<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 31, 2000
----------------
The Corporate Executive Board Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-24799 52-2056410
- ---------------------------- ------------ --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2000 Pennsylvania Ave., N.W. Washington, DC 20006
- ------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 777-5000
-----------------
- --------------------------------------------------------------------------------
(Former name and former address, if changed since last report.)
<PAGE>
Item 1. Changes in Control of Registrant.
Not Applicable.
Item 2. Acquisition or Disposition of Assets.
Not Applicable.
Item 3. Bankruptcy or Receivership
Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant.
Not Applicable.
Item 5. Other Events.
The Company's audited financial statements as of and for the three years ended
December 31, 1997, 1998 and 1999, and related Management's Discussion and
Analysis of Financial Condition and Results of Operations are set forth
below:
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders 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, 1998 and
1999, and the related statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1999.
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, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
January 31, 2000
3
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------
ASSETS 1998 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $12,232 $19,726
Marketable securities 3,872 --
Receivables:
Membership fees receivable, net 17,165 26,603
Due from stockholder 6,500 --
Due from affiliate 350 --
Other assets 383 1,318
Deferred income taxes, net 1,438 8,047
Deferred offering costs 1,251 --
Deferred incentive compensation 2,023 2,801
------- -------
Total current assets 45,214 58,495
------- -------
MARKETABLE SECURITIES -- 13,348
PROPERTY AND EQUIPMENT, NET 3,714 9,921
------- -------
Total assets $48,928 $81,764
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 5,159 $ 6,041
Accrued incentive compensation 2,661 3,877
Due to affiliate -- 41
Stock option repurchase and special
bonus plan liability 7,054 4,710
Deferred revenues 39,061 55,436
------- -------
Total current liabilities 53,935 70,105
------- -------
OTHER LIABILITIES -- 813
LONG-TERM STOCK OPTION REPURCHASE LIABILITY 3,140 --
------- -------
Total liabilities 57,075 70,918
------- -------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $0.01;
5,000,000 shares authorized, no shares
issued and outstanding -- --
Common stock, par value $0.01; 100,000,000
shares authorized and 12,504,400 and
13,569,960 shares issued and outstanding
as of December 31, 1998 and 1999, respectively 125 136
Additional paid-in-capital 2,646 269
Deferred compensation (953) (570)
Retained earnings (deficit) (9,965) 11,691
Accumulated elements of comprehensive income -- (680)
------- -------
Total stockholders' equity (deficit) (8,147) 10,846
------- -------
Total liabilities and stockholders'
equity (deficit) $48,928 $81,764
======= =======
See accompanying notes to financial statements.
4
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
REVENUES $38,669 $53,030 $70,767
Cost of services 20,036 25,373 28,602
------- ------- -------
GROSS PROFIT 18,633 27,657 42,165
------- ------- -------
COSTS AND EXPENSES:
Member relations and marketing 8,106 11,676 15,525
General and administrative 5,660 6,920 8,485
Depreciation 722 885 1,318
Stock option restructuring and repurchase
and special bonus plan 3,063 5,342 383
------- ------- -------
17,551 24,823 25,711
------- ------- -------
INCOME FROM OPERATIONS 1,082 2,834 16,454
INTEREST INCOME 122 786 1,114
------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,204 3,620 17,568
PROVISION FOR INCOME TAXES 120 361 4,322
------- ------- -------
NET INCOME $ 1,084 $ 3,259 $13,246
======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.09 $ 0.26 $ 1.00
======= ======= =======
Diluted $ 0.08 $ 0.22 $ 0.83
======= ======= =======
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION
OF EARNINGS PER SHARE:
Basic 12,504 12,504 13,223
Diluted 13,752 14,950 16,027
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997, 1998, and 1999
(In thousands, except share amounts)
Accumu-
lated
Preferred Common elements of Annual
stock stock Additional Deferred Retained compre- Compre-
-------------- ------------------ paid-in- compen- earnings hensive hensive
Shares Amount Shares Amount capital sation (deficit) income Total income
------ ------ ----------- ------ ---------- -------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- -- $ -- $ -- $ -- $ (7,411) $ -- $(7,411)
--
Distributions to stockholder -- -- -- -- -- -- (20) -- (20) $ --
Division spin-off -- -- 12,504,400 125 -- -- (7) -- 118 --
Deferred compensation pursuant to
substitution of stock options -- -- -- -- 2,646 (1,459) -- -- 1,187 --
Net income -- -- -- -- -- 1,084 -- 1,084 1,084
------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 12,504,400 125 2,646 (1,459) (6,354) -- (5,042) 1,084
=======
Distributions to stockholder -- -- -- -- -- -- (6,870) -- (6,870) --
Amortization of deferred
compensation -- -- -- -- -- 506 -- -- 506 --
Net income -- -- -- -- -- 3,259 -- 3,259 3,259
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- -- 12,504,400 125 2,646 (953) (9,965) -- (8,147) 3,259
=======
Distributions to (contributions
from) stockholder, net -- -- -- -- -- -- (6,519) -- (6,519) --
Net income - pre-termination of S
corporation status -- -- -- -- -- -- 1,555 -- 1,555 1,555
Termination of S corporation
status -- -- -- -- (14,929) -- 14,929 -- -- --
Issuance of common stock under
special bonus plan -- -- -- -- 1,440 -- -- -- 1,440 --
Issuance of common stock upon the
exercise of stock options -- -- 1,065,560 11 984 -- -- -- 995 --
Tax benefits related to the
exercise of stock options -- -- -- -- 10,128 -- -- -- 10,128 --
Amortization of deferred
compensation -- -- -- -- -- 383 -- -- 383 --
Unrealized losses on
available-for-sale marketable
securities, net of tax -- -- -- -- -- -- -- (680) (680) (680)
