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) February 20, 2001
-----------------------------------------
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 Avenue, N.W. Washington, D.C. 20006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (202) 777-5000
---------------------------------------
________________________________________________________________________________
(Former name and former address, if changed since last report.)
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 December 31, 1999 and 2000
and for each of the three years in the period ended December 31, 2000, and
related Management's Discussion and Analysis of Financial Condition and
Results of Operations are set forth below:
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide "best practices" research and analysis focusing on corporate
strategy, operations and general management issues. Best practices 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 web-based access to the program's content
database and decision support tools.
We were incorporated on September 11, 1997, under the laws of the State of
Delaware. Our business was operated as a division of The Advisory Board
Company, a Maryland corporation, 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 18,830,560
shares of our common stock in an initial public offering. In February 2000,
certain of our stockholders sold 11,023,030 shares of our common stock in a
secondary public offering. We did not directly receive any proceeds from the
sale of our common stock pursuant to the initial public offering or secondary
offering. However, we did receive cash from the exercise of employee common
stock options in conjunction with the sale of our common stock in the initial
public offering and secondary offering. Subsequent to the sale of common stock
in the secondary offering, the former sole stockholder owns no shares of our
common stock.
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 initially are recorded 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 35.2% from $38.7 million in 1997 to $95.5 million in 2000,
while costs have grown at a compound annual growth rate of 24.9% from $37.6
million in 1997 to $73.3 million in 2000. The increase in revenues was
primarily attributable to cross-selling additional subscriptions to existing
members, adding new members, price increases, and the introduction of new
subscription programs. The increase in costs has been driven principally by
the increase in the number of employees required to support subscription
growth. Stock option and related expenses and special bonus plan also has
affected costs as further explained below.
One measure of our business is its 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.
Our experience has been that a substantial portion of members renew
subscriptions for an equal or higher level each year. Contract Value has grown
at a compound annual growth rate of 32.9% over the past three years and was
$108.5 million at December 31, 2000.
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 and special bonus plan. 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 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 and special bonus
plan 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, a special bonus to selected employees and additional payroll
3
taxes for compensation expense relating to the taxable income recognized by
employees upon the exercise of non-qualified common stock options.
Results of Operations
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
Year Ended
December 31,
-------------------
1998 1999 2000
----- ----- -----
Revenues.................................................. 100.0% 100.0% 100.0%
Cost of services........................................ 47.8 40.4 37.8
----- ----- -----
Gross profit.............................................. 52.2 59.6 62.2
Costs and expenses:
Member relations and marketing.......................... 22.0 21.9 22.2
General and administrative.............................. 13.1 12.0 12.6
Depreciation............................................ 1.7 1.9 2.7
Stock option and related expenses and special bonus
plan................................................... 10.1 0.5 1.5
----- ----- -----
Total costs and expenses.............................. 46.9 36.3 39.0
----- ----- -----
Income from operations.................................... 5.3 23.3 23.2
Other income, net......................................... 1.5 1.6 2.4
----- ----- -----
Income before provision for income taxes.................. 6.8 24.9 25.6
Provision for income taxes................................ 0.7 6.2 10.0
----- ----- -----
Net income................................................ 6.1% 18.7% 15.6%
===== ===== =====
Years Ended December 31, 1998, 1999 and 2000
Revenues. Total revenues increased 33.4% from $53.0 million for 1998 to
$70.8 million for 1999, and 34.9% to $95.5 million for 2000. 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 subscription programs. The average subscription price increased 5.7% in
1998, 6.9% in 1999, and 6.0% in 2000. We introduced one new subscription
program in 1998, two new subscription programs in 1999 and three new
subscription programs in 2000.
Cost of services. Cost of services increased 12.7% from $25.4 million for
1998 to $28.6 million for 1999, and 26.2% to $36.1 million for 2000. 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 faculty to serve the growing membership base across all programs.
Cost of services as a percentage of revenues decreased from 47.8% for 1998 to
40.4% for 1999, and to 37.8% for 2000. 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 33.0% from $11.7 million for 1998 to $15.5 million for 1999, and
36.8% to $21.2 million for 2000. 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. Although we have added member relations and
marketing resources to increase revenues, member relations and marketing costs
have remained relatively consistent as a percentage of total revenues from
1998 to 2000.
4
General and administrative. General and administrative expenses increased
22.6% from $6.9 million for 1998 to $8.5 million for 1999, and 41.7% to $12.0
million for 2000. 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, and
facilities management to support our overall growth. Although general and
administrative expenses increased, general and administrative expenses
decreased as a percentage of total revenues from 1998 to 1999 due to the
relatively fixed nature of many of these costs. The increase of general and
administrative expenses as a percentage of total revenue for 2000 was due to
the additional consulting and training expenses associated with investments in
management information software.
