to a higher net loss, a decrease in participant deposits, partially offset by a decrease in prepaid expenses.
16
Cash used in investing activities was $10.0 million during the year ended December 31, 2014, whereas cash used in investing activities was $7.8 million during the year ended December 31, 2013. This $2.2 million difference was primarily due to a $20.5 million net increase in cash used for the purchase of available-for-sale securities from 2013, partially offset by cash received on the sale of BookRags and our corporate headquarters building for approximately $13.6 million in cash and $25.7 million in cash received from the sale of available-for-sale securities.
Cash used in financing activities was $0.3 million and $3.7 million during the years ended December 31, 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 $0.3 million in 2014. In addition, the prior year period included $1.0 million paid in stockholder dividends that did not recur in 2014.
Off-Balance Sheet Arrangements
As of December 31, 2014, we had no off-balance sheet arrangements, as defined in Item 303(a) (4) of Regulation S-K promulgated by the SEC.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in this Form 10-K. As described in Note 2, we are required to make estimates and assumptions that affect the reported disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business.
We consider that our most critical accounting estimates are related to the valuation of available-for-sale securities, 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.
Available-for-Sale Securities
As over 90 percent of our total assets are made up of available-for-sale securities, we evaluate 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.
Revenue Recognition
We invoice delegates in advance of travel, and payments made are recorded as deferred liabilities for participant deposits. Upon enrollment, each new delegate is required to make a deposit of between $300 and $500, depending on the program, with monthly, and lump sum payments due leading up to travel. The use of cash collected from participant deposits is not restricted by agreement or law, therefore is not reported as restricted cash. We also pay for certain program costs in advance of travel, including but not limited to airfare, hotel, and transportation services. Those advanced payments are recorded as prepaid program costs.
For non-directly delivered programs, we do not actively manage the operations of each program, and therefore, recognize revenue and anticipated costs from these programs on a net basis within total revenue when travel programs begin. For directly delivered programs in which we organize and operate all activities, we recognize the gross revenue and cost of sales of these programs over the period the programs operate.
We charge administrative fees under our withdrawal policy for any delegate who enrolls in our programs but does not ultimately travel. The amount of the administrative fee will vary depending on when the withdrawal occurs and the length of time before travel was to occur. We recognize withdrawal fees concurrent with the revenue recognition from the related programs.
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
17
program to provide a hedge against certain of these foreign currency risks, and we typically use forward contracts that allow us to acquire the foreign currency at a fixed price for a specified point in time. At December 31, 2014, amounts determined to be ineffective were recorded in earnings. All other remaining contracts qualified for cash flow hedge accounting at December 31, 2014.
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, 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 into earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. Any 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.
Contingencies
We are subject to the possibility of various contingencies including claims, suits and complaints, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining gain or loss contingencies. An estimated contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. For additional information regarding our contingencies, see Note 12, Commitments and Contingencies, to the Consolidated Financial Statements in this Form 10-K.
Item 8. | Financial Statements and Supplementary Data |
Reference is made to the Index to consolidated financial statements that appears on page II-1 to this Annual Report. The Consolidated Financial Statements and the Notes to the Consolidated Financial Statements listed in the Index to consolidated financial statements, which appear beginning on page II-2 of this Form 10-K, are incorporated by reference into this Item 8.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of December 31, 2014, the end of the period covered by this Form 10-K, our chief executive officer and principal finance and accounting 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-K 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 chief executive officer and principal finance and accounting officer as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Financial Statements and Practices
Our management is responsible for the preparation and fair presentation of the consolidated financial statements included in this Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect our management’s judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes the policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
18
registrant; to recording transactions as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles; to making receipts and expenditures only in accordance with authorizations of management and directors of our company; and for prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. We recognize that because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014, using criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission – 2013 (COSO) and concluded that we have maintained effective internal control over financial reporting as of December 31, 2014, based on these criteria.
This report does not include an attestation report on internal control over financial reporting by our independent registered public accounting firm since we are a smaller reporting company under the rules of the SEC.
Changes in Internal Control over Financial Reporting
For the quarter ended December 31, 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information |
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item is incorporated by reference from the information contained in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014.
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference from the information contained in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated by reference from the information contained in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is incorporated by reference from the information contained in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014.
Item 14. | Principal Accountant Fees and Services |
The information required by this item is incorporated by reference from the information contained in our Proxy Statement for our 2015 Annual Meeting of Shareholders to be filed within 120 days after the end of our fiscal year ended December 31, 2014.
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PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) The following documents are filed as part of this Annual Report:
(1) Financial Statements. See the accompanying Index to Consolidated Financial Statements, which appears on page II-1 of the Annual Report. The Report of Independent Registered Public Accounting Firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to consolidated financial statements, which appear beginning on page II-2 of this report, are incorporated by reference into Item 8 above.
(2) Financial Statement Schedules. Financial Statement Schedules have been omitted because the information required to be set forth therein is either not applicable or is included in the consolidated financial statements or the notes thereto.
(3) Exhibits. The exhibits listed on the accompanying Exhibit Index immediately following the signature page are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K.
20
AMBASSADORS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Ambassadors Group, Inc.
Spokane, Washington
We have audited the accompanying consolidated balance sheets of Ambassadors Group, Inc. (Company) as of December 31, 2014 and 2013 and the related consolidated statements of operations, and comprehensive loss, changes in stockholders’ equity, and cash flows for years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ambassadors Group, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Spokane, Washington
March 25, 2015
F-1
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, |
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2014 |
2013 |
|||||
ASSETS |
||||||
Current assets: |
||||||
Cash and cash equivalents | $ | 2,002 | $ | 9,473 | ||
Restricted Cash | 400 | — | ||||
Available-for-sale securities and other | 59,502 | 36,174 | ||||
Prepaid program costs and expenses | 1,335 | 7,069 | ||||
Accounts receivable | 666 | 1,792 | ||||
Deferred tax assets | — | 1,295 | ||||
Total current assets | 63,905 | 55,803 | ||||
Property and equipment, net | 2,429 | 18,452 | ||||
Available-for-sale securities | — | 719 | ||||
Intangibles | — | 3,522 | ||||
Goodwill | 70 | 9,781 | ||||
Other long-term assets | 81 | 82 | ||||
Total assets | $ | 66,485 | $ | 88,359 | ||
LIABILITIES |
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Current liabilities: |
||||||
Accounts payable and accrued expenses | $ | 2,794 | $ | 3,587 | ||
Participants’ deposits | 23,161 | 26,362 | ||||
Foreign currency exchange contracts | 1,345 | 244 | ||||
Deferred tax liability | 18 | — | ||||
Other liabilities | 1 | 119 | ||||
Total current liabilities | 27,319 | 30,312 | ||||
Foreign currency exchange contracts | — | 52 | ||||
Deferred tax liabilities | 6 | 2,087 | ||||
Total liabilities | 27,325 | 32,451 | ||||
Commitments and Contingencies (Note 12) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding | — | — | ||||
Common stock, $.01 par value; 50,000,000 shares authorized; 17,286,449 and 17,040,724 shares issued and outstanding as of December 31, 2014 and 2013 respectively | 173 | 170 | ||||
Additional paid-in capital | 1,630 | 411 | ||||
Retained earnings | 38,334 | 55,876 | ||||
Accumulated other comprehensive loss | (977 | ) |
(549 | ) |
||
Stockholders’ equity | 39,160 | 55,908 | ||||
Total liabilities and stockholders’ equity | $ | 66,485 | $ | 88,359 |
The accompanying notes are an integral part of the consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31, |
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2014 |
2013 |
|||||
Net revenue, non-directly delivered programs | $ | 29,823 | $ | 36,752 | ||
Gross revenue, directly delivered programs | 9,734 | 10,468 | ||||
Total revenue | 39,557 | 47,220 | ||||
Cost of sales, directly delivered programs | 5,719 | 7,046 | ||||
Cost of sales, program merchandise markdown | 554 | — | ||||
Gross margin | 33,284 | 40,174 | ||||
Operating expenses: |
||||||
Selling and marketing | 27,137 | 30,819 | ||||
General and administrative | 11,037 | 13,762 | ||||
Restructuring costs | 1,928 | 2,212 | ||||
Asset impairments | 2,517 | 6,466 | ||||
Total operating expenses | 42,619 | 53,259 | ||||
Operating loss | (9,335 | ) |
(13,085 | ) |
||
Other income: |
||||||
Interest, dividend income, and gain (loss) on sale of securities | 348 | 531 | ||||
Foreign currency and other income (expense) | (97 | ) |
23 | |||
Total other income | 251 | 554 | ||||
Loss before income tax provision | (9,084 | ) |
(12,531 | ) |
||
Income tax benefit (provision) | (178 | ) |
4,620 | |||
Net loss from continuing operations | (9,262 | ) |
(7,911 | ) |
||
Discontinued operations: |
||||||
Income (loss) from discontinued segment, including impairment and loss on disposal of $9.7 million | (9,316 | ) |
1,303 | |||
Income tax benefit (provision) | 1,036 | (469 | ) |
|||
Net income (loss) from discontinued operations | (8,280 | ) |
834 | |||
Net loss | $ | (17,542 | ) |
$ | (7,077 | ) |
Weighted-average common shares outstanding - basic and diluted | 17,052 | 16,713 | ||||
Net loss from continuing operations per share - basic and diluted | $ | (0.54 | ) |
$ | (0.47 | ) |
Net income (loss) from discontinued operations per share - basic and diluted | $ | (0.49 | ) |
$ | 0.05 | |
Total net loss per share - basic and diluted | $ | (1.03 | ) |
$ | (0.42 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Years ended December 31, |
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2014 |
2013 |
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Net loss | $ | (17,542 | ) |
$ | (7,077 | ) |
Unrealized loss on foreign currency exchange contracts, net of income tax benefit of $0 and $397 | (950 | ) |
(736 | ) |
||
Unrealized (gain) loss on available-for-sale securities, net of income tax benefit of $0 and $95 | 522 | (177 | ) |
|||
Comprehensive loss | $ | (17,970 | ) |
$ | (7,990 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total |
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Shares |
Amount |
|||||||||||||||||
Balances, December 31, 2012 | 17,047 | $ | 170 | $ | — | $ | 64,589 | $ | 364 | $ | 65,123 | |||||||
Net loss | — | — | — | (7,077 | ) |
— | (7,077 | ) |
||||||||||
Stock options exercised | 1 | — | 5 | — | — | 5 | ||||||||||||
Stock-based compensation expense | — | — | 2,433 | — | — | 2,433 | ||||||||||||
Excess tax shortfall from stock-based compensation | — | — | (1,517 | ) |
(619 | ) |
— | (2,136 | ) |
|||||||||
Stock redemptions | (115 | ) |
(1 | ) |
(509 | ) |
— | — | (510 | ) |
||||||||
Restricted stock grant | 108 | 1 | (1 | ) |
— | — | — | |||||||||||
Dividend to shareholders (0.06 per share) | — | — | — | (1,017 | ) |
— | (1,017 | ) |
||||||||||
Other comprehensive income, net of income taxes | — | — | — | — | (913 | ) |
(913 | ) |
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Balances, December 31, 2013 | 17,041 | 170 | 411 | 55,876 | (549 | ) |
55,908 | |||||||||||
Net loss | — | — | — | (17,542 | ) |
— | (17,542 | ) |
||||||||||
Stock options exercised | — | — | — | — | — | — | ||||||||||||
Stock-based compensation expense | — | — | 1,445 | — | — | 1,445 | ||||||||||||
Excess tax shortfall from stock-based compensation | — | — | (109 | ) |
— | — | (109 | ) |
||||||||||
Stock redemptions | (49 | ) |
— | (205 | ) |
— | — | (205 | ) |
|||||||||
Restricted stock grant | 294 | 3 | 88 | — | — | 91 | ||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (428 | ) |
(428 | ) |
||||||||||
Balances, December 31, 2014 | 17,286 | $ | 173 | $ | 1,630 | $ | 38,334 | $ | (977 | ) |
$ | 39,160 |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, |
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2014 |
2013 |
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Cash flows from operating activities: |
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Net loss | $ | (17,542 | ) |
$ | (7,077 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||
Depreciation and amortization | 5,755 | 5,368 | ||||
Stock-based compensation | 1,475 | 2,433 | ||||
Deferred income taxes | (877 | ) |
(3,319 | ) |
||
Loss on ineffective portion of foreign currency exchange contracts | 99 | — | ||||
Loss on available for sale securities | 150 | — | ||||
Loss on disposition and impairment of property and equipment | 1,933 | 6,466 | ||||
Impairment and loss on sale of discontinued operations | 9,676 | — | ||||
Program merchandise writedown | 554 | — | ||||
Excess tax shortfall from stock-based compensation | 109 | 2,136 | ||||
Change in assets and liabilities: |
||||||
Accounts receivable and other assets | 1,070 | (939 | ) |
|||
Prepaid program costs and expenses | 5,152 | 9,673 | ||||
Accounts payable, accrued expenses, and other current liabilities | (1,477 | ) |
(613 | ) |
||
Participants’ deposits | (3,201 | ) |
627 | |||
Net cash provided by operating activities | 2,876 | 14,755 | ||||
Cash flows from investing activities: |
||||||
Purchase of available for sale securities | (47,966 | ) |
(27,448 | ) |
||
Proceeds from sale of available-for-sale securities | 25,729 | 23,128 | ||||
Purchase of property and equipment | (1,249 | ) |
(3,110 | ) |
||
Proceeds from sale of property and equipment | 9,040 | — | ||||
Purchase of intangibles | (189 | ) |
(344 | ) |
||
Proceeds from sale of BookRags | 4,600 | — | ||||
Net cash used in investing activities | (10,035 | ) |
(7,774 | ) |
||
Cash flows from financing activities: |
||||||
Repurchase of Common Stock | (203 | ) |
(510 | ) |
||
Dividend payment to shareholders | — | (1,017 | ) |
|||
Proceeds from exercise of stock options | — | 5 | ||||
Excess tax shortfall from stock-based compensation | (109 | ) |
(2,136 | ) |
||
Net cash used in financing activities | (312 | ) |
(3,658 | ) |
||
Net increase (decrease) in cash and cash equivalents | (7,471 | ) |
3,323 | |||
Cash and cash equivalents, beginning of period | 9,473 | 6,150 | ||||
Cash and cash equivalents, end of period | $ | 2,002 | $ | 9,473 |
See Note 16, Supplemental Disclosures of Consolidated Statements of Cash Flows.
