##### 



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 March 31, 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
(State or Other Jurisdiction of
Incorporation or Organization)
    
    52-2056410
(I.R.S. Employer
Identification Number)2000 Pennsylvania Avenue, NW
Suite 6000
Washington, D.C.
(Address of Principal Executive Offices)
    
    20006
(Zip Code)
 (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 x     No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x     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 April 30, 2004, we had outstanding 36,899,995 shares of Common Stock, par
value $0.01 per share, and had outstanding no shares of Preferred 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 March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March
31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 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.
    
    
    14PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    14Item 2. Change in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
    
    
    14Item 3. Defaults Upon Senior Securities.
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    14Item 5. Other Information.
    
    
    14Item 6. Exhibits and Reports on Form 8-K.
    
    
    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) March 31, 2004
    
    December 31, 2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    84,553
    
    
    $
    118,568Marketable securities
    
    
    27,262
    
    
    
    11,859Membership fees receivable, net
    
    
    43,066
    
    
    
    63,160Deferred income taxes, net
    
    
    31,433
    
    
    
    30,972Deferred incentive compensation
    
    
    6,929
    
    
    
    7,332Prepaid expenses and other current assets
    
    
    8,478
    
    
    
    5,933Total current assets
    
    
    201,721
    
    
    
    237,824Deferred income taxes, net
    
    
    
    
    
    
    6,701Marketable securities
    
    
    191,141
    
    
    
    163,492Property and equipment, net
    
    
    18,696
    
    
    
    15,465Total assets
    
    $
    411,558
    
    
    $
    423,482Liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    11,423
    
    
    $
    12,480Accrued incentive compensation
    
    
    7,574
    
    
    
    11,072Deferred revenues
    
    
    155,681
    
    
    
    154,844Total current liabilities
    
    
    174,678
    
    
    
    178,396Other liabilities
    
    
    3,150
    
    
    
    3,093Total liabilities
    
    
    177,828
    
    
    
    181,489Stockholders equity:Preferred stock, par value $0.01; 5,000,000 shares authorized, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01; 100,000,000 shares authorized and
37,843,108 and 37,835,075 shares issued, and 36,899,335 and
37,283,068 shares outstanding as of March 31, 2004 and December 31,
2003, respectively
    
    
    378
    
    
    
    378Additional paid-in capital
    
    
    143,629
    
    
    
    143,426Retained earnings
    
    
    122,715
    
    
    
    113,532Accumulated elements of comprehensive income
    
    
    5,359
    
    
    
    4,277Treasury stock, 943,773 and 552,007 shares, at cost, at March 31,
2004 and December 31, 2003, respectively
    
    
    (38,351
    )
    
    
    (19,620
    )Total stockholders equity
    
    
    233,730
    
    
    
    241,993Total liabilities and stockholders equity
    
    $
    411,558
    
    
    $
    423,482
 3




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##### 



THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited) Three months endedMarch 31,2004
        
        2003Revenues
        
        $
        63,979
        
        
        $
        47,283Cost of services
        
        
        21,400
        
        
        
        16,118Gross Profit
        
        
        42,579
        
        
        
        31,165Costs and expenses:Member relations
            and marketing
        
        
        17,881
        
        
        
        12,387General and administrative
        
        
        7,238
        
        
        
        5,330Depreciation
        
        
        1,748
        
        
        
        1,356Stock option and
            related expenses(1)
        
        
        
        
        
        
        111Total costs and expenses
        
        
        26,867
        
        
        
        19,184Income from operations
        
        
        15,712
        
        
        
        11,981Other income, net
        
        
        2,168
        
        
        
        1,775Income before provision
            for income taxes
        
        
        17,880
        
        
        
        13,756Provision for income
            taxes
        
        
        5,900
        
        
        
        5,420Net income
        
        $
        11,980
        
        
        $
        8,336Earnings per share:Basic
        
        $
        0.32
        
        
        $
        0.22Diluted
        
        $
        0.31
        
        
        $
        0.22Dividends per share
        
        $
        0.075
        
        
        
        Weighted average
            shares used in the calculation of earnings per share:Basic
        
        
        37,187
        
        
        
        37,223Diluted
        
        
        38,868
        
        
        
        37,878(1) Composition
            of Stock options and related expenses:Cost of services
        
        $
        
        
        
        $
        74Member relations
            and marketing
        
        
        
        
        
        
        3General and administrative
        
        
        
        
        
        
        34Total
        
        $
        
        
        
        $
        111
 4




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##### 



THE CORPORATE EXECUTIVE BOARD COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three months endedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    11,980
    
