##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended September 30, 2004 oro
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number: 000-24799 THE CORPORATE EXECUTIVE BOARD COMPANY  Delaware
    
    52-2056410(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)2000 Pennsylvania Avenue, NW
    
    20006Suite 6000
    
    (Zip Code)Washington, D.C.(Address of Principal Executive Offices)
 (202) 777-5000
(Registrants Telephone Number, Including Area Code) Not applicable.
(Former Name, Former Address and Former Fiscal Year, if Changed, Since Last Report.) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes
þ     No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
þ     No o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. As of November 8, 2004, we had outstanding 38,969,465 shares of Common Stock,
par value $0.01 per share.




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##### 



THE CORPORATE EXECUTIVE BOARD COMPANY
INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.Condensed
Consolidated Balance Sheets at September 30, 2004 and December 31, 2003
    
    
    3Condensed
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2004 and 2003
    
    
    4Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    13Item 4. Controls and Procedures.
    
    
    13PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    14Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    14Item 3. Defaults Upon Senior Securities.
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    14Item 5. Other Information.
    
    
    14Item 6. Exhibits.
    
    
    14
 2




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##### 



PART I. FINANCIAL INFORMATION Item 1. Financial Statements. THE CORPORATE EXECUTIVE BOARD COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 September 30, 2004
    
    December 31, 2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    52,495
    
    
    $
    118,568Marketable securities
    
    
    46,204
    
    
    
    11,859Membership fees receivable, net
    
    
    44,063
    
    
    
    63,160Deferred income taxes, net
    
    
    35,556
    
    
    
    30,972Deferred incentive compensation
    
    
    5,361
    
    
    
    7,332Prepaid expenses and other current assets
    
    
    7,790
    
    
    
    5,933Total current assets
    
    
    191,469
    
    
    
    237,824Deferred income taxes, net
    
    
    
    
    
    
    6,701Marketable securities
    
    
    286,871
    
    
    
    163,492Property and equipment, net
    
    
    16,769
    
    
    
    15,465Total assets
    
    $
    495,109
    
    
    $
    423,482Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    16,065
    
    
    $
    12,480Accrued incentive compensation
    
    
    10,795
    
    
    
    11,072Deferred revenues
    
    
    141,907
    
    
    
    154,844Total current liabilities
    
    
    168,767
    
    
    
    178,396Other liabilities
    
    
    8,727
    
    
    
    3,093Total liabilities
    
    
    177,494
    
    
    
    181,489Stockholders equity:Common stock, par value $0.01; 100,000,000 shares
authorized, 39,980,200 and 37,835,075 shares issued
and 38,963,927 and 37,283,068 outstanding as of
September 30, 2004 and December 31, 2003,
respectively
    
    
    400
    
    
    
    378Additional paid-in capital
    
    
    214,573
    
    
    
    143,426Retained earnings
    
    
    141,552
    
    
    
    113,532Accumulated
elements of other comprehensive income
    
    
    3,446
    
    
    
    4,277Treasury stock, 1,016,273 and 552,007 shares, at
cost, at September 30, 2004 and December 31, 2003,
respectively
    
    
    (42,356
    )
    
    
    (19,620
    )Total stockholders equity
    
    
    317,615
    
    
    
    241,993Total liabilities and stockholders equity
    
    $
    495,109
    
    
    $
    423,482
 See accompanying notes to condensed consolidated financial statements. 3




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##### 



THE CORPORATE EXECUTIVE BOARD COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share amounts)
(Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    72,424
    
    
    $
    53,758
    
    
    $
    203,601
    
    
    $
    151,380Cost of services
    
    
    21,852
    
    
    
    18,225
    
    
    
    65,484
    
    
    
    51,380Gross profit
    
    
    50,572
    
    
    
    35,533
    
    
    
    138,117
    
    
    
    100,000Costs and expenses:Member relations and marketing
    
    
    18,657
    
    
    
    14,375
    
    
    
    55,101
    
    
    
    39,727General and administrative
    
    
    9,320
    
    
    
    5,293
    
    
    
    24,297
    
    
    
    15,789Depreciation
    
    
    1,965
    
    
    
    1,343
    
    
    
    5,305
    
    
    
    4,092Non-cash lease restructuring costs
    
    
    5,210
    
    
    
    
    
    
    
    5,210
    
    
    
    Stock option
and related expenses(1)
    
    
    
    
    
    
    
    
    
    
    408
    
    
    
    113Total costs and expenses
    
    
    35,152
    
    
    
    21,011
    
    
    
    90,321
    
    
    
    59,721Income from operations
    
    
    15,420
    
    
    
    14,522
    
    
    
    47,796
    
    
    
    40,279Other income, net
    
    
    2,627
    
    
    
    1,925
    
    
    
    7,136
    
    
    
    5,580Income before provision for income taxes
    
    
    18,047
    
    
    
    16,447
    
    
    
    54,932
    
    
    
    45,859Provision for income taxes
    
    
    6,093
    
    
    
    10,934
    
    
    
    18,265
    
    
    