Depreciation. Depreciation expense increased 48.9% from $0.9 million for
1998 to $1.3 million for 1999, and 95.2% to $2.6 million for 2000. The
increase in depreciation expense resulted from purchases of computer and
telephone equipment, office furniture and leasehold improvements for new
office facilities and investments in management information software.
Stock option and related expenses and special bonus plan. We recognized $2.9
million, $0.4 million and $0.4 million for 1998, 1999 and 2000, 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 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
$0.2 million in 2001. 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. In addition, in 2000, we recognized $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 common stock options, primarily in conjunction with the
secondary offering in February 2000.
Other income, net. Other income, net consists primarily of interest income
earned on a portfolio of cash equivalents and marketable securities, the
realized gain (loss) on the sale of marketable securities and the realized
loss on the write-off of fixed assets. Other income increased 41.7% from $0.8
million for 1998 to $1.1 million for 1999, and 103.1% to $2.3 million in 2000.
The growth in other income was due primarily to the increase in interest
income associated with the increased level of cash equivalents and marketable
securities. 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 $0.4
million, $4.3 million and $9.5 million for 1998, 1999 and 2000. 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.
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 1998,
1999 and 2000 primarily reflects the termination of the S corporation status
just prior to the initial public offering in February 1999 offset by the
benefit of Federal income tax incentives associated with the location of our
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, 1998 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 $2.1 million, $0.09 and $0.07 for 1998 and $10.4 million, $0.39 and
$0.32 for 1999.
Liquidity and Capital Resources
Cash flows from operating activities. 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 net income
growth and advance payment of subscriptions has resulted historically in
operating activities generating net positive cash flows. We generated net cash
flows from operating activities of $17.8 million, $26.3 million and $40.0
million for 1998,
5
1999 and 2000. For 1998, operating cash flow was generated primarily by the
increase in net income and the growth in deferred revenues, partially offset
by the growth in accounts receivable. For 1999 and 2000, operating cash flow
was generated primarily by the increase in net income, the utilization of tax
benefits created by the exercise of common stock options, and the growth in
deferred revenues, partially offset by the growth in membership fees
receivable. As of December 31, 1999 and 2000, we had cash, cash equivalents
and marketable securities of $33.1 million and $69.4 million. Management
expects that our current cash, cash equivalents and marketable securities
balances and net positive cash flows from operations will satisfy capital
expenditure requirements for at least the next 12 months.
Cash flows from investing activities. Net cash flows used in investing
activities during 1998, 1999 and 2000 were $2.2 million, $11.4 million, and
$44.3 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, net, of $10.6 million offset
by the repayment of a note receivable from our previous sole stockholder in
the amount of $6.5 million. Net cash flows used in investing activities during
2000 related to the additional investment in property and equipment of $9.3
million and the purchase (sale) of marketable securities, net, of $35.0
million.
Cash flows from financing activities. 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 2000 were $4.1 million. Net cash
flows used in financing activities during 1998 were attributable to the
payment of $1.9 million to The Advisory Board Company for the administrative
and facilities management services provided to us. We also made distributions
to our previous sole stockholder of $6.9 million and $4.0 million in 1998 and
1999, to pay income taxes on our S corporation earnings and to distribute our
estimated undistributed taxed or taxable earnings. In addition, net cash flows
used in financing activities during 1998, 1999 and 2000 were attributable to
agreements with certain employees prior to the spin-off relating to the
repurchase of stock options at fixed amounts. We paid $2.6 million, $3.1
million and $1.6 million related to these agreements in 1998, 1999 and 2000.
We are obligated to pay an additional $3.1 million in 2001. We also paid $1.7
million in expenses related to our initial public offering in 1999, which is
treated for accounting purposes as a distribution to our previous sole
stockholder. These financing activity distributions were offset in 2000 by the
receipt of $5.4 million in cash from the exercise of common stock options,
primarily in conjunction with the secondary offering.
In May 2000, we entered into a $10.0 million, unsecured loan agreement,
expiring May 2002, with a commercial bank that provides for a revolving line
of credit facility under which we may from time to time borrow, repay and re-
borrow funds. There have been no borrowings under the loan agreement. In
addition, we previously entered into a $1.3 million letter of credit
agreement, expiring September 2003, with a commercial bank to provide a
security deposit for our headquarters office lease. We pledged certain assets
as collateral under the letter of credit agreement.
6
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. We maintain a portfolio of cash, cash equivalents and
marketable securities with financial institutions. Cash and cash equivalents
consist of highly liquid U.S. government and U.S. Treasury obligations with
maturities of less than three months. Marketable securities consist primarily
of United States Treasury notes and bonds and Washington, DC 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.
