e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2011
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
|
|
(I.R.S. Employer |
of incorporation or organization)
|
|
Identification No.) |
|
|
|
2445 M Street, N.W. |
|
|
Washington, D.C.
|
|
20037 |
(Address of principal executive offices)
|
|
(Zip Code) |
202-266-5600
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered |
|
|
|
Common Stock, par value $0.01
|
|
The NASDAQ Stock Market LLC |
|
|
(NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act: Not applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. 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 definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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 Act). Yes o No þ
Based
upon the closing price of the registrants common stock as reported on the
NASDAQ Global Select Market on September 30, 2010, the aggregate market value of the common stock
held by non-affiliates of the registrant was $694,883,473.
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
on June 1, 2011 was 16,254,311.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain portions of the registrants
definitive proxy statement for the 2011 annual meeting of stockholders to be filed with the
Commission no later than 120 days after the end of the fiscal year covered by this report.
THE ADVISORY BOARD COMPANY
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page |
PART I
|
|
|
|
|
Item 1.
|
|
Business
|
|
|
1 |
|
Item 1A.
|
|
Risk Factors
|
|
|
11 |
|
Item 1B.
|
|
Unresolved Staff Comments
|
|
|
19 |
|
Item 2.
|
|
Properties
|
|
|
19 |
|
Item 3.
|
|
Legal Proceedings
|
|
|
20 |
|
Item 4.
|
|
[Removed and Reserved]
|
|
|
20 |
|
|
|
|
|
|
|
|
PART II
|
|
|
|
|
Item 5.
|
|
Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
|
|
|
21 |
|
Item 6.
|
|
Selected Financial Data
|
|
|
21 |
|
Item 7.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
23 |
|
Item 7A.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
|
|
34 |
|
Item 8.
|
|
Financial Statements and Supplementary Data
|
|
|
35 |
|
Item 9.
|
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
|
|
60 |
|
Item 9A.
|
|
Controls and Procedures
|
|
|
60 |
|
Item 9B.
|
|
Other Information
|
|
|
60 |
|
|
|
|
|
|
|
|
PART III
|
|
|
|
|
Item 10.
|
|
Directors, Executive Officers and Corporate Governance
|
|
|
61 |
|
Item 11.
|
|
Executive Compensation
|
|
|
61 |
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
|
|
61 |
|
Item 13.
|
|
Certain Relationships and Related Transactions, and Director Independence
|
|
|
61 |
|
Item 14.
|
|
Principal Accounting Fees and Services
|
|
|
61 |
|
|
|
|
|
|
|
|
PART IV
|
|
|
|
|
Item 15.
|
|
Exhibits and Financial Statement Schedules
|
|
|
62 |
|
SIGNATURES |
|
|
66 |
|
Index to Exhibits |
|
|
67 |
|
PART I
We have derived some of the information contained in this report concerning the markets and
industry in which we operate and the customers we serve from publicly available information and
from industry sources. Although we believe that this publicly available information and the
information provided by these industry sources are reliable, we have not independently verified the
accuracy of any of this information.
Our fiscal year is the 12-month period ending on March 31.
Unless the context indicates otherwise, references in this Annual Report on Form 10-K to we,
our, and us mean The Advisory Board Company and its consolidated subsidiaries.
Forward-looking Statements
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, are made throughout
this Annual Report on Form 10-K. Any statements contained in this Annual Report on Form 10-K that
are not statements of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words believes, anticipates, plans, expects, seeks,
estimates, and similar expressions are intended to identify forward-looking statements. While we
may elect to update forward-looking statements in the future, we specifically disclaim any
obligation to do so, even if our estimates change, and readers should not rely on those
forward-looking statements as representing our views as of any date subsequent to the date of the
filing of this report.
A number of important factors could cause our results to differ materially from those
expressed or implied by such forward-looking statements, including the factors discussed under the
heading Risk Factors in Part I, Item 1A of this report.
Item 1. Business.
Overview
We provide best practices research and analysis, business intelligence and software tools, and
management and advisory services to the health care and education industries. Through 50
subscription based programs, we leverage our intellectual capital to drive performance improvement
to our base of over 3,200 members by providing proven solutions to our members most important
business problems. We offer programs rooted in best practices in three key areas: best
practices research; business intelligence and software tools; and management and advisory services.
Our best practices research memberships serve as the foundation of intellectual property across all
programs and are focused on identifying best-demonstrated management practices, critiquing
widely-followed but ineffective practices, and analyzing emerging trends within the health care and
education industries. Our business intelligence and software tools programs leverage this
intellectual capital, allowing members to pair their own operational data with the best practices
insights from our research through web-based business intelligence and software tools founded upon
the critical insights of the industry. Our management and advisory services programs assist member
institutions efforts to adopt and implement best practices to improve their own performance. We
launched our first health care program in 1986 and our first education program in 2007. Since
becoming a public company in 2001, we have increased the total number of discrete programs we offer
from 13 to 50 as of March 31, 2011. Each of our 50 programs targets the issues of a specific
executive constituency or business function.
Our membership-based model, in which members actively participate in our research and analysis
on an annual basis, is central to our strategy. This model gives us privileged access to our
members business practices, proprietary data, and strategic plans and enables us to provide
detailed best practices analyses on current industry issues. In addition, through our executive
member relationships we are able to align our research agendas of our existing programs to address
our members most pressing problems, and also develop and offer new programs and services to meet
our members changing needs.
Each of our programs offers a standardized set of services, allowing us to spread our largely
fixed program cost structure across our membership base of participating organizations. This
economic model enables us to increase our revenue and operating profit as we expand the membership
base of our programs over time and, we believe, permits members to learn about industry best
practices and access hosted software solutions at a fraction of the cost of customized analysis,
consulting, services, or software development provided by other firms.
1
For a fixed fee, members of each program have access to an integrated set of services, and
most of these programs are renewable, with our member institution renewal rate for each of the last
five fiscal years equaling or exceeding 88%. We believe high renewal rates are a reflection of our
members recognition of the value they derive from participating in our programs. We served
approximately 3,200 members as of March 31, 2011.
Our membership includes some of the most prestigious institutions in the United States. As of
March 31, 2011, all 14 of the 2010-2011 U.S. News and World Report honor roll hospitals were
members, including The Johns Hopkins Hospital, the Mayo Clinic, Massachusetts General Hospital, and
The Cleveland Clinic. Our membership also includes leading pharmaceutical and biotech companies,
health care insurers, and medical device companies, such as Johnson & Johnson Health Care Systems,
Inc., Medtronic, Inc., and Bristol-Myers Squibb. Following our launch of programs serving education
organizations in fiscal 2008, we have added a number of high profile higher education institutions,
including University of California-Berkeley, Syracuse University, Georgetown University, University
of Virginia, University of North Carolina at Chapel Hill, and Washington University. Within our
member organizations, we serve a range of constituencies, including both the executive suite and
the broader management team. As of March 31, 2011, our 50 programs reached more than 6,900 chief
executive and chief operating officers and 81,500 senior executives, clinical leaders, department
heads, and product-line managers.
Corporate Information
We were incorporated in Maryland in 1979 and reincorporated in Delaware in 2001. The mailing
address of our principal executive offices is 2445 M Street, N.W., Washington, D.C., and our
telephone number is (202) 266-5600.
We maintain a corporate internet website at www.advisoryboardcompany.com. We make available
free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish the reports with the Securities and Exchange
Commission, or SEC. The contents of our website are not a part of this Annual Report on Form
10-K.
Business Strategy
To capitalize on the favorable characteristics of our target health care and education
markets, we continue to develop and operate membership-based programs that address the critical
issues facing our members in a standardized manner through research, analytics, and software tools
rooted in shared best practices. To accomplish our strategic objectives, we seek to:
|
|
|
Capitalize on our membership-based business model. We believe our membership-based
business model is a key to our success. Our membership model enables us to target issues of
relevance to a broad audience of similar organizations and to draw on their experience to
identify proven and high value solutions. At the same time, our economic model and fixed-fee
pricing promote frequent use of our programs and services by our members, which we believe
increases value received and program loyalty. |
|
|
|
|
Deliver a superior value proposition. Our programs offer access to best practices and
software tools at a fraction of the cost that other business services firms charge to
provide a comparable customized analysis or solution. Members use our programs to improve
the effectiveness of their organizations by increasing productivity, reducing operating
costs, and increasing revenue. We believe that our program prices generally represent a
small percentage of the potential bottom-line improvement members can achieve through the
successful application of even a subset of the best practices and software tools that they
receive as members of a particular program. As evidence of the value we provide, our member institution renewal rate for each of
the last five fiscal years equaled or exceeded 88%. |
|
|
|
|
Focus on best practices research and tools. We focus on providing research, analysis,
services and tools based on demonstrated best practices within the health care and education
industries. Our focus on deep vertical markets has enabled us to develop a membership that
includes progressive and highly regarded institutions where many industry issues are first
identified and where many of the best practices originate. We believe that these
organizations will continue to demand access to proven best practices and solutions to
common industry problems on a cost-effective, industry-wide basis and that our reputation
and success to date has uniquely positioned us as a leading source for identifying,
evaluating, communicating, and providing solutions that respond to evolving market needs. |
|
|
|
|
Continue research, analysis, and technology excellence. The quality of our research,
analysis, and technology is a critical component of our success. Experienced program
directors are responsible for assuring that our research methodology is |
2
|
|
|
applied to all studies and that quality is maintained across all deliverables, solutions,
software tools, and programs. We are highly selective in our hiring, recruiting the top
graduates of the leading universities and graduate schools. We emphasize continual training
of all employees in key areas, including industry analysis, economics, quantitative modeling,
root-cause analysis, data mapping, technology development, and presentation skills. |
|
|
|
Drive tangible results by incorporating data and analytics into web-based business
intelligence and software tools. Through our best practices research, we have identified the
need for business intelligence and software tools that consolidate, analyze, benchmark, and
report member data in order to gain visibility into areas of opportunity for operational or
financial improvement. To meet this member need, we have combined commercially available and
proprietary technology with our insight, industry expertise, and standardized data
definitions to offer web-based business intelligence and software tools. These tools provide
valuable insights by efficiently presenting regularly updated data extracted from what are
often numerous and disparate source systems, benchmarking our members performance against
the performance of other organizations, and allowing our members to drill down to
transaction-level detail. These sophisticated tools hardwire our existing best practices
research into the daily and weekly process flows at the member institutions, thereby
allowing a broad group of executives, managers, and front-line leaders to leverage the
insights and data in both their daily and strategic decisions. This integrated approach
allows our members to achieve ongoing, tangible cost and performance gains and a high return
on investment. We frequently update our business intelligence and software tools through new
features and functionality, research activities, and member input. |
|
|
|
|
Leverage our intellectual capital and relationships by providing best practices and
management services. We are able to efficiently leverage the substantial body of our best
practices research, case study experience, and relationships we have amassed to support
members in installing best practices solutions or to provide
standardized management support,
thereby generating additional revenue for a low incremental cost to us to serve. Our
research programs produce the best practices that we use to create the management tools and
executive education modules that comprise our best practices
management and advisory services engagements, which
are sold as discrete products for a separate fee. Our research and software programs also
provide a platform and source for identifying member organizations that seek additional
assistance in adopting the best practices profiled in our research, thereby enhancing our
ability to cross-sell our best practices management and advisory
services to existing members. |
|
|
|
|
Scale our economic model. Our economic model enables us to add new members to all of our
programs for a low incremental cost per member to us, thereby growing our revenue and
improving our operating income as we increase the membership base of our existing programs.
We actively cross-sell additional programs to our approximately 3,200 members through a
variety of avenues, including sales force visits, presentations at member meetings, and
announcements in our research publications and on our website. A significant portion of our
programs cost structure for delivering the programs standardized services is fixed and
therefore does not vary with the number of members who participate in a program. By
addressing issues that affect a broad range of members, we are able to spread the fixed
costs associated with our programs over a large number of members and potential members. |
|
|
|
|
Develop new programs. Over the last several years, we have added four to five new
programs per year, which we cross-sell to existing members and use to attract new member
institutions. Pulling from a large pipeline of potential program concepts, each year we
pursue a rigorous and templated research process, involving industry thought-leaders from
progressive and well-known organizations as advisors and conducting hundreds of member
interviews, through which we apply our defined new program development criteria to identify
our specific program launches. Prior to officially rolling out a program, we typically
convert a high percentage of our advisors to paying members, which gives us a recognizable
group of early partners to champion to others. In addition to our internal research and
development activities relating to new programs, we also intend to continue to expand our
portfolio of solutions through strategic partnerships with and acquisitions of companies
whose products and services complement our program offerings. Development of new products
and successful execution and integration of future partnerships and acquisitions are
integral to our overall strategy as we continue to expand our portfolio of services. We
currently plan to continue to launch four to five new programs each year. |
|
|
|
|
Target non-U.S. health care organizations, additional sectors of the health care
industry, and other markets with similar characteristics. We believe that our business model
and current memberships provide us significant assets that we can leverage to target health
care organizations across an expanded geographic terrain, additional sectors of the health
care industry, and vertical markets outside health care with similar relevant
characteristics. We currently serve approximately 240 non-U.S. health care organizations
through a Council of International Hospitals program, which includes several sub-programs,
that provides research and analysis derived from our work with U.S. health care
organizations, as well as through
|
3
|
|
|
certain of our existing U.S.-focused business intelligence and software tools programs. In
addition, we are seeking to leverage our existing Health Care Industry Strategy program to
expand our work with pharmaceutical, biotech, health insurance, and medical device companies,
as well as with other organizations with interest in U.S. hospital and health system
operations, performance, and data. We also plan to continue to expand and grow in our
education market by leveraging our proven new program development process in this vertical
market and applying relevant learning from our established health care business to serve as a
template for growth in this market. |
Our Markets
We deliver our services to the health care and education markets.
Health Care Market
We primarily serve health care organizations, a sector providing critical services to the
community and one that comprises a large and growing industry. The Centers for Medicare and
Medicaid Services estimates that spending in the United States for health care services will be
$2.7 trillion in 2011 and projects that spending will grow at an annual rate of approximately 6%
through 2019.
Health care organizations rely on external service providers to help them develop strategies,
consolidate and analyze data, improve operations and processes, and train staff in order to remain
competitive in the dynamic industry environment. We believe that the following characteristics of
the health care industry make it especially suited for our business model of standardized delivery
of professional information services and software tools rooted in shared best practices:
|
|
|
Common and Complex Industry-Wide Issues. Health care organizations of all sizes face many
of the same complex strategic, operational, and management issues, including increasing
revenue, reducing costs, improving physician performance, overcoming labor shortages,
managing clinical innovation, improving productivity, reengineering business processes,
increasing clinical quality, improving manager effectiveness, and complying with new
government regulations. Because the delivery of health care services is based on very
complex, interrelated processes, there is widespread interest in and broad applicability of
standardized programs that address the major challenges facing the industry. |
|
|
|
|
Fragmented Industry. Our target market within the health care industry consists of over
5,000 current or potential members in the United States and internationally. This target
market includes many health care providers that deliver health care services primarily on a
local or regional basis. As a result of this fragmentation, best practices that are
pioneered in local or regional markets are rarely widely known throughout the industry. |
|
|
|
|
Willingness to Share Best Practices. We believe that health care organizations have a
relatively high propensity to share best practices. Many hospitals and health systems are
non-profit organizations or compete in a limited geographic market and do not consider
organizations outside their market to be their competitors. In addition, the health care
industry has a long tradition of disseminating information as part of ongoing medical
research and education activities. |
|
|
|
|
Value Orientation. A membership model that provides access to best practices and business
intelligence tools on a shared-cost basis appeals to many value focused health care
organizations that may otherwise be reluctant to make discretionary investments to
commission an exclusive, higher priced, customized engagement, software development, or solution to address their
critical issues. |
Education Market
In addition to serving health care organizations, we expanded our program offerings in fiscal
2008 to provide similar best practices research and analysis services to universities and other
education institutions. We currently offer four industry-specific programs, which represented
approximately 5% of our revenue during fiscal 2011.
We selected the education market as an area for expansion due to the size of the market, with
post-secondary education in the United States estimated by the U.S. Department of Education to be a
$386 billion industry with more than 6,500 institutions and 18 million students, and because
universities and other education institutions share many similar characteristics with our core
health care market. Higher education institutions share a mission-driven orientation, common and
complex problems, fragmented markets, an inclination to share best practices, and a value focus. As
with health care, we believe these characteristics make this industry well suited to our business
model of low cost, standardized delivery of professional information services and software tools
rooted in shared best practices.
4
Our Membership
As of March 31, 2011, our membership
consisted of approximately 3,200 members composed
primarily of hospitals and health systems and colleges and universities, as well as pharmaceutical and biotech companies, health
care insurers, medical device and supply companies, and other
educational institutions. Within these organizations, our programs serve a range of constituencies,
including both the executive suite and the broader management team. As of March 31, 2011, our
programs reached over 6,900 chief executive and chief operating officers and more than 81,500
senior executives, clinical leaders, department heads, and product-line managers. No one member
accounted for more than 2% of our revenue in any of our last three fiscal years. For each of the
fiscal years ended March 31, 2009, 2010, and 2011, we generated approximately 3% of revenue from
members outside the United States.
We seek to involve the countrys most progressive health care and education organizations in
our membership. The participation of these members provides us with a window into the latest
challenges confronting the industries we serve and the most innovative best practices that we can
share broadly throughout our membership. As of March 31, 2011, we served all 14 of the honor roll
hospitals listed in the most recent U.S. News and World Report ranking, 99 of the largest 100
health care delivery systems, 20 of the worlds largest pharmaceutical and medical device
companies, and the majority of the U.S. News and World Report top 100 universities for 2011.
The following table sets forth information with respect to membership programs, members, and
renewals as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
Membership programs offered |
|
|
32 |
|
|
|
37 |
|
|
|
41 |
|
|
|
45 |
|
|
|
50 |
|
Total members |
|
|
2,662 |
|
|
|
2,761 |
|
|
|
2,817 |
|
|
|
2,985 |
|
|
|
3,243 |
|
Member renewal rate (1) |
|
|
89 |
% |
|
|
90 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
91 |
% |
Contract value (in thousands of dollars) (2) |
|
$ |
200,094 |
|
|
$ |
230,806 |
|
|
$ |
230,769 |
|
|
$ |
261,110 |
|
|
$ |
310,051 |
|
|
|
|
(1) |
|
For the fiscal year then ended. Shows the percentage of member institutions at the beginning
of a fiscal year that hold one or more memberships in any of our programs at the beginning of
the next fiscal year, adjusted to reflect mergers, acquisitions, or different affiliations of
members that result in changes of control over individual institutions. |
|
(2) |
|
The aggregate annualized revenue attributed to all agreements in effect at a given date,
without regard to the initial term or remaining duration of any such agreement. |
Programs and Services
As of March 31, 2011, we offered 50 distinct membership programs across three key models:
|
|
|
best practices research, which is focused on identifying best-demonstrated
management practices, critiquing widely-followed but ineffective practices, and analyzing
emerging trends; |
|
|
|
|
business intelligence and software tools, which allow members to pair their own
operational data with the best practices insights from our research; and |
|
|
|
|
management and advisory services, which assist member institutions efforts to
adopt and implement best practices to improve their own performance. |
Each year, our staff of research managers and analysts conducts thousands of interviews with
industry executives on a large number of substantive topic areas, including:
|
|
|
revenue cycle management; |
|
|
|
|
health system cost reduction; |
|
|
|
|
clinical reform and models for physician collaboration to impact quality, revenue,
and cost; |
|
|
|
|
operational efficiency; |
5
|
|
|
hospital and university department operations; |
|
|
|
|
pharmaceutical and medical device technology management; |
|
|
|
|
strategic approach to problem solving and innovation; |
|
|
|
|
elevating clinical quality; |
|
|
|
|
measuring and improving student learning outcomes; |
|
|
|
|
evidence based provision of care; |
|
|
|
|
nursing and academic faculty recruitment, retention, and productivity; and |
|
|
|
|
competing for scarce research funding. |
Insights from our research process fuels each of our program models. For our research programs, each program is run by a director who is responsible for applying our standard methodologies
to produce best practices studies, modules, and tools, and for maintaining the quality of all
program services. Relying on member steering sessions, member topic polls, functionality
prioritization exercises, and one-on-one interviews with top industry executives, each director
identifies the most timely and important topics of shared member interest and sets the programs
priorities in an annual agenda. The annual agenda is used to communicate potential best practices
study topics, and associated program services to participating members, although the
actual studies and services delivered to members across the corresponding time period
may vary from what is described in the agenda based on ongoing member input and changes in the
overall industry. A team composed of analysts, instructors, and/or clinicians is dedicated
to each program, collectively researching the program agenda, writing the best practices studies,
developing curricula, building tools, delivering executive education sessions, and providing all
other program services.
We focus our members senior management on important problems by providing an analysis of best
practices used by some of the most successful organizations to solve those problems, and by
providing tools and services to accelerate the adoption of best practices within our member
institutions. In fiscal 2011, we published approximately 60 new best practices research reports,
performed more than 195 member meetings and 2,300 on-site seminars to approximately 2,300 member
organizations reaching more than 40,000 executive and managerial participants, produced more than
1,100 customized research reports, and provided content to over 174,000 registered users via our
password-protected website and email.
For
software and management and advisory services programs, we leverage this research as well. As a result of our extensive relationships with members, we are provided a unique window into our
members needs, and we are able not only to adjust the research agendas of our existing programs
but also to offer new programs and services to meet our members changing needs. Over time, we have
broadened our offerings, moving from research programs largely focused on strategic issues to a
more expansive set of research and management and advisory programs that provide information and
tools to address strategic, operational, and management issues, as well as programs anchored by
web-based business intelligence and software tools that serve as a conduit to in-depth analysis and
integration of best practices into operations. We have supplemented our internal development of
programs with the introduction of programs developed by companies we have acquired. Our most recent
acquisitions include substantially all of the assets of Cielo MedSolutions LLC, which enhances our
existing suite of physician performance management solutions; Concuity Services, Inc., which
supplements our revenue-cycle program offerings; and substantially all of the assets of Southwind
Health Partners, L.L.C. and Southwind Navigator LLC, which expand our physician alignment product
offerings. For additional information regarding our recent acquisitions, see Note 5, Acquisitions
of our consolidated financial statements included appearing elsewhere in this report. Having
evolved our offerings, we have also achieved deeper penetration into each of our member
organizations, allowing a broader group of executives, managers, and front-line leaders access to
insight and tools required for both their daily and more strategic decisions.
Program Attributes
Our programs may include best practices research studies, executive education, proprietary
content databases and online tools, daily online executive briefings, original executive inquiry
service, business intelligence and software tools, and management and advisory services. Each
program typically charges a separate annual membership fee that is fixed for the duration of the
membership agreement and entitles participating members to access all of a programs membership
services. Most programs are renewable. The specific membership services vary by program and change
over time as services are periodically added or removed. Institutions can
6
only access our services within a program if they are members of the relevant program. The
types of services provided include those described below.
Best Practices Research Programs
Each of our 23 best practices research programs is targeted at a specific
member executive, addressing specific strategic challenges, operational issues, and management
concerns for the respective constituent each year. Each program includes access to studies,
executive education, proprietary databases and online services, and executive briefings, among
other services as we continue to innovate the programs. Each best practices research program
typically publishes two to four best practices research studies or modules annually, with a total
of approximately 60 best practices research studies published in fiscal 2011. We design each study
and module to present the conclusions and supporting best practices in a graphical format, enabling
the intended audience to quickly assimilate the 100 to 250 pages of research content. Research
studies usually include an up-front essay framing the major business issues and sections describing
up to 20 specific and proven best practices. Consistent application of our research methodology and
extensive staff member training across all programs enables us to maintain research quality across
all of our programs.
In addition to our research studies, we also deliver an executive education curriculum based
on our proprietary research to member institutions nationwide through three channels: general
membership meetings; presentations conducted on-site at member organizations; and frequent
teleconferences. In all three settings, we use interactive discussions to provide a deeper
understanding and facilitate practical application of the best practices we have identified. In
fiscal 2011, our staff of approximately 23 full- and part-time faculty delivered executive
education services to approximately 2,300 member organizations, reaching more than 40,000 executive
and managerial participants through more than 195 member meetings,
over 2,300 on-site seminars, and over 250 webconferences.
These interactions are valuable not only because of the service provided to members, but also
because these sessions serve as an important building block of our relationships with members,
allowing us the opportunity to gather input about our research agendas and services, generate leads
for cross-selling additional programs to existing members, and surface ideas for potential new
programs.
Across our research programs, we also offer a variety of databases, web-based content, and
online tools and calculators to increase the utility of our content, analyze an organizations
current performance, and assist the adoption of best practices at member institutions. Each
research program maintains a section on our password-protected member website, including such items
as best practices, executive modules, online data, audit toolkits, and market forecasting
instruments accessible only to members of the program. Through the website, members of each program
may search and access the electronic library of research studies, review executive education
modules, view meeting schedules, and communicate with our staff and other members.
To provide our member organizations with industry news and best practices on a more frequent
basis than is possible with our longer reports, some of our research programs also produce
executive briefings that provide short, comprehensive summaries of our research findings, best
practices, data, and industry news. Our editorial teams review the nations health care news drawn
from over 250 sources, including daily newspapers, news wires, magazines, clinical journals, and
city business journals, and summarize relevant industry business and clinical news in frequently
distributed five- to ten-page reports, available to our members through our password-protected
website and by email.
