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Advisory Board Co – IPO: ‘424B1’ on 11/13/01

On:  Tuesday, 11/13/01   ·   Accession #:  950133-1-503195   ·   File #:  333-68146

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/13/01  Advisory Board Co                 424B1                  1:2.3M                                   Bowne - DC/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       424B1 Prospectus                                    HTML    925K 

Table of Contents

5,000,000 Shares

Common Stock

         Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on The Nasdaq Stock Market’s National Market under the symbol “ABCO.”

      The selling stockholder is selling all of the shares of common stock in the offering. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholder.

      The underwriters have an option to purchase a maximum of 750,000 additional shares from the selling stockholder to cover over-allotments of shares.

      Investing in our common stock involves risks. See “Risk Factors” on page 7.

      Delivery of the shares of common stock will be made on or about November 16, 2001.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is November 12, 2001.

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      You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

      Until December 8, 2001 (25 days after commencement of the offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

      This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in the common stock. We urge you to read this entire prospectus carefully, including the “Risk Factors” section and our financial statements and the notes to those statements. Unless otherwise indicated, information presented in this prospectus assumes no exercise of the underwriters’ over-allotment option. Our fiscal year ends on March 31. References to fiscal 1998, fiscal 1999, fiscal 2000 and fiscal 2001 in this prospectus relate to the fiscal years ended March 31, 1998, March 31, 1999, March 31, 2000 and March 31, 2001, respectively. References to shares of common stock in this prospectus give effect to a 16.84-for-one stock split which was effected on October 26, 2001.

The Advisory Board Company

      We provide best practices research and analysis to the health care industry, focusing on business strategy, operations and general management issues. Best practices research identifies, analyzes and describes specific management initiatives, strategies and processes that produce the best results in solving common problems or challenges. We provide our best practices research and analysis through discrete annual programs to a membership of more than 2,000 hospitals, health systems, pharmaceutical and biotech companies, health care insurers, and medical device companies in the United States. Each program charges a fixed annual fee and provides members with best practices research reports, executive education and other supporting research services.

      We currently offer 13 distinct programs, each of which targets the issues of a specific executive constituency or business function. We sell substantially all of our program memberships as one-year agreements. Memberships in the majority of our programs are renewable at the end of their one-year contracts and these renewable programs generated 86% of our revenues for the six months ended September 30, 2001. The remaining 14% of our revenues came from programs that provide best practices installation support through 12-month memberships that are not individually renewable. Each program offers a standardized set of services, allowing us to spread our largely fixed program cost structure across our membership base of participating companies. This economic model enables us to increase our revenues and operating margin as we expand the membership base of our programs and, we believe, permits members to learn about industry best practices at a fraction of the cost of a customized analysis performed by a major consulting firm. We believe that the resulting program prices generally represent a small percentage of the potential bottom-line improvement members can achieve by successfully implementing one or more of the dozens of best practices they receive as members of a particular program.

      The health care industry is especially suited for our business model of developing standardized best practices programs that target large numbers of potential members with common problems and issues. The fragmented nature of the health care industry and our cooperative membership model enable us to identify new best practices that are not widely known and distribute them broadly to our members. Our programs provide access to best practices on a shared-cost basis that, we believe, is especially appealing to health care companies.

      Our business was founded in 1979 to provide best practices research and analysis across all industries. We launched our first health care best practices program in 1986. Almost all of our new program development efforts from fiscal 1996 through fiscal 1999 were targeted outside the health care sector as we focused on developing a division of our company, The Corporate Executive Board Company. After we divested our non-health care operations through the spin-off and 1999 initial public offering of The Corporate Executive Board Company, we adopted an aggressive growth strategy for our health care business.

      Since April 2000, we have launched seven new programs, five of which provide best practices installation support, and doubled the size of our sales force. The early results of this growth strategy can be seen in our recent operating results. For the six months ended September 30, 2001, our revenues grew 25.3% from the comparable period of the prior year and our income from operations grew from $0.9 million in the six months ended September 30, 2000 to $2.5 million in the six months ended September 30, 2001. We will continue to cross-sell our 13 current programs to existing members and develop new programs targeting the health care industry as part of our growth strategy to increase our revenues and earnings.

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Our Membership Model

      Our membership-based model, in which members actively participate in our research and analysis, is central to our strategy. This model gives us privileged access to our members’ business practices, proprietary data and strategic plans and enables us to provide detailed best practices analyses on current industry issues. Our member renewal rate for each of the last three years equaled or exceeded 84%, reflecting our members’ recognition of the value they derive from participating in our programs.

