UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 2010
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number: 000-24799
THE CORPORATE EXECUTIVE BOARD COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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52-2056410
(I.R.S. Employer
Identification Number)
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1919 North Lynn Street
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Arlington, Virginia
(Address of principal executive offices)
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22209
(Zip Code)
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(571) 303-3000
(Registrants telephone number, including area code)
Not applicable
(Former name, former address or former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
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 (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
þ
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
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No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
The Company had 34,272,302 shares of common stock, par value $0.01 per share, outstanding at August
3, 2010.
THE CORPORATE EXECUTIVE BOARD COMPANY
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements.
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THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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June 30,
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December 31,
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2010
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2009
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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89,456
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$
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31,760
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Marketable securities
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7,168
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18,666
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Membership fees receivable, net
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80,922
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125,716
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Deferred income taxes
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7,887
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7,989
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Deferred incentive compensation
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12,323
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9,721
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Prepaid expenses and other current assets
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9,096
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9,584
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Total current assets
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206,852
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203,436
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Deferred income taxes
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41,934
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39,744
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Marketable securities
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16,385
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25,784
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Property and equipment, net
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83,073
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89,462
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Goodwill
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38,109
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27,129
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Intangible assets, net
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18,245
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12,246
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Other non-current assets
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28,045
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25,394
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Total assets
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$
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432,643
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$
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423,195
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Liabilities and stockholders equity
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Current liabilities:
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Accounts payable and accrued liabilities
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$
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36,884
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$
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48,764
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Accrued incentive compensation
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23,809
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27,975
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Deferred revenues
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227,219
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222,053
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Total current liabilities
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287,912
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298,792
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Deferred income taxes
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1,008
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867
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Other liabilities
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75,626
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73,259
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Total liabilities
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364,546
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372,918
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Stockholders equity:
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Common stock, par value $0.01; 100,000,000 shares
authorized, 43,477,679 and 43,313,597 shares
issued, and 34,268,483 and 34,147,008 shares
outstanding at June 30, 2010 and December 31,
2009, respectively
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435
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433
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Additional paid-in capital
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404,955
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401,629
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Retained earnings
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289,814
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274,718
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Accumulated elements of other comprehensive income
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1,744
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1,181
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Treasury stock, at cost, 9,209,196 and 9,166,589
shares at June 30, 2010 and December 31, 2009,
respectively
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(628,851
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(627,684
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Total stockholders equity
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68,097
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50,277
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Total liabilities and stockholders equity
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$
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432,643
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$
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423,195
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See accompanying notes to condensed consolidated financial statements.
3
THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
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Three months ended June 30,
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Six months ended June 30,
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2010
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2009
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2010
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2009
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Revenues
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$
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109,577
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$
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110,695
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$
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209,752
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$
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228,135
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Costs and expenses:
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Cost of services
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39,283
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37,951
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72,795
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76,228
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Member relations and marketing
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30,155
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31,729
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55,935
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66,539
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General and administrative
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14,808
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14,891
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30,280
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30,627
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Depreciation and amortization
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5,639
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6,263
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10,774
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12,236
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Costs associated with exit activities
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11,518
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11,518
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Restructuring costs
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4,244
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5,188
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Total costs and expenses
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89,885
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106,596
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169,784
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202,336
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Income from operations
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19,692
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4,099
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39,968
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25,799
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Other (expense) income, net
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(789
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4,144
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(1,247
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4,234
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Income before provision for income taxes
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18,903
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8,243
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38,721
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30,033
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Provision for income taxes
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7,923
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3,297
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16,108
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12,015
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Net income
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$
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10,980
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$
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4,946
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$
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22,613
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$
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18,018
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Earnings per share:
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Basic
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$
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0.32
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$
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0.15
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$
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0.66
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$
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0.53
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Diluted
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$
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0.32
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$
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0.14
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$
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0.66
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$
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0.53
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Dividends per share
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$
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0.11
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$
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0.10
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$
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0.22
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$
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0.54
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Weighted average shares outstanding:
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Basic
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34,214
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34,105
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34,189
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34,081
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Diluted
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34,469
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34,276
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34,458
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34,190
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See accompanying notes to condensed consolidated financial statements.
4
THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended
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June 30,
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2010
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2009
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Cash flows from operating activities:
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Net income
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$
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22,613
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$
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18,018
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Adjustments to reconcile net income to net cash flows provided by operating activities:
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Costs associated with exit activities
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11,518
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Depreciation and amortization
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10,774
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12,236
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Deferred income taxes
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(1,948
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(2,486
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Share-based compensation
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3,174
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6,320
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Amortization of marketable securities premiums, net
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221
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342
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Changes in operating assets and liabilities:
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Membership fees receivable, net
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47,169
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59,488
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Deferred incentive compensation
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(2,602
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2,790
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Prepaid expenses and other current assets
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846
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(267
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Other non-current assets
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(2,651
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(874
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Accounts payable and accrued liabilities
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(18,111
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(27,954
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Accrued incentive compensation
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(4,166
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(11,607
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Deferred revenues
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(1,568
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(48,344
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Other liabilities
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2,366
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587
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Net cash flows provided by operating activities
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56,117
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19,767
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Cash flows from investing activities:
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Purchases of property and equipment, net
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(1,217
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(3,914
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Acquisition of business, net of cash acquired
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(8,957
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(168
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Sales and maturities of marketable securities, net
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20,284
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12,805
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Net cash flows provided by investing activities
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10,110
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8,723
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Cash flows from financing activities:
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Proceeds from the issuance of common stock under the employee stock purchase plan
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153
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450
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Purchases of treasury shares
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(1,167
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(81
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Payment of dividends
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(7,517
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(18,377
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Net cash flows used in financing activities
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(8,531
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(18,008
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Net increase in cash and cash equivalents
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57,696
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10,482
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Cash and cash equivalents, beginning of period
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31,760
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16,214
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Cash and cash equivalents, end of period
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$
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89,456
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$
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26,696
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See accompanying notes to condensed consolidated financial statements.
5
THE CORPORATE EXECUTIVE BOARD COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of operations
The Corporate Executive Board Company (the Company) drives better decision making and superior
outcomes among a global network of executives and business professionals. The Company provides its
members with the authoritative and timely decision support they need to elevate company performance
and excel in their careers. For an annual fee, members of each program and service have access to
an integrated set of products and services, including best practices studies, executive education,
customized analysis, proprietary databases and decision support tools. The Company also generates
advertising and content-related revenues through its wholly-owned subsidiary, Toolbox.com, Inc.
(Toolbox.com).