Net income - post-termination of S
corporation status -- -- -- -- -- -- 11,691 -- 11,691 11,691
------------------------------------------------------------------------------------------------
Balance at December 31, 1999 -- $ -- 13,569,960 $ 136 $ 269 $ (570) $11,691 $ (680) $10,846 $12,566
================================================================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,084 $ 3,259 $ 13,246
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation 722 885 1,318
Tax deductions resulting from the exercise of common
stock options -- -- 5,385
Deferred income taxes (194) (288) (1,458)
Stock option restructuring and repurchase 3,063 5,342 383
Changes in operating assets and liabilities:
Membership fees receivable, net (1,902) (1,369) (9,438)
Other assets (122) (261) (935)
Deferred incentive compensation (226) (927) (778)
Deferred revenues 9,778 7,587 16,375
Accounts payable and accrued liabilities 984 2,777 1,115
Accrued incentive compensation 365 762 1,216
Other liabilities -- -- 813
Special bonus plan -- -- (960)
-------- -------- --------
Net cash flows provided by operating activities 13,552 17,767 26,282
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) disposal of property and equipment, net (1,530) (2,086) (7,282)
Receivable from stockholder (6,500) -- 6,500
(Purchase) sale of marketable securities, net (3,754) (118) (10,610)
-------- -------- --------
Net cash used in investing activities (11,784) (2,204) (11,392)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in payable to/due from affiliate 7,189 (1,857) 391
Distributions to stockholder (20) (6,870) (4,000)
Proceeds from the exercise of common stock options -- -- 995
Payment of offering costs -- (951) (1,698)
Stock option repurchases -- (2,590) (3,084)
-------- -------- --------
Net cash provided by (used in) financing activities 7,169 (12,268) (7,396)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,937 3,295 7,494
Cash and cash equivalents, beginning of period -- 8,937 12,232
-------- -------- --------
Cash and cash equivalents, end of period $ 8,937 $ 12,232 $ 19,726
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Description of operations
The Corporate Executive Board Company (the "Company") provides "best
practices" research and analysis focusing on corporate strategy, operations and
general management issues. Best practice research identifies and analyzes
specific management initiatives, processes and strategies that have been
determined to produce the best results in solving common business problems or
challenges. 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 content database and other services.
2. Spin-off, recapitalization and initial public offering
The 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 to The Advisory Board
Company's sole stockholder (the "Spin-off"). 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 are reflected as changes in due
to/ due from 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 due to/ due from affiliate.
On February 23, 1999, 9,415,280 shares of common stock of the Company were
sold by the sole stockholder and certain optionholders in an initial public
offering (the "Initial Public Offering"). The Company did not directly receive
any of the proceeds from the sale of common stock by the selling stockholders
pursuant to the Initial Public Offering. In addition, immediately prior to the
Initial Public Offering, the Company amended and restated its certificate of
incorporation to increase the number of authorized shares of Class A Stock and
Class B Stock to 17,200 shares and 13,171,760 shares, respectively, and to
authorize 100,000,000 shares of Common Stock, and 5,000,000 shares of Preferred
Stock, each with a par value of $0.01 per share. In addition, to facilitate the
Initial Public Offering, the Company effected a 17.2-for-1 stock split of the
shares of Class A Stock and Class B Stock in the form of a stock dividend. The
Class A Stock and the Class B Stock were converted into Common Stock
contemporaneously with the Initial Public Offering. Accordingly, all share and
per share amounts have been retroactively adjusted to give effect to these
events.
3. Summary of significant accounting policies
Cash equivalents and marketable securities
Marketable securities that mature within three months of purchase are
classified as cash equivalents. Investments with maturities of more than three
months are classified as marketable securities. As of December 31, 1998 and
1999, the Company's marketable securities consisted of fixed income securities.
Effective January 1, 1999, the Company classified its marketable securities as
available-for-sale securities. Unrealized gains and losses on available-for-
sale marketable securities are excluded from net income and are included within
accumulated elements of comprehensive income within stockholders' equity
(deficit). Prior to January 1, 1999, the Company classified its marketable
securities as trading securities. The unrealized holding gains and losses at
the date the marketable securities were transferred to the available-for-sale
classification from the trading classification, have already been recognized
into earnings and will not be reversed.
Property and equipment and leasehold improvements
Property and equipment are stated at cost, less accumulated depreciation.
Replacements and major improvements are capitalized; maintenance and repairs
are charged to expense as incurred. Property and equipment depreciation expense
is calculated using the straight-line method over the estimated useful lives of
the assets, which range from five to eleven years.
8
<PAGE>
The costs of leasehold improvements are capitalized and amortized using the
straight-line method over the shorter of their useful lives or the lease term.
Recovery of 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 of an asset may not be recoverable. The Company recognizes an
impairment loss when the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset. The Company believes that no such
impairment exists as of December 31, 1999.