    
    $
    8,336Adjustments to reconcile net income to net cash flows provided by operating activities:Depreciation
    
    
    1,748
    
    
    
    1,356Deferred income taxes
    
    
    5,545
    
    
    
    5,420Amortization of marketable securities premiums, net
    
    
    727
    
    
    
    422Changes in operating assets and liabilities:Membership fees receivable, net
    
    
    20,094
    
    
    
    29,109Deferred incentive compensation
    
    
    403
    
    
    
    516Prepaid expenses and other current assets
    
    
    (2,545
    )
    
    
    (2,853
    )Accounts payable and accrued liabilities
    
    
    (1,057
    )
    
    
    63Accrued incentive compensation
    
    
    (3,498
    )
    
    
    (4,447
    )Deferred revenues
    
    
    837
    
    
    
    (9,877
    )Other liabilities
    
    
    57
    
    
    
    113Net cash flows provided by operating activities
    
    
    34,291
    
    
    
    28,158CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment, net
    
    
    (4,979
    )
    
    
    (1,482
    )Maturities and sales (purchases) of marketable securities, net
    
    
    (41,999
    )
    
    
    4,001Net cash flows provided by (used in) investing activities
    
    
    (46,978
    )
    
    
    2,519CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the exercise of common stock options
    
    
    
    
    
    
    7,326Proceeds from the issuance of common stock under the employee stock purchase plan
    
    
    200
    
    
    
    166Purchase of treasury shares
    
    
    (18,731
    )
    
    
    (13,398
    )Payment of dividends
    
    
    (2,797
    )
    
    
    Reimbursement of common stock offering costs
    
    
    
    
    
    
    175Payment of common stock offering costs
    
    
    
    
    
    
    (60
    )Net cash flows used in financing activities
    
    
    (21,328
    )
    
    
    (5,791
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (34,015
    )
    
    
    24,886Cash and cash equivalents, beginning of period
    
    
    118,568
    
    
    
    71,346Cash and cash equivalents, end of period
    
    $
    84,553
    
    
    $
    96,232
 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 unaudited consolidated financial statements
included herein have been prepared by us in accordance with accounting
principles generally accepted in the United States 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 months ended
March 31, 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 March 2003, certain of the Companys shareholders sold 588,000 shares
of its common stock in a registered public offering. The Company did not
directly receive any proceeds from the sale of its common stock pursuant to
this registered public offering. However, it did receive cash from the exercise
of common stock options in conjunction with the registered public offering. In
addition, the Company recognized $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 offering in
March 2003. The additional FICA taxes are included within Stock option and
related expenses on the condensed consolidated statements of income for the
three months ended March 31, 2003. 6




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##### 



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 monthsended March 31,2004
    
    2003Basic weighted average common shares outstanding
    
    
    37,187
    
    
    
    37,223Weighted average common share equivalents
outstanding
    
    
    1,681
    
    
    
    655Diluted weighted average common shares
outstanding
    
    
    38,868
    
    
    
    37,878
 Note 5  Comprehensive income Comprehensive income is defined as net income plus the net-of-tax impact
of foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. Comprehensive income for the three months ended March 31, 2004 and
2003 was $13.1 million and $8.0 million, respectively. The accumulated elements
of comprehensive income, net of tax, included within stockholders equity on
the condensed consolidated balance sheets are comprised solely of the change in
unrealized gains (losses) on available-for-sale marketable securities. Note 6  Supplemental cash flows disclosures For the three months ended March 31, 2003, we recognized $4.3 million in
stockholders equity for tax deductions associated with the exercise of
non-qualified common stock options and disqualifying dispositions of incentive
stock options. We did not recognize any deductions associated with the exercise
of non-qualified common stock options and disqualifying dispositions of
incentive stock options for the three months ended March 31, 2004. Estimated
current income tax payments for the three months ended March 31, 2004 and 2003 were $355,000 and $0, respectively. 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 March 31, 2004 and December 31, 2003, the Company
repurchased 943,773 shares and 552,007 shares, respectively, of treasury stock
at a total cost of $38.4 million and $19.6 million, respectively. In February 2004, the Companys Board of Directors declared a quarterly
dividend of $0.075 per share. The dividend was payable on March 31, 2004 to
stockholders of record at the close of business on March 10, 2004. On March 31, 2004, the Company paid cash dividends totaling $2.8
million. 7




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Note 8  Stock-based compensation At March 31, 2004, the Company had several 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. 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 EndedMarch 31,2004
    
    2003(In thousands, except pershare amounts)Net income, as reported
    
    $
    11,980
    
    
    $
    8,336Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net
of related tax effects
    