      Our membership includes the most prestigious and progressive health care institutions in the United States. As of September 30, 2001, 15 of the top 16 hospitals as ranked by U.S. News and World Report were members, including The Cleveland Clinic, Duke University Medical Center, Johns Hopkins Hospital, Massachusetts General Hospital, New York-Presbyterian Hospital and the UCLA Medical Center. Our membership also includes leading pharmaceutical and biotech companies, health care insurers and medical device companies, such as Genentech, Johnson & Johnson, Medtronic, Merck and WellPoint Health Networks. Our programs currently reach over 3,900 chief executive and chief operating officers and 40,000 senior executives, clinical leaders, department heads and product-line managers.

Our Business Strategy

      Our business strategy is to develop and operate membership-based best practices programs that research and analyze the strategic, operational and management issues facing the healthcare industry and distribute our findings to our members in a standardized manner. Key elements of our business strategy include:

Principal Executive Offices

      Our principal executive offices are located at The Watergate, 600 New Hampshire Avenue, NW, Washington, DC 20037. Our telephone number at that address is (202) 672-5600.

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The Offering

Risk Factors

      See “Risk Factors” beginning on page 7 for a discussion of material risks that prospective purchasers of our common stock should consider.

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Summary Financial Data

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Recent Operating Results

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RISK FACTORS

      In addition to the other information in this prospectus, you should consider carefully the following risk factors in evaluating us and our business before purchasing shares of common stock.

Risks Relating to Our Business

Our business is limited to the health care industry

      We derive substantially all of our revenues from clients in the health care industry and are prohibited by an agreement with The Corporate Executive Board Company from selling our membership-based programs to companies and institutions principally engaged in businesses other than health care until January 1, 2007. See “Certain Relationships and Transactions — Agreements with The Corporate Executive Board Company” for a more detailed discussion of this agreement.

      As a result, our business, financial condition and results of operations depend upon conditions affecting the health care industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the growth of the health care industry generally as well as our ability to increase the number of programs and services that we sell to our members. Factors that adversely affect the revenues and cash flows of the health care industry, including operating results, capital requirements, regulation and litigation, can be expected to reduce the funds available for purchase of our products and services.

We depend on renewals of our membership-based services

      We derive most of our revenues from renewable memberships in our discrete annual programs. Our prospects therefore depend on our ability to achieve and sustain high renewal rates on existing programs and to enter into new membership arrangements. Failure to achieve high renewal rates would have a material adverse effect on our business, financial condition and operating results. Our success in securing renewals depends upon our ability to deliver consistent, high-quality and timely research and analysis with respect to issues, developments and trends that members view as important. We cannot assure you that we will be able to sustain the necessary level of performance to achieve a high rate of renewals and, as a result, we cannot assure you that we will be able to increase or even maintain our revenues.

We may experience difficulties building and sustaining a membership base in our new programs

      We launched six new programs in fiscal 2001 and one new program in the first half of fiscal 2002. Our future success depends on our ability to capitalize on these recently introduced programs. Five of these new programs offer best practices installation support, which we began to offer in fiscal 2001. These programs provide 12-month memberships to help participants accelerate the installation of best practices profiled in our research studies. Memberships in these five programs are not individually renewable. In order to maintain our annual revenues and contract value from these five programs, we will have to enroll new members each year as other members complete their 12-month program terms. We cannot assure you that we will be successful in selling these new programs in the future. Lack of market acceptance of these new programs could have a material adverse effect on our business.

Programs we launch in the future may not be successful

      Our future success depends on our ability to develop new programs that serve specific health care constituencies and the changing needs of our current and prospective members for information, analysis and advice. We cannot assure you that our efforts to introduce new programs will be successful. Delays or failures during development or implementation, or lack of market acceptance, of new programs could have a material adverse effect on our business. Our business would be materially adversely affected if we were unable to develop and introduce successful new programs or other new services, or to make enhancements to existing programs, in a timely manner in response to member requirements.

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We may experience difficulties in anticipating market trends

      Our future success depends upon our ability to anticipate changing market trends and to adapt our research and analysis to meet the changing information and installation support needs of our members. We may not be able to provide helpful and timely research and analysis of developments and trends in a manner that meets market needs. Any such failure would have a material adverse effect on our business. The health care industry undergoes frequent and often dramatic changes, including the introduction of new and the obsolescence of old payments systems, changing regulatory environments, shifting strategies and market positions of major industry participants and changing objectives and expectations of health care consumers. This environment of rapid and continuous change presents significant challenges to our ability to provide our members with current and timely research, analysis and installation support on issues and topics of importance. Meeting these challenges requires the commitment of substantial resources. We cannot assure you that we will be able to meet these challenges.