Revenue recognition
Membership fees are recognized ratably over the term of the related
membership, which is generally twelve months. Membership fees are generally
billable when the member signs a letter of agreement. Certain membership fees
are billed on an installment basis. The Company's policy is to record the full
amount of membership fees receivable and related deferred revenue when a member
signs a letter of agreement.
Commission expense recognition
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.
Earnings per share
Basic earnings per share is computed by dividing net income by the number
of basic weighted average common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the number of diluted
weighted average common shares outstanding during the period. The number of
weighted average common share equivalents outstanding is determined in
accordance with the treasury-stock method. Common share equivalents consist of
common shares issuable upon the exercise of outstanding common stock options.
Weighted-average shares outstanding for the year ended December 31, 1997 was
calculated assuming that the capital structure established at the date of the
Spin-off was in effect during that period. A reconciliation of basic to diluted
weighted average common shares outstanding is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Basic weighted average common
shares outstanding 12,504 12,504 13,223
Weighted average common
share equivalents outstanding 1,248 2,446 2,804
------ ------ ------
Diluted weighted average
common shares outstanding 13,752 14,950 16,027
====== ====== ======
</TABLE>
Concentrations of credit risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of membership fees receivable and marketable
securities. Although the Company believes that the diversity of its large
membership base has historically minimized the risk of incurring material
losses due to concentrations of credit risk, the Company may be exposed to a
declining membership base in periods of market downturns, severe competition or
international developments.
The Company generates revenues from members located outside the United
States. For the years ending December 31, 1997, 1998, and 1999, approximately
31%, 33%, and 31% of revenues, respectively, were generated from members
located outside the United States. Sales to customers in European countries for
the years ended December 31, 1997, 1998, and 1999 were approximately 13%,
9
<PAGE>
15%, and 15%, respectively, with no other geographic area representing more
than 10% of revenues in any period. No one member accounted for more than 2%
of revenues for any period presented.
In addition, the Company maintains a portfolio of marketable securities
which consist primarily of Washington, D.C. municipal and agency fixed income
securities. The fixed income securities are issued by institutions which
operate within many different industries. As part of its cash management
process, the Company performs periodic evaluations of the relative credit
ratings of these marketable securities.
Fair value of financial instruments
The fair value of current assets and current liabilities approximates their
carrying value due to their short maturity.
Income taxes
Deferred income taxes are determined on the asset and liability method.
Under this method, temporary differences arise as a result of the difference
between the reported amounts of assets and liabilities and their tax basis.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or the entire
deferred tax asset will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax law and tax rates on the date
of the enactment of the change.
Research and development expenses
Costs related to the research and development of new company programs are
expensed when incurred.
Reclassification of prior-years' balances
Prior-years' balances have been reclassified to conform with the current-
year presentation.
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 costs and expenses during
the reporting period. Actual results could differ from those estimates.
4. Transactions with affiliates
Administrative support and management services
The Advisory Board Company provides the Company with limited 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 expires on December 31, 2000. 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 cost allocation methodology developed approximates the cost of
internally providing or externally sourcing such services and, therefore,
represents 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 principal stockholder, 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.
10
<PAGE>
Due from (due to) affiliate
Activity in the due from/ due to affiliate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period $ 5,682 $(1,507) $ 350
Costs allocated to the Company:
The Advisory Board Company (5,502) (4,931) (1,595)
DGB Enterprises, Inc. (1,490) (1,211) --
Cash transfers from the Company to
The Advisory Board Company 4,079 14,513 3,169
Cash transfers to the Company from
The Advisory Board Company (4,276) (6,514) (1,965)
------- ------- -------
Balance at end of period $(1,507) $ 350 $ (41)
======= ======= =======
</TABLE>
5. Membership fees receivable
Membership fees receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Billed membership fees receivable $13,339 $23,328
Unbilled membership fees receivable 5,059 4,616
------- -------
18,398 27,944
Allowance for doubtful accounts (1,233) (1,341)
------- -------
Membership fees receivable, net $17,165 $26,603
======= =======
</TABLE>
6. Receivable from stockholder
The Company held a promissory note in the amount of $6.5 million from its
then sole stockholder prior to the Initial Public Offering that was due and
payable on October 31, 2007. Interest of 7% on the outstanding promissory note
balance was payable semiannually on each May 1 and November 1. The stockholder
repaid the note in 1999 using proceeds from the Initial Public Offering.
