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EX-31.1 - EX-31.1 - ADVISORY BOARD CO | w76195exv31w1.htm |
EX-31.2 - EX-31.2 - ADVISORY BOARD CO | w76195exv31w2.htm |
EX-32.1 - EX-32.1 - ADVISORY BOARD CO | w76195exv32w1.htm |
EX-10.5 - EX-10.5 - ADVISORY BOARD CO | w76195exv10w5.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 000-33283
THE ADVISORY BOARD COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 52-1468699 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
2445 M Street, NW
Washington, D.C. 20037
(202) 266-5600
(Address and phone number of principal executive offices)
Washington, D.C. 20037
(202) 266-5600
(Address and phone number of principal executive offices)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 6, 2009, the company had outstanding 15,529,977 shares of Common Stock, par value
$0.01 per share.
THE ADVISORY BOARD COMPANY
INDEX TO FORM 10-Q
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE ADVISORY BOARD COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 29,961 | $ | 23,746 | ||||
Marketable securities |
11,839 | 8,385 | ||||||
Membership fees receivable, net |
126,151 | 116,739 | ||||||
Prepaid expenses and other current assets |
4,872 | 5,113 | ||||||
Deferred income taxes, net |
4,265 | 3,083 | ||||||
Total current assets |
177,088 | 157,066 | ||||||
Property and equipment, net |
23,817 | 34,156 | ||||||
Intangible assets, net |
4,423 | 4,463 | ||||||
Goodwill |
26,330 | 24,563 | ||||||
Deferred incentive compensation and other charges |
30,201 | 26,737 | ||||||
Deferred income taxes, net of current portion |
7,803 | 7,555 | ||||||
Other non-current assets |
5,000 | | ||||||
Marketable securities |
52,681 | 61,718 | ||||||
Total assets |
$ | 327,343 | $ | 316,258 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Deferred revenue |
$ | 145,368 | $ | 150,609 | ||||
Accounts payable and accrued liabilities |
39,591 | 35,777 | ||||||
Accrued incentive compensation |
6,342 | 7,320 | ||||||
Total current liabilities |
191,301 | 193,706 | ||||||
Long-term deferred revenues |
28,860 | 19,869 | ||||||
Other long-term liabilities |
3,463 | 3,784 | ||||||
Total liabilities |
223,624 | 217,359 | ||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01; 90,000,000 shares
authorized, 21,752,893 and 21,744,456 shares
issued as of September 30, 2009 and March 31,
2009, respectively, and 15,528,477 and 15,558,894
shares outstanding as of September 30, 2009 and
March 31, 2009, respectively |
217 | 217 | ||||||
Additional paid-in capital |
237,333 | 233,794 | ||||||
Retained earnings |
136,564 | 134,492 | ||||||
Accumulated elements of other comprehensive income |
1,515 | 1,307 | ||||||
Treasury stock, at cost 6,224,416 and 6,185,562
shares at September 30, 2009 and March 31, 2009,
respectively |
(271,910 | ) | (270,911 | ) | ||||
Total stockholders equity |
103,719 | 98,899 | ||||||
Total liabilities and stockholders equity |
$ | 327,343 | $ | 316,258 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
THE ADVISORY BOARD COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 58,323 | $ | 57,625 | $ | 115,026 | $ | 114,842 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
31,041 | 28,993 | 61,105 | 57,547 | ||||||||||||
Member relations and marketing |
13,136 | 13,058 | 25,693 | 25,456 | ||||||||||||
General and administrative |
8,835 | 7,214 | 15,602 | 14,109 | ||||||||||||
Depreciation and amortization |
1,718 | 1,327 | 3,621 | 2,410 | ||||||||||||
Write-off of capitalized software |
7,397 | | 7,397 | | ||||||||||||
(Loss) income from operations |
(3,804 | ) | 7,033 | 1,608 | 15,320 | |||||||||||
Other income, net |
584 | 948 | 1,546 | 2,152 | ||||||||||||
(Loss) income before benefit
(provision) for income taxes |
(3,220 | ) | 7,981 | 3,154 | 17,472 | |||||||||||
Income tax benefit (provision) |
1,104 | (2,578 | ) | (1,082 | ) | (5,739 | ) | |||||||||
Net (loss) income |
$ | (2,116 | ) | $ | 5,403 | $ | 2,072 | $ | 11,733 | |||||||
(Loss) earnings per share: |
||||||||||||||||
Net (loss) income per share basic |
$ | (0.14 | ) | $ | 0.32 | $ | 0.13 | $ | 0.68 | |||||||
Net (loss) income per share diluted |
$ | (0.14 | ) | $ | 0.32 | $ | 0.13 | $ | 0.68 | |||||||
Weighted average number of shares outstanding: |
||||||||||||||||
Basic |
15,527 | 16,922 | 15,541 | 17,143 | ||||||||||||
Diluted |
15,527 | 16,989 | 15,636 | 17,352 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
THE ADVISORY BOARD COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,072 | $ | 11,733 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
3,621 | 2,410 | ||||||
Write-off of capitalized software |
7,397 | | ||||||
Amortization of intangible assets |
536 | 446 | ||||||
Deferred income taxes |
(5,943 | ) | 797 | |||||
Excess tax benefits from share-based compensation |
| (291 | ) | |||||
Stock-based compensation expense |
7,871 | 6,333 | ||||||
Amortization of marketable securities premiums |
310 | 410 | ||||||
Changes in operating assets and liabilities: |
||||||||
Membership fees receivable |
(10,776 | ) | (9,298 | ) | ||||
Prepaid expenses and other current assets |
1,241 | 1,172 | ||||||
Deferred incentive compensation and other charges |
(3,464 | ) | 582 | |||||
Deferred revenues |
3,750 | 2,136 | ||||||
Accounts payable and accrued liabilities |
3,469 | (128 | ) | |||||
Accrued incentive compensation |
(978 | ) | (3,855 | ) | ||||
Other long-term liabilities |
(321 | ) | (100 | ) | ||||
Net cash provided by operating activities |
8,785 | 12,347 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(679 | ) | (9,608 | ) | ||||
Capitalized external use software development costs |
(496 | ) | (499 | ) | ||||
Cash paid for acquisition, net of cash acquired |
| (18,592 | ) | |||||
Redemptions and sales of marketable securities |
12,500 | 62,810 | ||||||
Purchases of marketable securities |
(6,965 | ) | (7,579 | ) | ||||
Cost basis investment and loan |
(6,000 | ) | | |||||
Net cash (used in) / provided by investing activities |
(1,640 | ) | 26,532 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock from exercise of stock options |
| 421 | ||||||
Withholding of shares to satisfy minimum employee tax withholding for vested
restricted stock units |
(2 | ) | (390 | ) | ||||
Proceeds from issuance of common stock under employee stock purchase plan |
71 | 210 | ||||||
Excess tax benefits from stock-based awards |
| 291 | ||||||
Purchases of treasury stock |
(999 | ) | (43,307 | ) | ||||
Net cash used in financing activities |
(930 | ) | (42,775 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
6,215 | (3,896 | ) | |||||
Cash and cash equivalents, beginning of period |
23,746 | 17,907 | ||||||
Cash and cash equivalents, end of period |
$ | 29,961 | $ | 14,011 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
THE ADVISORY BOARD COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business description and basis of presentation
The Advisory Board Company and its subsidiaries (the Company) provide best practices
research, analysis, executive education and leadership development, business intelligence software
tools, and installation support to hospitals, health systems, pharmaceutical and biotech companies,
health care insurers, medical device companies, and universities and other education institutions
through discrete programs. The Companys program offerings focus on business strategy, operations,
and general management issues. Best practices research identifies, analyzes, and describes specific
management initiatives, strategies, and processes that produce the best results in solving common
problems or challenges. For a fixed fee, members of each program have access to an integrated set
of services that may include best practices research studies and implementation tools, executive
education seminars, customized research briefs, web-based access to the programs content database,
and business intelligence tools. Memberships in each of the Companys best practices research
programs are renewable at the end of their membership contracts. Programs providing best practices
installation support help participants accelerate the adoption of best practices profiled in the
Companys research studies, and are not individually renewable.