    22,523Net income
    
    $
    11,954
    
    
    $
    5,513
    
    
    $
    36,667
    
    
    $
    23,336Earnings per share:Basic
    
    $
    0.31
    
    
    $
    0.15
    
    
    $
    0.96
    
    
    $
    0.63Diluted
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.92
    
    
    $
    0.61Dividends
per share
    
    $
    0.075
    
    
    $
    
    
    
    $
    0.225
    
    
    $
    Weighted average shares used in the calculation of earnings per share:Basic
    
    
    38,990
    
    
    
    37,308
    
    
    
    38,131
    
    
    
    37,298Diluted
    
    
    40,379
    
    
    
    38,762
    
    
    
    39,674
    
    
    
    38,403(1) Composition of Stock Option and Related Expenses:Cost of services
    
    $
    
    
    
    $
    
    
    
    $
    184
    
    
    $
    74Member relations and marketing
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    5General and administrative
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    34Total
    
    $
    
    
    
    $
    
    
    
    $
    408
    
    
    $
    113
 See accompanying notes to condensed consolidated financial statements. 4




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THE CORPORATE EXECUTIVE BOARD COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Nine months ended
September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    36,667
    
    
    $
    23,336Adjustments to reconcile net income to net cash flows provided by operating activities:Depreciation
    
    
    5,305
    
    
    
    4,092Deferred income taxes
    
    
    17,472
    
    
    
    21,777Non-cash lease restructuring costs
    
    
    5,210
    
    
    
    Amortization of marketable securities premiums, net
    
    
    2,071
    
    
    
    1,550Changes in operating assets and liabilities:Membership fees receivable, net
    
    
    19,097
    
    
    
    21,605Deferred incentive compensation
    
    
    1,971
    
    
    
    215Prepaid expenses and other current assets
    
    
    (1,857
    )
    
    
    (2,481
    )Accounts payable and accrued liabilities
    
    
    3,356
    
    
    
    (669
    )Accrued incentive compensation
    
    
    (277
    )
    
    
    (2,385
    )Deferred revenues
    
    
    (12,937
    )
    
    
    (15,155
    )Other liabilities
    
    
    549
    
    
    
    94Net cash flows provided by operating activities
    
    
    76,627
    
    
    
    51,979CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment, net
    
    
    (6,609
    )
    
    
    (4,634
    )Maturities (purchases) of marketable securities, net
    
    
    (160,796
    )
    
    
    (49,166
    )Net cash flows used in investing activities
    
    
    (167,405
    )
    
    
    (53,800
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the exercise of common stock options
    
    
    55,322
    
    
    
    8,031Proceeds from the issuance of common stock under the employee stock purchase plan
    
    
    662
    
    
    
    540Purchase of treasury stock
    
    
    (22,736
    )
    
    
    (19,204
    )Payment of dividends
    
    
    (8,647
    )
    
    
    Reimbursement of common stock offering costs
    
    
    225
    
    
    
    175Payment of common stock offering costs
    
    
    (121
    )
    
    
    (159
    )Net cash flows provided by (used in) financing activities
    
    
    24,705
    
    
    
    (10,617
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (66,073
    )
    
    
    (12,438
    )Cash and cash equivalents, beginning of period
    
    
    118,568
    
    
    
    71,346Cash and cash equivalents, end of period
    
    $
    52,495
    
    
    $
    58,908
 See accompanying notes to condensed consolidated financial statements. 5




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##### 



THE CORPORATE EXECUTIVE BOARD COMPANY NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Description of operations The Corporate Executive Board Company (the Company) provides best
practices research, decision support tools and executive education focusing on
corporate strategy, operations and general management issues. Best practices
research supports senior executive decision making by identifying and analyzing
specific management initiatives, processes and strategies that have been
determined to produce the best results in solving common business problems or
challenges. For a fixed annual fee, members of each of its research programs
have access to an integrated set of services, including best practices research
studies, executive education seminars, customized research briefs and Web-based
access to the programs content database and decision support tools. Note 2  Condensed
consolidated financial statements The accompanying condensed consolidated financial statements
included herein have been prepared by us in accordance with U.S.
generally accepted accounting
principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC) for reporting on Form 10-Q. Accordingly,
certain information and footnote disclosures required for complete consolidated
financial statements are not included herein. It is recommended that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and related notes as reported on the
Companys Form 10-K filed with the SEC on March 3, 2004. In managements opinion, all adjustments, consisting of normal recurring
adjustments, 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 condensed
consolidated balance sheet presented as of December 31, 2003 has been derived
from the financial statements that have been audited by the Companys
independent auditors. The results of operations for the three and nine months
ended September 30, 2004, may not be indicative of the results that may be
expected for the year ending December 31, 2004, or any other period within
calendar year 2004. Note 3  Public offerings of common stock In May 2004 and March 2003, certain of the Companys shareholders agreed
to sell 1.9 million and 588,000 shares of its common stock, respectively, in
registered public offerings. The Company did not directly receive any proceeds
from the sale of its common stock pursuant to these registered public
offerings. However, it did receive cash from the exercise of common stock
options in conjunction with these registered public offerings. In addition, the
Company recognized $408,000 and $83,000 in compensation expense reflecting
additional Federal Insurance Corporation Act (FICA) taxes as a result of the
taxable income that the employees recognized upon the exercise of non-qualified
common stock options in conjunction with the registered public
offerings in May
2004 and March 2003, respectively. The additional FICA taxes are included
within Stock option and related expenses in the condensed
consolidated
statements of income for the nine months ended September 30, 2004 and
2003. Note 4  Earnings per share Basic earnings per share was computed by dividing net income by the number
of basic weighted average common shares outstanding during the period. Diluted
earnings per share was computed by dividing net income by the number of diluted
weighted average common shares outstanding during the period. The number of
weighted average common share equivalents outstanding has been determined in
accordance with the treasury stock method. Common share equivalents consist of
common shares issuable upon the exercise of outstanding common stock options. A
reconciliation of basic to diluted weighted average common shares outstanding
is as follows (in thousands): Three months
    
    Nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Basic weighted average common shares outstanding
    
    
    38,990
    
    
    
    37,308
    
    
    
    38,131
    
    
    
    37,298Weighted average common share equivalents outstanding
    
    
    1,389
    
    
    
    1,454
    
    
    
    1,543
    
    
    
    1,105Diluted weighted average common shares outstanding
    
    
    40,379
    
    
    
    38,762
    
    
    
    39,674
    
    
    
    38,403
 6




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Note 5  Comprehensive income Comprehensive income is defined as net income plus the net-of-tax impact
of foreign currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income for the three months ended September 30, 2004
and 2003 was $14.4 million and $5.1 million, respectively. Comprehensive income
for the nine months ended September 30, 2004 and 2003 was $35.8 million and
$23.3 million, respectively. The accumulated elements of other comprehensive income,
net of tax, included within stockholders equity on the condensed consolidated
balance sheets are comprised primarily of the change in unrealized gains
(losses) on available-for-sale marketable securities. Note 6  Supplemental cash flows disclosures For the nine months ended September 30, 2004 and 2003, the Company
recognized $15.2 million and $4.5 million, respectively, in stockholders
equity for tax deductions associated with the exercise of non-qualified common
stock options and disqualifying dispositions of incentive stock options. Note 7  Stockholders equity In February 2003, the Companys Board of Directors authorized a share
repurchase of up to $75 million of the Companys common stock. Repurchases will
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. The
Company will fund its share repurchases with cash on hand and cash generated
from operations. As of September 30, 2004 and December 31, 2003, the Company
has repurchased 1,016,273 shares and 552,007 shares, respectively, of treasury
stock at a total cost of $42.4 million and $19.6 million, respectively. In
the nine months ended September 30, 2004, the Board of Directors
declared quarterly dividends of $0.075 per share which were paid on
March 31, 2004, June 30, 2004 and September 30, 2004 to stockholders of record
at the close of business on March 10, 2004, June 15, 2004 and September 15,
2004, respectively. For the nine months ended September 30, 2004, the Company
paid dividends to stockholders of record totaling $8.6 million. See Note 12
for information on the declaration of the fourth quarter dividend. The Company paid no cash
dividends prior to January 1, 2004. Note 8  Stock-based compensation At September 30, 2004, the Company had stock-based employee compensation
plans. These plans provide for the granting of stock options and restricted
stock to employees and non-employee members of our Board of Directors. The
Company accounts for those plans using the intrinsic value method of expense
recognition and measurement prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees,and related interpretations (collectively, APB No.
25). Accordingly, no stock-based compensation cost is reflected in net income,
as reported, as all stock options granted under the Companys stock-based
employee compensation plans have an exercise price equal to the market value of
the underlying common stock on the date of grant. FASB Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123), as amended by FASB Statement No.
148, Accounting for Stock-Based Compensation Transition and Disclosure,
established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. Pro forma information
regarding net income is required by SFAS No. 123, as amended, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method as prescribed by SFAS No. 123, as amended. 7




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The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation. For purposes of pro forma
disclosures, the estimated fair value of options is amortized to expense over
the vesting period. Three months
    
    Nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    11,954
    
    
    $
    5,513
    
    
    $
    36,667
    
    
    $
    23,336Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    4,334
    
    
    
    5,068
    
    
    
    12,027
    
    
    
    13,009Pro forma net income
    
    $
    7,620
    
    
    $
    445
    
    
    $
    24,640
    
    
    $
    10,327Earnings per share:Basic  as reported
    
    $
    0.31
    
    
    $
    0.15
    
    
    $
    0.96
    
    
    $
    0.63Basic  pro forma
    
    $
    0.20
    
    
    $
    0.01
    
    
    $
    0.65
    
    
    $
    0.27Diluted  as reported
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.92
    
    
    $
    0.61Diluted  pro forma
    
    $
    0.19
    
    
    $
    0.01
    
    
    $
    0.63
    
    
    $
    0.27Assumptions:Risk-free interest rate
    
    
    3.6
    %
    
    
    3.1
    %
    
    
    3.7
    %
    
    
    2.9
    %Dividend yield
    
    
    0.5
    %
    
    zero
    
    
    
    0.6
    %
    
    zeroExpected life of option (in years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Expected volatility
    