Note 2. Condensed consolidated financial statements
The accompanying condensed consolidated financial statements have been prepared by the Company in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and pursuant to the rules and regulations of the United States Securities and Exchange
Commission (the SEC) for reporting on Form 10-Q. Accordingly, certain information and disclosures
required for complete consolidated financial statements are not included. It is recommended that
these condensed consolidated financial statements be read in conjunction with the consolidated
financial statements and related notes in the Companys 2009 Annual Report on Form 10-K.
In managements opinion, all adjustments, consisting of a normal recurring nature, considered
necessary for a fair presentation of the condensed consolidated financial position, results of
operations, and cash flows at the dates and for the periods presented have been included. The
Company evaluated events subsequent to June 30, 2010 for potential recognition and/or disclosure
through the issuance of these financial statements. The condensed consolidated balance
sheet presented at December 31, 2009 has been derived from the financial statements that were
audited by the Companys independent registered public accounting firm. The results of operations
for the three and six months ended June 30, 2010 may not be indicative of the results that may be
expected for the year ended December 31, 2010 or any other period within 2010.
Note 3. Recent accounting pronouncements
Recently adopted
In January 2010, the FASB issued new guidance requiring additional disclosures for significant
transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value
disclosures related to the level of disaggregation, inputs, and valuation techniques. The adoption
of this new accounting guidance did not have a material impact on our consolidated financial
statements.
Not yet adopted
In January 2010, the FASB issued new accounting guidance to require additional disclosures about
purchases, sales, issuances, and settlements in the rollforward of Level 3 fair value measurements.
This new accounting guidance will be effective for the Company on January 1, 2011. The Company does
not expect the adoption of this new accounting guidance to have a material impact on its
consolidated financial statements.
In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables
that is effective for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, although early adoption is permitted. This guidance eliminates
the residual method under the current guidance and replaces it with the relative selling price
method when allocating revenue in a multiple deliverable arrangement. The selling price for each
deliverable shall be determined using vendor specific objective evidence of selling price, if it
exists, otherwise third-party evidence of selling price shall be used. If neither exists for a
deliverable, the vendor shall use its best estimate of the selling price for that deliverable.
After adoption, this guidance will also require expanded qualitative and quantitative disclosures.
The Companys memberships are sold with multiple elements and the Company is currently assessing
the impact of adoption on its financial position and results of operations.
6
Note 4. Acquisitions
In May 2010, the Company completed the acquisition of Iconoculture, Inc., a Minnesota corporation
(Iconoculture). Iconoculture provides comprehensive consumer insights and effective strategic
marketing advisory services and project support to an established customer base. The Company
acquired 100% of the equity interests of Iconoculture for an initial cash payment of $16.2 million,
plus a working capital adjustment of $4.0 million that was paid in July 2010. The Company also
will be required to pay an additional $1.5 million on April 1, 2011, less any amounts that the
Company is entitled to retain to reimburse it for any losses that are subject to indemnification by
the sellers under the terms of the acquisition agreement. Additional consideration may be payable
by April 1, 2011, if Iconocultures financial performance for the year ended December 31, 2010 meets
certain specified targets. The fair value of this additional consideration was $2.6 million at
the acquisition date. The fair value of the total consideration was $24.2 million and was
preliminarily allocated to the assets acquired, including intangible assets and liabilities
assumed, based on their estimated fair values. The Company allocated $9.2 million to intangible
assets with a weighted average amortization period of 4.5 years and $10.8 million to goodwill.
Note 5. Fair value measurements
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. There is a
three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This
hierarchy requires entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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Level 1 Quoted prices in active markets for identical assets or liabilities.
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Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data.
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|
|
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
|
The Company has segregated all assets and liabilities that are measured at fair value on a
recurring basis into the most appropriate level within the fair value hierarchy based on the inputs
used to determine the fair value at the measurement date. The following table presents financial
assets and financial liabilities that are measured at fair value on a recurring basis at the date
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents demand deposits
|
|
$
|
89,456
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,760
|
|
|
$
|
|
|
|
$
|
|
|
Debt securities issued by the District of Columbia
|
|
|
23,553
|
|
|
|
|
|
|
|
|
|
|
|
44,450
|
|
|
|
|
|
|
|
|
|
Variable insurance products held in a Rabbi Trust
|
|
|
|
|
|
|
13,035
|
|
|
|
|
|
|
|
|
|
|
|
13,612
|
|
|
|
|
|
Forward currency exchange contracts
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency exchange contracts
|
|
$
|
|
|
|
$
|
92
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
173
|
|
|
$
|
|
|
Contingent
consideration Iconoculture
|
|
|
|
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value estimate of the Iconoculture contingent consideration was $2.6 million at the date
of acquisition. Changes in the fair value of the contingent consideration 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 earnings in periods when the estimated fair value changes. The following table
represents a reconciliation of the change in the contingent consideration liability:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30, 2010
|
|
Beginning balance
|
|
$
|
|
|
Addition of Iconoculture contingent consideration
|
|
|
2,634
|
|
Fair value change
|
|
|
92
|
|
|
|
|
|
|
|
$
|
2,726
|
|
|
|
|
|
Certain assets, such as goodwill, intangible assets, and liabilities are measured at fair
value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value
on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when
there is impairment). No fair value adjustments or material fair value measurements were required
for non-financial assets or liabilities in the three and six months ended June 30, 2010 and 2009.
7
Note 6. Other liabilities
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred compensation
|
|
$
|
8,972
|
|
|
$
|
9,890
|
|
Lease incentives
|
|
|
32,604
|
|
|
|
33,588
|
|
Deferred rent benefit
|
|
|
21,236
|
|
|
|
19,459
|
|
Other
|
|
|
12,814
|
|
|
|
10,322
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
75,626
|
|
|
$
|
73,259
|
|
|
|
|
|
|
|
|
Note 7. Stockholders equity and share-based compensation
Share-based compensation
The Company granted 396,310 and 662,059 restricted stock units at a weighted-average fair value of
$25.63 and $10.76 in the six months ended June 30, 2010 and 2009, respectively. Share-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 vesting term of four years.
The Company recognized total share-based compensation costs of $1.7 million and $2.5 million in the
three months ended June 30, 2010 and 2009 and $3.2 million and $6.3 million in the six months ended
June 30, 2010 and 2009, respectively. At June 30, 2010, $18.1 million of total unrecognized
share-based compensation cost is expected to be recognized over a weighted-average period of
approximately 2 years.
Dividends
In May 2010, the Companys Board of Directors declared a cash dividend of $0.11 per share for the
second quarter of 2010 for stockholders of record on June 15, 2010. The dividend, totaling $3.8
million, was paid on June 30, 2010.
On August 5, 2010, the Board of Directors declared a third quarter cash dividend of $0.11 per
share. The dividend is payable on September 30, 2010 to stockholders of record at the close of
business on September 15, 2010. The Company funds its dividend payments with cash on hand and cash
generated from operations.