The unaudited consolidated financial statements included herein have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and pursuant to the rules and regulations of the U.S. 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. These unaudited
consolidated financial statements should be read in conjunction with the consolidated financial
statements and related notes as reported in the Companys Form 10-K for the year ended March 31,
2009 and the Companys quarterly reports on Form 10-Q for subsequent quarters. The
unaudited consolidated financial statements include the accounts of the Company and its
subsidiaries after elimination of all significant intercompany transactions.
In the opinion of management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the consolidated financial position, results of
operations, and cash flows at the dates and for the periods presented have been included. The
consolidated balance sheet presented as of March 31, 2009 has been derived from the financial
statements that have been audited by the Companys independent registered public accounting firm.
The consolidated results of operations for the three and six months ended September 30, 2009 may
not be indicative of the results that may be expected for the Companys fiscal year ending March
31, 2010, or any other period within the Companys fiscal year 2010.
Note 2. Recent accounting pronouncements
Recently adopted
In June 2009 the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (the ASC) was issued in the form of Financial Accounting Standards (FAS) No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement No. 162 (ASC 105-10). Upon issuance, the ASC became
the single source of authoritative, nongovernmental GAAP. The ASC reorganized GAAP pronouncements
into accounting topics, which are displayed using a single structure. Certain SEC guidance is also
included in the ASC and will follow a similar topical structure in separate SEC sections. ASC
105-10 is effective for interim periods and fiscal years ending after September 15, 2009. The
adoption of ASC 105-10 on July 1, 2009 did not have a material impact on the Companys financial
position or results of operations.
Accounting pronouncements not yet adopted
In June 2009 the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
No. 167). FAS No. 167 amends the Consolidation
topic of the ASC and requires enterprises to
perform a more qualitative approach to determining whether or not a variable interest entity will
need to be consolidated on a quarterly basis. This evaluation will be based on an enterprises
ability to direct and influence the activities of a variable interest entity that most
significantly impact its economic performance. FAS No. 167 is effective for interim periods and
fiscal years beginning after November 15, 2009. Early adoption is not permitted. The Company does
not expect the adoption of FAS No. 167 to have a material impact on the Companys financial
position or results of operations.
6
Table of Contents
Note 3. Fair value measurements
Financial instruments
The estimated fair values of financial instruments under ASC 825-10-50, Disclosures about Fair
Value of Financial Instruments, are determined based on relevant market information. These
estimates involve uncertainty and cannot be determined with precision. The Companys financial
instruments consist primarily of cash, cash equivalents, and marketable securities. The following
methods and assumptions are used to estimate the fair value of each class of financial instrument.
Cash and cash equivalents: This includes all cash and liquid investments with an original
maturity of three months or less from the date acquired. The carrying amount approximates fair
value because of the short maturity of these instruments. Cash equivalents consist of money market
funds with original maturity dates of less than three months for which the fair value is based on
quoted market prices. The majority of the Companys cash and cash equivalents are held at major
commercial banks.
Marketable securities: The Companys marketable securities, consisting of U.S. government
agency obligations and District of Columbia and other various state tax-exempt notes and bonds, are
classified as available-for-sale and are carried at fair market value based on quoted market
prices.
Measurements
Fair value is defined by ASC 820-10, Fair Value Measurements and Disclosures, as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. ASC 820-10 also discusses valuation techniques, such
as the market approach (comparable market prices), the income approach (present value of future income
or cash flow), and the cost approach (cost to replace the service capacity of an asset or
replacement cost). ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The following is a brief
description of those three levels:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies. |
The Companys population of financial assets and liabilities subject to fair value
measurements on a recurring basis and the necessary disclosures are as follows (in thousands):
Fair value measurement as of September 30, 2009 | ||||||||||||||||
Fair value | using fair value hierarchy | |||||||||||||||
as of September 30, 2009 | Level 1 | Level 2 | Level 3 | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents (1) |
$ | 29,961 | $ | 29,961 | $ | | $ | | ||||||||
Available-for-sale marketable
securities (2) |
64,520 | 64,520 | | |
(1) | Fair value is based on quoted market prices. | |
(2) | Fair value is determined using quoted market prices of identical assets. For further detail, see Note. 4. Marketable securities. |
7
Table of Contents
Non-financial assets and liabilities
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is,
the assets and liabilities are not measured at fair value on an ongoing basis but are subject to
fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At
September 30, 2009, certain of the Companys capitalized software assets were measured and recorded
at fair value due to circumstances that indicated that the carrying values of the assets were not
fully recoverable. As a result, the Company recognized an impairment of approximately $7.4 million.
The Company utilized the discounted cash flow method to determine the fair value of the capitalized
software assets as of September 30, 2009. Cash flows were
determined based on the Companys estimates of
future operating results and discounted using an internal rate of return consistent with that used
by the Company to evaluate cash flows of other assets of a similar nature. Due to the significant
unobservable inputs inherent in discounted cash flow methodologies, this method is classified as
Level 3 in the fair value hierarchy.
Assets held and used with
a carrying amount of $8.8 million were written down to a fair value
of $1.4 million, resulting in a pretax impairment charge of $7.4 million. Impaired capitalized
software with a fair value of $1.4 million is included in the
$6.1 million total of capitalized
software on the accompanying consolidated balance sheet as of
September 30, 2009. A fair value measurement was required due
to the Companys conclusion that certain capitalized software development costs were not fully
recoverable based on projected cash flows attributable to those assets. For additional information
related to this impairment, see Note 6. Property and equipment.
The following table
presents information about the impaired assets measured at fair value
on a non-recurring basis as
of September 30, 2009 (in thousands):
Fair value measurement | ||||||||||||
using fair value hierarchy | ||||||||||||
Fair value | Level 1 | Level 2 | Level 3 | |||||||||
Non-financial assets |
||||||||||||
Impaired capitalized software (1)
|
$ | 1,358 | $ | $ | $ | 1,358 |
(1) | Capitalized software is included within Property and equipment, net on the accompanying consolidated balance sheets. |
Note 4. Marketable securities
The aggregate value, amortized cost, gross unrealized gains, and gross unrealized losses on
available-for-sale marketable securities are as follows (in thousands):
As of September 30, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Amortized | unrealized | unrealized | |||||||||||||
value | cost | gains | losses | |||||||||||||
U.S. government agency obligations |
$ | 25,022 | $ | 24,465 | $ | 589 | $ | 32 | ||||||||
Washington, D.C. tax exempt obligations |
2,578 | 2,526 | 52 | | ||||||||||||
Tax exempt obligations of other states |
36,920 | 35,171 | 1,777 | 28 | ||||||||||||
$ | 64,520 | $ | 62,162 | $ | 2,418 | $ | 60 | |||||||||
As of March 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Amortized | unrealized | unrealized | |||||||||||||
value | cost | gains | losses | |||||||||||||
U.S. government agency obligations |
$ | 30,153 | $ | 29,525 | $ | 666 | $ | 38 | ||||||||
Washington, D.C. tax exempt obligations |
3,618 | 3,549 | 69 | | ||||||||||||
Tax exempt obligations of other states |
36,332 | 35,010 | 1,322 | | ||||||||||||
$ | 70,103 | $ | 68,084 | $ | 2,057 | $ | 38 | |||||||||
8
Table of Contents
The following table summarizes marketable securities maturities (in thousands):
As of September 30, 2009 | ||||||||
Fair | ||||||||
market | Amortized | |||||||
value | cost | |||||||
Matures in less than 1 year |
$ | 11,839 | $ | 11,594 | ||||
Matures after 1 year through 5 years |
29,992 | 28,131 | ||||||
Matures after 5 years through 10 years |
22,689 | 22,437 | ||||||
$ | 64,520 | $ | 62,162 | |||||
The weighted average maturity on all marketable securities held by the Company as of September
30, 2009 was approximately 4.1 years. Pre-tax net unrealized gains on the Companys investments of
$2.4 million as indicated above were caused by the decrease in market interest rates compared to
the average interest rate of the Companys marketable securities portfolio. Of this amount, $0.2
million is related to investments that mature before September 30, 2010. The Company purchased
certain of its investments at a premium or discount to their relative fair values, and the
contractual cash flows of these investments are guaranteed by an agency of the U.S. government or
otherwise fully insured. The Company has reflected the net unrealized gains and losses, net of tax,
in accumulated other comprehensive income in the consolidated balance sheets. The Company uses the
specific identification method to determine the cost of marketable securities that are sold.