7
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 as of December 31, 1999 and 2000, and the related statements of
income, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Washington, DC
January 31, 2001
8
THE CORPORATE EXECUTIVE BOARD COMPANY
BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-----------------
1999 2000
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $19,726 $ 19,493
Marketable securities..................................... -- 5,765
Membership fees receivable, net........................... 26,603 29,519
Deferred income taxes, net................................ 8,047 14,742
Deferred incentive compensation........................... 2,801 2,827
Prepaid expenses and other current assets................. 1,318 3,015
------- --------
Total current assets.................................... 58,495 75,361
------- --------
DEFERRED INCOME TAXES, NET.................................. -- 16,606
MARKETABLE SECURITIES....................................... 13,348 44,115
PROPERTY AND EQUIPMENT, NET................................. 9,921 16,412
------- --------
Total assets............................................ $81,764 $152,494
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 6,082 $ 8,102
Accrued incentive compensation............................ 3,877 3,013
Stock option repurchase liability......................... 4,710 3,140
Deferred revenues......................................... 55,436 71,281
------- --------
Total current liabilities............................... 70,105 85,536
------- --------
OTHER LIABILITIES........................................... 813 1,397
------- --------
Total liabilities....................................... 70,918 86,933
------- --------
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 27,139,920 and 31,144,069 shares issued
and outstanding as of December 31, 1999 and 2000,
respectively............................................. 271 311
Additional paid-in-capital................................ 134 38,579
Deferred compensation..................................... (570) (186)
Retained earnings......................................... 11,691 26,611
Accumulated elements of comprehensive income.............. (680) 246
------- --------
Total stockholders' equity.............................. 10,846 65,561
------- --------
Total liabilities and stockholders' equity.............. $81,764 $152,494
======= ========
See accompanying notes to financial statements.
9
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
REVENUES.............................................. $53,030 $70,767 $95,491
Cost of services.................................... 25,373 28,602 36,094
------- ------- -------
GROSS PROFIT.......................................... 27,657 42,165 59,397
------- ------- -------
COSTS AND EXPENSES:
Member relations and marketing...................... 11,676 15,525 21,236
General and administrative.......................... 6,920 8,485 12,021
Depreciation........................................ 885 1,318 2,573
Stock option and related expenses and special bonus
plan............................................... 5,342 383 1,371
------- ------- -------
Total costs and expenses.......................... 24,823 25,711 37,201
------- ------- -------
INCOME FROM OPERATIONS................................ 2,834 16,454 22,196
OTHER INCOME, NET..................................... 786 1,114 2,263
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.............. 3,620 17,568 24,459
PROVISION FOR INCOME TAXES............................ 361 4,322 9,539
------- ------- -------
NET INCOME............................................ $ 3,259 $13,246 $14,920
======= ======= =======
EARNINGS PER SHARE:
Basic............................................... $ 0.13 $ 0.50 $ 0.49
Diluted............................................. $ 0.11 $ 0.41 $ 0.43
WEIGHTED AVERAGE SHARES USED IN THE CALCULATION OF
EARNINGS PER SHARE:
Basic............................................... 25,009 26,446 30,321
Diluted............................................. 29,900 32,054 34,638
See accompanying notes to financial statements.
10
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 3,259 $ 13,246 $ 14,920
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation................................... 885 1,318 2,573
Deferred income taxes and tax benefits
resulting from the exercise of common stock
options....................................... (288) 3,927 9,065
Stock option and related expenses.............. 5,342 383 384
Loss on disposition of property and equipment.. -- -- 223
Changes in operating assets and liabilities:
Membership fees receivable, net............... (1,369) (9,438) (2,916)
Deferred incentive compensation............... (927) (778) (26)
Prepaid expenses and other current assets..... (261) (935) (1,697)
Accounts payable and accrued liabilities...... 2,777 1,115 1,871
Accrued incentive compensation................ 762 1,216 (864)
Deferred revenues............................. 7,587 16,375 15,845
Other liabilities............................. -- 813 584
Special bonus plan............................ -- (960) --
-------- -------- --------
Net cash flows provided by operating
activities.................................. 17,767 26,282 39,962
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (2,086) (7,282) (9,287)
Receivable from stockholder..................... -- 6,500 --
Purchase of marketable securities............... (1,242) (12,074) (89,569)
Sales and maturities of marketable securities... 1,124 1,464 54,574
-------- -------- --------
Net cash used in investing activities........ (2,204) (11,392) (44,282)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in payable to/due from affiliate......... (1,857) 391 152
Distributions to stockholder.................... (6,870) (4,000) --
Proceeds from the exercise of common stock
options........................................ -- 995 5,355
Proceeds from issuance of common stock under the
employee stock purchase plan................... -- -- 150
Reimbursement of offering costs................. -- -- 650
Payment of offering costs....................... (951) (1,698) (650)
Stock option repurchases........................ (2,590) (3,084) (1,570)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. (12,268) (7,396) 4,087
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 3,295 7,494 (233)
Cash and cash equivalents, beginning of period... 8,937 12,232 19,726
-------- -------- --------
Cash and cash equivalents, end of period......... $ 12,232 $ 19,726 $ 19,493
======== ======== ========
See accompanying notes to financial statements.
