<PAGE>
As filed with the Securities and Exchange Commission on July 24, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
THE CORPORATE EXECUTIVE BOARD COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8732 52-2056410
(STATE OR OTHER JURISDICTION (Primary Standard Industrial (I.R.S. Employer
OF INCORPORATION OR ORGANIZATION) Classification Code Number) IDENTIFICATION NO.)
</TABLE>
____________________
THE CORPORATE EXECUTIVE BOARD COMPANY
THE WATERGATE
600 NEW HAMPSHIRE AVENUE, N.W.
WASHINGTON, D.C. 20037
(202) 777-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
______________________
MICHAEL A. D'AMATO
THE CORPORATE EXECUTIVE BOARD COMPANY
THE WATERGATE
600 NEW HAMPSHIRE AVENUE, N.W.
WASHINGTON, D.C. 20037
(202) 777-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
______________
COPIES TO:
HOWARD B. ADLER, ESQ. THOMAS R. BROME, ESQ.
GIBSON, DUNN & CRUTCHER LLP CRAVATH, SWAINE & MOORE
1050 CONNECTICUT AVENUE, N.W. 825 EIGHTH AVENUE
WASHINGTON, D.C. 20036 NEW YORK, NY 10019
(202) 955-8500 (212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
______________
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[_]
______________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================
Proposed maximum Amount of
Title of each class of aggregate offering registration
securities to be registered price fee (1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share...... $195,000,000 $57,525
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to such section 8(a)
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 24, 1998
P R O S P E C T U S
_________ SHARES
[LOGO]
THE CORPORATE EXECUTIVE BOARD COMPANY
COMMON STOCK
_______________________
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), of The Corporate Executive Board Company, a Delaware corporation (the
"Corporate Executive Board" or the "Company"), offered hereby (the "Offering")
are being offered by the Selling Stockholders named herein under "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholders. See "Use of
Proceeds."
There is currently no public market for the Common Stock. It is currently
estimated that the initial public offering price per share of Common Stock will
be between $_____ and $_____. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company has applied for the listing of the Common Stock on the Nasdaq National
Market under the symbol "EXBD."
_______________________
SEE "RISK FACTORS" BEGINNING ON PAGE ___ FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
_______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
Underwriting Proceeds to
Price Discounts and Selling
to Public Commissions(1) Stockholders(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total (3) $ $ $
=========================================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) The expenses of the Offering, other than Underwriting Discounts and
Commissions, estimated to be approximately $1.3 million, will be paid by the
Company.
(3) The Principal Selling Stockholder (as defined herein) has granted the
Underwriters a 30-day option to purchase up to ________ additional shares of
Common Stock solely to cover over-allotments, if any. See "Underwriting." If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholders will be $_____,
$_____, and $_____ respectively.
__________________
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that the shares of Common Stock
offered hereby will be made available for delivery on or about ________________,
1998, at the office of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001, or through the facilities of the Depository Trust Company.
================================================================================
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
GOLDMAN, SACHS & CO.
__________, 1998
<PAGE>
[INSERT ARTWORK]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING AND SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF
A PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as general economic conditions, competition and other
factors discussed elsewhere in this Prospectus.
THE COMPANY
The Corporate Executive Board is the leading provider of "best practices"
research and analysis focusing on corporate strategy, operations and general
management issues. The Company provides its research and analysis on an annual
subscription basis to a membership of over 1,200 of the world's largest and most
prestigious corporations. For a fixed annual fee, members of each subscription
program have access to an integrated set of services, including best practices
research studies, executive education seminars, customized research briefs and
on-line access to the program's database. For each of the last three years, the
Company's revenue renewal rate (defined as the percentage of prior year's
contract value renewed) exceeded 90%. More than 60% of the Fortune 500
companies are members of the Corporate Executive Board.
The Company's membership-based model is central to its business strategy.
This model gives the Company access to the best business practices of its
members and enables the Company to provide comprehensive analysis on leading-
edge topics by leveraging the collective intellectual capital of its members. By
participating in the Corporate Executive Board, members can learn about the best
practices of the most progressive corporations in the world at a fraction of the
cost of a customized analysis performed by any of the major consulting firms.
The Company does not believe that in-house research and analysis departments at
individual corporations could obtain, at any price, similar information from
other corporations about their management practices. In general, the membership
comprises the most progressive competitors in each industry sector, including
American Express, British Airways, CitiCorp, Coca-Cola, Deutsche Bank, Hewlett-
Packard, Merrill Lynch, Microsoft, Procter & Gamble and Unilever. No one
customer accounted for more than 2% of revenues in any of the last three fiscal
years. The Company does not know of any other entity that enables corporations
to study a broad range of the best business practices of hundreds of other
business enterprises for fixed annual subscription fees.
The Company currently offers ten discrete subscription programs, each
focusing on a single business constituency: finance, sales, information
technology, corporate strategy, human resources, bank operations, insurance,
trust and private banking, business banking and retail banking. The Company has
added three new subscription programs across the past 18 months and anticipates
adding one to three new subscription programs per year for the foreseeable
future. Each subscription program charges a separate fixed annual subscription
fee and is served by a dedicated staff of analysts and researchers.
Subscriptions are generally renewable on a 12-month basis, and the average price
per subscription program at June 30, 1998 was approximately $26,000. In 1997,
the Company published 19 best practices research studies, completed over 14,000
customized research briefs and provided executive education services to 950
member corporations reaching approximately 20,000 executive participants. The
Company's 180 analysts and researchers have compiled a proprietary database of
140 best practices research studies and 20,000 customized research briefs
containing over 100,000 profiles of corporate practices.
The Corporate Executive Board's revenue has grown at a compound annual rate
of 55% over the last three years. Because each subscription program provides its
membership with standardized
3
<PAGE>
best practices research studies and executive education seminars, new members
immediately add revenues while only incrementally increasing operating costs.
The Company's growth strategy is to cross-sell additional subscription programs
to existing members, to add new members and to develop new subscription
programs.
The Company's business was operated as a division of The Advisory Board
Company, a Maryland corporation, until October 31, 1997 when the business was
contributed to the Company and spun-off to The Advisory Board Company's sole
stockholder. On October 31, 1997, all of the outstanding shares of the Company
were distributed as a dividend to the sole stockholder of The Advisory Board
Company. The Advisory Board Company continues to provide best practices research
and analysis to its member institutions in the health care sector. See "Certain
Transactions Prior to the Offering -- Formation and Spin-Off of the Company" and
"Certain Relationships and Transactions."
The Company maintains executive offices in Washington, D.C. at the
Watergate, 600 New Hampshire Avenue, N.W., Washington, D.C. 20037. Its telephone
number is (202) 777-5000.
4
<PAGE>
THE OFFERING
Common Stock offered by the Selling
Stockholders...................................... _________ shares
Total Common Stock to be
outstanding after the Offering.................... _________ shares (1)
Use of proceeds................................... The Company will not
directly receive any
proceeds from the sale of
the Common Stock pursuant
to the Offering. It is
expected that David G.
Bradley (the "Principal
Selling Stockholder")
will use approximately
$6.5 million of proceeds
to retire a promissory
note made by him in favor
of the Company.
Proposed Nasdaq symbol............................ "EXBD"
__________________
(1) Does not include _____ shares of Common Stock reserved for issuance under
the Company's Incentive Plan (as defined herein), the 1998 Plan (as defined
herein) and the Directors Plan (as defined herein), pursuant to which
options to purchase an aggregate of ______ shares are outstanding with a
weighted average exercise price of $____ per share.
RISK FACTORS
See "Risk Factors" beginning on page __ for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997 have been
derived from the financial statements of the Company which have been audited by
Arthur Andersen LLP, independent public accountants. The summary financial data
presented below as of December 31, 1993, 1994 and 1995 and as of March 31, 1998,
and for the years ended December 31, 1993 and 1994 and the three months ended
March 31, 1997 and 1998, have been derived from the unaudited financial
statements of the Company, which have been prepared on the same basis as the
audited financial statements of the Company. The unaudited financial statements
as of March 31, 1998 and for the three months ended March 31, 1997 and 1998
include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary for a fair presentation of the financial position
and results of operations as of and for such periods. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. The summary financial
data presented below should be read in conjunction with the Financial Statements
and the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
---------- ------- -------- ------- ------- ------ -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues.......................................... $8,108 $10,384 $ 17,547 $27,283 $38,669 $8,794 $11,598
Costs and expenses:
Cost of services............................... 4,713 7,698 10,849 15,078 20,036 4,366 5,323
Member relations and marketing................. 2,259 2,807 5,275 6,677 8,106 1,667 2,352
General and administrative..................... 778 1,147 2,589 3,832 5,660 1,787 1,468
Depreciation................................... 108 249 233 452 722 150 177
Stock option restructuring and
repurchase (2)............................... -- -- 9,390 1,473 3,063 1,032 409
---------- ------- -------- ------- ------- ------ -------
Total costs and expenses....................... 7,858 11,901 28,336 27,512 37,587 9,002 9,729
-------- ------- -------- ------- ------- ------ -------
Income (loss) from operations (2)................. 250 (1,517) (10,789) (229) 1,082 (208) 1,869
Interest income................................... -- -- -- -- 122 -- 161
-------- ------- -------- ------- ------- ------ -------
Income (loss) before provision (benefit) for
state income taxes............................... 250 (1,517) (10,789) (229) 1,204 (208) 2,030
Provision (benefit) for state income
taxes (3)....................................... 25 (151) (1,076) (23) 120 (20) 202
-------- ------- -------- --------- ------- ------ -------
Net income (loss)................................. $ 225 $(1,366) $ (9,713) $ (206) $ 1,084 $ (188) $ 1,828
======== ======= ======== ======= ======= ====== =======
Pro forma net income (loss) (3)................... $ 150 $ (910) $ (6,473) $ (137) $ 722 $ (125) $ 1,218
======== ======= ======== ======= ======= ====== =======
Pro forma net income (loss) per share -
basic (4)....................................... $0.21 $(1.25) $(8.90) $(0.19) $0.99 $(0.17) $1.68
Pro forma weighted average
shares outstanding-basic (4).................... 727 727 727 727 727 727 727
BALANCE SHEET DATA:
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
As of December 31, 1998
------------------------------------------------------------ -------------------
1993 1994 1995 1996 1997 Actual Pro
---- ---- ---- ---- ---- ------ forma
(5) (6)
-------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents......................... $ -- $ -- $ -- $ -- $ 8,937 $13,349 15,442
Working capital................................... 3,291 1,712 (3,530) (4,645) (5,005) (3,698) (4,296)
Total assets...................................... 8,423 13,154 18,568 23,107 39,868 36,560 35,962
Deferred revenues................................. 3,952 9,578 15,382 21,696 31,474 29,784 29,784
Total stockholder's equity (deficit).............. 3,874 2,508 (7,205) (7,411) (5,042) (4,108) (6,763)
</TABLE>
OTHER OPERATING DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Subscription programs(7) 6 7 9
Member institutions(7), (8) 772 973 1,114
Total membership
Subscriptions(7) 1,140 1,486 1,833
Average subscription programs
per member (7) 1.48 1.53 1.65
Revenue renewal rate(9) 91% 98% 91%
</TABLE>
(1) The Statement of Operations Data does not reflect certain future charges
that the Company expects to incur, of which approximately $2.0 million are
expected to be recognized during the quarter in which the Offering occurs.
Of the charges in such quarter, $1.9 million relate to the elimination of
certain employment requirements contained in the Liquid Markets Agreements
(as defined herein), and $0.1 million relate to a substitution of Company
stock options for Advisory Board Company stock options that occurred at the
time of the Spin-Off (as defined herein). See "Certain Transactions Prior
to the Offering -- Stock Option Restructuring and Repurchase Charges."
(2) The Company reflects charges relating to the Liquid Markets Agreements as
stock option repurchase expenses over the required employment period.
Furthermore, the terms of the stock option substitution effected at the
Spin-Off resulted in compensation expense being charged for the intrinsic
value of certain stock options. These charges are reflected as stock option
restructuring expense over the vesting period of the options. Excluding
these expenses related to the Company's options, Income (Loss) From
Operations for 1993, 1994, 1995, 1996 and 1997 would have been $0.3
million, $(1.5) million, $(1.4) million, $1.3 million, and $4.1 million,
respectively, and Income (Loss) From Operations for the three months ended
March 31, 1997 and March 31, 1998 would have been $0.8 million and $2.3
million, respectively.
(3) The Company has elected to be taxed under subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"), whereby the Principal
Selling Stockholder (who prior to the Offering was the Company's sole
stockholder) is liable for individual federal income taxes on the Company's
taxable income. As the District of Columbia does not recognize S
corporation status, the Company has been directly responsible for District
of Columbia taxes. Effective as of the closing of the Offering, the Company
will terminate its S corporation election and will be subject to corporate
level federal income taxes. See "Certain Transactions Prior to the
Offering -- S Corporation Distribution and Termination of S Corporation
Status." Accordingly, the pro forma net income (loss) reflects an
estimate of the income taxes that would have been recorded if the Company
had been a C corporation for the periods presented. See Note 6 of Notes to
Financial Statements.
(4) Basic pro forma net income (loss) per share is computed by dividing pro
forma net income (loss) by the weighted average number of shares of common
stock outstanding during the period. Fully diluted pro forma net income
(loss) per share is the
7
<PAGE>
same as basic pro forma earnings per share for all periods except the year
ended December 31, 1997 and the three months ended March 31, 1998. Fully
diluted pro forma net income per share is $0.85 and $1.38 for the year
ended December 31, 1997 and the three months ended March 31, 1998,
respectively. See Note 2 of Notes to Financial Statements.
(5) Pro forma to give effect to (1) the distribution of previously
undistributed taxed or taxable earnings of approximately $3.2 million based
on earnings through March 31, 1998, (2) termination of the Company's
S corporation election and the adjustment of the Company's federal deferred
income tax asset of approximately $3.8 million as of March 31, 1998,
(3) the planned amendment of the Liquid Markets Agreements which eliminates
future employment requirements as a condition for payment, resulting in an
increase in the long-term option repurchase liability of $2.1 million as of
March 31, 1998, (4) the retirement of a $6.5 million promissory note made
by the Principal Selling Stockholder in favor of the Company, and (5) the
payment of approximately $1.3 million in Offering expenses on behalf of the
Selling Stockholders. See "Certain Transactions Prior to the Offering
-- Stock Option Restructuring and Repurchase Charges."
(6) Does not include an adjustment for the distribution to be made to the
Principal Selling Stockholder prior to the closing of the Offering equal to
the estimated undistributed taxed or taxable earnings of the Company from
April 1, 1998 through the closing of the Offering. See "Certain
Transactions Prior to the Offering -- S Corporation Distribution and
Termination of S Corporation Status."
(7) At the end of the period.
(8) The Company's membership consists primarily of domestic and multinational
corporations and secondarily of large subsidiaries of corporations and non-
profit institutions.
(9) Revenue renewal rate is defined as the percentage of prior year contract
value renewed, including price increases. A portion of the increase in the
1996 renewal rate is due to a price increase related to the introduction of
on-site executive education services for certain subscription programs.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby.
DEPENDENCE ON RENEWALS OF MEMBERSHIP-BASED SERVICES
All of the Company's revenues are derived from annual membership
subscriptions for the Company's products and services. Accordingly, the
Company's prospects depend on its ability to achieve and sustain high renewal
rates on existing subscription programs and to enter into new membership
arrangements. The Company's ability to secure membership renewals is dependent
upon, among other things, its ability to deliver consistent, high-quality and
timely research and analysis with respect to issues, developments and trends
that members view as important. There can be no assurance that the Company will
be able to sustain the necessary level of performance to achieve a high rate of
membership renewals. Any inability to achieve high membership renewal rate
levels would have a material adverse effect on the Company's operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
SENIOR MANAGEMENT EXPERIENCE AND TRANSITION
Although James J. McGonigle has managed the business of the Company as a
division of The Advisory Board Company for approximately 3 years prior to the
Spin-Off, he has no experience as a Chief Executive Officer of an independent
corporation. In addition, the Company is actively seeking to hire a new Chief
Financial Officer. Michael A. D'Amato, the Company's current Chief Financial
Officer, does not expect to serve as an employee of the Company once the new
Chief Financial Officer has been hired and a suitable transition period has
elapsed, but Mr. D'Amato expects to continue as a director. Furthermore, Jeffrey
D. Zients, Chief Executive Officer of The Advisory Board Company, has been
actively involved in the management of the Company and will continue as a
director but will not be an officer of the Company after the closing of the
Offering. See "Management -- Directors, Executive Officers and Key Employees."
There can be no guarantee that the Company will be able to replace departing
members of its senior management team. A failure by the Company to successfully
transition its senior management or by the Company's senior management to
effectively manage the business of the Company would have a material adverse
effect on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends, in part, on the continued service
of its key management, research, sales, product development and operations
personnel and on its ability to continue to motivate and retain highly qualified
employees. Accordingly, future operating results will depend upon the Company's
ability to retain the services of these individuals. See "Business --
Employees" and "Management."
DEPENDENCE ON ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's success will depend, in part, upon its ability to hire,
train, motivate and retain a significant number of highly-skilled employees,
particularly management, research analysts and sales and marketing staff. The
Company has experienced, and expects to continue to experience, intense
competition for professional personnel with other producers of research and
analysis products and services and management consulting firms. Many of these
firms have substantially greater financial resources than the Company to attract
and compensate qualified personnel. There can be no assurance that the Company
will be successful in attracting a sufficient number of highly-skilled employees
in the future, or that it will be successful in training, motivating and
retaining the employees it is able to hire. Any material inability to do so
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees."
MANAGEMENT OF GROWTH
The Company's growth may place a significant demand on its financial,
operational and managerial resources. To manage any growth, the Company will
have to continue to implement and enhance its operations and financial systems
9
<PAGE>
and augment, train and manage its personnel. There can be no assurance
that the Company's systems, procedures or controls currently in place will be
adequate to support any growth of the Company's operations or that the Company
will be able to implement additional systems successfully and in a timely
manner, if required. Any inability of the Company to manage its growth
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT
The Company's future success will depend, in part, on its ability to
develop new subscription programs that address specific industry and business
organization sectors and the changing needs of its current and prospective
members for information, analysis and advice. The process of internally
researching, developing, launching and gaining client acceptance of new
subscription programs is inherently risky. Delays or failures during
development or implementation, or lack of market acceptance of new subscription
programs, could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
efforts to introduce new subscription programs will be successful. The Company's
business, financial condition and results of operations would be materially
adversely affected if it were unable to develop and introduce successful new
subscription programs or to make enhancements to existing subscription programs
in a timely manner in response to member requirements. See "Business --
Products and Services."
COMPETITION
The Company has many competitors, including research and database
companies, consulting firms, trade associations, nonprofit organizations and
the internal planning and marketing staffs of current and prospective member
organizations. The Company's competitors, many of which have substantially
greater financial, information gathering and marketing resources than the
Company, could choose to compete more directly against the Company in the
future. Increased competition, direct and indirect, in one or more of the
Company's market segments could adversely affect the Company's operating results
through pricing pressure and loss of market share. There can be no assurance
that the Company will be able to compete successfully. See "Business --
Competition."
RISKS ASSOCIATED WITH ANTICIPATING MARKET TRENDS
The Company's success depends, in part, upon its ability to anticipate
rapidly changing market trends and to adapt its research and analysis to meet
the changing information needs of its members. Certain of the industry and
business sectors that the Company analyzes undergo frequent and often dramatic
changes, including the introduction of new products and obsolescence of others,
shifting strategies and market positions of major industry participants and
changing objectives and expectations of users of members' products and services.
The environment of rapid and continuous change presents significant challenges
to the Company's ability to provide its members with current and timely research
and analysis on issues of importance. Meeting these challenges requires the
commitment of substantial resources. Any failure to continue to provide helpful
and timely research and analysis of developments and trends in a manner that
meets market needs would have a material adverse effect on the Company's
business, financial condition and results of operations.
FINANCIAL INSTITUTION INDUSTRY CONSOLIDATION
During 1997, approximately 56.4% of the Company's revenues were
attributable to financial institution members. Substantial consolidation in
the financial services industry has occurred over the last five years and is
expected to continue. This consolidation has resulted and is expected to
continue to result in a reduction in the number of the Company's financial
institution members. Such a reduction could result in decreased membership
revenues. No assurance can be given that the Company's results of operations
will not be materially adversely affected by such consolidation.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may fluctuate significantly in the future
due to various factors, including the growth in and timing of new memberships,
the timing of the development, introduction and marketing of new products and
services, the timing of the hiring of research analysts and sales and marketing
staff,
10
<PAGE>
changes in the spending patterns of the Company's members, the Company's
accounts receivable collection experience, changes in market demand for research
and analysis, foreign currency exchange rate fluctuations, competitive
conditions in the industry and general economic conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS RELATED TO CONTENT
As a publisher and distributor of original research and analysis and user
of licensed third-party content, the Company faces potential liability for
defamation, negligence, copyright and trademark infringement. Third party
content includes information created or provided by information services
organizations and consultants retained by the Company and may be delivered in
writing, over the Internet, or orally to clients. There can be no assurance that
the Company will not be involved in litigation, which can be expensive and time
consuming, as a result of the creation or dissemination of such content. Any
such litigation, whether or not resulting in a judgment requiring the payment of
monetary damages, could have a material adverse affect on the Company's
business, financial condition and results of operations.
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that, following the Offering, an active
trading market for the Common Stock will develop or be sustained or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiations among the Company, representatives of the Selling Stockholders and
the Representatives (as defined herein) of the Underwriters, and will not
necessarily reflect the market price of the Common Stock after the Offering.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The market price of the Common
Stock could experience significant fluctuations in response to, and may be
adversely affected by, variations in quarterly operating results, changes in
earnings estimates or other actions by analysts and earnings or other
announcements of the Company's members or competitors as well as other factors.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for future
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of the Common Stock in the public market
following the Offering or the perception that such sales could occur, could
adversely affect the market price of the Common Stock.
Immediately after the Offering, the Company will have outstanding ____
shares of Common Stock. The shares of Common Stock sold in the Offering will be
freely transferable without restriction or further registration under the
Securities Act except for any shares that are beneficially owned at any time by
an "affiliate" of the Company within the meaning of Rule 144 under the
Securities Act (which sales will be subject to the timing, volume and manner of
sale limitations of Rule 144). The _____ outstanding shares of Common Stock that
will be held by the Selling Stockholders after the Offering (____ shares if the
over-allotment option is exercised in full) are "restricted" securities within
the meaning of Rule 144 under the Securities Act and may not be publicly resold,
except in compliance with the registration requirements of the Securities Act or
pursuant to an exemption from registration, including that provided by Rule 144
under the Securities Act. See "Certain Transactions Prior to the Offering --
The Recapitalization," "Principal and Selling Stockholders" and "Certain
Relationships and Transactions."
The Company, its executive officers and the Selling Stockholders have
agreed that they will not offer, sell, contract to sell, announce any intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Securities Act relating to,
any shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock without the prior
written consent of Smith Barney Inc. for a period of 180 days after the date of
this Prospectus. Such restrictions will not affect the ability of the Company
to grant stock options for Common Stock pursuant to the Incentive Plan, the 1998
Plan and the Directors Plan, or to issue Shares of Common Stock pursuant to the
exercise of stock options currently outstanding or granted. See "Shares Eligible
for Future Sale" and "Underwriting."
11
<PAGE>
CERTAIN TRANSACTIONS PRIOR TO THE OFFERING
FORMATION AND SPIN-OFF OF THE COMPANY
Prior to October 31, 1997, the Company's business was operated as a
division of The Advisory Board Company. The Company was incorporated in the
State of Delaware on September 11, 1997. On October 31, 1997: (i) the Company
issued shares of common stock to The Advisory Board Company in consideration for
the transfer to the Company by The Advisory Board Company of the assets and
certain liabilities relating to the corporate-related business (the "Transferred
Business") of The Advisory Board Company and (ii) The Advisory Board Company
distributed all issued and outstanding shares of common stock of the Company to
David G. Bradley, the sole stockholder of The Advisory Board Company (the "Spin-
Off"). After the Spin-Off, The Advisory Board Company and the Company were
separate corporations, each owned directly by David G. Bradley.
The Spin-Off was consummated, among other things, (i) to permit management
of each of the Company and The Advisory Board Company to focus on their
respective strategic objectives and core business operations and (ii) to link
more directly incentive and compensation arrangements for key employees of each
entity with the operating results and performance of the respective entities.