The accompanying notes are an integral part of the consolidated financial statements.
F-6
AMBASSADORS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | The Company |
Ambassadors Group, Inc. (we, us or our) is an educational company primarily engaged in organizing and promoting differentiated worldwide travel programs for students and professionals. These consolidated financial statements include the accounts of Ambassadors Group, Inc., and our wholly owned subsidiaries, Ambassador Programs, Inc., Ambassadors Unlimited, LLC, AGI Hong Kong Limited, Beijing People to People Education Consultation Co., Ltd, Marketing Production Systems LLC, and World Adventures Unlimited, Inc. All significant intercompany accounts and transactions, which are of a normal recurring nature, are eliminated in consolidation.
Through September 2014 we operated an education oriented research website, BookRags.com, which provided study guides, lesson plans and other educational resources to students and teachers. This business was operated by BookRags, Inc. (BookRags) our then wholly-owned subsidiary. In September 2014, we consummated the sale of the BookRags subsidiary. All activities related to BookRags have been reflected as discontinued operations for all periods presented. For additional information, see Note 8 of Notes to Consolidated Financial Statements.
Subsequent to the sale of BookRags we operate in a single segment that consists of providing educational travel services to students and professionals through multiple itineraries.
All of our assets are located in the United States. Revenues from our directly delivered travel programs are derived primarily from activity in the United States. Revenue from our non-directly delivered programs is derived internationally in the following geographic areas for the years ended December 31, 2014 and 2013:
Years Ended December 31, |
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2014 |
2013 |
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Europe | 78 | % |
61 | % |
||
South Pacific (primarily Australia and New Zealand) | 12 | % |
17 | % |
||
Asia (primarily China) | 3 | % |
11 | % |
||
Other | 7 | % |
11 | % |
2. | Summary of Significant Accounting Policies |
Cash, Cash Equivalents, and Available-for-Sale Securities
We invest cash in excess of operating requirements in high quality, short-term money market instruments, government municipal bonds, and other investments at high credit quality institutions. At times, such balances may be in excess of the federal depository insurance limit or may be on deposit at institutions which are not covered by this insurance.
We consider investments with original maturities at date of purchase of three months or less to be cash equivalents. We classify our marketable debt investments as available-for-sale securities, which are carried at fair value and can be exposed to concentrations of credit risk and interest rate risk. 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 within interest, dividend income, and gain (loss) on sale of securities.
Management evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other-than-temporary, the securities will be written down to current market value, resulting in a loss recorded in the statement of operations. Realized losses could occur in future periods due to a change in management’s intent to hold the investments to maturity, a change in management’s assessment of credit risk, or a change in regulatory or accounting requirements.
Derivative Financial Instruments
We use foreign currency exchange contracts as a means of mitigating exposure to foreign currency risk connected to anticipated travel programs. In entering into these contracts, we have assumed the risk that might arise from the
F-7
possible inability of counterparties to meet the terms of their contracts. However, as all contracts are with high quality institutions, we do not expect any losses as a result of counterparty defaults.
We measure derivative contracts as assets and liabilities based on their fair value. Gains or losses resulting from changes in the fair value of derivatives in each period are recorded either in current earnings or other comprehensive income (OCI), depending on the use of the derivative, whether it qualifies for hedge accounting and whether that hedge is effective. Amounts deferred in OCI are reclassified to Net revenue, non-directly delivered programs when the hedged transaction has occurred. Ineffective portions of any change in fair value of a derivative are recorded in current period foreign currency and other income (expense).
Other Investments
Companies in which we own 20 percent or less are accounted for using the cost method, while companies we own at least 20 percent but less than 50 percent are accounted for using the equity method. Companies in which we own greater than 50 percent are consolidated into our financial statements and are listed in Note 1, The Company, to the consolidated financial statements.
In 2003, we purchased a minority interest in a company, Full On (Europe) Ltd. This company provides development activities for our delegates traveling in Europe, New Zealand and Australia, and is accounted for using the equity method. Additionally, during August 2005, we made an investment in a safety awareness firm to support the education of and support of safe travel practices, Safe Passage Travel I, LLC. This investment is accounted for using the cost method. Both investments are included in other long-term assets on the consolidated balance sheets.
Property and Equipment
Property and equipment are stated at acquisition cost less accumulated depreciation. Major additions and increases in functionality are capitalized, whereas cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the respective assets, generally between two to seven years.
We perform reviews for the impairment of property and equipment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When property and equipment are sold, retired, or impaired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in the consolidated statement of operations. Refer to Note 6, Property and Equipment.
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized but subject to an annual impairment test. An impairment loss is recognized if the carrying amount of the goodwill is not recoverable and exceeds its fair value. Refer to Note 9, Intangible Assets and Goodwill for further information.
Prepaid Program Costs and Expenses
Our prepaid expenses consist primarily of prepaid program costs for airline deposits, program delivery vendor deposits, hotel deposits and other miscellaneous costs associated with delivering our programs. Additionally, we have prepaid costs associated with merchandise used on our programs and other operating expenses, such as liability insurance. Those advanced payments are recorded as prepaid program costs and expenses.
Revenue Recognition
We invoice delegates in advance of travel, and payments made are recorded as deferred liabilities for participant deposits. The use of cash collected from participant deposits is not restricted by agreement or law, therefore is not reported as restricted cash. Upon enrollment, each new delegate is required to make a deposit of between $300 and $500, depending on the program, with monthly, and lump sum payments due leading up to travel.
For non-directly delivered programs, we do not actively manage the operations of each program, and therefore, recognize revenue and anticipated costs from these programs on a net basis within net revenue, non-directly delivered programs when travel programs begin.
For directly delivered programs in which we organize and operate all activities, we recognize the revenue associated with these programs within gross revenue, directly delivered programs over the period the programs operate. We recognize the costs associated with operating these programs within cost of sales, directly delivered programs over the period the programs operate.
F-8
We charge administrative fees under our withdrawal policy for any delegate who enrolls on our programs but does not ultimately travel. The amount of the administrative fee will vary depending on when the withdrawal occurs. We recognize administration fees concurrent with the revenue recognition from the related programs.
Restructuring Costs
Our restructuring costs are comprised primarily of contract termination fees, employee separation payments, and other transition related expenses. Liabilities associated with the restructuring plan are recognized and measured at fair value when the liability is incurred. We estimate the amounts of some of these costs based on expectations at the time the expenses are incurred and reevaluate the liabilities at each reporting date based on current expectations. Refer to Note 7, Restructuring Costs for further information.
Income Taxes
Deferred tax assets and liabilities and income tax expenses and benefits are recorded for the expected future income tax consequences of events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.
We recognize deferred tax assets to the extent that we determine these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. At December 31, 2014, we determined that we may not be able to realize all of our deferred tax assets before expiration, and therefore have recorded a valuation allowance. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments made from information currently available to us. We review these estimates and make changes to recorded amounts of uncertain tax positions as facts and circumstances warrant. Refer to Note 11, Income Taxes.
Earnings Per Share
Earnings per share - basic is computed using the two-class method by dividing net income by the weighted-average number of common shares, including participating securities, outstanding during the period. Earnings per share - diluted is computed by increasing the weighted-average number of common shares outstanding by the additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. Participating securities include our unvested employee restricted stock awards with time-based vesting, which receive non-forfeitable dividend payments. Refer to Note 15, Earnings Per Share.
Other Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity, net of tax. Our other comprehensive income is composed of unrealized gains and losses on foreign currency exchange contracts and available-for-sale securities.
Accounting for Stock-Based Compensation
We maintain an Equity Participation Plan under which we have granted non-qualified stock options, performance stock units, restricted stock awards, and restricted stock units to employees, non-employee directors and consultants. The fair value of the equity instruments granted are estimated on the date of grant using the Black-Scholes and other pricing models, utilizing assumptions as described in Note 13, Stock-Based Compensation.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires us to make estimates and judgments that affect the reported
F-9
amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those associated with available-for-sale securities, valuation of fixed assets, income taxes, foreign currency exchange contracts, revenue recognition, stock-based compensation, and contingencies.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
In June, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments when the terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition on performance stock unit awards. In some cases, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the employee is rendering service on the date the performance target is achieved. Our current performance stock unit awards are contingent upon employment status as well as internal metrics. As such, 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.
In April 2014, the 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 and will be reflected in periods following the fourth quarter of 2014.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (ASU 2014-15). This ASU requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The ASU requires disclosures that will enable financial statement users to understand the conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and management’s plans to alleviate such conditions and events. If substantial doubt cannot be alleviated, an entity must include a statement in the footnotes to the financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern. The standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. Upon adoption, we will use this new standard to assess going concern.
Management has assessed the impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us, or are not anticipated to have a material impact on our consolidated financial statements.
F-10
3. | Investments and Fair Value Measurements |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.
Our financial instruments are measured and recorded at fair value. Our non-financial assets, (including: property and equipment; intangible assets; and goodwill), are measured at fair value upon acquisition, reviewed annually, and are fully assessed if there is an indicator of impairment. An adjustment would be made to record non-financial assets at fair value only when 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. |
The following tables summarize the composition of our investments at December 31, 2014 and 2013 (in thousands):
Classification on Balance Sheet |
||||||||||||||||||
December 31, 2014 |
Amortized Cost |
Unrealized Losses |
Aggregate Fair Value |
Cash and cash equivalents |
Short-term available-for-sale securities |
Long-term available-for-sale securities |
||||||||||||
Short term municipal securities funds2 | $ | 59,520 | $ | (18 | ) |
$ | 59,502 | $ | — | $ | 59,502 | $ | — | |||||
Total | $ | 59,520 | $ | (18 | ) |
$ | 59,502 | $ | — | $ | 59,502 | $ | — |
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 through five years | 4,854 | (137 | ) |
4,717 | — | 4,717 | — | |||||||||||
Total | $ | 37,921 | $ | (540 | ) |
$ | 37,381 | $ | 488 | $ | 36,174 | $ | 719 |
1 | Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. |
2 | Amounts include short-term municipal security funds that do not have a set maturity date. |
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The following table details the fair value measurements of assets and liabilities measured on a recurring basis within the three levels of the fair value hierarchy at December 31, 2014 and 2013 (in thousands):
Fair Value Measurements at Reporting Date Using |
||||||||||||
December 31, 2014 |
Fair Market Value |
Level 1 |
Level 2 |
Level 3 |
||||||||
Municipal securities1 | $ | 59,502 | $ | 59,502 | $ | — | $ | — | ||||
Foreign currency exchange contracts | 14 | — | 14 | — | ||||||||
Total financial assets | $ | 59,516 | $ | 59,502 | $ | 14 | $ | — | ||||
Financial liabilities: |
||||||||||||
Foreign currency exchange contracts | 1,359 | — | 1,359 | — | ||||||||
Total financial liabilities | $ | 1,359 | $ | — | $ | 1,359 | $ | — |
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 securities2 | 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 December 31, 2014, municipal securities consisted solely of holdings in short-term municipal security funds. |
2 | 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. In addition, the underlying credit rating of the municipal securities at December 31, 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 security funds 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 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 auction-rate securities (ARS), which were valued using a pricing model that takes into account the average life of the underlying collateral, the rate of return, and the spread used for similar issuances.