    
    4,906
    
    
    
    3,840Pro forma net income
    
    $
    7,074
    
    
    $
    4,496Earnings per share:Basic  as reported
    
    $
    0.32
    
    
    $
    0.22Basic  pro forma
    
    $
    0.19
    
    
    $
    0.12Diluted  as reported
    
    $
    0.31
    
    
    $
    0.22Diluted  pro forma
    
    $
    0.18
    
    
    $
    0.12Assumptions:Risk-free interest rate
    
    
    3.0
    %
    
    
    2.9
    %Dividend yield
    
    
    0.6
    %
    
    zeroExpected life of option (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    39
    %
    
    
    55
    %Weighted-average fair value of options granted
    
    $
    17.50
    
    
    $
    16.11
 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. 8




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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  Commitments and contingencies Washington, D.C. income tax incentives The Office of Tax and Revenue of the Government of the District of
Columbia (the Office of Tax and Revenue) has adopted regulations in
accordance with the New E-Conomy Transformation Act of 2000 (the Act) that
modify the income and franchise tax, sales and use tax and personal property
tax regulations, effective April 2001. Specifically, the regulations provide
certain credits, exemptions and other benefits to a Qualified High Technology
Company (QHTC). In October 2003, the Company received notification from the
Office of Tax and Revenue that its certification as a QHTC under the Act had
been accepted. As a QHTC, the Companys Washington, D.C. statutory income tax
rate will be 0.0% through 2005 and 6.0% thereafter, versus 9.975% prior to this
qualification, and the Company is also eligible for certain Washington, D.C.
income tax credits and other benefits. The Company filed a claim for refund of sales and use taxes previously
paid to the Office of Tax and Revenue on qualifying QHTC purchases under the
Act. In February 2004, the Company received a notice of refund denial for the
claim. The Company believes this is inconsistent with the position taken by
the QHTC Activity Review Committee of the Office of Tax and Revenue, which
accepted the Companys QHTC status in October 2003. The Company plans to appeal
the denial for refund of sales and use taxes. At March 31, 2003, the Company valued its deferred income tax assets and
liabilities using the currently enacted federal income tax rate of 35.0% and
the QHTC Washington, D.C. income tax rate of 0.0%. In addition, the Company has
continued to provide for income, sales and use taxes as if it were a QHTC. If
the Office of Tax and Revenue rescinds its acceptance of the Companys QHTC
certification, or the Company otherwise determines that such action is likely,
it will record a benefit to earnings representing the impact on its existing
deferred tax assets of increasing the Washington, D.C. income tax rate to
9.975%, offset by the elimination of certain Washington, D.C. income tax
credits which, as of March 31, 2004, would have been approximately $1.4
million. Note 10  Subsequent events In May 2004, certain of the Companys stockholders agreed to sell 1.9
million shares of the Companys common stock in a registered public offering.
The common stock to be sold in the registered public offering will consist
primarily of common stock obtained by employees and directors from the exercise
of common stock options. The Company will not directly receive any proceeds
from the sale of our common stock pursuant to this registered public offering.
However, the Company will receive cash from the exercise of common stock
options in conjunction with the registered public offering. In addition, the
Company will recognize 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 offering in May 2004. In May 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 June 30, 2004 to stockholders of
record at the close of business on June 15, 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 CEBs 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 our content, 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 withdrawals 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 CEBs filings with the Securities and Exchange Commission,
including, but not limited to, its 2003 annual report on Form 10-K. 9




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##### 



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 its 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 34.3% to $244.8 million at March 31,
2004, from $182.3 million at March 31, 2003. Our operating costs and expenses consist of cost of services, member
relations and marketing, general and administrative expenses, depreciation, and
stock option and related expenses. 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. 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 monthsended March 31,2004
    
    2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    33.4
    
    
    
    34.1Gross profit
    
    
    66.6
    
    
    
    65.9Costs and expenses:Member relations and marketing
    
    
    27.9
    
    
    
    26.2General and administrative
    
    
    11.3
    
    
    
    11.3Depreciation
    
    
    2.7
    
    
    
    2.9Stock option and related expenses
    
    
    
    
    
    
    Total costs and expenses
    
    
    42.0
    
    
    
    40.6Income from operations
    
    
    24.6
    
    
    
    25.3Other income, net
    
    
    3.4
    
    
    
    3.8Income before provision for income taxes
    
    
    27.9
    
    
    
    29.1Provision for income taxes
    
    
    9.2
    
    
    