7. Property and equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Furniture, fixtures, and equipment $ 4,636 $ 8,310
Leasehold improvements 1,272 5,213
------- -------
5,908 13,523
Accumulated depreciation (2,194) (3,602)
------- -------
Property and equipment, net $ 3,714 $ 9,921
======= =======
</TABLE>
8. Income taxes
The Company was an S corporation for Federal income tax purposes until
immediately prior to the Initial Public Offering. As an S corporation, the
taxable income of the Company was passed through to
11
<PAGE>
the sole stockholder and was reported on the sole stockholder's Federal income
tax return. However, as the District of Columbia does not recognize S
corporation status, income taxes related to the District of Columbia were
provided for within the Company's financial statements prior to the Initial
Public Offering. Just prior to the Initial Public Offering, the Company
terminated its S corporation status and is now subject to Federal and state
income taxes at prevailing corporate rates. As a result, the Company recorded a
one-time deferred income tax benefit of $2.7 million due to the change in tax
status. The one-time deferred income tax benefit is reflected in net income for
the year ended December 31, 1999, as a reduction of the provision for income
taxes. If the Company had been a C corporation for U.S. Federal and state
income tax purposes since January 1, 1997 and recorded income taxes using an
annual effective rate of 41.0%, pro forma net income and basic and diluted
earnings per share would have been $0.7 million (unaudited), $0.06 (unaudited)
and $0.05 (unaudited) for the year ended December 31, 1997, $2.1 million
(unaudited), $0.17 (unaudited) and $0.14 (unaudited) for the year ended
December 31, 1998, and $10.4 million (unaudited), $0.78 (unaudited) and $0.65
(unaudited) for the year ended December 31, 1999.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Current $ 314 $ 649 $ 5,780
Deferred (194) (288) (1,458)
----- ----- -------
Provision for income taxes $ 120 $ 361 $ 4,322
===== ===== =======
</TABLE>
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. Federal income tax statutory rates to income
before provision for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Statutory U.S. Federal income
tax rate 35.0%
State income tax, net of U.S.
Federal income tax benefit 6.5
Termination of S corporation status (15.6)
Phase-in rate differential (4.0)
Other permanent differences 2.7
-----
Effective tax rate 24.6%
=====
</TABLE>
The statutory state and effective income tax rates reflected in the
provision for income taxes are both 9.975% for the years ended December 31,
1997 and 1998.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred compensation agreements $1,167 $1,608
Tax deduction resulting from the exercise
of common stock options -- 4,744
Financial reporting reserves 123 568
Stock option restructuring and repurchase 265 1,050
Employee benefits 20 301
Unrealized losses on available-for-sale
securities -- 454
Other 65 484
------ ------
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Total deferred tax assets 1,640 9,209
------ ------
Deferred tax liabilities:
Deferred incentive compensation 202 1,162
------ ------
Deferred tax assets, net $1,438 $8,047
====== ======
</TABLE>
Management believes that the Company likely will utilize these net deferred
tax assets to reduce future income tax expense.
9. Comprehensive income (loss)
Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Other comprehensive income (loss) refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income (loss), but excluded from net income
(loss). For the year ended December 31, 1999, the element within comprehensive
income consists solely of unrealized losses on available-for-sale securities.
At December 31, 1999, unrealized losses on available-for-sale securities
amounted to approximately $1.1 million. The related tax effect allocated to the
unrealized losses on available-for-sale securities included in comprehensive
income is approximately $454,000. There was no difference between net income
and comprehensive income for the years ended December 31, 1997 and 1998.
10. Defined contribution 401(k) plan
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 were
approximately $79,000, $112,000 and $159,000, during the years ending December
31, 1997, 1998, and 1999, respectively. In September 1998, the Company
established a defined contribution 401(k) Plan (the ''New Plan'') with the same
provisions as The Advisory Board Company Plan. As of September 1, 1998,
participants' accounts were transferred to the New Plan and subsequent
participant and Company contributions were made directly to the New Plan.
11. 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 equal to at least 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 ("Liquid Markets 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 Liquid Markets 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
13
<PAGE>
of $55 per option, minus the exercise price, in two installments (25% no later
than 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 Liquid Markets
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.
In December 1998, the Company amended the Liquid Markets Agreements
relating to its employees by eliminating the future employment requirements.
The Company recognized approximately $1.8 million and $2.4 million in
compensation expense related to the Liquid Markets Agreements in years 1997,
and 1998, respectively. There are no earnings charges subsequent to December
31, 1998, related to these agreements. The Company's obligation under the
Liquid Markets Agreements is reflected in stock option repurchase and special
bonus plan liability in the accompanying balance sheets. At December 31, 1999,
the future cash commitments related to the Liquid Markets Agreements were
approximately $4.7 million. In January 2000, the Company paid approximately
$1.6 million in accordance with the Liquid Markets Agreements.
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 generally become
exercisable 50% in February 2000, 30% in February 2001 and 20% in February
2002. The Current Plan provides for the issuance of options to purchase up to
5,504,000 shares of common stock. As of December 31, 1999, approximately
4,273,320 shares had been issued or were subject to Options under the Current
Plan. The Options expire between April 2001 and March 2009.
The terms of the Substitution Agreement resulted in a new measurement date
for 1,855,880 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 and special bonus plan
in the accompanying statements of income and was approximately $1.3 million,
$500,000, and $380,000 for the years ending December 31, 1997, 1998, and 1999,
respectively. The Company will continue to recognize compensation expense
related to certain substitution agreements in the years ending 2000 and 2001.
The recognition of compensation expense was not required for the remaining
1,421,993 options outstanding at the time of the Spin-off.
1999 Stock Option Plan
On February 18, 1999, the Company adopted the 1999 Stock Option Plan
("1999 Plan"), which reserves 1,892,000 shares of common stock for issuance.
During 1999, the Company granted 738,500 common stock options under the 1999
Plan at a weighted average exercise price of $19.60 per share.
Directors' Stock Option Plan
On December 14, 1998, the Company adopted the Directors' Stock Plan
("Directors' Plan"), which reserves 430,000 shares of common stock for
issuance. During 1999, the Company granted 36,120 common stock options under
the Directors' Plan at a weighted average exercise price of $14.24 per share.
