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Section 1: 10-K (10-K)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number: 000-33283
 
 
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THE ADVISORY BOARD COMPANY
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
52-1468699
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2445 M Street, N.W., Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 202-266-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01
 
The NASDAQ Stock Market LLC
 
 
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  þ
Based upon the closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market on June 30, 2016, the aggregate market value of the common stock held by non-affiliates of the registrant was $1,424,955,877.
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on February 28, 2017 was 40,235,820.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain portions of the registrant’s definitive proxy statement for the 2017 annual meeting of stockholders to be filed with the Commission no later than 120 days after the end of the fiscal period covered by this report.


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THE ADVISORY BOARD COMPANY
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EXPLANATORY NOTE REGARDING THIS ANNUAL REPORT
In November 2014, we elected to change our fiscal year from the period beginning on April 1 and ending on March 31 to the period beginning on January 1 and ending on December 31. We refer in this report to our 2016 fiscal year that began on January 1, 2016 and ended on December 31, 2016 as fiscal year 2016, to our 2015 fiscal year that began on January 1, 2015 and ended on December 31, 2015 as fiscal year 2015, and to the nine-month fiscal period that began on April 1, 2014 and ended on December 31, 2014 as the 2014 transition period.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, or PSLRA. These statements are intended to take advantage of the “safe harbor” provisions of the PSLRA. The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek,” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings, and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in this report under “Part I - Item 1A - Risk Factors.” Any forward-looking statement speaks only as of the date of this report, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date of this report.


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PART I
We have derived some of the information contained in this report concerning the markets and industry in which we operate and the customers we serve from publicly available information and from industry sources. Although we believe that this publicly available information and the information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.
Unless the context indicates otherwise, references in this report to the “Company,” “Advisory Board,” “we,” “our,” and “us” mean The Advisory Board Company and its consolidated subsidiaries.

Item 1. Business.
Overview
We are a leading provider of insight-driven performance improvement solutions to the rapidly changing health care and education industries. Through our subscription-based membership programs, software, data-enabled services, and consulting capabilities, we leverage our intellectual capital to help our clients, which we refer to as our members, solve their most critical business problems. As of the date of this report, we served approximately 5,600 members.
We provide members with best-practice industry research, and insights that they need to thrive in a dynamic market. We then help to guide and support our members in the implementation of these best practices through proprietary, high-value technology, services, and consulting capabilities. All of our programs are rooted in best practices and extend across four key areas:
Best practices research. Our best practices research and insight programs provide the foundation for all of our other programs. These programs are focused on understanding industry dynamics, identifying best-demonstrated management practices, critically evaluating widely-followed but ineffective practices, and analyzing emerging trends within the health care and education industries. We communicate and teach best practices across our broad network through independent forums for each key leadership constituency.
Technology. Our cloud-based software applications allow members to combine insights derived from our best practices research with their own operational and financial data and third-party and proprietary data to benchmark performance; identify and assess revenue, cost, quality, and performance improvement opportunities; and implement identified best practices.
Data-enabled services. We draw on our extensive data assets, distinctive technology platforms, proven processes, and deep expertise gained over years of experience to apply best practices and enablement services to directly produce results for our members.
Consulting services. Our consulting services programs assist our members’ own efforts to set strategic direction, address key operational challenges, and improve their performance. We deploy our experts to work side-by-side with members implementing best practice solutions and driving change in their organizations.
Corporate Information
We were incorporated in Maryland in 1979 and reincorporated in Delaware in 2001. The mailing address of our principal executive offices is 2445 M Street, N.W., Washington, D.C., 20037, and our telephone number is (202) 266-5600.
We maintain a corporate Internet website at www.advisoryboardcompany.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish the reports with the Securities and Exchange Commission, or SEC. The contents of our website are not a part of this annual report on Form 10-K.
Our Markets
Across our more than 35-year history, we have focused on providing insight-driven, differentiated, scalable, and renewable solutions to the rapidly transforming health care and education industries. Within the health care market, we primarily serve U.S. hospitals and health systems, and also sell programs to international hospitals, independent medical groups, post-acute care facilities, pharmaceutical, biotechnology, and medical device companies, as well as to health care insurers and other service providers. The Centers for Medicare and Medicaid Services estimated that spending in the United States for health care services was expected to be approximately $3.4 trillion in 2016, or approximately 18.1% of the country’s Gross Domestic Product (GDP), and was expected to grow to over $5.5 trillion, or 19.9% of GDP, by 2025.