    32
    %
    
    
    55
    %
    
    38
    %
    
    
    55
    %Weighted-average fair value of options granted
    
    $
    19.24
    
    
    $
    21.38
    
    
    $
    17.58
    
    
    $
    16.14
 Under the SFAS No. 123 pro forma disclosure provisions, the fair value of
options granted subsequent to December 15, 1995, has been estimated using the
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including
the expected stock price characteristics that are significantly different from
those of traded options. Because changes in the subjective input assumptions
can materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of the Companys stock rights. Note 9  Income taxes As
of September 30, 2003, the Company recognized its new status as a
Qualified High Technology Company (QHTC) in accordance with the New E-Conomy
Transformation Act of 2000 (the Act) that modifies the Washington, D.C.
income and franchise tax, sales and use tax and personal property tax
regulations, effective April 2001. For the three months ended
September 30, 2003, the Company recorded a non-cash income tax
charge to earnings of $8.2 million to reflect the impact on its deferred tax
assets of lowering the Washington, D.C. QHTC income tax rate to 0.0%,
from
9.975% prior to the QHTC qualification, partially offset by the recognition of
certain Washington, D.C. QHTC income tax credits. Additionally, during the
three months ended September 30, 2003, the Company reduced the provision for
income taxes by $2.4 million to reflect a true-up of the provision for income
taxes originally recorded at 39.4% during the six months ended June 30, 2003. Note 10  Lease
restructuring costs In
August 2004, the Company entered into a new twenty-year lease agreement for office
facilities in Rosslyn, Virginia beginning in early 2008. Contemporaneously
with the signing of the new Virginia office facilities lease, the
Companys previous obligations for several existing office
facility leases were assigned to, and assumed by, the lessor of the
new Virginia office facilities. As a result, the Company recorded a $5.2 million, net non-cash lease
restructuring charge comprised of the items further described below.
The Company recorded a non-cash
charge of $5.4 million which represents its estimate of the
lease incentives attributable to the assumption of the previous lease
agreements by the new lessor. Since the new lessor will assume the
remaining lease payments of the previous leases, the Company will recognize the
$5.4 million lease incentive on a straight-line basis over the
term of the new Virginia office facilities lease. The Company also
recorded a non-cash charge of $125,000 which represents our estimate
of certain restoration costs the Company may be required to pay for
office space that the Company will no longer occupy.
In addition, the Company recorded a non-cash benefit of approximately $351,000
for the reversal of a portion of certain deferred rental obligations that were
previously being recognized over the life of the original lease term, resulting
in constant rent expense over the original lease term. The assumption of a
lease agreement resulted in the reduction of the original lease term and,
therefore, the reversal of rent expense previously recognized for deferred rental obligations
that the Company will no longer incur. The total $5.2 million, net non-cash lease restructuring costs described
above are included within Non-cash lease restructuring
costs in the condensed consolidated statements of income. The
Company also incurred approximately $909,000 for additional external
financial and legal consulting costs to restructure existing lease
agreements and for the write-off of certain deferred leasehold improvement costs for office space that it will no longer occupy.
These expenses and costs are included within General and
administrative expenses in the condensed consolidated statements
of income. 8