Business Intelligence and Software Tool Programs
Seventeen of our programs are anchored by web-based business intelligence
and software tools that are regularly updated with member-specific data, to which the programs
members have continual access via the internet. These tools provide unique access to specific
performance improvement metrics at our member institutions, pulling data from disparate legacy
information systems through standardized data extracts and, with analytics and proprietary metrics
informed by our best practices research, transforming hard-to-access legacy data into performance
reports and benchmarks offering actionable insight for managers and executives. Members in these
programs receive best practices from our research and from peer organizations through member
meetings, teleconferences, and benchmarking, and, in addition, engage in regular interaction with
members of our staff who are tasked with helping our members analyze their data and with suggesting
tactics for improving performance.
These renewable programs address evergreen problems in terrains where we have developed
significant knowledge through our research programs. These include revenue cycle efficiency,
assistance with physician management, supply and other cost optimization, throughput in the
emergency department and surgical suites, utilization management, workforce management and
optimization, and improving quality of outcomes, among other areas. In addition to online
dashboards, the tools are built to be flexible and easy-to-use, offering members ad hoc querying,
performance alerts, drill down analysis, and comparative benchmarking.
Through the combination of our research and access to these tools, members gain insight into
areas of opportunity for operational or financial improvement, receive best practices toolkits to
capture the improvement, and directly use our resources to inform front-
7
line decisions on an hourly, daily, and weekly basis. By allowing our members to transform
their data into actionable information they can use to enhance performance, we have developed an
additional way for our members to quantify areas of opportunity and identify value captured through
use of these programs.
Management and Advisory Programs
Ten of our programs provide members with support in installing the best
practices profiled in our research studies within their own organizations and managing certain
processes. In these programs, which are not typically renewable, we offer members a standardized
package of management tools and on-site curriculum derived from content, data, and documents
gathered in the research process used to produce our best practices research studies, enabling us
to create best practices installation modules quickly and for a low incremental cost to us.
In these programs we offer diagnostic tools that include self-assessment tests, data
workbooks, and discussion guides to help members select those best practices most likely to have a
large impact within their own organizations, as well as installation tools that include task
checklists, process flow diagrams, results-reporting templates, project plans, job descriptions,
budgets, management reports, forms, surveys, policies and procedures, organization charts,
memoranda, and benchmark data designed to help members implement particular best practices. By
using our installation tools, members benefit from work already completed by other members, saving
them time, cost, and effort by leveraging tools proven successful in installing best practices.
Our standardized package of management tools is typically supplemented by
on-site sessions to educate executives and line managers in their use. The programs on-site
education sessions are designed to help members organize, structure, and manage an internal project
team tasked with installing select best practices, and develop the action plans for installing best
practices and tracking results.
Pricing
In the past, we sold substantially all of our memberships in our programs as one-year
agreements. In fiscal 2008, we began to enter into multi-year agreements in certain of our
membership programs, and our proportion of multi-year agreements has increased over time. Each program typically charges a separate fixed annual membership fee that
covers all the services in that program. Annual fees vary by program based on the target executive
constituency and the specific combination of services provided to participating members. Annual
fees for best practices research programs are generally billable in advance, with some membership
agreements being subject to a service guarantee under which a member may request a refund of its
fees, typically pro-rated relative to the length of the service period. Annual fees for programs
that offer management and advisory services or business intelligence and software tools are higher
than annual fees for research programs. The annual fees paid by members within the same program
also vary based on the size of the member institution and the total number of program memberships
the member purchases. Membership fees may also be lower for the initial members of new programs. In
some of our programs, we charge our members for certain direct billable expenses, such as travel
expenses.
Sales and Marketing
As of March 31, 2011, our sales force consisted of 145 new business development teams that are
responsible for selling new memberships to assigned program and geographic market territories. Each
new business development team generally consists of two employees: one marketer who travels to
prospective members to meet in person, and one marketing associate who provides support from the
office. Our two-person new business development teams sell programs to new members as well as
cross-sell additional programs to existing members of other programs. We maintain separate member
services teams that are responsible for servicing and renewing existing memberships. The separation
of responsibility for new membership sales and membership renewals reflects the varying difficulty
and cost of the respective functions, as well as the different skills required for each. New
business development representatives are compensated with a base salary and variable, goal-based
incentive bonuses and typically travel at least 60% of the time, conducting face-to-face meetings
with senior executives at current and prospective member institutions. Member services
representatives assume more of an in-house relationship management role, conducting most of their
responsibilities over the telephone.
8
Intellectual Property
We offer our members a range of products to which we claim intellectual property rights,
including research content, online services, databases, electronic tools, web-based applications,
performance metrics, and software products. We own and control a variety of trade secrets,
confidential information, trademarks, trade names, copyrights, and other intellectual property
rights that, in the aggregate, are of material importance to our business. We are licensed to use
certain technology and other intellectual property rights owned and controlled by others, and,
similarly, other companies are licensed to use certain technology and other intellectual property
rights owned and controlled by us. We consider our trademarks, service marks, databases, software,
and other intellectual property to be proprietary, and we rely on a combination of copyright,
trademark, trade secret, non-disclosure, and contractual safeguards to protect our intellectual
property rights.
Competition
We are not aware of any other organization that enables health care or education organizations
to receive services across as broad a range of best practices and software tools for fixed annual
fees as that offered by our company. We compete in some discrete programs and for discretionary
dollars against health care-focused, education-focused, and multi-industry firms.
These include consulting and strategy firms; market research, data, benchmarking, and forecasting
providers; technology vendors and services firms; health care
information technology firms; technology advisory firms; and specialized
providers of educational and training services. Other organizations, such as state and national
trade associations, group purchasing organizations, non-profit think-tanks, and database companies,
may also offer research, consulting, tools, and education services to health care and education
organizations. These organizations include, among others, Accenture Ltd., Accretive Health, Inc., Allscripts Healthcare Solutions, Inc., Cerner Corporation, Deloitte &
Touche LLP, Emdeon Inc., Huron Consulting, Inc., Ingenix, McKesson
Corporation, McKinsey & Company, MedAssets, Inc., Navigant Consulting, Passport Health
Communications, Inc. and Premier, Inc. We also compete with many smaller niche companies.
We believe that the principal competitive factors in our market include quality and timeliness
of research and analysis, applicability and efficacy of recommendations, strength and depth of
relationships with member senior executives, reliability and effectiveness of business intelligence
tools, distinctiveness of dashboards and user interfaces, depth and quality of the membership network, ability to meet the changing needs of our
current and prospective members, and service and affordability. We believe we compete favorably
with respect to each of these factors.
The Corporate Executive Board Company, which was a division of our company until 1999,
provides membership-based research programs on a cross-industry basis that are similar to some of
the types of programs that we sell to health care and education organizations. As part of a
collaboration agreement between us and The Corporate Executive Board Company, which could continue
through February 5, 2013, The Corporate Executive Board Company is generally prohibited from
selling membership-based best practices research programs to health care providers. In addition, as
part of this agreement, The Corporate Executive Board Company is prohibited from selling
membership-based best practices programs to other types of health care and education organizations
unless the programs address issues of a general business nature and are principally sold to
companies and institutions not in the health care or education industries. The noncompetition
clauses of this collaboration agreement generally prohibit us from selling membership-based best
practices research programs to organizations other than non-profit organizations or organizations
principally engaged in the businesses of health care or education.
Employees
As of March 31, 2011, we employed approximately 1,600 persons, approximately 1,100 of whom are
based out of our headquarters in Washington, D.C. None of our employees are represented by a
collective bargaining arrangement. We believe that our relations with our employees are favorable.
9
Executive Officers
The following table sets forth, as of March 31, 2011, the names, ages, and positions of the
persons who serve as our executive officers.
|
|
|
|
|
|
|
Executive Officers |
|
Age |
|
Position |
Robert W. Musslewhite
|
|
|
41 |
|
|
Chief Executive Officer and Director |
David L. Felsenthal
|
|
|
40 |
|
|
President |
Michael T. Kirshbaum
|
|
|
34 |
|
|
Chief Financial Officer and Treasurer |
Martin D. Coulter
|
|
|
45 |
|
|
Executive Director |
Evan R. Farber
|
|
|
38 |
|
|
General Counsel and Corporate Secretary |
Cormac F. Miller
|
|
|
37 |
|
|
Executive Director |
Scott A. Schirmeier
|
|
|
42 |
|
|
Executive Vice President |
Richard A. Schwartz
|
|
|
45 |
|
|
Executive Vice President |
Mary D. VanHoose
|
|
|
46 |
|
|
Chief Talent Officer |
Our executive officers are appointed by, and serve at the pleasure of, our Board of Directors.
Robert Musslewhite has served as our Chief Executive Officer since September 2008. Mr.
Musslewhite joined us in 2003, initially serving in executive roles in strategic planning and new
product development. In 2007, he was named Executive Vice President and general manager in charge
of software-based programs, and he became CEO the following year. Prior to joining us, Mr.
Musslewhite was an Associate Principal in the Washington, D.C., Amsterdam, and Dallas offices of
McKinsey & Company, where he served a range of clients across the consumer products and other
industries and was a co-leader of McKinseys Pricing Center. Mr. Musslewhite holds a J.D. from
Harvard Law School and an A.B. degree in Economics from Princeton University.
David L. Felsenthal became our President in September 2008. He first joined us in 1992 and
previously had been an Executive Vice President since February 2006, was Chief Financial Officer,
Secretary, and Treasurer from April 2001 through February 2006 and was named Chief Operating
Officer in January 2007. From September 1999 to March 2001, Mr. Felsenthal was Vice President of an
affiliated company, eHospital Inc., focused on developing and delivering health care content to
patients and providers via the internet. From 1997 to 1999, Mr. Felsenthal worked as Director of
Business Development and Special Assistant to the CEO/CFO of Vivra Specialty Partners, a private
health care services and technology firm. From 1992 through 1995, Mr. Felsenthal held various
positions with us in research and new product development. Mr. Felsenthal received an A.B. degree
from Princeton University and an M.B.A. from Stanford University.
Michael T. Kirshbaum became our Chief Financial Officer in February 2006 and Treasurer in
March 2007. Mr. Kirshbaum joined us in 1998 and prior to his current role, held a variety of
positions across the finance group, most recently serving as Senior Director of Finance, where he
was responsible for most of our finance operations, including our overall financial strategy and
budgeting process, as well as a number of other accounting functions. Mr. Kirshbaum has a B.S.
degree in Economics from Duke University.
Martin D. Coulter became Executive Director of our business intelligence and software programs
in 2008. Mr. Coulter joined us in November 2001 as a Managing Director with general management
responsibility for certain of our membership programs. Prior to joining us, Mr. Coulter served as
Chief Executive Officer of Citizens Energy Corporation, a non-profit health care and energy
company. Prior to 1999, Mr. Coulter was a principal at the Parthenon Group and a consultant at Bain
& Company. Mr. Coulter received a B.A. degree in Economics
from Trinity College, Dublin, Ireland, an M.S. degree in Banking and Financial from University College, Dublin, Ireland, and an M.B.A. from Harvard University.
Evan R. Farber joined us in October 2007 as General Counsel and has also served as Corporate
Secretary since November 2007. Prior to joining us, Mr. Farber was a partner at Hogan & Hartson
L.L.P. (now Hogan Lovells US LLP), a law firm in Washington, D.C., where he practiced corporate,
securities, transactional, and commercial law. Mr. Farber received a B.A. degree from Binghamton
University, State University of New York, and a J.D. from The George Washington University Law
School.
Cormac F. Miller became the Executive Director, Strategic Planning and New Product Development
in January 2007. Mr. Miller joined us in 1996 and has held various management positions within our
research programs, including Executive Director, Research from October 2005 to December 2006, and
Managing Director from October 2002 through October 2005. Mr. Miller received a B.S. degree from
the University of Wisconsin-Madison.
10
Scott A. Schirmeier became an Executive Vice President in February 2009. Mr. Schirmeier joined
us in 1995 and held various management positions overseeing marketing, sales, and relationship
management functions, including Senior Director, Sales and Relationship Management from July 1998
to March 2000, and served as an Executive Director in Sales and Marketing from March 2000 to June
2001. Mr. Schirmeier was our General Manager, Sales and Marketing, from June 2001 to October 2006.
In addition, he served as our Chief Marketing Officer from October 2006 to February 2009. Mr.
Schirmeier received a B.A. degree from Colby College.
Richard A. Schwartz was named Executive Vice President in February 2006, responsible for
strategic planning and general management of certain of our membership programs. Mr. Schwartz had
joined us in 1992 and held various management positions within our research programs, including
Executive Director, Research from June 1996 to March 2000. In addition, he had served as our
General Manager, Research from 2001 to 2006. Mr. Schwartz received a B.A. degree from Stanford
University and an M.B.A. from Duke University.
Mary D. VanHoose has served as Chief Talent Officer since 2009. In this role Ms. VanHoose is
responsible for executive and staff recruitment and development, as well as oversight of the firms
employee benefit and training programs. Ms. VanHoose joined us in 1991 and initially served as a
research analyst focusing on certain clinical best practices for hospitals and health care
providers. From 2000 to 2009, Ms. VanHoose served as our Executive Director of Career Management.
Ms. VanHoose received a B.A. degree from the University of Virginia.
Item 1A. Risk Factors.
Our
business, operating results, financial condition, and prospects are subject to a variety of
significant risks, many of which are beyond our control. The following is a description of some of
the important risk factors that may cause our actual results in future periods to differ
substantially from those we currently expect or seek. The factors described below may not be the
only risks that we face. Additional risks that we have not yet identified or that we currently
believe are immaterial may also adversely affect our business, operating results, financial
conditions, and prospects.
Our business is principally focused on the health care industry, and factors that adversely affect
the financial condition of the health care industry could consequently affect our business.
We derive most of our revenue from members in the health care industry. As a result, our
financial condition and results of operations could be adversely affected by conditions affecting
the health care industry generally and hospitals and health systems particularly. Our ability to
grow will depend upon the economic environment of the health care industry generally as well as our
ability to increase the number of programs and services that we sell to our members. The health
care industry is highly regulated and is subject to changing political, legistative, regulatory and other
influences. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our members to incur additional costs and could restrict our or our members operations. Many healthcare laws are complex and their application to us, our members, or the specific services and relationships we have with our members are not always clear.
In addition, federal and state legislatures have periodically considered programs to
reform or amend the U.S. health care system at both the federal and state level, such as the
Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of
2010. Due to the significant implementation issues arising under these laws, it is unclear what
long-term effects they will have on the health care industry and in turn on our business, financial
condition, and results of operations. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business.
There are many factors that could affect the purchasing practices, operations, and,
ultimately, the operating funds of health care organizations, such as reimbursement policies for
health care expenses, consolidation in the health care industry, and regulation, litigation, and
general economic conditions. In particular, we could be required to make unplanned modifications of
our products and services or could suffer delays or cancellations of orders or reductions in demand
for our products and services as a result of changes in regulations affecting the health care
industry, such as any increased regulation by governmental agencies of the purchase and sale of
medical products, changes to the Health Insurance Portability and Accountability Act of 1996, as
amended, and the regulations that have been issued under it, which we refer to collectively as
HIPAA, and other federal or state privacy laws, laws relating to the tax-exempt status of many of
our members, or restrictions on permissible discounts and other financial arrangements.
Because of current macro-economic conditions, including continued disruptions in the broader
capital markets and reduced demand for discretionary medical services, cash flow, access to credit,
and budgets continue to deteriorate for many health care delivery organizations. It is unclear what
long-term effects the economic downturn will have on the health care industry and in turn on our
business, financial condition, and results of operations.
11
If we are unable to sustain high renewal rates on our memberships, our revenue and results of
operations may suffer.
We derive most of our revenue from renewable memberships in our discrete annual programs. Our
prospects therefore depend on our ability to achieve and sustain high renewal rates on existing
programs. Our success in securing renewals depends upon the continuity of our principal contacts at
a member organization, our members budgetary environment, and our ability to deliver consistent,
reliable, high-quality, and timely research, tools, and analysis with respect to issues,
developments, and trends that members view as important. We may not be able to sustain the level of
performance necessary to achieve a high rate of renewals and, as a result, may not increase or even
maintain our revenue.
If we are unable to maintain our reputation and expand our name recognition, we may have difficulty
attracting new business and retaining current members.
As a provider of best practices research, analysis, executive education, software
tools, and management and advisory services, we believe our professional reputation is an important factor in attracting and
retaining our members and in building relationships with the progressive health care and education
organizations that supply many of the best practices we feature in our research. We believe that
establishing and maintaining a good reputation and name recognition are critical for attracting and
retaining members. If our reputation is damaged or if potential members are not familiar with us or
with the solutions we provide, we may be unable to attract new or retain existing members.
Promotion and enhancement of our name will depend largely on our success in continuing to provide
effective solutions. Our brand name and reputation will suffer if members do not perceive our
solutions to be effective or of high quality or if there inaccuracies
or defects in our solutions.
If we are not able to offer new and valuable products and services, our revenue and results of
operations may suffer.
Our success depends on our ability to develop new products and services that serve specific
constituencies, to anticipate changing market trends, and to adapt our research, tools, and
analysis to meet the changing needs of our members. We may not be able to provide helpful and
timely research and analysis of developments and trends in a manner that meets market needs. Any
such failure also could cause some of our existing products and services to become obsolete,
particularly in the health care industry, where needs continue to rapidly evolve with the
introduction of new and the obsolescence of old technology, changing payment systems and regulatory
requirements, shifting strategies and market positions of major industry participants, and changing
objectives and expectations of health care consumers. This environment of rapid and continuous
change presents significant challenges to our ability to provide our members with timely research,
business intelligence and software tools, and management and advisory services for issues and
topics of importance. As a result, we must continue to invest resources in development of new
programs and services in order to enhance our existing products and services and introduce new
high-quality products and services that members and potential members will want. Many of our member
relationships are non-exclusive or terminable on short notice, or otherwise terminable after a
specified term. If our new or modified product and service innovations are not responsive to user
preferences or industry or regulatory changes, are not appropriately timed with market opportunity,
or are not effectively brought to market, we may lose existing members, be unable to obtain new
members, or incur impairment of capitalized software development assets, and our results of
operations may suffer.
Because our programs offer a standardized set of services that allows us to spread our largely
fixed program cost structure across our membership base of participating organizations, we may lose
money on or terminate a program if we are unable to attract or retain a sufficient number of
members in that program to cover the costs. Terminating a program could result in dissatisfaction
among members of the terminated program, a loss of credibility with current and potential members,
and an adverse effect on our results of operations.
Future competition may adversely affect our business.
A failure to adequately track, understand, or address competitive pressures could have a
material adverse effect on our business. We compete in discrete programs and for discretionary
dollars against health care-focused, higher education-focused, and multi-industry
firms. These include consulting and strategy firms; market research, data, benchmarking and
forecasting providers; technology vendors and services firms; health care information technology firms; technology advisory firms; and
specialized providers of educational and training services. Other entities, such as state and
national trade associations, group purchasing organizations, non-profit think-tanks, and database
companies, may also offer research, consulting, tools, and education services to health care and
education organizations that are competitive with our programs.
As part of a collaboration agreement between us and The Corporate Executive Board Company,
through February 5, 2013, The Corporate Executive Board Company is generally prohibited from
selling certain membership-based best practices research products
12
and services to health care providers and education organizations. Upon expiration of the
collaboration agreements noncompetition obligations, The Corporate Executive Board Company may
sell membership-based best practices research programs in direct competition with some of our
discrete programs. Direct competition with The Corporate Executive Board Company in these programs
may have a material adverse effect on our business.
We may not be able to hire, train, motivate, manage, and retain a significant number of highly
skilled employees.
Our future success depends upon our ability to hire, train, motivate, manage, and retain a
significant number of highly skilled employees, particularly research analysts, technical experts,
and sales and marketing staff. We have experienced, and expect to continue to experience,
competition for professional personnel from management consulting firms and other producers of
research, technology, and analysis services. Hiring, training, motivating, managing, and retaining
employees with the skills we need is time consuming and expensive. Any failure in this regard could
hinder our ability to continue to provide high-quality research and other products and services,
implement tools, or complete existing member engagements and attract new members.
Unsuccessful design or implementation of our business intelligence and software tools may harm our
future financial success.
Software
development and implementation can take long periods of
time and require significant capital investments. If our business
intelligence and software tools are less effective,
cost-efficient, or attractive to our members than what they anticipate or does not function as
expected or designed, we may not recover the development costs, and our competitive position,
operations, or financial results could be adversely affected. In addition, any defects in our
business intelligence and software tools or other intellectual property could result in additional
development costs, the diversion of technical and other resources from our other development
efforts, significant cost to resolve the defect, a loss of credibility with current and potential
members, loss of members, harm to our reputation, risk of nonpayment, loss of revenue, and exposure
to liability claims. We also rely on technology and implementation support provided by others in
certain of our programs that offer business intelligence and software tools, and defects in their technology or
their failures to provide timely and accurate services also could result in a loss of credibility
with current or potential members, loss of members, harm to our reputation, risk of nonpayment,
loss of revenue, and exposure to liability claims from those members.
Some of our products and services are complex and require lengthy and significant work to
implement our products and services. Each members situation may be different, and unanticipated
difficulties and delays may arise as a result of failure by us or by the member to meet respective
implementation responsibilities. If the member implementation process is not executed successfully
or if execution is delayed, our relationships with some of our members may be adversely impacted,
and our results of operations may be negatively affected. In addition, cancellation of any
implementation of our products and services after it has begun may involve loss to us of time,
effort, and resources invested in the cancelled implementation as well as lost opportunity for
acquiring other members over that same period of time.
We may experience significant delays in generating, or an inability to generate, revenue if
potential members take a long time to evaluate our products and services.
A key element of our strategy is to market our products and services directly to health care
providers, such as health systems and acute care hospitals, and education institutions, such as
colleges and research universities, to increase the number of our products and services utilized by
existing members. We do not control many of the factors that will influence the decisions of these
organizations regarding the purchase of our products and services. The evaluation process can
sometimes be lengthy and could involve significant technical evaluation and commitment of personnel
by these organizations. The use of our products and services may also be delayed due to reluctance
to change or modify existing procedures. If we are unable to sell additional products and services
to existing hospital, health system, and education members, or enter into and maintain favorable
relationships with other health care providers or education organizations, our revenue could be
materially adversely affected.
Unsuccessful delivery of our management and advisory services may harm our future financial
success.
Ten of our programs as of March 31, 2011 offer support to help accelerate the installation of
best practices profiled in our research studies. Some of these programs are complex, and
unanticipated difficulties and delays may arise as a result of failure by us or by the member to
meet respective delivery responsibilities. If the member delivery process is not executed
successfully or if execution is delayed, our relationships with some of our members and our results
of operations may be negatively affected. In addition, cancellation of any delivery of our products
and services after it has begun may involve loss to us of time, effort, and resources invested in
the cancelled delivery as well as lost opportunity for acquiring other members over that same
period of time.
13
These management and advisory memberships are not individually renewable. In order to maintain
our annual revenue and contract value from these programs, we will have to enroll new members each
year as other members complete their program terms. We may not be successful in selling these
programs in the future. Lack of continued market acceptance of these programs could have a material
adverse effect on our business.
Federal and state privacy and security laws may increase the costs of operation and expose us to
civil and criminal sanctions.
We must comply with extensive federal and state requirements regarding the use, retention, and
security of patient health care information. The Health Insurance Portability and Accountability
Act of 1996, as amended, and the regulations that have been issued under it, which we refer to
collectively as HIPAA, contain substantial restrictions and requirements with respect to the use
and disclosure of individuals protected health information. These restrictions and requirements
are set forth in the Privacy Rule and Security Rule portions of HIPAA. The HIPAA Privacy Rule
prohibits a covered entity from using or disclosing an individuals protected health information
unless the use or disclosure is authorized by the individual or is specifically required or
permitted under the Privacy Rule. The Privacy Rule imposes a complex system of requirements on
covered entities for complying with this basic standard. Under the HIPAA Security Rule, covered
entities must establish administrative, physical, and technical safeguards to protect the
confidentiality, integrity, and availability of electronic protected health information maintained
or transmitted by them or by others on their behalf.
The HIPAA Privacy and Security Rules have historically applied directly to covered entities,
such as our members who are health care providers that engage in HIPAA-defined standard electronic
transactions. Because some of our members disclose protected health information to us so that we
may use that information to provide certain services to them, we are a business associate of
those members. In order to provide members with services that involve the use or disclosure of
protected health information, the HIPAA Privacy and Security Rules require us to enter into
business associate agreements with our members. Such agreements must, among other things, provide
adequate written assurances:
|
|
|
as to how we will use and disclose the protected health information; |
|
|
|
|
that we will implement reasonable administrative, physical, and technical
safeguards to protect such information from misuse; |
|
|
|
|
that we will enter into similar agreements with our agents and subcontractors that
have access to the information; |
|
|
|
|
that we will report security incidents and other inappropriate uses or disclosures
of the information; and |
|
|
|
|
that we will assist the covered entity with certain of its duties under the Privacy
Rule. |
In February 2009, the United States Congress enacted the Health Information Technology for
Economic and Clinical Health Act, or HITECH Act, as part of the American Recovery and Reinvestment
Act of 2009. With the enactment of the HITECH Act, the privacy and security requirements of HIPAA
have been modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security
requirements directly to business associates of covered entities. In other words, we must now
directly comply with certain aspects of the Privacy and Security Rules, and are also subject to
enforcement for a violation of HIPAA standards. Significantly, the HITECH Act also establishes new
mandatory federal requirements for both covered entities and business associates regarding
notification of breaches of security involving protected health information.