A Distribution Agreement, dated October 31, 1997, between The Advisory
Board Company and the Company (the "Distribution Agreement") provided for the
principal corporate transactions required to effect the Spin-Off. Among other
things, the Distribution Agreement required the transfer and assignment to the
Company of all assets and agreements (including Member Contracts (as defined in
the Distribution Agreement)) relating to the Transferred Business and the
assumption by the Company of liabilities, including all indebtedness relating to
the Transferred Business.
Pursuant to the Administrative Services Agreement (as defined herein) and
the Vendor Contracts Agreement (as defined herein), The Advisory Board Company
agreed to provide to the Company, for a one-year period after consummation of
the Spin-Off, certain administrative services and certain vendor services. The
Company has an option to extend each of these agreements for an additional year.
Also executed in connection with the Spin-Off, the Member Contracts Agreement
(as defined herein) effected the appointment of The Advisory Board Company as
agent of the Company in taking administrative and accounting-related actions on
behalf of the Company with respect to Member Contracts. The Member Contracts
Agreement will be terminated as of the closing of the Offering. Pursuant to a
Sublease Agreement (as defined herein), the Company also subleases its office
space from The Advisory Board Company on terms consistent with the original
lease agreement, subject to termination by The Advisory Board Company with at
least six months written notice. The Company records costs associated with these
agreements monthly as a payable to an affiliate, and expects to settle amounts
owed on a quarterly basis. See "Certain Relationships and Transactions."
The Company's financial statements present the accounts of the Company as
if it had operated as a stand-alone entity, in accordance with the accounting
rules prescribed for "carve-out" financial statements, for periods preceding the
Spin-Off. For these periods, net funds contributed by the Company are treated
as an affiliate receivable as cash flows were commingled in The Advisory Board
Company accounts. This affiliate receivable was settled as part of the transfer
of assets and liabilities at the Spin-Off pursuant to the Distribution
Agreement.
S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS
Prior to the closing of the Offering, the Company has been treated as an
S corporation under the Code for federal and certain state income tax
purposes. As a result, the Company's earnings were taxed for federal and
certain state tax purposes directly to the Principal Selling Stockholder.
Effective as of the closing of the Offering, the Company's status as an S
corporation will be terminated and the Company will become subject to federal
and state income taxes.
Prior to the closing of the Offering, the Company will distribute to the
Principal Selling Stockholder an amount equal to the estimated undistributed
taxed or taxable earnings of the Company (the "S Corporation Distribution").
12
<PAGE>
As of March 31, 1998, undistributed S corporation earnings approximated $3.2
million. The Company estimates that the actual amount of the S Corporation
Distribution will be between $___ million and $___ million.
In connection with the S Corporation Distribution, the Company and the
Principal Selling Stockholder will enter into a cross-indemnification agreement
pursuant to which the Company will indemnify the Principal Selling Stockholder
and the Principal Selling Stockholder will indemnify the Company with respect to
adverse tax effects resulting from the reallocation of income and expenses
between S corporation and C corporation tax years.
THE RECAPITALIZATION
The Company currently has two classes of common stock issued and
outstanding, differing only as to voting rights. In order to facilitate the
Offering, the Board of Directors and the Principal Selling Stockholder have
approved the reclassification of the Company's two outstanding classes of common
stock into shares of Common Stock (the "Reclassification"). The Principal
Selling Stockholder has also approved a ___-for-1 stock split (the "Stock
Split"), an increase in the authorized number of shares of Common Stock to
4,200,000 and the authorization of 420,000 shares of Preferred Stock (the
"Authorized Share Increase"). The Reclassification, the Stock Split and the
Authorized Share Increase are referred to herein as the "Recapitalization." As a
result of the Recapitalization, the Company will have ______ outstanding shares
of Common Stock as its only class of issued equity securities upon the
closing of the Offering. All holders of the Common Stock will have the same
rights and privileges. See "Description of Capital Stock."
STOCK OPTION RESTRUCTURING AND REPURCHASE CHARGES
Beginning in 1995 and prior to the Spin-Off, The Advisory Board Company
entered into agreements with certain employees to repurchase outstanding stock
options at fixed amounts, subject to certain employment requirements (the
"Liquid Markets Agreements"). The obligations associated with these agreements
were transferred to the Company in the Spin-Off to the extent such obligations
were attributable to employees of the Company. The cost of such agreements is
being charged to compensation expense over required employment periods. The
Company expects to eliminate future employment requirements and to recognize the
balance of the compensation expense related to these agreements (approximately
$1.9 million) during the quarter in which the Offering occurs. Furthermore, in
connection with the Spin-Off, The Advisory Board Company executed substitution
agreements with each of the employees of the Company participating in The
Advisory Board Company's stock option plan. The substitution allowed for the
exchange of Advisory Board Company options for Company options. The terms of
this substitution resulted in compensation expense being charged for the
intrinsic value of certain stock options over the vesting period. This
compensation expense will result in non-cash charges in the amount of $504,000
in 1998, $382,000 in 1999, $382,000 in 2000 and $191,000 in 2001. Accordingly,
compensation expense of approximately $96,000 relating to the substitution of
the stock options will be recognized during the quarter in which the Offering
occurs.
NAME CHANGE
On July __, 1998, the Company changed its name from The Corporate Advisory
Board Company to The Corporate Executive Board Company.
13
<PAGE>
USE OF PROCEEDS
All of the shares of Common Stock being sold in the Offering are being sold
by the Selling Stockholders. The Company will not directly receive any proceeds
from the sale of the Common Stock pursuant to the Offering.
The Principal Selling Stockholder has agreed to use a portion of the
proceeds from the sale of the Common Stock pursuant to the Offering to repay a
promissory note, in the principal amount of $6.5 million, made by the Principal
Selling Stockholder in favor of the Company.
DIVIDEND POLICY
Prior to the closing of the Offering, the Company paid dividends to the
Principal Selling Stockholder. After the Offering, the Company does not
anticipate declaring or paying dividends in the foreseeable future. The timing
and amount of future dividends, if any, will be determined by the Board of
Directors of the Company and will depend, among other factors, upon the
Company's earnings, financial condition and cash requirements at the time such
payment is considered.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 on an actual basis and pro forma to reflect the transactions set forth
in note (1) hereto. The Company will not receive directly any of the proceeds
from the Offering. See "Use of Proceeds" and "Principal and Selling
Stockholders." This table should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
ACTUAL PRO FORMA(1)
------ ------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Cash and cash equivalents.................................... $13,349 $
======= ==========
Current stock option repurchase liability(2)................. $ 3,059
-------
Total current liabilities............................... $ 3,059 $
======= ==========
Long-term stock option repurchase liability(2)............... 2,752 ----------
Preferred stock, par value $___ per share,
______ shares authorized, no shares issued and
outstanding.............................................. ------- ----------
Class A voting common stock, par value $0.01 per share,
1,000 shares authorized, 1,000 shares issued and
outstanding (actual), no shares issued and outstanding
(pro forma)................................................. --
Class B non-voting common stock, par value $0.01 per
share, 1,399,000 shares authorized, 726,000 shares
issued and outstanding (actual), no shares issued and
outstanding (pro forma)..................................... 7 ----------
Common stock, par value $.01 per share, ______ shares
authorized, no shares issued and outstanding (actual),
______ shares issued and outstanding (pro forma)...........
Additional paid-in capital................................... 2,764
Deferred compensation........................................ (1,303)
Accumulated deficit.......................................... (5,576)
------- ----------
Total capitalization.................................... $(1,356) $
======== ==========
</TABLE>
__________
(1) Assumes the following transactions took place as of March 31, 1998: (i) the
elimination of certain employment requirements contained in the Liquid
Markets Agreements with certain employees relating to the repurchase of
certain stock options prior to the Spin-Off; (ii) the S Corporation
Distribution; (iii) the Recapitalization; (iv) payment of the expenses of
the Offering; (v) receipt by the Company of proceeds from the retirement
of a promissory note made by the Principal Selling Stockholder in favor
of the Company; and (vi) the termination of the Company's S corporation
election and the adjustment of the Company's federal deferred income tax
asset. See "Certain Transactions Prior to the Offering -- S Corporation
Distribution and Termination of S Corporation Status; -- The
Recapitalization; and -- Stock Option Restructuring and Repurchase
Charges."
(2) The Company has Liquid Markets Agreements with certain employees relating
to the repurchase of certain stock options prior to the Spin-Off at fixed
amounts subject to certain employment requirements. The amount due under
these agreements during the next 12 months is classified as current stock
option repurchase liability, and the amount due thereafter is classified as
long-term stock option repurchase liability. See "Certain Transactions
Prior to the Offering -- Stock Option Restructuring and Repurchase
Charges."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997 have
been derived from the financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
financial data presented below as of December 31, 1993, 1994 and 1995 and as of
March 31, 1998, and for the years ended December 31, 1993 and 1994 and the three
months ended March 31, 1997 and 1998 have been derived from the unaudited
financial statements of the Company, which have been prepared on the same basis
as the audited financial statements of the Company. The unaudited financial
statements as of March 31, 1998 and for the three months ended March 31, 1997
and 1998 include all adjustments, consisting of normal recurring accruals, that
the Company considers necessary for a fair presentation of the financial
position and results of operations as of and for such periods. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. The
selected financial data presented below should be read in conjunction with the
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ----------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues.......................................... $8,108 $10,384 $ 17,547 $27,283 $38,669
Costs and expenses:
Cost of services............................... 4,713 7,698 10,849 15,078 20,036
Member relations and marketing................. 2,259 2,807 5,275 6,677 8,106
General and administrative..................... 778 1,147 2,589 3,832 5,660
Depreciation................................... 108 249 233 452 722
Stock option restructuring and
repurchase (2)............................... -- -- 9,390 1,473 3,063
------------- ----------- ---------- ---------- -----------
Total costs and expenses....................... 7,858 11,901 28,336 27,512 37,587
--------------- ------------ ---------- ---------- -----------
Income (loss) from operations (2)................. 250 (1,517) (10,789) (229) 1,082
Interest income................................... -- -- -- -- 122
------------- ----------- ---------- ---------- -----------
Income (loss) before provision (benefit) for
state income taxes............................... 250 (1,517) (10,789) (229) 1,204
Provision (benefit) for state income
taxes (3)....................................... 25 (151) (1,076) (23) 120
------------- ----------- ---------- ---------- -----------
Net income (loss)................................. $ 225 $(1,366) $ (9,713) $ (206) $ 1,084
============= =========== ========== ========== ===========
Pro forma net income (loss) (3)................... $ 150 $ (910) $ (6,473) $ (137) $ 722
============= ============ ============ ============ ===========
Pro forma net income (loss) per share -
basic (4)....................................... $0.21 $(1.25) $(8.90) $(0.19) $0.99
Pro forma weighted average
shares outstanding-basic (4).................... 727 727 727 727 727
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1997 1998
------------ ------------
<S> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues.......................................... $8,794 $11,598
Costs and expenses:
Cost of services............................... 4,366 5,323
Member relations and marketing................. 1,667 2,352
General and administrative..................... 1,787 1,468
Depreciation................................... 150 177
Stock option restructuring and
repurchase (2)............................... 1,032 409
------------ ------------
Total costs and expenses....................... 9,002 9,729
---------- -----------
Income (loss) from operations (2)................. (208) 1,869
Interest income................................... -- 161
------------ ------------
Income (loss) before provision (benefit) for
state income taxes............................... (208) 2,030
Provision (benefit) for state income
taxes (3)....................................... (20) 202
------------ ------------
Net income (loss)................................. $ (188) $ 1,828
============ ============
Pro forma net income (loss) (3)................... $ (125) $ 1,218
============ ============
Pro forma net income (loss) per share -
basic (4) (unaudited).......................... $(0.17) $1.68
Pro forma weighted average
shares outstanding-basic (4).................... 727 727
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
As of December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ---------- ---------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents......................... -- -- -- -- $ 8,937
Working capital................................... 3,291 1,712 (3,530) (4,645) (5,005)
Total assets...................................... 8,423 13,154 18,568 23,107 39,868
Deferred revenues................................. 3,952 9,578 15,382 21,696 31,474
Total stockholder's equity (deficit).............. 3,874 2,508 (7,205) (7,411) (5,042)
<CAPTION>
As of March 31,
1998
--------------------------
Actual Pro
---------- forma
(5) (6)
-------
<S> <C> <C>
Cash and cash equivalents......................... $13,349 $15,442
Working capital................................... (3,698) (4,296)
Total assets...................................... 36,560 35,962
Deferred revenues................................. 29,784 29,784
Total stockholder's equity (deficit).............. (4,108) (6,763)
</TABLE>
OTHER OPERATING DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
--------- ------- --------
<S> <C> <C> <C>
Subscription programs(7) 6 7 9
Member institutions(7),(8) 772 973 1,114
Total membership
subscriptions(7) 1,140 1,486 1,833
Average subscription programs
per membership(7) 1.48 1.53 1.65
Revenue renewal rate(9) 91% 98% 91%
</TABLE>
17
<PAGE>
(1) The Statement of Operations Data does not reflect certain future charges
that the Company expects to incur, of which approximately $2.0 million are
expected to be recognized during the quarter in which the Offering occurs.
Of the charges in such quarter, $1.9 million relate to the elimination of
certain employment requirements contained in the Liquid Markets Agreements
and $0.1 million relate to a substitution of Company stock options for
Advisory Board Company stock options that occurred at the time of the
Spin-Off. See "Certain Transactions Prior to the Offering -- Stock Option
Restructuring and Repurchase Charges."
(2) The Company reflects charges relating to the Liquid Markets Agreements as
stock option repurchase expenses over the required employment period.
Furthermore, the terms of the stock option substitution effected at the
Spin-Off resulted in compensation expense being charged for the intrinsic
value of certain stock options. These changes are reflected as stock option
restructuring expense over the vesting period of the options. Excluding
these expenses related to the Company's options, Income (Loss) From
Operations for 1993, 1994, 1995, 1996 and 1997 would have been $0.3
million, $(1.5) million, $(1.4) million, $1.3 million, and $4.1 million,
respectively, and Income (Loss) From Operations for the three months ended
March 31, 1997 and March 31, 1998 would have been $0.8 million and $2.3
million, respectively.
(3) The Company has elected to be taxed as an S Corporation under the Code
whereby the Principal Selling Stockholder (who prior to the Offering was
the Company's sole stockholder) is liable for individual federal income
taxes on the Company's taxable income. As the District of Columbia does not
recognize S corporation status, the Company has been directly responsible
for District of Columbia taxes. Upon completion of the Offering, the
Company will terminate its S corporation election and will be subject to
corporate level federal income taxes. See "Certain Transactions Prior to
the Offering -- S Corporation Distribution and Termination of S Corporation
Status." Accordingly, the pro forma net income (loss) reflects an estimate
of the income taxes that would have been recorded if the Company had been a
C corporation for the periods presented. See Note 6 of Notes to Financial
Statements.
(4) Basic pro forma net income (loss) per share is computed by dividing pro
forma net income (loss) by the weighted average number of shares of common
stock outstanding during the period. Fully diluted pro forma net income
(loss) per share is the same as basic pro forma earnings per share for all
periods except the year ended December 31, 1997 and the three months ended
March 31, 1998. Fully diluted pro forma net income per share is $0.85 and
$1.38 for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively. See Note 2 of Notes to Financial Statements.
(5) Pro forma to give effect to (1) the distribution of previously
undistributed taxed or taxable earnings of approximately $3.2 million based
on earnings through March 31, 1998, (2) termination of the Company's S
corporation election and the adjustment of the Company's federal deferred
income tax asset of approximately $3.8 million as of March 31, 1998, (3)
the planned amendment of the Liquid Markets Agreements which eliminates
future employment requirements as a condition for payment, resulting in an
increase in the long-term option repurchase liability of $2.1 million as of
March 31, 1998, (4) the retirement of a $6.5 million promissory note made
by the Principal Selling Stockholder in favor of the Company, and (5) the
payment of approximately $1.3 million in Offering expenses on behalf of the
Selling Stockholders. See "Certain Transactions Prior to the Offering --
Stock Option Restructuring and Repurchase Charges."
(6) Does not include an adjustment for the distribution to be made to the
Principal Selling Stockholder prior to the closing of the Offering equal to
the estimated undistributed taxed or taxable earnings of the Company from
April 1, 1998 through the closing of the Offering. See "Certain
Transactions Prior to the Offering -- S Corporation Distribution and
Termination of S Corporation Status."
(7) At the end of the period.
(8) The Company's membership consists primarily of domestic and multinational
corporations and secondarily of large subsidiaries of corporations and non-
profit institutions.
(9) Revenue renewal rate is defined as the percentage of prior year contract
value renewed, including price increases. A portion of the increase in the
1996 renewal rate is due to a price increase related to the introduction of
on-site executive education services for certain subscription programs.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
The Corporate Executive Board is the leading provider of "best practices"
research and analysis focusing on corporate strategy, operations and general
management issues. The Company provides its research and analysis on an annual
subscription basis to a membership of over 1,200 of the world's largest and most
prestigious corporations. For a fixed annual fee, members of each subscription
program have access to an integrated set of services, including best practices
research studies, executive education seminars, customized research briefs and
on-line access to the program's database.
Management's discussion and analysis and the accompanying financial
statements present the Company's results of operations as if it had operated as
a stand-alone entity in accordance with the accounting rules prescribed for
"carve-out" financial statements. The Company operated as a division of The
Advisory Board Company until October 31, 1997 when it was spun off to the sole
shareholder of The Advisory Board Company. See "Certain Transactions Prior to
the Offering -- Formation and Spin-Off of the Company."
Subscription memberships, which are annually renewable contracts and
generally payable by members at the beginning of the contract term, comprise
100% of the Company's revenues. Billings attributable to the Company's
subscription programs are initially recorded as deferred membership fees and
then recognized pro rata over the contract term.
The Company has experienced revenue growth each year since its inception.
Over the last three years, the Company's revenues have grown at a
compound annual growth rate of 55.0% from $10.4 million in 1994 to $38.7 million
in 1997. The Company's revenues were $8.8 million for the three months ended
March 31, 1997 compared to $11.6 million for the three months ended March 31,
1998. The Company attributes this growth in revenue to an increase in the
number of memberships, driven primarily by new sales for existing subscription
programs, the introduction of new subscription programs and consistent renewal
rates.
One measure of the Company's business is its annualized "Contract Value,"
which the Company calculates as the aggregate annualized membership revenue
attributed to all membership agreements in effect at a given point in time,
without regard to the remaining duration of such agreements. The Company's
experience is that a substantial portion of members renew subscriptions for an
equal or higher level of total membership payments each year. Contract Value
has grown at a compound annual growth rate of 49.1% over the past three fiscal
years and was $47.7 million at December 31, 1997.
The Company's operating expenses consist of cost of services, member
relations and marketing, general and administrative expenses and depreciation.
Cost of services represents the costs associated with the production and
delivery of the Company's products and services, including compensation of
research personnel and in-house faculty, the production of published materials,
the organization of member meetings and all associated support services. Member
relations and marketing expenses represent the costs of acquiring new members
and renewing existing members and consist of compensation expenses (including
sales commissions) travel and all associated support services. General and
administrative expenses include the costs of human resources and recruiting,
finance and accounting, management information systems, facilities management,
new product development and other administrative functions of the Company.
19
<PAGE>
The Company has Liquid Markets Agreements with certain employees relating
to the repurchase of certain options prior to the Spin-Off at fixed amounts
subject to certain employment requirements. The Company reflects these charges
as stock option repurchase expenses over the required employment period. In
conjunction with the Spin-Off, The Advisory Board Company executed substitution
agreements with each of the employees of the Company participating in The
Advisory Board Company's stock option plan. The substitution allowed for the
exchange of Advisory Board Company options for Company options. The terms of the
substitution resulted in compensation expense being charged for the intrinsic
value of certain options over the vesting period of the options, reflected as
stock option restructuring expense. See "Certain Transactions Prior to the
Offering -- Stock Option Restructuring and Repurchase Charges."
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH, 31
------------------------------- ----------------------
Revenues: 1995 1996 1997 1997 1998
--------- ------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues 100% 100% 100% 100% 100%
Costs and expenses:
Cost of services................................... 61.8 55.2 51.8 49.7 45.9
Member relations and marketing..................... 30.1 24.5 21.0 19.0 20.3
General and administrative......................... 14.8 14.0 14.6 20.3 12.7
Depreciation....................................... 1.3 1.7 1.9 1.7 1.5
Stock option restructuring and
repurchase...................................... 53.5 5.4 7.9 11.7 3.5
Total costs and expenses............................ 161.5 100.8 97.2 102.4 83.9
Income from operations.............................. (61.5) (0.8) 2.8 (2.4) 16.1
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
REVENUES. Total revenues increased 31.8% from $8.8 million for the three
months ended March 31, 1997 to $11.6 million for the three months ended March
31, 1998. The increase in revenues is primarily attributable to increased sales
of existing subscription programs, the introduction of two new subscription
programs and consistent renewal rates.
COST OF SERVICES. Cost of services decreased as a percentage of revenue
from 49.7% for the three months ended March 31, 1997 to 45.9% for the three
months ended March 31, 1998. This decrease is attributable to the fixed nature
of the production costs of best practices research studies, as these costs are
not materially affected by growth in the number of members. The absolute cost
of these services increased 20.5% from $4.4 million for the three months ended
March 31, 1997 to $5.3 million for the three months ended March 31, 1998. The
increases were principally due to the addition of research teams related to the
introduction of two new subscription programs and the increase in customized
research briefs and executive education costs to service the growing member base
for existing and new subscription programs.
MEMBER RELATIONS AND MARKETING. Member relations and marketing costs
increased as a percentage of total revenues from 19.0% for the three months
ended March 31, 1997 to 20.3% for the three months ended March 31, 1998. This
increase is attributable to the Company's efforts to increase the marketing
staff to expand efforts for existing subscription programs and to prepare for
the launch of two new subscription programs in 1998. The absolute dollar costs
of member relations and marketing increased 41.2% from $1.7 million for the
three months ended March 31, 1997 to $2.4 million for the three months ended
March 31, 1998. The increases were primarily due to increases in personnel and
related costs to expand marketing efforts on existing subscription programs, to
support planned new product offerings and to provide a consistent level of
member service to an expanding member base. The increases also were due to
increased incentive compensation correlated with the growth in revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
as a percentage of revenue from 20.3% for the three months ended March 31, 1997
to 12.7% for the three months ended March 31, 1998. The absolute dollar costs
for general and administrative expenses decreased 16.7% from $1.8 million for
the three months ended March 31, 1997 to $1.5 million for
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<PAGE>
the three months ended March 31, 1998. These decreases are primarily
attributable to costs associated with the launch of new subscription programs
and external costs of certain recruiting efforts incurred in the first quarter
of 1997.
DEPRECIATION. Depreciation expense remained consistent at $0.2 million for
the three months periods ended March 31, 1997 and 1998.
STOCK OPTION RESTRUCTURING AND REPURCHASE CHARGES. The Company recognized
$1.0 million and $253,000 in compensation expense related to the Liquid Markets
Agreements for the three months ended March 31, 1997 and 1998, respectively.
The Company expects to eliminate future employment requirements and to recognize
the balance of the compensation expense related to these agreements,
approximately $1.9 million, during the quarter in which the Offering occurs.
Furthermore, in connection with the Spin-Off, The Advisory Board Company
executed substitution agreements with each of the employees of the Company
participating in The Advisory Board Company's stock option plan. The terms of
this substitution resulted in compensation expense for the intrinsic value of
certain stock options to be charged over the vesting period. Resulting
compensation charges were $156,000 for the three months ended March 31, 1998.
There were no charges related to the option substitution prior to the Spin-Off.
See "Certain Transactions Prior to the Offering -- Stock Option Restructuring
and Repurchase Charges."
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES. Total revenues increased 56.0% from $17.5 million for the year
ended December 31, 1995 to $27.3 million for the year ended December 31, 1996,
and 41.8% to $38.7 million for the year ended December 31, 1997. The increase
in revenues is primarily attributable to increased sales of existing
subscription programs, the introduction of new subscription programs, consistent
renewal rates and, to a lesser degree, price increases. A portion of the
increase also is due to the introduction of on-site executive education
services to existing members resulting in price increases in 1996. The Company
introduced one new subscription program in 1996 and two new subscription
programs in 1997.