The following table details the fair value measurements of assets measured on a non-recurring basis within the three levels of the fair value hierarchy at December 31, 2013 (in thousands):
Fair Value Measurements at Reporting Date Using |
|||||||||||||||
December 31, 2013 |
Fair Market Value |
Level 1 |
Level 2 |
Level 3 |
Total Loss |
||||||||||
Property and equipment, land and building | $ | 11,000 | $ | — | $ | — | $ | 11,000 | $ | 4,544 |
In April 2012, our Board of Directors approved the listing for sale of our corporate headquarters building and land located in Spokane, Washington. We entered into a purchase and sale agreement in the third quarter of 2014 and closed on the sale in November 2014. During the third quarter of 2013, we performed an impairment analysis that resulted in us lowering the fair value of our corporate headquarters building and land by $4.5 million to $11.0 million based on a weighted average probability model of estimated future cash flows. Based on changes in the sales price and ultimately the final purchase and sales agreement, we recorded additional impairment charges in the second and third quarter of 2014 totaling $2.5 million. Refer to Note 6, Property and Equipment.
F-12
The following table presents a reconciliation for the year ended 2013 of available-for-sale ARS measured at fair value on a recurring basis using Level 3 inputs (in thousands):
December 31, |
December 31, |
|||||
2014 |
2013 |
|||||
Beginning balance | $ | 719 | $ | 723 | ||
Total gains or losses (realized/unrealized) | ||||||
Included in earnings | (115 | ) |
— | |||
Included in OCI | 281 | (4 | ) |
|||
Sales and settlements | (885 | ) |
— | |||
Ending balance | $ | — | $ | 719 |
In determining the fair value of our financial instruments, 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.
4. | Derivative Financial Instruments |
The majority of our travel programs take place outside of the United States and most foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to foreign currency risk relative to changes in 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 and to provide a hedge against foreign currency risk. At December 31, 2014 amounts determined to be ineffective have been recognized in earnings. All other remaining 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, which is primarily during the second and third quarters of the year when the majority of our international travel programs occur. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
At December 31, 2014, the following forward contracts were outstanding (in thousands):
Notional Amount |
Matures |
|||||
Forward contracts: |
||||||
Euro | 10,000 | January 2015 - July 2015 | ||||
Australian dollar | 3,250 | January 2015 - July 2015 | ||||
British pound | 1,900 | January 2015 - July 2015 | ||||
Canadian dollar | 400 | March 2015 - May 2015 | ||||
New Zealand dollar | 400 | March 2015 - July 2015 | ||||
Japanese Yen | 25,000 | May 2015 |
The fair values of our forward contracts were as follows (in thousands):
December 31, 2014 |
|||||||||
Derivatives designated as hedging instruments |
Total Net |
||||||||
Assets |
Liabilities |
Liabilities |
|||||||
Forward contracts | $ | 14 | $ | 1,359 | $ | 1,345 |
December 31, 2013 |
|||||||||
Derivatives designated as hedging instruments |
Total Net |
||||||||
Assets |
Liabilities |
Liabilities |
|||||||
Forward contracts | $ | 253 | $ | 549 | $ | 296 |
The net liabilities and asset derivatives at December 31, 2014 and 2013 are reported in the consolidated balance sheet as current and long-term foreign currency exchange contracts.
F-13
5. | Accumulated Other Comprehensive Income (Loss) |
Unrealized gains or losses related to derivative securities are recorded in 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 accumulated other comprehensive income (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, dividend income, and gain (loss) on sale of securities.
For years ended December 31, 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 |
|||||||||||
Year ended December 31, |
Year ended December 31, |
|||||||||||
2014 |
2013 |
2014 |
2013 |
|||||||||
Balance, beginning of period | $ | (192 | ) |
$ | 544 | $ | (357 | ) |
$ | (180 | ) |
|
Change before reclassification | (1,049 | ) |
(948 | ) |
372 | (352 | ) |
|||||
Reclassification into net revenue, non-directly delivered programs | — | (185 | ) |
— | — | |||||||
Reclassification into interest (income) expense and dividend income | 99 | — | 150 | 80 | ||||||||
Effect of incomes taxes | — | 397 | — | 95 | ||||||||
Other comprehensive income (loss), net of income taxes | (950 | ) |
(736 | ) |
522 | (177 | ) |
|||||
Balance, end of period | $ | (1,142 | ) |
$ | (192 | ) |
$ | 165 | $ | (357 | ) |
6. | Property and Equipment |
Property and equipment and the changes therein consist of the following (in thousands):
December 31, |
||||||
2014 |
2013 |
|||||
Land | $ | — | $ | 1,817 | ||
Building | — | 9,183 | ||||
Office furniture, fixtures and equipment | 782 | 2,658 | ||||
Computer equipment and software | 16,304 | 19,659 | ||||
Construction in progress | 434 | 146 | ||||
Total property and equipment, gross | 17,520 | 33,463 | ||||
Less accumulated depreciation | (15,091 | ) |
(15,011 | ) |
||
Total property and equipment, net | $ | 2,429 | $ | 18,452 |
The remaining cost of completion for construction in process, which consists of website and internal use software development, is estimated to be approximately $0.4 million as of December 31, 2014. For the years ended December 31, 2014 and 2013, we recognized approximately $5.5 million and $5.0 million, respectively, in depreciation and amortization expense.
Our corporate headquarters building was sold during the fourth quarter of 2014 and during the years ended December 31, 2014 and 2013, we recorded impairment expenses related to this building of $2.5 million and $4.5 million, respectively. In addition we recorded approximately $2.0 million in impairment related to other property and equipment during the year ended December 31, 2013. These losses were classified in our consolidated statements of operations as of December 31, 2014 and 2013 as asset impairments.
F-14
7. | Restructuring Costs |
During the third quarter of 2013, we initiated a corporate restructuring plan aimed at streamlining our cost structure and focusing our business primarily on our core Student Ambassador Programs in order to promote the long-term health of the organization. This plan included the wind down of the operations and programs associated with DSA and terminating the operations associated with our People to People – China office. The costs associated with this restructuring plan include contract termination fees associated with Discovery Student Adventures, asset impairments, and transition-related costs primarily comprised of charges for employee termination benefits, retention incentives during the transition period, and other operating costs incurred as part of the transition period. As of December 31, 2014, all restructuring expenses have been recognized.
The following table summarizes costs incurred as part of the restructuring plan and balance of the restructuring cost liability as of December 31, 2014 and 2013 (in thousands):
Year ended December 31, |
||||||
2014 |
2013 |
|||||
Restructuring liabilities as of January 1, | $ | 244 | $ | — | ||
Restructuring costs: |
||||||
Contract termination fees | — | 1,550 | ||||
Separation payments | 1,090 | 130 | ||||
Equity compensation expenses | 314 | 63 | ||||
Other transition costs | 524 | 469 | ||||
Total expense | 1,928 | 2,212 | ||||
less: cash payments made during period | 1,619 | 1,905 | ||||
less: non-cash expenses | 314 | 63 | ||||
Total restructuring liabilities as of December 31, | $ | 239 | $ | 244 |
8. | Discontinued Operations |
In furtherance to its focus on the core Student Ambassadors programs, in September 2014 we consummated the sale of BookRags for $5.0 million, subject to a $0.4 million escrow arrangement to be released in 2015. The amount subject to escrow is disclosed as restricted cash on the consolidated balance sheet. All activities related to BookRags have been reflected as discontinued operations on our consolidated financial statements for all periods presented. The BookRags disposal loss before considering the impact of income taxes was $9.7 million.
The following table summarizes the assets and liabilities of discontinued operations including in the consolidated balance sheet as of December 31, 2013. There were no assets and liabilities of discontinued operations as of December 31, 2014.
Assets |
|||
Current assets: |
|||
Cash and cash equivalents | $ | 765 | |
Accounts receivable | 731 | ||
Other current assets | 62 | ||
Total current assets | 1,558 | ||
Property and equipment, net | 710 | ||
Intangibles | 3,522 | ||
Goodwill | 9,711 | ||
Total assets | $ | 15,501 | |
Liabilities |
|||
Current liabilities: |
|||
Accounts payable and accrued expenses | $ | 283 | |
Other current liabilties | 118 | ||
Total current liabilities | 401 | ||
Other long-term liabilities | 1,056 | ||
Total liabilities | $ | 1,457 |
F-15
The following table summarizes the results of discontinued operations for the periods indicated (in thousands):
Year ended December 31, |
||||||
2014 |
2013 |
|||||
Total revenue | $ | 2,608 | $ | 3,975 | ||
Gross margin | $ | 2,282 | $ | 3,462 | ||
Selling & marketing expenses | $ | 714 | $ | 1,499 | ||
General & administrative expenses | $ | 687 | $ | 661 | ||
Restructuring costs | $ | 522 | $ | — | ||
Impairment and loss on sale of discontinued operations | $ | 9,676 | $ | — | ||
Operating income (loss) from discontinued operations | $ | (9,316 | ) |
$ | 1,302 | |
Income tax benefit (provision) on discontinued operations | $ | 1,036 | $ | (469 | ) |
|
Net income (loss) from discontinued operations | $ | (8,280 | ) |
$ | 834 |
9. | Intangible Assets and Goodwill |
As discussed in Note 8, Discontinued Operations, in September 2014, we completed the sale of all of the assets of BookRags, which included the entire $3.5 million of intangible assets outstanding as of December 31, 2013. Therefore, there are no intangible assets at December 31, 2014 other than goodwill.
Identified intangible assets related to discontinued operations and the changes therein consisted of the following at December 31, 2013 (in thousands):
December 31, |
|||
2013 |
|||
Content license agreements | $ | 838 | |
Content copyrights | 3,607 | ||
Advertising relationship | 512 | ||
Other | 130 | ||
Trademark | 517 | ||
Total intangible assets, gross | 5,604 | ||
Less accumulated amortization |
|||
Content license agreements | (236 | ) |
|
Content copyrights | (1,204 | ) |
|
Advertising relationship | (512 | ) |
|
Other | (130 | ) |
|
Total intangible assets, net | $ | 3,522 |
For the years ended December 31, 2014 and 2013, respectively, we recorded approximately $0.3 million and $0.4 million, respectively, in amortization expense on intangible assets which is included in income (loss) from discontinued operations.
Goodwill consisted of the following (in thousands):
December 31, |
||||||
2014 |
2013 |
|||||
Goodwill - BookRags | $ | — | $ | 9,711 | ||
Goodwill - Ambassador programs and other | 70 | 70 | ||||
Goodwill | $ | 70 | $ | 9,781 |
As discussed in Note 8, Discontinued Operations, in September 2014, we completed the sale of all of the assets of BookRags. During the second quarter of 2014 and due to business changes (which included the prospective sale of this segment) as well as the narrow margin results of annual impairment test in December 2013, in which the estimate fair value exceeded its carrying value by less than 5 percent, we re-evaluated the carrying value of BookRags and recorded a goodwill impairment charge of $9.7 million, as the implied fair value of the goodwill was determined to be lower than its carrying value. Using the income and market approaches, 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. This impairment charge has been recorded within discontinued operations and is reflected in the table above for the year ended December 31, 2014.
F-16
We completed our annual impairment test of goodwill related to Ambassadors Programs as of December 1, 2014, and concluded that no impairment existed.
10. | Line of Credit |
Our revolving credit agreement with Wells Fargo expired on June 1, 2014 and was not renewed.