Note 5. Other non-current assets
In June 2009 the Company invested in the convertible preferred stock of a private company that
provides technology tools and support services to health care providers. In addition, the Company
entered into a licensing agreement with that company. The convertible preferred stock investment is
recorded at cost, and the carrying amount of this investment at September 30, 2009 is $5.0 million
and is included in other non-current assets on the Companys consolidated balance sheets. The
convertible preferred stock carries a dividend rate of 8% that is payable if and when declared by
its board of directors. This investment is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of this asset may not be recoverable. The Company
believes that no such impairment indicators existed during the six months ended September 30, 2009.
Note 6. Property and equipment
Property and equipment consists of leasehold improvements, furniture, fixtures, equipment,
capitalized internal software development costs, and acquired developed technology. Property and
equipment is stated at cost, less accumulated depreciation and amortization. In certain of its
membership programs, the Company provides business intelligence software tools under hosting
arrangements where the software application resides on the Companys or its service providers
hardware. The members do not take delivery of the software and only receive access to the business
intelligence tools during the term of their membership agreement. In accordance with ASC
985-605-55, Revenue Recognition Hosting Arrangements, the development costs of this software are
accounted for in accordance with ASC 350-40, Internal-Use Software. Software development costs that
are incurred in the preliminary project stage are expensed as incurred. During the development
stage direct consulting costs and payroll-related costs for employees that are directly associated
with each project are capitalized and amortized over the estimated useful life of the software once
placed into operation. Capitalized software is amortized using the straight-line method over its
estimated useful life, which is generally five years. Replacements and major improvements are
capitalized, while maintenance and repairs are charged to expense as incurred.
The acquired developed technology is classified as property and equipment because the
developed software application resides on the Companys or its service providers hardware.
Amortization for acquired developed software is included in depreciation and amortization on the
Companys consolidated statements of income. Acquired developed software is amortized over its
estimated useful life of nine years based on the cash flow estimate used to determine the value of
the asset. The amount of acquired developed software amortization included in depreciation and
amortization for the three and six months ended September 30, 2009 was approximately $80,000 and
$160,000, respectively.
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Table of Contents
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. Leasehold improvements
are depreciated using the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term. There are no capitalized leases included in property and equipment
for the periods presented. Property and equipment consists of the following (in thousands):
As of | ||||||||
September 30, | March 31, | |||||||
2009 | 2009 | |||||||
Leasehold improvements |
$ | 15,253 | $ | 15,151 | ||||
Furniture, fixtures and equipment |
15,759 | 16,199 | ||||||
Software |
19,231 | 27,285 | ||||||
Property and equipment, gross |
50,243 | 58,635 | ||||||
Accumulated depreciation and amortization |
(26,426 | ) | (24,479 | ) | ||||
Property and equipment, net |
$ | 23,817 | $ | 34,156 | ||||
The Company applies the provisions of ASC 360-10, Impairment of Long-Lived Assets, when
changes in circumstances exist that suggest the carrying value of a long-lived asset may not be
fully recoverable. If an indication of impairment exists, and the Companys net book value of the
related assets is not fully recoverable based upon an analysis of its estimated discounted future
cash flows, the assets are written down to their estimated fair value. At September 30, 2009, the
Company concluded that certain capitalized software development costs were not fully recoverable.
As a result, the Company recognized an impairment on capitalized software of $7.4 million. For
further discussion of the impairment and the valuation method used, see Note 3. Fair value
measurements.
Note 7. Goodwill and other intangibles
Included in the Companys goodwill and other intangibles balances are goodwill and acquired
intangibles and internally developed capitalized software for sale. Goodwill is not amortized as it
has an estimated infinite life. Goodwill is reviewed for impairment at least annually as of March
31, or whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company believes that no such impairment indicators existed during the
six months ended September 30, 2009.
Intangible assets with finite lives are amortized on a straight-line basis over their
estimated useful lives which range from three to ten years. As of September 30, 2009, the
weighted average estimated useful life of acquired intangibles is
5.7 years with a weighted average
remaining life of approximately 5.0 years. As of
September 30, 2009, the weighted average estimated
useful life on internally developed intangibles is 5.0 years
with a weighted average remaining life
of approximately 4.7 years. The gross and net carrying balances and accumulated amortization of
other intangibles are as follows (in thousands):
As of September 30, 2009 | As of March 31, 2009 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | |||||||||||||||||||
amount | amortization | amount | amount | amortization | amount | |||||||||||||||||||
Other Intangibles |
||||||||||||||||||||||||
Internally developed intangible for sale: |
||||||||||||||||||||||||
Capitalized software |
$ | 2,469 | $ | (306 | ) | $ | 2,163 | $ | 1,973 | $ | (231 | ) | $ | 1,742 | ||||||||||
Acquired intangibles: |
||||||||||||||||||||||||
Developed software |
738 | (627 | ) | 111 | 738 | (554 | ) | 184 | ||||||||||||||||
Customer contracts |
3,313 | (1,164 | ) | 2,149 | 3,313 | (776 | ) | 2,537 | ||||||||||||||||
Total other intangibles |
$ | 6,520 | $ | (2,097 | ) | $ | 4,423 | $ | 6,024 | $ | (1,561 | ) | $ | 4,463 | ||||||||||
Amortization expense for other intangible assets for the three months ended September 30, 2009
and 2008, recorded in cost of services on the accompanying consolidated statements of income, was
approximately $268,000 and $254,000, respectively. Amortization expense for other intangible assets
for the six months ended September 30, 2009 and 2008, recorded in cost of services on the accompanying
consolidated statements of income, was approximately $536,000 and $446,000, respectively. The
following approximates the anticipated aggregate amortization expense for the remaining six months
of the fiscal year ended March 31, 2010; for each of the fiscal years ended March 31, 2011, 2012,
and 2013; and for the fiscal year ending March 31, 2014 and beyond: $0.7 million, $1.3 million,
$0.7 million, $0.5 million, and $1.2 million, respectively.
10
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Note 8. Stock-based compensation
Equity incentive plans
The Company issues awards, including stock options and restricted stock units (RSUs), under
the Companys 2005 Stock Incentive Plan (the 2005 Plan), the 2009 Stock Incentive Plan (the 2009
Plan), and, through September 11, 2009, the Companys 2006 Stock Incentive Plan (the 2006 Plan).