Any failure or perception of failure of our products or services to meet HIPAA standards and
related regulatory requirements could expose us to certain notification, penalty, and/or
enforcement risks and could adversely affect demand for our products and services, and
force us to expend significant capital and other resources to modify our products or services to
address the privacy and security requirements of our members and HIPAA.
In addition to our obligations under HIPAA, most states have enacted patient confidentiality
laws that protect against the disclosure of confidential medical information, and many states have
adopted or are considering adopting further legislation in this area, including privacy safeguards,
security standards, and data security breach notification requirements. These state laws, if more
stringent than HIPAA requirements, are not preempted by the federal requirements, and we are
required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations
might be made in the future or how those changes could affect our business or the associated costs
of compliance. For example, the federal Office of the National
14
Coordinator for Health Information Technology is coordinating the development of national
standards for creating an interoperable health information technology infrastructure based on the
widespread adoption of electronic health records in the health care sector. We are unable to
predict what, if any, impact the creation of such standards will have on our products, services, or
compliance costs.
Failure by us to comply with any of the federal and state standards regarding patient privacy,
identity theft prevention and detection, and data security may subject us to penalties, including
civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure
may injure our reputation and adversely affect our ability to retain existing members and attract
new members.
We may be liable to our members and may lose members if we are unable to collect and maintain
member data or lose member data.
Because of the large amount of data that we collect and manage from our members and other
third parties and the increasing use of technology in our programs, hardware failures or errors in
our processes or systems could result in data loss or corruption or cause the information that we
collect to be incomplete or contain inaccuracies that our members regard as significant.
Furthermore, our ability to collect and report data may be interrupted or limited by a number of
factors, including the failure of our network, software systems, or business intelligence tools,
security breaches, or the terms of our members contracts with their third party suppliers. In
addition, computer viruses may harm our systems, causing us to lose data, and the transmission of
computer viruses could expose us to litigation. In addition to potential liability, if we supply
inaccurate information or experience interruptions in our ability to capture, store, supply,
utilize, and report information, our reputation could be harmed and we could lose existing members
and experience difficulties in attracting new members.
Failure by our members to obtain proper permissions and waivers may result in claims against us or
may limit or prevent our use of data, which could harm our business.
We require our members to provide necessary notices and to obtain necessary permissions and
waivers for use and disclosure of the information that we receive, and we require contractual
assurances from them that they have done so and will do so. If they do not obtain necessary
permissions and waivers, then our use and disclosure of information that we receive from them or on
their behalf may be limited or prohibited by state or federal privacy laws or other laws. Any such
failure to obtain proper permissions and waivers could impair our functions, processes, and
databases that reflect, contain, or are based upon such data and may prevent use of such data. In
addition, such a failure could interfere with or prevent creation or use of rules and analyses or
limit other data-driven activities that benefit us. Moreover, we may be subject to claims or
liability for use or disclosure of information by reason of lack of valid notice, permission, or
waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our
operating results.
Our sources of data might restrict our use of or refuse to license data, which could adversely
impact our ability to provide certain products or services.
A portion of the data that we use is either purchased or licensed from third parties or
is obtained from our members for specific engagements. We also obtain a portion of the
data that we use from public records. We believe that we have all rights necessary to use the data
that is incorporated into our products and services. However, in the future, data providers could
seek to withdraw their data from us if there is a competitive reason to do so; if legislation is
passed restricting the use of the data; or if judicial interpretations are issued restricting use
of the data that we currently use in our products and services. Further, our licenses for
information may not allow us to use that information for all potential or contemplated applications
and products. If a substantial number of data providers, including our
members, were to withdraw or no longer provide their data to us, our ability to
provide products and services to our members could be materially adversely impacted.
If our products or services fail to provide accurate information, or if our content or any other
element of our products or services is associated with incorrect,
inaccurate, or faulty coding,
billing, or claims submissions to Medicare or any other third party payor, we could be liable to
customers or the government which could adversely affect our business.
Our products and content were developed based on the laws, regulations, and third party payor
rules in existence at the time such software and content was developed. If we interpret those laws,
regulations, or rules incorrectly; the laws, regulations, or rules materially change at any point
after the software and content was developed; we fail to provide up-to-date, accurate information;
or our products or services are otherwise associated with incorrect, inaccurate, or faulty coding,
billing, or claims submissions, then members could assert claims against us or the government, or
qui tam relators on behalf of the government could assert claims against us under the Federal False
Claims Act or similar state laws. The assertion of such claims and ensuing litigation, regardless
of its
15
outcome, could result in substantial costs to us, divert managements attention from
operations, damage our reputation, and decrease market acceptance of our services. We attempt to
limit by contract our liability to customers for damages. We cannot, however, limit liability the
government could seek to impose on us under the False Claims Act. Further, the allocations of
responsibility and limitations of liability set forth in our contracts may not be enforceable or
otherwise protect us from liability for damages.
Factors, including those beyond our control, could cause interruptions in our operations and may
adversely affect our reputation in the marketplace and our financial condition and results of
operations.
The timely development, implementation, and continuous and uninterrupted performance of our
business intelligence tools, hardware, network, applications, the internet, and other systems,
including those which may be provided by third parties, are important facets in our delivery of
products and services to our members. Our ability to protect these processes and systems against
unexpected adverse events is a key factor in continuing to offer our members our full complement of
products and services on time in an uninterrupted manner.
Our operations are vulnerable to interruption from a variety of sources, many of which are not
within our control, such as power loss and telecommunications failures; software and hardware
errors, failures, defects, or crashes; computer viruses and similar disruptive problems; fire,
flood, and other natural disasters; and attacks on our network or damage to our business
intelligence tools, software, and systems carried out by hackers or internet criminals.
System failures that interrupt our ability to develop or provide our products and services
could affect our members perception of the value of our products and services. Delays or
interruptions in the delivery of our products and services could result from unknown data,
software, or hardware defects, insufficient capacity, or the failure of our website hosting and
telecommunications vendors to provide continuous and uninterrupted service. Additionally, we host
some of our services and serve our customers through third-party data center hosting facilities. We
do not control the operation of these facilities. From time to time, we may need to relocate our
data or our customers data to alternative locations. Despite precautions taken during such moves,
any difficulties experienced may impair the delivery of our services. We also depend on service
providers that provide customers with access to our products and services. In addition, computer
viruses may harm our systems causing us to lose data, and the transmission of computer viruses
could expose us to litigation. In addition to potential liability, if we supply inaccurate
information or experience interruptions in our ability to capture, store and supply information,
our reputation could be harmed and we could lose customers. Any significant interruptions in our
products and services could damage our reputation in the marketplace and have a negative impact on
our business, financial condition, and results of operations.
If we are unable to maintain our third party providers or strategic alliances, or enter into new
alliances, we may be unable to grow our current business.
Our business strategy includes entering into strategic alliances and affiliations with
leading healthcare service providers. We work closely with our strategic partners either to expand
our penetration in certain areas or to expand our market capabilities. We may
not achieve our objectives through these alliances. Many of these companies have multiple
relationships and they may not regard us as significant to their business. These companies may, in
certain circumstances, pursue relationships with our competitors or develop or acquire products and
services that compete with our products and services. If existing alliances are terminated or we
are unable to enter into alliances with leading healthcare service providers, we may be unable to
maintain or increase our market presence.
Our business could be harmed if we are no longer able to license or integrate third party
technologies and data.
We depend upon licenses from third party vendors for some of the technology and data used in
our business intelligence and software tools, for some of the technology platforms upon which these
tools operate, and for some of our programs. We also use third party software to maintain and
enhance, among other things, content generation and delivery, and to support our technology
infrastructure. These technologies might not continue to be available to us on commercially
reasonable terms or at all. Most of these licenses can be renewed only by mutual agreement and may
be terminated if we breach the terms of the license and fail to cure the breach within a specified
period of time. Our inability to obtain any of these licenses could delay our ability to provide
services until alternative technology can be identified, licensed, and integrated, which may harm
our financial condition and results of operations. Some of our third party licenses are
non-exclusive, and our competitors may obtain the right to use any of the technology covered by
these licenses to compete directly with us.
16
Our use of third party technologies exposes us to increased risks, including risks associated
with the integration of new technology into our solutions, the diversion of our resources from
development of our own proprietary technology, and the generation of revenue from licensed
technology sufficient to offset associated procurement and maintenance costs. In addition, if our
vendors choose to discontinue support of the licensed technology in the future, we might not be
able to modify or adapt our own solutions.
Potential liability claims may adversely affect our business.
Our services, which involve recommendations and advice to organizations regarding complex
business and operational processes, regulatory and compliance issues, and labor practices, may give
rise to liability claims by our members or by third parties who bring claims against our members.
Health care and education organizations often are the subject of regulatory scrutiny and
litigation, and we cannot assure that we would not also be the subject of such litigation based on
our advice and services. Any such litigation, whether or not resulting in a judgment against us,
may adversely affect our reputation and could have a material adverse effect on our financial
condition and results of operations. We may not have adequate insurance coverage for claims against
us or that our insurance will cover all types of claims.
If the protection of our intellectual property is inadequate, our competitors may gain access to
our intellectual property and we may lose our competitive advantage.
Our success depends in part upon our ability to protect our intellectual property. To
accomplish this, we rely on a combination of intellectual property rights, including trade secrets,
copyrights, and trademarks, as well as customary contractual protections with employees,
contractors, members, and partners. The steps we have taken to protect our intellectual property
rights may not be adequate to deter misappropriation of our rights and may not be able to detect
unauthorized uses and take timely and effective steps to enforce our rights. If unauthorized uses
of our proprietary products and services were to occur, we might be required to engage in costly
and time-consuming litigation to enforce our rights. We may not prevail in any such litigation. Our
financial condition and results of operations could be impacted negatively if we lose our
competitive advantage because others were able to use our intellectual property.
If we are alleged to have infringed on the proprietary rights of third parties, we could incur
unanticipated costs and be prevented from providing our products and services.
As a publisher and distributor of original research and analysis, a user of third party
content, and an online content provider, we face potential liability for trademark and copyright
infringement and other claims based on the material we publish. Infringement claims may be asserted
against us in the future, and those claims may be successful. Any intellectual property rights
claim against us or our members, with or without merit, could be expensive to litigate, cause us to
incur substantial costs, harm our reputation, and divert management resources and attention in
defending the claim. Furthermore, a party making a claim against us could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services. In addition, licenses for any
intellectual property of third parties that might be required for our products or services may
become unavailable on commercially reasonable terms, or at all. As a result, we may also be
required to develop alternative non-infringing technology, which could require significant effort
and expense.
We may be exposed to loss of revenue resulting from our unconditional service guarantee.
We
offer an unconditional service guarantee in some of our membership
programs. A
member who has a service guarantee may request a refund of its
membership fee at any time during the membership term. Refunds are provided
on a pro rata basis relative to the remaining term of the membership. Requests for refunds of
membership fees by a significant number of our members could lower our revenue and have a material
adverse effect on our financial condition and results of operations.
Any significant increase in bad debt in excess of recorded estimates would have a negative impact
on our business, financial condition, and results of operations.
Our operations may incur unexpected losses from unforeseen exposures to member credit risk
degradation. We initially evaluate the collectibility of our accounts receivable based on a number
of factors, including a specific members ability to meet its financial obligations to us, the
length of time the receivables are past due, and historical collections experience. Based on these
assessments, we record a reserve for specific account balances as well as a general reserve based
on our historical experience for bad debt to reduce the related receivables to the amount we expect
to collect from members. If circumstances related to specific members change as a result of the
current economic climate or otherwise, such as a limited ability to meet financial obligations due
to bankruptcy, or if conditions deteriorate such that our past collection experience is no longer
relevant, the amount of accounts receivable that we are able to collect may be less than our
previous estimates as we experience bad debt in excess of reserves previously recorded.
17
We may pursue acquisition opportunities, which could subject us to considerable business and
financial risk.
We evaluate potential acquisitions of complementary businesses on an ongoing basis and may
from time to time pursue acquisition opportunities. We may not be successful in identifying
acquisition opportunities, assessing the value, strengths, and weaknesses of these opportunities,
or consummating acquisitions on acceptable terms. Future acquisitions may result in near term
dilution to earnings, including potentially dilutive issuances of equity securities or issuances of
debt. Acquisitions may expose us to particular business and financial risks, including risks that
we may:
|
|
|
suffer the diversion of financial and management resources from existing
operations; |
|
|
|
|
incur indebtedness and assume additional liabilities, known and unknown, including
liabilities relating to the use of intellectual property we acquire; |
|
|
|
|
incur significant additional capital expenditures, transaction and operating
expenses, and non-recurring acquisition-related charges; |
|
|
|
|
experience an adverse impact on our earnings from the amortization or impairment of
acquired goodwill and other intangible assets; |
|
|
|
|
fail to integrate successfully the operations and personnel of the acquired
businesses; |
|
|
|
|
enter new markets or market new products with which we are not entirely
familiar; and |
|
|
|
|
fail to retain key personnel of, vendors to, and clients of the acquired
businesses. |
If we are unable to address the risks associated with acquisitions, or if we encounter
unforeseen expenses, difficulties, complications, or delays frequently encountered in connection
with the integration of acquired entities and the expansion of operations, we may fail to achieve
expected cost savings, revenue opportunities, and other expected benefits of our acquisition
strategy and may be required to focus resources on integration of operations rather than on our
primary product and service offerings.
Any significant impairment of our goodwill would lead to a decrease in our assets and a reduction
in our net operating performance.
As of March 31, 2011, we had goodwill of approximately $67.2 million, which constituted
approximately 13.7% of our total assets as of that date. If we make changes in our business
strategy or if market or other conditions adversely affect our business operations, we may be
forced to record an impairment change, which would lead to a decrease in our assets and a reduction
in our net operating performance. If the testing performed indicates that impairment has occurred,
we will be required to record an impairment charge for the difference between the carrying value of
the goodwill and the implied fair value of the goodwill in the period in which the determination is
made. The testing of goodwill for impairment requires us to make significant estimates about the
future performance and cash flows of our company, as well as other assumptions. These estimates can
be affected by numerous factors, including changes in economic,
industry, or market conditions,
changes in underlying business operations, future reporting unit operating performance, existing or
new product market acceptance, changes in competition, or changes in technologies. Any changes in
key assumptions, or actual performance compared with those assumptions, about our business and its
future prospects or other assumptions could affect the fair value of one or more reporting units,
and result in an impairment charge.
We may invest in companies for strategic reasons and may not realize a return on our investments.
From time to time, we may make investments in companies to further their strategic objectives
and support our key business initiatives. As of March 31, 2011, we held approximately $5.0 million
of such investments. 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 may 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 may depend 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
18
companies fails, 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. Further, 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.
If we are required to collect sales and use taxes on the programs we sell in certain
jurisdictions, we may be subject to tax liability for past sales and our future sales may decrease.
Rules and regulations applicable to sales and use tax vary significantly from state to state.
In addition, the applicability of these rules, given the nature of our products and services, is
subject to change.
We may lose sales or incur significant costs should various tax jurisdictions be successful in
imposing sales and use taxes on a broader range of products and services. A successful assertion by
one or more tax jurisdictions that we should collect sales or other taxes on the sale of our
solutions could result in substantial tax liabilities for past sales, decrease our ability to
compete, and otherwise harm our business.
If one or more taxing authorities determines that taxes should have, but have not, been paid
with respect to our services, we may be liable for past taxes in addition to taxes going forward.
Liability for past taxes may also include very substantial interest and penalty charges. If we are
required to collect and pay back taxes and the associated interest and penalties and if our
members fail or refuse to reimburse us for all or a portion of these amounts, we will have
incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our
services going forward will effectively increase the cost of such services to our members and may
adversely affect our ability to retain existing members or to gain new members in the areas in
which such taxes are imposed.
We may not be able to fully realize our deferred tax assets.
For tax purposes, we have deferred income tax assets consisting primarily of state income tax
credit carry forwards. If our future taxable income is less than what we believe it will be, we may
not be able to fully realize our deferred tax asset. In estimating future tax consequences, we do
not consider the effect of future changes in existing tax laws or rates in the determination and
evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted. We
have established our deferred income tax assets and liabilities using currently enacted tax laws
and rates, including the estimated effects of our status as a Qualified High Technology Company, or
QHTC, on our Washington, D.C. deferred tax assets. We will recognize an adjustment to income for
the impact of new tax laws or rates on the existing deferred tax assets and liabilities when and if
new tax laws or rates are enacted that have an impact on our deferred income taxes.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters is located on approximately 180,000 square feet of office space in
Washington, D.C. The facilities accommodate research, delivery, marketing and sales, software
development, information technology, administration, and operations personnel. We lease our office
facilities, and the lease expires in June 2019. The terms of the lease contain provisions for
rental escalation and we are required to pay our portion of executory costs such as taxes,
insurance, and operating expenses. We also lease small office spaces in Portland, Oregon; Austin,
Texas; Nashville, Tennessee; Vernon Hills, Illinois; San Francisco, California; Ann Arbor,
Michigan; and Chennai, India. For information about our leased offices, see Note 15, Commitments
and contingencies, of our consolidated financial statements appearing elsewhere in this report. We
believe that our facilities are adequate for our current needs and that additional facilities will
be available for lease on a commercially reasonable basis to accommodate our anticipated growth.
19
Item 3. Legal Proceedings.
From time to time, we are subject to ordinary routine litigation incidental to our normal
business operations. We are not currently a party to, and our property is not subject to, any
material legal proceedings.
Item 4. [Removed and Reserved.]
20
PART II
Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market Information, Holders and Dividends
Our common stock is listed on the Global Select Market of The NASDAQ Stock Market LLC and is
traded under the NASDAQ symbol ABCO. The following table sets forth, for the periods indicated,
the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select
Market.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal Year Ended March 31, 2010: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
26.06 |
|
|
$ |
16.30 |
|
Second quarter |
|
$ |
27.53 |
|
|
$ |
22.80 |
|
Third quarter |
|
$ |
30.65 |
|
|
$ |
24.49 |
|
Fourth quarter |
|
$ |
33.37 |
|
|
$ |
31.50 |
|
Fiscal Year Ended March 31, 2011: |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
44.15 |
|
|
$ |
31.65 |
|
Second quarter |
|
$ |
44.97 |
|
|
$ |
39.74 |
|
Third quarter |
|
$ |
50.68 |
|
|
$ |
44.16 |
|
Fourth quarter |
|
$ |
52.81 |
|
|
$ |
46.43 |
|
As of June 1, 2011, there were eight holders of record of our common stock and 16,254,311
shares of common stock outstanding. The number of record holders does not include individuals or
entities who beneficially own shares but whose shares are held of record by a broker, bank or other
nominee, but does include each such broker, bank or other nominee as one record holder.
We have not declared or paid any cash dividend on our common stock since we became a public
company in 2001. We do not currently anticipate declaring or paying any cash dividends. The timing
and amount of future cash dividends, if any, is periodically evaluated by our Board of Directors
and would depend upon, among other factors, our earnings, financial condition, and cash
requirements.
Issuer Purchases of Equity Securities
In January 2004, our Board of Directors authorized the repurchase by us from time to time of
up to $50 million of our common stock. That authorization was increased in cumulative 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 pursuant to this publicly announced repurchase program. No minimum number of shares
has been fixed, and the share repurchase authorization has no expiration date. A summary of the
share repurchase activity for the Companys fourth quarter of fiscal 2011 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Shares That May |
|
|
Total Number of |
|
Average Price |
|
Announced Plans or |
|
Yet Be Purchased |
|
|
Shares Purchased |
|
Paid Per Share |
|
Programs |
|
Under The Plan |
January 1 to January 31, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
35,469,638 |
|
February 1 to February 28, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
35,469,638 |
|
March 1 to March 31, 2011 |
|
|
35,973 |
|
|
$ |
50.03 |
|
|
|
35,973 |
|
|
$ |
33,669,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
35,973 |
|
|
$ |
50.03 |
|
|
|
35,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, we had repurchased a total of 7,520,671 shares under our repurchase
program.
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating data. The selected financial
data presented below as of March 31, 2007, 2008, 2009, 2010, and 2011 and for the five fiscal years
in the period ended March 31, 2011 have been derived from our financial statements which have been
audited by Ernst & Young LLP, an independent registered public accounting firm. You should read the
selected financial data presented below in conjunction with our consolidated financial statements,
the Notes to the
21
consolidated financial statements, and Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(In thousands except per share amounts) |
|
Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
189,843 |
|
|
$ |
218,971 |
|
|
$ |
230,360 |
|
|
$ |
239,323 |
|
|
$ |
290,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
90,129 |
|
|
|
102,291 |
|
|
|
116,556 |
|
|
|
124,412 |
|
|
|
154,395 |
|
Member relations and marketing |
|
|
40,204 |
|
|
|
45,890 |
|
|
|
52,292 |
|
|
|
53,928 |
|
|
|
65,069 |
|
General and administrative |
|
|
22,815 |
|
|
|
25,269 |
|
|
|
26,725 |
|
|
|
32,133 |
|
|
|
38,225 |
|
Depreciation and amortization of property and equipment |
|
|
2,070 |
|
|
|
3,589 |
|
|
|
5,647 |
|
|
|
6,391 |
|
|
|
5,971 |
|
Write-off of capitalized software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
155,218 |
|
|
|
177,039 |
|
|
|
201,220 |
|
|
|
224,261 |
|
|
|
263,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
34,625 |
|
|
|
41,932 |
|
|
|
29,140 |
|
|
|
15,062 |
|
|
|
26,588 |
|
Other income, net |
|
|
6,819 |
|
|
|
6,142 |
|
|
|
2,445 |
|
|
|
2,340 |
|
|
|
1,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
41,444 |
|
|
|
48,074 |
|
|
|
31,585 |
|
|
|
17,402 |
|
|
|
28,454 |
|
Provision for income taxes |
|
|
(14,049 |
) |
|
|
(16,012 |
) |
|
|
(10,117 |
) |
|
|
(5,969 |
) |
|
|
(9,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,395 |
|
|
$ |
32,062 |
|
|
$ |
21,468 |
|
|
$ |
11,433 |
|
|
$ |
18,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
1.46 |
|
|
$ |
1.78 |
|
|
$ |
1.31 |
|
|
$ |
0.74 |
|
|
$ |
1.18 |
|
Net income per share diluted |
|
$ |
1.41 |
|
|
$ |
1.72 |
|
|
$ |
1.30 |
|
|
$ |
0.73 |
|
|
$ |
1.13 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
18,714 |
|
|
|
17,999 |
|
|
|
16,441 |
|
|
|
15,515 |
|
|
|
15,733 |
|
Diluted |
|
|
19,448 |
|
|
|
18,635 |
|
|
|
16,560 |
|
|
|
16,692 |
|
|
|
16,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(In thousands except per share amounts) |
|
|
|
(Unaudited) |
|
Stock-based compensation expense included in Statement of Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
$ |
4,273 |
|
|
$ |
3,930 |
|
|
$ |
2,764 |
|
Member relations and marketing |
|
|
2,436 |
|
|
|
2,248 |
|
|
|
1,663 |
|
General and administrative |
|
|
5,738 |
|
|
|
5,974 |
|
|
|
4,366 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
12,447 |
|
|
|
12,152 |
|
|
|
8,793 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
(12,447 |
) |
|
|
(12,152 |
) |
|
|
(8,793 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(8,464 |
) |
|
$ |
(7,984 |
) |
|
$ |
(5,725 |
) |
|
|
|
|
|
|
|
|
|
|
Impact on earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
(0.51 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(In thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,195 |
|
|
$ |
17,907 |
|
|
$ |
23,746 |
|
|
$ |
61,238 |
|
|
$ |
30,378 |
|
Marketable securities |
|
|
146,168 |
|
|
|
132,158 |
|
|
|
70,103 |
|
|
|
51,682 |
|
|
|
86,179 |
|
Working capital (deficit) |
|
|
(35,018 |
) |
|
|
(47,371 |
) |
|
|
(36,640 |
) |
|
|
(22,027 |
) |
|
|
(66,939 |
) |
Total assets |
|
|
286,174 |
|
|
|
305,114 |
|
|
|
316,258 |
|
|
|
386,772 |
|
|
|
491,188 |
|
Deferred revenue |
|
|
116,994 |
|
|
|
144,147 |
|
|
|
170,478 |
|
|
|
208,402 |
|
|
|
266,015 |
|
Total stockholders equity |
|
|
138,464 |
|
|
|
122,529 |
|
|
|
98,899 |
|
|
|
111,815 |
|
|
|
148,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership programs offered |
|
|
32 |
|
|
|
37 |
|
|
|
41 |
|
|
|
45 |
|
|
|
50 |
|
Total members |
|
|
2,662 |
|
|
|
2,761 |
|
|
|
2,817 |
|
|
|
2,985 |
|
|
|
3,243 |
|
Member institution renewal rate (1) |
|
|
89 |
% |
|
|
90 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
91 |
% |
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Contract value (in thousands) (2) |
|
$ |
200,094 |
|
|
$ |
230,806 |
|
|
$ |
230,769 |
|
|
$ |
261,110 |
|
|
$ |
310,051 |
|
Contract value per member (3) |
|
$ |
75,167 |
|
|
$ |
83,595 |
|
|
$ |
81,920 |
|
|
$ |
87,474 |
|
|
$ |
95,606 |
|
|
|
|
(1) |
|
The percentage of member institutions at the beginning of a fiscal year that hold one or more
memberships in any of our programs at the beginning of the next fiscal year, adjusted to
reflect mergers, acquisitions, or different affiliations of members that result in changes of
control over individual institutions. |
|
(2) |
|
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. |
|
(3) |
|
Total contract value divided by the number of members. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
We provide best practices research and analysis, business intelligence and software tools, and
management and advisory services to approximately 3,200 organizations, including hospitals, health
systems, pharmaceutical and biotech companies, health care insurers, medical device companies,
colleges, universities, and other educational institutions through 50 discrete programs. Members of
each program typically are charged a fixed fee and have access to an integrated set of services
that may include best practice research studies, executive education seminars, customized research
briefs, web-based access to the programs content database, and software tools.