11. | Income Taxes |
Major components of the benefit (provision) for income taxes from continuing operations consisted of the following (in thousands):
Years Ended December 31, |
||||||
2014 |
2013 |
|||||
Current tax expense | ||||||
Federal | $ | 85 | $ | 796 | ||
State | 5 | 36 | ||||
Deferred tax benefit | ||||||
Federal | 752 | 3,222 | ||||
State | 16 | 97 | ||||
Total income tax benefit (provision) | 858 | 4,151 | ||||
Less: tax benefit (provision) of discontinued operations | 1,036 | (469 | ) |
|||
Income tax benefit (provision) from continuing operations | $ | (178 | ) |
$ | 4,620 |
Components of the net deferred tax assets and liabilities are as follows (in thousands):
December 31, 2014 |
|||||||||
Assets |
Liabilities |
Total |
|||||||
Net operating loss carryforward | $ | 2,376 | $ | — | $ | 2,376 | |||
Amortization of goodwill and other intangibles | 5 | — | 5 | ||||||
Accrued compensation | 237 | — | 237 | ||||||
Unrealized loss on foreign currency exchange contracts | 494 | — | 494 | ||||||
Unrealized loss on available-for-sale securities | (6 | ) |
— | (6 | ) |
||||
Depreciation | — | (494 | ) |
(494 | ) |
||||
Stock options | 257 | — | 257 | ||||||
Restricted stock grants | 99 | — | 99 | ||||||
Prepaids | — | (152 | ) |
(152 | ) |
||||
Capital loss carryforward | 2,173 | — | 2,173 | ||||||
Other | 269 | — | 269 | ||||||
Valuation allowance | — | (5,282 | ) |
(5,282 | ) |
||||
Total deferred tax assets (liabilities) | $ | 5,904 | $ | (5,928 | ) |
$ | (24 | ) |
December 31, 2013 |
|||||||||
Assets |
Liabilities |
Total |
|||||||
Net operating loss carryforward | $ | 815 | $ | — | $ | 815 | |||
Amortization of goodwill and other intangibles | — | (894 | ) |
(894 | ) |
||||
Accrued vacation and compensation | 118 | — | 118 | ||||||
Unrealized loss on foreign currency exchange contracts | 101 | — | 101 | ||||||
Unrealized loss on available-for-sale securities | 88 | — | 88 | ||||||
Unrealized loss on auction rate securities | 97 | — | 97 | ||||||
Depreciation | — | (1,971 | ) |
(1,971 | ) |
||||
Stock options | 404 | — | 404 | ||||||
Restricted stock grants | 216 | — | 216 | ||||||
State tax deduction | 30 | — | 30 | ||||||
Prepaids | — | (209 | ) |
(209 | ) |
||||
Other | 413 | — | 413 | ||||||
Total deferred tax assets (liabilities) | $ | 2,282 | $ | (3,074 | ) |
$ | (792 | ) |
F-17
The income tax benefit (provision) differs from that computed using the federal statutory rate applied to income before income taxes as follows (in thousands):
Years Ended December 31, |
||||||||||||
2014 Amount |
% |
2013 Amount |
% |
|||||||||
Benefit at the federal statutory rate | $ | 3,088 | 34.0 | % |
$ | 4,262 | 34.0 | % |
||||
Tax-exempt interest | 128 | 1.4 | 206 | 1.7 | ||||||||
Uncertain state tax position | 53 | 0.6 | 64 | 0.5 | ||||||||
Tax rate change to deferreds - federal | — | 0.0 | 34 | 0.3 | ||||||||
State income tax, net of federal benefit | (5 | ) |
(0.1 | ) |
36 | 0.3 | ||||||
Idaho refund credit | 26 | 0.3 | — | 0.0 | ||||||||
Other | 4 | 0.0 | 18 | 0.1 | ||||||||
Valuation allowance | (3,472 | ) |
(38.2 | ) |
— | 0.0 | ||||||
Income tax benefit (provision) from continuing operations | (178 | ) |
(2.0 | %) |
4,620 | 36.9 | % |
|||||
Effect of discontinued operations | 1,036 | 6.7 | (469 | ) |
(0.1 | ) |
||||||
Total income tax benefit | $ | 858 | 4.7 | % |
$ | 4,151 | 37.0 | % |
As of December 31, 2014, no unrecognized tax benefits are recorded as accounts payable or accrued expenses in the consolidated balance sheet. During the years ended December 31, 2014 and 2013, we recognized $0.1 million and $0.1 million, respectively, of income tax benefit in the consolidated statement of operations associated with uncertain tax positions.
As of December 31, 2014, we have a tax net operating loss carryforward of $7.0 million that will begin expiring in 2033 if not utilized. Additionally, we have a capital loss carryforward of $6.2 million that will begin expiring in 2017 if not utilized.
The following summarizes the unrecognized tax benefits activity during 2014 and 2013 (in thousands):
2014 |
2013 |
|||||
Gross unrecognized tax benefit as of January 1, | $ | 83 | $ | 225 | ||
Increases in uncertain tax benefits as a result of tax positions taken during the current period | — | — | ||||
Settlements with tax authorities | — | (26 | ) |
|||
Lapse of statute of limitations | (83 | ) |
(116 | ) |
||
Gross unrecognized tax benefits as of December 31, | $ | 0 | $ | 83 |
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 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 December 31, 2014 and a valuation allowance of $5.3 million has been recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. This accounting treatment has no effect on our ability to utilize deferred tax assets such as a loss carryforward 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.
We file tax returns in the U.S. federal jurisdiction and various state jurisdictions. We may be subject to examination by the Internal Revenue Service for the years after 2010. We may also be subject to examination by various state jurisdictions for the years after 2009.
F-18
12. | Commitments and Contingencies |
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 certain rights to indemnification by us against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which covers certain liabilities arising from our obligation to indemnify our directors and officers and former directors in certain circumstances. No material indemnification liabilities were accrued at December 31, 2014.
13. | 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 may be best suited to the circumstances of the particular employee, director or consultant. As of December 31, 2014, we had 1,720,263 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), not to be less than the par value of a share of common stock, and if granted as performance-based compensation or as incentive stock options, not to be less than the fair market value of the stock on the date of grant. The Compensation Committee establishes the vesting period of the awards, which is generally set at 25 percent per year for four years. Options may be exercised any time after they vest for a period up to 10 years from the grant date.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of options. Option valuation models require the input of highly subjective assumptions, particularly for the expected term and stock price volatility. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Our employee stock options do not trade on a secondary exchange; therefore, employees do not derive a benefit from holding stock options unless there is an appreciation in the market price of our stock above the grant price. Such an increase in stock price would benefit all shareholders commensurately.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 2014 and 2013.
Year ended December 31, |
||||||
2014 |
2013 |
|||||
Expected dividend yield | — | % |
0.64 | % |
||
Expected stock price volatility | 42.09 | % |
48.75 | % |
||
Risk-free interest rate | 2.52 | % |
2.51 | % |
||
Expected life of options | 4.14 Years | 4.57 Years | ||||
Estimated fair value per option granted | $ | 1.49 | $ | 1.71 |
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
F-19
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 14.14 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 December 31, 2014, and the changes during the year 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 | 209,986 | 4.06 | |||||||
Forfeited / Expired | (566,522 | ) |
6.22 | ||||||
Exercised | — | — | |||||||
Outstanding at December 31, 2014 | 551,409 | $ | 6.11 | 7.15 | |||||
Exercisable at December 31, 2014 | 232,138 | $ | 8.57 | 4.76 |
During the years ended December 31, 2014 and 2013, the total intrinsic value of stock options exercised was zero and the total fair value of options which vested was zero and $43 thousand, respectively. The weighted-average grant-date fair value of options granted during the year ended December 31, 2014 was $0.3 million. The aggregate intrinsic value of outstanding and exercisable stock options was zero before applicable income taxes, based on our $2.50 closing stock price at December 31, 2014. This intrinsic value would have been received by the optionees had all in-the-money stock options been exercised on that date. Compensation expense recognized in the consolidated statement of operations for stock options was $0.6 million and $1.1 million for the years ended December 31 2014 and 2013, respectively, before the effect of income taxes. As of December 31, 2014, the 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 3.9 years.
Restricted Stock Grants
Under the terms of the Plan, restricted stock awards and restricted stock units may be granted 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. The fair value of restricted stock awards and restricted stock units are based on the market price of our shares on the grant date.
A summary of the activity of non-vested restricted stock awards and restricted stock units under the Plan as of December 31, 2014, and the changes during the year 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 | 298,216 | 2.42 | 88,809 | 4.27 | ||||||||||||||
Forfeited | (16,826 | ) |
5.44 | (19,350 | ) |
4.22 | ||||||||||||
Vested | (225,188 | ) |
5.10 | (15,010 | ) |
4.16 | ||||||||||||
Balance at December 31, 2014 | 341,637 | $ | 2.83 | 1.61 | 82,572 | $ | 4.17 | 1.88 |
At December 31, 2014, the aggregate value of non-vested restricted stock awards and restricted stock units was $0.9 million and $0.2 million, respectively, before applicable income taxes, based on a $2.50 closing stock price at December 31, 2014. During the years ended December 31, 2014 and 2013, the weighted-average grant date fair value
F-20
of restricted stock awards which vested was $1.2 million and $2.2 million, respectively. Compensation expense recognized in the consolidated statement of operations for restricted stock awards was $0.8 million and $1.3 million for the years ended December 31 2014 and 2013, respectively, before the effect of income taxes. Compensation expense recognized in the consolidated statement of operations for restricted stock units was $97 thousand for the year ended December 31, 2014 and $6 thousand for the year ended December 31, 2013, before the effect of income taxes. As of December 31, 2014, total unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units was approximately $0.7 million and $0.3 million, respectively, which is expected to be recognized over approximately 3.9 years.
Performance Stock Awards
Under the terms of the Plan, performance stock awards are granted by the Compensation Committee to key employees. Performance stock awards are based on achieving key internal metrics measured at the end of each fiscal year. 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. A forfeiture rate of 14 percent is used as a best estimate of future forfeitures. 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 December 31, 2014, and the changes during the year then ended is presented below:
Performance Stock Units |
Weighted- Average Grant Date Fair Value |
Weighted- Average Remaining Contractual Life (years) |
|||||||
Balance at December 31, 2013 | 114,560 | 4.41 | |||||||
Granted | 200,000 | $ | 2.15 | ||||||
Forfeited | (85,245 | ) |
2.15 | ||||||
Vested | — | — | |||||||
Balance at December 31, 2014 | 229,315 | $ | 2.50 | 2.84 |
During the year ended December 31, 2014, we granted 200,000 performance stock units payable upon the achievement of certain internal metrics over a performance period of January 1, 2015 through December 31, 2017. The total potential payouts for awards granted in 2014 ranged from 0 to 200,000 shares if targets are achieved during the performance period. Compensation expense of up to $430,000 related to these performance share unit awards is expected to be recognized over a weighted average period of three years as it is probable that the performance metrics will be achieved. Approximately $5,000 in compensation expense related to the 2014 grant has been recognized.
During the year ended December 31, 2013, we granted 121,756 performance stock units payable upon the achievement of certain internal metrics over a performance period of January 1, 2014 through December 31, 2016. The total potential payouts for awards granted in 2013 ranged from 78,149 to 121,756 shares if targets are achieved during the performance period. As of December 31, 2014 no compensation expense has been recognized related to performance stock units granted in 2013 as it is not probable that the performance metrics will be achieved.
14. | Employee Benefit Plan |
Effective March 2002, we established a 401(k) Profit Sharing Plan (the Sharing Plan) for our employees. Employees are eligible to participate in the Sharing Plan beginning the first month following 30 days of service and may contribute up to 100 percent of their salary, subject to the maximum contribution allowed by the Internal Revenue Service. Our matching contribution is discretionary based upon approval by management. Participants are immediately vested in their contributions plus actual earnings thereon. Participants vest progressively in the discretionary matching and profit sharing contributions of their account at the rate of 25 percent per year of service with participants becoming 100 percent vested at the completion of 4 years of service. During the years ended December 31, 2014 and 2013, we contributed approximately $0.1 million and $0.1 million to the Sharing Plan, respectively.
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15. | Earnings (Loss) Per Share |
The following table presents a reconciliation of basic and diluted EPS computations (in thousands, except per share data and anti-dilutive stock option counts):
Year ended December 31, |
||||||
2014 |
2013 |
|||||
Numerator: |
||||||
Loss from continuing operations | $ | (9,262 | ) |
$ | (7,911 | ) |
Income (loss) from discontinued operations | (8,280 | ) |
834 | |||
Net loss | (17,542 | ) |
(7,077 | ) |
||
Denominator: |
||||||
Weighted-average shares outstanding | 17,052 | 16,713 | ||||
Effect of unvested restricted stock awards considered participating securities | — | — | ||||
Weighted-average shares outstanding – basic | 17,052 | 16,713 | ||||
Effect of dilutive common stock options | — | — | ||||
Weighted-average shares outstanding – diluted | 17,052 | 16,713 | ||||
Loss from continuing operations - basic | (0.54 | ) |
(0.47 | ) |
||
Income (loss) from discontinued operations - basic | (0.49 | ) |
0.05 | |||
Net loss per share – basic | $ | (1.03 | ) |
$ | (0.42 | ) |
Loss from continuing operations - diluted | (0.54 | ) |
(0.47 | ) |
||
Income (loss) from discontinued operations - diluted | (0.49 | ) |
0.05 | |||
Net loss per share – diluted | $ | (1.03 | ) |
$ | (0.42 | ) |
Cash dividends declared per share | $ | — | $ | 0.06 | ||
Restricted stock awards excluded from the calculation of basic earnings per share | 201,319 | 272,851 | ||||
Stock options and restricted stock units excluded from the calculation of diluted earnings per share | 698,586 | 1,169,489 |
16. | Supplemental Disclosures of Consolidated Statements of Cash Flows |
We paid cash for taxes during 2014 and 2013 of approximately $18 thousand and $0.3 million, respectively.
