CEB 10Q 2002 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
		For the quarterly period ended March 31, 2002.

[_]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission File Number: 000-24799

THE CORPORATE EXECUTIVE BOARD COMPANY
(Exact name of registrant as specified in its charter)


Delaware		52-2056410
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

2000 Pennsylvania Avenue, NW
Suite 6000
Washington, DC		20006
(Address of principal executive offices)		(Zip Code)

(202) 777-5000

(Registrant’s telephone number, including area code)

Not applicable.
(Former name, former address and former fiscal year, if changed, since last report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [_]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 3, 2002, we had outstanding 36,977,652 shares of Common Stock, par value $0.01 per share and had outstanding no shares of Preferred Stock, par value $0.01 per share.

THE CORPORATE EXECUTIVE BOARD COMPANY
INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION
	ITEM 1. Financial Statements.
		Condensed Balance Sheets at March 31, 2002 and
			December 31, 2001	3
		Condensed Statements of Income for the Three
			Months Ended March 31, 2002 and 2001	4
		Condensed Statements of Cash Flows for the Three
			Months Ended March 31, 2002 and 2001	5
		Notes to Condensed Financial Statements		6
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			8
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.			12
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings.			13
	ITEM 2. Changes in Securities.			13
	ITEM 3. Defaults Upon Senior Securities and Use of Proceeds.			13
	ITEM 4. Submission of Matters to a Vote of Security Holders.			13
	ITEM 5. Other Information.			13
	ITEM 6. Exhibits and Reports on Form 8-K.			13

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED BALANCE SHEETS
(In thousands, except share amounts)


					March 31, 2002		December 31, 2001

					(Unaudited)
				Assets
Current assets:
	Cash and cash equivalents				$	78,502	$	48,271
	Marketable securities					44,998		35,735
	Membership fees receivable, net					19,097		42,011
	Deferred income taxes, net					20,485		19,881
	Deferred incentive compensation					3,474		4,216
	Prepaid expenses and other current assets					3,643		3,042

		Total current assets				170,199		153,156

Deferred income taxes, net						55,462		38,639
Marketable securities						38,977		48,463
Property and equipment, net						17,161		17,260

		Total assets			$	281,799	$	257,518

			Liabilities and Stockholders’ equity
Current liabilities:
	Accounts payable and accrued liabilities				$	7,890	$	10,683
	Accrued incentive compensation					4,067		6,387
	Deferred revenues					86,819		94,683

		Total current liabilities				98,776		111,753

Other liabilities						1,959		1,781

		Total liabilities				100,735		113,534

Stockholders’ equity:
	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 36,965,040 and 34,898,060 shares issued and outstanding as of March 31, 2002, and December 31, 2001, respectively					370		349
	Additional paid-in capital					126,015		94,221
	Retained earnings					54,174		48,243
	Accumulated elements of comprehensive income					505		1,171

		Total stockholders’ equity				181,064		143,984

Total liabilities and stockholders’ equity					$	281,799	$	257,518

See accompanying notes to condensed financial statements.

THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)


			Three months ended March 31,

			2002		2001

Revenues			$	37,023	$	29,215
	Cost of services			13,517		11,243

Gross profit				23,506		17,972

Costs and expenses:
	Member relations and marketing			9,108		6,490
	General and administrative			4,221		3,881
	Depreciation			1,204		921
	Stock option and related expenses			623		1,098

		Total costs and expenses		15,156		12,390

Income from operations				8,350		5,582
Other income, net				1,217		978

Income before provision for income taxes				9,567		6,560
Provision for income taxes				3,636		2,493

Net income			$	5,931	$	4,067

Earnings per share:
	Basic		$	0.17	$	0.13
	Diluted		$	0.16	$	0.11
Weighted average shares used in the calculation of earnings per share:
	Basic			35,538		31,796
	Diluted			37,130		35,408

See accompanying notes to condensed financial statements.

THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


				Three months ended March 31,

				2002			2001

Cash flows from operating activities:
Net income				$	5,931		$	4,067
Adjustments to reconcile net income to net cash flows provided by operating activities:
		Depreciation			1,204			921
		Deferred income taxes			3,636			2,493
		Stock option repurchases			—			(3,140	)
		Stock option and related expenses			—			93
		Amortization of marketable securities premiums (discounts), net			251			198
		Changes in operating assets and liabilities:
			Membership fees receivable, net		22,914			15,852
			Deferred incentive compensation		742			218
			Prepaid expenses and other current assets		(601	)		(562	)
			Accounts payable and accrued liabilities		(3,152	)		(319	)
			Accrued incentive compensation		(2,320	)		(624	)
			Deferred revenues		(7,864	)		(3,731	)
			Other liabilities		178			54