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Within the education market, we serve a range of public and private colleges, universities, and K-12 schools. The U.S. Department of Education estimates education institutions to be a $1.2 trillion market involving the participation of more than 85.7 million students and more than 136,000 institutions, including both degree-granting and other education organizations.
Both health care and education organizations rely on external service providers to help them develop strategies, consolidate and analyze data, improve operations and processes, and train staff in order to remain competitive in a dynamic industry environment. We believe that certain characteristics of the health care and education industries make them especially suited for our business model of standardized delivery of services and software rooted in shared best practices:
Undergoing transformation: Both the health care and education industries are undergoing tremendous change. Health care providers are facing an aging population, increasing cost and margin pressures, new regulations related to the Affordable Care Act and now the potential amendment or repeal of certain components of the Affordable Care Act, and movement from fee-for-service to value-based reimbursement. Colleges and universities are confronting a slower growing student population, shrinking state budgets, rising cost concerns, heightened attention to value and outcomes, and a movement towards performance-based funding. During these times of significant change, health care and education institutions are in greater need of, and are actively seeking, best practices to address their mounting challenges.
Common and complex industry-wide issues: Health care and education organizations of all types and sizes face many of the same complex strategic, operational, and management issues. Institutions are working to increase revenue, reduce costs, improve productivity and performance, manage innovation, reengineer business processes, and comply with new government regulations. Because the delivery of health care and education services is based on complex, interrelated processes, there is widespread interest in, and broad applicability of, standardized programs that address the major challenges facing the industries.
Fragmented target industries: We believe that our target market consists of over 15,000 health care organizations and over 5,000 education institutions. Many of these organizations deliver services primarily on a local or regional basis. As a result of this fragmentation, best practices that are pioneered in local or regional markets are rarely widely known throughout the industry.
Willingness to share best practices: We believe that health care and education organizations display a relatively high propensity to share best practices. Many health systems and universities are non-profit organizations or compete in a limited geographic market and do not consider organizations outside their market to be their competitors. In addition, the health care and education industries have a charter above commerce in serving their communities and their end customers, and have a long tradition of disseminating information as part of ongoing research and education activities.
Need for data and analytics: Health care data resides in numerous source systems both within and dispersed across a variety of organizations, including hospitals, physician practices, and government and commercial payers. Education data similarly is derived from a broad range of sources, which encompass students, parents, employers, high schools, colleges and universities, and other non-traditional education institutions. To achieve higher-quality outcomes and control costs, organizations within these markets exhibit a strong and continuing need for data and the systematic analysis of data to help them understand their current performance and identify opportunities for improvement.
Value orientation: A membership model that provides access to best practice insight, software applications, and value-added services on a syndicated basis appeals to many value-focused health care and education organizations that may be reluctant to make discretionary investments in an exclusive, higher-priced, customized engagement or tailored software solution to address their critical issues.
Our Strengths
We are a mission-driven organization with core values, a service ethic, and a results-oriented approach dedicated to helping health care and education institutions solve their most pressing problems. Our competitive strengths include the following:
Market leader in rapidly changing markets. We are a market leader in both the health care and education markets, serving executives at more than 3,000 U.S. hospitals and health systems since 1986 and over 1,100 U.S. colleges and universities since 2007. The ongoing transformation of these industries is presenting new challenges and creating demand for new programs and services. We believe our reputation and success to date have positioned us as a premier source and partner for identifying, evaluating, communicating, and providing solutions that respond to evolving market needs.

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A superior value proposition to members. Members use our programs to improve the effectiveness of their organizations by increasing productivity, reducing operating costs, and enhancing revenue. We believe that our program costs generally represent a small percentage of the potential benefit members can achieve through successful application of the best practices research, software, and consulting that they receive. In fact, we generated over $2.0 billion in documented value for our members. In addition, our fixed-fee pricing for research and software promotes frequent use of our programs by our members, which we believe increases both the value members receive and their loyalty to our programs.
Extensive membership base and longstanding member relationships. Our membership includes some of the largest and most prestigious health care and education institutions in the United States, including all 20 of the 2016-2017 U.S. News and World Report honor roll hospitals and 91 of the U.S. News and World Report’s top 100 national universities for 2017. Our programs reach more than 10,000 chief executive and chief operating officers, and over 300,000 other senior executives, operational and clinical leaders, department heads, and product-line managers. Our membership-based model, in which members participate in our research on an annual basis, gives us privileged access to our members’ business practices, proprietary data, and strategic plans, enabling us not only to identify and share emerging best practices but also to develop first-in-class and best-in-class new programs and services to meet our members’ changing needs.
Broad, insight-driven offerings. We provide a distinctively broad and deep set of best practices research, technology programs, data-enabled services, and consulting services, allowing us to assist our members in a variety of ways depending on their specific needs and problem areas. Our health care programs address key areas where hospitals and health systems require comprehensive and continuous support to address perennial challenges, including: driving health system growth, reducing care variation, and optimizing the revenue cycle. Our education programs focus on topics that include enrollment management, student success, academic programming, faculty productivity, and advancement. Our technology programs and data-enabled services differ from those of most of our competitors in that they are rooted in best practices, aggregate and standardize data from disparate source systems, and are part of a complementary platform of offerings.
Highly recurring, visible, and scalable business model. We derive the majority of our revenue from multi-year memberships across our distinct programs. Our member renewal rate for our research and software programs has equaled or exceeded 90% for each of the twelve-month fiscal periods in the five year period ended December 31, 2016, which we believe reflects our members’ recognition of the value they derive from participating in our programs. In addition, we can identify over 80% of our expected annual revenues at the beginning of the fiscal year based on our deferred revenue balance and historical program renewal trends. Our economic model, which features a standardized set of services and a largely fixed-cost structure, enables us to add new members to our programs at a low incremental cost of delivery, thereby disproportionately increasing operating profit for our members.
Consistent financial performance and strong cash flows. Since becoming a public company in 2001, we have increased our number of members, contract value per member, total contract value, and revenue nearly every year, including during economic downturns. Since March 31, 2012, our number of members has grown from 3,726 to 5,633, while our contract value per member has expanded from approximately $107,000 to approximately $140,000. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in our cash flows from operations exceeding our net income and often approximating our adjusted EBITDA.