11
THE CORPORATE EXECUTIVE BOARD COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1998, 1999, and 2000
(In thousands, except share amounts)
Accumu-
lated
Preferred elements of Annual
stock Common stock Additional Deferred Retained compre- Compre-
------------- ----------------- paid-in- compen- earnings hensive hensive
Shares Amount Shares Amount capital sation (deficit) income Total income
------ ------ ---------- ------ ---------- -------- --------- ----------- ------- -------
Balance at December 31,
1997................... -- $-- 25,008,800 $250 $ 2,521 $(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................... -- $-- 25,008,800 $250 $ 2,521 $ (953) $(9,965) $ -- $(8,147) $ 3,259
---- ---- ---------- ---- -------- ------- ------- ----- ------- =======
Distributions to
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 common
stock options......... -- -- 2,131,120 21 974 -- -- -- 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................... -- $-- 27,139,920 $271 $ 134 $ (570) $11,691 $(680) $10,846 $12,566
---- ---- ---------- ---- -------- ------- ------- ----- ------- =======
Issuance of common
stock upon the
exercise of common
stock options......... -- -- 3,998,470 40 5,315 -- -- -- 5,355 --
Issuance of common
stock under the
employee stock
purchase plan......... -- -- 5,679 -- 150 -- -- -- 150 --
Tax benefits related to
the exercise of stock
options............... -- -- -- -- 32,980 -- -- -- 32,980 --
Amortization of
deferred
compensation.......... -- -- -- -- -- 384 -- -- 384 --
Unrealized gains on
available-for-sale
marketable securities,
net of tax............ -- -- -- -- -- -- -- 926 926 926
Net income............. -- -- -- -- -- -- 14,920 -- 14,920 14,920
---- ---- ---------- ---- -------- ------- ------- ----- ------- -------
Balance at December 31,
2000................... -- $-- 31,144,069 $311 $ 38,579 $ (186) $26,611 $ 246 $65,561 $15,846
==== ==== ========== ==== ======== ======= ======= ===== ======= =======
See accompanying notes to financial statements.
12
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 practices 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 web-
based access to the program's content database and decision support tools.
2.Spin-off and initial and secondary public offerings of common stock
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"). In February 1999, 18,830,560
shares of common stock of the Company were sold in an initial public offering
(the "Initial Public Offering"). In February 2000, 11,023,030 shares of common
stock of the Company were sold in a secondary public offering (the "Secondary
Offering"). The Company did not directly receive any proceeds from the sale of
common stock pursuant to the Initial Public Offering or Secondary Offering.
However, the Company did receive cash from the exercise of common stock
options in conjunction with the Initial Public Offering and Secondary
Offering. Subsequent to the Secondary Offering, the former sole stockholder
owns no shares of the Company's common stock.
3.Stock split
In August 2000, the Company's Board of Directors declared a two-for-one
stock split in the form of a common stock dividend on the Company's common
stock, payable September 15, 2000, to stockholders of record September 1,
2000. The effect of the stock split is presented retroactively within the
statements of changes in stockholders' equity (deficit) at December 31, 1998,
1999 and 2000, by transferring the par value for the additional common shares
issued from the additional paid-in-capital account to the common stock
account. All references to share and per share amounts in the accompanying
financial statements included herein have been adjusted retroactively to
reflect the two-for-one stock split.
4.Summary of significant accounting policies
Cash equivalents and marketable securities
Short-term investments and marketable securities that mature within three
months of purchase are classified as cash equivalents. Short-term investments
and marketable securities with maturities of more than three months are
classified as marketable securities. As of December 31, 1999 and 2000, the
Company's marketable securities consisted primarily of United States Treasury
notes and bonds and Washington, DC tax exempt notes and bonds. The Company
classifies its marketable securities as available-for-sale securities, which
are carried at fair value based on quoted market prices. The net unrealized
gains and losses on available-for-sale marketable securities are excluded from
net income and are included within accumulated elements of comprehensive
income. The specific identification method is used to compute the realized
gains and losses on the sale of marketable securities. The Company may not
hold these marketable securities to maturity and may elect to sell these
securities at any time.
Property and equipment and leasehold improvements
Property and equipment consists of furniture, fixtures and equipment,
capitalized software development costs, and leasehold improvements. Property
and equipment are stated at cost, less accumulated depreciation
13
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
expense. Furniture, fixtures and equipment are depreciated using the straight-
line method over the estimated useful lives of the assets, which range from
three to seven years. Capitalized software development costs are depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from three to five years. Leasehold improvements are depreciated
using the straight-line method over the shorter of the estimated useful lives
of the assets or the lease term. Replacements and major improvements are
capitalized. Maintenance and repairs are charged to expense as incurred.
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, 2000.
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 agrees to the terms of the membership. 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 agrees to the terms of the membership.
Commission expense recognition
Commission expenses related to the negotiation of new memberships and the
renewal of existing memberships are deferred and amortized over the term of
the respective 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.