			Net cash flows provided by operating activities		20,919			15,520

Cash flows from investing activities:
	Purchases of property and equipment				(1,105	)		(2,640	)
	Purchases of marketable securities, net				(1,100	)		(14,999	)

			Net cash flows used in investing activities		(2,205	)		(17,639	)

Cash flows from financing activities:
	Proceeds from the exercise of common stock options				11,158			10,849
	Proceeds from the issuance of common stock under the employee stock purchase plan				157			189
	Withholding of selling shareholder income tax liabilities				—			1,223
	Reimbursement of common stock offering costs				300			375
	Payment of common stock offering costs				(98	)		(205	)

			Net cash flows provided by financing activities		11,517			12,431

Net increase in cash and cash equivalents					30,231			10,312
Cash and cash equivalents, beginning of period					48,271			19,493

Cash and cash equivalents, end of period				$	78,502		$	29,805

See accompanying notes to condensed financial statements.

THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 — Description of operations

We provide “best practices” research and quantitative analysis focusing on corporate strategy, operations and general management issues. Best practices research supports senior executive decision making by identifying and analyzing 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 of our research programs have access to an integrated set of services, including best practices research studies, executive education seminars, customized research briefs and web-based access to the program’s content database and decision support tools.

Note 2 — Condensed financial statements

The accompanying condensed unaudited financial statements included herein have been prepared by us in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these condensed financial statements be read in conjunction with the financial statements and related notes as reported on our Form 10-K filed with the SEC in February 2002.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the condensed financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The condensed balance sheet presented as of December 31, 2001, has been derived from the financial statements that have been audited by our independent public accountants. The results of operations for the three months ended March 31, 2002, may not be indicative of the results that may be expected for the year ending December 31, 2002, or any other period within calendar year 2002.

Note 3 — Public offerings of common stock

In March 2002 and in March and April 2001, certain of our shareholders sold 2,100,000 and 3,035,000 shares, respectively, of our common stock in registered public offerings. We did not directly receive any proceeds from the sale of our common stock pursuant to these registered public offerings. However, we did receive cash from the exercise of common stock options in conjunction with the registered public offerings. In addition, we recognized $623,000 and $1.0 million in compensation expense reflecting additional Federal Insurance Corporation Act (“FICA”) taxes as a result of the taxable income that the employees recognized upon the exercise of non-qualified common stock options in conjunction with the registered public offerings in March 2002 and in March and April 2001, respectively. The additional FICA taxes are included within “Stock option and related expenses” on the condensed statements of income.

Note 4 — Earnings per share

Basic earnings per share was computed by dividing net income by the number of basic weighted average common shares outstanding during the period. Diluted earnings per share was 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 has been determined in accordance with the treasury-stock method. Common share equivalents consist of common shares issuable upon the exercise of outstanding common stock options. A reconciliation of basic to diluted weighted average common shares outstanding is as follows:


	Three months ended March 31,

	2002		2001

Basic weighted average common shares outstanding		35,537,587		31,795,705
Weighted average common share equivalents outstanding		1,592,117		3,611,903

Diluted weighted average shares outstanding		37,129,704		35,407,608

Note 5 — Comprehensive income (loss)

Comprehensive income (loss) is defined as net income (loss) plus the net-of-tax impact of foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income for the three months ended March 31, 2002 and 2001, was $5.3 million and $4.6 million, respectively. The accumulated elements of comprehensive income, net of tax, included within stockholders’ equity on the balance sheets are comprised solely of the change in unrealized gains (losses) on available-for-sale marketable securities. Unrealized gains, net of tax, on available-for-sale marketable securities amounted to $505,000 and $768,000 at March 31, 2002 and 2001, respectively.

Note 6 — Supplemental cash flow disclosures

For the three months ended March 31, 2002 and 2001, we recognized $20.7 million and $33.3 million, respectively, in stockholders’ equity for tax deductions associated with the exercise of non-qualified common stock options. Estimated current income tax payments for the three months ended March 31, 2002 and 2001, have been reduced by the consideration of the tax deductions associated with the exercise of non-qualified common stock options.

Note 7 — Condensed financial statement reclassifications

Certain amounts in the condensed financial statements as of and for the three-month period ended March 31, 2001, have been reclassified to conform to the presentation in the condensed financial statements as of and for the three-month period ended March 31, 2002.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q of The Corporate Executive Board Company contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those indicated by forward-looking statements include, among others, our dependence on renewals of our membership-based services, our inability to know in advance if new products will be successful, difficulties we may experience in anticipating market trends, our need to attract and retain a significant number of highly skilled employees, restrictions on selling our products and services to the health care industry, continued consolidation in the financial institution industry which may adversely impact our business, fluctuations in operating results, our potential inability to protect our intellectual property rights, our potential exposure to litigation related content, our potential exposure to loss of revenue resulting from our unconditional service guarantee, various factors that could affect the estimated income tax rate, our ability to use our existing deferred tax assets, and possible volatility of stock price. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Membership subscriptions, which are principally annually renewable agreements, are generally payable by members at the beginning of the contract term. Billings attributable to memberships in our research programs initially are recorded as deferred revenues and then recognized pro rata over the membership contract term. At any time, a member may request a refund of their membership fee for a research program, which is provided on a pro rata basis relative to the remaining term of the membership.