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##### 



Note 11  Commitments
and Contingencies The
Company leases office facilities in the United States and the United
Kingdom expiring on various dates over the next twenty-three years.
Certain lease agreements include provisions for rental escalations
and require us to pay for executory costs such as taxes and
insurance. The Companys future minimum rental payments under non-cancelable operating
leases, excluding executory costs, total $590.8 million at September 30, 2004
and are scheduled to be paid out as follows: $2.3 million for the three months
ending December 31, 2004, $10.5 million for the year ending December 31, 2005,
$15.2 million for the year ending December 31, 2006, $15.5 million for the year
ending December 31, 2007, $26.3 million for the year ending December 31, 2008
and $521.0 million thereafter. The increase in the future commitments is primarily due to
the lease payments for the new Rosslyn, Virginia headquarters scheduled to
begin in early 2008 for a term of twenty years. See note 10  Lease
restructuring costs. Under the terms of the new office lease agreement, the Company has committed
to providing the landlord security deposits totaling $50 million to
be posted in two installments. To date, the Company has entered into a letter of credit agreement for $25.0
million with a commercial bank to provide a security deposit for the Rosslyn,
Virginia lease. The letter of credit will expire in February 2005, but can be
extended until August 2009. The Company has pledged $25.0 million of long-term
marketable securities as collateral under this letter of credit agreement. To
date, no amounts have been drawn on this letter of credit. Note 12  Subsequent events Stockholders equity In October 2004,
the Board of Directors declared a quarterly dividend of
$0.075 per share. The Company will fund its dividend payments with cash on hand
and cash generated from operations. The dividend is payable on December 31,
2004 to stockholders of record at the close of business on December 15, 2004. Income taxes In October 2004,
certain tax incentives within the Internal Revenue Code were extended for businesses to hire individuals who both live and work in a
designated empowerment zone within Washington, D.C. (the Employment Credits).
The Employment Credits originally expired on December 31, 2003, but were
recently extended through December 31, 2005, at which point the Employment
Credits will terminate. From 1999 through 2003, the Companys effective income
tax rate was lower as the Company recognized certain Employment Credits within
its Federal income tax calculation. At the time of the filing of this Quarterly Report on Form 10-Q with the
Securities and Exchange Commission, the Company is reviewing the
applicable provisions of the Internal Revenue Code regarding the extension
provisions of the Employment Credits and therefore has not yet determined the
benefit, if any, that the Employment Credits will have on its effective income
tax rate for the three months and year ending December 31, 2004. The Company
will recognize any income tax benefit from the Employment Credits for 2004 during the
quarter ended December 31, 2004. Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. This Quarterly Report on Form 10-Q of The Corporate Executive Board
Company contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. You are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below and in our filings with the Securities and Exchange Commission, and
consequently, actual operations and results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause
actual results to differ materially from those indicated by forward-looking
statements include, among others, our dependence on renewals of our
membership-based services, our inability to know in advance if new products
will be successful, difficulties we may experience in anticipating market
trends, our need to attract and retain a significant number of highly skilled
employees, restrictions on selling our products and services to the health care
industry, continued consolidation in the financial institutions industry, which
may limit our business with such companies, fluctuations in operating results,
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 unconditional service
guarantee, various factors that could affect our estimated income tax rate or
our ability to use our existing deferred tax assets, whether the Washington,
D.C. Office of Tax and Revenue withdraws our QHTC status and possible
volatility of our stock price. These factors are discussed more fully in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors sections of our filings with the Securities and
Exchange Commission, including, but not limited to, the 2003 annual report on
Form 10-K. Overview We provide best practices research and quantitative analysis focusing on
corporate strategy, operations and general management issues. Best practices
research supports senior executive decision making by identifying and analyzing
specific management initiatives, processes and strategies that have been
determined to produce the best results in solving common business problems or
challenges. For a fixed annual fee, members of each of our research programs
have access to an integrated set of services, including best practices research
studies, executive education seminars, customized research briefs and Web-based
access to the programs content database and decision support tools. Memberships, which are principally annually renewable agreements, are
generally payable by members at the beginning of the contract term. Billings
attributable to memberships in our research programs initially are recorded as
deferred revenues and then recognized pro rata over the membership contract
term, which is typically 12 months. At any time, a member may request a refund
of their membership fee for a research program, which is provided on a pro rata
basis relative to the remaining term of the membership. Our growth strategy is to cross-sell additional research programs to
existing members, to add new members and to develop new research programs and
decision support tools. The implementation of our growth strategy can be seen
in our operating results. One measure of our business is the annualized
contract value, which we calculate as the aggregate annualized revenue
attributed to all agreements in effect at a given point in time, without regard
to the remaining duration of any such agreement. Our experience has been that a
substantial portion of members renew subscriptions for an equal or higher level
each year. Contract value has increased 30.2% to $270.5 million at September
30, 2004, from $207.8 million at September 30, 2003. 9




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Our operating costs and expenses consist of cost of services, member
relations and marketing, general and administrative
expenses, depreciation, non-cash lease restructuring costs and stock option and related expenses. Cost of services
represents the costs associated with the production and delivery of our
products and services, including compensation of research personnel and
in-house faculty, the production of published materials, the organization of
executive education seminars and all associated support services. Member
relations and marketing expenses include the costs of acquiring new members,
the costs of maintaining and renewing existing members, compensation expense
(including sales commissions), travel and all associated support services.
General and administrative expenses include the costs of human resources and
recruiting, finance and accounting, management information systems, facilities
management, new product development and other administrative functions.
Non-cash lease restructuring costs primarily consists of a non-cash charge related to the
assumption of several of the Companys prior lease agreements by a new lessor.
Stock option and related expenses includes additional cash payroll taxes for
compensation expense relating to the taxable income recognized by employees
upon the exercise of non-qualified common stock options. Results of Operations The following table sets forth certain financial data as a percentage of
revenues for the periods indicated: Three months
    
    Nine monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    30.2
    
    
    
    33.9
    
    
    
    32.2
    
    
    
    33.9Gross profit
    
    
    69.8
    
    
    
    66.1
    
    
    
    67.8
    
    
    
    66.1Costs and expenses:Member relations and marketing
    
    
    25.8
    
    
    
    26.7
    
    
    
    27.1
    
    
    
    26.2General and administrative
    
    
    12.9
    
    
    
    9.8
    
    
    
    11.9
    
    
    
    10.4Depreciation
    
    
    2.7
    
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.7Non-cash lease restructuring costs
    
    
    7.2
    
    
    
    
    
    
    
    2.6
    
    
    
    Stock option and related expenses
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1Total costs and expenses
    
    
    48.5
    
    
    
    39.1
    
    
    
    44.4
    
    
    
    39.5Income from operations
    
    
    21.3
    
    
    
    27.0
    
    
    
    23.5
    
    
    
    26.6Other income, net
    
    
    3.6
    
    
    
    3.6
    
    
    
    3.5
    
    
    
    3.7Income before provision for income taxes
    
    
    24.9
    
    
    
    30.6
    
    
    
    27.0
    
    
    
    30.3Provision for income taxes
    
    
    8.4
    
    
    
    20.3
    
    
    
    9.0
    
    
    