Consolidation in the health care industry could adversely affect our business

      Many health care providers, insurers, medical device companies and pharmaceutical companies have consolidated to create larger organizations. Further consolidation could reduce the number of current and potential clients for our services. A reduction in the size of our target market could have a material adverse effect on our business.

      The larger organizations resulting from consolidation in the health care industry could have greater bargaining power which could affect the current pricing structure for our services. In addition, group purchasing organizations and managed care organizations could increase pressure on providers of health care related services, like ourselves, to reduce prices. Our failure to maintain adequate pricing levels could have a material adverse effect on our business.

We must attract and retain a significant number of highly-skilled employees

      Our future success depends upon our ability to hire, train, motivate and retain a significant number of highly-skilled employees, particularly research analysts and sales and marketing staff. Our inability to do so would have a material adverse effect on our business. We have experienced, and expect to continue to experience, intense competition for professional personnel from management consulting firms and other producers of research and analysis services. Many of these firms have substantially greater financial resources than we do to attract and compensate qualified personnel. We cannot assure you that we will be successful in attracting a sufficient number of highly-skilled employees in the future, or that we will be successful in training, motivating and retaining the employees we are able to hire.

Potential liability claims may adversely affect our business

      Our services, which involve recommendations and advice to health care providers regarding complex business and operational processes, regulatory and compliance issues and labor practices, may give rise to liability claims by our members or by third parties who bring claims against our members and us. Health care providers increasingly are the subject of litigation, and we cannot assure you that we would not also be the subject of such litigation based on our advice and services. A successful liability claim brought against us may adversely affect our reputation in the health care industry and could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that we would have adequate insurance coverage for claims against us.

Cost containment pressures on health care providers may adversely affect our business

      Health care providers have come under increasing pressure to contain operating costs in response to changes in reimbursement rates and increases in labor costs driven by workforce shortages. Health care financing entities, such as Medicare, Medicaid and private health plans, periodically adjust reimbursement rates to health care providers in response to changes in government legislation or market pressure to slow the growth of health care costs. As a result, health care providers may pressure professional information services companies to lower

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The expiration of our noncompetition agreement with The Corporate Executive Board Company may adversely affect our business

      We have a noncompetition agreement with The Corporate Executive Board Company which generally prohibits The Corporate Executive Board Company from selling any membership-based products and services to health care providers. Additionally, The Corporate Executive Board Company is prohibited from selling such products and services to other types of health care organizations unless the products and services are of a general business nature and are principally sold to companies and institutions not in the health care industry. This agreement ends on January 1, 2007. After that date, The Corporate Executive Board Company may sell membership-based products and services in direct competition with us. Direct competition with The Corporate Executive Board Company may have a material adverse effect on our revenues. See “Certain Relationships and Transactions — Agreements with The Corporate Executive Board Company” for a more detailed discussion of this noncompetition agreement.

Regulatory change in our market may adversely affect our business

      Changing political, economic and regulatory influences on health care providers could have a material adverse effect on our business, financial condition and results of operations. These influences affect the purchasing practices and operations of health care organizations. Federal and state legislatures periodically have considered programs to reform or amend the United States health care system at both the federal and state level. These efforts could adversely affect our members by resulting in lower reimbursement rates for health care providers, which could change the environment in which providers operate and reduce the willingness or ability of our members to renew or pay for our products and services.

We may have difficulty managing our growth

      Our growth may place significant demands on our financial, operational and managerial resources. To manage future growth, we will have to continue to implement and enhance our operations and financial systems and augment, train and manage our personnel. Our inability to manage our growth successfully would have a material adverse effect on our business, financial condition and results of operations.

We may be unable to protect our intellectual property rights

      We rely on copyright laws, as well as nondisclosure and confidentiality arrangements, to protect our proprietary rights in our products and services. We cannot assure you that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of our rights or that we will be able to detect unauthorized uses and take timely and effective steps to enforce our rights. If unauthorized uses of our proprietary products and services were to occur, we might be required to engage in costly and time-consuming litigation to enforce our rights. We cannot assure you that we would prevail in such litigation. If others were able to use our intellectual property, our ability to charge our fees for our services would be adversely affected.