Our membership business model allows us to create value for our members by providing proven
solutions to common and complex problems as well as quality content on a broad set of relevant
issues. Our growth has been driven by strong renewal rates, ongoing addition of new memberships in
our existing programs, continued new program launches, acquisition activity, and continued annual
price increases. Our member institution renewal rate was 88%, 89%, and 91% for fiscal 2009, 2010,
and 2011, respectively. We believe high renewal rates are a reflection of our members recognition
of the value they derive from participating in our programs. Our revenue grew 21.3% in fiscal 2011
over fiscal 2010 and grew 3.9% in fiscal 2009 over fiscal 2008. Our contract value increased 18.7%
to $310.1 million as of March 31, 2011 from March 31, 2010 and increased 13.1% to $261.1 million as
of March 31, 2010 from March 31, 2009. 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.
As of March 31, 2011, memberships in 40 of our programs were renewable at the end of their
membership contract term. Contract terms for these memberships generally run one, two, or three
years. Our other ten programs provide management and advisory services. Memberships in these ten
programs help members accelerate the adoption of best practices profiled in our research studies
and are not individually renewable. As of March 31, 2011, more than 85% of our contract value was
renewable. In each of our programs, we generally invoice and collect fees in advance of accrual
revenue.
Our operating costs and expenses consist of cost of services, member relations and marketing,
general and administrative expenses, depreciation and amortization of property and equipment
expenses, and, in fiscal 2010, the write-off of capitalized software. Cost of services includes the
costs associated with the production and delivery of our products and services, consisting of
compensation for research personnel, in-house faculty, software developers, and consultants; the
organization and delivery of membership meetings, teleconferences, and other events; production of
published materials; technology license fees; and costs of developing and supporting our web-based
content and business intelligence and software tools. Member relations and marketing includes the
costs of acquiring new members and the costs of account management, consisting of compensation,
including sales incentives; travel and entertainment expenses; training of personnel; sales and
marketing materials; and associated support services. 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 of property and equipment expense includes the cost of depreciation
of our property and equipment, amortization of costs associated with the development of software
and tools that are offered as part of certain of our membership programs, and amortization of
acquired developed technology. Write-off of capitalized software in fiscal 2010 includes the
impairment charge taken to write-down internally developed capitalized software balances to their
current fair value. Included in our operating costs for each year presented are stock-based
compensation expenses and expenses representing additional payroll taxes for compensation expense
23
as a result of the taxable income employees recognized upon the exercise of common stock
options and the vesting of restricted stock units.
Non-GAAP Financial Presentation
This managements discussion and analysis presents supplemental measures of our performance
which are derived from our consolidated financial information but which are not presented in our
consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP. These financial measures, which are considered
non-GAAP financial measures under SEC rules, are referred to as adjusted EBITDA, adjusted net
income, and non-GAAP earnings per diluted share. See Non-GAAP Financial Measures below for
information about these non-GAAP financial measures, including our reasons for including the
measures, material limitations with respect to the usefulness of the measures, and a reconciliation
of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
Results of Operations
The first table below shows statements of income data expressed as a percentage of revenue for
the periods indicated. The second table shows the stock-based compensation expense included in the
statements of income data expressed as a percentage of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
50.6 |
|
|
|
52.0 |
|
|
|
53.2 |
|
Member relations and marketing |
|
|
22.7 |
|
|
|
22.5 |
|
|
|
22.4 |
|
General and administrative |
|
|
11.6 |
|
|
|
13.4 |
|
|
|
13.2 |
|
Depreciation and amortization of property and equipment |
|
|
2.5 |
|
|
|
2.7 |
|
|
|
2.1 |
|
Write-off of capitalized software |
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
87.4 |
|
|
|
93.7 |
|
|
|
90.9 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12.6 |
|
|
|
6.3 |
|
|
|
9.1 |
|
Other income, net |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
13.7 |
|
|
|
7.3 |
|
|
|
9.7 |
|
Provision for income taxes |
|
|
(4.4 |
) |
|
|
(2.5 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
9.3 |
% |
|
|
4.8 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Stock-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
1.9 |
% |
|
|
1.6 |
% |
|
|
1.0 |
% |
Member relations and marketing |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
0.6 |
|
General and administrative |
|
|
2.5 |
|
|
|
2.5 |
|
|
|
1.5 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
5.5 |
|
|
|
5.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(3.7 |
%) |
|
|
(3.3 |
%) |
|
|
(2.0 |
%) |
|
|
|
|
|
|
|
|
|
|
Fiscal years ended March 31, 2009, 2010, and 2011
Overview. Net income decreased 46.7% from $21.5 million in fiscal 2009 to $11.4 million in
fiscal 2010, and increased 62.0% to $18.5 million in fiscal 2011. The decrease in net income during
fiscal 2010 was primarily due to two non-cash charges and acquisition-related costs incurred during
fiscal 2010, partially offset by revenue growth of 3.9%. During fiscal 2010, certain members of
senior management and the 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 non-cash charge during the year of $1.9 million. In addition, we recognized a
$7.4 million non-cash charge during fiscal 2010 resulting from the write-off of capitalized
software. The increase in net income during fiscal 2011 was primarily attributable to increased
revenue, as well as the absence of the two non-cash charges in 2010 described above, and was
partially offset by costs associated with the launch of new programs and an increase in the number
of new sales teams.
24
Adjusted EBITDA. Adjusted EBITDA decreased 8.8% from $48.0 million in fiscal 2009 to $43.8
million in fiscal 2010, and increased 9.6% to $48.0 million in fiscal 2011. The decrease in
adjusted EBITDA during fiscal 2010 was primarily attributable to personnel, meetings, and
deliverable costs incurred to support the expansion of new programs, including Southwind Health
Partners, L.L.C. and Southwind Navigator, LLC, which we refer together as Southwind, and an
increase in new product development costs, partially offset by revenue growth of 3.9%. The
increase in adjusted EBITDA during fiscal 2011 was primarily due to increased revenue, which was
partially offset by costs associated with the launch of new programs and an increase in the number
of new sales teams.
Revenue. Revenue increased 3.9% from $230.3 million in fiscal 2009 to $239.3 million in fiscal
2010, and increased 21.3% to $290.2 million in fiscal 2011. Our contract value increased from
$230.8 million as of March 31, 2009 to $261.1 million as of March 31, 2010, and increased to $310.1
million as of March 31, 2011.
The increase in revenue in fiscal 2010 over fiscal 2009 was primarily due to the cross-selling
of existing programs to existing members, the introduction and expansion of new programs, the
addition of new member organizations, the acquisition of substantially all of the assets of
Southwind and, to a lesser degree, price increases. The increase in revenue in fiscal 2011 over
fiscal 2010 was primarily due to cross-selling existing programs to existing members, the
introduction and expansion of new programs, the addition of new member organizations, the
acquisition of Concuity Services, Inc., or Concuity, and a full fiscal year of revenue from
Southwind.
We offered 41 membership programs as of March 31, 2009, 45 as of March 31, 2010, and 50 as of
March 31, 2011. Our membership base consisted of 2,817 member institutions as of March 31, 2009,
2,985 member institutions as of March 31, 2010, and 3,243 member institutions as of March 31, 2011.
Our average contract value per member was $81,920 for fiscal 2009, compared to $87,474 for fiscal
2010 and $95,606 for fiscal 2011.
Cost of services. Cost of services increased 6.7% from $116.6 million in fiscal 2009 to $124.4
million in fiscal 2010, and increased 24.1% to $154.4 million in fiscal 2011. As a percentage of
revenue, cost of services was 50.6% for fiscal 2009, 52.0% for fiscal 2010, and 53.2% for fiscal
2011. The increase of $7.8 million for fiscal 2010 was primarily due to $8.7 million of personnel,
meetings, and deliverable costs incurred to support the expansion of new programs, including
Southwind, offset by reductions in technology consultant fees associated with our business
intelligence and software tools, and by reductions in travel expense. The increase of $30.0 million
for fiscal 2011 was primarily attributable to an increase in personnel and other deliverable costs
from new programs, including the acquisitions of Southwind and Concuity.
Member relations and marketing. Member relations and marketing expense increased 3.1% from
$52.3 million in fiscal 2009 to $53.9 million in fiscal 2010, and increased 20.7% to $65.1 million
in fiscal 2011. As a percentage of revenue, member relations and marketing expense in fiscal 2009,
2010, and 2011 was 22.7%, 22.5%, and 22.4%, respectively. The total dollar increases in member
relations and marketing expense over each of the fiscal years were primarily due to increases in
sales staff and related travel and other associated costs, as we had an average of 112, 116, and
135 new business development teams during fiscal 2009, 2010, and 2011, respectively, as well as
increases in member relations personnel and related costs required to serve the expanding
membership base.
General and administrative. General and administrative expense increased 20.2% from $26.7
million in fiscal 2009 to $32.1 million in fiscal 2010, and increased 19.0% to $38.2 million in
fiscal 2011. As a percentage of revenue, general and administrative expense in fiscal 2009, 2010,
and 2011 was 11.6%, 13.4%, and 13.2%, respectively. The increase of $5.4 million in general and
administrative costs for fiscal 2010 was primarily due to $1.6 million in transaction costs
relating to the acquisitions of Southwind and Concuity, an accelerated stock-based compensation
charge of $1.1 million in connection with the voluntary surrender of certain stock options (as
described in Note 11, Stock-based compensation of our consolidated financial statements appearing
elsewhere in this report), an increase in new product development costs, and to a lesser extent
increases in information systems and finance personnel. The increase of $6.1 million in general and
administrative costs for fiscal 2011 was primarily due to an increase of $2.1 million increase in
direct recruitment expenses, as well as $2.3 million increase in our administrative overhead
departments to support our growing employee base. As of March 31, 2011 we had approximately 1,600
employees compared to 1,100 as of March 31, 2010.
Depreciation and amortization of property and equipment. Depreciation expense increased from
$5.6 million, or 2.5% of revenue, in fiscal 2009, to $6.4 million, or 2.7% of revenue, in fiscal
2010, and decreased to $6.0 million, or 2.1% of revenue, in fiscal 2011. The increase in fiscal
2010 was primarily due to increased amortization expense from developed capitalized internal-use
software tools of $0.4 million as well as increased depreciation expense related to the expansion
of additional floors in our headquarters facility under the terms of our lease agreement. The
decrease in fiscal 2011 was primarily attributable to decreased amortization expense from developed
capitalized internal-use software tools following a write-off of capitalized software during fiscal
2010.
25
Write-off of capitalized software. During fiscal 2010, we recognized an impairment charge on
capitalized internally developed software assets of $7.4 million with no comparable expense in the
prior or subsequent fiscal year.
Other income, net. Other income, net decreased from $2.4 million in fiscal 2009 to $2.3
million in fiscal 2010, and to $1.9 million in fiscal 2011. Other income, net consisted of interest
income of $3.5 million and a foreign exchange rate loss of $1.1 million in fiscal 2009, interest
income of $2.3 million and a foreign exchange rate gain of $46,000 in fiscal 2010, and interest
income of $1.7 million and a foreign exchange rate gain of $0.2 million in fiscal 2011. Interest
income decreased from $3.5 million in fiscal 2009 to $2.3 million in fiscal 2010, and to $1.7
million in fiscal 2011 due to lower interest rates and lower average invested cash balances
resulting from the acquisitions of Crimson Software, Inc., Southwind, and Concuity in fiscal 2009,
2010, and 2011, respectively. During fiscal 2009, 2010, and 2011, we recognized a foreign exchange
loss of $1.1 million and foreign exchange gains of $46,000 and $157,000, respectively, due to the
effect of fluctuating currency rates on our receivable balances from international members.
Provision for income taxes. Our provision for income taxes was $10.1 million, $6.0 million,
and $9.9 million in fiscal 2009, 2010, and 2011, respectively. Our effective tax rate in fiscal
2009, 2010, and 2011 was 32.0%, 34.3%, and 34.9%, respectively. The increase in our effective tax
rate in fiscal 2010 was 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 New E-conomy Transformation Act of
2000. The increase in our effective tax rate in fiscal 2011 was primarily due to the effect that
higher estimated net income for fiscal year 2011, when compared to fiscal year 2010, has on our
effective rate when compared to the fixed nature of our Washington D.C. tax credits that we receive
under that Act, and to a lesser degree, our lower tax-exempt interest income in fiscal 2011.
Stock-based compensation expense. We recognized the following stock-based compensation expense
in the consolidated statements of income line items for stock options and RSUs issued under our
stock incentive plans and for shares issued under our employee stock purchase plan for the years
ending March 31, 2009, 2010, and 2011 (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Stock-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
$ |
4,273 |
|
|
$ |
3,930 |
|
|
$ |
2,763 |
|
Member relations and marketing |
|
|
2,436 |
|
|
|
2,248 |
|
|
|
1,663 |
|
General and administrative |
|
|
5,738 |
|
|
|
5,974 |
|
|
|
4,366 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
12,447 |
|
|
|
12,152 |
|
|
|
8,792 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
(12,447 |
) |
|
|
(12,152 |
) |
|
|
(8,792 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(8,464 |
) |
|
$ |
(7,984 |
) |
|
$ |
(5,725 |
) |
|
|
|
|
|
|
|
|
|
|
Impact on diluted earnings per share |
|
$ |
(0.51 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Stock-based compensation by award type: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
7,209 |
|
|
$ |
6,287 |
|
|
$ |
3,590 |
|
Restricted stock units |
|
|
5,179 |
|
|
|
5,857 |
|
|
|
5,202 |
|
Employee stock purchase rights |
|
|
59 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
12,447 |
|
|
$ |
12,152 |
|
|
$ |
8,792 |
|
|
|
|
|
|
|
|
|
|
|
Included in stock-based compensation for the year ended March 31, 2010 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 March 31, 2011, $14.2 million of total unrecognized compensation cost related to
stock-based compensation is expected to be recognized over a weighted average period of 1.3 years.
26
Non-GAAP Financial Measures
The tables below present information for the fiscal periods indicated about our adjusted
EBITDA, adjusted net income, and non-GAAP earnings per diluted share.
We define adjusted EBITDA as earnings before other income, net, which includes interest
income and foreign currency losses and gains; income taxes; depreciation and amortization;
amortization of acquisition-related intangibles and capitalized software included in cost of
services; non-cash charges associated with the write-off of capitalized software and the
cancellation of certain stock options that occurred in the quarter ended September 30, 2009; costs
associated with the acquisitions of Concuity and Cielo MedSolutions LLC, or Cielo, that occurred in
the quarters ended March 31, 2010 and 2011, respectively; share-based compensation expense; and
fair value adjustments made to our acquisition-related earn out liabilities. We define adjusted
net income as net income excluding the net of tax effect of non-cash charges associated with the
write-off of capitalized software and the cancellation of certain stock options; share-based
compensation expense; amortization of acquisition-related intangibles; costs associated with the
acquisitions of Concuity and Cielo; and fair value adjustments made to our acquisition-related earn
out liabilities. We define non-GAAP earnings per diluted share as net income per share excluding
the net of tax effect of non-cash charges associated with the write-off of capitalized software and
the cancellation of certain stock options; share-based compensation expense; amortization of
acquisition-related intangibles; costs associated with the acquisitions of Concuity and Cielo; and
fair value adjustments made to our acquisition-related earn out liabilities.
We believe that providing information about adjusted EBITDA, adjusted net income, and non-GAAP
earnings per diluted share is useful to our investors. Our management uses these non-GAAP financial
measures, together with financial measures prepared in accordance with GAAP, to enhance its
understanding of our core operating performance, which represents our views concerning our
performance in the ordinary, ongoing, and customary course of our operations. In the future, we
expect to report again these non-GAAP financial measures excluding the items discussed above and
may incur expenses similar to the excluded items discussed above. Accordingly, the exclusion of
these and similar items in our non-GAAP presentation should not be interpreted as implying that the
items are non-recurring, infrequent, or unusual.
Our management believes that for the reasons discussed below, our use of supplemental
financial measures which exclude certain expenses facilitates an assessment by management and our
investors of the companys fundamental operating trends and addresses concerns of management and
investors that these expenses may obscure such underlying trends. Management uses the financial
measures for internal budgeting and other managerial purposes because the measures enable
management to evaluate projected operating results and make comparative assessments of our
performance over time while isolating the effects of certain items that vary from period to period
without any correlation to core operating performance, such as tax rates, interest income and
foreign currency exchange rates, periodic costs of certain capitalized tangible and intangible
assets, share-based compensation expense, and certain non-cash and special charges. The effects of
the foregoing items also vary widely among similar companies, and affect the ability of management
and investors to make company-to-company comparisons. In addition, merger and acquisition activity
can have inconsistent effects on earnings that are not related to core operating performance, for
example due to charges relating to acquisition costs, the amortization of acquisition-related
intangibles, and fluctuations in the fair value of contingent earn-out liabilities. Companies also
exhibit significant variations with respect to capital structure and cost of capital (which affect
relative interest expense) and differences in taxation and book depreciation of facilities and
equipment (which affect relative depreciation expense), including significant differences in the
depreciable lives of similar assets among various companies. By eliminating some of the foregoing
variations, management believes that the companys non-GAAP financial measures allow management and
investors to evaluate more effectively the companys performance relative to that of its
competitors and peer companies. Similarly, our management believes that because of the variety of
equity awards used by companies, the varying methodologies for determining both share-based
compensation and share-based compensation expense among companies and from period to period, and
the subjective assumptions involved in those determinations, excluding share-based compensation
from our non-GAAP financial measures enhances company-to-company comparisons over multiple fiscal
periods.
Management believes that providing non-GAAP information permits analysts, investors, and other
interested persons to obtain a better understanding of our core operating performance and to
evaluate the efficacy of the methodology and information used by management to evaluate and measure
that performance on a standalone and a comparative basis. As a result, we intend to continue to
provide these non-GAAP financial measures as part of our future earnings discussions, and the
inclusion of such measures in our periodic reports will provide consistency in our financial
reporting.
27
There are limitations associated with the non-GAAP financial measures we use as indicators of
performance, including the following:
|
|
|
the non-GAAP financial measures do not reflect capital expenditures and future
requirements for capital expenditures; |
|
|
|
|
the non-GAAP financial measures generally do not reflect depreciation and amortization,
which are non-cash charges, although the assets being depreciated and amortized will in
some cases have to be replaced in the future, nor do the measures reflect any cash
requirements for such replacements; |
|
|
|
|
the non-GAAP financial measures do not reflect the expense of equity awards to employees; |
|
|
|
|
the non-GAAP financial measures do not reflect the effect of earnings or charges
resulting from matters that management considers not indicative of our ongoing operations,
but which may recur; and |
|
|
|
|
to the extent that we change our accounting for certain transactions or other items from
period to period, our non-GAAP financial measures may not be directly comparable from
period to period. |
Our non-GAAP measures may be calculated differently from similarly titled measures used by
other companies, which limits their usefulness as comparative measures.
Our management compensates for these limitations by using the non-GAAP financial measures only
as a supplemental measure of our operating performance and by considering independently the
economic effects of the foregoing items that are or are not reflected in the measures. As a result
of the foregoing limitations, our non-GAAP financial measures should be considered in addition to
financial measures prepared in accordance with GAAP, but should not be considered a substitute for,
or superior to, GAAP measures or results as indicators of performance.
A reconciliation of our non-GAAP financial measures to the most directly comparable GAAP
financial measures is provided below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Net income |
|
$ |
21,468 |
|
|
$ |
11,433 |
|
|
$ |
18,524 |
|
Provision for income taxes |
|
|
10,117 |
|
|
|
5,969 |
|
|
|
9,930 |
|
Other income, net |
|
|
(2,637 |
) |
|
|
(2,340 |
) |
|
|
(1,866 |
) |
Depreciation and amortization |
|
|
5,647 |
|
|
|
6,391 |
|
|
|
5,971 |
|
Amortization of intangibles (1) |
|
|
976 |
|
|
|
1,644 |
|
|
|
4,721 |
|
Acquisition charges |
|
|
|
|
|
|
1,123 |
|
|
|
408 |
|
Fair value adjustments to acquisition-related earn out liabilities |
|
|
|
|
|
|
|
|
|
|
1,500 |
|
Write-off of capitalized software |
|
|
|
|
|
|
7,397 |
|
|
|
|
|
Option cancellation charge |
|
|
|
|
|
|
1,937 |
|
|
|
|
|
Share-based compensation expense |
|
|
12,448 |
|
|
|
10,216 |
|
|
|
8,792 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
48,019 |
|
|
$ |
43,770 |
|
|
$ |
47,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of those amounts included in cost of services on our consolidated statements
of income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
Net income |
|
$ |
21,468 |
|
|
$ |
11,433 |
|
|
$ |
18,524 |
|
Amortization of acquisition-related intangibles, net of tax |
|
|
783 |
|
|
|
1,079 |
|
|
|
2,896 |
|
Acquisition charges, net of tax |
|
|
|
|
|
|
738 |
|
|
|
266 |
|
Fair value adjustments to acquisition-related earn out liabilities, net of tax |
|
|
|
|
|
|
|
|
|
|
977 |
|
Write-off of capitalized software, net of tax |
|
|
|
|
|
|
4,860 |
|
|
|
|
|
Option cancellation charge, net of tax |
|
|
|
|
|
|
1,273 |
|
|
|
|
|
Share-based compensation, net of tax |
|
|
8,464 |
|
|
|
6,712 |
|
|
|
5,724 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
30,715 |
|
|
$ |
26,095 |
|
|
$ |
28,387 |
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
|
(unaudited) |
|
GAAP earnings per diluted share |
|
$ |
1.30 |
|
|
$ |
0.73 |
|
|
$ |
1.13 |
|
Amortization of acquisition-related intangibles, net of tax |
|
|
0.05 |
|
|
|
0.07 |
|
|
|
0.17 |
|
Acquisition charges, net of tax |
|
|
|
|
|
|
0.04 |
|
|
|
0.02 |
|
Fair value adjustments to acquisition-related earn out liabilities, net of tax |
|
|
|
|
|
|
|
|
|
|
0.06 |
|
Write-off of capitalized software, net of tax |
|
|
|
|
|
|
0.31 |
|
|
|
|
|
Option cancellation charge, net of tax |
|
|
|
|
|
|
0.08 |
|
|
|
|
|
Share-based compensation, net of tax |
|
|
0.51 |
|
|
|
0.43 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP earnings per diluted share |
|
$ |
1.86 |
|
|
$ |
1.66 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Cash flows generated from operating activities are our primary source of liquidity. 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 at least the next 12 months. We had cash, cash equivalents, and
marketable securities balances of $112.9 million and $116.6 million as of March 31, 2010 and 2011,
respectively. We expended $4.0 million and $8.3 million in cash to purchase shares of our common
stock through our share repurchase program during fiscal 2010 and 2011, respectively. We have no
long-term indebtedness.
Cash flows from operating activities. The combination of revenue growth, profitable
operations, and payment for memberships in advance of accrual revenue typically results in
operating activities that generate cash flows in excess of net income on an annual basis. Net cash
flows provided by operating activities were $39.7 million in fiscal 2009, $46.7 million in fiscal
2010, and $50.5 million in fiscal 2011. The increase in net cash flows provided by operating
activities in fiscal 2010 was primarily due to acceleration in contract value and deferred revenue
growth, as well as the impact of the write-off of capitalized software of $7.4 million and the $1.9
million non-cash charge associated with the cancellation of certain stock options. The increase in
net cash flows provided by operating activities in fiscal 2011 was primarily due to the increase in
net income and deferred revenue, partially offset by an increase in excess tax benefits resulting
from the exercise of employee stock options.
Cash flows from investing activities. Our cash management and investment strategy and capital
expenditure programs affect investing cash flows. Net cash flows provided by investing activities
were $27.4 million in fiscal 2009. Net cash flows used in investing activities were $4.3 million
and $91.1 million in fiscal 2010 and 2011, respectively.
In fiscal 2009, investing activities provided $27.4 million in cash, primarily from the net
proceeds on the redemption of marketable securities of $61.0 million, which was primarily used to
fund our share repurchase program and our acquisition of Crimson for $18.6 million, net of cash
received, and capital expenditures of $15.0 million, which included $3.8 million in purchases of
property and equipment related primarily to the scheduled expansion of our headquarters facility
and $9.7 million of capitalized software development costs related to our newer research programs
that include web-based business intelligence tools.
In fiscal 2010, investing activities used $4.3 million in cash, primarily consisting of $13.6
million used in our acquisition of Southwind and the related escrow, a $5.0 million investment, and
capital expenditures of $2.5 million, partially offset by the net proceeds on the redemption and
sales of marketable securities of $16.9 million.