The Company's revenue renewal rate, defined as the percentage of prior year
contract value renewed, including price increases, was 91%, 98%, and 91% for
1995, 1996, and 1997, respectively. A portion of the increase in the 1996
renewal rate is due to a price increase related to the introduction of on-site
executive education services for certain subscription programs.
COST OF SERVICES. Cost of services decreased as a percentage of revenue
from 61.8% for the year ended December 31, 1995 to 55.2% for the year ended
December 31, 1996, to 51.8% for the year ended December 31, 1997. This decrease
is attributable to the fixed nature of the production costs of best practices
research studies, as these costs are not materially affected by growth in the
number of members. The absolute cost of these services increased 39.8% from
$10.8 million for the year ended December 31, 1995 to $15.1 million for the year
ended December 31, 1996, and 32.5% to $20.0 million for the year ended December
31, 1997. The increases were principally due to the addition of research teams
related to the introduction of new subscription programs and the increase in
customized research briefs and executive education costs to service the growing
member base for existing and new subscription programs.
MEMBER RELATIONS AND MARKETING. Member relations and marketing costs
decreased as a percentage of total revenues from 30.1% for the year ended
December 31, 1995 to 24.5% for the year ended December 31, 1996, to 21.0% for
the year ended December 31, 1997. This decrease is largely attributable to the
Company's ability to leverage marketing personnel to sell multiple subscription
programs. The absolute dollar costs of member relations and marketing increased
26.4% from $5.3 million for the year ended December 31, 1995 to $6.7 million for
the year ended December 31, 1996, and 20.9% to $8.1 million for the year ended
December 31, 1997. The
21
<PAGE>
increases were primarily due to increases in personnel and related costs to
market and support new subscription programs, increased marketing efforts for
existing subscription programs and increased incentive compensation correlated
to the growth in revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
relatively constant as a percentage of total revenues at 14.8% for the year
ended December 31, 1995, 14.0% for the year ended December 31, 1996 and 14.6%
for the year ended December 31, 1997. The absolute dollar costs for general and
administrative expenses increased 46.2% from $2.6 million for the year ended
December 31, 1995 to $3.8 million for the year ended December 31, 1996, and
50.0% to $5.7 million for the year ended December 31, 1997. The increases
reflect investments in new product development, human resources and recruiting,
management information systems and finance and accounting functions required to
support the Company's growth.
DEPRECIATION. Depreciation expense increased 94.0% from $233,000 for the
year ended December 31, 1995 to $452,000 for the year ended December 31, 1996,
and 59.7% to $722,000 for the year ended December 31, 1997. The increase was
principally due to investments in computer equipment and software, office
furnishings and physical space to support the growth in the business.
STOCK OPTION RESTRUCTURING AND REPURCHASE CHARGES. The Company recognized
$9.4 million, $1.5 million and $1.8 million in compensation expense related to
the repurchase of certain stock options pursuant to the Liquid Markets
Agreements for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company expects to recognize the balance of the compensation expense related
to these agreements, approximately $1.9 million, during the quarter in which the
Offering occurs. In addition, the Company recorded compensation charges
resulting from the substitution of Company stock options for Advisory Board
Company options as part of the Spin-Off, of $1.3 million in 1997, with $504,000
in charges scheduled in 1998, $382,000 in 1999, $382,000 in 2000 and $191,000 in
2001. See "Certain Transactions Prior to the Offering -- Stock Option
Restructuring and Repurchase Charges."
LIQUIDITY AND CAPITAL RESOURCES
On October 31, 1997, the Company was a party to the Spin-Off transaction
with The Advisory Board Company whereby the assets and certain liabilities
relating to the corporate-related consulting business of The Advisory Board
Company were transferred to the Company, a newly incorporated entity. See
"Certain Transactions Prior to the Offering -- Formation and Spin-Off of the
Company."
The Company's financial statements present the accounts of the Company as
if it had operated as a stand-alone entity in accordance with the accounting
rules prescribed for "carve-out" financial statements for periods preceding the
Spin-Off on October 31, 1997. For these periods, net funds contributed by the
Company were treated as an affiliate receivable as cash flows were commingled in
The Advisory Board Company accounts. This affiliate receivable was settled as
part of the transfer of assets and liabilities in the Spin-Off.
The Company entered into certain agreements with The Advisory Board Company
coincident with the Spin-Off. See "Certain Transactions Prior to the Offering
- -- Formation and Spin-Off of the Company" and "Certain Relationships and
Transactions." The Company records costs associated with these agreements
monthly as a payable to affiliate, and expects to pay amounts owed to The
Advisory Board Company on a quarterly basis.
The Company has financed its operations to date through funds generated
from operations. Member subscriptions, which are annually renewable contracts
and generally payable by members at the beginning of the contract term, comprise
100% of the Company's revenues. The combination of year-to-year revenue growth
and payments in advance from members has historically resulted in positive cash
generation from operations. The Company generated $1.4 million in cash from
operating activities during 1995, $5.5 million in 1996, and $13.6 million in
1997. In the three months ended March 31, 1998, the Company generated $8.9
million in cash from operating activities.
22
<PAGE>
In 1997, the Company invested $11.8 million, of which $1.5 million was used
for the purchase of property and equipment, $3.8 million was used for the
purchase of marketable securities and $6.5 million was loaned to the Principal
Selling Stockholder. The Company's investment policy allows for the investment
of excess funds in short-term to intermediate-term federal government or
investment grade obligations. In the first three months of 1998, the Company
used $2.4 million to repurchase stock options and $206,000 for the purchase of
marketable securities. See Note 9 of Notes to Financial Statements for further
discussion regarding the option repurchase program.
In the first three months of 1998, the Company distributed $1.1 million to
the Principal Selling Stockholder primarily to pay income taxes on the Company's
S corporation earnings.
The Company holds a promissory note in the amount of $6.5 million from the
Principal Selling Stockholder. The note bears interest at a rate of 7% payable
semiannually. The principal is payable on October 31, 2007. The note is
collateralized by assets of the Principal Selling Stockholder. The Principal
Selling Stockholder has agreed to repay this note from the proceeds of the
Offering.
As of March 31, 1998, the Company had cash and cash equivalents of $13.3
million. Management expects that its current cash balances and cash flows from
operations will satisfy working capital, financing activities and capital
expenditure requirements for the foreseeable future.
In addition, the Company will distribute an amount to the Principal Selling
Stockholder equal to the estimated undistributed earnings of the Company of
approximately $3.2 million through March 31, 1998. The estimated distribution
through March 31, 1998 does not include the amount to be distributed for
earnings from April 1, 1998 through closing of the Offering. These distributions
will be paid out of the Company's cash balances. See "Certain Transactions Prior
to the Offering -- S Corporation Distribution and Termination of S Corporation
Status."
The Company has certain commitments related to the relocation of its office
facilities. The Company estimates that it will incur approximately $2.6 million
and $4.0 million in leasehold improvements and related costs in 1998 and 1999,
respectively. The Company has entered into a $1.3 million Letter of Credit
Agreement with a commercial bank to provide a security deposit for the office
space lease, expiring on June 23, 2003. The Letter of Credit Agreement is
collateralized by the Company's cash, accounts receivable and physical property.
The Company has Liquid Markets Agreements with certain employees relating
to the repurchase of certain stock options prior to the Spin-Off at fixed
amounts. The Company paid $2.4 million related to these agreements in the first
quarter of 1998, and is obligated to pay $3.0 million during the remainder of
1998, $1.7 million in 1999, and $3.1 million in 2000. See "Certain Transactions
Prior to the Offering -- Stock Option Restructuring and Repurchase Charges."
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company adopted both of these
standards during the three months ended March 31, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income," to be reported in the financial statements and/or notes
thereto. As the Company does not currently have any components of "other
comprehensive income," reported net income is the same as "total comprehensive
income" for the three months ended March 31, 1997 and 1998.
SFAS No. 131 requires entities to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim reporting
purposes during 1998. The Company is in the process of assessing
23
<PAGE>
the additional disclosures, if any, required by SFAS No. 131. However, such
adoption will not impact the Company's results of operations or financial
position, since it relates only to disclosures.
Management of the Company is taking steps to assess the nature and extent
of the impact of Year 2000 on its systems and applications. While management has
not yet finalized its analysis, it does not expect that the costs to make its
systems Year 2000-compliant will have a material adverse effect on its results
of operations or financial position. Such costs will be expensed as incurred.
24
<PAGE>
BUSINESS
OVERVIEW
The Corporate Executive Board is the leading provider of "best practices"
research and analysis focusing on corporate strategy, operations and general
management issues. The Company provides its research and analysis on an annual
subscription basis to a membership of over 1,200 of the world's largest and most
prestigious corporations. For a fixed annual fee, members of each subscription
program have access to an integrated set of services, including best practices
research studies, executive education seminars, customized research briefs and
on-line access to the program's database. For each of the last three years,
the Company's revenue renewal rate (defined as the percentage of prior year's
contract value renewed) exceeded 90%. More than 60% of the Fortune 500
companies are members of the Corporate Executive Board.
The Company's membership-based model is central to its business strategy.
This model gives the Company access to the best business practices of its
members and enables the Company to provide comprehensive analysis on leading-
edge topics by leveraging the collective intellectual capital of its members. By
participating in the Corporate Executive Board, members can learn about the best
practices of the most progressive corporations in the world at a fraction of the
cost of a customized analysis performed by any of the major consulting firms.
The Company does not believe that in-house research and analysis departments at
individual corporations could obtain, at any price, similar information from
other corporations about their management practices. In general, the membership
comprises the most progressive competitors in each industry sector, including
American Express, British Airways, CitiCorp, Coca-Cola, Deutsche Bank, Hewlett-
Packard, Merrill Lynch, Microsoft, Procter & Gamble and Unilever. No one
customer accounted for more than 2% of revenues in any of the last three fiscal
years. The Company believes that there is no other entity that enables
corporations to study a broad range of the best practices of hundreds of other
business enterprises for fixed annual subscription fees.
The Company currently offers ten discrete subscription programs, each
focusing on a single business constituency: finance, sales, information
technology, corporate strategy, human resources, bank operations, insurance,
trust and private banking, business banking and retail banking. The Company has
added three new subscription programs across the past 18 months and anticipates
adding one to three new subscription programs per year for the foreseeable
future. Each subscription program charges a separate fixed annual subscription
fee and is served by a dedicated staff of analysts and researchers.
Subscriptions are generally renewable on a 12-month basis, and the average price
per subscription program at June 30, 1998 was approximately $26,000. In 1997,
the Company published 19 best practices research studies, completed over 14,000
customized research briefs and provided executive education services to 950
member corporations reaching approximately 20,000 executive participants. The
Company's 180 analysts and researchers have compiled a proprietary database of
140 best practices research studies and 20,000 customized research briefs
containing over 100,000 profiles of corporate practices.
The Corporate Executive Board's revenue has grown at a compound annual rate
of 55% over the last three years. Because each subscription program provides
its membership with standardized best practices research studies and
executive education seminars, new members immediately add revenues while only
incrementally increasing operating costs. The Company's growth strategy is to
cross-sell additional subscription programs to existing members, to add new
members and to develop new subscription programs.
INDUSTRY BACKGROUND
Corporations today are experiencing greater competitive demands and facing
increasingly complex strategic and operational issues. The globalization of the
economy, the transformation from an industrial era to an information age and the
accelerating pace of technological change are dramatically altering the business
environment. In response to these trends, companies are exploring new business
strategies as well as reevaluating the performance of functional areas within
25
<PAGE>
their organizations in order to maintain their competitive edge. The pace of
change is driving a greater interest in gaining access to leading management
practices and solutions to common business problems on a cross-industry basis.
Capitalizing on the growing demand for information on business and
management issues, the professional information services industry has
experienced significant growth over the past few years. Industry participants
have approached the market for business-focused information by offering a
variety of products and services, including market research, strategic planning,
implementation services and educational programs. Services also differ by the
level of engagement, with some offering project-driven or long-term consulting
contracts, and others providing continuous research publishing. Within this
broad industry, management consulting and training and development have emerged
as key segments, representing $50 billion and $59 billion in 1997 revenues,
respectively. Other entities, such as trade associations, non-profit think-tanks
and research and database companies, also offer research, consulting and
education services.
The Corporate Executive Board offers a unique approach that combines many
of the benefits of general management consulting and training and development
firms. As to major business issues (such as managing growth, cost reengineering,
outsourcing and strategy development), the Company's research and analysis
covers the identical intellectual terrain of general management consulting. The
distinction is that the Corporate Executive Board provides the same,
standardized product to the whole of its membership at a fraction of the cost of
consulting services. In common with training and development firms, the Company
offers education services both on-site at member institutions and in large
multi-company settings. Unlike training and development firms, which typically
invest only periodically in new curriculum development, the Corporate Executive
Board's curriculum is constantly updated by its best practices research
organization. A further distinction is the seniority and breadth of the
audience, with the Company briefing executive and senior management staff across
a broad range of industry and functional areas. Because of this unique approach
to the market, the Company believes that it offers its customers a superior
value proposition.
BUSINESS STRATEGY
The Company's goal is to research and analyze the most pertinent and timely
strategic and operational issues facing its membership, and to distribute the
results of this analysis to its membership in the most efficient, effective, and
helpful manner. The Company's membership model allows it to draw upon a large
and growing universe of issues and solutions of relevance to today's leading
corporations. The Company actively engages its membership to help focus its
research on the challenges of the current business environment and to maintain
and enhance its position as the leading provider of best practices research and
analysis.
. MAINTAIN MEMBERSHIP-BASED MODEL. The Company believes that the
membership-based model is key to its success and continually strives
to increase the ties between its members and the Corporate Executive
Board. The Company encourages members to view the Corporate Executive
Board as their proprietary off-site research facility. The Company's
fixed-fee economic model promotes frequent use of the Company's
products and services. The Company believes that member satisfaction
grows as members access more of the Company's services, and that the
growing roster of satisfied members validates the Company's business
model and induces new members to join the Corporate Executive Board.
. FOCUS ON BEST PRACTICES RESEARCH. The focus of the Company's work is
research on best demonstrated business and management practices. Many
large corporations believe that there are "economies of intellect" in
business that can be realized by learning from the experiences of
similar entities facing common business problems.
26
<PAGE>
The Company believes that there will be a continuing desire on the
part of progressive corporations to access evolving solutions to these
common business problems. The Company's success to date has uniquely
positioned it as the leading source for identifying, studying,
evaluating and communicating these evolving solutions.
. CONTINUE RESEARCH AND ANALYSIS EXCELLENCE. The quality of its research
and analysis has driven the success of the Corporate Executive Board.
The Company regularly interacts with senior executives at member
institutions to identify the most important strategic and operational
issues for research and analysis. Experienced program directors are
responsible for assuring that the Company's research methodology is
applied to all studies and that research quality is maintained across
all subscription programs. The Company is highly selective in its
hiring, recruiting only the top graduates of the leading universities
and graduate schools. Furthermore, the Company emphasizes continual
training of all employees in key areas, including industry analysis,
economics, quantitative modeling, root-cause analysis and presentation
skills. The Company currently employs over 180 analysts and
researchers.
. LEVERAGE ECONOMIC MODEL. All of the Company's revenues are derived
from annual fees for each subscription program. Most of the Company's
costs of delivering its products and services in each subscription
program are fixed and do not vary with the number of subscribers.
The Company expects to increase revenues and improve operating
margins as it adds new members to each subscription program.
GROWTH STRATEGY
The Company believes that demand for its services will continue to grow, as
even the most prestigious corporations recognize the need to improve their
performance and seek access to other companies' solutions to common corporate
problems. The Company's growth strategy centers on leveraging the formula that
it has developed across the past decade by cross-selling subscription programs
to existing members, adding new members and developing new subscription
programs.
. CROSS-SELL ADDITIONAL SUBSCRIPTION PROGRAMS TO EXISTING MEMBERS. On
average, members currently participate in 1.6 subscription programs.
Corporations that have been members for three or more years currently
participate in an average of 2.6 subscription programs. The Company is
actively cross-selling additional programs to its members and believes
that most members are potential participants in approximately four to
five of its current subscription programs. As the Company develops new
subscription programs, cross-selling opportunities will increase.
. ADD NEW MEMBERS. The Company has targeted 1,300 additional
institutions worldwide in its current core market, including
corporations with revenues greater than $500 million and financial
institutions with assets in excess of $1 billion. In 1997, the Company
added 332 new member institutions.
. DEVELOP NEW SUBSCRIPTION PROGRAMS. The Company currently offers
subscription programs covering ten business constituencies: finance,
sales, information technology, corporate strategy, human resources,
bank operations, insurance, trust and private banking, business
banking and retail banking. The Company has added three new
subscription programs in the past 18 months and has thus far
identified 50 additional potential business constituencies that may
be suitable for subscription programs in the future.
27
<PAGE>
THE MEMBERSHIP
The Company's membership-based model is central to its business strategy.
This model gives the Company access to the best demonstrated practices of its
members and enables the Company to provide comprehensive analysis on leading-
edge topics by leveraging the collective intellectual capital of its
members. By participating in the Corporate Executive Board, members can learn
about the best practices of the most progressive corporations in the world at a
fraction of the cost of a customized analysis performed by any of the major
consulting firms. The Company does not believe that in-house research and
analysis departments at individual corporations could obtain, at any price,
similar information from other corporations about their best business practices.
The Company believes that there is no other entity that enables corporations to
study a broad range of the best business practices of hundreds of other business
enterprises for fixed annual subscription fees.
The Company regularly interacts with senior executives at member
institutions to identify the most important strategic and operational issues for
research and analysis and continually strives to increase the ties between its
members and the Corporate Executive Board. The Company's products and services
are available exclusively to members. The Company's fixed-fee economic model
promotes frequent use of the Company's products and services. The Company
encourages members to view the Corporate Executive Board as their proprietary
off-site research facility. The Corporate Executive Board believes that member
satisfaction grows as members access more of the Company's services, and that
the growing roster of satisfied members validates the Company's business model
and induces new members to join the Corporate Executive Board.
More than 60% of the Fortune 500 companies are members of the Corporate
Executive Board. At June 30, 1998, the Corporate Executive Board included 1,280
members. The membership includes some of the largest and most progressive
competitors in each sector. Some of the leading institutions in the membership
are identified in the following table:
<TABLE>
<CAPTION>
CHEMICALS CONSUMER PRODUCTS ENERGY
<S> <C> <C>
Bayer AG Anheuser-Busch Companies, Inc. British Gas plc
The Dow Chemical Company Cadbury Schweppes p.l.c. The British Petroleum Company p.l.c.
Eastman Chemical Company The Coca-Cola Company Enron Corporation
E.I. du Pont de Nemours & Co. The Gillette Company Mobil Corporation
Imperial Chemical Industries plc NIKE, Inc. PacifiCorp
Monsanto Company The Procter & Gamble Company Shell Oil Company
RJR Nabisco Holdings Corp. Texaco Inc.
Unilever plc TransCanada Pipelines Limited
FINANCIAL SERVICES INSURANCE MANUFACTURING
American Express Company Aetna Inc. ABB Asea Brown Boveri Pty. Ltd.
Barclays Bank plc The Allstate Corporation The Boeing Company
Charles Schwab & Co., Inc. CIGNA Corp. Ford Motor Company
The Chase Manhattan Corporation John Hancock Mutual Life Insurance Company General Electric Company
Citicorp New York Life Insurance Company Lockheed Martin Corporation
Deutsche Bank AG The Prudential Insurance Company of America Minnesota Mining & Manufacturing Company
Fidelity Investment Co. State Farm Mutual Automobile Insurance Philips Electronics NV
Merrill Lynch and Co., Inc. Company Siemens AG
The Travelers Group
MEDIA AND PUBLISHING RETAIL TECHNOLOGY
British Sky Broadcasting Group plc Best Buy Co., Inc. America Online Inc.
Comcast Corporation The Gap, Inc. Compaq Computer Corporation
Dow Jones & Company, Inc. The Home Depot, Inc. Dell Computer Corp.
The McGraw-Hill Companies The Limited, Inc. Electronic Data Systems Corp.
L.L. Bean, Inc. Hewlett-Packard Company
McDonald's Corporation
Sears Roebuck and Co.
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
The New York Times Company Starbucks Coffee Company Intel Corporation
The Thomson Corporation Microsoft Corp.
Time Warner, Inc. SAP AG
The Washington Post Company Sun Microsystems, Inc.
TELECOMMUNICATIONS INSTITUTIONAL
AT&T Corporation Central Intelligence Agency
Bell Atlantic Corporation Department of Energy
Bell Canada Department of Treasury
Bell South Corporation Duke University
British Telecommunications plc Harvard University
GTE Corporation National Security Agency
Lucent Technologies Inc. Stanford University
Nokia Group University of Virginia
US WEST Inc.
WorldCom, Inc.
</TABLE>
Memberships are renewable annually. The following table sets forth
information with respect to members, subscriptions and renewals for the periods
shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
Subscription programs(1) 6 7 9
Member institutions(1),(2) 772 973 1,114
Total membership subscriptions(1) 1,140 1,486 1,833
Average subscription programs per member 1.48 1.53 1.65
institution(1)
Revenue renewal rate(3) 91% 98% 91%
</TABLE>
___________
(1) At the end of the period.
(2) The Company's membership consists primarily of domestic and
multinational corporations and secondarily of large subsidiaries of
corporations and non-profit institutions.
(3) Revenue renewal rate is defined as the percentage of prior year
contract value renewed, including price increases. A portion of the
increase in the 1996 renewal rate is due to a price increase related
to the introduction of on-site executive services for certain
subscription programs.
PRODUCTS AND SERVICES
GENERAL
The Corporate Executive Board's research products and services are
renewable, membership-based subscription programs that focus on identifying,
analyzing and describing best demonstrated management practices. In 1997,
the Company published 19 best practices research studies, delivered over
14,000 customized research briefs and provided executive education services to
950 member corporations reaching approximately 20,000 executive participants.
In general, the research focuses primarily on identifying best demonstrated
management practices, and secondarily on critiquing widely-followed but
ineffective practices. The Company's staff of 180 analysts and researchers
conducted over 40,000 company interviews in 1997, focusing on a large number of
substantive areas, including compensation, employee relations, training,
finance, cost management, performance metrics, risk management, marketing,
sales, new product development and strategic alliances. The Corporate Executive
Board believes that it adds value by focusing the attention of senior management
on important issues and providing an unbiased, objective analysis of best
practices for dealing with those issues currently employed by the most
successful corporations in the world.
The Corporate Executive Board's research programs offer a cost-effective,
time-efficient opportunity for senior executives to learn from the practices and
experiences of other corporations from around the world. Member institutions can
participate in one of the Company's subscription
29
<PAGE>
programs for a fraction of the cost of proceeding independently either through
an internal research effort or through engagement of the services of a
management consulting firm.
Each subscription program is guided by a 12- to 18-month agenda. Each
subscription program has a research director who is responsible for applying the
Company's research methodology to produce best practices studies and for
maintaining research quality across all subscription program services. Using
fax polls, steering sessions and one-on-one interviews, the subscription
program's director works closely with the membership to identify agenda topics
of shared interest and to set the subscription program's research priorities.
Each subscription program is staffed by a dedicated team of researchers,
analysts and instructors who collectively research and write the best practices
studies, complete the customized research briefs and present the findings to the
membership.
The Company currently offers ten subscription programs, each targeting a
specific senior executive constituency within a corporate headquarters function
or vertical market segment: finance, sales, information technology, corporate
strategy, human resources, bank operations, insurance, trust and private
banking, business banking and retail banking.