A reconciliation of basic to diluted weighted average common shares
outstanding is as follows (in thousands):
Year Ended December
31,
--------------------
1998 1999 2000
------ ------ ------
Basic weighted average
common shares
outstanding............ 25,009 26,446 30,321
Weighted average common
share equivalents
outstanding............ 4,891 5,608 4,317
------ ------ ------
Diluted weighted average
common shares
outstanding............ 29,900 32,054 34,638
====== ====== ======
Concentrations of credit risk
Financial instruments, which potentially expose the Company to concentration
of credit risk, consist primarily of membership fees receivable and of cash,
cash equivalents and marketable securities. Concentrations of credit risk with
respect to membership fees receivable are limited due to the large number of
members and their dispersion across many different industries and countries
worldwide. However, the Company may be exposed to a declining membership base
in periods of unforeseen market downturns, severe competition or international
developments.
14
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company generates revenues from members located outside the United
States. For the years ended December 31, 1998, 1999 and 2000, approximately
33%, 31% and 29% of total revenues, respectively, were generated from members
located outside the United States. Revenues from customers in European
countries were approximately 15% for each of the years ended December 31,
1998, 1999 and 2000, with no other geographic area representing more than 10%
of total revenues in any period. No individual member accounted for more than
2% of revenues for any period presented.
The Company maintains a portfolio of cash, cash equivalents and marketable
securities, which is designed for safety of principal and liquidity, with
financial institutions. Cash and cash equivalents consist of highly liquid
U.S. government and U.S. Treasury obligations with maturities of less than
three months. Marketable securities consist primarily of United States
Treasury notes and bonds and Washington, DC tax exempt notes and bonds. The
Company performs periodic evaluations of the relative credit ratings related
to the cash, cash equivalents and 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 costs
Costs related to the research and development of new company programs are
expensed in the year incurred.
Reclassification of prior-years' balances
Prior-years' balances have been reclassified to conform to the current-year
presentation.
Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
15
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
5.Marketable securities
The aggregate market value, amortized cost, gross unrealized gains and gross
unrealized losses on available-for-sale marketable securities are as follows
(in thousands):
As of December 31, 1999
---------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses
------- --------- ---------- ----------
United States Treasury notes and
bonds............................. $ 2,002 $ 2,078 $-- $ 76
Washington, DC tax exempt notes and
bonds............................. 11,346 12,404 2 1,060
------- ------- ---- ------
$13,348 $14,482 $ 2 $1,136
======= ======= ==== ======
As of December 31, 2000
---------------------------------------
Gross Gross
Market Amortized Unrealized Unrealized
Value Cost Gains Losses
------- --------- ---------- ----------
United States Treasury notes and
bonds............................. $38,812 $38,637 $236 $ 61
Washington, DC tax exempt notes and
bonds............................. 11,068 10,840 228 --
------- ------- ---- ----
$49,880 $49,477 $464 $ 61
======= ======= ==== ====
The following table summarizes marketable securities maturities (in
thousands):
As of December 31,
2000
---------------------
Fair Market Amortized
Value Cost
----------- ---------
Less than one year..................................... $ 5,765 $ 5,759
Matures in 1 to 5 years................................ 36,021 35,778
Matures in 6 to 10 years............................... 4,881 4,793
Matures after 10 years................................. 3,213 3,147
------- -------
$49,880 $49,477
======= =======
The Company may not hold these marketable securities to maturity and may
elect to sell these securities at any time.
6.Membership fees receivable
Membership fees receivable consist of the following (in thousands):
As of December
31,
----------------
1999 2000
------- -------
Billed membership fees receivable.......................... $23,328 $23,561
Unbilled membership fees receivable........................ 4,616 7,586
------- -------
27,944 31,147
Allowance for doubtful accounts............................ (1,341) (1,628)
------- -------
Membership fees receivable, net............................ $26,603 $29,519
======= =======
16
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
7.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 7.0% 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.
8.Property and equipment
Property and equipment consist of the following (in thousands):
As of December
31,
----------------
1999 2000
------- -------
Furniture, fixtures, and equipment......................... $ 7,371 $10,944
Software development costs................................. 939 5,377
Leasehold improvements..................................... 5,213 5,613
------- -------
13,523 21,934
Accumulated depreciation................................... (3,602) (5,522)
------- -------
Property and equipment, net................................ $ 9,921 $16,412
======= =======
9.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 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, 1998 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 $2.1 million (unaudited), $0.09 (unaudited) and $0.07 (unaudited)
for the year ended December 31, 1998, and $10.4 million (unaudited), $0.39
(unaudited) and $0.32 (unaudited) for the year ended December 31, 1999.