In fiscal 2011, investing activities used $91.9 million in cash, primarily consisting of $42.6
million used in our acquisitions of Concuity and Cielo, $37.0 million used on the net purchases
marketable securities, and capital expenditures of $12.3 million.
Cash flows from financing activities. We used net cash flows in financing activities of $61.3
million and $4.9 million in fiscal 2009 and 2010, respectively. We had net cash flows provided by
financing activities of $10.6 million in fiscal 2011.
In fiscal 2009 we used net cash flows in financing activities of $61.3 million. Of this
amount, we applied approximately $61.5 million to repurchase 2,051,225 shares of our common stock
and $0.8 million to satisfy minimum employee tax withholding for vested restricted stock units. The
effects of these transactions were offset in part by our receipt of $0.4 million from the exercise
of stock options and $0.3 million from the issuance of common stock under our employee stock
purchase plan.
29
In fiscal 2010 we used net cash flows in financing activities of $4.9 million, consisting of
repurchasing 146,179 shares of our common stock for approximately $4.0 million and $1.2 million
withheld to satisfy minimum employee tax withholding for vested restricted stock units, offset by
$0.2 million from the exercise of stock options and $0.1 million from the issuance of common stock
under our employee stock purchase plan.
In fiscal 2011 we had net cash flows provided by financing activities of $10.6 million,
consisting of $17.8 million from the exercise of stock options, $0.2 million from the issuance of
common stock under our employee stock purchase plan, and $2.6 million in excess tax benefits
resulting from the exercise of employee options, offset by our repurchase of 188,930 shares of our
common stock for approximately $8.3 million and our use of $1.6 million to satisfy minimum employee
tax withholding for vested restricted stock units.
Credit facilities. 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 fiscal year of not less than
three to one. The credit facility renews automatically each year until October 31, 2011, and can be
increased at our request by up to an additional $10 million per year. We have not requested any
increases in the credit facility and there have been no borrowings under the facility. The
availability of borrowings under the credit facility was $20 million as of March 31, 2011.
Contractual obligations. The following summarizes our contractual obligations as of March 31,
2011 and the effect such obligations are expected to have on our liquidity and cash flows in future
periods. These obligations relate to obligations under our headquarters and other offices leases as
well as purchase obligations for software development services, both of which are more fully
described in Note 15, Commitments and contingencies, of our consolidated financial statements
appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period |
|
|
(in thousands) |
|
|
Total |
|
<1 Year |
|
1-3 Yrs |
|
4-5 Yrs |
|
>5 Yrs |
Non-cancelable operating leases |
|
$ |
73,656 |
|
|
$ |
8,288 |
|
|
$ |
28,133 |
|
|
$ |
18,516 |
|
|
$ |
18,719 |
|
Purchase obligations |
|
$ |
3,000 |
|
|
$ |
|
|
|
$ |
3,000 |
|
|
$ |
|
|
|
$ |
|
|
Share Repurchase
In January 2004, our Board of Directors authorized the repurchase by us from time to time of
up to $50 million of our common stock. This authorization was increased in cumulative 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. We intend to fund any future
share repurchases with cash on hand and with cash generated from operations. No minimum number of
shares for repurchase has been fixed, and the share repurchase authorization has no expiration
date. All repurchases have been made in the open market pursuant to this publicly announced
repurchase program. As of March 31, 2011, the remaining authorized repurchase amount was $33.6
million.
Exercise of Stock Options and Purchases under our Employee Stock Purchase Plan
Options granted to participants under our stock-based incentive compensation plans that were
exercised to acquire shares in fiscal 2009, 2010, and 2011 generated cash of approximately $0.4
million, $0.2 million, and $17.8 million, respectively, from payment of option exercise prices. In
addition, in fiscal 2009, 2010, and 2011 we generated cash of approximately $0.3 million, $0.1
million, and $0.2 million, respectively, in discounted stock purchases by participants under our
employee stock purchase plan.
Off-Balance Sheet Arrangements
As of March 31, 2011, we had no off-balance sheet financing or other arrangements with
unconsolidated entities or financial partnerships (such as entities often referred to as structured
finance or special purpose entities) established for purposes of facilitating off-balance sheet
financing or other debt arrangements or for other contractually limited purposes.
Summary of Critical Accounting Policies
We have identified the following policies as critical to our business operations and the
understanding of our results of operations. This listing is not a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP, with no need for managements judgment in their application. There
are also areas in
30
which managements judgment in selecting any available alternative would not produce a
materially different result. Certain of our accounting policies are particularly important to the
presentation of our financial condition and results of operations and may require the application
of significant judgment by our management. In applying those policies, our management uses its
judgment to determine the appropriate assumptions to be used in the determination of certain
estimates. Those estimates are based on our historical experience, our observance of trends in the
industry, information provided by our members, and information available from other outside
sources, as appropriate. For a more detailed discussion on the application of these and other
accounting policies, see Note 3, Summary of significant accounting policies of our consolidated
financial statements appearing elsewhere in this report. Our critical accounting policies are
discussed below.
Revenue recognition
Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is
fixed or determinable, (3) services have been rendered and payment has been contractually earned,
and (4) collectibility is reasonably assured. Fees are generally billable when a letter of
agreement is signed by the member, and fees receivable during the subsequent twelve month period
and related deferred revenue are recorded upon the commencement of the agreement or collection of
fees, if earlier. In many of our higher priced programs and membership agreements with terms that
are greater than one year, fees may be billed on an installment basis. Members whose membership
agreements are subject to the service guarantee may request a refund of their fees, which is
provided on a pro rata basis relative to the length of the service period.
Revenue from renewable memberships is recognized ratably over the term of the related
subscription agreement. Certain membership programs incorporate hosted business intelligence and
software tools. In many of these agreements, members are charged set up fees in addition to
subscription fees for access to the hosted web-based business intelligence tools and related
membership services. Both set up fees and subscription fees are recognized ratably over the term of
the membership agreement, which is generally one to three years. Upon launch of a new program that
incorporates a business intelligence software tool, all program revenue is deferred until the tool
is generally available for release to our membership, and then recognized ratably over the
remainder of the contract term of each agreement. One of our programs includes delivered software
tools together with implementation services, technical support, and related membership services.
For these arrangements, we separate the fair value of the technical support and related membership
services from the total value of the contract based on vendor specific objective evidence of fair
value. The fees related to the software license and implementation services are bundled and
recognized as services are performed using project hours as the basis to measure progress towards
completion. Fees associated with the technical support and related membership services are recorded
as revenue ratably over the term of the agreement, beginning when all other elements have been
delivered. Multiple contracts with a single member are treated as separate arrangements for revenue
recognition purposes.
We also perform professional services sold under separate agreements that include management
and consulting services. We recognize professional services revenues on a time-and-materials basis
as services are rendered.
Allowance for uncollectible revenue
Our ability to collect outstanding receivables from our members has an effect on our operating
performance and cash flows. We maintain an allowance for uncollectible revenue as a reduction of
revenue based on our ongoing monitoring of members credit and the aging of receivables. To
determine the allowance for uncollectible revenue, we examine our collections history, the age of
accounts receivable in question, any specific member collection issues that have been identified,
general market conditions, and current economic trends.
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 membership
programs, we provide software tools under a hosting arrangement where the software application
resides on our service providers hardware. The members do not take delivery of the software and
only receive access to the business intelligence and software tools during the term of their
membership agreement. Computer software development costs that are incurred in the preliminary
project stage are expensed as incurred. During the development stage direct consulting costs and
payroll 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.
31
The acquired developed technology is classified as property and equipment because the
developed software application resides on our service providers hardware. Amortization for
acquired developed software is included in the depreciation and amortization of property and
equipment line item of our 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 intangible asset.
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.
Business combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration are recognized at
their fair value on the acquisition date. All subsequent changes to a valuation allowance or
uncertain tax position that relate to the acquired company and existed at the acquisition date that
occur both within the measurement period and as a result of facts and circumstances that existed at
the acquisition date are recognized as an adjustment to goodwill. All other changes in valuation
allowance are recognized as a reduction or increase to expense or as a direct adjustment to
additional paid-in capital as required. We capitalize any acquired in-process research and
development as an intangible asset and amortize it over its estimated useful life. As a result of
our adoption of the revised accounting guidance for business combinations as of the beginning of
fiscal 2010, acquisition-related costs are now recorded as expenses in our consolidated financial
statements that would previously have been capitalized as a part of the purchase price pursuant to
previous accounting rules.
Goodwill and other intangible assets
The excess cost of an acquisition over the fair value of the net assets acquired is recorded
as goodwill. Goodwill and other intangible assets with indefinite lives are not amortized, but
rather tested for impairment on an annual basis on March 31, or more frequently if events or
changes in circumstances indicate potential impairment. We have concluded that our reporting units
that we use to assess goodwill impairment are the same as our operating segments.
We assess goodwill for impairment using a two-step impairment test. Step one of the test is
used to identify whether or not an impairment may exist. In the first step, we compare the fair
value of each reporting unit to its carrying value. We determine the fair value of our reporting
units based on the income approach. Under the income approach, we calculate the fair value of a
reporting unit based on the present value of estimated future cash flows. If the fair value of the
reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not
impaired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair
value of the reporting unit, an impairment may exist. If it is determined that an impairment may
exist, step two of the impairment test must then be performed to measure the amount of the
impairment, if any. The second step determines the implied fair value of the reporting units
goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then
we record an impairment loss equal to the difference. Determining the fair value of a reporting
unit is judgmental in nature and involves the use of significant estimates and assumptions. These
estimates and assumptions include revenue growth rates and operating margins used to calculate
projected future cash flows, discount rates and future economic and market conditions. Our
estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable. These valuations require the use of managements assumptions, which would not
reflect unanticipated events and circumstances that may occur.
Other intangible assets consist of capitalized software for sale and acquired intangibles. We
capitalize consulting costs and payroll and payroll-related costs for employees directly related to
building a software product once technological feasibility is established. We determine that
technological feasibility is established by the completion of a detail program design or, in its
absence, completion of a working model. Once the software product is ready for general
availability, we cease capitalizing costs and begin amortizing the intangible asset on a
straight-line basis over its estimated useful life. The weighted average estimated useful life of
capitalized software is five years. Other intangible assets include those assets that arise from
business combinations consisting of developed
32
technology, non-competes, trademarks, contracts, and
customer relationships that are amortized, on a straight-line basis, over six
months to ten years. Finite-lived intangible assets are required to be amortized over their
useful lives and are evaluated for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
Recovery of long-lived assets (excluding goodwill)
We record our long-lived assets, such as property and equipment, at cost. We review the
carrying value of our long-lived assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be fully recoverable. The test
for recoverability is made using an estimate of the undiscounted expected future cash flows and, if
required, the impairment loss, if any, is measured as the amount that the carrying value of the
asset exceeds the assets fair value if the asset is not recoverable. We consider expected cash
flows and estimated future operating results, trends, and other available information in assessing
whether the carrying value of assets is impaired. If we determine that an assets carrying value is
impaired, we will record a write-down of the carrying value of the identified asset and charge the
impairment as an operating expense in the period in which the determination is made. Although we
believe that the carrying values of our long-lived assets are appropriately stated, changes in
strategy or market conditions or significant technological developments could significantly impact
these judgments and require adjustments to recorded asset balances.
Deferred incentive compensation and other charges
Direct incentive compensation to our employees related to the negotiation of new and renewal
memberships, license fees to third party vendors for tools, data, and software incorporated in
specific memberships that include business intelligence tools, and other direct and incremental
costs associated with specific memberships are deferred and amortized over the term of the related
memberships.
Income taxes
Deferred income taxes are determined using 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 bases. 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.
Stock-based compensation
We measure and recognize stock-based compensation cost based on the estimated fair values of
the stock-based awards on the grant date. Stock-based compensation costs are recognized as an
expense in the consolidated statements of income over the vesting periods of the awards. We
calculate the grant date estimated fair value of stock options using a Black-Scholes valuation
model. Determining the estimated fair value of stock-based awards is subjective in nature and
involves the use of significant estimates and assumptions, including the term of the stock-based
awards, risk-free interest rates over the vesting period, expected dividend rates, the price
volatility of our shares, and forfeiture rates of the awards. Forfeitures are estimated at the time
of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The forfeiture rate is based on historical experience. Our fair value estimates are
based on assumptions we believe are reasonable but that are inherently uncertain. The fair value of
restricted stock units is determined as the fair market value of the underlying shares on the date
of grant.
We also report the benefits of tax deductions in excess of recognized compensation expense as
a financing cash inflow in our consolidated statements of cash flows.
To the extent we change the terms of our employee stock-based compensation programs,
experience market volatility in the pricing of our common stock that increases the implied
volatility calculation, or refine different assumptions in future periods such as forfeiture rates
that differ from our current estimates, among other potential factors, the stock-based compensation
expense that we record in future periods and the tax benefits that we realize may differ
significantly from what we have recorded in previous reporting periods.
Recent Accounting Pronouncements
See Note 3, Summary of significant accounting policies of our consolidated financial
statements appearing elsewhere in this report for a description of recent accounting
pronouncements, including the expected dates of adoption.
33
Item 7A. 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. As of March 31, 2011, our marketable securities
consisted of $62.5 million in tax-exempt notes and bonds issued by various states, and $23.7
million in U.S. government agency securities. The weighted average maturity on all our marketable
securities as of March 31, 2011 was approximately 5.3 years. We perform periodic evaluations of the
relative credit ratings related to our 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. Due to the nature of our investments we have not prepared
quantitative disclosure for interest rate sensitivity in accordance with Item 305 of the SECs
Regulation S-K as we believe the effect of interest rate fluctuations would not be material.
Foreign currency risk. Although they accounted for approximately 3% of our fiscal 2011
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 (primarily British Pound Sterling). 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 us. In fiscal 2009, 2010, and 2011, we recorded
foreign currency exchange (losses) or gains of ($1.1 million), $46,000, and $157,000, respectively,
which are included in other income, net in our consolidated statements of income. A hypothetical
10% change in foreign currency exchange rates would not have a material impact on our financial
position as of March 31, 2011.
34
Item 8. Financial Statements and Supplementary Data.
Report of Managements Assessment of Internal Control Over Financial Reporting
Management is responsible for the preparation and integrity of our consolidated financial
statements appearing in our Annual Report. Our consolidated financial statements were prepared in
conformity with accounting principles generally accepted in the United States of America and
include amounts based on managements estimates and judgments. All other financial information in
this report has been presented on a basis consistent with the information included in our
consolidated financial statements.
Management is also responsible for establishing and maintaining adequate internal control over
financial reporting. We maintain a system of internal control that is designed to provide
reasonable assurance as to the reliable preparation and presentation of our consolidated financial
statements in accordance with generally accepted accounting principles, as well as to safeguard
assets from unauthorized use or disposition.
Our control environment is the foundation for our system of internal control over financial
reporting and is reflected in our Code of Ethics for Employees, Code of Business Conduct and Ethics
for Members of the Board of Directors and Code of Ethics for Finance Team Members. Our internal
control over financial reporting is supported by formal policies and procedures which are reviewed,
modified and improved as changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of outside directors,
meets periodically with members of management and the independent registered public accounting firm
to review and discuss internal control over financial reporting and accounting and financial
reporting matters. The independent registered public accounting firm reports to the Audit Committee
and accordingly has full and free access to the Audit Committee at any time.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over financial reporting as of
March 31, 2011 based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review
of the documentation of controls, evaluation of the design effectiveness of controls, testing of
the operating effectiveness of controls and a conclusion on this evaluation. Based on this
evaluation, management has concluded that our internal control over financial reporting was
effective as of March 31, 2011.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation
report on the effectiveness of internal control over financial reporting, which is included herein.
|
|
|
|
|
|
|
|
/s/ Robert W. Musslewhite
|
|
|
Robert W. Musslewhite |
|
|
Chief Executive Officer and Director
June 14, 2011 |
|
|
|
|
|
|
/s/ Michael T. Kirshbaum
|
|
|
Michael T. Kirshbaum |
|
|
Chief Financial Officer and Treasurer
June 14, 2011 |
|
|
35
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
The Board of Directors and Stockholders of
The Advisory Board Company and Subsidiaries:
We have audited The Advisory Board Company and subsidiaries internal control over financial
reporting as of March 31, 2011, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Advisory Board Company and subsidiaries management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Report of Managements
Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Advisory Board Company and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2011, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of The Advisory Board Company and
subsidiaries as of March 31, 2011 and 2010, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years in the period ended March 31, 2011
of The Advisory Board Company and subsidiaries and our report dated June 14, 2011 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Baltimore, Maryland
June 14, 2011
36
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
The Board of Directors and Stockholders of
The Advisory Board Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Advisory Board Company and
subsidiaries as of March 31, 2011 and 2010, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years in the period ended March 31,
2011. Our audits also included the financial statement schedule of The Advisory Board Company for
the three years in the period ended March 31, 2011 as listed in the Index at Item 15(a)(2). These
financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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 consolidated financial position of The Advisory Board Company and subsidiaries as of
March 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended March 31, 2011, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), The Advisory Board Companys internal control over financial reporting as of
March 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 14,
2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Baltimore, Maryland
June 14, 2011
37
THE ADVISORY BOARD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2010 |
|
|
2011 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
61,238 |
|
|
$ |
30,378 |
|
Marketable securities |
|
|
10,422 |
|
|
|
|
|
Membership fees receivable, net |
|
|
143,453 |
|
|
|
179,162 |
|
Prepaid expenses and other current assets |
|
|
3,326 |
|
|
|
7,069 |
|
Deferred income taxes, net |
|
|
5,629 |
|
|
|
5,894 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
224,068 |
|
|
|
222,503 |
|
Property and equipment, net |
|
|
22,183 |
|
|
|
29,529 |
|
Intangible assets, net |
|
|
9,161 |
|
|
|
18,450 |
|
Goodwill |
|
|
37,255 |
|
|
|
67,155 |
|
Deferred incentive compensation and other charges |
|
|
37,563 |
|
|
|
46,226 |
|
Deferred income taxes, net of current portion |
|
|
7,782 |
|
|
|
9,646 |
|
Other non-current assets |
|
|
7,500 |
|
|
|
11,500 |
|
Marketable securities |
|
|
41,260 |
|
|
|
86,179 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
386,772 |
|
|
$ |
491,188 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
182,689 |
|
|
$ |
223,876 |
|
Accounts payable and accrued liabilities |
|
|
51,254 |
|
|
|
51,957 |
|
Accrued incentive compensation |
|
|
12,152 |
|
|
|
13,609 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
246,095 |
|
|
|
289,442 |
|
Long-term deferred revenue |
|
|
25,713 |
|
|
|
42,139 |
|
Other long-term liabilities |
|
|
3,149 |
|
|
|
11,015 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
274,957 |
|
|
|
342,596 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.01; 90,000,000 shares authorized, 21,836,893 and 22,530,909 shares
issued as of March 31, 2010 and 2011, respectively, and 15,505,152 and 16,010,238 shares
outstanding as of March 31, 2010 and 2011, respectively |
|
|
218 |
|
|
|
225 |
|
Additional paid-in capital |
|
|
239,548 |
|
|
|
267,242 |
|
Retained earnings |
|
|
145,925 |
|
|
|
164,449 |
|
Accumulated elements of other comprehensive income (loss) |
|
|
1,034 |
|
|
|
(120 |
) |
Treasury stock, at cost 6,331,741 and 6,520,671 shares as of March 31, 2010 and 2011, respectively |
|
|
(274,910 |
) |
|
|
(283,204 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
111,815 |
|
|
|
148,592 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
386,772 |
|
|
$ |
491,188 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated balance sheets.
38
THE ADVISORY BOARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Revenue |
|
$ |
230,360 |
|
|
$ |
239,323 |
|
|
$ |
290,248 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
116,556 |
|
|
|
124,412 |
|
|
|
154,395 |
|
Member relations and marketing |
|
|
52,292 |
|
|
|
53,928 |
|
|
|
65,069 |
|
General and administrative |
|
|
26,725 |
|
|
|
32,133 |
|
|
|
38,225 |
|
Depreciation and amortization of property and equipment |
|
|
5,647 |
|
|
|
6,391 |
|
|
|
5,971 |
|
Write-off of capitalized software |
|
|
|
|
|
|
7,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
29,140 |
|
|
|
15,062 |
|
|
|
26,588 |
|
Other income, net |
|
|
2,445 |
|
|
|
2,340 |
|
|
|
1,866 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
31,585 |
|
|
|
17,402 |
|
|
|
28,454 |
|
Provision for income taxes |
|
|
(10,117 |
) |
|
|
(5,969 |
) |
|
|
(9,930 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,468 |
|
|
$ |
11,433 |
|
|
$ |
18,524 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
1.31 |
|
|
$ |
0.74 |
|
|
$ |
1.18 |
|
Net income per share diluted |
|
$ |
1.30 |
|
|
$ |
0.73 |
|
|
$ |
1.13 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,441 |
|
|
|
15,515 |
|
|
|
15,733 |
|
Diluted |
|
|
16,560 |
|
|
|
15,692 |
|
|
|
16,415 |
|
The accompanying notes are an integral part of these consolidated statements.
39
THE ADVISORY BOARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elements of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
Common Shares |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Comprehensive |
|
|
|
Stock |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
Income |
|
Balance as of March 31,
2008 |
|
|
17,393,626 |
|
|
|
215 |
|
|
|
217,170 |
|
|
|
113,024 |
|
|
|
1,540 |
|
|
|
(209,420 |
) |
|
|
122,529 |
|
|
|
|
|
Acquisition of Crimson
Software, Inc. |
|
|
102,984 |
|
|
|
1 |
|
|
|
4,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,725 |
|
|
|
|
|
Proceeds from exercise of
stock options |
|
|
18,625 |
|
|
|
|
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420 |
|
|
|
|
|
Vesting of restricted
stock units, net of shares
withheld to satisfy
minimum employee tax
withholding |
|
|
80,070 |
|
|
|
1 |
|
|
|
(825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(824 |
) |
|
|
|
|
Deficient tax benefits
from stock-based awards |
|
|
|
|
|
|
|
|
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(479 |
) |
|
|
|
|
Proceeds from issuance of
common stock under
employee stock purchase
plan |
|
|
14,844 |
|
|
|
|
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
|
|
|
|
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
12,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,447 |
|
|
|
|
|
Purchases of treasury stock |
|
|
(2,051,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,491 |
) |
|
|
(61,491 |
) |
|
|
|
|
Change in net unrealized
gains (losses) on
available-for-sale
marketable securities, net
of income taxes of ($125) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
|
|
|
|
(233 |
) |
|
|
(233 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,468 |
|
|
|
|
|
|
|
|
|
|
|
21,468 |
|
|
|
21,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2009 |
|
|
15,558,894 |
|
|
|
217 |
|
|
$ |
233,794 |
|
|
$ |
134,492 |
|
|
$ |
1,307 |
|
|
$ |
(270,911 |
) |
|
$ |
98,899 |
|
|
$ |
21,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of
stock options |
|
|
11,500 |
|
|
|
|
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214 |
|
|
|
|
|
Vesting of restricted
stock units, net of shares
withheld to satisfy
minimum employee tax
withholding |
|
|
75,364 |
|
|
|
1 |
|
|
|
(1,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,248 |
) |
|
|
|
|
Deficient tax benefits
from stock-based awards |
|
|
|
|
|
|
|
|
|
|
(811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(811 |
) |
|
|
|
|
Proceeds from issuance of
common stock under
employee stock purchase
plan |
|
|
5,573 |
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
|
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
12,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,152 |
|
|
|
|
|
Purchases of treasury stock |
|
|
(146,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,999 |
) |
|
|
(3,999 |
) |
|
|
|
|
Reversal of deferred tax
asset for option
cancellation |
|
|
|
|
|
|
|
|
|
|
(4,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,700 |
) |
|
|
|
|
Change in net unrealized
gains (losses) on
available-for-sale
marketable securities, net
of income taxes of ($94) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
(273 |
) |
|
|
(273 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,433 |
|
|
|
|
|
|
|
|
|
|
|
11,433 |
|
|
|
11,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2010 |
|
|
15,505,152 |
|
|
|
218 |
|
|
$ |
239,548 |
|
|
$ |
145,925 |
|
|
$ |
1,034 |
|
|
$ |
(274,910 |
) |
|
$ |
111,815 |
|
|
$ |
11,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of
stock options |
|
|
605,641 |
|
|
|
6 |
|
|
|
17,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,776 |
|
|
|
|
|
Vesting of restricted
stock units, net of shares
withheld to satisfy
minimum employee tax
withholding |
|
|
84,039 |
|
|
|
1 |
|
|
|
(1,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,627 |
) |
|
|
|
|
Excess tax benefits from
stock-based awards |
|
|
|
|
|
|
|
|
|
|
2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,569 |
|
|
|
|
|
Proceeds from issuance of
common stock under
employee stock purchase
plan |
|
|
4,336 |
|
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191 |
|
|
|
|
|
Stock-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
8,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,792 |
|
|
|
|
|
Purchases of treasury stock |
|
|
(188,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,294 |
) |
|
|
(8,294 |
) |
|
|
|
|
Change in net unrealized
gains (losses) on
available-for-sale
marketable securities, net
of income taxes of ($619) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,154 |
) |
|
|
|
|
|
|
(1,154 |
) |
|
|
(1,154 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,524 |
|
|
|
|
|
|
|
|
|
|
|
18,524 |
|
|
|
18,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2011 |
|
|
16,010,238 |
|
|
|
225 |
|
|
$ |
267,242 |
|
|
$ |
164,449 |
|
|
$ |
(120 |
) |
|
$ |
(283,204 |
) |
|
$ |
148,592 |
|
|
$ |
17,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated statements.