The following table describes the Company's current subscription programs:
<TABLE>
<CAPTION>
SUBSCRIPTION YEAR PRIMARY EXECUTIVE
PROGRAM NAME INTRODUCED RESEARCH FOCUS CONSTITUENCY MEMBERSHIP BASE
-------------- ---------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Working Council for 1998 Finance Chief financial officers Corporations across all
Chief Financial industries
Officers
Working Council for 1997 Sales Senior sales executives Corporations across all
Sales Executives industries
Working Council for 1997 Information Chief information Corporations across all
Chief Information technology officers industries
Officers
Corporate Strategy 1996 Corporate strategy Senior corporate Corporations across all
Board strategists industries
Corporate Leadership 1993 Human resources Senior human resources Corporations across all
Council executives industries
Operations Council 1992 Bank operations Senior Vice Presidents Commercial banks
of bank operations
Insurance Advisory 1991 Insurance Senior marketing Insurance providers
Board executives
The VIP Forum 1989 Trust and private Executives in marketing Brokerage houses,
banking and line management commercial, trust and
private banks, mutual
fund companies
Business Banking Board 1986 Business banking Executive Vice Commercial banks and
Presidents of commercial nonbank lenders
banking
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Council on Financial 1983 Retail banking Executives in line Commercial banks,
Competition management, marketing consumer credit lenders
and brand management
</TABLE>
The Company's subscription programs provide members an integrated set of
products and services for a single annual fee. Each program provides its members
with (i) best practices research studies, (ii) executive education services,
(iii) customized research briefs and (iv) on-line access to the program's
proprietary research database. A description of each service follows:
BEST PRACTICES RESEARCH STUDIES
Each subscription program generally publishes three to five best practices
research studies annually, each addressing a specific corporate issue or problem
identified in the research agenda. Each best practices study is designed to
present the conclusions and supporting best practices in a graphical format,
enabling the intended audience to quickly scan and assimilate the 100 to 300
pages of research content. Each report is created using the Company's structured
research methodology: topic selection, root cause analysis, secondary research,
primary interviewing, analysis of findings and report writing. Each program
director can call upon the support of the Chief Research Officer and his staff
to provide assistance in framing arguments, screening best practices and editing
studies and their derivative executive education curriculum content.
In the course of researching a best practices study topic, the research
team typically will review thousands of pages of business and academic
literature to ground their understanding of the issues. They then will initiate
the research process to identify progressive management practices or evaluate
specific business strategies, typically conducting hundreds of in-depth
interviews with corporations, industry experts, management consultants and
academic leaders. During the course of its research, a team generally analyzes
and evaluates dozens of specific management practices in an attempt to isolate
the 8 to 15 most important practices worthy of potential implementation by
members, separating out demonstrated and proven business practices and disposing
of those concepts, whether popular or conventional, that largely have failed.
Each best practices study comprises two principal elements--the essay and
the best practices. The essay consists of a series of observations and
supporting evidence that frames the problems or business issues, helping
communicate the need for change or action to the membership at large. Each study
typically contains 8 to 15 best practices, and each best practice generally
features a 12- to 20-page case study of narrative text, graphics and supporting
analytical detail describing how the best practice works, how it was implemented
and the best practice's costs and benefits. In many cases, the Company assigns
pseudonyms to protect the confidentiality of proprietary information outlined in
a best practice. Consistent application of the Company's research methodology
across all subscription programs enables the Company to increase the number of
its subscription programs while maintaining research quality.
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<PAGE>
The following table lists selected agenda topics for each of the Company's
ten research programs:
<TABLE>
<CAPTION>
PROGRAM NAME PUBLISHED OR PLANNED BEST PRACTICES REPORT TITLES
------------ -----------------------------------------------------------------------
<S> <C> <C> <C>
Working Council for Motivating and Rewarding Models for Effective Corporate Performance
Chief Financial Growth: Finance's Role in CEO-CFO Working Metrics: Evolving
Officers Supporting Growth Partnerships Measurement Systems at
First-Tier Companies
Working Council for Customer Integration: Perfecting the Sales Existing Customer Strategy:
Sales Executives Models, Lessons and Best Channel: Economics and Innovations in Customer
Practices for Maximizing Impact of the New Service, Retention and
Relationships Electronic Marketplace Recovery
Working Council for Far From the Ground: Creating Business Quest for Customer Contact:
Chief Information Strategies for Advantage: Models for Case Studies in IT-Enabled
Officers Attracting IT Talent in Partnering with the Line Needs Identification
a Perfecting Labor
Market
Corporate Strategy Board Unbroken Growth: Stall Points: Barriers to Strategy Development
Salient Insights from Growth for the Large Excellence: Frontier
Inaugural Research Corporate Enterprise Practices of the World's
Great Strategic Planning
Departments
Corporate Leadership Forced Outside: Heart of the Enterprise: Recruiting Excellence:
Council Leadership Talent Core Competencies and the Emerging Practices and
Sourcing and Retention Renaissance of the Large Organization Structures
Corporation
Operations Council Retail Teleservicing: Item Processing: Strategies Retail Lockbox: Achieving
Achieving Operational for Continuing Operational Excellence in
Excellence in Financial Cost-Reduction in Check Scannable Remittance
Services Call Centers Processing Operations Processing
Insurance Advisory Board The "Retail" Revolution: The New Gold Standard: To Wake the Sleeping Giant:
Retirement Services in Restoring Profitability Insurance Distribution in
an Era of Self-Reliance Through Customer Value an Open Market
Management
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Business Banking Board Escaping the Commodity Cleared for Takeoff: Charting a New Course:
Trap: Strategies for Matching Strategy to Forging the Value-Focused
Competing in an Customer Needs Middle Market Bank
Economically Rational
Market
The VIP Forum The Future of Advice: Beyond Customer The "Retail" Revolution:
World-Class Strategies Satisfaction: A Retirement Services in an
for Serving the "New Quantitative Analysis of Era of Self-Reliance
Investor" Satisfaction in the
Affluent Market
Council on Financial Present at the Creation: Financial Innovation Around Traveling by Daylight:
Competition Redefining Competitive the World: 1997 Review of Using Profitability
Advantage Through New Retail Products Information to Guide the
Data-Driven Marketing Retail Financial Institution
and Management
</TABLE>
EXECUTIVE EDUCATION
The Company's executive education curriculum, which is based on its
proprietary best practices research, is provided to member companies worldwide.
The Company delivers executive education services through two primary channels--
general membership meetings and tailored on-site seminars. The Company's
executive education provides lively, interactive forums for reinforcing the
Company's textual best practices research studies.
In 1997, the Company delivered executive education services to 950 member
companies, reaching approximately 20,000 executive participants. Each
subscription program hosts a series of general membership meetings, where the
most important research findings from the annual agenda are presented to groups
of 20 to 200 members. In 1997, the Company hosted 48 member meetings in North
America, Europe and Australia/Asia.
As an example, the following table sets forth the 1998 schedule of general
membership meetings to be hosted by the Corporate Leadership Council, the
Company's human resources subscription program. Each subscription
program hosts similar general membership meetings.
<TABLE>
<CAPTION>
MEETING DATE MEETING LOCATION TARGET AUDIENCE
------------ ---------------- ---------------
<S> <C> <C>
February 16 Sydney, Australia HR Executives
February 17 Sydney, Australia HR Staff & Line Managers
April 17 New York, NY HR Staff & Line Managers
May 14-15 Washington, DC HR Executives
September 14-15 Washington, DC HR Executives
October 8-9 Washington, DC HR Executives
October 13-14 San Francisco, CA HR Executives
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
October 19 Atlanta, GA HR Staff & Line Managers
October 23 New York, NY HR Staff & Line Managers
October 26-27 Washington, D.C. HR Executives
November 2 Toronto, Canada HR Staff & Line Managers
November 6 Chicago, IL HR Staff & Line Managers
November 9-10 Washington, D.C. HR Executives
November 13 London, England HR Staff & Line Managers
November 16-17 London, England HR Executives
November 23-24 Washington, D.C. HR Executives
December 10-11 Washington, D.C. HR Executives
</TABLE>
Certain subscription programs also provide on-site executive education
seminars as part of their membership services. Once a year, those members
entitled to an on-site seminar can schedule a Corporate Executive Board faculty
member to travel to their corporation to deliver an executive education module,
typically a one- to three-hour lecture, case study or facilitated working group
discussion, of the member's choice. In 1997, the Company conducted 872 on-site
seminars at member corporations.
The Corporate Executive Board deploys a staff of 14 full-time and part-time
faculty who conduct the on-site education seminars. The library of executive
education modules is updated throughout the year as new best practices research
is translated into executive education content.
As an example, the following table sets forth certain information regarding
current executive education modules available for on-site seminars to members of
the Corporate Leadership Council. Those subscription programs offering on-site
education provide similar executive education modules.
<TABLE>
<CAPTION>
MODULE TARGET AUDIENCE
------ ---------------
<S> <C>
Role of Human Resources in the New Corporate Headquarters HR Management Teams
Workforce Management Structures of the New "Employers of Line Managers
Choice"
Core Competencies and the Renaissance of the Large HR Executives & Line Staff
Corporation
Revolutionizing Transactional Service Delivery HR Managers
Leadership Shortage Across the Spectrum HR Management Teams
Accelerating the Development of Rising Leaders HR Executives, Executive Development
& Succession Planning Teams
Leadership Talent Sourcing and Retention Recruiting and Staffing Teams
</TABLE>
CUSTOMIZED RESEARCH BRIEFS
Members of subscription programs may assign short-answer, customized
research requests. Individual briefs can take the form of a literature search,
vendor profile, data retrieval or original primary and secondary research,
depending upon the need of the requesting member. Each member is assigned a
dedicated research manager who assists members in establishing the appropriate
34
<PAGE>
parameters and scope for the research effort. In 1997, the Company completed
over 14,000 customized assignments on behalf of over 1,000 requesting members.
Once initiated, each research effort takes an average of eight days to
complete, depending on the depth of the information request, the type of
research product desired and the time requirements of the member. Researchers
typically begin their inquiry with a review of the Company's proprietary
research archives and then conduct a broad literature search to identify
relevant background material and practices.
Written research briefs generally contain five case studies or profiles of
interviewed institutions, highlighting significant trends, successful practices
and comparative responses to a range of questions. Upon completion and delivery
of the written brief to the requesting member, the best of these briefs are
accessible to other members through proprietary databases. Members are able to
search, select, view and print research briefs directly from the subscription
program database at no additional charge.
The Company believes that the customized research service of its
subscription programs builds its proprietary databases, serves as an excellent
marketing tool for attracting new members and encourages members to view the
Company as a reliable and effective resource for primary research. The following
table sets forth sample report topics of customized research briefs undertaken
by the Company in the recent past:
WORKING COUNCIL FOR SALES EXECUTIVES
. Competitive Intelligence Units
. Recruiting Top Sales Talent
. Branding in Commodity Industries
. Developing Electronic Commerce Channels
. Team-Based Selling
WORKING COUNCIL FOR CHIEF INFORMATION OFFICERS
. Offshore Contracting: Accessing Indian and Irish Labor Markets
. Customer-Centric IT Strategy in the Express Shipping Industry
. SAP Implementation Contracting
. The Role of the Project Office: Embedding Project Management
Discipline
. IT Recruiting: Channels and Strategies
CORPORATE STRATEGY BOARD
. Best Practices in M&A Execution
. Business Strategies for Entering China: Case Studies
. Structure of the Corporate Development Function
. The Balanced Scorecard
. Role of the CEO in the Strategic Planning Process
CORPORATE LEADERSHIP COUNCIL
. Developing a Corporate University or Learning Center
. Flexible Benefits Plans at United Kingdom-Based Companies
. Customer Service Reward Programs
. Self-Directed Work Teams in a Union Environment
. Gainsharing Programs for Hourly Employees
35
<PAGE>
OPERATIONS COUNCIL
. Retail Lockbox Outsourcing
. Customer Service Center Standards
. ATM Support Services
. Automated Investment Accounting Systems
. Practices for Handling Peak Check Volumes
INSURANCE ADVISORY BOARD
. Group Retirement Product Customer Support
. Direct Sales of Life Insurance and Annuities
. Auto Insurance Rating Factors
. No-Load and Low-Load Whole Life Insurance Products
. Group Disability Insurance Marketing
BUSINESS BANKING BOARD
. Measuring Small Business and Middle Market Profitability
. Loan Workout Department Structures
. Corporate Sweep Accounts
. Turnkey 401(k) Products for Small Businesses
. Benchmarking the Commercial Credit Underwriting and Approval
Process
THE VIP FORUM
. Electronic Delivery of Trust and Investment Services
. Client Prospecting and Retention in the Affluent Market
. Pension Fund Companies in Chile and Argentina
. Personal Banking Programs
. Centralized Credit Underwriting for Private Banking Departments
COUNCIL ON FINANCIAL COMPETITION
. Telephone Bill Payment Programs
. Branch Site Selection Procedures in Spanish-Speaking Countries
. Credit Card Risk-Based Pricing
. Customer Referral Programs
. Branding Issues Associated with Bank Mergers and Acquisitions
ON-LINE PROPRIETARY DATABASES
Each subscription program maintains a proprietary database of best
practices and, in some cases, quantitative data accessible only to members of
the subscription program. The Company's growing proprietary databases are
updated continually with new corporate practices, quantitative performance data
and related information supplied by other members and derived by the Company's
researchers. All information and graphics generated in best practices research
studies and customized research briefs are included in the databases and are
available for corporate benchmarking and comparison by other members.
The Company's proprietary databases currently include 140 best practices
research studies and 20,000 original research briefs containing over 100,000
profiles of corporate practices.
36
<PAGE>
In 1996, the Company began to offer its members electronic access to
research content through password-protected World Wide Web sites. The Company
believes that the Internet provides a convenient means for members to commission
customized research briefs, browse and download the electronic library of
research studies and graphics, review executive education modules and meeting
schedules and communicate with the Company's staff.
PRICING
Memberships in the Corporate Executive Board subscription programs are sold
as renewable one-year agreements. Agreements generally are paid in full within
three months of the start of the subscription period. At June 30, 1998, the
average price for a subscription program was approximately $26,000. The actual
price varies by size of member and by subscription program, and may be lower for
charter subscribers to new subscription programs. By spreading its costs across
a broad membership and offering a largely standardized research product, the
Company is able to charge fees that are a small fraction of the typical
engagement fees of specialized research or consulting firms.
The Company offers an unconditional service guarantee to its members. At
any time during the subscription period, a member may demand a full refund of
its subscription fee for that year. During the year ended December 31, 1997,
members requested refunds for five subscriptions under this guarantee
program.
SALES AND MARKETING
The Company markets an integrated set of services, consisting of best
practices research studies, executive education, customized research briefs and
on-line access to its proprietary databases, for a fixed fee per subscription
program. The Company believes that this marketing strategy highlights the value
to the members of the Company's range of services and emphasizes the membership
nature of the Company's business model, actively engaging the membership and
reinforcing members' commitment to the Corporate Executive Board.
At June 30, 1998, the Company's sales force consisted of 27 new business
development representatives who are responsible for selling new memberships to
assigned geographic market segments in the United States and abroad, as well as
19 member services representatives who are responsible for servicing and
renewing existing memberships. The Company has invested extensively in the
expansion of its direct sales force in order to continue the growth of its
member base. The Corporate Executive Board sales and member services staff is
based at the Company's headquarters in Washington, D.C. The Company maintains an
additional sales and member services office in London, England.
The separation of responsibility for new membership sales and membership
renewal reflects the varying difficulty and cost of the respective functions.
New business development representatives are highly incentivized and travel on
average 60% of the time, conducting face-to-face meetings with senior executives
at prospective member institutions. Member services representatives assume more
of an in-house coordinating role, conducting most of their responsibilities over
the telephone.
Although the Company actively markets its subscription programs throughout
the year, in the past, approximately 55% of all renewals have taken place in the
fourth quarter of the year.
COMPETITION
The Company currently has few direct competitors, and those that do exist
compete only in narrow industry or functional segments. The Company competes
indirectly against other professional information services providers, including
management consulting firms, training and development companies, non-profit
think-tanks and research and database
37
<PAGE>
companies. The Company is not aware of any other entity that enables
corporations to study as broad a range of the best corporate management
practices for fixed annual subscription fees.
The Company believes that the principal competitive factors in its market
include quality and timeliness of research and analysis, reliable delivery,
depth and quality of the membership, ability to meet changing customer needs,
superior service and affordably-priced products. The Company believes it
competes favorably with respect to each of these factors.
The Advisory Board Company provides products and services to the health
care industry that are similar to the types of products and services that the
Company generally provides to corporations. The Company and The Advisory Board
Company have entered into the ABC Noncompetition Agreement (as defined herein),
which, for a seven-year term, generally prohibits the Company from competing
with The Advisory Board Company with respect to health care clients and issues
and prohibits The Advisory Board Company from competing with respect to non-
health care clients and issues. See "Certain Relationships and Transactions --
Agreements with the Advisory Board Company; Noncompetition Agreement."
EMPLOYEES
At June 30, 1998, the Company employed approximately 350 persons. Of these
employees, approximately 330 were located at the Company's headquarters in
Washington, D.C. and 20 were located at the Company's facilities in London,
England. None of the Company's employees is represented by a collective
bargaining arrangement. The Company believes that its relations with its
employees are favorable.
The Company believes strongly in a culture of meritocracy, rewarding key
contributors with opportunities for rapid professional growth and advancement as
well as competitive compensation. Training is a critical job component for all
of the Company's employees, including industry analysis, economics, quantitative
modeling, root-cause analysis and presentation skills.
FACILITIES
The Company's headquarters currently are located in approximately 49,000
square feet of office space in Washington, D.C. The facility accommodates
research, marketing and sales, information technology, administration, graphic
services and operations personnel. The Company recently signed a lease for a new
headquarters facility and plans to gradually transition all personnel to the new
facility. This new lease has an 11 year term and provides for an initial
committment of 21,000 square feet in 1998 and 66,000 square feet of expansion
space in 1999, expiring on June 30, 2009. The Company believes that its existing
and planned facilities will be adequate for its current needs and that
additional facilities are available for lease to meet future needs.
38
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the names, ages (as of July 21, 1998)
and positions with the Company of the persons who serve as directors, executive
officers and other key employees of the Company:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Harold ("Rusty") L. Siebert 52 Chairman of the Board of Directors
James ("Jay") J. McGonigle 35 Chief Executive Officer and Director
Michael A. D'Amato 44 Executive Vice President - Finance, Chief Financial
Officer, Secretary and Director/(1)/
Sally Chang 33 General Manager, Sales and Marketing
Derek C. van Bever 40 Chief Research Officer
Jeffrey D. Zients 31 Director
KEY EMPLOYEES
- -------------
Paul C. Amoruso 32 Executive Director, Research
Jonathan F. Baker 32 Managing Director, Sales and Marketing
Peter Freire 36 Executive Director, Research
Michael P. Kostoff 41 Executive Director, Research
William B. McKinnon 29 Managing Director, Sales and Marketing
Thomas L. Monahan 31 Managing Director, Research
Matthew S. Olson 46 Executive Director, Research
</TABLE>
________________________________
(1) The Company is actively seeking to hire a new Chief Financial Officer. It
is expected that Mr. D'Amato will cease to serve as an employee of the
Company once the new Chief Financial Officer has been hired and a suitable
transition period has elapsed, although it is expected he will remain
a director.
[Two] additional independent directors will be named in an amendment to
the Registration Statement.
DIRECTORS AND EXECUTIVE OFFICERS
Harold ("Rusty") L. Siebert has been the Chairman of the Board since July
1998. From 1996 through July 1998, Mr. Siebert served as Chief Executive Officer
and Chairman of Inforum Inc., a company providing marketing and planning systems
for health care clients, and as Executive Vice President of Medstat/Thomson.
From 1995 until 1996, Mr. Siebert served as Bureau Chief of TennCare, the State
of Tennessee's Medicaid managed care program. From 1993 until 1995, Mr. Siebert
was a consultant to Medstat. In 1988, Mr. Siebert, founded Inforum and served as
Chairman and Chief Executive Officer of Inforum from 1988 through 1993. Prior to
1988, he held various senior-level positions at HBO & Co. and Baxter
International. He also serves on the Board of Directors of PMT Services, a
credit card processing company. Mr. Siebert received his B.S. from Miami
University in Oxford, Ohio.
James ("Jay") J. McGonigle has been the Chief Executive Officer and a
director of the Company since July 1998. From the Spin-Off until July 1998, Mr.
McGonigle was the General Manager of the Company, and from 1995 until the Spin-
Off, he was the General Manager of the corporate division of The Advisory Board
Company with responsibility for managing the business assumed by the Company in
the Spin-Off. From 1990 to 1995, Mr. McGonigle was a consultant in the Financial
Institutions Group at McKinsey & Company. Mr. McGonigle received a B.A. from the
Woodrow Wilson School at Princeton University, and a J.D. from Harvard Law
School.
Michael A. D'Amato has been the Executive Vice President - Finance, Chief
Financial Officer, Secretary and a director of the Company since July 1998.
From the Spin-Off until July 1998, Mr.
39
<PAGE>
D'Amato served as the Chief Financial Officer of the Company and of DGB
Enterprises, Inc., a company wholly-owned by the Principal Selling Stockholder,
and from 1996 until July 1998, he was the Chief Financial Officer of The
Advisory Board Company. From 1995 to 1996, Mr. D'Amato served as the Special
Advisor to the Chairman of The Advisory Board Company. From 1982 until 1995,
Mr. D'Amato was a partner with Bain and Company. Mr. D'Amato received a B.S.
from Massachusetts Institute of Technology and an M.B.A. from Harvard
University. Mr. D'Amato also serves on the Board of Directors of The Wesley-
Jessen Company, a contact lens manufacturer.
Sally Chang has been the General Manager, Sales and Marketing, of the
Company since June 1998. From 1992 until joining the Company, she served in
various management capacities with The Advisory Board Company, including General
Manager, Health Care Member Services; General Manager, Health Care Research; and
an Executive Director, Research. Prior to 1992, Ms. Chang worked in the
corporate planning department of Fuji Xerox in Tokyo, as a general management
consultant with Touche Ross, and in the merger and acquisitions group of Drexel
Burnham Lambert. Ms. Chang received an A.B. from Harvard University, an M.A.
from the University of Pennsylvania and an M.B.A. from the Wharton School of
Business at the University of Pennsylvania.
Derek C. van Bever has been the Chief Research Officer of the Company since
the Spin-Off. From 1995 through the date of the Spin-Off, he served as the Chief
Research Officer of the business assumed by the Company in the Spin-Off. Prior
to that, he served in various management capacities with The Advisory Board
Company, which he joined in 1981. Mr. van Bever received a B.A. and an M.A. from
the University of Delaware and an M.B.A. from Harvard University.
Jeffrey D. Zients has been a director of the Company since July 1998. From
the Spin-Off until July 1998, Mr. Zients was the Executive Vice President
of the Company. He also has served as the Chief Operating Officer of DGB
Enterprises, Inc. since the Spin-Off. From 1992, Mr. Zients held various
positions with The Advisory Board Company, most recently serving as its Chief
Operating Officer from 1996 until July 1998 and Chief Executive Officer since
July 1998. Prior to 1992, Mr. Zients was employed at Mercer Management
Consulting and Bain and Company. Mr. Zients received a B.S. from Duke
University.
KEY EMPLOYEES
Paul C. Amoruso has been an Executive Director, Research, of the Company
since the Spin-Off, focusing on the information technology and sales practices.
Prior to the Spin-Off, Mr. Amoruso worked in various capacities with The
Advisory Board Company, which he joined in 1994. From 1993 to 1994, he was owner
and President of Daedalus Partners, a consulting firm and broker-dealer serving
early-stage corporations. Mr. Amoruso received a B.A. from Wesleyan University
and an M.B.A. from the Wharton School of Business at the University of
Pennsylvania.
Jonathan F. Baker has been a Managing Director, Sales and Marketing, of the
Company since the Spin-Off. Prior to the Spin-Off, Mr. Baker served in similar
capacities with The Advisory Board Company, which he joined in 1989.
Mr. Baker received a B.A. from the University of Virginia.
Peter Freire has been an Executive Director, Research, of the Company since
the Spin-Off, focusing on the human resources practice. Prior to the Spin-Off,
Mr. Freire served in similar capacities with The Advisory Board Company, which
he joined in 1991. Prior to joining The Advisory Board Company, he served as
a consultant for Bain and Company and as a corporate banking officer for the
Bank of America. Mr. Freire received a B.A. from the London School of
Economics and an M.B.A. from Harvard University.
Michael P. Kostoff has been an Executive Director, Research, of the Company
since the Spin-Off, focusing on the financial services practice. Prior to the
Spin-Off, Mr. Kostoff served in similar capacities with The Advisory Board
40
<PAGE>
Company, which he joined in 1989. Mr. Kostoff received a B.S. from the United
States Military Academy and an M.P.A. from Harvard University.
William B. McKinnon has been a Managing Director, Sales and Marketing, of
the Company since the Spin-Off, focusing on the financial services practice.