Our non-cash investing and financing activities during the years ended December 31, 2014 and 2013 are as follows (in thousands):
2014 |
2013 |
|||||
Unrealized loss on foreign currency exchange contracts | $ | (1,049 | ) |
$ | (1,133 | ) |
Unrealized gain (loss) on available-for-sale securities | $ | 522 | $ | (272 | ) |
|
Property and equipment | $ | — | $ | (30 | ) |
17. | Subsequent Events |
Subsequent to year end, we initiated a reduction in employee work force in February of 2015 and we expect to reduce approximately 60% of the total workforce. As of May 2015, we anticipate we will employ approximately 90 full-time employees.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMBASSADORS GROUP, INC. | ||
By: |
/s/ PHILIP B. LIVINGSTON
|
|
Philip B. Livingston, Chief Executive Officer, (Principle Executive Officer) |
Date: March 25, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/ PHILIP B. LIVINGSTON
|
Chief Executive Officer, (Principal Executive Officer) |
March 25, 2015 |
Philip B. Livingston | ||
/s/ LISA O. RAPUANO
|
Chairman of the Board of Directors | March 25, 2015 |
Lisa O. Rapuano | ||
/s/ LISA N. NETZ
|
Principal Financial and Accounting Officer | March 25, 2015 |
Lisa N. Netz | ||
/s/ DEBRA DULSKY
|
Director | March 25, 2015 |
Debra Dulsky | ||
/s/ PETER H. KAMIN
|
Director | March 25, 2015 |
Peter H. Kamin | ||
/s/ JEFFERSON P. GRAMM
|
Director | March 25, 2015 |
Jefferson P. Gramm | ||
/s/ JAMES M. KALUSTIAN
|
Director | March 25, 2015 |
James M. Kalustian |
II-1
INDEX TO EXHIBITS
Exhibit Number |
Description |
||
3.1 | Amended and Restated Certificate of Incorporation of the registrant incorporated by reference to the registrant’s Registration Statement on Form 10 filed on November 15, 2001. | ||
3.2 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the registrant incorporated by reference to the registrant’s Form 8-K filed on May 17, 2005. | ||
3.3 | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Ambassadors Group, Inc. incorporated by reference to the registrant’s Form 8-K filed on July 10, 2012 | ||
3.4 | Bylaws of the registrant incorporated by reference to the registrant’s Registration Statement on Form 10 filed on November 15, 2001. | ||
3.5 | Certificate of Amendment of By-Laws of Ambassadors Group, Inc. incorporated by reference to the registrant’s Form 8-K filed on July 10, 2012. | ||
3.6 | Certificate of Amendment of By-Laws of Ambassadors Group, Inc. incorporated by reference to the registrant’s Form 8-K filed on November 18, 2013. | ||
4.1 | Form of Common Stock Certificate of the registrant incorporated by reference to the registrant’s Form 10-K filed on March 9, 2007. | ||
10.1 | Form of Indemnification Agreement between the registrant and each of its executive officers and directors incorporated by reference to the registrant’s Registration Statement on Form 10 filed on January 25, 2002. * | ||
10.2 | General Contract dated April 1, 1995 between People to People International and International Ambassador Programs, Inc. incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. (1) | ||
10.3 | Consent to Assignment Agreement dated August 3, 1995 by and among People to People International, International Ambassador Programs, Inc., Ambassadors International, Inc. and Ambassador Programs incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. | ||
10.4 | Amendment to General Contracts dated January 22, 2000 by and among People to People International, Ambassadors International, Inc. and Ambassador Programs, Inc. incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. | ||
10.5 | Letter dated February 13, 2001, by Ambassadors International, Inc. to People to People International incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. | ||
10.6 | Letter dated August 8, 2006, by the registrant to People to People International incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. | ||
10.7 | Letter dated December 9, 2009, by the registrant to People to People International incorporated by reference to the registrant’s Form 10-K filed March 11, 2013. | ||
10.8 | Real Property Purchase and Sale Agreement and Escrow Instructions dated as of August 6, 2014 by and between the registrant, Northwest Farm Credit Services, FLCA and First American Title Insurance Company, incorporated by reference to the registrant’s Form 10-Q filed August 12, 2014. | ||
10.9 | Stock Purchase Agreement dated as of September 5, 2014 by and between the registrant and GradeSaver, LLC, incorporated by reference to the registrant’s Form 8-K filed September 11, 2014. | ||
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Exhibit Number |
Description |
||
10.10 | Form of 2001 Equity Participation Plan Agreement incorporated by reference to the registrant’s Registration Statement on Form 10 filed on November 15, 2001. * | ||
10.11 | 2009 Equity Participation Plan incorporated by reference to the registrant’s Definitive Proxy Statement on Form 14A filed on April 6, 2009. * | ||
10.12 | 2013 Stock Incentive Plan incorporated by reference to the registrant’s Definitive Proxy Statement on Form 14A filed on May 6, 2013. * | ||
10.13 | Severance Agreement dated February 12, 2014 by and between the registrant and Eric G. Anderson incorporated by reference to the registrant’s Form 8-K filed February 2, 2014. * | ||
10.14 | Severance Agreement dated October 15, 2013 by and between the registrant and Lisa N. Netz incorporated by reference to the registrant’s Form 10-K filed March 27, 2014. * | ||
10.15 | Letter Agreement dated May 13, 2014 between the registrant and Philip Livingston, incorporated by reference to the registrant’s Form 8-K dated May 19, 2014. * | ||
10.16 | Noncompetition, Nonsolicitation and Confidential Information Agreement dated May 13, 2014 between the registrant and Philip B. Livingston, incorporated by reference to the registrant’s Form 8-K dated May 19, 2014. * | ||
10.17 | Employment Agreement dated December 17, 2014 by and between the registrant and Philip B. Livingston. * ** | ||
14.1 | Code of Ethics incorporated by reference to the registrant’s Definitive Proxy Statement on Form 14A filed on April 13, 2010. | ||
21.1 | List of subsidiaries of the registrant as of December 31, 2014. ** | ||
23.1 | Consent of BDO USA, LLP, Independent Registered Public Accounting Firm. ** | ||
31.1 | Certification under Section 302 of the Sarbanes-Oxley Act of 2002. (2) | ||
31.2 | Certification under Section 302 of the Sarbanes-Oxley Act of 2002. (2) | ||
32.1 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002. (2) |
(1) | Confidential treatment requested under Rule 24b-2 of the Exchange Act. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been provided separately to the SEC pursuant to the confidential treatment request. |
(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. |
* | Indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K. |
** | Filed herewith in the registrant’s Form 10-K filed March 25, 2015. |
II-3
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement”), dated December 17, 2014, is entered into by and between Ambassadors Group, Inc. (the “Company”), and Philip B. Livingston (“Mr. Livingston”) and is effective as of December 17, 2014 (the “Effective Date”).
WITNESSETH:
WHEREAS, the Company has employed Mr. Livingston as its Interim Chief Executive Officer since May 7, 2014, pursuant to that certain Letter Agreement between the Company and Mr. Livingston dated May 13, 2014 (the “Prior Agreement”), and currently Mr. Livingston serves as director of the Company; and
WHEREAS, the Company desires to employ Mr. Livingston as its Chief Executive Officer, and Mr. Livingston desires to accept such employment, pursuant to the terms and conditions set forth in this Agreement;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations contained herein, the Company and Mr. Livingston agree as follows:
ARTICLE | 1: EMPLOYMENT AND DUTIES: |
1.1 Term. Subject to the terms and conditions of this Agreement, the Company agrees to employ Mr. Livingston, and Mr. Livingston agrees to be employed by the Company. The “Term” of such employment shall begin as of the Effective Date and continue until Mr. Livingston or the Company elects to terminate such employment, provided that at least 90 days notice of such election shall be given by the party electing to terminate.
1.2 Duties and Responsibilities. Beginning as of the Effective Date, Mr. Livingston shall be employed by the Company and as its Chief Executive Officer and shall be nominated for re-election to the Company’s board of directors (the “Board”). Mr. Livingston shall report to the Board. Mr. Livingston agrees to perform diligently and to the best of Mr. Livingston’s abilities, and in a trustworthy, businesslike and efficient manner, the duties and services customarily associated with the position of Chief Executive Officer and such other duties and responsibilities as may be agreed upon by Mr. Livingston and the Board.
1.3 Code of Ethics and Conduct. Mr. Livingston shall at all times comply with, and be subject to, such policies and procedures as the Company may establish from time to time, including, without limitation, the Company’s Code of Ethics and Conduct (the “Code of Ethics and Conduct”).
1.4 Time and Efforts. Except as expressly approved by the Board, Mr. Livingston shall, during the period of Mr. Livingston’s employment by the Company, devote Mr. Livingston’s full business time, energy, and best efforts to the business and affairs of the Company and the Company Entities. Mr. Livingston may not engage, directly or indirectly, in any other business, investment, or activity that interferes with Mr. Livingston’s performance of Mr. Livingston’s duties hereunder, is contrary to the interest of the Company or any of its affiliated subsidiaries and divisions (each, a “Company Entity,” and collectively with the Company, the “Company Entities”) or requires any significant portion of Mr. Livingston’s business time. The foregoing notwithstanding, the parties recognize and agree that Mr. Livingston may engage in passive personal investments and other business activities, including serving on other boards of directors, provided such activities do not conflict with the business and affairs of the Company Entities or interfere with Mr. Livingston’s performance of his duties hereunder. Mr. Livingston shall be permitted to retain any compensation received for service on any unaffiliated corporation’s board of directors.
1.5 Duty of Loyalty; Conflicts of Interest. Mr. Livingston acknowledges and agrees that he owes a fiduciary duty of loyalty, fidelity, and allegiance to act at all times in the best interests of the Company and to do no act which would, directly or indirectly, injure any such entity’s business, interests, or reputation. It is agreed that any direct or indirect interest in, connection with, or benefit from any outside activities, particularly commercial activities, which interest might in any way adversely affect any Company Entity, involves a possible conflict of interest. In keeping with Mr. Livingston’s fiduciary duties to the Company, Mr. Livingston agrees that he shall not knowingly become involved in a conflict of interest with the Company, or upon discovery thereof, allow such a conflict to continue. Moreover, Mr. Livingston shall not engage in any activity that might involve a possible conflict of interest without first obtaining approval in accordance with the Company’s policies and procedures.
ARTICLE | 2: COMPENSATION AND BENEFITS: |
2.1 Base Salary. Mr. Livingston’s base salary during the Term shall be $400,000 per annum, of which $100,000 shall be paid in Company equity grants and $300,000 shall be paid in cash in accordance with the Company’s standard payroll practice. The annual equity grants will be awarded on the Effective Date and each anniversary thereof, and will vest in equal 12-month installments on the 15th of each month thereafter. Mr. Livingston’s base salary shall be reviewed annually by the Compensation Committee of the Board (the “Compensation Committee”) or the Board and may be increased, in the Compensation Committee’s or the Board’s sole discretion, from time to time. Such increased base salary shall become the minimum base salary under this Agreement and may not be decreased thereafter without the written consent of Mr. Livingston unless otherwise permitted by this Agreement.
2.2 Annual Bonus. During the Term, Mr. Livingston shall participate in a bonus plan pursuant to which an annual cash bonus shall be paid to Mr. Livingston in an amount to be determined by the Compensation Committee or the Board, which annual bonus shall be targeted at 100% of Mr. Livingston’s then current base salary (the “Target Bonus”). Payment of the bonus shall be made at the same time as bonuses are paid to other senior executive officers and shall be based on parameters, including, without limitation, performance goals applicable to Mr. Livingston, and such parameters shall be approved by the Compensation Committee or the Board.
2.3 Incentive Compensation. During the Term, Mr. Livingston shall participate in the Company’s long-term incentive plans, including its 2013 Equity Participation Plan, on the terms established from time to time by the Compensation Committee or the Board. The Company intends to grant awards to Mr. Livingston under its long-term incentive plans, the terms of which shall be determined in good faith by the Compensation Committee and/or Board; provided that such grants shall be targeted at a nominal face amount of 100% of Mr. Livingston’s then current base salary subject to appropriate performance and time based vesting. For the initial grant (representing the first 3 years of such grants), Mr. Livingston shall be granted 400,000 shares of Company stock, 12.5% of which shall vest on May 7, 2015, 12.5% of which shall vest on May 7, 2016, 12.5% of which shall vest on May 7, 2017, 12.5% of which shall vest on May 7, 2018, and 50% of which shall vest (if at all) immediately after the Company and its consolidated subsidiaries attain a target mutually agreed by Mr. Livingston and the Compensation Committee for any fiscal year of the Company from the fiscal year ended December 31, 2014 through the fiscal year ended December 31, 2017, based on the Company’s year-end audited financial statements.