Note 8. Derivative instruments and hedging activities
The Companys international operations are subject to risks related to currency exchange
fluctuations. Prices for the Companys products and services are denominated primarily in U.S.
dollars, including products and services sold to members that are located outside the United
States. Many of the costs associated with the Companys operations located outside the United
States are denominated in local currencies. As a consequence, increases in local currencies against
the U.S. dollar in countries where the Company has foreign operations would result in higher
effective operating costs and, potentially, reduced earnings. The Company uses forward contracts,
designated as cash flow hedging instruments, to protect against foreign currency exchange rate
risks inherent with its cost reimbursement agreements with its United Kingdom subsidiary. A forward
contract obligates the Company to exchange a predetermined amount of U.S. dollars to make
equivalent Pound Sterling (GBP) payments equal to the value of such exchanges.
The Company formally documents all relationships between hedging instruments and hedged items as
well as its risk management objective and strategy for undertaking hedge transactions. The maximum
length of time over which the Company is hedging its exposure to the variability in future cash
flows is 12 months. The forward contracts are recognized on the consolidated balance sheets at fair
value. Changes in the fair value measurements of the derivative instruments are reflected as
adjustments to other comprehensive income (OCI) and/or current earnings. The Company has no
credit-risk-related contingent features in any of its agreements with its derivative counterparty.
The notional amount of outstanding forward contracts was $14.4 million at June 30, 2010.
8
The fair values of all derivative instruments, which are designated as hedging instruments, on the
Companys condensed consolidated balance sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
77
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
92
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
The pre-tax effect of the derivative instruments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in OCI on Derivative (Effective portion)
|
|
Derivatives in Cash Flow
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Hedging Relationships
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Forward currency contracts
|
|
$
|
(83
|
)
|
|
$
|
291
|
|
|
$
|
(362
|
)
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Loss Reclassified
|
|
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective portion)
|
|
from Accumulated
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
OCI into Income (Effective portion)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Cost of services
|
|
$
|
(118
|
)
|
|
$
|
(439
|
)
|
|
$
|
(292
|
)
|
|
$
|
(1,032
|
)
|
Member relations and marketing
|
|
|
(45
|
)
|
|
|
(379
|
)
|
|
|
(111
|
)
|
|
|
(916
|
)
|
General and administrative
|
|
|
(40
|
)
|
|
|
(180
|
)
|
|
|
(100
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(203
|
)
|
|
$
|
(998
|
)
|
|
$
|
(503
|
)
|
|
$
|
(2,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ineffective portion of the cash flow hedges was not material.
Note 9. Restructuring costs
Accrued restructuring costs, which are included in Accounts payable and accrued liabilities,
consist of severance and related termination benefits. Changes to the restructuring liability are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tower Group
|
|
|
|
2008 Plan
|
|
|
2009 Plan
|
|
|
Plan
|
|
Balance at December 31, 2009
|
|
$
|
532
|
|
|
$
|
2,472
|
|
|
$
|
1,109
|
|
Cash payments
|
|
|
(395
|
)
|
|
|
(832
|
)
|
|
|
(1,010
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
137
|
|
|
|
1,640
|
|
|
|
99
|
|
Cash payments
|
|
|
(137
|
)
|
|
|
(552
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
$
|
1,088
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not expect to incur any significant additional costs under these plans.
Note 10. Income taxes
The effective tax rate was 41.9% and 41.6% in the three and six months ended June 30, 2010,
respectively, which reflects a full-year expected annualized tax rate of approximately 40%,
excluding the effects of unrealized currency translation gains/losses. The effective tax rate was
40.0% in the three and six months ended June 30, 2009.
The Company made income tax payments of $17.2 million and $12.9 million in the three months ended
June 30, 2010 and 2009 and $18.2 million and $21.0 million in the six months ended June 30, 2010
and 2009, respectively.
9
Note 11. Earnings per share
A reconciliation of basic to diluted weighted average common shares outstanding is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
34,214
|
|
|
|
34,105
|
|
|
|
34,189
|
|
|
|
34,081
|
|
Effect of dilutive common shares outstanding
|
|
|
255
|
|
|
|
171
|
|
|
|
269
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
34,469
|
|
|
|
34,276
|
|
|
|
34,458
|
|
|
|
34,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 2.5 million and 3.6 million shares for the three and six months ended June 30, 2010
and 2009, respectively, related to share-based compensation awards have been excluded from the
dilutive effect shown above because their impact would be anti-dilutive.
Note 12. Comprehensive income
Total comprehensive income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$
|
10,980
|
|
|
$
|
4,946
|
|
|
$
|
22,613
|
|
|
$
|
18,018
|
|
Change in unrealized gains of marketable securities, net of tax
|
|
|
(70
|
)
|
|
|
(151
|
)
|
|
|
(246
|
)
|
|
|
(41
|
)
|
Unrealized gains on forward contracts, net of tax
|
|
|
121
|
|
|
|
769
|
|
|
|
94
|
|
|
|
1,531
|
|
Change in cumulative translation adjustment
|
|
|
211
|
|
|
|
(234
|
)
|
|
|
716
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
11,242
|
|
|
$
|
5,330
|
|
|
$
|
23,177
|
|
|
$
|
19,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated elements of other comprehensive income at June 30, 2010 consists of a $0.6 million
unrealized gain, net of tax, on marketable securities and a $1.1 million cumulative foreign
currency translation gain. Accumulated elements of other comprehensive income at December 31, 2009
consists of a $0.9 million unrealized gain, net of tax, on marketable securities; a $0.1 million
unrealized loss, net of tax, on forward currency exchange contracts; and a $0.4 million cumulative
foreign currency translation gain.
Note 13. Commitments and contingencies
Operating leases
The Company leases office facilities that expire on various dates through 2028. Generally, the
leases carry renewal provisions and rental escalations and require the Company to pay executory
costs such as taxes and insurance.
In May 2010, the Company amended and restated the sublease agreement entered into in June 2009 with
a third party to exercise the extension clause contained in the original sublease from October 2021
through January 2028, which terminates with the Companys existing lease in January 2028. The
Company also sublet additional space from November 2011 through January 2028 and from October 2014
through January 2028. The amended and restated sublease also contains an expansion option for
additional square footage, which may be exercised at the subtenants discretion, from October 2014
through January 2028. Total noncancelable sublease payments over the term will be approximately
$283.8 million. The subtenant will be required to pay its pro rata portion of any increases in
building operating expenses and real estate taxes.