Prior to the Spin-Off, Mr. McKinnon served in similar capacities with The
Advisory Board Company, which he joined in 1990. Mr. McKinnon received a
B.A. from Duke University.
Thomas L. Monahan has been a Managing Director, Research, of the Company
since the Spin-Off, focusing on the financial services practice. Prior to the
Spin-Off, Mr. Monahan served in similar capacities with The Advisory Board
Company, which he joined in January 1996. From 1994 to December 1995, he
served as a senior consultant for the Deloitte & Touche Consulting Group.
From 1990 to 1994, Mr. Monahan served as a Director at the Committee for
Economic Development. He also previously served as a staff consultant at
Andersen Consulting. Mr. Monahan received a B.A. from Harvard University and
an M.B.A. from New York University.
Matthew S. Olson has been an Executive Director, Research, of the Company
since the Spin-Off. Prior to the Spin-Off, Mr. Olson served in similar
capacities with The Advisory Board Company, which he joined in 1982. Prior to
joining The Advisory Board Company, he served as an economist for the Overseas
Private Investment Corporation. Mr. Olson received a B.A. and an M.A. from the
University of Minnesota and an M.A. from The Johns Hopkins University.
___________________________
All directors are elected annually and serve until the next annual meeting
of stockholders or until the election and qualification of their successors. The
Board of Directors elects the Company's executive officers and such officers
serve at the discretion of the Board. Except for Sally Chang and Paul C. Amoruso
who are married, there are no family relationships among the directors,
executive officers and other key employees of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
Following the closing of the Offering, the Board of Directors will
establish an audit committee (the "Audit Committee"), which will be composed of
non-management directors. The Audit Committee, among other things, will make
recommendations to the Board of Directors concerning the engagement of
independent public accountants; monitor and review the quality and activities of
the Company's internal audit function and those of its independent accountants;
and monitor the adequacy of the Company's operating and internal controls as
reported by management and the independent or internal auditors. The members of
the Audit Committee will be Messrs. ____________.
Compensation Committee
Following the closing of the Offering, the Board of Directors will
establish a compensation committee (the "Compensation Committee"). The
Compensation Committee, among other things, will review salaries, benefits and
other compensation, including stock-based compensation under the Incentive Plan,
the 1998 Plan and the Directors Plan, of directors, officers, and other key
employees of the Company and will make recommendations to the Board of
Directors. The members of the Compensation Committee will be Messrs. __________.
DIRECTOR COMPENSATION
Directors' compensation is set from time to time by the Board of Directors
or, to the extent authorized by the Board, by the Compensation Committee of the
Board, under the Company's Directors Plan and such other arrangements as such
committee determines to be appropriate. The Board of Directors has determined
that initially each director who is not an employee of the Company will, upon
the later of the date of the closing of the Offering or the time such
41
<PAGE>
person commences service as a non-employee director, receive a one-time
grant of options to purchase ________ shares of Common Stock. Non-employee
directors will also receive an annual grant of options to purchase ______ shares
of Common Stock and will be paid an annual retainer in the amount of $_____.
Pursuant to the terms of the Directors Plan, all non-employee director
options will have an exercise price equal to the Market Value (as defined in the
Directors Plan) of the Common Stock at the time such options are granted
(which in the case of options granted on the date of the closing of the
Offering will be deemed to equal the offering price set forth on the cover page
of this Prospectus). Directors who are employees of the Company do not receive
any additional compensation for their service as directors. The Company will
reimburse each director for his or her reasonable out-of-pocket expenses for
attending Board of Directors meetings.
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<PAGE>
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
earned for services rendered to the Company for the fiscal year ended December
31, 1997 by certain executive officers whose annual salary and bonus during
fiscal year 1997 exceeded $100,000 (the "Named Officers") [Note: Amounts
reflected on all tables will be adjusted to take into account the
recapitalization of the Company]:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> Long-Term
Annual Compensation Compensation
------------------- ------------
Number of All Other
Name and Principal Positions Year Salary(1) Bonus(1)(2) Options Compensation(3)
- ---------------------------- ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
James J. McGonigle 1997 $400,000 $ 19,250 28,500 --
General Manager
Derek C. van Bever 1997 356,250 -- 10,500 $860,000
Chief Research Officer
Elizabeth Keffer(4) 1997 300,000 -- -- 680,000
General Manager, Member Services
Jeffrey D. Zients(5) 1997 170,000 102,500 60,000 --
Executive Vice President
Michael A. D'Amato(5) 1997 136,000 -- 28,000 --
Chief Financial Officer
</TABLE>
________________________________
(1) Salary and bonus consists of amounts paid by The Advisory Board Company
for services performed from January 1, 1997 through the date of the Spin-
Off for the businesses assumed by the Company in the Spin-Off and, except
as noted otherwise, amounts paid by the Company for services performed
from the date of the Spin-Off through the end of the fiscal year.
(2) The Company generally does not pay bonuses to its executive officers.
However, the Company from time to time has paid discretionary bonuses
under certain special circumstances.
(3) Consists of $860,000 and $680,000 paid to Mr. van Bever and Ms. Keffer,
respectively, in connection with the repurchase of certain options of The
Advisory Board Company prior to the time of the Spin-Off.
(4) From the Spin-Off to June 1, 1998, Ms. Keffer was the General Manager,
Member Services, of the Company. On June 1, 1998, she joined The Advisory
Board Company in a similar capacity.
(5) Reported compensation represents payments by The Advisory Board Company
prior to the Spin-Off and, after the Spin-Off, by DGB Enterprises, Inc.,
as reflected in the Company's 1997 audited financial statements prepared
as if the Company had operated as a stand-alone entity in accordance with
accounting rules prescribed for "carve-out" financial statements. As of
July 1998, Mr. Zients ceased to serve as an executive officer of the
Company, although he continues as a director of the Company.
43
<PAGE>
The following table sets forth certain information concerning grants of
stock options to each of the Company's Named Officers during the fiscal year
ended December 31, 1997 [Note: Amounts reflected on all tables will be adjusted
to take into account the recapitalization of the Company.]:
STOCK OPTION GRANTS IN 1997 FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants/(1)/
------------------------------------------------------------------------------
% of Total Market Potential Realizable
Number of Options Price on Value at Assumed Annual
Shares Granted to Exercise Date Rates of Stock Price
Underlying Employees in Price of Expiration Appreciation
Name Option Grants Fiscal Year (per share)/(1)/ Grant/(1)/ Date for Option Term
--------- ------------- ----------- ----------- -------- -------------- -----------------------
5% 10%
---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
James J. McGonigle/(2)/ 28,500 10.46% $ 5.00 $35.00 April 30, 2003 $1,162,030 $1,542,394
Derek C. van Bever 10,500 3.85 35.00 35.00 April 30, 2004 137,147 315,326
Elizabeth Keffer -- -- -- -- -- -- --
Jeffrey D. Zients/(3)/ 57,462 21.09 16.00 35.00 March 31, 2009/(4)/ 2,591,035 5,051,171
2,538 0.93 35.00 35.00 March 31, 2009/(4)/ 66,220 174,880
Michael A. D'Amato/(2)(3)/ 25,212 9.26 16.00 35.00 April 30, 2001 643,346 828,435
2,788 1.02 35.00 35.00 April 30, 2001 18,171 38,638
</TABLE>
________________
(1) Options were granted in connection with the Spin-Off in replacement and
substitution of previously granted options for stock of The Advisory Board
Company. Exercise prices reflect adjustments of exercise prices of
cancelled options of The Advisory Board Company. Except as otherwise
noted, options generally become exercisable 50% one year following the
Offering, 30% two years following the Offering and 20% three years
following the Offering.
(2) Messrs. McGonigle's and D'Amato's stock option agreements with the Company
each provide that (A) upon the date, if ever, that the number of shares of
Common Stock outstanding on a fully diluted basis first equals or exceeds
1,100,000 shares, the number of shares of Common Stock subject to his
options shall be increased by 10% of the sum of the number of shares that
(i) remain subject to his options, and (ii) have been issued under the
options and continue to be held by him, and (B) upon the date, if ever,
that the number of shares of Common Stock outstanding on a fully diluted
basis first equals or exceeds 1,200,000 shares, the number of shares of
Common Stock subject to his options shall be increased by 10% of the sum
of the number of shares that (i) remain subject to his options, and (ii)
have been issued under the options and continue to be held by him. The
exercise price per each additional share on each such date shall equal the
fair market value of a share of Common Stock on each such date.
(3) Messrs. Zients' and D'Amato's options will become exercisable immediately
before the closing of the Offering. Messrs. Zients' and D'Amato's options
with respect to ____ shares and ____ shares, respectively, will be
exercised immediately before the closing of the Offering and such shares
will be sold as part of the Offering. See "Principal and Selling
Stockholders."
(4) Mr. Zients' options will expire on the earlier of (A) March 31, 2009 and
(B) the later of (i) 30 days after the expiration of any lockup period
applicable to the shares of Common Stock subject to his options or (ii)
the date he ceases to serve as a director of the Company.
44
<PAGE>
The following table sets forth certain information concerning stock options
held by each of the Company's Named Officers during fiscal year ended December
31, 1997 [Note: Amounts reflected on all tables will be adjusted to take into
account the recapitalization of the Company.]:
AGGREGATED OPTION EXERCISES IN 1997 FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End(1)
-------------------------- ------------------
Shares Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James J. McGonigle -- $ -- -- 28,500 $ -- $1,197,000
Derek C. van Bever -- -- -- 10,500 -- 126,000
Elizabeth Keffer -- -- -- -- -- --
Jeffrey D. Zients -- -- 3,213 56,787 97,019 1,714,759
Michael A. D'Amato -- -- -- 28,000 -- 815,028
</TABLE>
_______________
(1) Based upon a Fiscal Year-End value estimated at $47.00 per share.
EMPLOYMENT AGREEMENTS
Mr. McGonigle is employed by the Company pursuant to the terms of an
employment agreement which continues in effect until Mr. McGonigle's termination
or separation from the Company. Under the terms of the employment agreement, Mr.
McGonigle receives an annual salary of $400,000, which is subject to increases
on an annual basis in the Company's sole discretion, and was given a one-time
signing bonus of $200,000 upon commencing work with the Company. The employment
agreement requires Mr. McGonigle to devote his efforts and abilities to the
Company on a full-time basis and provides that Mr. McGonigle, in addition to
salary, is entitled to certain fringe benefits, including participation in the
Company's 401(k) plan and the reimbursement of business-related expenses. Mr.
McGonigle's employment agreement provides for accelerated vesting of certain
options and certain other benefits upon a sale of the Company or termination of
employment other than for cause.
Contemporaneously with the execution of his employment agreement, Mr.
McGonigle executed a noncompetition agreement with the Company pursuant to which
Mr. McGonigle, among other things, agreed not to compete with the Company for a
period of up to three years after his termination of employment. Mr. McGonigle
also agreed as part of his noncompetition agreement with the Company not to
disclose any of the Company's confidential or proprietary information during the
course of his employment or upon termination of his employment for any reason
and not to solicit employees of the Company to leave for a period of three years
after the termination of his employment with the Company for any reason.
Mr. Siebert serves as the Chairman of the Board of Directors of the
Company pursuant to the terms of an employment agreement which continues in
effect until Mr. Siebert's termination or separation from the Company. Under the
terms of the employment agreement, Mr. Siebert receives
45
<PAGE>
an annual salary of $300,000, which is subject to changes in the Company's sole
discretion. The employment agreement provides that Mr. Siebert, in addition to
salary, is entitled to certain fringe benefits, including participation in the
Company's 401(k) plan and the reimbursement of business-related expenses. In
addition, the employment agreement provides that Mr. Siebert shall be granted
options to purchase 10,000 shares of Common Stock at the then prevailing fair
market value of the Company upon the effective date of his employment with the
Company and, at the time of the consummation of the Offering, he shall be
granted options to purchase 10,000 additional shares of Common Stock of the
Company at the offering price of such shares (as set forth on the cover page of
this Prospectus).
Contemporaneously with the execution of his employment agreement, Mr.
Siebert executed a noncompetition agreement with the Company pursuant to which
Mr. Siebert, among other things, agreed not to compete with the Company for a
period of three years after his termination of employment, not to disclose any
of the Company's confidential or proprietary information during the course of
his employment or upon termination of his employment for any reason, and not to
solicit employees of the Company to leave for a period of three years after the
termination of his employment with the Company for any reason.
Mr. D'Amato is employed by the Company pursuant to the terms of an
employment agreement which continues in effect until Mr. D'Amato's termination
or separation from the Company. Under the terms of the employment agreement,
Mr. D'Amato receives an annual salary of $400,000, which is subject to increases
on an annual basis in the Company's sole discretion. The employment agreement
provides that Mr. D'Amato, in addition to salary, is entitled to certain fringe
benefits, including participation in the Company's 401(k) plan and the
reimbursement of business related expenses. In addition, the employment
agreement provides that Mr. D'Amato shall be granted options at such times, in
such amounts and under such terms as offered to non-employee directors of the
Company under the Directors Plan or other stock-based incentive plans of
the Company following the effective date of his employment agreement.
Mr. D'Amato has executed a noncompetition agreement with the Company
pursuant to which Mr. D'Amato, among other things, agreed not to compete with
the Company for a period of three years after his termination of employment if
he voluntarily resigns or is terminated by the Company for cause. In addition,
if Mr. D'Amato is terminated by the Company without cause, the Company may
require that Mr. D'Amato not compete with the Company for a period up to two
years if the Company agrees to pay Mr. D'Amato 125% of his base salary at the
time of his termination for each one-year period of noncompetition. Mr. D'Amato
also agreed as part of his noncompetition agreement with the Company not to
disclose any of the Company's confidential or proprietary information during the
course of his employment or upon termination of his employment for any reason
and not to solicit employees of the Company to leave for a period of three years
after the termination of his employment with the Company for any reason.
All officers and key employees have executed noncompetition agreements
containing terms similar to those executed by Messrs. McGonigle, Siebert and
D'Amato. All of these noncompetition agreements (including the agreements of
Messrs. McGonigle, Siebert and D'Amato) do not apply to any subsequent
employment with The Advisory Board Company, DGB Enterprises, Inc. and any other
company owned by the Principal Selling Stockholder provided such employment is
consistent with the ABC Noncompetition Agreement (as defined herein) and the
Principal Selling Stockholder Noncompetition Agreement (as defined herein). See
"Certain Relationships and Transactions." There are no other employment
agreements in effect with respect to any directors, officers or employees
of the Company.
46
<PAGE>
STOCK PLANS AND AGREEMENTS
THE CORPORATE EXECUTIVE BOARD COMPANY STOCK-BASED INCENTIVE COMPENSATION
PLAN
In connection with the Spin-Off, on October 31, 1997, the Board of
Directors adopted and the Principal Selling Stockholder approved the Company's
Stock-Based Incentive Compensation Plan (the "Incentive Plan"). The Incentive
Plan is designed to provide only for the grant of stock options (the "Incentive
Plan Options") that do not qualify as incentive stock options under Section 422
of the Code.
As of the closing of the Offering, approximately ______ shares have been
issued under or are subject to Incentive Plan Options granted before the closing
of the Offering. Generally, Incentive Plan Options become exercisable 50% one
year following the Offering, 30% two years following the Offering and 20% three
years following the Offering and expire as of April 30, 2003. In connection with
the Offering, the Board amended the Incentive Plan to reduce the total number of
shares available for issuance under the Incentive Plan to _____ shares, and to
adopt certain technical amendments relating to the Company becoming a publicly
traded entity. The number of shares subject to outstanding Incentive Plan
Options or reserved for issuance under the Incentive Plan is subject to anti-
dilution provisions for reorganizations, recapitalizations, stock splits, stock
dividends and similar events. After granting Incentive Plan Options with respect
to shares available for issuance under the Incentive Plan, the Board of
Directors does not intend to make any additional grants under the Incentive
Plan.
The purpose of the Incentive Plan is to provide participants with an
increased economic and proprietary interest in the Company in order to encourage
those participants to contribute to the success and progress of the Company.
Incentive Plan Options may only be granted to employees of the Company who are
members of a select group of management or other key employees of the Company
that the Administrator (as defined herein) may from time to time designate
for participation in the plan. The Incentive Plan is administered by the
Compensation Committee of the Board of Directors or by the Board of Directors
itself (the "Administrator"), which may in its sole discretion establish the
terms, provisions and conditions upon which Incentive Plan Options are granted
(including, but not limited to, exercise price, exercisability, and vesting).
The Administrator may permit payment for the Common Stock purchased upon the
exercise of any Incentive Plan Options, on an individual basis, to be paid for
by cash or any other alternative means including the acceptance of a promissory
note secured by the number of shares of Common Stock then issuable upon exercise
of the Incentive Plan Options. Unless otherwise provided, Incentive Plan Options
are nontransferable by the optionholder other than by will or the laws of
descent and distribution, and are exercisable only by the optionholder during
his or her lifetime. No Incentive Plan Options shall have a term extending
beyond May 1, 2009.
1998 STOCK OPTION PLAN
On ________, 1998, the Board of Directors adopted and the Principal Selling
Stockholder of the Company approved the Company's 1998 Stock Option Plan (the
"1998 Plan"). The purpose of the 1998 Plan is to provide participants with an
increased economic and proprietary interest in the Company in order to encourage
those participants to contribute to the success and progress of the Company. The
1998 Plan is designed to provide only for the grant of stock options ("Options")
that do not qualify as incentive stock options under Section 422 of the Code.
Options may only be granted to the Company's or its subsidiaries' officers,
independent contractors, and employees.
The 1998 Plan authorizes the grant of Options to purchase _____ shares of
the Company's Common Stock, except that such number shall be increased by the
number of shares of Common Stock, if any, subject to Incentive Plan Options that
are cancelled, expire or terminate or that otherwise are available for issuance
but for any other reason are not issued under the Incentive Plan. In addition,
if any shares subject to Options granted under the 1998 Plan are cancelled,
expire, terminate or for any other reason are not issued under such Options,
such shares will again
47
<PAGE>
become available for issuance under Options. All references in the 1998 Plan
and in outstanding Options to the number and type of shares or other securities
subject thereto are subject to anti-dilution provisions for reorganizations,
reclassifications, dividends (other than regular, quarterly cash dividends), or
other distributions, stock splits, reverse stock splits, spin-offs or similar
transactions, or if substantially all of the property and assets of the Company
are sold, unless the terms of the transaction provide otherwise.
The 1998 Plan is administered by the Administrator, which in its discretion
shall establish the terms, provisions and conditions of Options (including, but
not limited to, exercise price, exercisability, and vesting), except that the
Administrator may not grant Options with an exercise price below the stock's
fair market value on the date the Options are granted unless such Options are
granted in substitution of options granted by a new employee's previous employer
or the optionee pays or foregoes compensation in the amount of any discount.
Unless the Administrator provides otherwise, Options granted under the 1998 Plan
become exercisable incrementally over the four years following the date of
grant. The Administrator may also provide that the shares of stock issued upon
exercise of an Option will be subject to additional conditions or agreements as
the Administrator in its discretion may specify before the exercise of the
Option, including deferrals on issuance of shares, conditions on vesting or the
transferability of Options, and forfeiture or repurchase provisions.
The Administrator may permit payment for the Common Stock purchased upon
the exercise of any Options granted under the 1998 Plan, on an individual basis,
to be paid for by cash or any other alternative means including the acceptance
of a promissory note secured by the number of shares of Common Stock then
issuable upon exercise of the Options. Unless otherwise provided by the
Administrator, Options granted under the 1998 Plan are nontransferable by the
optionholder other than by will or the laws of descent and distribution, and are
exercisable only by the optionholder during his or her lifetime.
The 1998 Plan provides that, unless approved by the Company's stockholders,
the 1998 Plan may not be amended to increase the number of shares of Common
Stock authorized for issuance. Subject to the foregoing limitation and except as
otherwise required by law, the Board of Directors may periodically amend the
1998 Plan without further stockholder approval. Unless earlier terminated by the
Board of Directors, the 1998 Plan shall terminate on May 1, 2009.
DIRECTORS' STOCK PLAN
On ________, 1998, the Board of Directors adopted and the Principal Selling
Stockholder approved the Company's Directors' Stock Plan (the "Directors Plan").
The purpose of the Directors Plan is to assist the Company in attracting,
retaining and motivating qualified individuals to serve on the Company's Board
of Directors and to align their financial interests with those of the Company's
shareholders by providing for or increasing their proprietary interest in the
Company.
Any person who is a member of the Company's Board of Directors or of the
board of directors of a subsidiary of the Company is eligible for the award of
stock options and/or stock grants under the Directors Plan. The Directors Plan
is administered by the Company's Board of Directors or, as to certain aspects
provided for in the Directors Plan, by the Compensation Committee (collectively,
the "Committee"). The Directors Plan is intended to operate in a manner that
exempts grants of stock under the Directors Plan from Section 16(b) of the
Securities Exchange Act of 1934, as amended.
The maximum number of shares of the Company's Common Stock that can be
issued under the Directors Plan is _____. Any shares subject to a stock option
or stock grant which for any reason are not issued or are reacquired under the
stock option or stock grant are not counted against the number of shares that
can be issued under the Directors Plan. All references in the Directors Plan
and in outstanding options and stock grants to the number and type of shares or
48
<PAGE>
other securities subject thereto will be subject to anti-dilution provisions for
reorganizations, reclassifications, dividends (other than regular, quarterly
cash dividends), or other distributions, stock splits, reverse stock splits,
spin-offs or similar transactions, or if substantially all of the property and
assets of the Company are sold, unless the terms of the transaction provide
otherwise.
Under the Directors Plan, the Committee may provide for stock options
and/or stock grants to be awarded to directors and has the discretion to
establish the terms, provisions and conditions of such awards (including, but
not limited to, exercise price, exercisability, and vesting), except that the
Committee may not grant options with an exercise price below the stock's fair
market value on the date the options are granted unless the optionee pays or
foregoes compensation in the amount of any discount. The Directors Plan allows
the Committee to condition the receipt of stock options or stock grants upon a
director electing to forego any other form of compensation, including any cash
retainers if then paid by the Company. The Committee may also provide that the
shares of stock issued upon exercise of an option will be subject to additional
conditions or agreements as the Committee in its discretion may specify before
the exercise of the option, including deferrals on issuance of shares,
conditions on vesting or the transferability of options, and forfeiture or
repurchase provisions. The maximum number of shares of Common Stock subject to
stock options and stock awards granted under the Directors Plan for any calendar
year to any person on account of his or her service as a director may not exceed
___________ shares. Unless otherwise provided by the Committee, awards granted
under the Directors Plan are nontransferable by the director other than by will
or the laws of descent and distribution, and are exercisable only by the
director during his or her lifetime.
The Directors Plan provides that, unless approved by the Company's
stockholders, the Directors Plan may not be amended to increase the number of
shares of Common Stock authorized for issuance. Subject to the foregoing
limitation and except as otherwise required by law, the Board of Directors may
periodically amend the Directors Plan without further stockholder approval.
Unless earlier terminated by the Board of Directors, the Directors Plan shall
terminate on May 1, 2009.
INDEMNIFICATION ARRANGEMENTS
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") limits, to the maximum extent permitted by the
Delaware General Corporation Law, the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors. The
Company's Amended and Restated Bylaws (the "Bylaws") provide that the Company
shall indemnify its officers, directors, employees and other agents to the
fullest extent permitted by law.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provision, the Company has been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a Compensation Committee. During
fiscal year 1997, the functions of the Compensation Committee were performed by
the Board of Directors, which consisted soley of the Principal Selling
Stockholder. The Principal Selling Stockholder is the President and Chairman of
the Board of The Advisory Board Company and DGB Enterprises, Inc.
49
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
AGREEMENTS WITH THE ADVISORY BOARD COMPANY
The following are descriptions of certain agreements between the Company
and The Advisory Board Company. The Administrative Services Agreement (as
defined herein), the Vendor Contracts Agreement (as defined herein), the Member
Contracts Agreement (as defined herein) (collectively, the "Services
Agreements") and the Sublease Agreement (as defined herein) were entered into
between the Company and The Advisory Board Company in connection with the
Spin-Off. The Company records costs associated with the Services Agreements
and the Sublease Agreement monthly as a payable to an affiliate, and expects
to settle amounts owed on a quarterly basis. The ABC Noncompetition Agreement
(as defined herein) between the Company and The Advisory Board Company was
entered into prior to the closing of the Offering.