40
THE ADVISORY BOARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,468 |
|
|
$ |
11,433 |
|
|
$ |
18,524 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
|
5,647 |
|
|
|
6,391 |
|
|
|
5,971 |
|
Write-off of capitalized software |
|
|
|
|
|
|
7,397 |
|
|
|
|
|
Amortization of intangible assets |
|
|
980 |
|
|
|
1,644 |
|
|
|
4,723 |
|
Deferred income taxes |
|
|
3,635 |
|
|
|
(8,136 |
) |
|
|
(1,511 |
) |
Excess tax benefits from stock-based awards |
|
|
(291 |
) |
|
|
|
|
|
|
(2,569 |
) |
Stock-based compensation expense |
|
|
12,447 |
|
|
|
12,152 |
|
|
|
8,792 |
|
Amortization of marketable securities premiums |
|
|
681 |
|
|
|
633 |
|
|
|
741 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees receivable |
|
|
(25,485 |
) |
|
|
(25,822 |
) |
|
|
(32,346 |
) |
Prepaid expenses and other current assets |
|
|
(1,381 |
) |
|
|
1,799 |
|
|
|
(3,339 |
) |
Deferred incentive compensation and other charges |
|
|
(4,529 |
) |
|
|
(10,826 |
) |
|
|
(8,663 |
) |
Deferred revenues |
|
|
22,410 |
|
|
|
36,277 |
|
|
|
56,310 |
|
Accounts payable and accrued liabilities |
|
|
4,449 |
|
|
|
9,532 |
|
|
|
9,573 |
|
Accrued incentive compensation |
|
|
(2,712 |
) |
|
|
4,832 |
|
|
|
394 |
|
Other long-term liabilities |
|
|
2,372 |
|
|
|
(635 |
) |
|
|
(6,131 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
39,691 |
|
|
|
46,671 |
|
|
|
50,469 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(14,017 |
) |
|
|
(1,802 |
) |
|
|
(10,317 |
) |
Capitalized external use software development costs |
|
|
(996 |
) |
|
|
(742 |
) |
|
|
(2,012 |
) |
Cash paid for acquisition, net of cash acquired |
|
|
(18,592 |
) |
|
|
(13,600 |
) |
|
|
(42,605 |
) |
Redemptions of marketable securities |
|
|
88,054 |
|
|
|
45,412 |
|
|
|
26,080 |
|
Purchases of marketable securities |
|
|
(27,033 |
) |
|
|
(28,561 |
) |
|
|
(63,083 |
) |
Other investing activities |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by / (used in) investing activities |
|
|
27,416 |
|
|
|
(4,293 |
) |
|
|
(91,937 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock from exercise of stock options |
|
|
420 |
|
|
|
214 |
|
|
|
17,770 |
|
Withholding of shares to satisfy minimum employee tax withholding for vested restricted stock units |
|
|
(825 |
) |
|
|
(1,249 |
) |
|
|
(1,628 |
) |
Proceeds from issuance of common stock under employee stock purchase plan |
|
|
337 |
|
|
|
148 |
|
|
|
191 |
|
Excess tax benefits from stock-based awards |
|
|
291 |
|
|
|
|
|
|
|
2,569 |
|
Purchases of treasury stock |
|
|
(61,491 |
) |
|
|
(3,999 |
) |
|
|
(8,294 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(61,268 |
) |
|
|
(4,886 |
) |
|
|
10,608 |
|
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents |
|
|
5,839 |
|
|
|
37,492 |
|
|
|
(30,860 |
) |
Cash and cash equivalents, beginning of period |
|
|
17,907 |
|
|
|
23,746 |
|
|
|
61,238 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
23,746 |
|
|
$ |
61,238 |
|
|
$ |
30,378 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
5,211 |
|
|
$ |
12,958 |
|
|
$ |
12,068 |
|
The accompanying notes are an integral part of these consolidated statements.
41
THE ADVISORY BOARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business description
The Advisory Board Company (individually and collectively with its subsidiaries, the
Company) provide best practices research and analysis, business intelligence and software tools,
and management and advisory services to hospitals, health systems, pharmaceutical and biotech
companies, health care insurers, medical device companies, colleges, universities, and other
educational institutions through discrete programs. Members of each program are typically charged a
fixed annual fee and have access to an integrated set of services that may include best practices
research studies, executive education seminars, customized research briefs, web-based access to the
programs content database, and business intelligence and software tools.
Note 2. Basis of presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated.
Note 3. Summary of significant accounting policies
Cash equivalents and marketable securities
Included in cash equivalents are marketable securities that mature within three months of
purchase. Investments with maturities of more than three months are classified as marketable
securities. Current marketable securities have maturity dates within twelve months of the balance
sheet date. As of March 31, 2010 and 2011, the Companys marketable securities consisted of U.S.
government agency obligations and various state tax-exempt notes and bonds. The Companys
marketable securities, which are classified as available-for-sale, are carried at fair market 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 other
comprehensive income, net of tax. The specific identification method is used to compute the
realized gains and losses on the sale of marketable securities.
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 membership
programs, the Company provides software tools under a hosting arrangement 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 and software tools
during the term of their membership agreement. Computer software development costs that are
incurred in the preliminary project stage are expensed as incurred. During the development stage,
direct consulting costs and payroll 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 the depreciation and amortization of
property and equipment line item of 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 intangible asset.
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.
42
Business Combinations
The Company records acquisitions using the purchase method of accounting. All of the assets
acquired, liabilities assumed, contractual contingencies, and contingent consideration are
recognized at their fair value on the acquisition date. All subsequent changes to a valuation
allowance or uncertain tax position that relate to the acquired company and existed at the
acquisition date that occur both within the measurement period and as a result of facts and
circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. All
other changes in valuation allowance are recognized as a reduction or increase to expense or as a
direct adjustment to additional paid-in capital as required. Any acquired in-process research and
development is capitalized as an intangible asset and amortized it over its estimated useful life.
Acquisition-related costs are recorded as expenses in the consolidated financial statements. The
results of operations of acquired businesses are included in the consolidated financial statements
from the acquisition date.
Goodwill and other intangible assets
The excess cost of an acquisition over the fair value of the net assets acquired is recorded
as goodwill. The primary drivers that generate goodwill are the value of synergies between the
acquired entities and the Company and the acquired assembled workforce, neither of which qualifies
as an identifiable intangible asset. The Companys goodwill and other intangible assets with
indefinite lives are not amortized, but rather tested for impairment on an annual basis on March
31, or more frequently if events or changes in circumstances indicate potential impairment. The
Company has concluded that its reporting units used to assess goodwill impairment are the same as
its operating segments.
The Company assesses goodwill for impairment using a two-step impairment test. Step one of the
test is used to identify whether or not an impairment may exist. In the first step, the fair value
of each reporting unit is compared to its carrying value. The Company determines the fair value of
its reporting units based on the income approach. Under the income approach, the fair value of a
reporting unit is calculated based on the present value of estimated future cash flows. If the fair
value of the reporting unit exceeds the carrying value of the net assets assigned to that unit,
goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, an impairment may exist. If it is determined that an
impairment may exist, step two of the impairment test is performed to measure the amount of the
impairment, if any. The second step determines the implied fair value of the reporting units
goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then
an impairment loss equal to the difference is recorded.
Other intangible assets consist of capitalized software for sale and acquired intangibles. The
Company capitalizes consulting costs and payroll and payroll-related costs for employees directly
related to building a software product once technological feasibility is established. The Company
determines that technological feasibility is established by the completion of a detail program
design or, in its absence, completion of a working model. Once the software product is ready for
general availability, the Company ceases capitalizing costs and begins amortizing the intangible
asset on a straight-line basis over its estimated useful life. The weighted average estimated
useful life of capitalized software is five years. Other intangible assets include those assets
that arise from business combinations consisting of developed technology, non-competes, trademarks,
contracts, and customer relationships that are amortized, on a straight-line basis, over six months
to ten years. Finite-lived intangible assets are required to be amortized over their useful lives
and are evaluated for possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable.
Recovery of long-lived assets (excluding goodwill)
The Company records long-lived assets, such as property and equipment, at cost. The carrying
value of long-lived assets is reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be fully recoverable. The test
for recoverability is made using an estimate of the undiscounted expected future cash flows and, if
required, the impairment loss is measured as the amount that the carrying value of the asset
exceeds the assets fair value if the asset is not recoverable. The Company considers expected cash
flows and estimated future operating results, trends, and other available information in assessing
whether the carrying value of assets is impaired. If it is determined that an assets carrying
value is impaired, a write-down of the carrying value of the identified asset will be recorded as
an operating expense on the consolidated statements of income in the period in which the
determination is made.
43
Revenue recognition
Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is
fixed or determinable, (3) services have been rendered and payment has been contractually earned,
and (4) collectability is reasonably assured. Fees are generally billable when a letter of
agreement is signed by the member, and fees receivable during the subsequent twelve month period
and related deferred revenue are recorded upon the commencement of the agreement or collection of
fees, if earlier. In many of the Companys higher priced programs and membership agreements with
terms that are greater than one year, fees may be billed on an installment basis. Members whose
membership agreements are subject to the service guarantee may request a refund of their fees,
which is provided on a pro rata basis relative to the length of the service period.
Revenue from renewable memberships is recognized ratably over the term of the related
subscription agreement. Certain membership programs incorporate hosted business intelligence and
software tools. In many of these agreements, members are charged set up fees in addition to
subscription fees for access to the hosted web-based business intelligence tools and related
membership services. Both set up fees and subscription fees are recognized ratably over the term of
the membership agreement, which is generally one to three years. Upon launch of a new program that
incorporates a business intelligence software tool, all program revenue is deferred until the tool
is generally available for release to the Companys membership, and then recognized ratably over
the remainder of the contract term of each agreement. One of the Companys programs includes
delivered software tools together with implementation services, technical support, and related
membership services. For these arrangements, the Company separates the fair value of the technical
support and related membership services from the total value of the contract based on vendor
specific objective evidence of fair value. The fees related to the software license and
implementation services are bundled and recognized as services are performed using project hours as
the basis to measure progress towards completion. Fees associated with the technical support and
related membership services are recorded as revenue ratably over the term of the agreement,
beginning when all other elements have been delivered. Multiple contracts with a single member are
treated as separate arrangements for revenue recognition purposes.
The Company also performs professional services sold under separate agreements that include
management and consulting services. The Company recognizes professional services revenues on a
time-and-materials basis as services are rendered.
Allowance for uncollectible revenue
The Companys ability to collect outstanding receivables from its members has an effect on the
Companys operating performance and cash flows. The Company records an allowance for uncollectible
revenue as a reduction of revenue based on its ongoing monitoring of members credit and the aging
of receivables. To determine the allowance for uncollectible revenue, the Company examines its
collections history, the age of accounts receivable in question, any specific member collection
issues that have been identified, general market conditions, and current economic trends.
Deferred incentive compensation and other charges
Direct incentive compensation to employees related to the negotiation of new and renewal
memberships, license fees to third party vendors for tools, data, and software incorporated in
specific memberships that include business intelligence tools, and other direct and incremental
costs associated with specific memberships are deferred and amortized over the term of the related
memberships.
Earnings per share
Basic earnings per share is computed by dividing net income by the number of 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 computation
because their effect was anti-dilutive. Fully diluted shares outstanding for the fiscal year ended
March 31, 2011 includes 33,279 contingently issuable shares related to the component of the
Southwind Health Partners, L.L.C. and Southwind Navigator, LLC (together, Southwind) earn-out
estimated to be settled in stock. For additional information regarding these shares, see Note 5,
Acquisitions.
44
A reconciliation of basic to diluted weighted average common shares outstanding is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
2009 |
|
2010 |
|
2011 |
Basic weighted average common shares outstanding |
|
|
16,441 |
|
|
|
15,515 |
|
|
|
15,733 |
|
Dilutive impact of stock options |
|
|
94 |
|
|
|
101 |
|
|
|
539 |
|
Dilutive impact of restricted stock units |
|
|
25 |
|
|
|
76 |
|
|
|
110 |
|
Dilutive impact of earn-out liability |
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
16,560 |
|
|
|
15,692 |
|
|
|
16,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following stock based awards that were not included in calculating diluted net income per
share because their effect was anti-dilutive (in thousands): |
|
|
|
Year Ended March 31, |
|
|
2009 |
|
2010 |
|
2011 |
Anti-dilutive stock based awards |
|
|
2,920 |
|
|
|
1,753 |
|
|
|
485 |
|
Concentrations of risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents, marketable securities, and membership fees
receivable. The Company maintains cash and cash equivalents and marketable securities with
financial institutions. Marketable securities consist of U.S. government agency obligations and
various state tax-exempt notes and bonds. The Company performs periodic evaluations of the relative
credit ratings related to the cash, cash equivalents, and marketable securities. The credit risk
with respect to membership fees receivable is generally diversified due to the large number of
entities comprising the Companys membership base, and the Company establishes allowances for
potential credit losses. No one member accounted for more than 2% of revenue for any period
presented.
For each of the fiscal years ended March 31, 2009, 2010, and 2011, the Company generated
approximately 3% of revenue from members outside the United States. The Companys limited
international operations subject the Company to risks related to currency exchange fluctuations.
Prices for the Companys 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 the Company has members would result in a foreign exchange loss
recognized by the Company.
Other income, net
Other income, net for the fiscal year ended March 31, 2009 includes $3.5 million of interest
income earned from the Companys marketable securities and $1.1 million of losses on foreign
exchange rates. Other income, net for the fiscal year ended March 31, 2010 includes $2.3 million of
interest income earned from the Companys marketable securities and a $46,000 gain on foreign
exchange rates. Other income, net for the fiscal year ended March 31, 2011 includes $1.7 million of
interest income earned from the Companys marketable securities and a $158,000 gain on foreign
exchange rates.
Income taxes
Deferred income taxes are determined using 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 bases. 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.
Fair value of financial instruments
The Companys marketable securities consisting of U.S. government agency obligations and
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.
45
Segment reporting
Operating segments are components of an enterprise about which separate financial information
is available and regularly evaluated by the chief operating decision maker of an enterprise. Under
this definition, the Company contains two operating segments as of March 31, 2011. Both segments
have similar economic characteristics, provide similar products and services sold to the same or
very similar customers, and have similar sales and distribution procedures. Consequently, the
Company has one reportable segment for financial statement purposes.
Research and development costs
Costs related to the research and development of new programs are expensed when incurred.
Research and development costs were immaterial for the fiscal years presented.
Stock-based compensation
The Company has several stock-based compensation plans which are described more fully in Note
11, Stock-based compensation. These plans provide for the granting of stock options and
restricted stock units (RSUs) to employees and non-employee members of the Companys Board of
Directors. Stock-based compensation cost is measured at the grant date of the stock-based awards
based on their fair values, and is recognized as an expense in the consolidated statements of
income over the vesting periods of the awards. The fair value of RSUs is determined as the fair
market value of the underlying shares on the date of grant. The Company calculates the fair value
of all stock option awards, with the exception of the stock options issued with market-based
conditions, on the date of grant using the Black-Scholes model. The fair value of stock options
issued with market-based conditions is calculated on the date of grant using a lattice
option-pricing model. Forfeitures are estimated based on historical experience at the time of grant
and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable
but that are inherently uncertain.
Use of estimates in preparation of consolidated financial statements
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). These accounting principles
require the Company to make certain estimates, judgments, and assumptions. For cases where the
Company is required to make certain estimates, judgments, and assumptions, the Company believes
that the estimates, judgments, and assumptions upon which it relies are reasonable based upon
information available to the Company at the time that these estimates, judgments, and assumptions
are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported amounts of revenue
and expenses during the periods presented. To the extent there are material differences between
these estimates, judgments, or assumptions and actual results, the Companys financial statements
will be affected. The Companys estimates, judgments, and assumptions may include: estimates of bad
debt reserves, estimates to establish employee bonus and commission accruals, estimating useful
lives of acquired or internally developed intangible assets, estimating the fair value of goodwill
and intangibles and evaluating impairment, determining when investment impairments are
other-than-temporary, estimates in stock-based compensation forfeiture rates, and estimating the
potential for future tax consequences of events that have been recognized in the Companys
financial statements or tax returns.
Recent accounting pronouncements
Recently adopted
The following is a summary of the new accounting guidance issued and applicable to the Company
for the fiscal year ended March 31, 2011. The adoption of this guidance did not have a material
impact on the Companys financial position or results of operations.
In January 2010, the Financial Accounting Standards Board (the FASB) amended the accounting
standards for fair value measurement and disclosures. The amended guidance requires additional
disclosures, specifically regarding the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the transfers. It also requires separate
presentation of purchases, sales, issuances, and settlements of Level 3 fair value measurements.
The guidance is effective for interim and annual reporting periods beginning after December 15,
2009, with the exception of the additional Level 3 disclosures, which are effective for fiscal
years beginning after December 15, 2010. The guidance affecting Level 1 and Level 2 fair value
measurements was
46
adopted on January 1, 2010 and the guidance regarding Level 3 disclosures was adopted on April
1, 2010. The adoption of this guidance did not impact the Companys financial position or results
of operations.
Accounting pronouncements not yet adopted
In October 2009, the FASB amended the accounting standards for revenue recognition with
multiple elements. The amended guidance allows the use of managements best estimate of selling
price for individual elements of an arrangement when vendor specific objective evidence or third
party evidence is unavailable. Additionally, it eliminates the residual method of revenue
recognition in accounting for multiple element arrangements and expands the disclosure requirements
for revenue recognition. The guidance is effective for fiscal years beginning on or after June 15,
2010. This guidance will be effective for the Company beginning April 1, 2011. The Company is
currently assessing the future impact of this new accounting update to its consolidated financial
statements.
In October 2009, the FASB amended the accounting standards for revenue arrangements with
software elements. The amended guidance modifies the scope of the software revenue recognition
guidance to exclude tangible products that contain both software and non-software components that
function together to deliver the products essential functionality. The pronouncement is effective
for fiscal years beginning on or after June 15, 2010. This guidance must be adopted in the same
period an entity adopts the amended revenue arrangements with multiple elements guidance described
above.
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 March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Fair |
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
value |
|
|
cost |
|
|
gains |
|
|
losses |
|
U.S. government agency obligations |
|
$ |
23,721 |
|
|
$ |
24,042 |
|
|
$ |
164 |
|
|
$ |
485 |
|
Tax exempt obligations of other states |
|
|
62,458 |
|
|
|
62,310 |
|
|
|
1,109 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,179 |
|
|
$ |
86,352 |
|
|
$ |
1,273 |
|
|
$ |
1,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Fair |
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
value |
|
|
cost |
|
|
gains |
|
|
losses |
|
U.S. government agency obligations |
|
$ |
11,956 |
|
|
$ |
11,630 |
|
|
$ |
326 |
|
|
$ |
|
|
Washington, D.C. tax exempt obligations |
|
|
2,521 |
|
|
|
2,506 |
|
|
|
15 |
|
|
|
|
|
Tax exempt obligations of other states |
|
|
37,205 |
|
|
|
35,902 |
|
|
|
1,485 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,682 |
|
|
$ |
50,038 |
|
|
$ |
1,826 |
|
|
$ |
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes marketable securities maturities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011 |
|
|
|
Fair market |
|
|
Amortized |
|
|
|
value |
|
|
cost |
|
Matures in less than 1 year |
|
$ |
|
|
|
$ |
|
|
Matures after 1 year through 5 years |
|
|
34,783 |
|
|
|
33,616 |
|
Matures after 5 years through 10 years |
|
|
51,396 |
|
|
|
52,736 |
|
|
|
|
|
|
|
|
|
|
$ |
86,179 |
|
|
$ |
86,352 |
|
|
|
|
|
|
|
|
The gross realized gains on sales of available-for-sale investments were $21,000 in the fiscal
year ended March 31, 2009. The gross realized losses on sales of available-for-sale investments
were $23,000 and $124,000 for the fiscal years ended March 31, 2010, and 2011, respectively.
The weighted average maturity on all marketable securities held by the Company as of March 31,
2011 was approximately 5.3 years. Pre-tax net unrealized losses on the Companys investments of
$0.2 million as indicated above were caused by the increase in market interest rates compared to
the average interest rate of the Companys marketable securities portfolio. Of this amount, none is
related to investments that mature before March 31, 2012. The Company purchased certain of its
investments at a premium or discount
47
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 contractual terms of
these investments do not permit the issuer to settle the securities at a price less than the
amortized cost bases of the investments. The Company does not intend to sell these investments and
it is not more likely than not that it will be required to sell the investments before recovery of
the amortized cost bases, which may be maturity; therefore, the Company does not consider these
investments to be other than temporarily impaired as of March 31, 2011. 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. Acquisitions
Cielo
On February 1, 2011, the Company acquired substantially all the assets of Cielo MedSolutions,
LLC (Cielo), a leading provider of population management analytics and patient registry software
in the ambulatory environment. The Company acquired Cielo to enhance its existing suite of
physician performance management solutions through the addition of analytics and workflow tools
that give providers visibility across a patient population to enable appropriate clinical
decisions. The total purchase price of $11.7 million consisted of an initial payment of $7.3
million of cash and the fair value of estimated additional contingent payments of $4.4 million.
These additional contingent payments will become due and payable to the former owners of the Cielo
business if certain product development and subscription milestones are met over the evaluation
periods beginning at the acquisition date extending through July 31, 2012. The Company allocated
$3.8 million to intangible assets with a weighted average amortization period of five years and
allocated $8.1 million to goodwill, which represents synergistic benefits expected to be generated from
scaling Cielos offerings across the Companys large membership base. Goodwill is deductible for tax purposes.
The total purchase price was allocated to the assets acquired, including intangible assets and
liabilities assumed, based on their estimated fair values as of February 1, 2011. The Companys
fair value of identifiable tangible and intangible assets was determined by management taking into
account a valuation using an income approach from a market participant perspective, and estimates
and assumptions provided by management. Of the total estimated purchase price, $0.4 million was
allocated to acquired assets, $0.4 million was allocated to assumed liabilities, and $3.8 million
was allocated to intangible assets which consist of the value assigned to acquired technology
related intangibles of $3.0 million, and customer relationships and employee related intangibles of
$0.8 million.
Acquisition related transaction costs of $0.4 million, including actual and estimated legal,
accounting, and other professional fees directly related to the acquisition, are included in
general and administrative expenses on the accompanying consolidated statements of income for the
fiscal year ended March 31, 2011. The financial results of Cielo are included in the Companys
consolidated financial statements from the date of acquisition. Pro forma financial information for
this acquisition has not been presented because the effects were not material to the Companys
historical consolidated financial statements.
Concuity
On April 1, 2010, the Company acquired for cash, all outstanding shares of the health care
division of Trintech Group plc (Concuity), a leading provider of a contract and payment
management solution for hospitals and physician groups. The Company acquired Concuity to supplement
its revenue-cycle portfolio by incorporating Concuitys web-based ClearContracts software tool into
a new program. The total purchase price consisted of an initial payment of $34.0 million. The
Company allocated $11.3 million to intangible assets with a weighted average amortization period of
five years. Approximately $21.8 million was allocated to goodwill, which represents synergistic
benefits expected to be generated from scaling Concuitys offerings across the Companys large
membership base. Goodwill is deductible for tax purposes.
Purchase price allocation
The total purchase price was allocated to Concuitys tangible and separately identifiable
intangible assets acquired and liabilities assumed based on their estimated fair values as of April
1, 2010. The total purchase price was allocated as set forth below (in thousands):
|
|
|
|
|
Unbilled accounts receivable |
|
$ |
3,207 |
|
Accounts receivable |
|
|
529 |
|
Other assets |
|
|
4,199 |
|
48
|
|
|
|
|
Acquired developed technology |
|
|
6,250 |
|
Customer related intangible assets |
|
|
4,000 |
|
Employee related intangible assets |
|
|
500 |
|
Trademarks |
|
|
500 |
|
Goodwill |
|
|
21,808 |
|
Current liabilities |
|
|
(1,339 |
) |
Contingent earn-out liability |
|
|
(4,000 |
) |
Deferred revenue |
|
|
(1,670 |
) |
|
|
|
|
Total purchase price, net of cash acquired |
|
$ |
33,984 |
|
|
|
|
|
The Companys fair value of identifiable intangible assets was determined by management taking
into account a valuation using an income approach from a market participant perspective, and
estimates and assumptions provided by management. The acquired developed technology, customer
related intangible assets, employee related intangible assets, and trademarks have estimated lives
of 5.0 years, 5.0 years, 5.0 years, and 4.0 years, respectively, which is consistent with the cash
flow estimates used to create the valuation models of each identifiable asset. The acquired
developed technology, customer related intangible assets, employee related intangible assets, and
trademarks are included in intangible assets, net on the March 31, 2011 consolidated balance sheet.
The excess of the purchase price over the net tangible and identifiable intangible assets has been
recorded as goodwill.
Acquisition related transaction costs of $1.1 million, including legal, accounting, and other
professional fees directly related to the acquisition, are included in general and administrative
expenses on the accompanying consolidated statements of income for the fiscal year ended March 31,
2010. The financial results of Concuity are included in the Companys consolidated financial
statements from the date of acquisition. Pro forma financial information for this acquisition has
not been presented because the effects were not material to the Companys historical consolidated
financial statements.