We may be exposed to litigation related to content

      As a publisher and distributor of original research and analysis and user of licensed third-party content, we face potential liability for defamation, negligence and copyright and trademark infringement. Any such litigation, whether or not resulting in a judgment against us, could have a material adverse effect on our business, financial condition and results of operations. Third-party content includes information created or provided by information services organizations and consultants whom we retain and may be delivered in writing, over the internet or orally to our members.

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There have been recent changes in our senior management

      Frank J. Williams joined us in September 2000 and became our Chief Executive Officer in June 2001. Mr. Williams has no prior experience as a chief executive officer of an independent public corporation. David L. Felsenthal worked for us or an affiliate from 1992 to 1995 and from 1999 to the present and became our Chief Financial Officer, Treasurer and Secretary in April 2001. Mr. Felsenthal has no prior experience in those positions. A failure by our senior management to effectively manage our business would have a material adverse effect on our operating results.

Our management has no experience in managing a public company

      Our management team has historically operated our business as a privately-owned corporation. The individuals who now constitute our management have never had responsibility for managing a publicly-traded company.

We may face damage to our professional reputation or legal liability if our clients are not satisfied with our services

      As a provider of best practices research and analysis, our professional reputation is an important factor in attracting and retaining our members and in building relationships with the progressive health care companies that supply many of the best practices we feature in our research. If members were to become dissatisfied with the quality of our best practices research and the services we provide, our professional reputation could be damaged. If we fail to meet our contractual obligations, we could be subject to legal liability or loss of client relationships.

Risks Relating to Our Certificate of Incorporation and Bylaw Provisions and the Offering

A large number of shares may be sold in the market following the offering which may depress our stock price

      Sales of a substantial number of shares of our common stock in the public market by our stockholders after the offering, or the perception that such sales may occur, could depress the market price of our common stock. Upon completion of the offering, we will have outstanding 12,149,735 shares of common stock. Of these shares, the 5,000,000 shares offered under this prospectus, or 5,750,000 shares if the underwriters exercise their over-allotment option, which will represent 41% of our outstanding common stock, or 47% if the underwriters exercise their over-allotment option, will be freely tradable, without restriction, in the public market unless held by an affiliate of ours. After the lock-up agreements pertaining to the offering expire 180 days from the date of this prospectus, our existing stockholders will be entitled, until five years after the closing of the offering, to require us to register their shares. As of September 30, 2001, there were options outstanding to purchase 8,927,120 shares of our common stock, 547,300 shares of which were exercisable. Approximately one-third of the remaining outstanding options will become exercisable on each of the first, second and third anniversaries of the offering. We may issue an additional 3,352,608 shares under our stock option plans as of September 30, 2001. Upon exercise, these options will be eligible for sale in the public market. We may issue 842,000 shares under our employee stock purchase plan after the closing of the offering.

An active public market for our common stock may not develop, which would impede your ability to sell your shares and depress our stock price

      The initial price of our common stock to be sold in the offering will be determined through negotiations between the selling stockholder and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Before the offering, no public market existed for our common stock. An active public market for our common stock may not develop or be sustained after the offering, which could affect your ability to sell your shares and depress the market price of your shares. The market price of your shares may fall below the initial public offering price.

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Our current stockholders will continue to control our company

      After the offering, our current stockholders, consisting of the selling stockholder, the chairman of the board and another director of the board, collectively will own 59% of our common stock, or 53% of our common stock if the underwriters’ over-allotment option is exercised in full. These stockholders may have interests that conflict with yours and, acting together, would be able to control any matter requiring approval by our stockholders, including the election of directors and the approval of significant corporate transactions, including a change of control.

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

      We have made forward-looking statements in this prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, the effects of future regulation and the effects of competition.

      Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we distribute this prospectus.

      You should understand that many important factors, in addition to those discussed elsewhere in this prospectus, could cause our results to differ materially from those expressed in forward-looking statements. These factors include our dependence on the health care industry, our membership-based business model, economic and other conditions in the markets in which we operate, and governmental regulations.

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CERTAIN TRANSACTIONS PRIOR TO THE OFFERING

S Corporation Distribution and Termination of S Corporation Status

      Prior to the closing of the offering, we will continue to be treated as an S corporation for federal and certain state income tax purposes. As a result, our earnings continue to be taxed for federal and certain state tax purposes directly to our stockholders. Effective as of the closing of the offering, our status as an S corporation will be terminated and we will become subject to federal and state income taxes as a C corporation. At the close of the offering, the termination of our S corporation election will result in a $1.6 million increase in federal deferred tax asset, decreased by the amount of the distribution of our S corporation net operating loss carryforward asset. As of September 30, 2001, our S corporation net operating loss carryforward asset was $0.5 million.