2.4 Change in Control. During the Term, in the event of a Change in Control (as defined below), Mr. Livingston shall be entitled to receive a minimum lump sum cash payment equal to a pro rata Target Bonus for the year in which the Change in Control occurs, which shall be based on the portion of such year that Mr. Livingston was employed by the Company prior to the effective date of the Change in Control. Such payment, if any, shall be made no later than 60 days after the effective date of the Change in Control. During the Term, in the event of a Change in Control, Mr. Livingston shall also be entitled to accelerated vesting of all of his incentive awards that would otherwise vest after the date on which the Change in Control occurs, pursuant Section 3.9. For the avoidance of doubt, accelerated vesting will apply to Mr. Livingston’s performance-based incentive awards which are not vested at the time of such Change of Control. For purposes of this Agreement, “Change in Control” shall mean occurrence of any of the following after the date of this Agreement: (a) any merger, consolidation or business combination in which the stockholders of the Company immediately prior to the merger, consolidation or business combination do not own at least a majority of the outstanding equity interests of the surviving parent entity, or (b) the sale of all or substantially all of the Company’s assets in a single transaction or a series of related transactions, other than a Company Liquidation (as defined in Section 2.5).
2.5 Company Liquidation. During the Term, in the event a Company Liquidation (as defined below) is commenced, Mr. Livingston shall be entitled to accelerated vesting of all his incentive awards (other than performance-based incentive awards) that would otherwise vest after the date on which the Company Liquidation commences. For the avoidance of doubt, accelerated vesting will not apply to Mr. Livingston’s performance-based incentive awards which are not vested on such date. For purposes of this Agreement, “Company Liquidation” shall mean the liquidation, dissolution or winding up of the Company and/or all or substantially all of its assets or operations, following approval by stockholders of the Company of a plan for such liquidation, dissolution or winding up or upon or as a result of the appointment of a receiver, intervenor, conservator, trustee or similar officer for the Company.
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2.6 Vacation and Holidays. During the Term, Mr. Livingston shall be entitled to at least 4 weeks paid vacation in each calendar year, or such greater amount of vacation as may be determined in accordance with the Company’s vacation policy as in effect from time to time. Mr. Livingston shall also be entitled to all paid holidays given by the Company to its executives.
2.7 Housing Allowance. During the Term, Mr. Livingston shall be entitled to a $2,000 monthly housing allowance, paid in cash in accordance with the Company’s standard payroll practice. For the purposes of this Agreement, such monthly housing allowance shall not be deemed included in Mr. Livingston’s base salary.
2.8 Business Expenses; Travel. During the Term, the Company shall pay or reimburse Mr. Livingston within 90 days for all actual, reasonable and customary business expenses incurred by Mr. Livingston in the course of his employment, plus travel to and from New Jersey as agreed separately with the Company; provided that Mr. Livingston submits proper receipts and such business and travel expenses are incurred and accounted for in accordance with the Company’s applicable policies and procedures.
2.9 Employee Benefits. While employed by the Company, Mr. Livingston shall be allowed to participate, on the same basis generally as other employees of the Company, in all general employee benefit plans and programs, which on the Effective Date or thereafter are made available by the Company Entities to all or substantially all of the Company’s similarly situated employees. Such benefits, plans, and programs may include, without limitation, medical, vision, and dental care, life insurance, disability protection, qualified and non-qualified retirement plans, retiree medical plans and stock option, stock grant and stock purchase programs, if any. Except as specifically provided in this Agreement, nothing in this Agreement is to be construed or interpreted to increase or alter in any way the rights, participation, coverage, or benefits under such benefit plans or programs than provided to similarly situated employees pursuant to the terms and conditions of such benefit plans and programs.
2.10 Company Plans. Notwithstanding anything to the contrary in this Agreement, it is specifically understood and agreed that the Company Entities shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any incentive, employee benefit or stock or stock option program or plan, so long as such actions are similarly applicable to covered employees generally.
2.11 Withholding. The Company shall withhold from any compensation, benefits, or amounts payable under this Agreement, including dividend payments on unvested shares if applicable, all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling.
ARTICLE | 3: TERMINATION OF EMPLOYMENT AND EFFECTS OF SUCH TERMINATION |
3.1 Termination of Employment. Mr. Livingston’s employment with the Company shall be terminated prior to the end of the Term: (i) upon Mr. Livingston’s death, (ii) upon Mr. Livingston’s Retirement (as defined below), (iii) upon Mr. Livingston’s Permanent Disability (as defined below), (iv) at any time by the Company upon written notice to Mr. Livingston, whether for Company Cause (as defined below) or not, (v) by Mr. Livingston upon 90 days written notice to the Company, whether for Good Reason (as defined below) or not, or (vi) upon the completion of a Company Liquidation.
(i) “Retirement” means Mr. Livingston’s retirement at or after normal retirement age (either voluntarily or pursuant to the Company’s retirement policy).
3 |
(ii) “Permanent Disability” means Mr. Livingston’s physical or mental incapacity to perform his usual duties with such condition likely to remain continuously and permanently as determined by the Board in good faith.
(iii) “Company Cause” means termination of Mr. Livingston’s employment by the Company for any of the following: (a) Mr. Livingston’s gross negligence or willful misconduct in the performance of the duties and services required of Mr. Livingston pursuant to this Agreement, (b) Mr. Livingston’s final conviction of, or plea of guilty or nolo contendere to, a felony or Mr. Livingston engaging in fraudulent or criminal activity relating to the scope of Mr. Livingston’s employment (whether or not prosecuted), (c) a material violation of the Code of Ethics and Conduct, (d) Mr. Livingston’s breach of any material provision of this Agreement, provided that Mr. Livingston receives written notice from the Company and is afforded a reasonable opportunity (at least 30 days) to cure such breach, (e) any continuing or repeated failure to perform the duties as requested in writing by the Board, provided Mr. Livingston is afforded a reasonable opportunity (at least 30 days) to cure such breach, (f) the commission of a felony or crime involving moral turpitude, or (g) conduct which brings the Company Entities into public disgrace or disrepute in any material respect. Determination as to whether or not Company Cause exists for termination of Mr. Livingston’s employment will be made by the Board in good faith.
(iv) “Good Reason” means a termination of employment by Mr. Livingston because of: (a) the assignment to Mr. Livingston of any significant duties materially inconsistent with Mr. Livingston’s status as Chief Executive Office of the Company, or a reduction in the nature of Mr. Livingston’s responsibilities or Mr. Livingston’s status, in each case which results in a material diminution of Mr. Livingston’s authority, duties or responsibilities, or (b) a breach by the Company of any material provision of this Agreement. For the avoidance of doubt, the commencement of a Company Liquidation does not, by itself, constitute Good Reason. In order for Mr. Livingston to terminate for Good Reason, (a) Mr. Livingston must notify the Company in writing within 90 days of the event constituting Good Reason, (b) the event must remain uncorrected by the Company for 30 days following such notice (the “Notice Period”), and (c) such termination must occur within 90 days after the expiration of the Notice Period. An across-the-board base salary and/or Target Bonus opportunity reduction and, in the case of base salary, not below the initial base salary set forth in Section 2.1, similarly affecting Mr. Livingston and all other executives of the Company shall not constitute a material breach of this Agreement by the Company.
3.2 Retirement, Termination with Company Cause, and Resignation Without Good Reason. If Mr. Livingston’s employment is terminated by reason of Retirement, Company Cause, or resignation without Good Reason (including, without limitation, Mr. Livingston’s election to terminate the Term as provided in Section 1.1), then Mr. Livingston shall be entitled to each of the following:
(i) Any base salary earned, accrued or owing to Mr. Livingston through the effective date of termination of employment,
(ii) Reimbursement for all reasonable and customary business expenses incurred by Mr. Livingston in performing services for the Company Entities prior to the effective date of termination of employment,
(iii) Payment equal to the amount of any accrued, but unused, vacation time, and
(iv) Any individual bonuses or individual incentive compensation not yet paid, but due and payable under the Company’s plans for years prior to the year of Mr. Livingston’s termination of employment.
4 |
Subject to Sections 3.13 and 4.2, such payments shall be made to Mr. Livingston on the date that is 60 days after the effective date of termination of employment; provided that Mr. Livingston has executed a release, in substantially the form attached hereto as Annex A (the “Severance Agreement and Release”) no later than 7 days prior to such payment date. Mr. Livingston shall not be entitled to (1) any bonus or incentive compensation for the year in which he terminates employment unless specifically granted by the Compensation Committee or Board, or (2) any other payments or benefits by or on behalf of the Company Entities except for those which may be payable pursuant to the terms of the Company Entities’ employee benefit plans, stock, option, or other equity plans or the applicable agreements underlying such plans. Except for (i) through (iv) above, it is specifically understood that all future compensation to which Mr. Livingston is entitled and all future benefits for which Mr. Livingston is eligible, shall cease and terminate as of the effective date of termination of employment.
3.3 Resignation for Good Reason and Termination Without Company Cause. Subject to Sections 3.13 and 4.2, if Mr. Livingston’s employment is terminated by reason of resignation for Good Reason, or termination by the Company for any reason (including, without limitation, the Company’s election to terminate the Term as provided in Section 1.1), other than Company Cause, then Mr. Livingston shall be entitled to each of the following:
(i) The amounts described in clauses (i), (ii), (iii) and (iv) of Section 3.2 paid as described in Section 3.2,
(ii) A cash amount equal to the sum of: (a) 100% of Mr. Livingston’s base salary in effect as of the effective date of termination of employment, plus (b) a pro rata portion of the Target Bonus for the year in which such termination occurs, which portion shall be based on the portion of such year that Mr. Livingston was employed by the Company prior to the effective date of the termination of employment and shall only be paid to the extent such bonus would be paid at the end of the year in which such termination of employment occurs, based on achievement of the applicable parameters, including performance goals, set pursuant to Section 2.2 and attained at the time of such termination of employment. Except as otherwise provided herein, such compensation shall be paid to Mr. Livingston in equal installments in accordance with the Company’s customary payroll practices during the period commencing on the effective date of termination of employment and ending on the earlier to occur of (A) the first anniversary of the effective date of termination of employment or (B) the date Mr. Livingston violates any of the covenants set forth in the Noncompetition Agreement (as defined below).
(iii) Accelerated vesting of that portion of his incentive awards that would otherwise vest during the 12 months following the termination of employment. For the avoidance of doubt, accelerated vesting shall not apply to Mr. Livingston’s performance-based incentive awards which are not vested at the time Mr. Livingston’s employment is terminated by Mr. Livingston for Good Reason or by the Company without Company Cause.
(iv) To the extent permitted by applicable law and the insurance and benefits policies to which Mr. Livingston is entitled to participate (collectively, “Benefit Plans”), the Company shall maintain Mr. Livingston’s paid coverage for health insurance (through the payment of Mr. Livingston’s COBRA premiums) and other dental and life insurance benefits for the earlier to occur of: (a) Mr. Livingston obtaining the age of 65, (b) the date another employer provides Mr. Livingston benefits substantially comparable to the benefits provided by the above-referenced Benefit Plans, or (c) the 12-month anniversary of the effective date of Mr. Livingston’s termination of employment. During the applicable period of coverage described in the foregoing sentence, Mr. Livingston shall be entitled to benefits on substantially the same basis as would have otherwise been provided had Mr. Livingston not been terminated and the Company will have no obligation to pay any benefits to, or premiums on behalf of, Mr. Livingston after such period ends. To the extent that such benefits are available under the above-referenced Benefit Plans and Mr. Livingston had such coverage immediately prior to termination of employment, such continuation of benefits for Mr. Livingston shall also cover Mr. Livingston’s dependents for so long as Mr. Livingston is receiving benefits under this clause (iv).
3.4 Death and Permanent Disability. Subject to Sections 3.13 and 4.2, if Mr. Livingston’s employment is terminated by reason of Death or Permanent Disability, Mr. Livingston’s estate, in the case of death, or Mr. Livingston (or his legal guardian), in the case of Permanent Disability, shall be entitled to payment of (i) the amounts described in clauses (i), (ii), (iii) and (iv) of Section 3.2 paid as described in Section 3.2, plus (ii) a pro rata portion of the Target Bonus for the year in which such termination occurs, which portion shall be based on the portion of such year that Mr. Livingston was employed by the Company prior to the effective date of the termination of employment, paid on the date that is 60 days after the effective date of termination of employment; provided that, in the case of Permanent Disability and Mr. Livingston’s health permitting, Mr. Livingston has executed the Severance Agreement and Release no later than 7 days prior to such payment date.
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3.5 Company Liquidation. Subject to Sections 3.13 and 4.2, if Mr. Livingston’s employment is terminated by reason of a Company Liquidation, Mr. Livingston shall be entitled to payment of (i) the amounts described in clauses (i), (ii) and (iv) of Section 3.3 paid as described in Section 3.3; provided that Mr. Livingston has executed a Severance Agreement and Release no later than 7 days prior to the first date of any such payments.