One measure of our business is its annualized “Contract Value,” which we calculate as the aggregate annualized revenue attributed to all agreements in effect at a given point in time, without regard to the remaining duration of any such agreement. Our experience has been that a substantial portion of members renew subscriptions for an equal or higher level each year. Contract value has increased 27.5% to $143.4 million at March 31, 2002, from $112.5 million at March 31, 2001.

Our operating costs and expenses consist of cost of services, member relations and marketing, general and administrative expenses, depreciation, and stock option and related expenses. 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, the costs of servicing and renewing existing members, compensation expense (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. Stock option and related expenses includes non-cash compensation expense related to certain stock option agreements in existence at the time of the spin-off from The Advisory Board Company and includes additional cash payroll taxes for compensation expense relating to the taxable income recognized by employees upon the exercise of non-qualified common stock options.

Other income, net consists primarily of interest income earned on a portfolio of cash, cash equivalents and marketable securities, which consists primarily of highly liquid U.S. Treasury notes and bonds and Washington, D.C. tax exempt notes and bonds.

Results of operations

The following table sets forth-certain financial data as a percentage of revenues for the periods indicated:


			Three months ended March 31,
			2002			2001

Revenues				100.0	%		100.0	%
	Cost of services			36.5			38.5

Gross profit				63.5			61.5

Costs and expenses:
	Member relations and marketing			24.6			22.2
	General and administrative			11.4			13.3
	Depreciation			3.3			3.2
	Stock option and related expenses			1.7			3.8

		Total costs and expenses		40.9			42.4

Income from operations				22.6			19.1
Other income, net				3.3			3.3

Income before provision for income taxes				25.8			22.5
Provision for income taxes				9.8			8.5

Net income				16.0	%		13.9	%

Revenues.Total revenues increased 26.7% to $37.0 million for the three months ended March 31, 2002, from $29.2 million for the three months ended March 31, 2001. The increase in revenues was attributable primarily to cross-selling additional subscriptions to existing members, adding new members, price increases and the introduction of new research programs.

Cost of services.Cost of services increased 20.2% to $13.5 million for the three months ended March 31, 2002, from $11.2 million for the three months ended March 31, 2001. The increase in cost of services was principally due to increased research staffing and related compensation costs to support new research 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 to 36.5% for the three months ended March 31, 2002, from 38.5% from March 31, 2001. This decrease was attributable to the fixed nature of a portion of the production costs of best practices research studies, as these costs are not significantly affected by growth in the number of membership subscriptions.

Gross profit trend.Historically, the gross profit margin (gross profit as a percentage of total revenues) has fluctuated based upon the growth in revenues offset by the costs 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 profit margin for the three months ended March 31, 2002, may not be indicative of future results.

Member relations and marketing.Member relations and marketing costs increased 40.3% to $9.1 million for the three months ended March 31, 2002 from $6.5 million for the three months ended March 31, 2001. The increase in member relations and marketing costs is 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. Member relations and marketing costs as a percentage of total revenues has increased to 24.6% for the three months ended March 31, 2002, from 22.2% for the three months ended March 31, 2001 with the addition of additional member relations and marketing resources to serve the expanding membership base.

General and administrative.General and administrative expenses increased 8.8% to $4.2 million for the three months ended March 31, 2002, from $3.9 million for the three months ended March 31, 2001. The increase in general and administrative expenses resulted principally from staffing increases in general management, human resources and recruiting, finance and accounting, management information systems, new business development and facilities management to support our growth.

These increases were offset by a decrease in consulting and training expenses associated with prior year investments in management information software and a decrease in costs associated with our reduced use of external personnel search firms. Although general and administrative expenses increased during the period since 2001, general and administrative expenses decreased as a percentage of revenue in 2002 due to the fixed nature of a portion of these costs, which are not significantly affected by growth in revenues.

Depreciation.Depreciation expense increased 30.7% to $1.2 million for the three months ended March 31, 2002, from $921,000 for the three months ended March 31, 2001. The increase in depreciation expense was principally due to the additional investment in leasehold improvements for additional office space in Washington, D.C., and the purchase of computer equipment and software to support organizational growth.