      In May and June 2001, we made cash distributions to the selling stockholder in an aggregate amount of $13.0 million. Prior to the closing of the offering, we will distribute an additional estimated $4.8 million in cash and promissory notes to our stockholders. In addition, we will pay approximately $1.3 million in offering expenses and transfer to the selling stockholder substantially all amounts receivable from affiliate companies, which were $6.4 million as of September 30, 2001 and are estimated to be $8.3 million at the close of the offering, and income taxes receivable of $1.2 million. These transactions will be treated for accounting purposes as distributions to our stockholders.

      In connection with these distributions and payments, we entered into a cross-indemnification agreement with our existing stockholders under which we will indemnify these stockholders and these stockholders will indemnify us with respect to adverse tax effects resulting from the reallocation of income and expenses between S corporation and C corporation tax years.

Recapitalization

      In October 2001, our board of directors and stockholders approved a 16.84-for-one stock split of our class A and class B common stock, which was effected on October 26, 2001. At the time of this stock split, we had two classes of common stock issued and outstanding, class A voting common stock and class B nonvoting common stock, which differed only as to voting rights. Our certificate of incorporation provides for the reclassification of our two outstanding classes of common stock into shares of a single class of common stock upon the closing of the offering. See “Description of Capital Stock, Certificate of Incorporation and Bylaws.”

Reincorporation

      Prior to August 13, 2001 we were incorporated as a Maryland corporation. In order to change our state of incorporation, our board of directors and our stockholders approved a merger, effective August 13, 2001, into a Delaware corporation. As of the effective date of the merger, each outstanding share of the Maryland corporation’s class A common stock was exchanged for one share of the Delaware corporation’s class A common stock and each outstanding share of the Maryland corporation’s class B common stock was exchanged for one share of the Delaware corporation’s class B common stock. All outstanding shares of common stock of the Maryland corporation were then cancelled. No accounting recognition will be given to the reincorporation.

USE OF PROCEEDS

      The selling stockholder is selling all of the shares of common stock being sold in the offering, including any shares sold on exercise of the underwriters’ over-allotment option. We will not receive any proceeds from the offering.

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DIVIDEND POLICY

      We made cash distributions to the selling stockholder of $2.6 million in fiscal 2000 and $16,000 in fiscal 2001. In May and June 2001, we made cash distributions to the selling stockholder in an aggregate amount of $13.0 million. Prior to the closing of the offering we will make the distributions to our stockholders described in “Certain Transactions Prior to the Offering — S Corporation Distribution and Termination of S Corporation Status.” We do not anticipate declaring or paying dividends after the offering. The timing and amount of future dividends, if any, would be determined by our board of directors and would depend, among other factors, upon our results of operations, financial condition and cash requirements at the time such payment is considered.

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CAPITALIZATION

      The following table sets forth our capitalization at September 30, 2001 on an actual and as adjusted basis. You should read this table in conjunction with the financial statements and notes to the financial statements included elsewhere in this prospectus.

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DILUTION

      The following table compares the public offering price of the shares to the cost to our existing stockholders of shares of common stock that they acquired from us within the past five years, or which they have the right to acquire from us under outstanding stock options.

      As of September 30, 2001, our common stock had a negative tangible book value of $0.76 per fully diluted share. Pro forma for the transactions expected to occur upon completion of the offering, our negative tangible net worth per share as of September 30, 2001 would have been $1.38. Because all of the shares are being sold by the selling stockholder, the sale of shares in the offering will not affect our net worth and purchasers of our shares will experience significant dilution from their purchase price to the negative tangible net worth per share.

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SELECTED FINANCIAL DATA

      The following table sets forth selected financial and operating data. The selected financial data presented below as of March 31, 2001, and for each of the years in the five-year period ended March 31, 2001, have been derived from our financial statements which have been audited by Arthur Andersen LLP, independent public accountants. The selected financial data for the six months ended September 30, 2000 and 2001, and the recent operating results for the quarters ended December 31, 2000, March 31, 2001, June 30, 2001 and September 30, 2001 are derived from our unaudited financial statements and include all adjustments, consisting of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the six months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended March 31, 2002. You should read the selected financial data presented below in conjunction with our financial statements, the notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”