The provision for income taxes consists of the following (in thousands):
Year Ended December
31,
----------------------
1998 1999 2000
----- ------- ------
Current.............................................. $ 649 $ 5,780 $8,582
Deferred............................................. (288) (1,458) 957
----- ------- ------
Provision for income taxes........................... $ 361 $ 4,322 $9,539
===== ======= ======
17
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
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:
Year Ended
December 31,
--------------
1999 2000
------ ------
Statutory U.S. Federal income tax rate........................ 35.0% 35.0%
State income tax, net of U.S. Federal income tax benefit...... 6.5 6.5
Termination of S corporation status........................... (15.6) --
Phase-in rate differential.................................... (4.0) --
Other permanent differences................................... 2.7 (2.5)
------ -----
Effective tax rate.......................................... 24.6% 39.0%
====== =====
The statutory state and effective income tax rates reflected in the
provision for income taxes are both 9.975% for the year ended December 31,
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):
As of December
31,
--------------
1999 2000
------ -------
Deferred tax assets:
Deferred compensation agreements........................... $1,608 $ 1,250
Net operating loss carryforward............................ 4,744 29,865
Financial reporting reserves............................... 568 702
Stock option restructuring and repurchase.................. 1,287 --
Employee benefits.......................................... 301 400
Unrealized losses on available-for-sale securities......... 454 --
Other...................................................... 484 579
------ -------
Total deferred tax assets................................ 9,446 32,796
------ -------
Deferred tax liabilities:
Unrealized gains on available-for-sale securities.......... -- 157
Employee benefits.......................................... -- 41
Deferred incentive compensation............................ 1,162 1,173
Other...................................................... 237 77
------ -------
Total deferred tax liabilities........................... 1,399 1,448
------ -------
Deferred tax assets, net................................. $8,047 $31,348
====== =======
The Company has net operating losses which resulted in a deferred tax asset
of $4.7 million and $29.9 million at December 31, 1999 and 2000, respectively.
The net operating losses expire in the years 2019 through 2020. The Company
believes that its future taxable income will be sufficient for the full
realization of the deferred tax assets. The Company has realized tax benefits
(reductions of taxes payable) resulting from the exercise of common stock
options of $5.4 million and $8.1 million in the years ended December 31, 1999
and 2000, respectively. The Company recognized no tax deductions from the
exercise of common stock options in the year ended December 31, 1998.
18
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
10.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 year ended December 31, 1999 and
2000, was $12.6 million and $15.8 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 losses,
net of tax, on available-for-sale marketable securities amounted to $0.7
million at December 31, 1999. Unrealized gains, net of tax, on available-for-
sale marketable securities amounted to $0.9 million at December 31, 2000.
There was no difference between net income and comprehensive income for the
year ended December 31, 1998.
11.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 ASA provides for fees based on either direct costs, costs per
certain transaction, headcount, or a fixed cost per month.
Management cost allocations consisting primarily of senior executive costs
allocated by DGB Enterprises, Inc., a separate entity controlled by the
Company's former sole stockholder, were 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.
Due from (due to) affiliate
Activity due from (due to) affiliate is as follows (in thousands):
Year Ended December
31,
-----------------------
1998 1999 2000
------- ------- -----
Balance at beginning of period.................... $(1,507) $ 350 $ (41)
Costs allocated to the Company:
The Advisory Board Company...................... (4,931) (1,595) (22)
DGB Enterprises, Inc............................ (1,211) -- --
Cash transfers from the Company to The Advisory
Board Company.................................... 14,513 3,169 220
Cash transfers to the Company from The Advisory
Board Company.................................... (6,514) (1,965) (350)
------- ------- -----
Balance at end of period.......................... $ 350 $ (41) $(193)
======= ======= =====
12.Employee benefit plans
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. 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
19
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
participant and Company contributions were made directly to the New Plan.
Contributions to the Plans for the Company's participants were $0.1 million,
$0.2 million and $0.2 million during the years ended December 31, 1998, 1999
and 2000, respectively.
Employee stock purchase plan
In June 2000, the Company established an employee stock purchase plan (the
"ESPP"). Under the ESPP, employees authorize payroll deductions from 1% to 10%
to purchase shares of the Company's common stock. The ESPP is authorized to
issue up to 1,050,000 shares of the Company's common stock. As of December 31,
2000, 5,679 shares of the Company's common stock have been issued under the
ESPP.
13.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 make a payment 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 $2.4 million in compensation expense related to the Liquid
Markets Agreements in the year ended December 31, 1998. There are no earnings
charges subsequent to December 31, 1998, related to these agreements. At
December 31, 2000, the future cash commitments related to the Liquid Markets
Agreements were $3.1 million and are reflected in stock option repurchase
liability in the accompanying balance sheets. In January 2001, the Company
paid $3.1 million in accordance with the Liquid Markets Agreements, the final
cash commitment related to the Liquid Markets Agreements.
20
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 a Substitution Agreement (the
"Substitution Agreement") 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 Current Plan provides for the issuance of options to
purchase up to 11,008,000 shares of common stock. As of December 31, 2000,
10,569,400 options, net of cancellations, to purchase common stock had been
granted under the Current Plan. The Options generally become exercisable fifty
percent (50%) in February 2000, thirty percent (30%) in February 2001 and
twenty percent (20%) in February 2002 and expire between April 2001 and March
2009.