Southwind
On December 31, 2009, the Company acquired substantially all of the assets of Southwind Health
Partners, L.L.C. and Southwind Navigator, LLC, together a leading health care industry management
and advisory firm focused on hospital-physician integration and physician practice management. The
$16.9 million total purchase price consisted of $11.1 million of cash paid to the Southwind equity
holders, net of $0.2 million in cash acquired, and the fair value of estimated additional
contingent payments of $5.6 million, of which a portion is payable in shares of the Companys
common stock and was recorded as a liability as of March 31, 2010 and 2011. These additional
contingent payments will become due and payable to the former owner of the Southwind business if
certain milestones are met over the evaluation periods beginning at the acquisition date and
extending through December 31, 2014. A $1.5 million upward adjustment was made to the fair value of
the contingent liabilities during the year ended March 31, 2011. This adjustment was recorded in
cost of services on the accompanying consolidated statements of income and increased the liability
to $7.1 million as of March 31, 2011. See Note 10, Fair value measurements for further details.
The total purchase price was allocated to the assets acquired, including intangible assets and
liabilities assumed, based on their estimated fair values as of December 31, 2009. The Companys
fair value of identifiable tangible and intangible assets was determined by management taking into
account a valuation using an income approach from a market participant perspective, and estimates
and assumptions provided by management. Of the total estimated purchase price, $2.3 million was
allocated to acquired assets, $1.9 million was allocated to assumed liabilities, and $5.6 million
was allocated to intangible assets which consist of the value assigned to customer related
intangibles, primarily customer relationships and trademarks, of $5.5 million, and employee related
intangibles of $0.1 million. The acquired customer and employee related intangibles have estimated
lives ranging from six months to nine years based on the cash flow estimates used to create the
valuation models of each identifiable asset with a weighted average amortization period of 7.2
years. Approximately $10.9 million was allocated to goodwill, which represents synergistic benefits
expected to be generated from scaling Southwinds offerings across the Companys large membership
base. Goodwill is deductible for tax purposes.
Acquisition related transaction costs of $0.5 million, including actual and estimated legal,
accounting, and other professional fees directly related to the acquisition, are included in
general and administrative expenses on the accompanying consolidated statements of income for the
fiscal year ended March 31, 2010. The financial results of Southwind are included in the Companys
consolidated financial statements from the date of acquisition. Pro forma financial information for
this acquisition has not been presented because the effects were not material to the Companys
historical consolidated financial statements.
49
Note 6. 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 as of March 31, 2011 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, none of which have been declared by the investee and recorded
by the Company. 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 fiscal years ended March 31, 2010 or
2011.
Note 7. 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 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 software tools during the term of
their membership agreement. 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 software within 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
of property and equipment on the Companys consolidated statements of income. Acquired developed
software is amortized over its weighted average estimated useful life of approximately seven 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 of property and equipment
for the fiscal years ended March 31, 2009, 2010, and 2011 was approximately $0.3 million, $0.3
million, and $0.4 million, respectively.
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 March 31, |
|
|
|
2010 |
|
|
2011 |
|
Leasehold improvements |
|
$ |
15,270 |
|
|
$ |
15,734 |
|
Furniture, fixtures and equipment |
|
|
16,242 |
|
|
|
18,472 |
|
Software |
|
|
19,865 |
|
|
|
30,524 |
|
|
|
|
|
|
|
|
|
|
|
51,377 |
|
|
|
64,730 |
|
Accumulated depreciation and amortization |
|
|
(29,194 |
) |
|
|
(35,201 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
22,183 |
|
|
$ |
29,529 |
|
|
|
|
|
|
|
|
The Company evaluates its long-lived assets for impairment when changes in circumstances exist
that suggests 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 undiscounted future cash flows, the
assets are written down to their estimated fair value. The Company did not recognize any impairment
losses on any of its long-lived assets during the fiscal years ended March 31, 2011 or March 31,
2009. As of September 30, 2009, the Company concluded that certain capitalized software development
costs were not fully recoverable. As a result, the Company recognized a pre-tax impairment charge
on capitalized software of $7.4 million during the three months ended September 30, 2009. For
further discussion of the impairment and the valuation method used, see Note 10, Fair value
measurements.
Note 8. 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
fiscal years ended March 31, 2009, 2010, and 2011. There was no impairment of goodwill recorded in
the fiscal years ended March 31, 2009, 2010, or 2011.
50
Intangible assets with finite lives are amortized on a straight-line basis over their
estimated useful lives which range from six months to ten years. As of March 31, 2011, the weighted
average remaining useful life of acquired intangibles was approximately 4.9 years. As of March 31,
2011, the weighted average remaining useful life of internally developed intangibles was
approximately 4.0 years.
The gross and net carrying balances and accumulated amortization of other intangibles are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
As of March 31, 2011 |
|
|
|
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 |
|
$ |
2,715 |
|
|
$ |
(553 |
) |
|
$ |
2,162 |
|
|
$ |
4,695 |
|
|
$ |
(1,173 |
) |
|
$ |
3,522 |
|
Acquired intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed software |
|
|
738 |
|
|
|
(723 |
) |
|
|
15 |
|
|
|
6,988 |
|
|
|
(1,988 |
) |
|
|
5,000 |
|
Customer relationships |
|
|
3,600 |
|
|
|
(100 |
) |
|
|
3,500 |
|
|
|
8,200 |
|
|
|
(1,320 |
) |
|
|
6,880 |
|
Trademarks |
|
|
1,500 |
|
|
|
(75 |
) |
|
|
1,425 |
|
|
|
2,000 |
|
|
|
(500 |
) |
|
|
1,500 |
|
Non-compete agreements |
|
|
100 |
|
|
|
(25 |
) |
|
|
75 |
|
|
|
750 |
|
|
|
(205 |
) |
|
|
545 |
|
Customer contracts |
|
|
3,713 |
|
|
|
(1,729 |
) |
|
|
1,984 |
|
|
|
3,713 |
|
|
|
(2,710 |
) |
|
|
1,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles |
|
$ |
12,366 |
|
|
$ |
(3,205 |
) |
|
$ |
9,161 |
|
|
$ |
26,346 |
|
|
$ |
(7,896 |
) |
|
$ |
18,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for other intangible assets for the fiscal years ended March 31, 2009,
2010, and 2011, recorded in cost of services on the accompanying consolidated statements of income,
was approximately $1.0 million, $1.6 million, and $4.7 million, respectively. The following
approximates the anticipated aggregate amortization expense to be recorded in cost of services on
the consolidated statements of income for each of the following five fiscal years ending March 31,
2012 through 2016: $4.2 million, $4.0 million, $4.0 million, $3.6 million, and $0.8 million,
respectively, and $1.4 million thereafter.
Note 9. Membership fees receivable
Membership fees receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2010 |
|
|
2011 |
|
Billed fees receivable |
|
$ |
36,827 |
|
|
$ |
38,055 |
|
Unbilled fees receivable |
|
|
110,238 |
|
|
|
145,992 |
|
|
|
|
|
|
|
|
|
|
|
147,065 |
|
|
|
184,047 |
|
Allowance for uncollectible revenue |
|
|
(3,612 |
) |
|
|
(4,885 |
) |
|
|
|
|
|
|
|
Membership fees receivable, net |
|
$ |
143,453 |
|
|
$ |
179,162 |
|
|
|
|
|
|
|
|
Billed fees receivable represent invoiced membership fees. Unbilled fees receivable represent
fees due to be billed to members who have elected to pay on an installment basis and all of the
unbilled fees recorded are expected to be billed in the next twelve months.
Note 10. Fair value measurements
Financial assets and liabilities
The estimated fair values 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 assets or liabilities that are valued on a recurring basis.
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
51
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 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 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.
Contingent earn-out liabilities: This represents the Companys estimated fair value of the
contingent earn-out liabilities related to acquisitions based on probability assessments of certain
performance achievements during the earn-out periods. Contingent earn-out liabilities are included
in other long-term liabilities on the accompanying consolidated balance sheets. See Note 5,
Acquisitions for further details.
Measurements
Fair value is defined 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. The
valuation can be determined using widely accepted 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). As a
basis for applying a market-based approach in fair value measurements, GAAP establishes 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 |
|
Fair value measurement as of March 31, 2011 |
|
|
as of March 31, |
|
using fair value hierarchy |
|
|
2011 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
$ |
30,378 |
|
|
$ |
30,378 |
|
|
|
|
|
|
|
|
|
Available-for-sale marketable securities (2) |
|
|
86,179 |
|
|
|
86,179 |
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out liabilities (3) |
|
|
15,500 |
|
|
|
|
|
|
|
|
|
|
|
15,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
Fair value measurement as of March 31, 2010 |
|
|
as of March 31, |
|
using fair value hierarchy |
|
|
2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
$ |
61,238 |
|
|
$ |
61,238 |
|
|
|
|
|
|
|
|
|
Available-for-sale marketable securities (2) |
|
|
51,682 |
|
|
|
51,682 |
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out liabilities (3) |
|
|
5,600 |
|
|
|
|
|
|
|
|
|
|
|
5,600 |
|
|
|
|
(1) |
|
Fair value is based on quoted market prices. |
|
(2) |
|
Fair value is determined using quoted market prices of the assets. For further detail, see Note 4, Marketable securities. |
|
(3) |
|
This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect
the Companys own assumptions in measuring fair value using the income approach. In developing these estimates, the
Company considered certain performance projections, historical results, and general macro-economic environment and
industry trends. |
The Companys fair value estimate of the Southwind earn-out liability was $5.6 million as of
the date of acquisition. The final amount paid will be made in a combination of cash and/or the
Companys common stock. The Companys fair value estimate of the Concuity earn-out liability, which
is payable in cash, was $4.0 million as of the date of acquisition. The Companys fair value
estimate of the Cielo earn-out liability, which is payable in cash, was $4.4 million as of the date
of acquisition. Changes in the fair value of the contingent earn-out liabilities subsequent to the
acquisition date, including changes arising from events that occurred after the acquisition date,
such as changes in the Companys estimate of performance achievements and discount rates, are
recognized in
52
earnings in the periods when the estimated fair value changes. The following table represents
a reconciliation of the change in the contingent earn-out liabilities for the fiscal years ended
March 31, 2009, 2010 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Beginning balance |
|
$ |
|
|
|
$ |
5,600 |
|
|
$ |
5,600 |
|
Fair value change in Southwind contingent earn-out liability (1) |
|
|
|
|
|
|
|
|
|
|
1,500 |
|
Addition of Concuity contingent earn-out liability |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
Addition of Cielo contingent earn-out liability |
|
|
|
|
|
|
|
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
5,600 |
|
|
$ |
15,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts were recognized in cost of services on the accompanying
consolidated statements of income. |
Non-financial assets and liabilities
Certain assets and liabilities are measured at fair value on a non-recurring 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). As of
September 30, 2009, the Company concluded that certain capitalized software development costs were
not fully recoverable based on projected cash flows attributable to those assets. As a result,
certain assets held and used with a carrying amount of $8.8 million as of September 30, 2009 were
written down to a fair value of $1.4 million, resulting in a pre-tax impairment charge of $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. For additional information
related to this impairment, see Note 7, Property and equipment.
During the fiscal years ended March 31, 2011 and March 31, 2009, no fair value adjustments or
material fair value measurements were required for non-financial assets or liabilities.
Note 11. 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.
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). Stock-based awards granted
under the 2005 Plan have a seven year maximum contractual term. 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). Stock-based
awards granted under the 2006 Plan and the 2009 Plan have a five year maximum contractual term. As
of March 31, 2011, there were 638,029 shares available for issuance under the 2005 Plan and 569,151
shares available for issuance under the 2009 Plan.
The 2009 Plan and the 2005 Plan (the Plans) are administered by the Compensation Committee
of the Companys Board of Directors, which has the authority to determine which officers,
directors, and employees are awarded options or share awards pursuant to the Plans and to determine
the terms of the awards. Grants may consist of treasury shares or newly issued shares. Options are
rights to purchase common stock of the Company at the fair market value on the date of grant. The
exercise price of a stock option or other equity-based award is equal to the closing price of the
Companys common stock on the date of grant. The Company generally awards
53
non-qualified options, but the Plans do allow for options to qualify as incentive stock
options under Section 422 of the Internal Revenue Code. Holders of options do not participate in
dividends, if any, until after the exercise of the award. RSUs are equity settled stock-based
compensation arrangements of a number of shares of the Companys common stock. RSU holders do not
participate in dividends, if any, nor do they have voting rights until the restrictions lapse.
Stock option activity. During the fiscal years ended March 31, 2009, 2010, and 2011, the
Company granted 437,911, 950,050, and 297,500 stock options, respectively, with a weighted average
exercise price of $44.64, $19.04, and $34.75, respectively. The weighted average fair values of the
stock option grants are listed in the stock option valuation section below. During the fiscal years
ended March 31, 2009, 2010, and 2011, participants exercised 18,625, 11,500, and 605,641 options
for a total intrinsic value of $0.4 million, $0.1 million, and $9.8 million, respectively.
Intrinsic value is calculated as the number of shares exercised times the Companys stock price at
exercise less the exercise price of the option.
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 no consideration in return, and were not promised any consideration in return,
such as future equity grants to replace the surrendered options. The Company does not plan to vary
its equity grant practices as a result of this cancellation. The Company accelerated the remaining
expense on these cancelled awards, which 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 during the fiscal year ended March 31, 2010.
This cancellation resulted in the reversal of $4.7 million of deferred tax assets that would no
longer be realized. 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. During the fiscal years ended March 31, 2009, 2010, and 2011,
the Company granted 158,933, 76,500, and 266,314 RSUs, respectively. The valuation of RSUs is
determined as the fair market value of the underlying shares on the date of grant. The weighted
average grant date fair value of RSUs granted for the fiscal years ended March 31, 2009, 2010, and
2011 was $44.76, $18.52, and $33.85, respectively. During the fiscal years ended March 31, 2009,
2010, and 2011, participants vested in 90,755, 115,839, and 120,378 RSUs, respectively, for a total
intrinsic value of $1.5 million, $3.6 million, and $5.4 million, respectively. Intrinsic value is
calculated as the number of shares vested times the Companys closing stock price at the vesting
date. Of the 120,378 RSUs vested in the fiscal year ended March 31, 2011, 36,339 shares were
withheld to satisfy minimum employee tax withholding.
There were 199,956 RSUs outstanding as of March 31, 2011. During the fiscal year ended March
31, 2011, 20,000 RSUs were forfeited. The weighted average fair value of RSUs granted during the
fiscal year ended March 31, 2011 was $33.85, the majority of which vest in four equal annual
installments on the anniversary of the grant date.
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 March 31, 2011, a total of 755,232 shares were available for
issuance under the ESPP. During the fiscal years ended March 31, 2009, 2010, and 2011, the Company
issued 14,844, 5,573, and 4,336 shares, respectively. under the ESPP at an average price of $23.82,
$26.68, and $44.23 per share, respectively. The compensation expense related to the ESPP recorded
in the fiscal years ended March 31, 2009, 2010, and 2011 was not material.
Valuation assumptions and equity based award activity
As discussed in Note 3, Summary of significant accounting policies, determining the
estimated fair value of stock-based awards is judgmental in nature and involves the use of
significant estimates and assumptions, including the term of the stock-based awards, risk-free
interest rates over the vesting period, expected dividend rates, the price volatility of the
Companys shares, and forfeiture rates of the awards.
54
Stock option valuation
The Company calculates the fair value of all stock option awards, with the exception of the
stock options issued with market-based conditions, on the date of grant using the Black-Scholes
model. The expected term for its stock options was determined through analysis of historical data
on employee exercises, vesting periods of awards, and post-vesting employment termination behavior.
The risk-free interest rate is based on U.S. Treasury bonds issued with similar life terms to the
expected life of the grant. Volatility is calculated based on historical volatility of the daily
closing price of the Companys common stock continuously compounded with a look back period similar
to the terms of the expected life of the grant. The Company has not declared or paid any cash
dividend on its common stock since the closing of its initial public offering and does not
currently anticipate declaring or paying any cash dividends. The timing and amount of future cash
dividends, if any, is periodically evaluated by the Companys Board of Directors and would depend
upon, among other factors, the Companys earnings, financial condition, and cash requirements.
The following average key assumptions were used in the valuation of stock options granted in
each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
2009 |
|
2010 |
|
2011 (1) |
Stock option grants: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.80% - 3.28 |
% |
|
|
1.44% - 2.19 |
% |
|
|
0.8% - 2.56 |
% |
Expected lives in years |
|
|
4.0 |
|
|
|
4.0 |
|
|
|
3.9 |
|
Expected volatility |
|
|
28.0% - 31.0 |
% |
|
|
35.8% - 41.9 |
% |
|
|
36.7% - 42.1 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted average exercise price of options granted |
|
$ |
44.64 |
|
|
$ |
19.04 |
|
|
$ |
34.75 |
|
Weighted average grant date fair value of options granted |
|
$ |
12.08 |
|
|
$ |
6.01 |
|
|
$ |
11.27 |
|
Number of shares granted |
|
|
437,911 |
|
|
|
950,050 |
|
|
|
297,500 |
|
|
|
|
(1) |
|
Includes 45,000 stock options that were issued with market-based
conditions to an employee. The Company calculated the fair value of
these stock option awards. The options were valued on the date of
grant at $9.82 per share using a lattice option-pricing model. The
significant assumptions used were as follows: risk-free interest rate
of 1.71%; expected term of 3.3 years; expected volatility of 38.35%;
dividend yield of 0.0%; and a weighted average exercise price of
$34.27 per share. |
The following table summarizes the changes in common stock options during the fiscal year
ended March 31, 2011 for all of the stock incentive plans described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Number of |
|
|
Average |
|
|
Term (in |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
years) |
|
|
(in thousands) |
|
Outstanding, March 31, 2008 |
|
|
2,445,979 |
|
|
$ |
42.17 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
437,911 |
|
|
$ |
44.64 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(18,625 |
) |
|
$ |
22.48 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(29,500 |
) |
|
$ |
37.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2009 |
|
|
2,835,765 |
|
|
$ |
42.73 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
950,050 |
|
|
$ |
19.04 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(11,500 |
) |
|
$ |
18.58 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(75,085 |
) |
|
$ |
47.37 |
|
|
|
|
|
|
|
|
|
Cancellations |
|
|
(830,365 |
) |
|
$ |
53.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
|
2,868,865 |
|
|
$ |
31.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
297,500 |
|
|
$ |
34.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(605,641 |
) |
|
$ |
29.35 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(31,125 |
) |
|
$ |
43.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2011 |
|
|
2,529,599 |
|
|
$ |
32.79 |
|
|
|
3.52 |
|
|
$ |
47,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
1,494,709 |
|
|
$ |
37.32 |
|
|
|
3.19 |
|
|
$ |
21,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above is the sum of the amounts by which the quoted
market price of our common stock exceeded the exercise price of the options as of March 31, 2011,
for those options for which the quoted market price was in excess of the exercise price. This
amount changes over time based on changes in the fair market value of the Companys stock. During
the fiscal
55
years ended March 31, 2009, 2010, and 2011, 683,952, 173,413, and 311,990 options,
respectively, vested with fair values of $6.1 million, $1.7 million, and $2.5 million,
respectively.
Valuation for restricted stock units
RSUs are valued at the grant date closing price of the Companys common stock as reported by
The NASDAQ Stock Market LLC (NASDAQ).
Valuation for employee stock purchase rights
The value of employee stock purchase rights for shares of stock purchased under the ESPP is
determined as the fair market value of the underlying shares on the date of purchase as determined
by the closing price of the Companys common stock as recorded by NASDAQ, less the purchase price,
which is 95% of the closing price of the Companys common stock. The ESPP enrollment begins on the
first day of the quarter. Stock purchases occur on the last day of the quarter, with only eligible
employee payroll deductions for the period used to calculate the shares purchased. There is no
estimate of grant date fair value or estimated forfeitures since actual compensation expense was
recorded in the period on the purchase date. The fair value of employee stock purchase rights is
equivalent to a 5% discount of the purchase date closing price.
Forfeitures
Forfeitures are estimated based on historical experience at the time of grant and adjusted, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based
compensation expense is recognized on a straight line basis, net of an estimated forfeiture rate,
for only those shares expected to vest over the requisite service period of the award, which is
generally the option vesting term and can range from six months to four years. Changes in estimated
forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and
will also impact the amount of compensation expense to be recognized in future periods.
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, for the fiscal years ended March 31, 2009, 2010, and 2011 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Stock-based compensation expense included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
$ |
4,273 |
|
|
$ |
3,930 |
|
|
$ |
2,763 |
|
Member relations and marketing |
|
|
2,436 |
|
|
|
2,248 |
|
|
|
1,663 |
|
General and administrative |
|
|
5,738 |
|
|
|
5,974 |
|
|
|
4,366 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
12,447 |
|
|
|
12,152 |
|
|
|
8,792 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
(12,447 |
) |
|
|
(12,152 |
) |
|
|
(8,792 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(8,464 |
) |
|
$ |
(7,984 |
) |
|
$ |
(5,725 |
) |
|
|
|
|
|
|
|
|
|
|
Impact on diluted earnings per share |
|
$ |
(0.51 |
) |
|
$ |
(0.51 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Stock-based compensation expense by award type: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
7,209 |
|
|
$ |
6,287 |
|
|
$ |
3,590 |
|
Restricted stock units |
|
|
5,179 |
|
|
|
5,857 |
|
|
|
5,202 |
|
Employee stock purchase rights |
|
|
59 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
12,447 |
|
|
$ |
12,152 |
|
|
$ |
8,792 |
|
|
|
|
|
|
|
|
|
|
|
56
As of March 31, 2011, $14.2 million of total unrecognized compensation cost related to
stock-based compensation is expected to be recognized over a weighted average period of 1.3 years.
Tax benefits
The benefits of tax deductions in excess of recognized book compensation expense are reported
as a financing cash inflow in the accompanying consolidated statements of cash flows. Approximately
$0.3 million, $0, and $2.6 million of tax benefits associated with the exercise of employee stock
options and restricted stock units were recorded as cash from financing activities in the fiscal
years ended March 31, 2009, 2010, and 2011, respectively.
Note 12. Accumulated other comprehensive income
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 13. Income taxes
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Current |
|
$ |
6,482 |
|
|
$ |
14,105 |
|
|
$ |
11,441 |
|
Deferred |
|
|
3,635 |
|
|
|
(8,136 |
) |
|
|
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
10,117 |
|
|
$ |
5,969 |
|
|
$ |
9,930 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount of income taxes determined by applying
the applicable income tax statutory rates to income before provision for income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
2009 |
|
2010 |
|
2011 |
Statutory U.S. federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net of U.S. federal income tax benefit |
|
|
2.2 |
|
|
|
5.7 |
|
|
|
5.5 |
|
Tax-exempt interest income |
|
|
(1.6 |
) |
|
|
(2.7 |
) |
|
|
(1.5 |
) |
D.C. QHTC income tax credits |
|
|
(5.0 |
) |
|
|
(9.1 |
) |
|
|
(7.3 |
) |
Other permanent differences, net |
|
|
1.4 |
|
|
|
5.4 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
32.0 |
% |
|
|
34.3 |
% |
|
|
34.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences between the tax bases of assets
and liabilities and their reported amounts in the consolidated financial statements. The tax effect
of these temporary differences is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2010 |
|
|
2011 |
|
Deferred income tax assets (liabilities): |
|
|
|
|
|
|
|
|
Tax credit carry forwards |
|
$ |
6,818 |
|
|
$ |
7,775 |
|
Deferred compensation accrued for financial reporting purposes |
|
|
4,885 |
|
|
|
5,515 |
|
Stock-based compensation |
|
|
6,487 |
|
|
|
6,831 |
|
Reserve for uncollectible revenue |
|
|
1,550 |
|
|
|
1,980 |
|
Depreciation |
|
|
|
|
|
|
270 |
|
Acquired intangibles |
|
|
|
|
|
|
298 |
|
Unrealized losses on available-for-sale securities |
|
|
|
|
|
|
61 |
|
Other |
|
|
918 |
|
|
|
295 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
20,658 |
|
|
|
23,025 |
|
|
|
|
|
|
|
|
Capitalized software development costs |
|
|
(3,157 |
) |
|
|
(4,584 |
) |
Acquired intangibles |
|
|
(1,529 |
) |
|
|
|
|
Deferred incentive compensation and other deferred charges |
|
|
(1,769 |
) |
|
|
(2,901 |
) |
Unrealized gains on available-for-sale securities |
|
|
(557 |
) |
|
|
|
|
Depreciation |
|
|
(235 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(7,247 |
) |
|
|
(7,485 |
) |
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
13,411 |
|
|
$ |
15,540 |
|
|
|
|
|
|
|
|
57
In estimating future tax consequences, the Company generally considers all expected future
events in the determination and evaluation of deferred tax assets and liabilities. The Company
believes that its estimated future taxable income will be sufficient for the full realization of
its deferred income tax assets. The effect of future changes in existing laws or rates is not
considered in the determination and evaluation of deferred tax assets and liabilities until the new
tax laws or rates are enacted.
The Company uses a more-likely-than-not recognition threshold based on the technical merits of
the tax position taken 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 (of which the amount was $0 as of March 31, 2011) will
significantly change within the next 12 months. 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 the fiscal years ended March
31, 2009, 2010, or 2011. The Company files income tax returns in U.S. federal and state and foreign
jurisdictions. 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 2007.