Future minimum rental payments under non-cancelable operating leases and future minimum
receipts under subleases, excluding executory costs, are as follows at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
YE 2010
|
|
|
YE 2011
|
|
|
YE 2012
|
|
|
YE 2013
|
|
|
YE 2014
|
|
|
Thereafter
|
|
Operating lease obligations
|
|
$
|
613,634
|
|
|
$
|
17,199
|
|
|
$
|
35,007
|
|
|
$
|
34,639
|
|
|
$
|
34,494
|
|
|
$
|
34,190
|
|
|
$
|
458,105
|
|
Sublease receipts
|
|
|
(284,198
|
)
|
|
|
(4,638
|
)
|
|
|
(9,932
|
)
|
|
|
(13,883
|
)
|
|
|
(14,238
|
)
|
|
|
(13,383
|
)
|
|
|
(228,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net lease obligations
|
|
$
|
329,436
|
|
|
$
|
12,561
|
|
|
$
|
25,075
|
|
|
$
|
20,756
|
|
|
$
|
20,256
|
|
|
$
|
20,807
|
|
|
$
|
229,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
From time to time, the Company is subject to litigation related to normal business operations. The
Company vigorously defends itself in litigation and is not currently a party to, and the Companys
property is not subject to, any legal proceedings likely to materially affect our financial
results.
The Company continues to evaluate potential tax exposures relating to sales and use, payroll,
income and property tax laws, and regulations for various states in which the Company sells or
supports its goods and services. Accruals for potential contingencies are recorded by the Company
when it is probable that a liability has been incurred and the liability can be reasonably
estimated. As additional information becomes available, changes in the estimates of the liability
are reported in the period that those changes occur. The Company accrued a liability of $3.9
million at June 30, 2010 and December 31, 2009, respectively, relating to certain sales and use tax
regulations for states in which the Company sells or supports its goods and services.
10
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion and analysis of our consolidated financial condition and results of
operations should be read in conjunction with our condensed consolidated financial statements and
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following
discussion includes forward-looking statements that involve certain risks and uncertainties. For
additional information regarding forward-looking statements and risk factors, see Forward-looking
statements.
Executive Overview
Our four key operating priorities for
2010 are to drive member loyalty through high-value personal engagement; invest
globally in our strongest brands; improve the member experience through
enhanced technology and analytic platforms; and elevate member performance
through great content and product innovation. We expect to leverage and expand
our integrated sales and service model to retain and grow our existing
membership base, version our products and services for markets with a
substantial growth opportunity (e.g., government, Asia-Pacific region, and
Europe), launch new products and services, and protect the core economics of
our business through effective cost management. As part of our strategy, we may
acquire companies that bring us capabilities and intellectual property that
address additional member needs.
During the three months ended
June 30, 2010, we continued to see encouraging returns from focus on our
priorities and from sound execution by our teams. By linking great research and
data to urgent member work and decisions, our teams have driven positive
renewal outcomes and solid progress on sales. While we expect to see continued
improvement in our financial performance through the remainder of 2010, mixed
economic news, the modest (and inconsistent) pace of global economic recovery,
and lingering uncertainty about future economic growth could impact our
business and our results. While we are finding that companies are increasingly
focusing on forward-looking priorities, which are areas where we can and do add
significant value, they continue to control expenditures amid ongoing
uncertainty about the future. In addition, while our European operations have
shown strong progress during the transition to a new commercial model, that
transition remains in the early stages.
Contract Value, which is defined as the
aggregate annualized revenues attributed to all agreements in effect at a given
date without regard to the remaining duration of any such agreement, was
$410.1 million at June 30, 2010, an increase of 2.1%, compared to
$401.6 million at June 30, 2009. The increase is due an increase in
the purchase of memberships by middle market clients, the acquisitions of Tower
Group, Inc. (“Tower Group”) in October 2009 and Iconoculture,
Inc. (“Iconoculture”) in May 2010, and improved cross-sales of
large corporate memberships. As anticipated, growth from these factors was
offset by reductions in Contract Value as a result of discontinued programs.
Net income and Adjusted net income were
$11.0 million in the three months ended June 30, 2010 compared to net
income of $4.9 million and Adjusted net income of $14.4 million in
the three months ended June 30, 2009. Net income and Adjusted net income
were $22.6 million in the six months ended June 30, 2010 compared to
net income of $18.0 million and Adjusted net income of $28.0 million
in the six months ended June 30, 2009. Revenues and earnings in the first
half of 2010 were slightly ahead of our expectations primarily due to
improvements in program renewals.
Total costs and expenses were
$89.9 million in the three months ended June 30, 2010, a decrease of
$16.7 million from the three months ended June 30, 2009. Our EBITDA
and Adjusted EBITDA margins were 22.1% in the second quarter of 2010 compared
to an EBITDA margin of 12.7% and Adjusted EBITDA margin of 26.9% in the second
quarter of 2009. Total costs and expenses were $169.8 million in the six
months ended June 30, 2010, a decrease of $32.6 million from the six
months ended June 30, 2009. Our EBITDA and Adjusted EBITDA margins were
23.2% for the six months ended June 30, 2010 compared to an EBITDA margin
of 18.1% and Adjusted EBITDA margin of 25.4% for the six months ended
June 30, 2009.
We also plan to make selective
investments where we see clear opportunities to accelerate our return to
growth, such as additional service and sales capacity, expansion of our
government member base, further investment in the Asia Pacific region, and
targeted new product launches. As a result, we expect our operating margins in
2010 will continue to be pressured by the combination of lower year-over-year
revenues and expenses that we expect to trend higher in the second half of the
year.
11
Non-GAAP Financial Measures
The tables below include financial measures of EBITDA, Adjusted EBITDA, Adjusted net income, and
Non-GAAP diluted earnings per share, which are non-GAAP financial measures provided as a complement
to the results provided in accordance with accounting principles generally accepted in the United
States of America (GAAP). The term EBITDA refers to a financial measure that we define as
earnings before interest income, net, depreciation and amortization, and provision for income
taxes. The term Adjusted EBITDA refers to a financial measure that we define as earnings before
interest income, net, depreciation and amortization, provision for income taxes, impairment loss,
costs associated with exit activities, restructuring costs, and gain on acquisition. The term
Adjusted net income refers to net income excluding the after tax effects of impairment loss,
costs associated with exit activities, restructuring costs, and gain on acquisition. Non-GAAP
diluted earnings per share refers to net income per diluted share, excluding the per share
after-tax effects of impairment loss, costs associated with exit activities, restructuring costs,
and gain on acquisition.
These non-GAAP measures may be considered in addition to results prepared in accordance with GAAP,
but they should not be considered a substitute for, or superior to, GAAP results. We intend to
continue to provide these non-GAAP financial measures as part of our future earnings discussions
and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our
financial reporting. A reconciliation of these non-GAAP measures to GAAP results is provided below.