SERVICES AGREEMENTS
Administrative Services Agreement. Pursuant to an Administrative Services
Agreement, dated as of October 31, 1997, as amended and restated on July 21,
1998 (the "Administrative Services Agreement"), The Advisory Board Company has
agreed to provide certain administrative services to the Company. Under the
Administrative Services Agreement, services include information systems support
and maintenance, certain human resources functions, and general services such as
facilities management. The Administrative Services Agreement provides for fees
for these services based on either direct costs per certain transaction,
headcount or a fixed cost per month. The Company believes that the services
provided under the Administrative Services Agreement may be obtained from
alternative sources and that the fees pursuant to the Administrative Services
Agreement approximate the cost to internally provide or otherwise externally
source such services. The aggregate value of the services provided under this
agreement is less than $___ per month. The term of this agreement is one year
from October 31, 1997, with the Company having an option to extend for an
additional year. The Company expects to assume internally these functions over
this term.
Vendor Contracts Agreement. Pursuant to a Vendor Contracts Agreement,
dated as of October 31, 1997, as amended and restated on July 21, 1998 (the
"Vendor Contracts Agreement"), the Company participates in certain vendor
contracts entered into by The Advisory Board Company for the provision of
certain services, such as telecommunications, travel, mailing and general office
services. The Vendor Contracts Agreement specifies that the Company will either
pay the vendor directly if costs can be segregated and billed separately, or it
will reimburse The Advisory Board Company for its reasonably allocated share of
commonly billed costs. The term of this agreement is one year from October 31,
1997, with the Company having an option to extend for an additional year. The
Company expects to enter into separately negotiated vendor agreements as soon as
reasonably practical, and does not expect to incur material incremental costs.
Member Contracts Agreement. The Member Contracts Agreement, dated as of
October 31, 1997 (the "Member Contracts Agreement"), will be terminated upon
the closing of the Offering. Under the Member Contracts Agreement, The Advisory
Board Company acted as the Company's agent to provide administrative and
accounting services on behalf of the Company in connection with member
contracts, including the processing of new member contracts, the renewal of
existing member contracts and the collection of payments relating to member
contracts. The Member Contracts Agreement provides for fees for these services
based on either direct costs per certain transaction, headcount or a fixed cost
per month.
50
<PAGE>
SUBLEASE AGREEMENT
Pursuant to a Sublease Agreement, dated as of October 31, 1997, as amended
and restated (the "Sublease Agreement"), the Company currently subleases its
office space from The Advisory Board Company on terms consistent with the
original lease agreement, subject to termination by The Advisory Board Company
at any time with at least six months written notice. The Company's share of the
leased cost was determined based upon the same per square foot rent as the
original lease. The Company has entered into its own lease for separate property
and expects it will vacate the subleased space by August 1999.
NONCOMPETITION AGREEMENT
The Company has entered into a Noncompetition Agreement, dated as of
July 21, 1998 (the "ABC Noncompetition Agreement") with The Advisory Board
Company. The agreement has a term of seven years, and generally prohibits the
Company from selling its products or services to any company or institution, or
any division or subsidiary of any company or institution, that is principally
engaged in the health care business (provided that the Company may sell products
or services to non-health care divisions or subsidiaries of health care
companies). The ABC Noncompetition Agreement prohibits The Advisory Board
Company from selling its products and services to any company or institution, or
any division or subsidiary of any company or institution, that is not
principally engaged in the health care business (provided that The Advisory
Board Company may sell products or services to health care divisions or
subsidiaries of non-health care companies). The companies and institutions that
would be regarded under this agreement as being principally engaged in the
business of health care generally include providers of patient care (such as
hospitals, outpatient facilities, home health agencies and relevant government
agencies) and providers of medical professional services (such as physician and
nursing services). The Company may continue to sell those products and services
that it has sold as of the Offering to its existing clients that are principally
engaged in the health care business if such products and services do not cover
health care industry issues in particular. The Advisory Board Company may
continue to sell products and services to its existing clients that are not
principally engaged in the health care business if such products and services
specifically address health care industry issues.
The Company and The Advisory Board Company are both permitted, subject to
certain limitations, to sell their products and services to the following types
of companies and institutions: pharmaceutical companies, medical supply
companies, technology, software and communications vendors selling to health
care companies, companies providing health insurance, and managed care
companies. The types of products and services that the Company and The Advisory
Board Company are permitted to sell to such companies are limited in the
following manner: (i) The Advisory Board Company may sell only products and
services the content of which is specific to the health care industry, and (ii)
the Company may sell only products and services that are of a general business
nature and are sold by the Company to companies that are not principally engaged
in the health care business. Moreover, the Company and The Advisory Board
Company have agreed not to introduce to such companies products and services
that compete with the existing products and services of the other company.
Under the ABC Noncompetition Agreement, each of the Company and The
Advisory Board Company is prohibited, at any time during the term of the
Agreement, from recruiting or employing any person who is an employee of the
other company at such time, or who was an employee of such other company at any
time during the 24-month period preceding the date of such recruitment or
employment, unless the chief executive officer of the company currently
employing such employee consents to such recruitment and employment by the other
company. However, the Company and The Advisory Board Company have agreed on a
list of seven current employees of the Company who The Advisory Board Company
may recruit and hire for any period commencing 24 months after the Offering. In
addition, The Advisory Board Company may hire Michael A. D'Amato, the Executive
Vice President-Finance and Chief Financial Officer of the Company, at any time
commencing 6 months after the closing of the Offering. Additionally, under the
ABC Noncompetition Agreement, each of the Company and The Advisory Board Company
is required to incorporate in the noncompetition agreements that it enters into
with its respective employees provisions that would prohibit such employees from
competing with the other company.
51
<PAGE>
AGREEMENTS AND ARRANGEMENTS WITH THE PRINCIPAL SELLING STOCKHOLDER
PRINCIPAL SELLING STOCKHOLDER NONCOMPETITION AGREEMENT
The Principal Selling Stockholder and the Company have entered into a
five-year noncompetition agreement, dated as of July 21, 1998 (the "Principal
Selling Stockholder Noncompetition Agreement").
The Principal Selling Stockholder Noncompetition Agreement prohibits the
Principal Selling Stockholder and any entity controlled by the Principal Selling
Stockholder from selling products and services that compete with the products
and services offered by the Company. The Principal Selling Stockholder and any
entities controlled by the Principal Selling Stockholder expressly are permitted
to sell magazines, newspapers and news services to any entity. Further, the
Principal Selling Stockholder and entities controlled by the Principal Selling
Stockholder may sell advertising for its publications and news services to
any entity. Finally, the Principal Selling Stockholder and entities controlled
by the Principal Selling Stockholder may offer products and services that are
specifically addressed to and deal with advertising, promotion, or marketing
activities by companies and institutions and advertising agencies. Such products
and services may only be offered to the offices and divisions of companies,
institutions or advertising agencies that are responsible for the placement or
designing of advertisements.
Under the Principal Selling Stockholder Noncompetition Agreement, the
Principal Selling Stockholder and any entity controlled by the Principal Selling
Stockholder is prohibited at any time during the term of this agreement, from
recruiting or employing any person who is an employee of the Company at that
time, or who was employed by the Company at any time during the 24-month period
preceding the date of such recruitment or employment, unless the Chief Executive
Officer of the Company consents to such recruitment and employment. The
Principal Selling Stockholder and the Company have agreed on a list of seven
current employees of the Company who the Principal Selling Stockholder and/or
any entity controlled by the Principal Selling Stockholder may recruit and hire
in any enterprise for any period commencing 24 months after the Offering closes.
In addition, The Principal Selling Stockholder and/or any entity controlled by
the Principal Selling Stockholder may hire Michael A. D'Amato, the Executive
Vice President-Finance and Chief Financial Officer of the Company, for any
period commencing 6 months after the closing of the Offering.
PROMISSORY NOTE
The Company holds a promissory note in the amount of $6.5 million from the
Principal Selling Stockholder. This Note bears interest at a rate of 7% payable
semiannually on each May 1 and November 1. The principal sum is due and payable
on October 31, 2007. The Principal Selling Stockholder has agreed to repay the
note from the proceeds of the Offering.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1998 with respect to (i) each
person known by the Company to beneficially own 5% or more of the outstanding
shares of Common Stock, including any option to purchase 5% or more of the
Common Stock, (ii) each Director and Named Officer of the Company, (iii) all
executive officers of the Company and all members of the Board of Directors as a
group and (iv) the three Selling Stockholders: David G. Bradley, Jeffrey D.
Zients and Michael A. D'Amato. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power
with respect to all shares beneficially owned. [Note: Amounts reflected on this
table will be adjusted to take into account the recapitalization of the
Company.]
<TABLE>
<CAPTION>
Shares Beneficially Number
Owned Prior To of Shares to Be Beneficially
Offering Shares Owned After Offering
-------------------- --------------------------
Name Number Percent Offered Number(1) Percent (1)
- ------------------------------------------- --------- --------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C>
David G. Bradley 727,000 100.00% ____ _____ ______
Jeffrey D. Zients 60,000 7.62% ____ _____ ______
Michael A. D'Amato 28,000 3.71% ____ _____ ______
Harold L. Siebert -- 0.00% ____ _____ ______
James J. McGonigle -- 0.00% ____ _____ ______
Sally Chang -- 0.00% ____ _____ ______
Derek C. van Bever -- 0.00% ____ _____ ______
Elizabeth Keffer -- 0.00% ____ _____ ______
All executive officers and directors as
a group (7 persons) 88,000 10.80% ____ _____ ______
</TABLE>
_________________________________
(1) Assumes no exercise of the Underwriters' over-allotment option.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation, upon completion of the Offering
and giving effect to the Recapitalization, provides that the Company is
authorized to issue ____________ shares of Common Stock, par value $.01 per
share, and 420,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock"). As of June 30, 1998, the Company had 1,000 shares of Class A
Voting Common Stock and 726,000 shares of Class B Non-Voting Common Stock
outstanding. Upon completion of the Offering and giving effect to the
Recapitalization, there will be _________ shares of Common Stock outstanding and
no shares of Preferred Stock outstanding. In addition, an aggregate of _________
shares of Common Stock are reserved for issuance under the Incentive Plan, the
1998 Plan and the Directors Plan.
COMMON STOCK
Stockholders are entitled to one vote for each share of Common Stock held
of record on all matters on which stockholders are entitled or permitted to
vote. The Common Stock does not have cumulative voting rights in the election
of directors. As a result, holders of a majority of the shares of Common Stock
voting for the election of directors can elect all the directors standing for
election.
Holders of the Common Stock are entitled to receive dividends out of funds
legally available therefor when and if declared from time to time by the Board
of Directors. See "Dividend Policy." In the event of the liquidation,
dissolution or winding up of the Company, the holders of the Common Stock will
be entitled to share ratably in all assets remaining after payment of
liabilities, subject to the rights of any then outstanding Preferred Stock. The
Common Stock has no preemptive, subscription or conversion rights and there are
no redemption or sinking fund provisions in the Company's Second Amended and
Restated Certificate of Incorporation. The rights, preferences and privileges of
holders of the Common Stock are subject to, and may be adversely affected by,
the rights of holders of shares of any series of Preferred Stock that the
Company may designate and issue in the future. The issued and outstanding shares
of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized to issue the Preferred Stock in
different series and classes and to fix the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), liquidation preferences and other rights and
preferences of the Preferred Stock not in conflict with the Company's Second
Amended and Restated Certificate of Incorporation or Delaware law. There
currently are no shares of Preferred Stock outstanding and the Board of
Directors has no present plans to issue any shares of Preferred Stock. The Board
of Directors, without stockholder approval, can issue shares of Preferred Stock
with voting and conversion rights that could adversely affect the voting power
of holders of the Common Stock. The issuance of shares of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BYLAWS REGARDING CORPORATE GOVERNANCE
The Company's Certificate of Incorporation provides that the Board may not
adopt a "stockholders rights plan" (as defined in the Certificate of
Incorporation), commonly called a "poison pill," unless the rights plan (i) is
ratified by the affirmative vote of a majority of the votes cast of the
outstanding shares of Common Stock then outstanding and present in person or by
proxy at the next meeting of stockholders, (ii) by its terms expires no later
than 37 months after adoption (unless extended by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock) and (iii)
permits the rights issued thereunder to be redeemed at any time by the
affirmative vote of the holders of a majority of outstanding shares the Common
Stock. The Company has elected not to be subject to Section 203 of the Delaware
General Corporation Law, which generally prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware
54
<PAGE>
corporation for three years following the date such person became an interested
stockholder unless certain conditions are satisfied. The Company's Certificate
of Incorporation does not permit stockholders to act by written consent without
a meeting of stockholders. The Certificate of Incorporation and the Bylaws
provide that special meetings of stockholders may be called by a majority of the
full Board of Directors, the Chairman of the Board or any holder or holders of
at least 40% of any class of the Company's outstanding capital stock then
entitled to vote at the meeting.
The Company's Bylaws provide that the number of directors will be fixed
from time to time by the stockholders or the Board of Directors. The number of
directors is currently fixed at four.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the Delaware General Corporation Law, no director of the
Company will be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director. Under the Delaware General
Corporation Law, liability of a director may not be limited (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision of
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Company's Bylaws provide that it shall indemnify its directors,
officers, employees and agents to the fullest extent permitted by the Delaware
General Corporation Law. The Company may purchase and maintain insurance or
furnish similar protection on behalf of any officer or director against any
liability asserted against the officer or director and incurred by the officer
or director in such capacity, or arising out of the status, as an officer or
director.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ________________.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding ________
shares of Common Stock (assuming no exercise of the Over-allotment Option), and
_____ shares of Common Stock will be reserved for issuance upon the exercise of
outstanding stock options pursuant to the Incentive Plan, the 1998 Plan and the
Directors Plan. The shares of Common Stock sold in the Offering will be
freely tradable without restriction or further registration under the
Securities Act of 1933, except that any shares of Common Stock held by an
"affiliate" of the Company (an "Affiliate") within the meaning of Rule 144
under the Securities Act of 1933 will be subject to the resale limitations of
Rule 144. The remaining ______ shares outstanding upon completion of the
Offering, including _______ shares of Common Stock held by the Selling
Stockholders (_______ shares if the Over-allotment Option is exercised in
full), are "restricted securities" as the term is defined under Rule 144 and
may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year, including any Affiliate of the Company, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
reported average weekly trading volume of the Common Stock on national
securities exchanges during the four calendar weeks preceding such sale. Sales
under Rule 144 also are subject to certain requirements regarding the manner of
sale, notice and the availability of current public information about the
Company. In addition, a person who is not deemed to have been an Affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
The Company, its executive officers, and the Selling Stockholders have
agreed that they will not offer, sell, contract to sell, announce any intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Securities Act relating to,
any shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock without the prior
written consent of Smith Barney Inc. for a period of 180 days after the date
of this prospectus. Such restrictions will not affect the ability of the
Company to grant stock options for Common Stock pursuant to the Incentive Plan,
the 1998 Plan or the Directors Plan, or to issue Common Stock pursuant to the
exercise of stock options currently outstanding or granted pursuant to the
Incentive Plan, the 1998 Plan or the Directors Plan. See "Underwriting."
56
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof, each of the Underwriters, for whom Smith Barney, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Friedman, Billings, Ramsey
& Co., Inc. and Goldman, Sachs & Co. are acting as representatives (the
"Representatives"), has severally agreed to purchase, and the Selling
Stockholders have agreed to sell to each Underwriter, shares of Common Stock
which equal the number of shares set forth opposite the name of such Underwriter
below:
<TABLE>
<CAPTION>
UNDERWRITERS Number of Shares
------------ ----------------
<S> <C>
Smith Barney Inc. .......................................................
Donaldson, Lufkin & Jenrette Securities Corporation......................
Friedman, Billings, Ramsey & Co., Inc....................................
Goldman, Sachs & Co......................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock included in the Offering (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and part to certain dealers at a price that represents a
concession not in excess of $______ per share below the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $______ per share to other U.S. Underwriters or to certain other
dealers. After the initial offering of the shares of Common Stock offered
hereby, the public offering price and other selling terms may be changed by the
Underwriters.
The Principal Selling Stockholder has granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to an aggregate of __________ additional shares of Common Stock at the price to
public set forth on the cover page of this Prospectus. The Underwriters may
exercise such option to purchase additional shares of Common Stock solely for
the purpose of covering over-allotments, if any, in connection with the sale of
the shares of Common Stock offered hereby. To the extent such option is
exercised, the Underwriters will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number of shares of Common Stock set forth
opposite the Underwriters' names in the preceding table bears to the total
number of shares in such table.
The Company, the Selling Stockholders, and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company and the Selling Stockholders have agreed, subject to certain
limited exceptions, that, for a period of 180 days after the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of any Common Stock (or
any securities convertible into or exercisable or exchangeable for Common Stock)
or, in the case of the Company, grant any options or warrants to purchase Common
Stock. In addition, all of the directors (other than those resigning in
connection with the Offerings) and executive officers of the Company have agreed
to the same restriction for a period beginning on the date of this Prospectus
and ended on _____________, 1998.
57
<PAGE>
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada in
which such offer is made.
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholders or the Underwriters that would permit any offering to the
general public of the shares of Common Stock offered hereby in any jurisdiction
other than the United States.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
In connection with the Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common
Stock or effecting purchases of the Common Stock for the purpose of pegging,
fixing or maintaining the price of Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above in lieu
of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby if the
Underwriters purchase Common Stock in the open market for the account of the
underwriting syndicate and the securities purchased can be traced to a
particular Underwriter, the underwriting syndicate may require the Underwriter
in question to purchase the Common Stock in question at a cost price to the
syndicate or may recover from (or decline to pay to) the Underwriter in question
the selling concession applicable to the securities in question. The
Underwriters are not required to engage in any of these activities and any such
activities, if commenced, may be discontinued at any time.
[In the ordinary course of their respective businesses, certain of the
Underwriters and their affiliates] have performed, and may in the future
perform, investment banking or commercial banking services for the Company.]
58
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gibson, Dunn & Crutcher LLP, Washington, DC. Certain
legal matters will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, NY.
EXPERTS
The audited financial statements and schedule as of December 31, 1996 and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, DC 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as
part thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. A copy of the Registration Statement, and the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
The SEC also maintains a World Wide Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants such as the Company which file electronically with the SEC. The
Registration Statement, including all exhibits thereto and amendments thereof,
are available on this World Wide Web site.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of December 31, 1996 and 1997, as of March 31, 1998 and
Pro Forma as of March 31, 1998.......................................... F-3
Statements of Operations for the years ending December 31, 1995,
1996 and 1997, and the three months ending March 31, 1997 and 1998...... F-4
Statements of Changes in Stockholder's Deficit for the years ending
December 31, 1995, 1996 and 1997, and the three months ending
March 31, 1998.......................................................... F-5
Statements of Cash Flows for the years ending December 31, 1995, 1996,
and 1997, and the three months ending March 31, 1997 and 1998........... F-6
Notes to Financial Statements............................................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of The Corporate Executive Board Company:
We have audited the accompanying balance sheets of The Corporate Executive Board
Company (formerly the Corporate Advisory Board Company and a division of The
Advisory Board Company until October 31, 1997) as of December 31, 1996 and 1997,
and the related statements of operations, stockholder's deficit and cash flows
for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 financial statements referred to above present fairly, in
all material respects, the financial position of The Corporate Executive Board
Company as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
July 24, 1998
F-2
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly The Corporate Advisory Board Company)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
--------- ---------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 8,937 $13,349 $10,192
Marketable securities - 3,754 3,960 3,960
Membership fees receivable, net 13,894 15,796 7,869 7,869
Deferred income taxes 956 1,150 992 4,801
Deferred incentive compensation (Note 2) 870 1,096 1,168 1,168
Prepaid expenses and other current assets - 122 380 380
Receivable from affiliate 5,682 - - -
Receivable from stockholder (Note 10) - 6,500 6,500 6,500
------- ------- -------- -------
Total current assets 21,402 37,355 34,218 34,870
------- ------- -------- -------
PROPERTY AND EQUIPMENT, net 1,705 2,513 2,342 2,342
------- ------- ------- -------
Total assets $23,107 $39,868 $36,560 $37,212
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Deferred revenues $21,696 $31,474 $29,784 $29,784
Accounts payable and accrued liabilities 1,098 2,082 2,359 2,359
Accrued incentive compensation 1,534 1,899 2,060 2,060
Payable to affiliate - 1,507 654 654
Stock option repurchase liability (Note 9) 1,719 5,398 3,059 3,059
------- -------- ------- -------
Total current liabilities 26,047 42,360 37,916 37,916
------- -------- ------- -------
OTHER LIABILITIES:
Long-term stock option repurchase liability (Note 9) 4,471 2,550 2,752 4,809
------- -------- ------- -------
Total liabilities 30,518 44,910 40,668 42,725
------- -------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
STOCKHOLDER'S DEFICIT (Note 9):
Class A Voting Common Stock, $0.01 par value;
1,000 shares authorized, issued and outstanding
as of December 31, 1997 and March 31, 1998 - - - -
Class B Nonvoting Common Stock, $0.01 par value;
1,399,000 shares authorized and 726,000 shares
issued and outstanding as of December 31, 1997,
and March 31, 1998 - 7 7 7
Additional paid-in capital - 2,764 2,764 2,764
Deferred compensation - (1,459) (1,303) (1,303)
Accumulated deficit (7,411) (6,354) (5,576) (6,981)
--------- ------- ------- --------
Total stockholder's deficit (7,411) (5,042) (4,108) (5,513)
--------- ------- ------- --------
Total liabilities and stockholder's deficit $23,107 $39,868 $36,560 $37,212
========= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly The Corporate Advisory Board Company)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDING DECEMBER 31, ENDING MARCH 31,
---------------------------------- ------------------
1995 1996 1997 1997 1998
-------- --------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES $ 17,547 $27,283 $38,669 $8,794 $11,598
COSTS AND EXPENSES:
Cost of services 10,849 15,078 20,036 4,366 5,323
Member relations and marketing 5,275 6,677 8,106 1,667 2,352
General and administrative 2,589 3,832 5,660 1,787 1,468
Depreciation 233 452 722 150 177
Stock option restructuring and repurchase
(Note 9) 9,390 1,473 3,063 1,032 409
-------- --------- -------- -------- --------
28,336 27,512 37,587 9,002 9,729
-------- --------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (10,789) (229) 1,082 (208) 1,869
INTEREST INCOME - - 122 - 161
-------- --------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR STATE
INCOME TAXES (10,789) (229) 1,204 (208) 2,030
PROVISION (BENEFIT) FOR STATE INCOME TAXES (1,076) (23) 120 (20) 202
-------- --------- -------- -------- --------
NET INCOME (LOSS) $(9,713) $ (206) $ 1,084 $ (188) 1,828
======== ========== ======== ======== ========
HISTORICAL NET INCOME (LOSS) PER SHARE-BASIC
(NOTE 2) $(13.36) $ (0.28) $ 1.49 $ (0.26) $ 2.51
======== ========= ======== ======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING-BASIC
(NOTE 2) 727 727 727 727 727
========= ========= ======== ======== ========
HISTORICAL NET INCOME (LOSS) PER SHARE-DILUTED
(NOTE 2) $(13.36) $ (0.28) $ 1.28 $ (0.26) $ 2.07
========= ========= ======== ======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING-DILUTED
(NOTE 2) 727 727 850 727 883
========= =========== ======== ======== ========
PRO FORMA STATEMENT OF OPERATIONS
DATA (UNAUDITED) (NOTE 2):
Income (loss) before provision (benefit) for
income taxes, as reported $(10,789) $ (229) $ 1,204 $ (208) $ 2,030
Pro forma income tax provision (benefit) (4,316) (92) 482 (83) 812
--------- ----------- -------- -------- --------
Pro forma net income (loss) $ (6,473) $ (137) $ 722 $ (125) $ 1,218
========= =========== ======== ======== ========
Pro forma net income (loss) per share-
basic $ (8.90) $ (0.19) $ 0.99 $ (0.17) $ 1.68
========= =========== ======== ======== ========
Pro forma net income (loss) per share-
diluted $ (8.90) $ (0.19) $ 0.85 $ (0.17) $ 1.38
========= =========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly the Corporate Advisory Board Company)
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996, AND 1997, AND THE THREE MONTHS
ENDING MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A VOTING CLASS B NONVOTING ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN DEFERRED
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ---------- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 - $- - $- $- $-
Net loss - - - - - -
------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1995 - - - - - -
Net loss - - - - - -
------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1996 - - - - - -
Distributions to stockholder - - - - - -
Division Spin-Off (Note 2) 1,000 - 726,000 7 - -
Deferred compensation pursuant to
substitution of stock options - - - - 2,764 (1,459)
Net income - - - - - -
------ ------ ------- ------ ------ -------
BALANCE AT DECEMBER 31, 1997 1,000 - 726,000 7 2,764 (1,459)
Distributions to stockholder (unaudited) - - - - - -
Amortization of deferred compensation (unaudited) - - - - - -
Net income (unaudited) - - - - - 156
------ ------ ------- ------ ------ -------
BALANCE AT MARCH 31, 1998 (UNAUDITED) 1,000 $- 726,000 $7 $2,764 $(1,303)
====== ====== ======= ====== ====== =======
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- ---------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 2,508 $ 2,508
Net loss (9,713) (9,713)
-------- --------
BALANCE AT DECEMBER 31, 1995 (7,205) (7,205)
Net loss (206) (206)
-------- --------
BALANCE AT DECEMBER 31, 1996 (7,411) (7,411)
Distributions to stockholder (20) (20)
Division Spin-Off (Note 2) (7) -
Deferred compensation pursuant to
substitution of stock options - 1,305
Net income 1,084 1,084
-------- --------
BALANCE AT DECEMBER 31, 1997 (6,354) (5,042)
Distributions to stockholder (unaudited) (1,050) (1,050)
Amortization of deferred compensation (unaudited) - 156
Net income (unaudited) 1,828 1,828
-------- --------
BALANCE AT MARCH 31, 1998 (UNAUDITED) $(5,576) $(4,108)
======== ========
</TABLE>
F-5
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly The Corporate Advisory Board Company)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDING ENDING
DECEMBER 31, MARCH 31,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
-------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,713) $ (206) $ 1,084 $ (188) $ 1,828
Adjustments to reconcile net income to net cash flows
provided by operating activities-
Depreciation 233 452 722 150 177
Option repurchase and restructuring 9,390 1,473 3,063 1,032 409
Changes in assets and liabilities:
Membership fees receivable, net (4,154) (3,356) (1,902) 1,793 7,927
Deferred income taxes (785) 144 (194) - 158
Deferred incentive compensation (464) 218 (226) (9) (72)
Prepaid expenses and other
current assets - - (122) - (258)
Deferred revenues 5,804 6,314 9,778 (1,917) (1,690)
Accounts payable and accrued liabilities 611 121 984 695 277
Accrued incentive compensation 491 342 365 (272) 161
-------- ------- -------- --------- --------
Net cash flows provided by
operating activities 1,413 5,502 13,552 1,284 8,917
-------- ------- -------- --------- --------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of property and equipment (818) (776) (1,530) (607) (6)
Purchases of marketable securities - - (3,754) - (206)
Receivable from stockholder - - (6,500) - -
-------- ------- -------- --------- --------
Net cash flows used in investing activities (818) (776) (11,784) (607) (212)
-------- ------- -------- --------- --------
CASH FLOWS (USED FOR) PROVIDED BY FINANCING ACTIVITIES:
Change in payable to/receivable from affiliate 574 (1,221) 7,189 (677) (853)
Distributions to stockholder - - (20) - (1,050)
Stock option repurchases (1,169) (3,505) - - (2,390)
-------- ------- -------- --------- --------
Net cash flows (used in) provided by financing
activities (595) (4,726) 7,169 (677) (4,293)
-------- ------- -------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 8,937 - 4,412
Cash and cash equivalents, beginning of period - - - - 8,937
-------- ------- -------- --------- --------
Cash and cash equivalents, end of period $ - $ - $ 8,937 $ - $ 13,349
======== ======= ======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
State income taxes $ - $ - $ 90 $ - $ 35
======== ======= ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly The Corporate Advisory Board Company)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998, AND FOR THE THREE MONTHS ENDING
MARCH 31, 1997 AND 1998, IS UNAUDITED)
1. BASIS OF ACCOUNTING AND BUSINESS DESCRIPTION:
The Corporate Executive Board Company (the "Company", formerly The Corporate
Advisory Board Company) was incorporated on September 11, 1997, under the laws
of the State of Delaware. The Company's business was operated as a division
of The Advisory Board Company, a Maryland corporation, until October 31, 1997
when the business was contributed to the Company and spun-off (the "Spin Off")
to The Advisory Board Company's sole stockholder. On October 31, 1997, all of
the outstanding shares of the Company were distributed as a dividend to the
sole stockholder of The Advisory Board Company. The Company is structured as
an "S" corporation, with ownership maintained by a sole stockholder. The
Company and The Advisory Board Company are wholly-owned by the same
stockholder. The accompanying financial statements represent the accounts of
the Company as if it had operated as a stand-alone entity in accordance with
the accounting rules prescribed for "carve-out" financial statements.