Upon approval of the 2009 Plan by the Companys stockholders on September 11, 2009, the 2006 Plan
was frozen with respect to new awards. Awards may consist of treasury shares or newly issued
shares. The exercise price of a stock option or other stock-based award is equal to the closing
price of the Companys common stock on the date of grant. RSUs are stock-based
compensation arrangements settled in shares of the Companys common stock. Stock-based awards
granted under the 2005 Plan have a seven year maximum contractual term. Stock-based awards granted
under the 2006 Plan and the 2009 Plan have a five year maximum contractual term.
The aggregate number of shares of the Companys common stock available for issuance under the
2005 Plan may not exceed 1,600,000, plus the shares that remained available for issuance under the
Companys 2001 Stock Incentive Plan (the 2001 Plan) as of November 15, 2005 and shares subject to
outstanding awards under the 2001 Plan that, on or after such date, cease for any reason to be
subject to such awards (other than reason of exercise or settlement of the awards to the extent
they are exercised for or settled in vested and non-forfeitable shares). The aggregate number of
shares of the Companys common stock available for issuance under the 2009 Plan may not exceed
1,055,000, plus the shares that remained available for issuance under the 2006 Plan as of June 26,
2009 and shares subject to outstanding awards under the 2006 Plan that, on or after such date,
cease for any reason to be subject to such awards (other than reason of exercise or settlement of
the awards to the extent they are exercised for or settled in vested and non-forfeitable shares).
As of September 30, 2009, there were 684,289 shares available for issuance under the 2005 Plan and
1,253,327 under the 2009 Plan.
Stock option activity. During the three and six months ended September 30, 2009, the Company
granted 29,000 and 920,050 stock options with a weighted average exercise price of $25.01 and
$18.68, respectively. During the three and six months ended September 30, 2008, the Company granted
6,000 and 437,911 stock options with a weighted average exercise price of $36.32 and $44.64,
respectively. The weighted average fair value of the stock option grants are in the valuation
assumptions table below. During the three and six months ended September 30, 2009, there were no
exercises of stock options. In addition, there were no exercises of stock options during the three
months ended September 30, 2008. During the six months ended September 30, 2008, participants
exercised 18,625 options.
In September 2009 certain members of the Companys senior management and Board of Directors
voluntarily surrendered an aggregate of 830,025 stock options (both vested and unvested) having
exercise prices between $51.56 per share and $60.60 per share. The individuals who surrendered
options received nothing in return, and were promised nothing in return, such as future equity
grants to replace the surrendered options. During the three months ended September 30, 2009, no new
equity grants were made to members of the Companys senior management or Board of Directors. In
addition, the Company does not plan to vary its equity grant practices as a result of this
cancellation. In accordance with ASC 718-20-35-9, Awards Classified as Equity Cancellation and
Replacement, the Company accelerated the remaining expense on these cancelled awards that resulted
in pre-tax charges of approximately $0.7 million recorded in cost of services, $0.1 million
recorded in member relations and marketing, and $1.1 million recorded in general and administrative
expense. This cancellation created tax shortfalls that resulted in the reversal of $4.4 million of
deferred tax assets. The reversal of these deferred tax assets resulted in a decrease to additional
paid-in capital as the Company has a sufficient pool of excess tax
benefits.
Restricted stock unit activity. The Company did not grant RSUs during the three months ended
September 30, 2009 or 2008. During the six months ended September 30, 2009 and 2008, the Company
granted 76,500 and 165,433 RSUs, respectively. The weighted average grant date fair value of RSUs
granted for the six months ended September 30, 2009 and 2008 was $18.60 and $44.76, respectively.
During the three and six months ended September 30, 2009, the
Company issued 5,362 and 5,485
shares of common stock, respectively, to settle vested RSUs. There were no shares of
common stock issued for vested RSUs during the three months ended September 30,
2008. During the six months ended September 30, 2008, participants received 18,007 shares of common
stock relating to the vesting of RSUs. There were no shares withheld to satisfy employee tax
withholdings during the three months ended September 30, 2009 or 2008. During the six months ended
September 30, 2009 and 2008, 77 shares and 7,162 shares were withheld to satisfy minimum employee
tax withholding of $2,000 and $390,000, respectively.
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Valuation assumptions. The Company calculates the fair value of each stock option award on the
date of grant using the Black-Scholes valuation model. The following average key assumptions were
used in the model to value stock option grants for each respective period:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock option grants: |
||||||||||||||||
Risk-free interest rate |
1.9 | % | 3.0 | % | 1.6 | % | 2.9 | % | ||||||||
Expected lives in years |
4.0 | 4.0 | 4.1 | 4.0 | ||||||||||||
Expected volatility |
41.9 | % | 28.6 | % | 37.4 | % | 28.3 | % | ||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Weighted average grant date fair value of options granted |
$ | 8.78 | $ | 9.95 | $ | 5.94 | $ | 12.07 |
Employee stock purchase plan. The Company sponsors an employee stock purchase plan (ESPP)
for all eligible employees. Under the ESPP, employees authorize payroll deductions from 1% to 15%
of their eligible compensation to purchase shares of the Companys common stock. Under the ESPP,
shares of the Companys common stock may be purchased at the end of each fiscal quarter at 95% of
the closing price of the Companys common stock. A total of 842,000 shares of the Companys common
stock are authorized under the ESPP. As of September 30, 2009, a total of 762,189 shares were
available for issuance under the ESPP. During the three and six months ended September 30, 2009,
the Company issued 1,448 shares and 2,952 shares under the ESPP at an average price of $23.88 per
share and $24.16 per share, respectively. During the three and six months ended September 30, 2008,
the Company issued 3,777 shares and 7,153 shares under the ESPP at an average price of $25.64 per
share and $29.31 per share, respectively.
Compensation expense. The Company recognized stock-based compensation expense in the following
consolidated statements of income line items for stock options and RSUs and for shares issued under
the Companys ESPP according to FASB ASC 718-10, Share-Based Payment, for the three
and six months ended September 30, 2009 and 2008 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock-based compensation expense included in: |
||||||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
$ | 1,646 | $ | 1,159 | $ | 2,588 | $ | 2,158 | ||||||||
Member relations and marketing |
643 | 634 | 1,158 | 1,197 | ||||||||||||
General and administrative |
2,643 | 1,737 | 4,125 | 2,978 | ||||||||||||
Depreciation |
| | | | ||||||||||||
Total costs and expenses |
4,932 | 3,530 | 7,871 | 6,333 | ||||||||||||
Income from operations |
(4,932 | ) | (3,530 | ) | (7,871 | ) | (6,333 | ) | ||||||||
Net income |
$ | (3,240 | ) | $ | (2,390 | ) | $ | (5,171 | ) | $ | (4,265 | ) | ||||
Impact on diluted earnings per share |
$ | 0.21 | $ | 0.14 | $ | 0.33 | $ | 0.25 | ||||||||
There are no stock-based compensation costs capitalized as part of the cost of an asset.
Stock-based compensation expense by award type is below (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock-based compensation by award type: |
||||||||||||||||
Stock options |
$ | 3,525 | $ | 2,132 | $ | 5,066 | $ | 3,845 | ||||||||
Restricted stock units |
1,405 | 1,382 | 2,801 | 2,452 | ||||||||||||
Employee stock purchase rights |
2 | 16 | 4 | 36 | ||||||||||||
Total stock-based compensation |
$ | 4,932 | $ | 3,530 | $ | 7,871 | $ | 6,333 | ||||||||
As of September 30, 2009, $15.4 million of total unrecognized compensation cost related to
stock-based compensation is expected to be recognized over a weighted average period of 1.4 years.