Stock option and related expenses.We recognized $623,000 and $1.0 million in compensation expense during the three months ended March 31, 2002 and 2001, respectively, reflecting additional Federal Insurance Corporation Act (“FICA”) taxes as a result of the taxable income that the employees recognized upon the exercise of non-qualified common stock options, primarily in conjunction with the sale of our common stock in the registered public offerings in March 2002 and March and April 2001.

In addition, we recognized $93,000 for the three months ended March 31, 2001 related to stock option agreements in existence at the time of the spin-off from The Advisory Board Company’s sole stockholder. In connection with the spin-off, we executed substitution agreements with each of our employees participating in The Advisory Board Company stock option plan. These substitution agreements resulted in compensation expense being recognized by us over the vesting period. After 2001, we will recognize no additional compensation expense related to these substitution agreements.

Other income, net.Other income, net consists primarily of interest income earned on a portfolio of cash equivalents and marketable securities. Other income, net increased 24.4% to $1.2 million for the three months ended March 31, 2001, from $978,000 for the three months ended March 31, 2001. The growth in other income, net was due primarily to the increase in interest income associated with the increased level of cash, cash equivalents and marketable securities. Cash, cash equivalents and marketable securities increased as a result of cash flows from operating activities and cash flows from financing activities further discussed in the liquidity and capital resources section below.

Provision for income taxes.We recorded a provision for income taxes of $3.6 million and $2.5 million for the three months ended March 31, 2002 and 2001, respectively. Although our effective income tax rate has remained at 38.0% for each of the three months ended March 31, 2002 and 2001, our provision for income taxes increased due to the continued growth in income before provision for income taxes.

Liquidity and Capital Resources

Cash flows from operating activities.We have financed our operations to date through funds generated from operating activities. Membership subscriptions, which are principally annually renewable agreements, are generally payable by members at the beginning of the contract term. The combination of revenue growth and advance payment of membership subscriptions has historically resulted in net positive cash flows provided by operating activities. We generated net cash flows from operating activities of $20.9 million and $15.5 million for the three months ended March 31, 2002 and 2001, respectively. For the three months ended March 31, 2002 and 2001, operating cash flows were generated within the period principally by net income, the utilization of tax benefits created by the exercise of common stock options, and the collection of membership fees receivable, partially offset by the decrease in deferred revenues. As of March 31, 2002, we had cash, cash equivalents and marketable securities of $162.5 million. We expect that out current cash, cash equivalents and marketable securities balances and anticipated net positive cash flows from operations will satisfy working capital, financing, and capital expenditure requirements for the next twelve months.

Cash flows from investing activities.We used net cash flows in investing activities of $2.2 million and $17.6 million during the three months ended March 31, 2002 and 2001, respectively. During the three months ended March 31, 2002 and 2001, investing cash flows were used within the period to purchase available-for-sale marketable securities and to purchase leasehold improvements for additional office space in Washington, D.C., computer equipment and software.

Cash flows from financing activities.We generated net cash flows from financing activities of $11.5 million and $12.4 million during the three months ended March 31, 2002 and 2001, respectively. Net cash provided by financing activities during the three months ended March 31, 2002 and 2001, was primarily attributed to the receipt of cash from the exercise of common stock options in conjunction with the sale of 2,100,000 and 3,035,000 shares of our common stock in March 2002 and March and April 2001, respectively.

At March 31, 2002 and December 31, 2001, we have no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate risk primarily through our portfolio of cash, cash equivalents and marketable securities, which is designed for safety of principal and liquidity. Cash and cash equivalents consist of highly liquid U.S. Treasury obligations with maturities of less than three months. Marketable securities consist primarily of U.S. Treasury notes and bonds and Washington, D.C. tax exempt notes and bonds. We perform periodic evaluations of the relative credit ratings related to the cash, cash equivalents and marketable 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.


PART II.		OTHER INFORMATION

ITEM 1.		Legal Proceedings. We are not currently a party to any material legal proceedings.

ITEM 2.		Change in Securities. Not applicable.

ITEM 3.		Defaults Upon Senior Securities and Use of Proceeds. Not applicable.

ITEM 4.		Submission of Matters to a Vote of Security Holders. Not applicable.

ITEM 5.		Other Information. Not applicable.

ITEM 6.		Exhibits and Reports on Form 8-K.

		(a) Exhibits: None.

		(b) Reports on Form 8-K: On February 28, 2002, we filed a Current Report on Form 8-K which included an underwriting agreement, dated February 27, 2002, among The Corporate Executive Board Company, Deutsche Banc Alex Brown Inc. and the stockholders listed therein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

The Corporate Executive Board Company

By: /s/ Clay M. Whitson

Clay M. Whitson
Chief Financial Officer

Date: May 13, 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

CEB (CEB) Inactive 10-Q2002 Q1 Quarterly report

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