The Company provides "best practices" research and analysis focusing on
corporate strategy, operations and general management issues. The Company
provides its research and analysis to corporations on an annual subscription
basis. For a fixed annual fee, members of each subscription program have access
to an integrated set of services, including best practices research studies,
executive education seminars, customized research briefs and on-line access to
the Company's databases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data as of March 31, 1998, and for the three months ending
March 31, 1997 and 1998, have been prepared by the Company, without audit, and
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of interim period
results. The results of operations for the three months ending March 31, 1998,
are not necessarily indicative of the results to be expected for the full year.
SPIN-OFF PRESENTATION
Prior to the Spin-Off, the Company did not maintain separate bank accounts and
all cash receipts and disbursements were made via The Advisory Board Company and
reflected as changes in receivable from (payable to) affiliate. Subsequent to
the Spin-Off, the Company is responsible for its own cash management and records
amounts owed to The Advisory Board Company in payable to affiliate. The Company
settles the amounts due to The Advisory Board Company for certain common vendor
costs and under an Administrative Services Agreement (Note 3), and amounts due
to DGB Enterprises, Inc., for management cost allocations (Note 3), at least
quarterly.
REVENUE AND COMMISSION EXPENSE RECOGNITION
Membership fees are recognized ratably over the term of the related membership,
which is generally twelve months. Membership fees are generally billable when a
letter of agreement is signed by the member. Certain membership fees are billed
on an installment basis (Note 4).
F-7
<PAGE>
The Company's policy is to record the full amount of membership fees receivable
and related deferred revenue when a letter of agreement is signed by a member.
Certain incentive compensation expenses related to the negotiation of new and
renewal memberships are deferred and are amortized over the term of the related
memberships.
NET INCOME (LOSS) PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued after December 15, 1997. SFAS
No. 128 requires dual presentation of basic and diluted net income per share.
Basic net income per share includes no dilution and is computed by dividing net
income or loss available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted net income per share
includes the impact of dilutive securities, such as options, warrants and
convertible debt or preferred equity securities. Options outstanding as of
December 31, 1995 and 1996, and March 31, 1997, were not included in calculating
diluted net income per share because they were anti-dilutive. As a result,
there is no difference between the amounts of basic and diluted net income per
share for those periods.
In February 1998, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 98 ("SAB 98") concerning the computation of earnings per share.
Among other things, SAB 98 affects companies that issued shares of stock within
twelve months of an initial public offering ("IPO"), and/or converted from an
"S" corporation to a "C" corporation for Federal income tax purposes. SAB 98
requires that in addition to reporting pro forma net income per share for the
effect of the change in tax status, companies also report actual historical net
income per share. Further, prior to the issuance of SAB 98, stock and stock
options issued within twelve months of an IPO below the IPO price were treated
as if outstanding for all periods presented, calculated using the treasury stock
method. SAB 98 has discontinued this treatment for such issuances when the
issuance price was considered more than nominal ("nominal issuances"). The
Company has determined that the issuances of stock and stock options within
twelve months of the IPO were not nominal issuances. SAB 98 was effective upon
its issuance and has been applied in the accompanying financial statements for
all periods presented. Weighted-average shares outstanding for the years ending
December 31, 1995, 1996 and 1997, and the three months ending March 31, 1997 and
1998, were calculated assuming that the capital structure established at the
date of the Spin-Off was in effect during those periods.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDING ENDING
DECEMBER 31, MARCH 31,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- -------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted-average common shares
outstanding-basic 727 727 727 727 727
Dilutive effect of stock options - - 123 - 156
------- -------- ------- ------ -------
Weighted-average common and equivalent shares
outstanding - diluted 727 727 850 727 883
======= ======== ======= ====== =======
</TABLE>
F-8
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS DATA (UNAUDITED)
Prior to the closing of the initial public offering, the Company will terminate
its status as an "S" corporation and will be subject to Federal and state taxes
at prevailing corporate rates. Accordingly, pro forma unaudited net income
(loss) and net income (loss) per share are based on the assumption that the
Company's "S" corporation status was terminated at the beginning of each period.
The Company has provided income taxes on a pro forma basis as if it were a
subchapter "C" corporation for all periods presented utilizing an effective rate
of 40%.
PRO FORMA BALANCE SHEET (UNAUDITED)
The unaudited pro forma balance sheet as of March 31, 1998, reflects (1) the
distribution of previously undistributed "S" corporation earnings taxed or
taxable to the Company's sole stockholder of approximately $3.2 million based on
earnings through March 31, 1998, but does not include the amount to be
distributed for "S" corporation earnings from April 1, 1998, through the
termination of the Company's "S" corporation election upon completion of the
initial public offering, (2) termination of the Company's "S" corporation
election and the adjustment of the Company's deferred income tax asset of
approximately $3.8 million as of March 31, 1998, and (3) the amendment of the
Liquid Markets Agreements (see Note 9), which eliminate future employment
requirements as a condition for payment, resulting in an increase in the long-
term option repurchase liability of $2.1 million as of March 31, 1998. The pro
forma adjustments give effect to transactions that will occur upon completion of
the Company's initial public offering.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities, and membership fees receivable. The Company maintains
cash and cash equivalents and marketable securities with quality financial
institutions. Marketable securities consist of diversified holdings of high-
grade municipal and corporate bonds. The concentration of credit risk with
respect to membership fees receivable is generally diversified due to the large
number of entities comprising the Company's membership base. The Company
performs periodic evaluations of the financial institutions, securities
investments, and its membership base and establishes allowances for potential
credit losses.
The Company generates revenue from customers located outside the United States.
For the years ending December 31, 1995, 1996, and 1997, and the three months
ending March 31, 1997 and 1998, approximately 28%, 29%, 31%, 31%, and 32% of
revenue, respectively, was generated from customers outside the United States.
Sales to customers in European countries for the years ending December 31, 1995,
1996, and 1997, and the three months ending March 31, 1997 and 1998, were
approximately 10%, 12%, 13%, 13%, and 14%, respectively, with no other
geographic area representing more than 10% of revenue in any period. No one
customer accounted for more than 2% of revenues for any period presented.
F-9
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of current assets and current liabilities approximates their
carrying value due to their short maturity. The fair value of the long-term
portion of stock option repurchase liability was approximately $2.2 million as
of December 31, 1997, utilizing a discount rate of 7%.
LONG-LIVED ASSETS
Long-lived assets and identifiable assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual dispositions. The Company
considers expected cash flows and estimated future operating results, trends,
and other available information in assessing whether the carrying value of the
assets is impaired. The Company believes that no such impairment existed as of
December 31, 1996, 1997, and March 31, 1998.
PROPERTY AND EQUIPMENT
Furniture, fixtures, and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, ranging from five to seven years.
INCOME TAXES
The sole stockholder has elected that the Company be treated as an "S"
corporation for Federal income tax purposes, whereby taxable income or losses
flow through to, and are reportable by, the individual stockholder.
Accordingly, no provision has been made for Federal income taxes in the
accompanying audited financial statements. The District of Columbia as well as
several states, however, do not recognize "S" corporation status. Income taxes
related to the District of Columbia and other states are calculated for the
Company on a separate return basis for all periods presented using the liability
method in accordance with SFAS No. 109, "Accounting for Income Taxes." The
unaudited pro forma information included in the statement of operations reflects
income tax expense as if the Company had been a stand-alone "C" corporation for
all periods presented.
PRODUCT DEVELOPMENT
Costs related to the identification and development of new programs are expensed
when incurred.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Marketable securities that mature within three months of purchase are considered
cash equivalents. Investments with maturities of more than three months are
classified as marketable securities. As of December 31, 1997, and March 31,
1998, the Company's marketable securities were municipal and corporate bonds.
These bonds are classified as trading securities in accordance with SFAS No.
115, "Accounting for Certain Investments in
F-10
<PAGE>
Debt and Equity Securities." Accordingly, the carrying value of these bonds is
adjusted to fair value, with unrealized gains and losses included in the
statements of operations. At December 31, 1997, and March 31, 1998, the fair
value of marketable securities approximated historical cost.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company adopted both of these
standards during the three months ending March 31, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months ending March 31, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such
adoption will not impact the Company's results of operations or financial
position, since it relates only to disclosures.
3. TRANSACTIONS WITH AFFILIATES:
ADMINISTRATIVE SUPPORT AND MANAGEMENT SERVICES
The Advisory Board Company, which is controlled by the same sole shareholder as
the Company, provides the Company with administrative support services.
Subsequent to the Spin-Off, fees are charged to the Company for these services
in accordance with an Administrative Services Agreement (the "ASA"). The term
of the ASA is one year from October 31, 1997, with the Company having an option
to extend for an additional year. The ASA provides for fees based on either
direct costs, costs per certain transaction, headcount, or a fixed cost per
month. For periods prior to the Spin-Off, the Company allocated the costs for
administrative support services using methodologies designed to consistently
apply the provisions of the ASA (e.g., direct costs, revenue activity drivers,
or headcount). In management's opinion, the standard
F-11
<PAGE>
costs developed approximate the cost of internally providing or externally
sourcing such services and, therefore, represent what the costs would be on a
stand-alone basis.
Management cost allocations, consisting primarily of senior executive costs
allocated by DGB Enterprises, Inc., a separate entity controlled by the
Company's sole shareholder, are charged to the Company (pre and post Spin-Off)
based on an allocation of time spent on the Company's activities by each
executive monthly. In management's opinion, the allocations represent what the
costs would be on a stand-alone basis.
RECEIVABLE FROM (PAYABLE TO) AFFILIATE
Activity in the receivable from (payable to) affiliate is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDING DECEMBER 31, ENDING MARCH 31,
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 5,035 $ 4,461 $ 5,682 $ 5,682 $(1,507)
Costs allocated to the Company-
The Advisory Board Company (2,096) (3,454) (5,502) (1,547) (1,210)
DGB Enterprises, Inc. (1,064) (1,404) (1,490) (455) (261)
Cash transfers from the Company to
The Advisory Board Company 2,586 6,079 4,079 2,679 5,074
Cash transfers to the Company from
The Advisory Board Company - - (4,276) - (2,750)
------- ------- ------- ------- -------
Balance at end of period $ 4,461 $ 5,682 $(1,507) $ 6,359 $ (654)
======= ======= ======= ======= =======
</TABLE>
4. MEMBERSHIP FEES RECEIVABLE:
Membership fees receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
-------------------
1996 1997 1998
------ ------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Billed fees receivable $11,106 $12,734 $ 6,625
Installment fees receivable 3,188 4,062 2,444
------- ------- -------
14,294 16,796 9,069
Allowance for doubtful accounts (400) (1,000) (1,200)
------- ------- -------
Membership fees receivable, net $13,894 $15,796 $ 7,869
======= ======= =======
</TABLE>
F-12
<PAGE>
Billed fees receivable represent invoiced membership fees. Installment fees
receivable represent fees due to be billed to members who have elected to pay on
an installment basis. Netted against revenues are provisions for bad debt of
$0.06 million, $0.3 million, $0.6 million, and $0.2 million, for the years
ending December 31, 1995, 1996, and 1997, and the three months ending March 31,
1998, respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
-----------------
1996 1997 1998
------ ------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture, fixtures, and equipment $ 2,928 $ 4,458 $ 4,464
Accumulated depreciation (1,223) (1,945) (2,122)
------- ------- -------
Property and equipment, net $ 1,705 $ 2,513 $ 2,342
======== ======= =======
</TABLE>
6. INCOME TAXES:
The provision (benefit) for state income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDING DECEMBER 31, ENDING MARCH 31, ENDING MARCH 31,
--------------------------
1995 1996 1997 1997 1998
------- ------- -------- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current $ (291) $ (167) $ 314 $ (20) $ 44
Deferred (785) 144 (194) - 158
------- ------- -------- ----- -----
Provision (benefit) for state
income taxes $(1,076) $ (23) $ 120 $ (20) $ 202
======= ======= ======== ===== =====
</TABLE>
F-13
<PAGE>
The statutory state and effective tax rates reflected in the provision (benefit)
for income taxes are both 9.975%. Deferred income taxes are provided for
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. The tax effect of these temporary
differences is presented below (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------
1996 1997 1998
------- ------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred state income tax assets:
Deferred compensation agreements $ 617 $ 923 $ 726
Unamortized Section 481(a) adjustment related to conversion to
accrual basis tax reporting 162 --- ---
Allowance for doubtful accounts 44 100 120
Compensation accrued for financial reporting purposes 153 189 205
Other 65 47 58
------ ------ ------
Total deferred state income tax assets 1,041 1,259 1,109
------ ------ ------
Deferred state income tax liabilities:
Deferred incentive compensation 85 109 117
------ ------ ------
Net deferred state income tax assets $ 956 $1,150 $ 992
====== ====== ======
</TABLE>
Management of the Company has determined that based upon the Company's expected
future earnings it will more likely than not be able to fully recognize these
net deferred state income tax assets.
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered an office space sublease agreement with The Advisory
Board Company that is cancelable upon six months'notice. In 1998, the Company
initiated plans to relocate its office facilities and negotiated a new lease
with an unrelated third party. The lease will expire on June 30, 2009. The
Company's estimated future minimum lease payments under these lease agreements
(including the transition period) are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 $ 1,498
1999 2,395
2000 2,457
2001 2,883
2002 2,941
Thereafter 21,281
-------
Total $33,455
=======
</TABLE>
F-14
<PAGE>
In conjunction with the new lease, the Company entered into a $1.3 million
Letter-of-Credit Agreement to provide a security deposit for the office space
lease. The Letter-of-Credit Agreement is collateralized by the Company's cash,
accounts receivable and property and equipment.
Rent expense charged to operations during the fiscal years ending December 31,
1995, 1996, and 1997, was approximately $0.9 million, $1.3 million, and $1.6
million, respectively. Rent expense charged for the three months ending March
31, 1997 and 1998, was $0.3 million and $0.5 million, respectively.
8. BENEFIT PLANS:
In fiscal 1993, The Advisory Board Company began sponsoring a defined
contribution 401(k) Plan (the "Plan") in which the Company's employees
participate. Pursuant to the Plan, all employees who have reached the age of
twenty-one are eligible to participate. The sponsor provides contributions
equal to 25% of an employee's contribution up to a maximum of 4% of base salary.
Contributions to the Plan for the Company's participants during the years ending
December 31, 1995, 1996, and 1997, were approximately $36,000, $51,000 and
$79,000, respectively. Contributions for the three months ending March 31, 1997
and 1998, were $16,000 and $25,000, respectively.
9. STOCK OPTION PLANS:
BACKGROUND
On March 1, 1994, The Advisory Board Company adopted the Stock-Based Incentive
Compensation Plan (the "Original Plan") to provide for granting of incentive
stock options ("Original Options"). The Original Plan entitled certain
employees to purchase shares of The Advisory Board Company's Class B Nonvoting
Common Stock at a price at least equal to the fair market value of The Advisory
Board Company's stock on the date of grant. The Original Options were
exercisable on the date ten years after the date of grant, subject to
acceleration upon the occurrence of certain events that would alter the current
ownership of The Advisory Board Company, including an initial public offering or
private sale.
LIQUID MARKETS AGREEMENTS
On March 31, 1995, The Advisory Board Company and existing optionees adopted the
Liquid Markets Agreements ("LM Agreements") to provide the optionees an
opportunity to (i) sell all or a portion of their Original Options to The
Advisory Board Company immediately and/or (ii) modify all or a portion of their
Original Options in accordance with the terms and conditions of the Continuing
Stock-Based Incentive Compensation Plan, which is described below (the
"Continuing Option Plan").
The LM Agreements provided for the designation of Original Options as described
above and governed the payments to be made to the optionees for options sold
("Sold Options"). For the options elected to be sold, The Advisory Board
Company was committed to pay an initial payment of $55 per option, minus the
exercise price, in two installments (25% no later than
F-15
<PAGE>
December 31, 1995, and 75% no later than December 31, 1996). The Advisory Board
Company was also obligated to pay the optionee an additional payment (the "Earn
Out Payment") based on The Advisory Board Company's income from operations for
the fiscal year ending March 31, 1998.
In March 1997, The Advisory Board Company amended the LM Agreements to provide
for (1) guaranteed versus variable Earn Out Payments, (2) revised payment
schedules, (3) revised employment requirements, and (4) in limited instances,
the ability to put current options retroactively into the Liquid Markets plan.
The accompanying financial statements present the compensation expense related
to employees of the Company prior to and after the Spin-Off.
The Company recognized approximately $9.4 million, $1.5 million and $1.8 million
in compensation expense related to the LM Agreements in years 1995, 1996, and
1997, respectively. Approximately $1.0 and $0.2 million were recognized for the
three months ending March 31, 1997 and 1998, respectively.
The Company's obligation under the LM Agreements is reflected in stock option
repurchase liability in the accompanying balance sheets. Earnings charges
subsequent to March 31, 1998, related to this agreement are approximately $2.1
million. During the year ending December 31, 1997, the Company made no payments
under the LM Agreements. During the three months ending March 31, 1998, the
Company paid $2.3 million in accordance with the LM Agreements. Future cash
commitments related to the LM Agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 $ 5,398
1999 1,670
2000 3,140
-------
Total $10,208
=======
</TABLE>
STOCK-BASED INCENTIVE
COMPENSATION PLAN
Adopted on March 31, 1995, the Continuing Option Plan amended and restated the
Original Plan and formalized the terms and conditions of the remaining modified
options (the "Continuing Options"). In conjunction with the Spin-Off, The
Advisory Board Company executed Substitution Agreements with each of the
employees of the Company participating in the Continuing Option Plan. The
Substitution Agreement provided for the exchange of The Advisory Board Company
Continuing Options for options in the Company (the "Options") granted under the
Company's Stock-Based Incentive Compensation Plan (the "Current Plan"), which
was adopted at the time of the Spin-Off. The Options will generally be
exercisable at the earlier of April 1, 2000, a sale of the Company, or upon an
initial public offering of the Company's capital stock (50% one year after the
offering, 30% two years after the offering and 20% three years after the
offering). The Options expire between April 2001 and March 2009. Upon exercise,
the following means of disposing of the stock will be available to the
optionee:
F-16
<PAGE>
(i) prior to an initial public offering, the exercise of a right by the
optionee to sell the stock to the Company at fair market value after a minimum
six-month holding period, (ii) prior to an initial public offering, the
exercise of a right to sell the stock to a purchaser upon a sale of the
Company, (iii) the open market sale after an initial public offering of the
Company's capital stock, or (iv) prior to an initial public offering, the
exercise of a right by the Company to redeem the stock at fair market value.
The Current Plan provides for the issuance of options to purchase up to 400,000
shares of Class B Nonvoting Common Stock. As of March 31, 1998, a total of
122,800 shares were available for future awards under this plan.
The terms of the Substitution Agreement resulted in a new measurement date for
107,900 options held by employees of the Company, resulting in the recognition
of compensation expense. The compensation expense is being recognized over the
related vesting period. The compensation expense is reflected in stock option
restructuring and repurchase in the accompanying statements of operations and
was $1.3 and $0.2 million for the year ending December 31, 1997, and the three
months ending March 31, 1998, respectively. The Company will recognize the
remaining $1.3 million over the vesting period, which is subject to
acceleration, as described above, in the event of an initial public offering.
The recognition of compensation expense was not required on the remaining
82,674 options outstanding at the time of the Spin-Off under the provisions of
EITF No. 90-9.