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Note 9. Earnings per share
Basic earnings per share is computed by dividing net income by the number of weighted average
common shares outstanding during the period. Diluted earnings per share is computed by dividing net
income by the number of weighted average common shares increased by the dilutive effects of
potential common shares outstanding during the period. The number of potential common shares
outstanding is determined in accordance with the treasury stock method, using the Companys
prevailing tax rates. Certain potential common share equivalents were
not included in the computation
because their effect was anti-dilutive. For financial reporting purposes, in periods of losses from
continuing operations, basic loss per share and dilutive loss per share are the same. The Company
reported a net loss for the three months ended September 30, 2009 and excluded 80,000 shares and
55,000 shares, respectively, from the computation of diluted loss per share related to outstanding
stock options and RSUs, respectively. A reconciliation of basic to diluted weighted average common
shares outstanding is as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic weighted average common shares outstanding |
15,527 | 16,922 | 15,541 | 17,143 | ||||||||||||
Dilutive impact of stock options |
| 43 | 47 | 183 | ||||||||||||
Dilutive impact of restricted stock units |
| 24 | 48 | 26 | ||||||||||||
Diluted weighted average common shares outstanding |
15,527 | 16,989 | 15,636 | 17,352 | ||||||||||||
The following potential common share equivalents were not included in calculating diluted net
income per share because their effect was anti-dilutive (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Anti-dilutive stock
options and
restricted stock
units |
2,220 | 1,151 | 2,909 | 678 |
Note 10. Comprehensive income
Comprehensive income consists of net income plus the net-of-tax impact of unrealized gains and
losses on certain investments in debt securities. Comprehensive loss for the three months ended
September 30, 2009 was $1.8 million. Comprehensive income for the six months ended September 30,
2009 was $2.3 million; and $5.0 million and $10.1 million for the three and six months ended
September 30, 2008, respectively. The accumulated elements of other comprehensive income, net of
tax, included within stockholders equity on the consolidated balance sheets are composed solely of
net unrealized gains and losses on marketable securities, net of applicable income taxes.
Note 11. Income taxes
FASB ASC 805-740, Income Taxes, prescribes a minimum recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position. If a tax
position does not meet the more-likely-than-not initial recognition threshold, no benefit is
recorded in the financial statements. The Company does not currently anticipate that the total
amounts of unrecognized tax benefits will significantly change within the next 12 months. The
Company files income tax returns in U.S. federal and state and foreign jurisdictions. The Company
classifies interest and penalties on any unrecognized tax benefits as a component of the provision
for income taxes. No interest or penalties were recognized in the consolidated statements of income
for either of the three or six month periods ended September 30, 2009 or 2008. With few exceptions,
the Company is no longer subject to U.S. federal, state, and local tax examinations for filings in
major tax jurisdictions before 2005.
Note 12. Stockholders equity
In April 2008 the Companys Board of Directors authorized an increase in its cumulative share
repurchase program to $350 million of the Companys common stock. As of September 30, 2009, $45.0
million is available for repurchase of shares under the authorization. For the three and six months
ended September 30, 2009, 3,872 shares and 38,854 shares were repurchased under this program,
respectively. For the three and six months ended September 30, 2008, 1,086,517 shares and 1,266,138
shares were
repurchased under this program, respectively. All repurchases to date have been made in the
open market. No minimum number of shares subject to
13
Table of Contents
repurchase has been fixed and the share
repurchase authorization has no expiration date. The Company has funded, and expects to continue to
fund, its share repurchases with cash on hand, proceeds from the sale of marketable securities, and
cash generated from operations.
As of September 30, 2009 and March 31, 2009, the Company had repurchased 7,224,416 shares and
7,185,562 shares of the Companys common stock, respectively, at a total cost of $305.0 million and
$304.0 million, respectively. Of these repurchased shares, 1,000,000 shares have been retired.
Note 13. Subsequent events
The Company has evaluated subsequent events through November 9, 2009, the date the financial
statements were issued. On November 6, 2009, the Companys Board of Directors appointed Sanju K.
Bansal of MicroStrategy Incorporated to serve as a member of its Board of Directors and its
Governance Committee. Mr. Bansal will receive compensation for his services similar to other
non-employee directors of the Company, including a $15,000 annual retainer.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context indicates otherwise, references in this report to the Company, the
registrant, we, our and us mean The Advisory Board Company and its subsidiaries.
This report includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Any statements contained herein that are not statements of historical fact may be deemed
to be forward-looking statements. These statements can sometimes be identified by our use of
forward-looking words such as may, will, believes,
anticipates, plans, expects,
seeks, estimates, or intends and similar expressions. These statements involve known and
unknown risks, uncertainties, and other factors that may cause our actual results, performance, or
achievements to be materially different from the results, performance, or achievements expressed or
implied by the forward-looking statements, including the factors discussed under Item 1A. Risk
Factors in our annual report on Form 10-K for the fiscal year ended March 31, 2009 (the 2009 Form
10-K) and our quarterly reports on Form 10-Q for subsequent quarters, filed with the Securities
and Exchange Commission. We undertake no obligation to update any forward-looking statements,
whether as a result of circumstances or events that arise after the date the statements are made,
new information, or otherwise.
Overview
We provide best practices research, analysis, executive education and leadership development,
business intelligence software tools, and installation support and provide membership to
approximately 2,800 organizations including hospitals, health systems, pharmaceutical and biotech
companies, health care insurers, medical device companies, and universities and other education
institutions through discrete programs. Our program offerings focus on business strategy,
operations, and general management issues. Best practice research identifies, analyzes, and
describes specific management initiatives, strategies, and processes that produce the best results
in solving common problems or challenges. Members of each program typically are charged a fixed fee
and have access to an integrated set of services that may include best practices research studies
and implementation tools, executive education seminars, customized research briefs, web-based
access to the programs content database, and business intelligence software tools.
Our membership business model allows us to focus on a broad set of issues relevant to our
member organizations, while promoting frequent use of our programs and services by our members. Our
revenue was $115.0 million in the six months ended September 30, 2009 compared to $114.8 million
the six months ended September 30, 2008, and our contract value was $237.6 million as of September
30, 2009 compared to $230.6 million as of September 30, 2008. We define contract value as the
aggregate annualized revenue attributed to all agreements in effect at a given point in time,
without regard to the initial term or remaining duration of any such agreement.
Memberships in 34 of our programs are renewable at the end of their membership contract term,
the majority of which are 12 months in length. Our other nine best practices programs provide
installation support. These installation support memberships help members accelerate the adoption
of best practices profiled in our research studies and are not individually renewable.
14
Table of Contents
Our operating costs and expenses consist of cost of services, member relations and
marketing, general and administrative expenses, and depreciation and amortization expenses. Cost of
services represents the costs associated with the production and delivery of our products and
services. Member relations and marketing expenses include the costs of acquiring new members and
renewing existing members. General and administrative expenses include the costs of human resources
and recruiting, finance and accounting, management information systems, facilities management, new
program development, and other administrative functions. Depreciation and amortization expense
includes the cost of depreciation of our property and equipment, amortization of costs associated
with the development of business intelligence software and tools that are offered as part of
certain of our membership programs, and amortization of acquired developed technology. Included in
our operating costs for each year presented are stock-based compensation expenses and expenses
representing additional payroll taxes for compensation expense as a result of the taxable income
employees recognized upon the exercise of common stock options and the vesting of restricted stock
units.
Critical accounting policies
Our accounting policies, which are in compliance with GAAP, require us to apply methodologies,
estimates and judgments that have a significant impact on the results we report in our financial
statements. In our 2009 Form 10-K, we have discussed those material policies that we believe are
critical and require the use of complex judgment in their application. There have been no material
changes to our policies since our last fiscal year ended March 31, 2009.