Washington, D.C. income tax incentives
The Office of Tax and Revenue of the Government of the District of Columbia (the Office of
Tax and Revenue) provides regulations that modify the income and franchise tax, sales and use tax,
and personal property tax regulations for Qualified High Technology Companies (QHTC) doing
business in the District of Columbia.
In February 2006, the Company received notification from the Office of Tax and Revenue that
its certification as a QHTC under the New E-conomy Transformation Act of 2000 had been accepted
effective as of January 1, 2004. As a QHTC, the Companys Washington, D.C. statutory income tax
rate was 0.0% through calendar year 2008 and 6.0% thereafter, versus 9.975% prior to this
qualification. Under that Act, the Company is also eligible for certain Washington, D.C. income tax
credits and other benefits. As of March 31, 2011, the Company has $12.2 million of Washington, D.C.
tax credits which have expiration rates ranging from 2016 to 2021.
Note 14. 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. The Company repurchased
2,051,225, 146,179, and 188,930 shares of its common stock at a total cost of approximately $61.5
million, $4.0 million, and $8.3 million in the fiscal years ended March 31, 2009, 2010, and 2011,
respectively, pursuant to its share repurchase program. All repurchases to date have been made in
the open market. No minimum number of shares subject to repurchase has been fixed and the share
repurchase authorization has no expiration date. As of March 31, 2011, the remaining authorized
repurchase amount was $33.7 million.
As of March 31, 2011 and March 31, 2010, the Company had repurchased 7,520,671 and 7,331,741
shares of the Companys common stock, respectively, at a total cost of $316.3 million and $308.0
million, respectively. Of these repurchased shares, 1,000,000 shares have been retired.
Note 15. Commitments and contingencies
Operating leases
The Company leases its headquarters space (the Lease) under an operating lease that expires
in 2019. Leasehold improvements related to the Lease are depreciated over the term of the Lease and
totaled approximately $11.0 million, net, and $10.0 million, net, as of March 31, 2010 and 2011,
respectively. The terms of the Lease contain provisions for rental escalation, and the Company is
required to pay its portion of executory costs such as taxes, insurance, and operating expenses.
The Company also leases (under operating leases) small office spaces in Portland, Oregon; Austin,
Texas; Nashville, Tennessee; Vernon Hills, Illinois; San Francisco, California; Ann Arbor, Michigan
and Chennai, India. The Oregon lease expires in June 2016, the Texas lease in October 2019, the
Tennessee lease in September 2017, the Illinois lease in September 2014, the California lease in
November 2012, the Michigan lease in December 2012, and the India lease in December 2016. The
Company recognized rental and executory expenses of $8.5 million, $9.3 million, and $9.4 million in
the fiscal years ended March 31, 2009, 2010, and 2011, respectively, related to these leases.
58
The following table details the future minimum lease payments under the Companys current
leases, excluding rental escalation and executory costs (in thousands):
|
|
|
|
|
Year Ending March 31, |
|
|
|
|
2012 |
|
$ |
8,288 |
|
2013 |
|
|
9,318 |
|
2014 |
|
|
9,573 |
|
2015 |
|
|
9,242 |
|
2016 |
|
|
9,413 |
|
Thereafter |
|
|
27,822 |
|
|
|
|
|
Total |
|
$ |
73,656 |
|
|
|
|
|
Purchase obligations
The Company has entered into an agreement for the purchase of software development services
which is not cancelable. As of March 31, 2011, the Companys obligation in connection with this
agreement runs through November 2013, and the payments expected to be made under this agreement
total $3.0 million during that period. No purchases have been made under this arrangement as of
March 31, 2011.
Credit facility
In November 2006, the Company 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 under the credit facility, if any, will be collateralized by certain of the
Companys marketable securities and will bear interest at an amount based on the published LIBOR
rate. The Company is also required to maintain an interest coverage ratio for each of its fiscal
years of not less than three to one. The Company was in compliance with this financial covenant for
the fiscal year ended March 31, 2011. The credit facility renews automatically each year until
October 31, 2011, and can be increased at the request of the Company by as much as $10 million per
year up to an aggregate maximum increase of $50 million. The Company has not requested any
increases in the credit facility and there have been no borrowings under the facility. The amount
available for borrowing as of March 31, 2011 was $20 million.
Benefit plan
The Company sponsors a defined contribution 401(k) plan (the 401(k) Plan) for all employees
who have reached the age of twenty-one. The Company provides discretionary contributions in the
range of 0% to 100%, which percentage is determined by the Company after the end of the applicable
plan year, of an employees contribution up to a maximum of 4% of base salary. During the period
from March 1, 2009 to December 31, 2009, the Company suspended its discretionary contributions to
the 401(k) Plan. Contributions to the 401(k) Plan for the fiscal years ended March 31, 2009, 2010,
and 2011 were approximately $1.0 million, $0.3 million, and $2.2 million, respectively.
Litigation
From time to time, the Company is subject to ordinary routine litigation incidental to its
normal business operations. The Company is currently not a party to, and its property is not
subject to, any material legal proceedings.
Note 16. Segments and geographic areas
Operating segments are components of an enterprise about which separate financial information
is available and regularly evaluated by the chief operating decision maker of an enterprise. The
Company has one reportable segment for financial statement purposes. For additional detail on the
Companys determination of segments, see Note 3, Summary of significant accounting policies for
additional information.
Substantially all of the Companys identifiable assets are located in the United States.
Disclosed in the following table is revenue information for each geographic area for the years
ended March 31, 2009, 2010, and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
United States |
|
$ |
223,497 |
|
|
$ |
229,389 |
|
|
$ |
280,273 |
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Other countries |
|
|
6,863 |
|
|
|
9,934 |
|
|
|
9,975 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
230,360 |
|
|
$ |
239,323 |
|
|
$ |
290,248 |
|
|
|
|
|
|
|
|
|
|
|
Note 17. Quarterly financial data (unaudited)
Unaudited summarized financial data by quarter for the fiscal years ended March 31, 2010 and
2011 is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 Quarter Ended |
|
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
Revenue |
|
$ |
56,703 |
|
|
$ |
58,323 |
|
|
$ |
60,893 |
|
|
$ |
63,404 |
|
Income (loss) from operations (1) |
|
|
5,412 |
|
|
|
(3,804 |
) |
|
|
5,955 |
|
|
|
7,499 |
|
Income (loss) before provision for income taxes (1) |
|
|
6,374 |
|
|
|
(3,220 |
) |
|
|
6,558 |
|
|
|
7,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,188 |
|
|
$ |
(2,116 |
) |
|
$ |
4,309 |
|
|
$ |
5,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
(0.14 |
) |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
Diluted |
|
$ |
0.27 |
|
|
$ |
(0.14 |
) |
|
$ |
0.27 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 Quarter Ended |
|
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
Revenue |
|
$ |
66,688 |
|
|
$ |
71,102 |
|
|
$ |
75,210 |
|
|
$ |
77,248 |
|
Income from operations |
|
|
6,945 |
|
|
|
7,043 |
|
|
|
5,658 |
|
|
|
6,942 |
|
Income before provision for income taxes |
|
|
7,166 |
|
|
|
7,620 |
|
|
|
6,138 |
|
|
|
7,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,593 |
|
|
$ |
4,884 |
|
|
$ |
3,934 |
|
|
$ |
5,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
|
$ |
0.31 |
|
|
$ |
0.25 |
|
|
$ |
0.32 |
|
Diluted |
|
$ |
0.29 |
|
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
$ |
0.31 |
|
|
|
|
(1) |
|
Includes a non-cash charge of $1.9 million associated with the cancellation of certain stock
options and a $7.4 million non-cash charge resulting from the write-off of capitalized
software in the quarter ended September 30, 2009. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b) as of March 31, 2011. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures which, by their nature, can provide only reasonable
assurance regarding managements control objectives. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of March 31, 2011, our disclosure
controls and procedures were effective.
No changes in our internal control over financial reporting occurred during fourth quarter of
fiscal 2011 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
See Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K
for the Report of Managements Assessment of Internal Control Over Financial Reporting and the
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting.
Item 9B. Other Information.
None.
60
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
See Executive Officers in Part I, Item 1 of this Annual Report on Form 10-K for information
about our executive officers, which is incorporated by reference in this Item 10. Other information
required by this Item 10 is incorporated herein by reference to our definitive proxy statement for
our 2011 annual meeting of stockholders, referred to as the 2011 proxy statement, which we will
file with the SEC on or before 120 days after our 2011 fiscal year-end of March 31, 2011, and which
appears in the 2011 proxy statement, including under the captions Proposal No. 1Election of
Directors, Board Corporate Governance Matters and Section 16(a) Beneficial Ownership Reporting
Compliance.
We have adopted a code of ethics for our senior financial officers that applies to all of our
senior financial officers, including our chief executive officer, chief financial officer, chief
accounting officer, controller, and any person performing similar functions. The code of ethics for
finance team members is available to the public in the The FirmInvestor RelationsGovernance
section of the Companys website at www.advisoryboardcompany.com. Any person may request a copy of
the code of ethics for finance team members, without charge, by writing to us at The Advisory Board
Company, 2445 M Street, N.W., Washington, DC 20037, Attention: Corporate Secretary. We intend to
satisfy the SECs disclosure requirements regarding amendments to, or waivers of, the code of
ethics for our senior financial officers by posting such information on our website.
Item 11. Executive Compensation.
Information required by this Item 11 is incorporated herein by reference to the 2011 proxy
statement, including the information in the 2011 proxy statement appearing under the captions
Board Corporate Governance Matters, Compensation Committee Report on Executive Compensation,
Compensation Discussion and Analysis, Executive Compensation and Potential Payments Upon
Termination of Employment or Change of Control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information required by this Item 12 is incorporated herein by reference to the 2011 proxy
statement, including the information in the 2011 proxy statement appearing under the captions
Security Ownership and Equity Compensation Plan Information.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item 13 is incorporated herein by reference to the 2011 proxy
statement, including the information in the 2011 proxy statement appearing under the caption Board
Corporate Governance Matters.
Item 14. Principal Accounting Fees and Services.
Information required by this Item 14 is incorporated herein by reference to the 2011 proxy
statement, including the information in the 2011 proxy statement appearing under the caption
Proposal No. 2Ratification of the Selection of Ernst & Young LLP as Independent Registered
Public Accounting Firm for the Fiscal Year Ending March 31, 2012.
61
Part IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1) The following financial statements of the registrant and report of independent registered
public accounting firm are included in Item 8 hereof:
Report of Independent Registered Public Accounting Firm on the Consolidated Financial
Statements
Consolidated Balance Sheets as of March 31, 2010 and 2011
Consolidated Statements of Income for the years ended March 31, 2009, 2010, and 2011
Consolidated Statements of Changes in Stockholders Equity for the years ended March 31,
2009, 2010, and 2011
Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2010, and 2011
Notes to Consolidated Financial Statements.
(2) Except as provided below, all financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission either have been
included in the Financial Statements or are not required under the related instructions, or are
not applicable and therefore have been omitted.
Schedule II Valuation and Qualifying Accounts
(3) The following exhibits are either provided with this Form 10-K or are incorporated herein by
reference:
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
3.1
|
|
Certificate of Incorporation of the Company, as amended. Incorporated by reference to the
Companys Registration Statement on Form S-1/A filed with the Securities and Exchange
Commission (the Commission) on October 29, 2001. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.1 of the
Companys Current Report on Form 8-K filed with the Commission on November 14, 2007. |
|
|
|
4.1
|
|
Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the Companys
Registration Statement on Form S-1/A filed with the Commission on October 29, 2001. |
|
|
|
10.1*
|
|
The Advisory Board Company 2001 Stock-Based Incentive Compensation Plan. Incorporated by
reference to Exhibit 10.13 of the Companys Registration Statement on Form S-1/A filed with the
Commission on August 22, 2001. |
|
|
|
10.2*
|
|
Form of Term Sheet and Standard Terms and Conditions pursuant to The Advisory Board Company
2001 Stock-Based Incentive Compensation Plan. Incorporated by reference to Exhibit 10.14 of the
Companys Registration Statement on Form S-1/A filed with the Commission on August 22, 2001. |
|
|
|
10.3*
|
|
The Advisory Board Company Directors Stock Plan. Incorporated by reference to Exhibit 10.15 of
the Companys Registration Statement on Form S-1/A filed with the Commission on August 22,
2001. |
|
|
|
10.4*
|
|
Form of Term Sheet and Standard Terms and Conditions for Director Non-qualified Stock Options
pursuant to The Advisory Board Company Directors Stock Plan Incorporated by reference to
Exhibit 10.16 of the Companys Registration Statement on Form S-1/A filed with the Commission
on August 22, 2001. |
|
|
|
10.5
|
|
Form of Indemnity Agreement between the Company and certain officers, directors and employees.
Incorporated by reference to Exhibit 10.33 of the Companys Registration Statement on Form
S-1/A filed with the Commission on August 22, 2001. |
|
|
|
10.6
|
|
Form of Indemnification Agreement between the Company and certain officers, directors and
employees. Incorporated by reference to Exhibit 10.5 of the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2009. |
62
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.7*
|
|
Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.34 of the Companys
Registration Statement on Form S-1/A filed with the Commission on October 29, 2001. |
|
|
|
10.8*
|
|
The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed with the Commission on November 17, 2005. |
|
|
|
10.9*
|
|
Form of Standard Terms and Conditions for Restricted Stock Units pursuant to The Advisory Board
Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.39 of the Companys
Annual Report on Form 10-K for the fiscal year ended March 31, 2006. |
|
|
|
10.10*
|
|
Form of Restricted Stock Unit Award Agreement pursuant to The Advisory Board Company 2005 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.40 of the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2006. |
|
|
|
10.11*
|
|
The Advisory Board Company 2006 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed with the Commission on November 17, 2006. |
|
|
|
10.12*
|
|
Form of Restricted Stock Award Agreement pursuant to The Advisory Board Company 2005 and 2006
Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.13*
|
|
Form of Award Agreement for Non-qualified Stock Options pursuant to The Advisory Board Company
2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q for quarter ended September 30, 2008. |
|
|
|
10.14*
|
|
The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed with the Commission on September 16, 2009. |
|
|
|
10.15*
|
|
Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board Company 2005
and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K filed with the Commission on September 16, 2009. |
|
|
|
10.16*
|
|
Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board Company 2005
and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K filed with the Commission on September 16, 2009. |
|
|
|
10.17*
|
|
Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board Company
2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.4 of the Companys
Current Report on Form 8-K filed with the Commission on September 16, 2009. |
|
|
|
10.18*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and Frank J.
Williams. Incorporated by reference to Exhibit 10.4 of the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2008. |
|
|
|
10.19*
|
|
Amended and Restated Employment Agreement, entered into as of November 3, 2010, by and between
The Advisory Board Company and Frank J. Williams. Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed with the Commission on November 9, 2010. |
|
|
|
10.20*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and Robert W.
Musslewhite. Incorporated by reference to Exhibit 10.5 of the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.21*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and David L.
Felsenthal. Incorporated by reference to Exhibit 10.6 of the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2008. |
|
|
|
10.22
|
|
Agreement of Lease, dated October 20, 2003, between the Company and 2445 M Street Property LLC.
Incorporated by reference to Exhibit 10.37 of the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003. |
|
|
|
10.23
|
|
Agreement to Commercial Note and attachments thereto, dated, dated November 7, 2006, between
SunTrust Bank and the Company. Incorporated by reference to Exhibit 10.34 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. |
|
|
|
10.24
|
|
Investment Property Security Agreement, dated as of November 7, 2006, by and between SunTrust
Bank, Merrill Lynch and the Company. Incorporated by reference to Exhibit 10.35 of the
Companys Quarterly Report on Form 10-Q for quarter ended September 30, 2006. |
63
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.25
|
|
Collaboration Agreement, dated as of February 6, 2007, between The Corporate Executive Board
Company and the Company (the Collaboration Agreement). Incorporated by reference to Exhibit
10.42 of the Companys Annual Report on Form 10-K filed for the fiscal year ended March 31,
2007. On May 27, 2008, the Commission granted confidential treatment with respect to certain
portions of the Collaboration Agreement. |
|
|
|
10.26
|
|
Letter agreement, dated February 4, 2010, between The Advisory Board Company and The Corporate
Executive Board Company concerning the Collaboration Agreement, dated February 6, 2007.
Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q for
the quarter ended December 30, 2009. |
|
|
|
21.1
|
|
Subsidiaries of the Registrant. Filed herewith. |
|
|
|
23.1
|
|
Consent of Ernst & Young LLP. Filed herewith. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended. Filed herewith. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended. Filed herewith. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350. Filed herewith. |
|
|
|
* |
|
Management contracts or compensation plans or arrangements in which directors or executive
officers participate. |
64
THE ADVISORY BOARD COMPANY
SCHEDULE II Valuation and Qualifying Accounts
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Additions |
|
|
Additions |
|
|
|
|
|
|
|
|
|
at |
|
|
Charged |
|
|
Charged to |
|
|
Deductions |
|
|
Balance |
|
|
|
Beginning |
|
|
to |
|
|
Other |
|
|
From |
|
|
at End of |
|
|
|
of Year |
|
|
Revenue |
|
|
Accounts |
|
|
Reserve |
|
|
Year |
|
Year ending March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible revenue |
|
$ |
2,977 |
|
|
$ |
2,413 |
|
|
$ |
|
|
|
$ |
2,652 |
|
|
$ |
2,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,977 |
|
|
$ |
2,413 |
|
|
$ |
|
|
|
$ |
2,652 |
|
|
$ |
2,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible revenue |
|
$ |
2,738 |
|
|
$ |
3,452 |
|
|
$ |
|
|
|
$ |
2,578 |
|
|
$ |
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,738 |
|
|
$ |
3,452 |
|
|
$ |
|
|
|
$ |
2,578 |
|
|
$ |
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible revenue |
|
$ |
3,612 |
|
|
$ |
4,733 |
|
|
$ |
|
|
|
$ |
3,460 |
|
|
$ |
4,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,612 |
|
|
$ |
4,733 |
|
|
$ |
|
|
|
$ |
3,460 |
|
|
$ |
4,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 14, 2011 |
/s/ Robert W. Musslewhite
|
|
|
Robert W. Musslewhite, |
|
|
Chief Executive Officer and Director |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons in the capacities indicated on the dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
/s/ Robert W. Musslewhite
Robert W. Musslewhite
|
|
Chief Executive Officer and
Director (Principal
Executive Officer)
|
|
June 14, 2011 |
|
|
|
|
|
/s/ Michael T. Kirshbaum
Michael T. Kirshbaum |
|
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
|
|
June 14, 2011 |
|
|
|
|
|
|
|
Executive Chairman
|
|
June 14, 2011 |
Frank J. Williams |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
June 14, 2011 |
Sanju K. Bansal |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
June 14, 2011 |
Peter J. Grua |
|
|
|
|
|
|
|
|
|
|
|
Lead Director
|
|
June 14, 2011 |
Kelt Kindick |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
June 14, 2011 |
Mark R. Neaman |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
June 14, 2011 |
Leon D. Shapiro |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
June 14, 2011 |
LeAnne M. Zumwalt |
|
|
|
|
66
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
3.1
|
|
Certificate of Incorporation of the Company, as amended. Incorporated by reference to
the Companys Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission (the Commission) on October 29, 2001. |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.1 of
the Companys Current Report on Form 8-K filed with the Commission on November 14, 2007. |
|
|
|
4.1
|
|
Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement on Form S-1/A filed with the Commission on October 29,
2001. |
|
|
|
10.1*
|
|
The Advisory Board Company 2001 Stock-Based Incentive Compensation Plan. Incorporated by
reference to Exhibit 10.13 of the Companys Registration Statement on Form S-1/A filed
with the Commission on August 22, 2001. |
|
|
|
10.2*
|
|
Form of Term Sheet and Standard Terms and Conditions pursuant to The Advisory Board
Company 2001 Stock-Based Incentive Compensation Plan. Incorporated by reference to
Exhibit 10.14 of the Companys Registration Statement on Form S-1/A filed with the
Commission on August 22, 2001. |
|
|
|
10.3*
|
|
The Advisory Board Company Directors Stock Plan. Incorporated by reference to Exhibit
10.15 of the Companys Registration Statement on Form S-1/A filed with the Commission on
August 22, 2001. |
|
|
|
10.4*
|
|
Form of Term Sheet and Standard Terms and Conditions for Director Non-qualified Stock
Options pursuant to The Advisory Board Company Directors Stock Plan Incorporated by
reference to Exhibit 10.16 of the Companys Registration Statement on Form S-1/A filed
with the Commission on August 22, 2001. |
|
|
|
10.5
|
|
Form of Indemnity Agreement between the Company and certain officers, directors and
employees. Incorporated by reference to Exhibit 10.33 of the Companys Registration
Statement on Form S-1/A filed with the Commission on August 22, 2001. |
|
|
|
10.6
|
|
Form of Indemnification Agreement between the Company and certain officers, directors
and employees. Incorporated by reference to Exhibit 10.5 of the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2009. |
|
|
|
10.7*
|
|
Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.34 of the
Companys Registration Statement on Form S-1/A filed with the Commission on October 29,
2001. |
|
|
|
10.8*
|
|
The Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Commission on
November 17, 2005. |
|
|
|
10.9*
|
|
Form of Standard Terms and Conditions for Restricted Stock Units pursuant to The
Advisory Board Company 2005 Stock Incentive Plan. Incorporated by reference to Exhibit
10.39 of the Companys Annual Report on Form 10-K for the fiscal year ended March 31,
2006. |
|
|
|
10.10*
|
|
Form of Restricted Stock Unit Award Agreement pursuant to The Advisory Board Company
2005 Stock Incentive Plan. Incorporated by reference to Exhibit 10.40 of the Companys
Annual Report on Form 10-K for the fiscal year ended March 31, 2006. |
|
|
|
10.11*
|
|
The Advisory Board Company 2006 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Commission on
November 17, 2006. |
|
|
|
10.12*
|
|
Form of Restricted Stock Award Agreement pursuant to The Advisory Board Company 2005 and
2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.13*
|
|
Form of Award Agreement for Non-qualified Stock Options pursuant to The Advisory Board
Company 2005 and 2006 Stock Incentive Plans. Incorporated by reference to Exhibit 10.1
of the Companys Quarterly Report on Form 10-Q for quarter ended September 30, 2008. |
|
|
|
10.14*
|
|
The Advisory Board Company 2009 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Commission on
September 16, 2009. |
|
|
|
10.15*
|
|
Form of Award Agreement for Restricted Stock Units pursuant to The Advisory Board
Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.2
of the Companys Current Report on Form 8-K filed with the Commission on September 16,
2009. |
67
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
10.16*
|
|
Form of Award Agreement for Qualified Stock Options pursuant to The Advisory Board
Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.3
of the Companys Current Report on Form 8-K filed with the Commission on September 16,
2009. |
|
|
|
10.17*
|
|
Form of Award Agreement for Non-Qualified Stock Options pursuant to The Advisory Board
Company 2005 and 2009 Stock Incentive Plans. Incorporated by reference to Exhibit 10.4
of the Companys Current Report on Form 8-K filed with the Commission on September 16,
2009. |
|
|
|
10.18*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and Frank J.
Williams. Incorporated by reference to Exhibit 10.4 of the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.19*
|
|
Amended and Restated Employment Agreement, entered into as of November 3, 2010, by and
between The Advisory Board Company and Frank J. Williams. Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed with the Commission on
November 9, 2010. |
|
|
|
10.20*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and Robert W.
Musslewhite. Incorporated by reference to Exhibit 10.5 of the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.21*
|
|
Employment Agreement, dated as of September 12, 2008, between the Company and David L.
Felsenthal. Incorporated by reference to Exhibit 10.6 of the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2008. |
|
|
|
10.22
|
|
Agreement of Lease, dated October 20, 2003, between the Company and 2445 M Street
Property LLC. Incorporated by reference to Exhibit 10.37 of the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003. |
|
|
|
10.23
|
|
Agreement to Commercial Note and attachments thereto, dated, dated November 7, 2006,
between SunTrust Bank and the Company. Incorporated by reference to Exhibit 10.34 of the
Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. |
|
|
|
10.24
|
|
Investment Property Security Agreement, dated as of November 7, 2006, by and between
SunTrust Bank, Merrill Lynch and the Company. Incorporated by reference to Exhibit 10.35
of the Companys Quarterly Report on Form 10-Q for quarter ended September 30, 2006. |
|
|
|
10.25
|
|
Collaboration Agreement, dated as of February 6, 2007, between The Corporate Executive
Board Company and the Company (the Collaboration Agreement). Incorporated by reference
to Exhibit 10.42 of the Companys Annual Report on Form 10-K filed for the fiscal year
ended March 31, 2007. On May 27, 2008, the Commission granted confidential treatment
with respect to certain portions of the Collaboration Agreement. |
|
|
|
10.26
|
|
Letter agreement, dated February 4, 2010, between The Advisory Board Company and The
Corporate Executive Board Company concerning the Collaboration Agreement, dated February
6, 2007. Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on
Form 10-Q for the quarter ended December 30, 2009. |
|
|
|
21.1
|
|
Subsidiaries of the Registrant. Filed herewith. |
|
|
|
23.1
|
|
Consent of Ernst & Young LLP. Filed herewith. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as amended. Filed herewith. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as amended. Filed herewith. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350. Filed herewith. |
|
|
|
* |
|
Management contracts or compensation plans or arrangements in which directors or executive
officers participate. |
68