TRANSACTIONS
A summary of changes in common stock options under the Original Plan, the
Continuing Option Plan, and the Current Plan is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE WEIGHTED-AVERAGE
OF OPTIONS PER SHARE EXERCISE PRICE
------------ ---------------- ------------------
<S> <C> <C> <C>
THE ADVISORY BOARD COMPANY ORIGINAL OPTIONS:
Outstanding at December 31, 1994 129,100 $15.00 - $30.00 $16.25
Options granted 144,475 $50.00 - $63.00 $51.64
Options sold under LM Agreement (111,100) $15.00 - $30.00 $15.99
-------- --------------- ------
Outstanding at December 31, 1995 162,475 $15.00 - $63.00 $47.91
Options granted 12,000 $63.00 - $70.00 $65.92
-------- --------------- ------
Outstanding at December 31, 1996 174,475 $15.00 - $70.00 $49.15
Options granted 17,500 $ 74.00 $74.00
Options sold under LM Agreement (18,000) $15.00 - $30.00 $17.92
Options canceled (5,000) $ 63.00 $63.00
-------- -------------- ------
Outstanding prior to Spin-Off Transaction 168,975 $15.00 - $74.00 $53.59
======== ============== ======
COMPANY OPTIONS:
Outstanding subsequent to Spin-Off
Transaction and related substitution 190,574 $1.00 - $22.00 $13.20
Options granted 81,826 $35.00 - $47.00 $37.53
------- -------------- ------
Outstanding at December 31, 1997 272,400 $1.00 - $47.00 $20.51
Options granted (unaudited) 4,800 $ 47.00 $47.00
------- -------------- ------
Outstanding at March 31, 1998 (unaudited) 277,200 $1.00 - $47.00 $20.97
======= ============== ======
</TABLE>
F-17
<PAGE>
Exercise prices for options outstanding at March 31, 1998, are as follows
(unaudited):
<TABLE>
<CAPTION>
NUMBER OUTSTANDING AS
OF WEIGHTED-AVERAGE
MARCH 31, REMAINING CONTRACTUAL WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES 1998 LIFE-YEARS EXERCISE PRICE
------------------------ ---------------------- --------------------- ----------------
<S> <C> <C> <C>
$ 1.00 - $ 1.00 10,000 5.08 $ 1.00
$ 5.00 - $ 7.00 40,500 5.08 $ 5.26
$ 10.00 - $ 15.00 26,000 5.08 $12.87
$ 16.00 - $ 22.00 114,074 7.62 $17.17
$ 35.00 - $ 35.00 66,526 5.54 $35.00
$ 47.00 - $ 47.00 20,100 5.08 $47.00
- ----------------- -------- ----- -------
$ 1.00 - $ 47.00 277,200 6.24 $20.97
================= ======== ===== =======
</TABLE>
As of March 31, 1998, 3,213 of the options that have been granted are
exercisable.
The Company has elected to account for stock and stock rights in accordance with
APB No. 25. SFAS No. 123, "Accounting for Stock Based Compensation," established
an alternative method of expense recognition for stock-based compensation awards
to employees based on fair values. The Company has elected not to adopt SFAS
No. 123 for expense recognition purposes.
Pro forma information regarding net income is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123. The fair values of
options granted during the years ended December 31, 1995, 1996 and the three
months ending March 31, 1997, were estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate of 6.5%; no dividend yield; weighted-
average expected lives of the option of five years, and expected volatility of
50%. The fair values of options granted during the year ended December 31,
1997, and the three months ending March 31, 1998, were estimated under the same
method, with the following weighted-average assumptions: risk free interest
rate of 5.5%; no dividend yield; weighted-average expected lives of the options
of three years, and expected volatility of 50%.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price characteristics that
are significantly different from those of traded options. Because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock rights.
The weighted-average fair values of The Advisory Board Company original options
granted during the years ended December 31, 1995, 1996, from January 1 to the
date of the Spin-Off, and during the three months ending March 31, 1997, were
$26.72, $34.11, $37.23, and $37.23 per
F-18
<PAGE>
share, respectively. The weighted-average fair values of Company options granted
from the date of the Spin-Off to December 31, 1997, and the three months ending
March 31, 1998, were $21.90 and $18.37, respectively. For purposes of pro forma
disclosures, the estimated fair value of options is amortized to expense over
the estimated service period. If the Company had used the fair value accounting
provisions of SFAS No. 123, the pro forma net loss for 1995 and 1996, would have
been approximately $9.9 million and $0.6 million, or $13.60 and $0.80 per share
(basic and diluted on a historical basis), respectively. Pro forma net income
for 1997 would have been approximately $1.0 million or $1.39 per share (basic
historical) and $1.19 per share (diluted - historical). Pro forma net loss for
the three months ending March 31, 1997, would have been approximately $0.3
million, or $0.40 per share (basic and diluted on a historical basis). Pro
forma net income for the three months ending March 31, 1998, would have been
approximately $1.7 million or $2.40 per share (basic-historical) and $1.97 per
share (diluted-historical). The provisions of SFAS No. 123 may not necessarily
be indicative of future results.
10. RECEIVABLE FROM STOCKHOLDER:
The Company holds a promissory note in the amount of $6.5 million from its
principal stockholder. The note bears interest at a rate of 7% payable
semiannually on each May 1 and November 1; the principal sum is due and
payable on October 31, 2007. The Company expects this note to be repaid in
1998 using proceeds from the initial public offering and, accordingly, has
classified it as current in the accompanying balance sheets.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of The Corporate Executive Board Company:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of The Corporate Executive Board Company (formerly The
Corporate Advisory Board Company and a division of The Advisory Board Company
until October 31, 1997) included in this registration statement and have issued
our report thereon dated July 24, 1998. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
Schedule II -- Valuation and Qualifying Accounts is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
July 24, 1998
F-20
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
(formerly The Corporate Advisory Board Company)
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
OF YEAR EXPENSES ACCOUNTS RESERVE YEAR
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year ending December 31, 1995
Allowance for doubtful accounts $ 35 $ 322 $ - $ 263 $ 94
-------- -------- --------- -------- ---------
$ 35 $ 322 $ - $ 263 $ 94
======== ======== ========= ======== =========
Year ending December 31, 1996
Allowance for doubtful accounts $ 94 $ 715 $ - $ 409 $ 400
-------- -------- --------- -------- ---------
$ 94 $ 715 $ - $ 409 $ 400
======== ======== ========= ======== =========
Year ending December 31, 1997
Allowance for doubtful accounts $400 $1,180 $ - $ 580 $1,000
-------- -------- --------- -------- ---------
$400 $1,180 $ - $ 580 $1,000
======== ======== ========= ======== =========
</TABLE>
F-21
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE
SECURITIES TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT
ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
______________
TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................
Risk Factors...................................................................
Certain Transactions Prior to the Offering.....................................
Use of Proceeds................................................................
Dividend Policy................................................................
Capitalization.................................................................
Selected Financial Data........................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operation............................................
Business.......................................................................
Management.....................................................................
Certain Relationships and Transactions.........................................
Principal and Selling Stockholders.............................................
Description of Capital Stock...................................................
Shares Eligible for Future Sale................................................
Underwriting...................................................................
Legal Matters..................................................................
Experts........................................................................
Additional Information.........................................................
Index to Financial Statements..................................................
Until , 1998 (25 days after the commencement of the Offering) all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to their unsold allotments or subscriptions.
______________ Shares
THE CORPORATE EXECUTIVE BOARD COMPANY
Common Stock
[LOGO]
______________
PROSPECTUS
_______, 1998
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Friedman, Billings, Ramsey & Co., Inc.
Goldman, Sachs & Co.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering (all of which will
be borne by the Company), are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
-------- ------
<S> <C>
Securities and Exchange Commission registration fee........ 57,525
NASD filing fee............................................ 20,000
Nasdaq listing fees........................................
Printing expenses..........................................
Accounting fees and expenses...............................
Legal fees and expenses.................................... 500,000
Blue Sky fees and expenses................................. 5,000
Transfer agent's fees and expenses.........................
Miscellaneous..............................................
Total......................................................
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his or her conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if he or she acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that, despite the
II-1
<PAGE>
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to be indemnified for such expenses
which the court shall deem proper.
Section 145 of the Delaware General Corporation Law further provides that
(i) to the extent that a former or present director or officer of a corporation
has been successful in the defense of any action, suit or proceeding referred to
in subsections (a) and (b) or in the defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith;
(ii) indemnification provided for by Section 145 shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled; and (iii)
the corporation may purchase and maintain insurance on behalf of any present or
former director, officer, employee or agent of the corporation or any person who
at the request of the corporation was serving in such capacity for another
entity against any liability asserted against such person and incurred by him or
her in any such capacity or arising out of his or her status as such, whether or
not the corporation would have the power to indemnify him or her against such
liabilities under Section 145.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Company's Certificate of Incorporation provides that a director shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. However, such provision does not eliminate or
limit the liability of a director for acts or omissions not in good faith or for
breaching his or her duty of loyalty, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. In addition, the
Bylaws of the Company contain provisions indemnifying the directors, officers,
employees and agents of the Company to the fullest extent permitted by the
Delaware General Corporation Law. Any indemnification under the Company's Bylaws
is subject to a prior determination by a majority of the directors of the
Company who are not party to the underlying action that the person seeking
indemnification has met the applicable standard of conduct.
Under the provisions of the Company's Bylaws, expenses incurred by an
officer or director in defending a civil or criminal suit or proceeding shall be
paid by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the person seeking
indemnification to repay such amounts if it is ultimately determined that he or
she is not entitled to be indemnified.
The Company may, to the fullest extent permitted by the Delaware General
Corporation Law, purchase and maintain insurance on behalf of any officer,
director, employee or agent against any liability which may be asserted against
such person.
[The Company anticipates obtaining a policy of directors' and officers'
liability insurance prior to the closing of the Offering.]
II-2
<PAGE>
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 --Form of Underwriting Agreement.*
3.1 --Second Amended and Restated Certificate of Incorporation of the Company.*
3.2 --Amended and Restated Bylaws of the Company.*
4.1 --Specimen Common Stock Certificate.*
5.1 --Opinion of Gibson, Dunn & Crutcher LLP.*
10.1 --Employment Agreement, dated ___ __, 1998, between the Company and James J. McGonigle.*
10.2 --Employment Agreement, dated ___ __, 1998, between the Company and Harold L. Siebert.*
10.3 --Employment Agreement, dated ___ __, 1998, between the Company and Michael A. D'Amato.*
10.4 --The Corporate Executive Board Company Stock-Based Incentive Compensation Plan.*
10.5 --Directors' Stock Plan.*
10.6 --1998 Stock Option Plan.*
10.7 --Cross-Indemnification Agreement, dated as of ___ __, 1998 between David G. Bradley and the Company.*
10.8 --Promissory Note, dated October 31, 1998, between David G. Bradley and the Company.
10.9 --Security Agreement, dated October 31, 1997, between the Principal Selling Stockholder and the Company.
10.10 --Administrative Services Agreement, dated as of October 31, 1997, as amended and restated
on ___ __, 1998, between The Advisory Board Company and the Company.*
10.11 --Member Contracts Agreement, dated as of October 31, 1997, between The Advisory Board Company and the Company.*
10.12 --Vendor Contracts Agreement, dated as of October 31, 1997, as amended and restated on ___ __, 1998,
between The Advisory Board Company and the Company.*
10.13 --Non-Competition Agreement, dated as of ___ __, 1998, between The Advisory Board Company
and the Company.*
10.14 --Non-Competition Agreement, dated as of ___ __, 1998, between the Company and David G.
Bradley.*
10.15 --Sublease Agreement, dated as of October 31, 1997, as amended and restated on ___ __, 1998, between
The Advisory Board and the Company.*
21.1 --List of Subsidiaries of the Registrant.
23.1 --Consent of Gibson, Dunn & Crutcher LLP (included in its opinion filed as Exhibit 5.1).*
23.2 --Consent of Arthur Andersen LLP.
24.1 --Power of Attorney (included in the signature page in Part II of the Registration
Statement).
99.1 --Consent of Persons to Become Directors Pursuant to Rule 438.*
</TABLE>
_______________________
* To be filed by amendment.
(b) Financial Statement Schedules
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted, except for Schedule II -- Valuation and Qualifying Accounts which is
provided on page F-21.
II-3
<PAGE>
ITEM 16. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia, on
July 24, 1998.
THE CORPORATE EXECUTIVE BOARD
By: /s/ James J. McGonigle
--------------------------
Name: James J. McGonigle
Title: Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Jeffrey D. Zients and Michael A. D'Amato,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to the
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James J. McGonigle President, Chief Executive Officer and July 24, 1998
- ------------------------------------
James J. McGonigle Director (Principal Executive Officer)
- ------------------------------------
/s/ Michael A. D'Amato Chief Financial Officer (Principal Financial July 24, 1998
- ------------------------------------
Michael A. D'Amato and Principle Accounting Officer)
- ------------------------------------
/s/ Jeffrey D. Zients Director July 24, 1998
- ------------------------------------
Jeffrey D. Zients
- ------------------------------------
/s/ Harold L. Siebert Director July 24, 1998
- ------------------------------------
Harold L. Siebert
- ------------------------------------
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No.
-------
<S> <C>
1.1 --Form of Underwriting Agreement.*
3.1 --Second Amended and Restated Certificate of Incorporation of the Company.*
3.2 --Amended and Restated Bylaws of the Company.*
4.1 --Specimen Common Stock Certificate.*
5.1 --Opinion of Gibson, Dunn & Crutcher LLP.*
10.1 --Employment Agreement, dated [ ], between the Company and James J. McGonigle.*
10.2 --Employment Agreement, dated [ ], between the Company and Harold L. Siebert.*
10.3 --Employment Agreement, dated [ ], 1998, between the Company and Michael A. D'Amato.*
10.4 --The Corporate Executive Board Company Stock-Based Incentive Compensation Plan.*
10.5 --Directors' Stock Plan.*
10.6 --1998 Stock Option Plan.*
10.7 --Cross-Indemnification Agreement, dated as of [ ], 1998, between David G. Bradley and the Company.*
10.8 --Promissory Note, dated October 31, 1997, between the Principal Selling Stockholder and the Company.
10.9 --Security Agreement, dated October 31, 1997, between the Principal Selling Stockholder and the Company.
10.10 --Administrative Services Agreement, dated as of October 31, 1997, as amended and restated
on July __, 1998, between The Advisory Board Company and the Company.*
10.11 --Member Contracts Agreement, dated as of October 31, 1997, between The Advisory Board Company and the
Company.*
10.12 --Vendor Contracts Agreement, dated as of October 31, 1997, as amended and restated on July
__, 1998, between The Advisory Board Company and the Company.*
10.13 --Non-Competition Agreement, dated as of [ ], between The Advisory Board Company
and the Company.*
10.14 --Non-Competition Agreement, dated as of [ ], between the Company and David G.
Bradley.*
10.15 --Sublease Agreement, dated as of October 31, 1997, as amended and restated on July __,
1998, between The Advisory Board Company and the Company.*
21.1 --List of Subsidiaries of the Registrant.
23.1 --Consent of Gibson, Dunn & Crutcher LLP (included in its opinion filed as Exhibit 5.1).*
23.2 --Consent of Arthur Andersen LLP.
24.1 --Power of Attorney (included in the signature page in Part II of the Registration
Statement).
99.1 --Consent of Persons to Become Directors Pursuant to Rule 438.*
</TABLE>
_______________________
* To be filed by amendment.
<PAGE>
Exhibit 10.8
PROMISSORY NOTE
---------------
$6,5000,000 October 31, 1997
FOR VALUE RECEIVED, the undersigned, an individual with his principal
residence at 2211 30th Street, N.W., Washington, DC 20008, promises to pay to
order of The Corporate Advisory Board Company, Inc., a corporation with its
principal place of business at 600 New Hampshire Avenue, NW, Washington, DC
20037, or at such other place as the holder thereof may from time to time
designate, the principal sum of $6,500,000, with interest at the rate of seven
percent (7%) per annum, subject to the terms and conditions herein contained.
1. The principal sum shall be due and payable on October 31, 2007.
2. Interest on the outstanding balance of the principal sum shall accrue
at the rate of seven percent (7%) per annum from October 31, 1997 until this
Note is paid in full, and shall be payable semiannually in arrears on each May 1
and November 1, beginning May 1, 1998.
3. This Note may be prepaid in whole or in part at any time without
penalty.
4. This Note is secured by, and is issued in connection with a Loan and
Security Agreement ("Security Agreement") on even date herewith.
5. Upon the occurrence of an Event of Default, as that term is defined in
the Security Agreement, and the continuation of any such Event of Default for a
period of thirty days after the delivery of written notice to the undersigned
setting forth such Event of Default, the unpaid balance of the principal and any
interest accrued thereon shall, at the option of the holder hereof, at once
become due and payable. The notice of default shall be deemed to be delivered
if delivered to the undersigned or if sent by United States certified or
registered mail to the undersigned at the address set forth or at the last
address furnished by it for such purpose.
Except as aforesaid, the undersigned hereby waives demand and
presentation for payment, notice of non-payment and dishonor, protest
and notice of protest and the benefit of any homestead exemption which
may by law be waived as to this Note.
6. Any payment by the undersigned on this Note shall be credited first to
any interest then due, and the remainder on the principal sum, and interest
shall thereupon cease to accrue upon the amount so credited on the said
principal sum.
7. All installments of principal and interest hereunder shall be payable
in lawful money of the United States.
IN WITNESS WHEREOF, the undersigned has set its hand and seal as of the
day, month and year first hereinabove written.
Debtor:
/s/ 10/31/97
- -------------------------------------------- -----------------
David G. Bradley Date
Creditor:
The Corporate Advisory Board Company, Inc.
By:
/s/ 10/31/97
- -------------------------------------------- -----------------
Jeffrey D. Zients, Executive Vice President Date
<PAGE>
Exhibit 10.9
SECURITY AGREEMENT
------------------
This Security Agreement ("Agreement") is entered into this 31st day of
October 1997 by and between The Corporate Advisory Board Company, Inc.
("Creditor") and David G. Bradley (herein referred to as the "Debtor"), with
reference to the following facts:
A. Concurrently herewith, Debtor has executed in favor of Creditor a
Promissory Note ("Note") in the aggregate principal amount of
$6,500,000.
B. Debtor desires to pledge certain collateral and proceeds as security
for the balance due under the Note on the terms and conditions set
forth on this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Debtor hereby pledges the following:
A. Pledge and Collateral. As assurance and security for the full
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payment of the Note and the faithful performance of all the covenants and
conditions to be performed by Debtor under the Note and this Agreement, Debtor
hereby pledges, grants, bargains, assigns and transfers to Creditor a security
interest in and to fifty percent of the outstanding shares of the common stock
of National Journal Group, Inc., a Delaware corporation, as of October 31, 1997,
and all substitutions, replacements and proceeds thereof, including cash
proceeds, proceeds of cash and all distributions of cash or property thereon,
such as cash dividends, stock dividends and stock splits. Such common stock and
all such proceeds are hereafter collectively referred to as the "Collateral."
B. Pledge of Proceeds. Debtor warrants and represents that Creditor,
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upon demand, shall be entitled to payment of the balance due from any proceeds
received from the sale of Collateral. To the extent under the Note that such
proceeds are not realized or are insufficient to fully pay off the balance due,
Creditor shall credit Debtor for the amount so paid and the principal amount of
the balance shall be reduced accordingly.
2. Representations and Warranties of Debtors. Debtor represents and
warrants to Creditor as follows:
(a) That except for the security interest created hereby, Debtor has
title to the Collateral, free and clear of all liens,
encumbrances and other security interests.
(b) That Debtor will be able to pay its debts as they mature, and has
not (i) admitted in writing an inability to pay debts as they
mature, (ii) made any assignment for the benefit of creditors,
(iii) applied for or consented to the appointment of a receiver
or trustee for its affairs, or (iv) been the subject of any
bankruptcy, insolvency, reorganization or liquidation proceeding.
<PAGE>
(c) That the execution, delivery and performance of this Agreement
and the Note and the consummation of the transactions
contemplated by this Agreement and the Note have been fully
authorized by Debtor, and, upon delivery, will be valid and
binding agreements and obligations of Debtor.
(d) That the execution, delivery and performance of this Agreement
and the Note, and the compliance with the terms and provisions
thereof, and the consummation of the transactions described
herein, do not and will not conflict with or result in a breach
of or constitute a default under any of the terms, conditions or
provisions of any agreement, commitment, loan agreement, note,
contract, lease, indenture, or understanding to which Debtor is a
party or by which it is bound or to which the Collateral is
subject, or result in the creation of any lien or encumbrance
upon the Collateral except for the security interest created
hereby.
3. Default. Default under this Agreement will be deemed to have occurred
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upon the happening of any of the following events:
(a) Debtor fails to pay the principal payments and accrued interest
when due in accordance with the Note.
(b) Debtor files a voluntary proceeding under the Bankruptcy Code, or
any involuntary petitions under the Bankruptcy Code are filed against the
Debtor;
(c) Any lien or other attachment is placed against the Collateral
(other than the security interest created hereby) or a Writ of Execution is
served against the Collateral; or
(d) Any representation or warranty made under this Agreement is or
becomes untrue, or Debtor breaches any covenant hereunder.
4. Remedies on Default. Upon the occurrence of a default, Creditor may
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cause the Collateral to be transferred to its name or to the name of its
nominees, and Creditor shall have all of the remedies of a secured party under
law, which rights shall include the right to sell or dispose of the Collateral,
or any part thereof, at public or private sale, and to foreclose the lien or
security interest created pursuant to this Agreement by any available judicial
procedure or without judicial process if notified to do so by Creditor. The
Collateral may then be sold on such day and at such place as determined by the
Creditor. Creditor shall deduct and retain from the proceeds of such sale or
sales all costs, expenses and charges paid or incurred on the taking, removal,
handling and sale of the Collateral, or otherwise incurred in connection
therewith, including without limitation all attorney's fees incurred by
Creditor; the balance of the proceeds shall be applied by Creditor to the
indebtedness, obligations and liabilities secured by the Collateral, in such
order and manner as Creditor may determine; and the surplus, if any, shall be
paid to the person or persons lawfully entitled to receive the same. At any
sale or sales made under this Agreement, or authorized herein, Creditor or any
person on behalf of Creditor, or any other person, may bid for and purchase the
Collateral being sold.
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<PAGE>
5. Further Documents. Debtor agrees to execute and deliver such further
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documents as may be required by Creditor to more fully perfect and secure its
position under this Agreement, including, without limitation, stock powers
separate from certificate.
6. Voting Rights and Dividends. During the term; hereof and so long as
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Debtor is not in default in the performance of any of the terms of this
Agreement or in the payment of the principal or interest under the Note, Debtor
shall have the right to receive all dividends and other distributions declared
with respect to the Collateral, and Debtor shall have the right to vote the
Collateral with respect to any and all corporate questions.
7. Assignment. The Agreement and all rights hereunder may not be
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assigned by either party without prior written notice to the nonassigning
party and any such nonconsented to assignment shall be void.
8. Notices. All notices or other communications permitted or required
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pursuant to this Agreement shall be in writing and shall be deemed given upon
deposit in the United States mail, first-class, postage prepaid, certified with
a return receipt, addressed to the last known address of the parties. Either
party shall have the right to change the place of giving notices to it by
providing written notice to the other party.
9. Litigation and Attorney's Fees. In the event any party in this
------------------------------
Agreement files against the other party to this Agreement an action for the
breach hereof or to enforce any of its rights hereunder, the prevailing party in
such action shall be entitled to recover from the losing party all expenses
incurred by it in such action, including without limitation attorney's fees.
10. Entire Agreement. This Agreement, together with the Note of even
----------------
date, constitutes the entire agreement between the parties pertaining to the
balance due under the Note. This Agreement may not be amended or modified
except by a writing executed by Creditor or Debtor.
11. Counterparts. This Agreement may be executed in counterparts, each of
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which shall constitute an original document, but which together shall constitute
one and the same instrument.
AGREED TO AND ACCEPTED THIS 31st day of October, 1997.
DEBTOR: CREDITOR:
By: The Advisory Board Company
/s/ /s/
- ----------------------------------- -------------------------------------------
David G. Bradley Jeffrey D. Zients, Executive Vice President
11/21/97 10/31/97
- ----------------------------------- -------------------------------------------
Date Date
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<PAGE>
EXHIBIT 21.1
List of Subsidiaries of the Registrant:
NONE
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
July 24, 1998