Results of operations
The following table shows statements of income data expressed as a percentage of revenue for
the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
53.2 | % | 50.3 | % | 53.1 | % | 50.1 | % | ||||||||
Member relations and marketing |
22.5 | % | 22.7 | % | 22.3 | % | 22.2 | % | ||||||||
General and administrative |
15.1 | % | 12.5 | % | 13.6 | % | 12.3 | % | ||||||||
Depreciation and amortization |
2.9 | % | 2.3 | % | 3.1 | % | 2.1 | % | ||||||||
Write-off of capitalized software |
12.7 | % | | 6.5 | % | | ||||||||||
(Loss) income from operations |
(6.4 | )% | 12.2 | % | 1.4 | % | 13.3 | % | ||||||||
Other income, net |
0.9 | % | 1.6 | % | 1.3 | % | 1.9 | % | ||||||||
(Loss)
income before benefit (provision) for
income taxes |
(5.5 | )% | 13.8 | % | 2.7 | % | 15.2 | % | ||||||||
Income tax benefit (provision) |
1.9 | % | (4.5 | )% | (0.9 | )% | (5.0 | )% | ||||||||
Net (loss) income |
(3.6 | )% | 9.4 | % | 1.8 | % | 10.2 | % | ||||||||
Three and six months ended September 30, 2009 and 2008
Overview. Revenue increased 1.2% to $58.3 million for the three months ended September 30,
2009 from $57.6 million for the three months ended September 30, 2008, and for the six months ended
September 30, 2009 revenue increased 0.2% to $115.0 million from $114.8 million for the same period
in 2008. Net loss for the three months ended September 30, 2009
was $2.1 million, and net income for
the six months ended September 30, 2009 was $2.1 million.
Net income for the three and six months ended September 30, 2008 was
$5.4 million and $11.7 million, respectively. The decrease in net income during
fiscal 2010 is primarily due to two non-cash charges. During the three months ended
September 30, 2009 certain members of the Companys senior management and Board of Directors
voluntarily surrendered for cancellation a total of 830,025 options that had exercise prices
between $51.56 per share and $60.60 per share. This cancellation led to a nonrecurring non-cash
charge during the quarter of $1.9 million. Also during the three months ended September 30, 2009 we
recognized a $7.4 million non-cash charge resulting from the write-off of capitalized software.
Revenue. Total revenue increased 1.2% to $58.3 million for the three months ended September
30, 2009 from $57.6 million for the three months ended September 30, 2008. Total revenue increased
0.2% to $115.0 million for the six months ended September 30, 2009 from $114.8 million for the six
months ended September 30, 2008. Our contract value increased 3.0% to $237.6 million for the
second quarter of fiscal 2010 from $230.6 million for the second quarter of fiscal 2009. The
increases in revenue and contract value were
15
Table of Contents
primarily due to the introduction and expansion of new
programs and cross-selling existing programs to existing members, and, to a lesser degree, the
addition of new member organizations, and price increases. We offered 43 membership programs as of
September 30, 2009 and 39 membership programs as of September 30, 2008.
Cost of services. Cost of services increased 7.1% to $31.0 million for the three months ended
September 30, 2009 from $29.0 million for the three months ended September 30, 2008. Cost of
services increased 5.0% to $60.4 million for the six months ended September 30, 2009 from $57.5
million for the six months ended September 30, 2008. The increase in cost of services was primarily
due to increased personnel, meetings, licensing fees, and deliverable costs from the expansion of
new programs launched during the calendar year. We also recognized an accelerated stock-based
compensation charge of $0.7 million in the three and six months ended September 30, 2009, or 1.2%
and 0.6% of revenue, respectively, in connection with the cancellation of certain stock options.
As a percentage of revenue, cost of services was 53.2% and 53.1% for the three and six months
ended September 30, 2009 and 50.3% and 50.1% for the three and six months ended September 30, 2008,
respectively.
Member relations and marketing. Member relations and marketing expense was $13.1 million in
the three months ended September 30, 2009 and 2008. Member relations and marketing expense
increased 0.9% to $25.7 million for the six months ended September 30, 2009 from $25.5 million for
the six months ended September 30, 2008. As a percentage of revenue, member relations and marketing
expense was 22.5% for the three months ended September 30, 2009 compared to 22.7% for the three
months ended September 30, 2008 and was 22.3% for the six months ended September 30, 2009 compared
to 22.2% for the six months ended September 30, 2008. The small increase in member relations and
marketing was primarily due to an increase in member relations personnel and related costs required
to serve the expanding membership base. In addition, we recognized an accelerated stock-based
compensation charge of $0.1 million in the three months ended September 30, 2009 in connection with
the voluntary surrender of certain stock options.
General and administrative. General and administrative expense increased 22.5% to $8.8 million
for the three months ended September 30, 2009 from $7.2 million for the three months ended
September 30, 2008. General and administrative expense increased 10.6% to $15.6 million for the six
months ended September 30, 2009 from $14.1 million for the six months ended September 30, 2008. The
increase in general and administrative was primarily due to the accelerated stock-based
compensation charge of $1.1 million, or 1.9% and 1.0% of revenue, respectively, in the three and
six months ended September 30, 2009 in connection with the voluntary surrender of certain stock
options as well as increased new product development costs. As a percentage of revenue, general and
administrative expense was 15.1% for the three months ended September 30, 2009 compared to 12.5%
for the three months ended September 30, 2008 and was 13.6% for the six months ended September 30,
2009 compared to 12.3% for the six months ended September 30, 2008.
Depreciation and amortization. Depreciation and amortization expense increased to $1.7 million
for the three months ended September 30, 2009 from $1.3 for the three months ended September 30,
2008. Depreciation and amortization expense increased to $3.6 million for the six months ended
September 30, 2009 from $2.4 million for the six months ended September 30, 2008. These increases
are primarily due to increased amortization expense from developed capitalized internal-use
software tools, including acquired developed technology associated with our acquisition of Crimson
Software, Inc. (Crimson) in April 2008, and the amortization of costs related to the expansion of
additional floors in our headquarters facility under the terms of our lease agreement.
Write-off of capitalized
software. During the three months ended September 30, 2009,
we recognized an impairment charge on
capitalized internally developed software assets of $7.4 million with no comparable expense in the prior year
periods.
Other income, net. Other income, net consists of interest income and gain on foreign exchange
rates. Other income, net decreased to $0.6 million for the three months ended September 30, 2009,
from $0.9 million for the three months ended September 30, 2008. Interest income decreased to $0.6
million for the three months ended September 30, 2009, from $0.9 million in the same period of the
prior year due to a lower average balance in marketable securities, as well as a lower average
interest rate. Other income, net decreased to $1.6 million for the six months ended September 30,
2009, from $2.2 million for the six months ended September 30, 2008. Interest income decreased to
$1.2 million for the six months ended September 30, 2009, from $2.2 million in the same period of
the prior year due to a lower balance in marketable securities, as well as a lower average interest
rate. As a result of fluctuating currency rates, we recognized foreign exchange loss of $20,000 in
the three months ended September 30, 2009 and a foreign exchange
gain of $0.4 million in the six months ended September 30, 2009. The effect of the movement in
foreign exchange rates on our income statement was immaterial during the three and six months
ending September 30, 2008.