    14.9Net income
    
    
    16.5
    %
    
    
    10.3
    %
    
    
    18.0
    %
    
    
    15.4
    %
 Three and Nine Months Ended September 30, 2004 and September 30, 2003 Revenues.Revenues increased 34.7% to $72.4 million for the three months
ended September 30, 2004, from $53.8 million for the three months ended
September 30, 2003. Revenues increased 34.5% to $203.6 million for the nine
months ended September 30, 2004, from $151.4 million for the nine months ended
September 30, 2003. The largest driver of the increase in revenues during the
three and nine months ended September 30, 2004 was the cross-selling of
additional subscriptions to existing members. Other drivers contributing to the
increase in revenues for the three and nine months ended September 30, 2004
included the introduction of new research programs, the
addition of new members and, to a lesser extent, price increases. Cost of services.Cost of services increased 19.9% to $21.9 million for
the three months ended September 30, 2004, from $18.2 million for the three
months ended September 30, 2003. Cost of services increased 27.5% to $65.5
million for the nine months ended September 30, 2004, from $51.4 million for
the nine months ended September 30, 2003. The increase in cost of services was
principally due to compensation costs for new research and executive education
staff, an increase in external consulting expenses to support existing programs
and an increase in travel costs due to an increase of executive education
seminars. Cost of services as a percentage of revenues decreased to 30.2% for
the three months ended September 30, 2004, from 33.9% for the three months
ended September 30, 2003. Cost of services as a percentage of revenues
decreased to 32.2% for the nine months ended September 30, 2004, from 33.9% for
the nine months ended September 30, 2003. The year-over-year changes in the
cost of services as a percentage of revenue are due to the leverage inherent in
our membership-based business model and a shift in the timing of our publishing
and executive education seminar schedule relative to the period ended September 30, 2003. Cost of services as a percentage of revenues may fluctuate
from quarter to quarter due to the timing of executive education seminars, the
timing of the completion and delivery of best practices research studies and
the introduction of new research programs. Accordingly, the cost of services as
a percentage of revenues for the three and nine months ended September 30, 2004
may not be
indicative of future quarterly or annual results. 10




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Gross profit.Historically, the gross profit as a percentage of revenues,
or gross profit margin, has fluctuated based upon the growth in revenues offset
by the costs of delivering best practices research studies, the timing of
executive education seminars, the volume of customized research briefs, the
hiring of personnel, and the introduction of new membership programs.
Accordingly, the gross profit margin for the three and nine months ended
September 30, 2004, may not be indicative of future results. A number of
factors that impact gross profit margin are discussed in the Cost of services
description above. Member relations and marketing.Member relations and marketing costs
increased 29.8% to $18.7 million for the three months ended September 30, 2004
from $14.4 million for the three months ended September 30, 2003. Member
relations and marketing costs increased 38.7% to $55.1 million for the nine
months ended September 30, 2004 from $39.7 million for the nine months ended
September 30, 2003. The year-over-year increase in member relations and
marketing costs is due to an increase in member relations and
marketing personnel and related costs, an increase in marketing
travel expense to support higher revenue activity, and commission
expenses associated with increased revenue.
Member relations and marketing costs as a percentage of revenues decreased to
25.8% for the three months ended September 30, 2004, from 26.7% for the three
months ended September 30, 2003 reflecting a larger increase in revenue growth for the three months ended
September 30, 2004, as compared to 2003. Member relations and marketing costs as a
percentage of revenues increased to 27.1% for the nine months ended September
30, 2004, from 26.2% for the nine months ended September 30,
2003, due primarily to the changes in member relations and marketing
costs noted above. General and administrative.General and administrative expenses increased
76.1% to $9.3 million for the three months ended September 30, 2004, from $5.3
million for the three months ended September 30, 2003. General and
administrative expenses increased 53.9% to $24.3 million for the nine months
ended September 30, 2004, from $15.8 million for the nine months ended
September 30, 2003. The year-over-year increase in general and administrative
expenses is driven by an increase in staff and related costs and the use of
external financial, legal and information technology consultants to support our
organizational growth and our compliance with certain regulatory requirements.
In addition, in August 2004, the Company entered into a new lease agreement for
office facilities in Rosslyn, Virginia beginning 2008. In association with the
new lease agreement, we incurred additional external financial and legal
consulting costs to restructure existing lease agreements and we
recorded $909,000 to expense certain deferred leasehold improvement costs for office space that
it will no longer occupy. See further discussion of the
new lease agreement in the Non-cash lease restructuring costs
section below. Depreciation.Depreciation expense increased 46.3% to $2.0 million for the
three months ended September 30, 2004, from $1.3 million for the three months
ended September 30, 2003. Depreciation expense increased 29.6% to $5.3 million
for the nine months ended September 30, 2004, from $4.1 million for the nine
months ended September 30, 2003. The increase in depreciation expense was
principally due to the additional investment in leasehold improvements for
additional office space in London, England and new computer equipment and
software to support our organizational growth. Non-cash lease restructuring costs.
In August 2004, the Company entered into a new twenty-year lease agreement for
office facilities in Rosslyn, Virginia beginning in early 2008.
Contemporaneously with the signing of the new Virginia office facilities lease,
the Companys previous obligations for several existing office facility leases
were assigned to, and assumed by, the lessor of the new Virginia office
facilities. As a result, the Company recorded a $5.2 million, net non-cash
lease restructuring charge comprised of the items further described below. The
Company recorded a non-cash charge of $5.4 million which represents our
estimate of the lease incentives attributable to the assumption of the previous
lease agreements by the new lessor. The Company will recognize the $5.4 million
lease incentive on a straight-line basis over the term of the new Virginia
office facilities lease. The Company also recorded a non-cash charge of
$125,000 which represents our estimate of certain restoration costs the Company
may be required to pay for office space which the Company will no longer
occupy. In addition, the Company recorded a non-cash benefit of approximately
$351,000 for the reversal of a portion of certain deferred rental
obligations that
were previously being recognized over the life of the original lease term,
resulting in constant rent expense over the original lease term. The assumption
of a lease agreement resulted in the reduction of the original lease term and,
therefore, the reversal of rent expense previously recognized for deferred rental obligations that the Company will no longer incur. Stock option and related expenses.We recognized zero dollars in
compensation expense for the three months ended September 30, 2004 and 2003,
respectively. We recognized $408,000 and $113,000 in compensation expense for
the nine months ended September 30, 2004 and 2003, respectively, reflecting
additional FICA taxes as a result of the taxable income that the employees
recognized upon the exercise of non-qualified common stock options, primarily
in conjunction with the sale of our common stock in the registered public
offering in May 2004 and March 2003. See further discussion of the sale of our
common stock in the registered public offerings of common stock in the
Liquidity and Capital Resources section below. Provision for income taxes. We recorded a provision for income taxes of
$6.1 million and $10.9 million for the three months ended September 30, 2004
and 2003, respectively. We recorded a provision for income taxes of $18.3
million and $22.5 million for the nine months ended September 30, 2004 and
2003, respectively. The decrease in the provision for income taxes and the
effective income tax rate for the three and nine months ended September 30,
2004, as compared to 2003, is principally due to an $8.2 million non-cash income tax charge to earnings
in 2003 to recognize the impact on our deferred tax assets of
lowering the Washington, D.C. QHTC income tax rate to zero to reflect our new status as a Qualified
High Technology Company (QHTC) within Washington, D.C. 11