14
<PAGE>
Transactions
The following table summarizes the changes in common stock options under
employee common stock option plans described above:
<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, 1996 ........... 174,475 $15.00-$70.00 $49.15
Options granted .......................... 17,500 74.00 74.00
Options sold under Liquid Markets
Agreement ................................ (18,000) 15.00-30.00 17.92
Options cancelled ........................ (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, related substitution and
recapitalization ......................... 3,277,873 $ 0.06-$1.28 $ 0.77
Options granted .......................... 1,407,407 2.03-2.73 2.18
---------- ------
Outstanding at December 31, 1997 ........... 4,685,280 0.06-2.73 1.19
Options granted .......................... 865,160 2.73-14.24 7.30
Options cancelled ........................ (211,560) 2.03-2.73 2.14
---------- ------
Outstanding at December 31, 1998 ........... 5,338,880 0.06-14.24 2.13
Options granted .......................... 745,500 19.00-38.13 19.60
Options cancelled ........................ (7,000) 19.00 19.00
Options exercised ........................ (1,065,560) 0.93 0.93
---------- ------------- ------
Outstanding at December 31, 1999 ........... 5,011,820 $0.06-$38.13 $4.96
========== ============= ======
</TABLE>
Exercise prices for employee stock options outstanding at December 31, 1999,
are as follows:
<TABLE>
<CAPTION> Weighted-
Average
Number Outstanding Remaining Weighted-
Range of as of Contractual Average
Exercise Prices December 31, 1999 Life-Years Exercise Price
--------------- ----------------- ---------- --------------
<S> <C> <C> <C>
$0.06--$0.06 172,000 3.33 $ 0.06
0.29--0.41 696,600 3.33 0.31
0.58--0.87 447,200 3.33 0.75
0.93--1.28 896,513 3.82 0.71
2.03--2.03 963,647 3.69 2.03
2.73--3.11 476,440 3.33 2.88
6.98--6.98 448,920 3.87 6.98
14.24--14.24 172,000 3.58 14.24
19.00--19.00 686,000 9.13 19.60
23.38--38.13 52,500 9.38 27.44
--------------- --------- ---- ------
$0.06--$38.13 5,011,820 4.40 $ 4.96
=============== ========= ---- ------
</TABLE>
As of December 31, 1999, 448,040 options with a weighted average exercise
price of $1.15 are exercisable.
Accounting for stock based compensation
The Company has elected to account for stock and stock rights in accordance
with Accounting Principles Board Opinion number 25, Accounting for Stock Issued
to Employees (APB No. 25). However, pro forma information regarding net income
is required by Financial Accounting Standards
15
<PAGE>
Number 123, Accounting for Stock Based Compensation (FAS No. 123) if the
provisions of FAS No. 123 are not elected to be adopted.
Under the FAS No. 123 pro forma disclosure provisions, the fair value of
options granted subsequent to December 15, 1995, has been estimated using the
Black-Scholes option valuation model. 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 the Company's stock rights.
The fair value of options granted during the years ended December 31, 1997,
1998 and 1999 was estimated using the Black-Scholes option valuation model with
the following weighted-average assumptions: risk free interest rate of 5.5%,
5.5% and 6.5%, respectively; no dividend yield for any year; weighted-average
expected lives of the option of three years, three years and five years,
respectively; and expected volatility of 50%, 50% and 60%, respectively.
The weighted-average fair value of The Advisory Board Company original
options granted in 1997 during the period January 1 to the date of the Spin-off
was $2.16 per share, the weighted-average fair value of Company options granted
from the date of the Spin-off to December 31, 1997 was $1.27 per share. The
weighted average fair value of Company options granted during the years ended
December 31, 1998 and 1999 was $3.19 per share and $10.03 per share,
respectively. For purposes of pro forma disclosures, the estimated fair value
of options is amortized to expense over the estimated service period. Under
the FAS No. 123 pro forma disclosure provisions, pro forma net income for 1997
would have been approximately $1.6 million or $0.13 per share (pro forma basic)
and $0.11 per share (pro forma diluted), pro forma net income for 1998 would
have been approximately $1.6 million or $0.13 per share (pro forma basic) and
$0.10 per share (pro forma diluted), and pro forma net income for 1999 would
have been approximately $9.8 million or $0.74 per share (pro forma basic) and
$0.61 per share (pro forma diluted). The provisions of FAS No. 123 may not
necessarily be indicative of future results.
12. Special bonus plan
In December 1998, the Company and its sole stockholder agreed to pay a
special bonus to selected employees in an amount totaling $2.4 million. The
special bonus was paid at the Initial Public Offering -- 60% in stock owned by
the sole stockholder and 40% in cash by the Company. The Company recognized
$2.4 million in expense related to this plan in 1998.
13. Supplemental cash flows disclosures
Income taxes paid during the years ended December 31, 1997, 1998 and 1999,
amounted to $90,000, $470,000 and $260,000, respectively. For the year ended
December 31, 1999, the Company recognized $10.1 million in stockholders' equity
(deficit) for tax deductions associated with the exercise of non-qualified
stock options. Estimated current income tax payments for the year ended
December 31, 1999 have been reduced by the consideration of the tax deductions
associated with the exercise of non-qualified stock options.