16
Table of Contents
Income tax benefit (provision). Our income tax benefit was $1.1 million for the three months ended
September 30, 2009 and our provision for income taxes was $2.6 million for the three months ended
September 30, 2008. Our provision for income taxes was $1.1 million for the six months ended
September 30, 2009 and $5.7 million for the six months ended September 30, 2008. Our effective tax
rate during the three months ended September 30, 2009 was 34.3%, compared to 32.3% for the three
months ended September 30, 2008 and was 34.3% for the six months
ended September 30, 2009, compared
to 32.8% for the six months ended September 30, 2008. The increase in tax rate is due primarily to
an increase in our Washington, D.C. statutory income tax rate from 0% to 6% as of January 1, 2009
in accordance with the District of Columbias New E-conomy Transformation Act of 2000.
Stock-based compensation expense. We recognized the following stock-based compensation expense
in the consolidated statements of income line items for stock options and restricted stock units
issued under our stock incentive plans and for shares issued under our employee stock purchase
plans for the three and six months ended September 30, 2009 and 2008 (in thousands, except per
share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock-based compensation expense included in: |
||||||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
$ | 1,646 | $ | 1,159 | $ | 2,588 | $ | 2,158 | ||||||||
Member relations and marketing |
643 | 634 | 1,158 | 1,197 | ||||||||||||
General and administrative |
2,643 | 1,737 | 4,125 | 2,978 | ||||||||||||
Depreciation |
| | | | ||||||||||||
Total costs and expenses |
4,932 | 3,530 | 7,871 | 6,333 | ||||||||||||
Income from operations |
(4,932 | ) | (3,530 | ) | (7,871 | ) | (6,333 | ) | ||||||||
Net income |
$ | (3,240 | ) | $ | (2,390 | ) | $ | (5,171 | ) | $ | (4,265 | ) | ||||
Impact on diluted earnings per share |
$ | 0.21 | $ | 0.14 | $ | 0.33 | $ | 0.25 | ||||||||
Included in costs and expenses above are pre-tax charges relating to the acceleration of the
remaining expense on cancelled stock option awards of approximately $0.7 million recorded in cost
of services, $0.1 million recorded in member relations and marketing, and $1.1 million recorded in
general and administrative expense.
As of September 30, 2009, $15.4 million of total unrecognized compensation cost related to
stock-based compensation is expected to be recognized over a weighted average period of 1.4 years.
Liquidity and capital resources
Cash flows generated from operating activities are our primary source of liquidity and we
believe that existing cash, cash equivalents, and marketable securities balances and operating cash
flows will be sufficient to support operating and capital expenditures, as well as share
repurchases and potential acquisitions, during the next 12 months. We had cash, cash equivalents,
and marketable securities balances of $94.5 million and $93.8 million at September 30, 2009 and
March 31, 2009, respectively. We repurchased $1.0 million and $43.3 million shares of our common
stock through our share repurchase program during the six months ended September 30, 2009 and 2008,
respectively.
Cash flows from operating activities. The combination of profitable operations and payment for
memberships in advance of accrual revenue typically results in operating activities generating net
positive cash flows on an annual basis. Cash flows from operating activities fluctuate from quarter
to quarter based on the timing of new and renewal contracts as well as certain expenses, and the
first and second quarters of our fiscal year typically provide the lowest quarterly cash flows from
operations. Net cash flows provided by operating activities were $8.8 million and $12.3 million for
the six months ended September 30, 2009 and 2008, respectively. The decrease in net cash flows
provided by operating activities was primarily due to the decrease in net income for the six months
ended September 30, 2009 compared to the same period in 2008.
Cash flows from investing activities. The Companys cash management and investment strategy,
capital expenditure programs, and acquisition activities affect investing cash flows. Net cash
flows used in investing activities were $1.6 million for the six months ended September 30, 2009.
Net cash flows provided by investing activities were $26.6 million for the six months ended
September 30, 2008.
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Investing activities for the six months ended September 30, 2009 used $1.6 million of cash,
consisting primarily of a $5.0 million investment and a $1.0 million loan to unrelated entities,
offset by net proceeds on the redemption and sales of marketable securities of $5.5 million, and $1.2 million
in capital expenditures. Investing activities for the six months ended September 30, 2008 provided
$26.6 million in cash primarily from the net proceeds on the redemption and sales of marketable
securities of $55.2 million, which was used primarily for the cash purchase of Crimson for $18.6
million, net of cash received, for capital expenditures of $10.1 million, and for our share
repurchase program of $43.3 million. Capital expenditures during the six months ended September 30,
2008 included $3.5 million in purchases of property and equipment related primarily to the
scheduled expansion of our headquarters facility and $5.0 million of capitalized software
development costs related to our newer programs that include business intelligence software tools.
Cash flows from financing activities. We used net cash flows in financing activities of $0.9
million and $42.8 million in the six months ended September 30, 2009 and 2008, respectively. We did
not receive any proceeds from the exercise of stock options during the six months ended September
30, 2009. During the six months ended September 30, 2008, we received approximately $421,000 from
the exercise of stock options. Also in the six months ended September 30, 2009 and 2008, we
received approximately $71,000 and $210,000, respectively, in proceeds from the issuance of common
stock under our employee stock purchase plan. We repurchased 38,854 and 1,086,517 shares of our
common stock at a total cost of approximately $1.0 million and $43.3 million in the six months
ended September 30, 2009 and 2008, respectively, pursuant to our share repurchase program.
Contractual obligations. In November 2006 we entered into a $20 million revolving credit
facility with a commercial bank that can be used for working capital, share repurchases, or other
general corporate purposes. Borrowings on the credit facility, if any, will be collateralized by
certain of our marketable securities and will bear interest at an amount based on the published
LIBOR rate. We are also required to maintain an interest coverage ratio for each of our fiscal
years of not less than three to one. The credit facility renews automatically each year until 2011,
and can be increased at our request by up to an additional $10 million per year up to $50 million
in the aggregate. There have been no borrowings under the credit facility, and we have not
increased the original amount of the facility.
We currently have lease obligations for certain administrative office space. There have not
been any material changes outside the ordinary course of business to our contractual obligations
during the six months ended September 30, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest rate 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 include investments in highly liquid U.S. Treasury obligations
with maturities of less than three months. At September 30, 2009, our marketable securities consist
of $2.6 million in tax-exempt notes and bonds issued by the District of Columbia, $36.9 million in
tax-exempt notes and bonds issued by various states, and $25.0 million in U.S. government agency
securities. The weighted average maturity on all our marketable securities as of September 30, 2009
was approximately 4.1 years. We perform periodic evaluations of the relative credit ratings related
to the cash, cash equivalents, and marketable securities. Our portfolio is subject to inherent
interest rate risk as investments mature and are reinvested at current market interest rates. We
currently do not use derivative financial instruments to adjust our portfolio risk or income
profile.
With respect to recent global economic events, there is an unprecedented uncertainty in the
financial markets, which could bring potential liquidity risks to the Company. Such risks could
include additional declines in our stock value, less availability and higher costs of additional
credit, potential counterparty defaults, and further commercial bank failures. The Company does not
believe that the value or liquidity of its cash, cash equivalents, and marketable securities, as
described above, have been significantly impacted by the recent credit crisis. In addition, the
creditworthiness of our customers is constantly monitored by the Company, and we believe that our
current group of customers are sound and represent no abnormal business risk.
Foreign currency risk. Although it represents less than 3% of our revenue, our international
operations subject us to risks related to currency exchange fluctuations. Prices for our services
sold to members located outside the United States are sometimes denominated in local currencies. As
a consequence, increases in the U.S. dollar against local currencies in countries where we have
members would
result in a foreign exchange loss recognized by the Company. In the three and six months
ending September 30, 2009, we recorded a foreign currency exchange loss of $20,000 and a foreign
currency gain of $360,000, respectively, which are included in Other income, net in the
consolidated statements of income. The effect of the movement in foreign exchange rates on our
income statement was immaterial during the three and six months ending September 30, 2008.