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During the three months ended September 30, 2004, we increased our annual
effective income tax rate to 33.25%, from 33.0%, to reflect the
decreased income tax benefit we receive from interest income derived from Washington, D.C. tax
exempt notes and bonds. We reflected the cumulative increase in the annual effective
income tax rate to 33.25% during the three months ended September
30, 2004. Other
income, net. Other income, net increased 36.5% to $2.6 million for
the three months ended September 30, 2004, from $1.9 million for the three
months ended September 30, 2003. Other income, net increased 27.9% to $7.1
million for the nine months ended September 30, 2004, from $5.6 million for the
nine months ended September 30, 2003. The year-over-year growth in other
income, net, was principally from interest income associated with the increased
levels of cash, cash equivalents and marketable securities and the gain on the
sale of available-for-sale marketable securities. Cash, cash equivalents and
marketable securities increased as a result of cash flows from operating
activities and cash flows from financing activities as further discussed in the
Liquidity and Capital Resources section below. Liquidity and Capital Resources Cash flows from operating activities.We have financed our operations to
date through funds generated from operating activities. Membership
subscriptions, which are principally annually renewable agreements, are
generally payable by members at the beginning of the contract term. The
combination of revenue growth, profitable operations and advance payment of
membership subscriptions has historically resulted in net positive cash flows
provided by operating activities. We generated net cash flows from operating
activities of $76.6 million and $52.0 million for the nine months ended
September 30, 2004 and 2003, respectively. For the nine months ended September
30, 2004 and 2003, operating cash flows were generated within the period
principally by net income, the collection of membership fees
receivable, and the utilization of tax benefits created by the
exercise of common stock options, offset by a decrease in deferred revenues. As of September 30, 2004, we had cash,
cash equivalents and marketable securities of $385.6 million. We expect that
our current cash, cash equivalents and marketable securities balances and
anticipated net positive cash flows from operations will satisfy working
capital, financing, and capital expenditure requirements for the next twelve
months. Cash flows from investing activities.We used net cash flows in investing
activities of $167.4 million and $53.8 million during the nine months ended
September 30, 2004 and 2003, respectively. During the nine months ended
September 30, 2004 we purchased available-for-sale marketable
securities, net of sales and maturities,
of $160.8 million and purchased leasehold improvements for additional office
space in London, England and computer equipment and software totaling $6.6
million. During the nine months ended September 30, 2003 investing cash flows
were used for the purchase, net of sales and maturities, of available-for-sale
marketable securities of $49.2 million and for the purchases of leasehold
improvements for additional office space in Washington, DC, computer equipment
and software of $4.6 million. Cash flows from financing activities.We generated net cash flows from
financing activities of $24.7 million and used net cash flows from financing
activities of $10.6 million during the nine months ended September 30, 2004 and
2003, respectively. Net cash generated from financing activities during the
nine months ended September 30, 2004 was primarily attributed to the receipt
of $55.3 million in cash from the exercise of common stock options, primarily
in conjunction with the sale of 1.9 million shares of our common stock in a
registered public offering in May 2004, which was offset by the repurchase of
our common stock during the period, which totaled $22.7 million, and the
payment of dividends during the period, which totaled $8.6 million. Net cash
used in financing activities during the nine months ended September 30, 2003
was primarily attributed to the repurchase of our common stock during the
period, which totaled $19.2 million, partially offset by the receipt of $8.0
million in cash from the exercise of common stock options, primarily in
conjunction with the sale of 588,000 shares of our common stock in a registered
public offering in March 2003. In addition, in
October 2004 the Board of Directors declared a quarterly
dividend of $0.075 per share which will be payable in December 2004. See
further discussion of the quarterly dividend and the effect of this event on
the cash flows from financing activities in Note 12  Subsequent events to
the condensed consolidated financial statements which can be found in this Form
10-Q under the heading Item 1. Financial Statements. We
lease office facilities in the United States and the United Kingdom
expiring on various dates over the next twenty-three years. Certain
lease agreements include provisions for rental escalations and
require us to pay for executory costs such as taxes and insurance.
Our future minimum rental payments under non-cancelable operating
leases, excluding executory costs and considering the new Rosslyn,
Virginia lease agreement described in Note 10  Lease
restructuring costs and Note 11  Commitments and
contingencies to the condensed consolidated financial statements which can be found
in this Form 10-Q under the heading Item 1. Financial
Statements., total $590.8 million. Under the terms of the new Rosslyn, Virginia lease agreement, we have committed
to providing the landlord security deposits totaling $50 million to
be posted in two installments. To date, we have entered into a letter of credit agreement for $25.0
million with a commercial bank to provide a security deposit for the Rosslyn,
Virginia lease. The letter of credit will expire in February 2005, but can be
extended until August 2009. We have pledged $25.0 million of long-term
marketable securities as collateral under this letter of credit agreement. To
date, no amounts have been drawn on this letter of credit. At September 30, 2004 and December 31, 2003,
we have no off-balance sheet financing or other arrangements with
unconsolidated entities or financial partnerships (such as entities often
referred to as structured finance or special purpose entities) established for
purposes of facilitating off-balance sheet financing or other debt arrangements
or for other contractually narrow or limited purposes. 12