3.6 Conditions to Severance Benefits. The severance benefit paid and provided to Mr. Livingston pursuant to Section 3.3, Section 3.5 and/or Section 3.9 shall be in consideration of Mr. Livingston’s continuing obligations under this Agreement after termination of employment, including, without limitation, Mr. Livingston’s obligations under the Noncompetition Agreement (as defined below). Further, as a condition to the receipt of such severance benefit, the Company shall require Mr. Livingston to first execute the Severance Agreement and Release. The performance of the Company’s obligations under Section 3.3, Section 3.5 and/or Section 3.9 and the receipt of the severance benefit provided thereunder by Mr. Livingston shall constitute full settlement of all such claims and causes of action. Mr. Livingston shall not be under any duty or obligation to seek or accept other employment following a termination of employment pursuant to which a severance benefit payment or benefit under Section 3.3, Section 3.5 and/or Section 3.9 is owing and the amounts and benefits due Mr. Livingston pursuant to Section 3.3, Section 3.5 and/or Section 3.9 shall not be reduced or suspended, except as otherwise provided, if Mr. Livingston accepts subsequent employment or earns any amounts as a self-employed individual, provided, however that in the event Mr. Livingston breaches any of Mr. Livingston’s obligations under the Noncompetition Agreement, then, in addition to the Company’s right to specific performance pursuant to the Noncompetition Agreement or any other rights that the Company may have under this Agreement or otherwise, the Company shall have the right to terminate payment of any amounts or benefits to which Mr. Livingston would otherwise be entitled pursuant to Section 3.3, Section 3.5 and/or Section 3.9.
3.7 Limitation of Remedies. Mr. Livingston’s rights under Article 3 are Mr. Livingston’s sole and exclusive rights against the Company Entities and any affiliate of the Company, and the Company Entities’ sole and exclusive liability to Mr. Livingston under this Agreement, whether such claim is based in contract, tort or otherwise, for the termination of his employment relationship with the Company.
3.8 Resolution of Disputes; No Waiver. Mr. Livingston agrees that all disputes relating to Mr. Livingston’s employment or termination of employment shall be resolved as provided in Section 4.5 hereof; provided, however, that decisions as to whether and as of what date Mr. Livingston has become Permanently Disabled shall be limited to whether such decision was reached in good faith. Nothing contained in this Article 3 shall be construed to be a waiver by Mr. Livingston of any benefits accrued for or due Mr. Livingston under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by the Company except that Mr. Livingston shall not be entitled to any severance benefits pursuant to any severance plan or program of the Company except as outlined in this Agreement.
3.9 Vesting of Awards. Subject to Section 4.2, with respect to any equity awards or grants made by the Company and notwithstanding any provision to the contrary in any applicable plan, program or agreement: (a) upon a Change in Control pursuant to Section 2.4, all stock options, restricted stock and other equity rights held by Mr. Livingston will become fully vested and/or exercisable, as the case may be, on the date on which such termination of employment occurs, and all stock options held by Mr. Livingston shall remain exercisable until the earlier to occur of: (i) the expiration date of the applicable option term or (ii) the date that is 90 days after Mr. Livingston’s termination date; (b) upon a Company Liquidation pursuant to Section 2.5, all non-performance based stock options, restricted stock and other equity rights held by Mr. Livingston will become fully vested and/or exercisable, as the case may be, on the date on which such Company Liquidation commences, and all non-performance based stock options held by Mr. Livingston shall remain exercisable until the earlier to occur of: (i) the expiration date of the applicable option term, (ii) the date that is 90 days after the date such Company Liquidation commences or (iii) the date that such Company Liquidation is completed; and (c) upon termination of Mr. Livingston’s employment by Mr. Livingston for Good Reason or by the Company without Company Cause, that portion of Mr. Livingston’s non-performance based stock options, restricted stock and other equity rights held by Mr. Livingston, as the case may be, that would otherwise vest during the 12 months following the termination of employment, will become vested and/or exercisable, and all such vested stock options held by Mr. Livingston shall remain exercisable until the earlier to occur of: (i) the expiration date of the applicable option term or (ii) the date that is 90 days after Mr. Livingston’s termination date. For the avoidance of doubt, accelerated vesting shall not apply to Mr. Livingston’s performance-based incentive awards which are not vested at the time a Company Liquidation commences or of termination of employment by Mr. Livingston for Good Reason or by the Company without Company Cause, but shall apply to Mr. Livingston’s performance-based incentive awards which are not vested at the time of a Change of Control.
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For example, if (i) Mr. Livingston terminated his employment for Good Reason 6 months after the initial grant of Mr. Livingston’s incentive awards described in Section 2.3 and 6 months after his employment commenced under this Agreement, and (ii) on such termination date the performance targets mutually agreed by Mr. Livingston and the Compensation Committee were not yet met, then the 12.5% of unvested stock that would have vested on the one-year anniversary of such initial grant would immediately vest on such termination date (subject to the limitations imposed by Section 4.2), and all the remaining stock comprising Mr. Livingston’s initial grant pursuant to Section 2.3 would immediately be cancelled and/or forfeited.
3.10 Continuing Obligations. Termination of the employment relationship does not terminate those obligations imposed by this Agreement, which are continuing obligations, including, without limitation, Mr. Livingston’s obligations under the Noncompetition Agreement (as defined below) pursuant to Section 4.1.
3.11 Effects of Termination; Payment of Taxes. The payment of any monies to Mr. Livingston under this Agreement after the date of termination of employment does not constitute an offer or a continuation of employment of Mr. Livingston. In no event shall Mr. Livingston represent or hold himself out to be an employee of any Company Entity after the effective date of termination of employment. Except where the Company is lawfully required to withhold any federal, state, or local taxes, Mr. Livingston shall be responsible for any and all federal, state, or local taxes that arise out of any payments to Mr. Livingston hereunder.
3.12 Continuing Assistance. During any period during which any monies are being paid to Mr. Livingston under this Agreement after the effective date of termination of employment, Mr. Livingston shall provide to any Company Entity reasonable levels of assistance in answering questions concerning the business of any Company Entity, transition of responsibility, or litigation, provided that all out of pocket expenses of Mr. Livingston reasonably incurred in connection with such assistance are fully and promptly reimbursed and that any such assistance after the Non-Compete Period (as defined below) shall not interfere or conflict with the obligations which Mr. Livingston may owe to any other employer.
3.13 Timing of Payments. For any period during which Mr. Livingston is a “specified employee” under Regulations Section 1.409A-1(b)(i), any compensation paid to Mr. Livingston under this Article 3 shall be paid in accordance with the following payment schedule: (1) one-half of such compensation shall be paid to Mr. Livingston on the earlier of (i) the 6-month anniversary (“Six Month Payment Date”) of the effective date of termination of employment, and (ii) Mr. Livingston’s death; and (2) the remaining balance of such compensation shall be paid to Mr. Livingston in equal installments in accordance with the Company’s customary payroll practices commencing the first pay period after the Six Month Payment Date and ending on the earlier to occur of (A) the first anniversary of the effective date of such termination of employment, or (B) the date Mr. Livingston breaches any provision of the Noncompetition Agreement.
ARTICLE | 4: MISCELLANEOUS: |
4.1 Reaffirmation of Noncompetition, Nonsolicitation and Confidential Information Agreement. In consideration of the benefits conferred by this Agreement and as an inducement to enter into this Agreement and accept the obligations hereunder, Mr. Livingston and the Company reaffirm in all respects their respective obligations under that certain Noncompetition, Nonsolicitation and Confidential Information Agreement dated May 13, 2014 (the “Noncompetition Agreement”).
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4.2 Limitations on Payments. Notwithstanding any other provision of this Agreement:
(i) | Each payment under this Agreement is intended to be exempt from, or compliant with, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and this Agreement shall be interpreted in a manner consistent with this intention. In no event, however, shall the Company have liability relating to the failure or alleged failure of any payment under this Agreement to comply with, or be exempt from, the requirements of Section 409A. For purposes of this Agreement, all references to “termination of employment” and correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of the Treasury Regulations after giving effect to the presumptions contained therein). Additionally, Mr. Livingston’s right to receive any installment payments pursuant to this Agreement will be treated as a right to receive a series of separate and distinct payments. |
(ii) | The Company shall, to the extent necessary, modify the timing of delivery of compensation and/or benefits to Mr. Livingston if it is determined that the timing would result in the additional tax and/or interest and/or penalties assessed to Mr. Livingston under Section 409A. |
(iii) | In the event that the separation benefits and other benefits provided for in this Agreement or otherwise payable to Mr. Livingston constitute “parachute payments” within the meaning of Section 280G of the Code and, but for this Section 4.2, would be subject to the excise tax imposed by Section 4999 of the Code, then such payments will either be (a) delivered in full, or (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the excise tax under Section 4999, whichever of the foregoing amounts, taking into account applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Mr. Livingston in the greatest amount of benefits on an after-tax basis. If a reduction in Mr. Livingston’s payments is necessary so that no portion is subject to the excise tax under Section 4999, the reduction shall occur in the following order: (1) reduction of the cash payments; (2) cancellation of awards granted “contingent on a change in ownership or control” within the meaning of Section 280G; (3) cancellation of accelerated vesting of equity awards; and (4) reduction of continued employee benefits. In the event that acceleration of vesting of equity award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant. In no event will Mr. Livingston have any discretion with respect to the ordering of payment reductions. |
4.3 Dividends. Other than with respect to performance-based incentive awards, all shares awarded pursuant to this Agreement, whether vested or unvested, shall be entitled to cash dividends to the same extent as shares held by other record holders. With respect to Mr. Livingston’s performance-based incentive awards which are not vested at the time of any record date for a cash dividend or other cash distribution, dividend payments and distributions shall be held by the Company and paid to Mr. Livingston only if and when such performance-based incentive awards vest.
4.4 Notices. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when received by or tendered to Mr. Livingston or the Company, as applicable, by pre-paid courier or by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company:
Ambassadors Group, Inc.
Attention: Legal/Risk
2001 S. Flint Road
Spokane, WA 99224
If to Mr. Livingston: To his last known personal residence
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4.5 Governing Law; Arbitration. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without reference to principles of conflict of laws. Any controversy relating to this Agreement shall be settled by binding arbitration according to the applicable employment dispute resolution rules of the American Arbitration Association in Spokane, Washington. To the extent required by law, the Company agrees to pay all costs, including the arbitrator’s fees, which are peculiar to the arbitration process.
4.6 No Waiver. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
4.7 Assignment. Neither party may assign, sell, transfer, delegate or otherwise dispose of any rights or obligations under this Agreement without the prior written consent of the other party.
4.8 Voluntary Agreement. Mr. Livingston expressly acknowledges that he has voluntarily executed this Agreement and that he has had the opportunity to be represented and advised by counsel concerning the terms and conditions of this Agreement as well as his execution thereof.
4.9 Entire Agreement. The Prior Agreement is hereby terminated as of the Effective Date; provided that any equity awards previously made thereunder shall not terminate or be cancelled and the vesting of such awards shall remain unchanged. This Agreement is intended by the parties to be the complete, exclusive and final expression of the Company’s and Mr. Livingston’s agreement with respect to the subject matters hereof and supersedes, and may not be contradicted by, or modified or supplemented by, evidence of any prior or contemporaneous agreement as to the subject matter hereof, and no extrinsic evidence whatsoever may be introduced to vary the terms of this Agreement. No waiver of any of the provisions of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed or construed as a further, continuing or subsequent waiver of any such provision or as a waiver of any other provision of this Agreement. No failure to exercise and no delay in exercising any right, remedy or power hereunder shall preclude any other or further exercise of any other right, remedy or power provided herein or by law or in equity. The Company and Mr. Livingston expressly agree that (i) this Agreement shall survive any termination or cessation of Mr. Livingston’s employment by the Company or by Mr. Livingston, and (ii) this Agreement may not be altered, amended, changed, terminated or modified in any respect except by a written instrument clearly expressing the intent to so modify this Agreement signed by Mr. Livingston and an officer or director of the Company.
4.10 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to exceed the limitations permitted by applicable law, as determined by such court in such action, then the provisions will be deemed reformed to the maximum limitations permitted by applicable law and the parties hereby expressly acknowledge their desire that in such event such action be taken. Notwithstanding the foregoing, the Company and Mr. Livingston further agree that if any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions shall remain in full force and effect and in no way shall be affected, impaired or invalidated..
4.11 Descriptive Headings. Descriptive headings contained herein are for reference only and in no way define, limit, extend or describe the scope of this Agreement or any provisions thereof.
4.12 Counterparts. This Agreement may be executed in two or more counterparts, with each an original, and with both together constituting one and the same agreement.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company and Mr. Livingston have duly executed this Agreement in multiple originals to be effective as of the Effective Date.