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Item 4. Controls and Procedures.
The Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have
evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by
this quarterly report as required by Rules 13a-15(b) or 15d-15(b) of the
Exchange Act.
The Companys management, including the CEO and CFO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent all errors
and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will be met. Based on
their evaluation, such officers have concluded that, as of the end of the period covered by this
quarterly report, the Companys disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commissions rules and forms and to provide
reasonable assurance that such information is accumulated and communicated to the Companys
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. During the period covered by this quarterly report, there have been no changes to our
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the risk factor listed below and other information contained in this Quarterly
Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk
Factors in our 2009 Form 10-K.
We may invest in companies for strategic reasons and may not realize a return on our investments.
From time to time, the Company may make investments in companies to further its strategic
objectives and support our key business initiatives. Such investments could include equity or debt
instruments in private companies, and many of these instruments may be non-marketable at the time
of our initial investment. These companies range from early-stage companies that are often still
defining their strategic direction to more mature companies with established revenue streams and
business models. The success of these companies is dependent on product development, market
acceptance, operational efficiency, and other key business factors. The companies in which we
invest may fail because they may not be able to secure additional funding, obtain favorable
investment terms for future financings, or take advantage of liquidity events such as public
offerings, mergers, and private sales. The current economic environment may increase the risk of
failure of the companies in which we may invest due to limited access to credit and reduced
frequency of liquidity events. If any of these private companies fail, we could lose all or part of
our investment in that company. If we determine that impairment indicators exist and that there are
other-than-temporary declines in the fair value of the investments, we may be required to write
down the investments to their fair value and recognize the related write-down as an investment
loss. Our investments will likely be concentrated in companies in the health care sector, and
declines in this market or changes in managements plans with respect to our investments in this
market sector could result in significant impairment charges.
Furthermore, when the strategic objectives of an investment have been achieved, or if the
investment or business diverges from our strategic objectives, we may decide to dispose of the
investment. Our investments in private companies may not be liquid, and we may not be able to
dispose of these investments on favorable terms or at all. The occurrence of any of these events
could harm our results of operations. As of September 30, 2009, we hold approximately $6.0 million
of such investments.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In January 2004 the Companys Board of Directors authorized the repurchase of up to $50
million of the Companys common stock, which authorization was increased in amount to $100 million
in October 2004, to $150 million in February 2006, to $200 million in January 2007, to $250 million
in July 31, 2007, and to $350 million in April 2008. All repurchases have been made in the open
market. No minimum number of shares has been fixed, and the share repurchase authorization has no
expiration date.
Total Number of | Approximate | |||||||||||||||||||
Shares Purchased as | Cumulative Number | Dollar Value of | ||||||||||||||||||
Part of Publicly | of Shares Purchased | Shares That May | ||||||||||||||||||
Total Number of | Average Price | Announced Plans or | as Part of a Publicly | Yet Be Purchased | ||||||||||||||||
Shares Purchased | Paid Per Share | Programs | Announced Plan | Under The Plan | ||||||||||||||||
July 1 to July 31, 2009 |
3,872 | $ | 25.84 | 3,872 | 7,224,416 | $ | 44,963,836 | |||||||||||||
August 1 to August 30, 2009 |
| $ | | | 7,224,416 | $ | 44,963,836 | |||||||||||||
September 1 to September
30, 2009 |
| $ | | | 7,224,416 | $ | 44,963,836 | |||||||||||||
Total |
3,872 | $ | 25.84 | 3,872 | ||||||||||||||||
Item 4. Submission of Matters to a Vote of Security Holders.
The Companys 2009 annual meeting of stockholders was held on September 11, 2009. The
following is a tabulation of the voting on the proposals presented at the annual meeting:
Proposal No. 1 Election of Directors. The following nominees were elected as directors,
each to serve until the next annual meeting of stockholders or until a successor is named and
qualified:
Number of | Number of | |||||||
Votes Cast For | Votes Withheld | |||||||
Peter J. Grua
|
14,771,496 | 197,873 | ||||||
Kelt Kindick
|
14,555,421 | 413,948 | ||||||
Robert W. Musslewhite
|
14,624,959 | 344,410 | ||||||
Mark R. Neaman
|
14,624,948 | 344,421 | ||||||
Leon D. Shapiro
|
14,585,696 | 383,673 | ||||||
Frank J. Williams
|
14,624,959 | 344,410 | ||||||
LeAnne M. Zumwalt
|
14,771,176 | 198,193 |
Proposal No. 2 Ratification of the Selection of Ernst & Young LLP as Independent Registered
Public Accounting Firm for the Fiscal Year Ending March 31, 2010. The selection of Ernst & Young
LLP was ratified.
Number of votes cast for the proposal
|
14,795,971 | |||
Number of votes cast against the proposal
|
154,078 | |||
Number of abstentions
|
19,320 |
Proposal No. 3 Adoption and Approval of the Companys 2009 Stock Incentive Plan. The
proposal to adopt the Companys 2009 Stock Incentive Plan was approved.
Number of votes cast for the proposal |
10,724,757 | |||
Number of votes cast against the proposal |
3,649,245 | |||
Number of abstentions |
78,084 | |||
Number of broker non-votes |
517,283 |
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Item 5. Other Information.
On November 6, 2009, the Companys Board of Directors appointed Sanju K. Bansal to serve as a
member of the Board of Directors and of its Governance Committee. Mr. Bansal is Executive Vice
President, Chief Operating Officer and Secretary of MicroStrategy Incoporated. He has served as
Executive Vice President and Chief Operating Officer since 1993. Mr. Bansal has been a member of
MicroStrategys board of directors since September 1997 and has served as Vice Chairman of its
board of directors since November 2000. Prior to joining MicroStrategy as Vice President,
Consulting in 1990, Mr. Bansal was a consultant at Booz Allen & Hamilton, a worldwide technical and
management consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.S. in Computer Science from The
Johns Hopkins University. Mr. Bansal will receive compensation for his services similar to other
non-employee directors of the Company, including a $15,000 annual
retainer, and it is anticipated that he will be granted options to purchase 30,000 shares of the
Companys common stock in connection with his appointment to the Board of
Directors.
Item 6. Exhibits.
(a) Exhibits:
*3.1 | Certificate of Incorporation of The Advisory Board Company, as amended | |
#3.2 | Amended and Restated Bylaws of The Advisory Board Company | |
*3.3 | Form of Common Stock Certificate | |
+10.1 | The Advisory Board Company 2009 Stock Incentive Plan | |
+10.2 | Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans | |
+10.3 | Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans | |
+10.4 | Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company 2005 and 2009 Stock Incentive Plans | |
10.5 | Form of Indemnification Agreement | |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended | |
32.1 | Certifications pursuant to 18 U.S.C. Section 1350 |
* | Incorporated herein by reference to the Companys registration statement on Form S-1, declared effective by the U.S. Securities and Exchange Commission on November 9, 2001. | |
# | Filed as Exhibit 3.1 to the Companys Current Report on Form 8-K filed on November 14, 2007 and incorporated herein by reference. | |
+ | Filed as Exhibits to the Companys Current Report on Form 8-K filed on September 16, 2009 and incorporated herein by reference. |
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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 ADVISORY BOARD COMPANY |
||||
Date: November 9, 2009 | By: | /s/ Michael T. Kirshbaum | ||
Michael T. Kirshbaum | ||||
Chief Financial Officer and Treasurer | ||||
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description of Exhibit | |
10.5
|
Form of Indemnification Agreement | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended | |
32.1
|
Certifications pursuant to 18 U.S.C. Section 1350 |
23