    11.5Net income
    
    
    18.7
    %
    
    
    17.6
    %
 10




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##### 



Three Months Ended March 31, 2004 and March 31, 2003 Revenues.Revenues increased 35.3% to $64.0 million for the three months
ended March 31, 2004, from $47.3 million for the three months ended March 31,
2003. The largest driver of the increase in revenues during the three months
ended March 31, 2004 was the cross-selling of additional subscriptions to
existing members. Other drivers contributing to the increase in revenues for
the three months ended March 31, 2004 included the introduction of new research
programs, price increases and the addition of new members. Cost of services.Cost of services increased 32.8% to $21.4 million for
the three months ended March 31, 2004, from $16.1 million for the three months
ended March 31, 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 33.4% for the three months
ended March 31, 2004, from 34.1% for the three months ended March 31, 2003 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 ending March 31, 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 months ended
March 31, 2004 may not be indicative of future quarterly or annual results. 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 months ended March 31, 2004,
may not be indicative of future results. A number of factors that impact gross
profit margin are discussed in the costs of services description above. Member relations and marketing.Member relations and marketing costs
increased 44.4% to $17.9 million for the three months ended March 31, 2004 from
$12.4 million for the three months ended March 31, 2003. The year-over-year
increase in member relations and marketing costs is due to an increase in
marketing travel expenses to support higher revenue activity, commission expenses associated with increased revenue
and, to a lesser extent, an increase in member relations and marketing
personnel and related costs. Member relations and marketing costs as a
percentage of revenues increased to 27.9% for the three months ended March
31, 2004, from 26.2% for the three months ended March 31, 2003, due primarily
to the changes in expenses in member relations and marketing noted above. General and administrative.General and administrative expenses increased
35.8% to $7.2 million for the three months ended March 31, 2004, from $5.3
million for the three months ended March 31, 2003. The increase in general and
administrative expenses is driven by one-time, lease termination costs
associated with our move to a new office facility within London, England, an
increase in staff and related costs and the use of external consultants to support our organizational growth. In addition, during
the three months ended March 31, 2004, we also experienced a decrease, as
compared to 2003, in recruiting costs by reducing our use of external search
firms. Although general and administrative expenses increased for the items
noted above during the three months ended March 31, 2004, as compared to the
three months ended March 31, 2003, general and administrative expenses as a
percentage of revenues remained fairly constant. Due to the fixed nature of a
portion of these costs, which are not significantly
affected on a quarterly basis by growth in revenues, we expect that the
general and administrative expenses as a percentage of revenues will decline
across the remainder of 2004. 11




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Depreciation.Depreciation expense increased 28.9% to $1.7 million for the
three months ended March 31, 2004, from $1.4 million for the three months ended
March 31, 2003. The increase in depreciation expense was principally due to the
additional investment in leasehold improvements for additional office space in
Washington, D.C. and for the new office space in London, England and new
computer equipment and software to support organizational growth. Stock option and related expenses.We recognized $111,000 in compensation
expense for the three months ended March 31, 2003 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 March 2003.
We recognized no stock compensation and related expense for the three months
ended March 31, 2004. 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. Other income, net.Other income, net increased 22.1% to $2.2 million for
the three months ended March 31, 2004, from $1.8 million for the three months
ended March 31, 2003. The 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. Provision for income taxes.We recorded a provision for income taxes of
$5.9 million and $5.4 million for the three months ended March 31, 2004 and
2003, respectively. The decrease in our effective income tax rate to 33.0% for
the three months ended March 31, 2004 from 39.4% for the three months ended
March 31, 2003 primarily reflects the recognition of the credits, exemptions
and other tax benefits associated with our status as a Qualified High
Technology Company (QHTC) within Washington, D.C. In October 2003, we received notification from the Office of Tax and
Revenue that our certification as a QHTC had been accepted. As a QHTC, our
Washington, D.C. statutory income tax rate will be 0.0% through 2005 and 6.0%
thereafter, versus 9.975% prior to this qualification, and we are eligible for
certain Washington, D.C. income tax credits and other benefits. Accordingly, we
recorded a non-cash income tax charge to earnings of $8.2 million during the
third quarter ended September 30, 2003 for the impact on our deferred tax
assets of lowering the Washington, D.C. income tax rate to 0.0%, partially
offset by the recognition of certain Washington, D.C. income tax credits. We filed a claim for refund for sales and use taxes previously paid to the
Office of Tax and Revenue on qualifying QHTC purchases under the Act. We
subsequently received a notice of refund denial for the claim. This notice of
refund denial is inconsistent with the position taken by the QHTC Activity
Review Committee of the Office of Tax and Revenue, which approved our QHTC
status in October 2003. We plan to appeal the denial for refund of sales and
use taxes. At March 31, 2004, we valued our deferred income tax assets and
liabilities using the currently enacted federal income tax rate of 35.0% and
the QHTC Washington, D.C. income tax rate of 0.0%. In addition, we have
continued to provide for income, sales and use taxes as if we were a QHTC. If
the Office of Tax and Revenue rescinds its acceptance of our QHTC
certification, or we otherwise determine that such action is likely, we will
record a benefit to earnings representing the impact on our existing deferred
tax assets of increasing the Washington, D.C. income tax rate to 9.975%, offset
by the elimination of certain Washington, D.C. income tax credits which, as of
March 31, 2004, would have been approximately $1.4 million. 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, 12