In addition, in connection with the Initial Public Offering, the sole
stockholder gave $1.4 million in shares of common stock to selected employees
to satisfy a portion of the special bonus plan liability.
14. Commitments and contingencies
Operating Leases
The Company leases office facilities in the United States and the United
Kingdom expiring on various dates over the next eight years. The lease
agreements include provisions for rental escalations based on the Consumer
Price Index and require the Company to pay for executory costs such as taxes
16
<PAGE>
and insurance. Future minimum rental payments under non-cancelable operating
leases, excluding executory costs are as follows (in thousands):
Year Ending
December 31,
------------
2000 $ 2,736
2001 3,165
2002 3,225
2003 3,296
2004 3,320
Thereafter 15,858
-------
Total $31,600
=======
Rent expense charged to operations during the fiscal years ended December
31, 1997, 1998, and 1999, was approximately $1.6 million, $2.4 million, and
$3.6 million, respectively. The Company obtained a $1.3 million Letter of
Credit Agreement to provide a security deposit for the office space lease. The
Company's cash, accounts receivable and property and equipment collateralize
the Letter of Credit Agreement.
15. Quarterly financial data (unaudited)
Unaudited summarized financial data by quarter for the years ending
December 31, 1998 and 1999 is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998
Quarter Ended
-------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $11,598 $12,909 $13,732 $ 14,791
Gross profit 6,180 6,671 7,494 7,312
Income before provision (benefit)
for income taxes 2,051 1,851 1,932 (2,213)
Net income (loss) $ 1,847 $ 1,681 $ 1,713 ($1,984)
Earnings per share:
Basic $ 0.15 $ 0.13 $ 0.14 ($0.16)
Diluted $ 0.13 $ 0.11 $ 0.11 ($0.13)
</TABLE>
<TABLE>
<CAPTION>
1999
Quarter Ended
-------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $15,703 $16,700 $18,414 $ 19,950
Gross profit 8,950 9,952 11,324 11,939
Income before provision for income
taxes 3,464 3,987 4,811 5,306
Net income $ 4,867 $ 2,332 $ 2,863 $ 3,184
Earnings per share:
Basic $ 0.38 $ 0.18 $ 0.21 $ 0.23
Diluted $ 0.31 $ 0.15 $ 0.18 $ 0.19
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders 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 January 31, 2000. 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.
January 31, 2000
18
<PAGE>
The Corporate Executive Board Company
Schedule II--Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Deductions
Beginning Costs and Other from Balance at
of Year Expenses Accounts Reserve End of Year
------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Year ending December 31, 1997
Allowance for doubtful accounts....... $ 400 $1,180 $ -- $ 580 $1,000
------ ------ ---------- ------ ------
$ 400 $1,180 $ -- $ 580 $1,000
====== ====== ========== ====== ======
Year ending December 31, 1998
Allowance for doubtful accounts....... $1,000 $1,409 $ -- $1,176 $1,233
------ ------ ---------- ------ ------
$1,000 $1,409 $ -- $1,176 $1,233
====== ====== ========== ====== ======
Year ending December 31, 1999
Allowance for doubtful accounts........ $1,233 $1,851 $ -- $1,743 $1,341
------ ------ ---------- ------ ------
$1,233 $1,851 $ -- $1,743 $1,341
====== ====== ========== ====== ======
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion and analysis and the accompanying financial statements
present our results of operations as if we had operated as a stand-alone entity
in accordance with the accounting rules prescribed for "carve-out" financial
statements. We were incorporated on September 11, 1997. Our business was
operated as a division of The Advisory Board Company until October 31, 1997 when
the business was contributed to us and spun-off to The Advisory Board Company's
sole stockholder. On February 23, 1999, certain of our stockholders sold
9,415,280 shares of our common stock in an initial public offering.
Subscription memberships, which are annually renewable contracts, are
generally payable by members at the beginning of the contract term. Billings
attributable to our subscription programs are recorded initially as deferred
revenues and then recognized pro rata over the subscription contract term.
Over the last three years, our revenues have grown at a compound annual
growth rate of 37.4% from $27.3 million in 1996 to $70.8 million in 1999, while
costs have grown at a compound annual growth rate of 25.4% from $27.5 million in
1996 to $54.3 million in 1999, resulting in operating losses prior to 1997 and
income from operations of $1.1 million, $2.8 million and $16.5 million for 1997,
1998 and 1999. We attribute the growth in revenues to an increase in the number
of memberships which has been driven primarily by new sales for existing
subscription programs and the introduction of new subscription programs. The
increase in costs is a function of the growth in memberships and subscription
programs and investments in certain administrative functions. Stock option
restructuring and repurchase charges also affect costs as further explained
below.
One measure of our business is our annualized "Contract Value," which we
calculate as the aggregate annualized subscription membership revenue attributed
to all subscription membership agreements in effect at a given point in time
without regard to the remaining duration of any such agreement, including an
estimate of pending subscription membership renewals and an estimate of members
who will discontinue their subscription membership prior to their annual renewal
date in the subsequent year. Our experience is that a substantial portion of
members renews subscriptions for an equal or higher level each year. Contract
Value has grown at a compound annual growth rate of 31.3% over the past three
years and was $80.6 million at December 31, 1999.