We believe that EBITDA, Adjusted EBITDA, Adjusted net income and Non-GAAP diluted earnings per
share are relevant and useful supplemental information for our investors. We use these non-GAAP
financial measures for internal budgeting and other managerial purposes, when publicly providing
our business outlook and as a measurement for potential acquisitions. A limitation associated with
EBITDA and Adjusted EBITDA is that they do not reflect the periodic costs of certain capitalized
tangible and intangible assets used in generating revenues in our business. Management evaluates
the costs of such tangible and intangible assets through other financial measures such as capital
expenditures. Management compensates for these limitations by also relying on the comparable GAAP
financial measure of income from operations, which includes depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$
|
10,980
|
|
|
$
|
4,946
|
|
|
$
|
22,613
|
|
|
$
|
18,018
|
|
Interest income, net
|
|
|
(363
|
)
|
|
|
(475
|
)
|
|
|
(799
|
)
|
|
|
(1,073
|
)
|
Depreciation and amortization
|
|
|
5,639
|
|
|
|
6,263
|
|
|
|
10,774
|
|
|
|
12,236
|
|
Provision for income taxes
|
|
|
7,923
|
|
|
|
3,297
|
|
|
|
16,108
|
|
|
|
12,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
24,179
|
|
|
$
|
14,031
|
|
|
$
|
48,696
|
|
|
$
|
41,196
|
|
Costs associated with exit activities
|
|
|
|
|
|
|
11,518
|
|
|
|
|
|
|
|
11,518
|
|
Restructuring costs
|
|
|
|
|
|
|
4,244
|
|
|
|
|
|
|
|
5,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
24,179
|
|
|
$
|
29,793
|
|
|
$
|
48,696
|
|
|
$
|
57,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$
|
10,980
|
|
|
$
|
4,946
|
|
|
$
|
22,613
|
|
|
$
|
18,018
|
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with exit activities
|
|
|
|
|
|
|
6,911
|
|
|
|
|
|
|
|
6,911
|
|
Restructuring costs
|
|
|
|
|
|
|
2,546
|
|
|
|
|
|
|
|
3,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
10,980
|
|
|
$
|
14,403
|
|
|
$
|
22,613
|
|
|
$
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
GAAP diluted earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.14
|
|
|
$
|
0.66
|
|
|
$
|
0.53
|
|
Adjustments, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with exit activities
|
|
|
|
|
|
|
0.20
|
|
|
|
|
|
|
|
0.20
|
|
Restructuring costs
|
|
|
|
|
|
|
0.07
|
|
|
|
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP diluted earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.41
|
|
|
$
|
0.66
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Critical Accounting Policies
Our accounting policies require us to apply methodologies, estimates and judgments that have a
significant impact on the results we report in our consolidated financial statements. In our 2009
Annual Report on Form 10-K, we have discussed those material policies that we believe are critical
and require the use of complex judgment in their application, and there have been no changes to our
critical accounting policies since that time.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that had a material effect on our condensed
consolidated financial statements in the three and six months ended June 30, 2010. See Note 3 to
the condensed consolidated financial statements for a discussion of recent accounting
pronouncements.
Results of Operations
We generate the majority of our revenues through memberships that provide access to our products
and services, which are delivered through several channels. Memberships, which principally are
annually renewable agreements, primarily are payable by members at the beginning of the contract
term. Billings attributable to memberships for our products and services initially are recorded as
deferred revenues and then generally are recognized on a pro-rata basis over the membership
contract term, which typically is 12 months. Generally, a member may request a refund of its
membership fee during the membership term under our service guarantee. Refunds are provided on a
pro-rata basis relative to the remaining term of the membership.
Our operating costs and expenses consist of:
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|
|
Cost of services, which represents the costs associated with the production and delivery
of our products and services, consisting of compensation, including share-based
compensation, for research personnel, in-house faculty, and product advisors; the
organization and delivery of membership meetings, seminars, and other events; ongoing
product development costs; production of published materials, costs of developing and
supporting our membership web platform and digital delivery of products and services; and
associated support services.
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|
|
|
Member relations and marketing, which represents the costs of acquiring new members and
the costs of account management, consisting of compensation, including sales incentives and
share-based compensation; travel and related expenses; recruiting and training of
personnel; sales and marketing materials; and associated support services, as well as the
costs of maintaining our customer relationship management software (CRM).
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|
|
|
General and administrative, which represents the costs associated with the corporate and
administrative functions, including human resources and recruiting, finance and accounting,
legal, management information systems, facilities management, business development and
other. Costs include compensation, including share-based compensation; third-party
consulting and compliance expenses; and associated support services.
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|
|
|
Depreciation and amortization, consisting of depreciation of our property and equipment,
including leasehold improvements, furniture, fixtures and equipment, capitalized software
and Web site development costs and the amortization of intangible assets.
|
Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended June 30, 2009
Revenues
Revenues decreased 1.0% to $109.6 million in the three months ended June 30, 2010 from $110.7
million in the three months ended June 30, 2009. Revenues decreased 8.1% to $209.8 million in the
six months ended June 30, 2010 from $228.1 million in the six months ended June 30, 2009. Lower
deferred revenues at December 31, 2009 compared to December 31, 2008 and lower bookings throughout
2009 contributed to the decrease in revenues for these periods. These decreases were partially
offset by revenues from the Tower Group and Iconoculture acquisitions. Renewal rates increased in
the six months ended June 30, 2010, resulting in an increase
in deferred revenues; however, there is a lag between changes in Contract Value and the time it
takes for those changes to be fully reflected in our revenues.
13
Costs and expenses
Declines in share-based compensation, facilities expense, additional costs from the businesses we
acquired, and the impact of changes in the exchange rates of the U.S. dollar to the British Pound
all contributed to year-over-year changes in costs and expenses in 2010. These items are allocated
to Cost of services, Member relations and marketing, and General and administrative expenses. While
our total costs and expenses have declined significantly in 2010, as compared to 2009, foreign
currency exchange rates and the additional expenses associated with acquired businesses have offset
a portion of the expense reductions we made to our core business in 2009. We discuss these major
components of costs and expenses on an aggregated basis below:
|
|
|
Share-based compensation decreased $0.6 million and $3.1 million in the three and six
months ended June 30, 2010, respectively, compared to the same periods in 2009. The
decrease was primarily a result of a decrease in the total fair value of new share-based
awards granted mainly as a result of declines in the trading price of our common stock and
the reduced number of awards granted in 2009 and 2010 as compared to prior years.
|
|
|
|
Facilities expense decreased $2.1 million and $5.0 million in the three and six months
ended June 30, 2010, respectively, compared to the same periods in 2009. The decrease was
primarily due to the impact of a sublease of a portion of our headquarters facility, which
began in the third quarter of 2009.
|
|
|
|
In October 2009, we acquired 100% of the equity interest of Tower Group and in May 2010,
we acquired 100% of the equity interest of Iconoculture. These two companies increased our
total costs and expenses by $7.1 million and $10.4 million for the three and six months
ended June 30, 2010, respectively.