The terms of the Substitution Agreement resulted in a new measurement date
for 3,711,760 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 and related expenses and special bonus plan in the
accompanying statements of income and was $0.5 million, $0.4 million and $0.4
million for the years ending December 31, 1998, 1999 and 2000, respectively.
The Company will recognize compensation expense related to certain
substitution agreements of $0.2 million in the year ending 2001. The
recognition of compensation expense was not required for the remaining
2,843,986 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 provides for the issuance of options to purchase up to 3,784,000
shares of common stock. During 1999, the Company granted 1,491,000 options to
purchase common stock under the 1999 Plan at a weighted average exercise price
of $9.80 per share. During 2000, the Company granted 1,613,000 options to
purchase common stock under the 1999 Plan at a weighted average exercise price
of $21.78 per share. As of December 31, 2000, 2,970,126 options, net of
cancellations, to purchase common stock had been granted under the 1999 Plan.
The common stock options granted under the 1999 Plan generally become
exercisable twenty-five percent (25%) per year beginning one year from the
date of grant and expire between February 2009 and July 2010.
Directors' Stock Option Plan
On December 14, 1998, the Company adopted the Directors' Stock Plan
("Directors' Plan"), which provides for the issuance of options to purchase up
to 860,000 shares of common stock for issuance. During 1998, the Company
granted 288,960 options to purchase common stock under the Directors' Plan at
a weighted average exercise price of $7.12 per share. During 1999, the Company
granted 72,240 options to purchase common stock under the Directors' Plan at a
weighted average exercise price of $7.12 per share. During 2000, the Company
granted 70,000 options to purchase common stock under the Directors' Plan at a
weighted average exercise price of $21.19 per share. As of December 31, 2000,
431,200 common stock options had been granted under the Directors' Plan. The
common stock options granted under the Directors' Plan generally become
exercisable one hundred percent (100%) one year from the date of grant and
expire between December 2009 and February 2010.
21
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Transactions
The following table summarizes the changes in common stock options for the
common stock option plans described above:
Exercise Weighted-
Number Price per Average
of Options Share Exercise Price
---------- ------------ --------------
Outstanding at December 31, 1997... 9,370,560 $ 0.03- 1.37 $ 0.60
Options granted.................. 2,019,280 1.37- 7.12 4.15
Options cancelled................ (423,120) 1.02- 1.37 1.07
---------- ------------ ------
Outstanding at December 31, 1998... 10,966,720 0.03- 7.12 1.23
Options granted.................. 1,563,240 7.12-19.07 9.67
Options cancelled................ (14,000) 9.50 9.50
Options exercised................ (2,131,120) 0.47 0.47
---------- ------------ ------
Outstanding at December 31, 1999... 10,384,840 0.03-19.07 2.64
Options granted.................. 1,683,000 21.19-33.11 21.75
Options cancelled................ (228,234) 0.29-21.19 8.05
Options exercised................ (3,998,470) 0.03-13.52 1.34
---------- ------------ ------
Outstanding at December 31, 2000... 7,841,136 $ 0.03-33.11 $ 7.25
========== ============ ======
Information with respect to the common stock option plans outstanding at
December 31, 2000, is as follows:
Weighted-
Weighted- Average
Number Outstanding Average Remaining
as of Exercise Contractual
Range of Exercise Prices December 31, 2000 Price Life-Years
------------------------ ------------------ --------- -----------
$ 0.03 -- $ 0.03.................. 137,600 $0.03 2.33
0.15 -- 0.21.................. 786,800 0.16 2.33
0.29 -- 0.44.................. 338,840 0.40 2.09
0.47 -- 0.64.................. 947,192 0.53 4.10
1.02 -- 1.02.................. 1,001,028 1.02 2.84
1.37 -- 1.56.................. 505,320 1.44 1.98
3.49 -- 3.49.................. 625,040 3.49 2.24
7.12 -- 7.12.................. 605,200 7.12 5.78
9.50 -- 9.50.................. 1,196,866 9.50 8.15
11.69 -- 15.00.................. 51,250 13.47 8.36
19.07 -- 21.19.................. 1,511,000 21.18 9.15
25.38 -- 33.11.................. 135,000 28.19 9.46
--------------- --------- ----- ----
$ 0.03 -- $33.11.................. 7,841,136 $7.25 5.20
=============== ========= ===== ====
As of December 31, 2000, 1,146,930 common stock options with a weighted
average exercise price of $4.05 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 Number 123, Accounting
for Stock Based Compensation (FAS No. 123) if the provisions of FAS No. 123
are not elected to be adopted.
22
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1998,
1999 and 2000 was estimated using the Black-Scholes option valuation model
with the following weighted-average assumptions: risk free interest rate of
5.5%, 6.5% and 5.0%, respectively; no dividend yield for any year; weighted-
average expected lives of the option of three years, five years and four
years, respectively; and expected volatility of 50%, 60% and 92%,
respectively.