Our operating costs and 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 our 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 include the costs of acquiring new members and
renewing existing members and also include 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.
Results of Operations
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
20
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
--------- ----------- ----------
<S> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0%
Cost of services.......................................... 51.8 47.8 40.4
--------- ----------- ----------
Gross profit.............................................. 48.2 52.2 59.6
Costs and expenses:
Member relations and marketing............................ 21.0 22.0 21.9
General and administrative................................ 14.6 13.1 12.0
Depreciation.............................................. 1.9 1.7 1.9
Stock option restructuring and repurchase................. 7.9 10.1 0.5
--------- ----------- ----------
Total costs and expenses.............................. 45.4 46.9 36.3
--------- ----------- ----------
Income from operations..................................... 2.8 5.3 23.3
Interest income............................................ 0.3 1.5 1.6
--------- ----------- ----------
Income before provision for income taxes................... 3.1 6.8 24.9
Provision for income taxes................................. 0.3 0.7 6.2
--------- ----------- ----------
Net income................................................. 2.8% 6.1% 18.7%
========= =========== ==========
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenues. Total revenues increased 37.1% from $38.7 million for 1997 to
$53.0 million for 1998, and 33.4% to $70.8 million for 1999. The increase in
revenues was primarily attributable to increased sales of subscriptions for
existing research programs, the introduction of new subscription programs and,
to a lesser degree, price increases. We introduced two new subscription
programs in 1997, one new subscription program in 1998 and two new subscription
programs in 1999.
Cost of services. Cost of services increased 26.6% from $20.0 million for
1997 to $25.4 million for 1998, and 12.7% to $28.6 million for 1999. The
increase in cost of services was principally due to increased research staffing
and related compensation costs to support the introduction of new subscription
programs and an increase in short answer research and executive education
services staffing to serve the growing membership base across all programs. Cost
of services as a percentage of revenues decreased from 51.8% for 1997 to 47.8%
for 1998, and to 40.4% for 1999. This decrease was attributable to the fixed
nature of the production costs of best practices research studies, as growth in
the number of subscription memberships does not significantly affect these
costs.
Member relations and marketing. Member relations and marketing costs
increased 44.0% from $8.1 million for 1997 to $11.7 million for 1998, and 33.0%
to $15.5 million for 1999. The increase in member relations and marketing costs
was primarily due to the increase in sales staff and related costs, the increase
in commission expense associated with increased revenues, and the increase in
member relations personnel and related costs to serve the expanding membership
base. Although we have added member relations and marketing resources to
increase revenues, member relations and marketing costs have remained largely
consistent as a percentage of total revenues from 1997 to 1999.
General and administrative. General and administrative expenses increased
22.3% from $5.7 million for 1997 to $6.9 million for 1998, and 22.6% to $8.5
million for 1999. The increase in general and administrative expenses resulted
primarily from staffing increases in general management, human resources and
recruiting, finance and accounting, management information systems, and
facilities management to support our overall growth. Although general and
administrative expenses have increased, general and administrative expenses have
decreased as a percentage of total revenues from 1997 to 1999 due to the
relatively fixed nature of many of these costs.
Depreciation. Depreciation expense increased 22.6% from $0.7 million for
1997 to $0.9 million for 1998, and 48.9% to $1.3 million for 1999. The increase
in depreciation expense was due to purchases of computer and telephone
equipment, software and office furniture and capitalization of leasehold
improvements for the new office facilities required to support organizational
growth.
Stock option restructuring and repurchase and special bonus plan. We
recognized $3.1 million, $2.9 million, and $0.4 million for 1997, 1998 and 1999
related to stock option agreements in existence at the time of the spin-off. In
connection with the spin-off, we executed substitution agreements with each of
our employees
21
<PAGE>
participating in The Advisory Board Company stock option plan. These
substitution agreements resulted in compensation expense being recognized by us
over the vesting period. We will continue to recognize compensation expense
related to certain substitution agreements estimated at $0.4 million in 2000 and
$0.2 million in 2001. In addition, in December 1998, we and our principal
stockholder agreed to make payments in an aggregate amount of $2.4 million to
selected employees under a special bonus plan, and we recorded the full amount
of that charge at that time.
Provision for income taxes. We recorded a provision for income taxes of
$0.1 million, $0.4 million, and $4.3 million for 1997, 1998 and 1999. Prior to
February 22, 1999, we were treated as an S corporation for Federal income tax
purposes and recognized income taxes only related to the District of Columbia.
However, just prior to our initial public offering, we terminated our S
corporation status and are now subject to Federal and state income taxes at
prevailing corporate rates. The difference in the effective income tax rates for
1997, 1998, and 1999 primarily reflects the termination of the S corporation
status just prior to the initial public offering in February 1999 and the
benefit of Federal income tax incentives associated with the location of our new
office facilities. If we had elected to be taxed under subchapter C of the
Internal Revenue Code for U.S. Federal and state income tax purposes beginning
January 1, 1997 and recorded income tax expense using an annual effective rate
of 41.0%, pro forma net income and basic and diluted earnings per share would
have been $0.7 million, $0.06 and $0.05 for 1997, $2.1 million, $0.17 and $0.14
for 1998 and $10.4 million, $0.78 and $0.65 for 1999.