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##### 



Critical Accounting Policies Our
accounting policies, which are in compliance with U.S. generally
accepted accounting principles, require us to apply
methodologies, estimates and judgments that have a significant impact on the
results we report in our financial statements. In our annual report on Form
10-K we have discussed those policies that we believe are critical and require
the use of complex judgment in their application. Since the date of that Form
10-K, there have been no material changes to our critical accounting policies
or the methodologies or assumptions applied under them. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to interest rate risk primarily through our portfolio of
cash, cash equivalents and marketable securities, which is designed for safety
of principal and liquidity. Cash and cash equivalents consist of highly liquid
U.S. Treasury obligations with maturities of less than three months. Marketable
securities consist primarily of U.S. Treasury notes and bonds and insured
Washington, D.C. tax exempt notes and bonds. We perform periodic evaluations of
the relative credit ratings related to the cash, cash equivalents and
marketable securities. This portfolio is subject to inherent interest rate risk
as investments mature and are reinvested at current market interest rates. We
currently do not use derivative financial instruments to adjust our portfolio
risk or income profile. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures: The Companys Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated
the effectiveness of the Companys disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this quarterly report based on the evaluation of these controls and
procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act. The
Companys management, including the CEO and CFO, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. Based on their
evaluation, such officers have concluded that, as of the end of the period
covered by this quarterly report, the Companys disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company required to be included in the Companys
periodic filings under the Exchange Act. During the period covered by this
quarterly report, there have been no changes to our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. 13




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##### 



PART II. OTHER INFORMATION Item 1. Legal Proceedings. From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We currently are
not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material
adverse effect on our business, financial condition or operating results. Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds. Issuer Purchases of Equity Securities Total Number ofSharesPurchased as
    
    Approximate $ ValueTotal Number of
    
    Average
    
    Part of a
    
    of Shares That MayShares
    
    Price
    
    Publicly
    
    Yet Be PurchasedPurchased
    
    Paid per Share
    
    Announced Plan
    
    Under the PlansJuly 1, 2004 to July 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    36,648,963August 1, 2004 to August 31, 2004
    
    
    72,500
    
    
    $
    55.24
    
    
    
    72,500
    
    
    $
    32,644,107September 1, 2004 to September
30, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    32,644,107Total
    
    
    72,500
    
    
    $
    55.24
    
    
    
    72,500
 In February 2003, the Companys Board of Directors authorized a
share repurchase of up to $75 million of the Companys common
stock. Repurchases will 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. The Company will fund its share repurchases
with cash on hand and cash generated from operations. As of September
30, 2004 and December 31, 2003, the Company has repurchased 1,016,273
shares and 552,007 shares, respectively, of treasury stock at a total
cost of $42.4 million and $19.6 million, respectively. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits. (a) Exhibits. Exhibit No.
    
    Description31.1
    
    
    Certification of the Chief Executive Officer pursuant to Rule 13a  14(a) of the Securities
Exchange Act of 1934.31.2
    
    
    Certification of the Chief Financial Officer pursuant to Rule 13a  14(a) of the Securities
Exchange Act of 1934.32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350.
 14




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: November 8, 2004 The Corporate Executive Board Company By: /s/ Timothy R.
Yost
Timothy R. Yost
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)