|
|
|
|
Our expenses are also impacted by currency fluctuations, primarily in the value of the
British Pound compared to the U.S. dollar. The value of the British Pound versus the U.S.
dollar was approximately $0.06 lower on average in the three months ended June 30, 2010
compared to the same period in 2009. The value of the British Pound versus the U.S. dollar
was approximately $0.03 higher on average in the six months ended June 30, 2010 compared to
the same period in 2009. Costs incurred for foreign subsidiaries will fluctuate based upon
changes in foreign currency rates in addition to other operational factors. We enter into
cash flow hedges for our UK subsidiary to mitigate foreign currency risk, which offsets a
portion of the impact foreign currency fluctuations have on costs and expenses.
|
Cost of services
Cost of services increased 3.5% to $39.3 million in the three months ended June 30, 2010 from $38.0
million in the three months ended June 30, 2009. The increase of $1.3 million was primarily due to
variable compensation, which increased $3.0 million due to improved operating results.
Additionally, third party consulting expenses increased $0.7 million and travel and related
expenses increased $0.3 million. These increases were partially offset by a $1.4 million decrease
in compensation and related costs. The decrease in compensation and related costs was primarily a
result of the headcount reductions related to our restructuring plans and was offset by an increase
in headcount relating to re-investments in our product research and delivery teams and the
acquisitions of both Tower Group and Iconoculture. Additionally, deferred compensation expense
decreased $0.9 million, allocated facilities costs decreased $0.7 million, and share-based
compensation expense decreased $0.4 million.
Cost of services decreased 4.5% to $72.8 million in the six months ended June 30, 2010 from $76.2
million in the six months ended June 30, 2009. The decrease of $3.4 million was primarily due to a
$3.9 million decrease in compensation and related costs, primarily a result of the headcount
reductions related to our restructuring plans and was offset by an increase in headcount relating
to re-investments in our product research and delivery teams and the acquisitions of both Tower
Group and Iconoculture. Additionally, share based compensation expense decreased $2.0 million,
allocated facilities costs decreased $1.7 million, costs associated with the production and
delivery of meetings and other services decreased $1.7 million as a result of fewer members, and
deferred compensation expense decreased $0.3 million. These decreases were partially offset by
variable compensation, which increased $4.9 million due to improved operating results and a $0.7
million increase in third party consulting expenses.
14
Member relations and marketing
Member relations and marketing expense decreased 5.0% to $30.2 million in the three months ended
June 30, 2010 from $31.7 million in the three months ended June 30, 2009. The decrease of $1.5
million was primarily due to a $0.8 million decrease in allocated facilities costs and a $0.8
million decrease in third party consulting expenses. Additionally, deferred compensation expense
decreased $0.4 million and share-based compensation decreased $0.2 million. These decreases were
partially offset by an increase in travel and related expenses of $0.5 million.
Member relations and marketing expense decreased 15.9% to $55.9 million in the six months ended
June 30, 2010 from $66.5 million in the six months ended June 30, 2009. The decrease of $10.6
million was primarily due to a $3.7 million decrease in compensation and related costs, primarily a
result of the headcount reductions related to our restructuring plans and was offset by an increase
in headcount relating to re-investments in our sales teams and the acquisitions of both Tower Group
and Iconoculture. Additionally, allocated facilities and overhead costs decreased $2.8 million,
third party consulting expenses decreased $1.6 million, variable compensation decreased $1.5
million due to lower sales volume, and share-based compensation decreased $0.3 million.
General and administrative
General and administrative expense decreased 0.6% to $14.8 million in the three months ended June
30, 2010 from $14.9 million in the three months ended June 30, 2009. The decrease of $0.1 million
was primarily due to a $0.4 million decrease in deferred compensation expense, a $0.4 million
decrease in allocated facilities expense, and a $0.3 million decrease in travel and related
expenses. These decreases were partially offset by an increase in variable compensation of $0.8
million due to improved operating results and $0.3 million of transaction expenses related to the
Iconoculture acquisition.
General and administrative expense decreased 1.1% to $30.3 million in the six months ended June 30,
2010 from $30.6 million in the six months ended June 30, 2009. The decrease of $0.3 million was
primarily due to a $0.8 million decrease in share-based compensation expense decrease, a $0.8
million decrease in allocated facilities expense, a $0.7 million decrease in compensation and
related costs, and a $0.3 million decrease in travel and related expenses. The decrease in
compensation and related costs was primarily a result of the headcount reductions related to our
restructuring plans and was offset by an increase in headcount relating to the acquisitions of
Tower Group and Iconoculture. These decreases were partially offset by an increase in variable
compensation of $1.4 million due to improved operating results, $0.4 million in transaction
expenses related to the Iconoculture acquisition, and employee search fees of $0.3 million.
Depreciation and amortization
Depreciation and amortization expense decreased 10.0% to $5.6 million in the three months ended
June 30, 2010 from $6.3 million in the three months ended June 30, 2009. The decrease of $0.7
million was primarily due to lower depreciation expense as a result of fixed assets and leasehold
improvements disposed of in the second quarter of 2009 as part of our costs associated with exit
activities and was partially offset by a $0.4 million increase in amortization expense related to
the intangible assets of Iconoculture.
Depreciation and amortization expense decreased 11.9% to $10.8 million in the six months ended June
30, 2010 from $12.2 million in the six months ended June 30, 2009. The decrease of $1.4 million was
primarily due to lower depreciation expense as a result of fixed assets and leasehold improvements
disposed of in the second quarter of 2009 as part of our costs associated with exit activities and
was partially offset by a $0.4 million increase in amortization expense related to the intangible
assets of Iconoculture.
Restructuring costs
In the three and six months ended June 30, 2009, we recognized $4.2 million and $5.2 million of
restructuring costs, most of which was associated with severance and related termination benefits
from the restructuring plans we announced in 2008 and 2009.
Other (expense) income, net
Other (expense) income, net in the three months ended June 30, 2010 was comprised of $0.4 million
of interest income and $0.1 million of foreign currency gain offset by a $0.9 million decrease in
the fair value of deferred compensation plan assets and $0.4
million of other expense. Other (expense) income, net in the three months ended June 30, 2009 was
comprised of $0.5 of interest income, $2.2 million foreign currency gain, and a $1.4 million
increase in the fair value of deferred compensation plan assets.
15
Other (expense) income, net in the six months ended June 30, 2010 was comprised of $0.8 million of
interest income offset by a $0.3 million decrease in the fair value of deferred compensation plan
assets, a $0.8 of foreign currency loss, and $0.9 million of other expense. Other (expense) income,
net in the six months ended June 30, 2009 was comprised of $1.1 million of interest income, $0.8
million increase in the fair value of deferred compensation plan assets, $1.9 million foreign
currency gain and $0.4 million of other income.