Gross profit trend. Historically, the gross margin (gross profit as a
percentage of total revenues) has fluctuated based upon the growth in revenues
offset by the cost of delivering best practices research studies, the timing of
executive education seminars, the volume of customized research briefs and the
hiring of personnel. Accordingly, the gross margin for 1999 may not be
indicative of future results.
Liquidity and Capital Resources
We have financed our operations to date through funds generated from
operating activities. Subscription memberships, which are annually renewable
contracts, are generally payable by members at the beginning of the contract
term. The combination of revenue growth and advance payment of subscription
memberships has resulted historically in operating activities generating net
positive cash flows. We generated net cash flows from operating activities of
$13.6 million, $17.8 million and $26.3 million for 1997, 1998 and 1999. For
1997 and 1998, operating cash flow was generated primarily by increased revenues
and related changes in the balance sheet accounts. For 1999, operating cash
flow was generated primarily by increased revenues, the use of tax deductions
associated with the exercise of non-qualified stock options and related changes
in the balance sheet accounts. As of December 31, 1998 and 1999, we had cash,
cash equivalents and marketable securities of $16.1 million and $33.1 million.
Management expects that its current cash and cash equivalents and marketable
securities balances and net positive cash flows from operations will satisfy
working capital, financing activities and capital expenditure requirements for
at least the next 12 months.
Net cash flows used in investing activities during 1997, 1998 and 1999 were
$11.8 million, $2.2 million and $11.4 million. Net cash flows used in investing
activities during 1997 were attributable to the additional investment in
property and equipment of $1.5 million, the lending of $6.5 million under a note
agreement to our previous sole stockholder and the purchase (sale) of marketable
securities, net of $3.8 million. Net cash flows used in investing activities
during 1998 were attributable primarily to the additional investment in property
and equipment of $2.1 million. Net cash flows used in investing activities
during 1999 related to the additional investment in property and equipment of
$7.3 million and the purchase (sale) of marketable securities of $10.6 million
offset by the repayment of a note receivable from our previous sole stockholder.
Net cash flows provided by financing activities during 1997 were $7.2
million. Net cash flows used in financing activities during 1998 and 1999 were
$12.3 million and $7.4 million. Net cash flows provided by financing activities
during 1997 were attributable to the administrative and facilities management
services provided to us by The Advisory Board Company. Amounts owed to or to be
received from The Advisory Board Company are recorded in the due to/due from
affiliate account. Net cash flows used in financing activities during 1998 were
attributable to the payment to The Advisory Board Company for the administrative
and facilities management services provided to us, the distribution to our
previous sole stockholder of $6.9 million to pay income taxes on our S
corporation earnings and to distribute our estimated undistributed taxed or
taxable
22
<PAGE>
earnings, and the payment of $2.6 million for stock option agreements with
certain employees prior to the spin-off relating to the repurchase of stock
options at fixed amounts. Net cash flows used in financing activities during
1999 were attributable to agreements with certain employees prior to the spin-
off relating to the repurchase of stock options at fixed amounts. We paid $3.1
million related to these agreements in 1999, and are obligated to pay an
additional $4.7 million in 2000. We also distributed $4.0 million to our
previous sole stockholder. In addition, we paid $1.7 million in expenses related
to our initial public offering, which is treated for accounting purposes as a
distribution to our previous sole stockholder.
We have obtained a commitment for a $10.0 million, 12-month revolving line
of credit from a commercial bank. In addition, we have entered into a $1.3
million letter of credit agreement, expiring June 2003, with a commercial bank
to provide a security deposit for our office space lease. We pledged certain of
our assets as collateral under the letter of credit agreement.
Market Risk
We are exposed to interest rate risk primarily through our portfolio of
cash equivalents and marketable securities, which is designed for safety of
principal and liquidity and consists primarily of Washington, D.C. municipal and
agency fixed income securities. This portfolio is subject to inherent interest
rate risk as investments mature and are re-invested at current market interest
rates. We currently do not use derivative financial instruments to adjust our
portfolio risk or income profile.
Item 6. Resignations of Registrant's Directors.
Not Applicable.
Item 7. Financial Statements and Exhibits.
(c) Exhibits
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
Item 8. Change in Fiscal Year.
Not Applicable.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
The Corporate Executive Board Company
-------------------------------------
(Registrant)
Date: January 31, 2000 /s/ Clay M. Whitson
---------------- -------------------------
Clay M. Whitson
Chief Financial Officer
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
Exhibit 23 Consent of Arthur Andersen LLP
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated January 31, 2000 in this Form 8-K which is incorporated by
reference in the Registration Statement File No. 333-74145.
Washington, DC /s/ ARTHUR ANDERSEN LLP
January 31, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information obtained from the Corporate
Executive Board Company financial statements as of and for the period ended
December 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,726
<SECURITIES> 13,348
<RECEIVABLES> 26,603
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,495
<PP&E> 9,921
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,764
<CURRENT-LIABILITIES> 70,105
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 10,710
<TOTAL-LIABILITY-AND-EQUITY> 81,764
<SALES> 70,767
<TOTAL-REVENUES> 70,767
<CGS> 28,602
<TOTAL-COSTS> 54,313
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,568
<INCOME-TAX> 4,322
<INCOME-CONTINUING> 13,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,246
<EPS-BASIC> 1.00
<EPS-DILUTED> 0.83
</TABLE>