The weighted average fair value of Company options granted during the years
ended December 31, 1998, 1999 and 2000 was $1.60 per share, $5.01 per share
and $14.73 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 1998 would have been $1.6 million or $0.07 per share (pro
forma basic) and $0.05 per share (pro forma diluted), pro forma net income for
1999 would have been $9.8 million or $0.37 per share (pro forma basic) and
$0.31 per share (pro forma diluted), and pro forma net income for 2000 would
have been $8.3 million or $0.27 per share (pro forma basic) and $0.24 per
share (pro forma diluted). The provisions of FAS No. 123 may not necessarily
be indicative of future results.
14.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 and is reflected in stock
option and related expenses and special bonus plan in the accompanying
statements of income.
15.Supplemental cash flows disclosures
Income taxes paid during the years ended December 31, 1998, 1999 and 2000,
amounted to $470,000, $260,000 and $0, respectively. For the year ended
December 31, 1999 and 2000, the Company recognized $10.1 million and $33.0
million, respectively, 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 and 2000, 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.
16.Loan Agreement
In May 2000, the Company entered into a $10.0 million, unsecured loan
agreement with a commercial bank that provides for a revolving line of credit
facility under which the Company may from time to time borrow, repay and re-
borrow funds. The interest rate on any outstanding borrowings under the loan
agreement is the Eurodollar Daily Floating Rate plus .75% per annum. The
maturity date of the loan agreement is May 25, 2002. There have been no
borrowings under the loan agreement.
23
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
17.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. Certain 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
and insurance. Future minimum rental payments under non-cancelable operating
leases, excluding executory costs are as follows (in thousands):
Year Ending December 31,
------------------------
2001.............................................................. $ 4,721
2002.............................................................. 5,120
2003.............................................................. 5,231
2004.............................................................. 4,897
2005.............................................................. 4,991
Thereafter........................................................ 16,890
-------
Total........................................................... $41,850
=======
Rent expense charged to operations during the fiscal years ended December
31, 1998, 1999 and 2000, was $2.4 million, $3.6 million and $3.8 million,
respectively. The Company obtained a $1.3 million letter of credit with a
commercial bank, expiring September 2003, to provide a security deposit for
its headquarters office lease. The Company's cash, accounts receivable and
property and equipment collateralize the Letter of Credit Agreement.
18.Quarterly financial data (unaudited)
Unaudited summarized financial data by quarter for the years ended December
31, 1999 and 2000 is as follows (in thousands, except per share amounts):
1999 Quarter Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues......................... $15,703 $16,700 $18,414 $19,950
Gross profit..................... 8,950 9,952 11,324 11,939
Income before provision (benefit)
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.......................... $ 0.19 $ 0.09 $ 0.11 $ 0.12
Diluted........................ $ 0.16 $ 0.07 $ 0.09 $ 0.10
2000 Quarter Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues......................... $20,784 $22,612 $25,084 $27,011
Gross profit..................... 12,307 14,240 16,035 16,815
Income before provision for
income taxes.................... 4,406 5,936 6,705 7,412
Net income....................... $ 2,688 $ 3,620 $ 4,090 $ 4,522
Earnings per share:
Basic.......................... $ 0.09 $ 0.12 $ 0.13 $ 0.15
Diluted........................ $ 0.08 $ 0.10 $ 0.12 $ 0.13
24
19.Subsequent event (unaudited)
The Company has entered into a new lease agreement for additional office
space. The estimated future minimum lease payments under this new lease
agreement are approximately $14.4 million. The new lease agreement expires in
July 2012.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of The Corporate Executive Board Company:
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of The Corporate Executive Board
Company included in this Form 8-K and have issued our report thereon dated
January 31, 2001. 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, DC
January 31, 2001
26
THE CORPORATE EXECUTIVE BOARD COMPANY
Schedule II--Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at Additions Charged to Deductions
Beginning Charged to Other from Balance at
of Year Revenue Accounts Reserve End of Year
---------- ---------- ---------- ---------- -----------
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
====== ====== ==== ====== ======
Year ending December 31,
2000
Allowance for doubtful
accounts............. $1,341 $3,590 $-- $3,303 $1,628
------ ------ ---- ------ ------
$1,341 $3,590 $-- $3,303 $1,628
====== ====== ==== ====== ======
27
Item 6. Resignations of Registrant's Directors.
Not applicable.
Item 7. Financial Statements and Exhibits.
(c) Exhibits
23 Consent of Arthur Andersen LLP
Item 8. Change in Fiscal Year.
Not applicable.
28
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: February 19, 2001
- -----------------------------------
/s/ Clay M. Whitson
-----------------------------------------
Clay M. Whitson, Chief Financial Officer
29
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
23 Consent of Arthur Andersen LLP