Provision for income taxes
The effective tax rate was 41.9% and 41.6% in the three and six months ended June 30, 2010,
respectively, which reflects a full-year expected annualized tax rate of approximately 40%,
excluding the effects of unrealized currency translation gains/losses. The effective tax rate was
40.0% in the three and months ended June 30, 2009, respectively. Our provision for income taxes
differs from the U.S. statutory rate of 35% primarily due to state income taxes, unrealized
currency translation gains/losses, and non-deductible expenses.
Liquidity and Capital Resources
Cash flows generated from operating activities are our primary source of liquidity. In 2009, we
worked aggressively to align our cost structure with a lower revenue profile by implementing a
range of expense management activities, including the elimination of lower-performing programs,
workforce reductions, discretionary expense controls, and real estate subleases. In the first
quarter of 2010, we increased our quarterly dividend to $0.11 from $0.10. Our Q1 2009 dividend was
$0.44, and we decreased our quarterly dividend to $0.10 in the second quarter of 2009. We had cash
and cash equivalents and marketable securities of $113.0 million and $73.4 million at June 30, 2010
and 2009, respectively.
We believe that existing cash and cash equivalents and marketable securities balances and operating
cash flows will be sufficient to support operations, anticipated capital expenditures, and the
payment of dividends, as well as potential share repurchases during the next 12 months. Our future
cash flows will depend on many factors, including our rate of Contract Value growth and selective
investments to expand our brands and enhance technology. Also, we may make investments in, or
acquisitions of, complementary businesses, which could require us to seek additional financing.
In May 2010, we completed the acquisition of Iconoculture. Iconoculture provides comprehensive
consumer insights and effective strategic marketing advisory services and project support to an
established customer base. We acquired 100% of the equity interests of Iconoculture for an initial
cash payment of $16.2 million, plus a working capital adjustment of $4.0 million that was paid in
July 2010. We also will be required to pay an additional $1.5 million on April 1, 2011, less any
amounts that we are entitled to retain to reimburse us for any losses that are subject to
indemnification by the sellers under the terms of the acquisition agreement. Additional
consideration may be payable by April 1, 2011 if Iconocultures financial performance for the year
ended December 31, 2010 meets certain specified targets. This fair value of this additional
consideration was $2.6 million at the acquisition date. The fair value of the total consideration
was $24.2 million and was preliminarily allocated to the assets acquired, including intangible
assets and liabilities assumed, based on their estimated fair values We allocated $9.2 million to
intangible assets with a weighted average amortization period of 4.5 years and $10.8 million to
goodwill.
Cash flows from operating activities
Membership subscriptions, which principally are annually renewable agreements, generally are
payable by members at the beginning of the contract term. Historically, the combination of revenue
growth, profitable operations, and advance payments of membership subscriptions has resulted in net
cash flows provided by operating activities. Net cash flows provided by operating activities were
$56.1 million and $19.8 million in the six months ended June 30, 2010 and 2009, respectively.
The increase in cash flows from operations was primarily due to a $5.1 million increase in deferred
revenues over December 31, 2009, including Iconoculture, compared to a decrease of $48.3 million in
the same period of 2009. The increase in deferred revenues was the result of higher sales bookings
in the first six months of 2010 versus the same period of 2009 and the acquisition of Iconoculture
in May 2010. Additionally, our lower cost structure and expense management activities contributed to
the increase in cash flows from operations in 2010.
16
We made income tax payments of $18.2 million and $21.0 million in the six months ended June 30,
2010 and 2009, respectively and expect to continue making tax payments in future periods. We made
payments under restructuring plans of $3.0 million and $5.4 million in the six months ended June
30, 2010 and 2009, respectively.
Cash flows from investing activities
Our cash management, acquisition, and capital expenditure strategies affect cash flows from
investing activities. Net cash flows provided by investing activities were $10.1 million and $8.7
million in the six months ended June 30, 2010 and 2009, respectively. We generated $20.3 million
and $12.8 million from maturities of marketable securities and used $1.2 million and $3.9 million
for capital expenditures, primarily on technology infrastructure, in the six months ended June 30,
2010 and 2009, respectively. Additionally, we utilized $9.0 million for the Iconoculture
acquisition in May 2010, which includes an initial payment of $16.2 million, net of cash acquired
totaling $7.2 million. We estimate that capital expenditures to support our infrastructure will
range from $6.0 to $8.0 million in 2010.
Cash flows from financing activities
Net cash flows used in financing activities were $8.5 million and $18.0 million in the six months
ended June 30, 2010 and 2009, respectively. The $9.5 million decrease in cash flows used in
financing activities is primarily the result of the decrease in our quarterly dividend in the first
quarter of 2009. Our quarterly dividend was $0.10 in the second quarter of 2009, and $0.11 in the
first and second quarters of 2010. Additionally, we repurchased approximately $1.2 million of our
shares in the six months ended June 30, 2010 compared to $0.1 million in the six months ended June
30, 2009. These repurchases were the result of employees using common stock received from the
exercise of share-based awards to satisfy the statutory minimum federal and state withholding
requirements generated from the exercise of such awards.
Commitments and contingencies
On May 3, 2010, we amended and restated the sublease agreement entered into in June 2009 with a
third party to exercise the extension clause contained in the original sublease from October 2021
through January 2028, which terminates with our existing lease in January 2028. We also sublet
additional space of approximately 96,000 square feet from November 2011 through January 2028 and
approximately 32,000 square feet from October 2014 through January 2028. The amended and restated
sublease also contains an expansion option, which may be exercised at the subtenants discretion,
for an additional 32,000 square feet from October 2014 through January 2028. Total noncancelable
sublease payments over the term will be approximately $283.8 million. The subtenant will be
required to pay its pro rata portion of any increases in building operating expenses and real
estate taxes. We expect that the sublease will reduce 2010 rent expense by approximately
$9 million and reduce 2011 rent expense by approximately $12.5 million. The sublease represents an
additional step in our efforts to re-align sales and service resources and to move closer to its
membership base.
We continue to evaluate potential tax exposure relating to sales and use, payroll, income and
property tax laws, and regulations for various states in which we sell or supports its goods and
services. Accruals for potential contingencies are recorded when it is probable that a liability
has been incurred, and the liability can be reasonably estimated. As additional information
becomes available, changes in the estimates of the liability are reported in the period that those
changes occur. We have accrued a liability of $3.9 million at June 30, 2010 and December 31, 2009,
respectively, relating to certain sales and use tax regulations for states in which we sell or
support our goods and services.