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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 $34.3
million and $28.2 million for the three months ended March 31, 2004 and 2003,
respectively. For the three months ended March 31, 2004 and 2003, operating
cash flows were generated within the period principally by net income, the
utilization of tax benefits created by the exercise of common stock options,
the collection of membership fees receivable, and in 2004 the growth in deferred
revenues, offset by the decrease in prepaid
expenses and other current assets and accrued incentive compensation. As of
March 31, 2004, we had cash, cash equivalents and marketable securities of $303
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 $47.0 million during the three months ended March 31, 2004 and
generated net cash flows from investing activities of $2.5 million during the
three months ended March 31, 2003. During the three months ended March 31, 2004
we purchased available-for-sale marketable securities, net, of $42.0 million
and purchased leasehold improvements for additional office space in Washington,
D.C. and London, England and computer equipment and software totaling $5.0
million. During the three months ended March 31, 2003, net cash flows from
investing activities were generated by maturities of available-for-sale
marketable securities of $4.0 million, partially offset by the purchase of
leasehold improvements for additional office space in Washington, D.C.,
computer equipment and software of $1.5 million. Cash flows from financing activities.We used net cash flows from
financing activities of $21.3 million and $5.8 million during the three months
ended March 31, 2004 and 2003, respectively. Net cash used in financing
activities during the three months ending March 31, 2004 was primarily
attributed to the repurchase of our common stock during the period, which
totaled $18.7 million, and the payment of dividends during the period, which
totaled $2.8 million. Net cash used in financing activities during the three
months ending March 31, 2003 was primarily attributed to the repurchase of our
common stock during the period, which totaled $13.4 million, partially offset
by the receipt of $7.3 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 March 2003.  In May 2004, certain of the Companys stockholders agreed to sell 1.9
million shares of the Companys common stock in a registered public offering.
In addition, the Board of Directors declared a quarterly dividend of $0.075 per
share in May 2004 which will be payable in June 2004. See further discussion of
the registered public offering and the quarterly dividend and the effect of
these events on the cash flows from financing activities in Note 10 
Subsequent Events to the condensed consolidated financial statements which can
be found in this Form 10-Q under the heading Item 1. Financial Statements. During the three months ended March 31, 2004, we
had no material changes, outside the ordinary course of business, in our non-cancellable contractual financial obligations. At March 31, 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. Critical Accounting Policies Our accounting policies, which are in compliance with accounting
principles generally accepted in the United States, 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. 13




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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. 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. Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. Issuer Purchases of Equity Securities Total Number of
    
    Approximate $ ValueShares Purchased as
    
    of Shares That MayTotal Number of
    
    Average Price Paid
    
    Part of a Publicly
    
    Yet Be PurchasedShares Purchased
    
    per Share
    
    Announced Plan
    
    Under the PlansJanuary 1, 2004 to January 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    55,380,000February 1, 2004 to February 29, 2004
    
    
    237,066
    
    
    $
    49.12
    
    
    
    237,066
    
    
    $
    43,734,996March 1, 2004 to March 31, 2004
    
    
    154,700
    
    
    $
    45.80
    
    
    
    154,700
    
    
    $
    36,648,963Total
    
    
    391,766
    
    
    $
    47.81
    
    
    
    391,766
 The Company
has an ongoing authorization from the Board of Directors to repurchase shares of its stock in
the open market and privately negotiated transactions subject to market conditions. No minimum number of shares has been fixed. 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 and Reports on Form 8-K (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.
 (b) Reports on Form 8-K:  (i)
    
    On February 5, 2004, the Company furnished a Current Report on Form
8-K, which included a press release, dated February 3, 2004, in which
the Company reported earnings for the fourth quarter and year ended
2003 and provided a financial outlook for fiscal 2004. 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: May 6, 2004 The Corporate Executive Board Company By: /s/ Timothy R. Yost
Timothy R. Yost
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 15