| ADVISORY BOARD CO Item 1A Risk Factors In addition to the other information in this Form 10-K, you should consider carefully the following risk factors in evaluating us and 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, until January 1, 2007, 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 |
| 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 economic environment of the health care industry generally as well as our ability to increase the number of programs and services that we sell to our members |
| 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 |
| Our success in securing renewals depends upon our members’ budgetary environment, our ability to deliver consistent, reliable, high-quality and timely research, tools and analysis with respect to issues, developments and trends that members view as important |
| We cannot assure you that we will be able to sustain the level of performance necessary 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 |
| 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 |
| 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 |
| 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 |
| 9 _________________________________________________________________ We may experience difficulties sustaining a membership base in our installation support programs Eight of our programs offer best practices installation support |
| These programs typically provide 12-month memberships to help participants accelerate the installation of best practices profiled in our research studies |
| Memberships in these programs are not individually renewable |
| In order to maintain our annual revenues and contract value from these programs, we will have to enroll new members each year as other members complete their program terms |
| We cannot assure you that we will be successful in selling these programs in the future |
| Lack of continued market acceptance of these programs could have a material adverse effect on our business |
| 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, tools and analysis to meet the changing needs of our members |
| We may not be able to provide helpful and timely research and analysis of developments and trends in a manner that meets market needs |
| Any such failure 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, web-based tools, and installation support around 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, technology 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 often are the subject of regulatory scrutiny and 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 |
| We may experience fluctuations in operating results Our operating results may fluctuate significantly due to various factors, including the growth in and timing of new programs, our revenue mix, the timing of the development, introduction, general availability and marketing of new products, technologies and services, the timing of executive education seminars, the timing of the hiring of research analysts and sales and marketing staff, changes in the spending patterns of our members, our accounts receivable collection experience, changes in market demand for research, tools and analysis, competitive conditions in the industry and general economic conditions |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” 10 _________________________________________________________________ Cost containment pressures on health care providers may reduce the market for our services Health care providers have come under increasing pressure to contain operating costs in response to such things as 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 decrease the amounts they spend on professional services companies or pressure the companies to lower the cost of the services and products they provide, which could adversely impact our revenues and/or operating margin and could have a material adverse effect on our business |
| 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 |
| 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 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 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 and web-based tools, 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 |
| We may face damage to our professional reputation and business prospects if our clients are not satisfied with our services As a provider of best practices research, tools 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, online tools and services we provide, our professional reputation could be damaged |
| If we fail to meet our contractual obligations, we could be subject to loss of client relationships that could adversely affect our business and prospects |
| We may be exposed to loss of revenue resulting from our unconditional service guarantee We offer an unconditional service guarantee under a majority of our membership programs |
| At any time, a member who has a guarantee may request a refund of their membership fee |
| Refunds are provided on a pro rata basis relative to the remaining term of the membership |
| Requests for refunds of membership fees by a significant number of our members could lower revenues and have a material adverse effect on our financial condition and results of operations |
| Sustained or repeated hardware, network or application failures or delays in or problems with our development or implementation of decision-support tools could impair our operations and impact our members’ perception of value, or prevent us from meeting our contractual obligations 11 _________________________________________________________________ The timely development and implementation of and continuous and uninterrupted performance of our hardware, network and applications, including those which may be provided by third parties, is an important tool in our delivery of services to our customers |
| Our ability to protect these processes and systems against unexpected adverse events is a key factor in continuing to offer our members our full complement of services on time in an uninterrupted manner |
| System failures that interrupt our ability to develop applications or provide our services could affect our members’ perception of the value of our services |
| Delays or interruptions in the delivery of our services could result from unknown hardware defects, insufficient capacity or the failure of our website hosting and telecommunications providers to provide continuous and uninterrupted service |
| We also depend on Internet service providers that provide members with access to our services |
| Any hardware failure, disruption in web hosting, telecommunications or Internet access, or any failure to handle higher volumes of user traffic, could harm our business |
| Adoption of a change in US GAAP accounting standards for employee stock options is expected to have a significant adverse effect on the reporting of our results of operations In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised Statement of Financial Accounting Standards (“SFAS”) Nodtta 123(R), “Share-Based Payment — an Amendment of FASB Statement Nos |
| SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions |
| SFAS Nodtta 123(R) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date with limited exceptions and recognize the cost over the period during which an employee is required to provide service in exchange for the award |
| We are required to adopt SFAS Nodtta 123(R) in the quarter beginning April 1, 2006 |
| Following adoption of SFAS Nodtta 123(R) in fiscal 2007 we expect that we will record substantial non-cash compensation expenses |
| The adoption of SFAS Nodtta 123(R) is not expected to have a significant effect on our financial condition or net cash flows but is expected to have a significant adverse effect on the reporting of our results of operations |
| There may be risks related to our status as a Qualified High Technology Company In February 2006, we received notification from the Office of Tax and Revenue of the District of Columbia that we had been certified, effective January 1, 2004, as a Qualified High Technology Company under the New E-Conomy Transformation Act of 2000, as amended |
| This certification had the effect of reducing our Washington, DC statutory income tax rate to 0dtta0prca through calendar year 2008, and 6dtta0prca thereafter, compared to 9dtta975prca per year without the qualification |
| We cannot assure you that our business activities and operations will continue to qualify as QHTC activities under the Act in the future |
| We may not be able to fully realize our deferred tax asset For tax purposes, we have deferred income taxes consisting primarily of net operating loss carry forwards for regular federal and state income tax purposes generated from the exercise of common stock options |
| If our future taxable income is less than what we believe it will be, or if the deferred tax asset generated by net operating loss carry forwards is utilized prior to the date that the Washington, DC tax rate changes to 6dtta0prca, we may not be able to fully realize our deferred tax asset |