Contractual obligations
There have been no material changes to the contractual obligations tables as disclosed in our 2009
Annual Report on Form 10-K. We have operating lease obligations that relate primarily to our office
leases that expire on various dates through 2028. The operating lease obligations generally include
scheduled rent increases.
17
Off-Balance Sheet Arrangements
At June 30, 2010 and December 31, 2009, 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 narrow or limited
purposes.
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All such forward-looking statements are based on
managements beliefs, current expectations and information currently available to management. These
statements are contained throughout this Quarterly Report on Form 10-Q, including under the section
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements frequently contain words such as believes, expects, anticipates,
intends, plans, will, estimates, forecasts, projects and other words of similar meaning.
One can also identify forward-looking statements by the fact that they do not relate strictly to
historical or current facts, financial results or financial condition. Forward-looking statements
include information concerning our possible or assumed results of operations, business strategies,
financing plans, competitive position and potential growth opportunities.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ
materially from those set forth in the forward-looking statements. One must carefully consider any
such statement and should understand that many factors could cause actual results to differ
materially from the forward-looking statements. Factors that could cause actual results to differ
materially from those indicated by forward-looking statements include, among others, uncertainty in
the global economy, downward pressures on our 2010 margins, our dependence on renewals of our
membership-based services, the sale of additional programs to existing members and our ability to
attract new members, success in collections of our membership fees, our restructuring plans may not
be successful, lower demand for our products and services, risks relating to international
regulations and business risks, foreign currency exposures, our transition to an integrated account
model may cause unanticipated negative results, financial and operational risks associated with our
acquisitions, our potential inability to attract and retain a significant number of highly skilled
employees, our potential inability to protect our intellectual property rights, our potential
exposure to litigation related to the content of our products, our potential exposure to loss of
revenue resulting from our service guarantee, various factors that could affect our estimated
income tax rate or our ability to use our existing deferred tax assets, changes in estimates or
assumptions relating to share-based compensation expense under FAS 123(R), possible volatility of
our stock price, and future financial performance of our members and their industries. One should
carefully evaluate such forward-looking statements in light of factors, including risk factors,
described in the Companys filings with the Securities and Exchange Commission. In Item 1A. Risk
Factors of the Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed
on March 1, 2010, the Company discusses in more detail various important factors that could cause
actual results to differ from expected or historic results. One should understand that it is not
possible to predict or identify all such factors. Consequently, the reader should not consider any
such list to be a complete statement of all potential risks or uncertainties. All forward-looking
statements contained in this Quarterly Report on Form 10-Q are qualified by these cautionary
statements and are made only as of the date this Quarterly Report on Form 10-Q is filed. We
undertake no obligation, other than as required by law, to update or revise publicly any
forward-looking statements, whether as a result of new information, future events or otherwise.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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There has been no material change in the Companys assessment of its sensitivity to market risk
since its presentation set forth in Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in its Annual Report on Form 10-K for the year ended December 31, 2009.
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Item 4.
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Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
In connection with the preparation of the amendment to our Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended (the Exchange Act)), and have concluded that as of June 30, 2010, our disclosure
controls and procedures are effective in providing reasonable assurance that information required
to be disclosed in the
reports that the Company files and submits under the Exchange Act is recorded, processed,
summarized, and reported when required and is accumulated and communicated to management, as
appropriate, to allow timely decisions regarding required disclosure.
18
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting that occurred
during the most recently completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings.
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From time to time, the Company is subject to litigation related to normal business operations. The
Company vigorously defends itself in litigation. However, the Company is not currently a party to,
and the Companys property is not subject to, any legal proceedings likely to materially affect our
financial results.
In addition to the other information contained in this Quarterly Report on Form 10-Q, you should
carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2009 Annual
Report on Form 10-K. There were no material changes during the quarter ended June 30, 2010 to this
information reported to the Companys 2009 Annual Report on Form 10-K.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds.
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Issuer Purchases of Equity Securities
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Total Number of
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|
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Shares
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Approximate $
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|
|
|
|
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Average
|
|
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Purchased as
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Value of Shares
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|
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Total
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|
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Price
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Part of a
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|
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That May Yet Be
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Number of
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Paid Per
|
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Publicly
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Purchased
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Shares Purchased
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Share
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Announced Plan
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Under the Plans
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April 1, 2010 to April 30, 2010 (1)
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35,800
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$
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27.49
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35,800
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$
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21,149,476
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May 1, 2010 to May 31, 2010
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|
|
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$
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$
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21,149,476
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June 1, 2010 to June 30, 2010
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|
|
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$
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$
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21,149,476
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|
|
|
|
|
|
|
|
|
|
|
|
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Total
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35,800
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$
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27.49
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|
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35,800
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(1)
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Amounts include the effect of employees using common stock received from the exercise of
share-based awards to satisfy the statutory minimum federal and state withholding requirements
generated from the exercise of such awards. In effect, the Company repurchased, at fair market
value, a portion of the common stock received by employees upon exercise of their awards.
|
Repurchases may continue to be made from time to time in open market and privately negotiated
transactions subject to market conditions. No minimum number of shares has been fixed. We fund our
share repurchases with cash on hand and cash generated from operations.
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Item 3.
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Defaults Upon Senior Securities.
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None.
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Item 4.
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(Removed and Reserved).
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Item 5.
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Other Information.
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None.
19
(a) Exhibits:
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Exhibit No.
|
|
Description
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a 14(a) of the Securities Exchange
Act of 1934, as amended
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31.2*
|
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Certification of the Chief Financial Officer pursuant to Rule 13a 14(a) of the Securities Exchange
Act of 1934, as amended
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32.1*
|
|
Certifications pursuant to 18 U.S.C. Section 1350
|
|
|
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101.INS**
|
|
XBRL Instance Document
|
|
|
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema Document
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|
|
|
101.CAL**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB**
|
|
XBRL Taxonomy Extension Labels Linkbase Document
|
|
|
|
101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
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*
|
|
Filed herewith
|
|
**
|
|
Furnished with the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010
|
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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THE CORPORATE EXECUTIVE BOARD COMPANY
(Registrant)
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Date: August 9, 2010
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By:
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/s/ Richard S. Lindahl
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|
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Richard S. Lindahl
|
|
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Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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|
21
Exhibit Index
|
|
|
Exhibit No.
|
|
Description
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a 14(a) of the Securities Exchange
Act of 1934, as amended
|
|
|
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a 14(a) of the Securities Exchange
Act of 1934, as amended
|
|
|
|
32.1*
|
|
Certifications pursuant to 18 U.S.C. Section 1350
|
|
|
|
101.INS**
|
|
XBRL Instance Document
|
|
|
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB**
|
|
XBRL Taxonomy Extension Labels Linkbase Document
|
|
|
|
101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
*
|
|
Filed herewith
|
|
**
|
|
Furnished with the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010
|
22
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