EMPLOYER | ||
AMBASSADORS GROUP, INC. | ||
By: | /S/ Lisa O. Rapuano | |
Name: | Lisa O. Rapuano | |
Title: | Chairman of the Board of Directors | |
EMPLOYEE | ||
/s/ Philip B. Livingston | ||
Philip B. Livingston |
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Annex A
SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE
THIS SEPARATION OF EMPLOYMENT AGREEMENT AND GENERAL RELEASE (the “Agreement”) is made as of this _____ day of ___________, _____, by and between Ambassadors Group, Inc. (the “Company”) and Philip B. Livingston (“Executive”).
WHEREAS, the Company employs Executive pursuant to the terms and conditions set forth in that certain Employment Agreement dated as of ___________, 2014 between Executive and the Company (as amended from time to time, the “Employment Agreement”), which provides for certain payments and benefits in the event that Executive’s employment is terminated under certain circumstances; and
WHEREAS, an express condition of Executive’s entitlement to the payments and benefits under the Employment Agreement is the execution of a general release in the form set forth below; and
WHEREAS, Executive and the Company mutually desire to terminate Executive’s employment effective _____________, 20__ (“Date of Termination”).
NOW, THEREFORE, IT IS HEREBY AGREED by and between Executive and the Company as follows:
1. (a) Executive, for and in consideration of the commitments of the Company as set forth in paragraph 5 of this Agreement, and intending to be legally bound, does hereby REMISE, RELEASE AND FOREVER DISCHARGE the Company, its affiliates, predecessors, subsidiaries and parents, and their present or former officers, directors, shareholders, employees, and agents, and its and their respective successors, assigns, heirs, executors, and administrators and the current and former trustees or administrators of any pension or other benefit plan applicable to the employees or former employees of the Company (collectively, “Releasees”) from all causes of action, suits, debts, claims and demands whatsoever in law or in equity, which Executive ever had, now has, or hereafter may have, whether known or unknown, or which Executive’s heirs, executors, or administrators may have, by reason of any matter, cause or thing whatsoever, from any time prior to the date of this Agreement, and particularly, but without limitation of the foregoing general terms, any claims arising from or relating in any way to Executive’s employment relationship with the Company, the terms and conditions of that employment relationship, and the termination of that employment relationship, including, but not limited to, any claims arising under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the Employee Retirement Income Security Act of 1974, and any other claims under any federal, state or local common law, statutory, or regulatory provision, now or hereafter recognized, and any claims for attorneys’ fees and costs. This Agreement is effective without regard to the legal nature of the claims raised and without regard to whether any such claims are based upon tort, equity, implied or express contract or discrimination of any sort.
(b) To the fullest extent permitted by law, and subject to the provisions of paragraph 10 and paragraph 12 below, Executive represents and affirms that Executive has not filed or caused to be filed on Executive’s behalf any charge, complaint or claim for relief against the Company or any Releasee and, to the best of Executive’s knowledge and belief, no outstanding charges, complaints or claims for relief have been filed or asserted against the Company or any Releasee on Executive’s behalf; and Executive has not reported any improper, unethical or illegal conduct or activities to any supervisor, manager, department head, human resources representative, agent or other representative of the Company or any Releasee, to any member of the Company’s or any Releasee’s legal or compliance departments, or to the ethics hotline, and has no knowledge of any such improper, unethical or illegal conduct or activities. In the event that there is outstanding any such charge, complaint or claim for relief, Executive agrees to seek its immediate withdrawal and dismissal with prejudice. In the event that for any reason said charge, complaint or claim for relief cannot be withdrawn, Executive shall not voluntarily testify, provide documents or otherwise participate in any investigation or litigation arising therefrom or associated therewith and shall execute such other papers or documents as the Company’s counsel determines may be necessary to have said charge, complaint or claim for relief dismissed with prejudice. Nothing herein shall prevent Executive from testifying in any cause of action when required to do so by process of law. Executive shall promptly inform the Company if called upon to testify.
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(c) Executive does not waive any right to file a charge with the Equal Employment Opportunity Commission (“EEOC”) or participate in an investigation or proceeding conducted by the EEOC, but explicitly waives any right to file a personal lawsuit or receive monetary damages that the EEOC might recover if said charge results in an EEOC lawsuit against the Company or Releasees.
2. In consideration of the Company’s agreements as set forth in paragraph 5 herein, Executive agrees to reaffirm Executive’s obligations described in that certain Noncompetition, Nonsolicitation and Confidential Information Agreement dated May 13, 2014 (the “Noncompetition Agreement”).
3. Executive further agrees and recognizes that Executive has permanently and irrevocably severed Executive’s employment relationship with the Company, that Executive shall not seek employment with the Company or any affiliated entity at any time in the future, and that the Company has no obligation to employ him in the future.
4. Executive further agrees that Executive will not disparage or subvert the Company or any Releasee, or make any statement reflecting negatively on the Company, its affiliated corporations or entities, or any of their officers, directors, employees, agents or representatives, including, but not limited to, any matters relating to the operation or management of the Company or any Releasee, Executive’s employment and the termination of Executive’s employment, irrespective of the truthfulness or falsity of such statement.
5. In consideration for Executive’s promises, as set forth herein, the Company agrees to pay or provide to or for Executive the payments and benefits described in the Employment Agreement, the provisions of which are incorporated herein by reference. Except as set forth in this Agreement, it is expressly agreed and understood that Releasees do not have, and will not have, any obligations to provide Executive at any time in the future with any payments, benefits or considerations other than those recited in this paragraph, or those required by law, other than under the terms of any benefit plans which provide benefits or payments to former employees according to their terms.
6. Executive understands and agrees that the payments, benefits and agreements provided in this Agreement are being provided to him in consideration for Executive’s acceptance and execution of, and in reliance upon Executive’s representations in, this Agreement. Executive acknowledges that if Executive had not executed this Agreement containing a release of all claims against the Releasees, Executive would not have been entitled to the payments and benefits set forth in the Employment Agreement.
7. Executive acknowledges and agrees that this Agreement and the Employment Agreement supersede any employment agreement or offer letter Executive has with the Company or any Releasee. To the extent Executive has entered into any other enforceable written agreement with the Company or any Releasee that contains provisions that are outside the scope of this Agreement and the Employment Agreement and are not in direct conflict with the provisions in this Agreement or the Employment Agreement, the terms in this Agreement and the Employment Agreement shall not supercede, but shall be in addition to, any other such agreement. Except as set forth expressly herein, no promises or representations have been made to Executive in connection with the termination of Executive’s Employment Agreement, if any, or offer letter, if any, with the Company, or the terms of this Agreement.
8. Executive agrees not to disclose the terms of this Agreement or the Employment Agreement to anyone, except Executive’s spouse, attorney and, as necessary, tax/financial advisor. It is expressly understood that any violation of the confidentiality obligation imposed hereunder constitutes a material breach of this Agreement.
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9. Executive represents that (i) Executive does not, without the Company’s prior written consent, presently have in Executive’s possession any records and business documents, whether on computer or hard copy, and other materials (including but not limited to computer disks and tapes, computer programs and software, office keys, correspondence, files, customer lists, technical information, customer information, pricing information, business strategies and plans, sales records and all copies thereof) (collectively, the “Corporate Records”) provided by the Company and/or its predecessors, subsidiaries or affiliates or obtained as a result of Executive’s prior employment with the Company and/or its predecessors, subsidiaries or affiliates, or created by Executive while employed by or rendering services to the Company and/or its predecessors, subsidiaries or affiliates and (ii) Executive has not destroyed or caused to be destroyed any Corporate Records (other than in accordance with the Company’s normal document retention policies). Executive acknowledges that all such Corporate Records are the property of the Company and agrees that Executive will return to the Company in good condition any and all Corporate Records that may be held by Executive or may in the future come into Executive’s possession or control. In addition, Executive shall promptly return to the Company in good condition any and all Company owned equipment or property, including, but not limited to, automobiles, personal data assistants, facsimile machines, copy machines, pagers, credit cards, cellular telephone equipment, business cards, laptops, computers, and any other items requested by the Company. As of the Date of Termination, the Company will make arrangements to remove, terminate or transfer any and all business communication lines including network access, cellular phone, fax line and other business numbers.
10. Nothing in this Agreement shall prohibit or restrict Executive from: (i) making any disclosure of information required by law; (ii) providing information to, or testifying or otherwise assisting in any investigation or proceeding brought by, any federal regulatory or law enforcement agency or legislative body, any self-regulatory organization, or the Company’s designated legal, compliance or human resources officers; or (iii) filing, testifying, participating in or otherwise assisting in a proceeding relating to an alleged violation of any federal, state or municipal law relating to fraud, or any rule or regulation of the Securities and Exchange Commission or any self-regulatory organization.
11. The parties agree and acknowledge that the agreement by the Company described herein, and the settlement and termination of any asserted or unasserted claims against the Releasees, are not and shall not be construed to be an admission of any violation of any federal, state or local statute or regulation, or of any duty owed by any of the Releasees to Executive.
12. Executive agrees and recognizes that should Executive breach any of the obligations or covenants set forth in this Agreement, the Company will have no further obligation to provide Executive with the consideration set forth herein, and will have the right to seek repayment of all consideration paid up to the time of any such breach. Further, Executive acknowledges in the event of a breach of this Agreement, Releasees may seek any and all appropriate relief for any such breach, including equitable relief and/or money damages, attorneys’ fees and costs.
13. Executive further agrees that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as to an equitable accounting of all earnings, profits and other benefits arising from any violations of this Agreement, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled.
14. This Agreement and the obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with the laws of the State of Washington, without reference to principles of conflict of laws.
15. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington, without reference to principles of conflict of laws.
16. Executive certifies and acknowledges as follows:
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(a) That Executive has read the terms of this Agreement, and that Executive understands its terms and effects, including the fact that Executive has agreed to RELEASE AND FOREVER DISCHARGE the Releasees from any legal action arising out of Executive’s employment relationship with the Company and the termination of that employment relationship; and
(b) That Executive has signed this Agreement voluntarily and knowingly in exchange for the consideration described herein, which Executive acknowledges is adequate and satisfactory to him and which Executive acknowledges is in addition to any other benefits to which Executive is otherwise entitled; and
(c) That Executive has been and is hereby advised in writing to consult with an attorney prior to signing this Agreement; and
(d) That Executive does not waive rights or claims that may arise after the date this Agreement is executed; and
(e) That the Company has provided Executive with a period of twenty-one (21) days within which to consider this Agreement (including, without limitation, Executive’s release and waiver of any and all claims under the Age Discrimination In Employment Act), and that Executive has signed on the date indicated below after concluding that this Separation of Employment Agreement and General Release is satisfactory to Executive; and
(f) Executive acknowledges that this Agreement may be revoked by him within seven (7) days after execution, and it shall not become effective until the expiration of such seven (7) day revocation period. In the event of a timely revocation by Executive, this Agreement will be deemed null and void and the Company will have no obligations hereunder.
[SIGNATURE PAGE FOLLOWS]
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Intending to be legally bound hereby, Executive and the Company executed the foregoing Separation of Employment Agreement and General Release this ______ day of ______________, _____.
Witness:
PHILIP B. LIVINGSTON
AMBASSADORS GROUP, INC.
By: Witness:
Name:
Title:
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EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following is a list of our subsidiaries as of December 31, 2014:
1. | Ambassador Programs, Inc., incorporated in Delaware |
2. | Ambassadors Unlimited, LLC., a Delaware state limited liability company |
3. | World Adventures Unlimited, Inc., incorporated in Delaware |
The following is a list of Ambassador Programs, Inc.’s subsidiaries as of December 31, 2014:
1. | Marketing Production Systems, LLC., a Washington state limited liability company |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ambassadors Group, Inc.
Spokane, Washington
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-083572, 333-159768, 333-189533 and 333-202129) of Ambassadors Group, Inc. of our report dated March 25, 2015, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/BDO USA, LLP
Spokane, Washington
March 25, 2015
EXHIBIT 31.1
CERTIFICATION
I, Philip B. Livingston, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2014 of Ambassadors Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 25, 2015 | /s/ Philip B. Livingston |
Philip B. Livingston | |
Chief Executive Officer | |
(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Lisa N. Netz, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2014 of Ambassadors Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Lisa N. Netz | |
Lisa N. Netz | |
Vice President, Finance and Secretary | |
(Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Ambassadors Group, Inc., (the “Company”) on Form 10-K for the period ending December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Philip B. Livingston, chief executive officer of the Company, and Lisa N. Netz, vice president, finance and secretary, certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Philip B. Livingston | ||
Philip B. Livingston | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
/s/ Lisa N. Netz | ||
Lisa N. Netz | ||
Vice President, Finance and Secretary | ||
(Principal Financial Officer and Principal Accounting Officer) |
Earnings (Loss) Per Share (Tables)
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12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2014
|
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Earnings (Loss) Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of Basic and Diluted EPS Computations | The following table presents a reconciliation of basic and diluted EPS computations (in thousands, except per share data and anti-dilutive stock option counts):
|
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