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Growth Strategy
We believe we are well positioned to capitalize on the favorable characteristics in our target markets and deploy our competitive strengths to continue growing our business. As part of our growth strategy, we plan to:
Add new health care and education members. We believe there are over 15,000 potential members in the health care market and over 5,000 potential members in the education market. Although we currently have an established membership base in these markets, we actively seek to continue adding new members. In addition, we believe that our business model and existing membership base represent significant assets that we can use to attract additional non-provider health care members and international health care and education members. We currently serve approximately 400 non-U.S. health care organizations through programs that rely on research and analysis primarily derived from our work with U.S. health care organizations. In addition, we are seeking to expand our work with independent medical groups, pharmaceutical, biotechnology, medical device, and health insurance companies, as well as with other organizations with an interest in U.S. hospital and health system operations, performance, and data.
Expand relationships with and create additional value for existing members. We have developed broad and deep relationships with approximately 4,400 members and over 200,000 executives across our health care programs, and approximately 1,100 members and over 80,000 executives across our education programs. As members recognize benefits from one program, they may seek out or become strong candidates for other programs and services. In addition, our steady interaction with members through research, sales, program development and delivery, and account management provides us with insight into which of our programs would be most suitable for them. Since 2011, we have increased contract value per member by 47%, from approximately $95,000 to approximately $140,000 as of December 31, 2016, by selling additional programs to existing members and adding new members. The average contract value is approximately $124,000 per health care member and approximately $193,000 per education member. This average contract value continues to remain a small portion of many institutions’ total expenditures on professional services per year.
Continue innovating through member-driven product development. As our markets rapidly evolve, we seek to expand our portfolio of programs and services through development of new programs and successful execution and integration of acquisitions and strategic partnerships. Each year, we pursue a rigorous research process involving extensive member feedback, in which we build a large pipeline of potential new program concepts and existing program extensions and innovations. We then concentrate our efforts on areas of greatest interest to our members. Our research and development process benefits from insight derived through our research programs and the involvement of industry thought leaders from progressive and well-known organizations that act as advisors, as well as from information we gather from hundreds of member interviews. We currently plan to continue introducing new programs and existing program extensions and innovations through a mixture of internal development activities, partnerships, and acquisitions.
Use differentiated data and expertise to provide comprehensive solutions to members. As the health care and education industries continue their transformation, our members are increasingly looking to consolidate and replace their individual vendors and products with strategic partners, integrated technology platforms, and comprehensive solutions. We believe many of our members will consider us particularly well suited to respond to this demand based on our unique research and best-practice insights, differentiated data acquisition and standardization capabilities, compiled data sets across thousands of physicians, patients, and students, and reputation for deep industry expertise and a strategic approach to solving issues.

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Our Offerings
We are a best practices firm that uses a combination of research, technology, and consulting to improve the performance of health care and education organizations around the world. We forge and find the best new ideas and proven practices from across our vast network of leaders. Then we customize and hardwire them into every level of our member organizations, creating enduring value. Through our membership model, we collaborate with executives and their teams to find and implement the best solutions to their toughest challenges. Our research programs offer proven, actionable insights inspired by the industry’s most progressive organizations. Our technology programs offer analytics platforms that surface opportunities, hardwire best practices, and accelerate progress. Our data-enabled services leverage our expertise to deliver value on behalf of our members. Our consulting services offer seasoned experts for strategic, customized support.
Health Care
Our health care offerings are presented to the marketplace collectively as Advisory Board (www.advisory.com). We launched our first health care research program in 1986, and have built our market leadership position by providing best practice research and insight to health care leaders. We expanded into the delivery of distinct consulting capabilities in 2001, and serviced 400 organizations throughout 2016 with our staff of experts. In 2004, we launched our first technology program and serve 3,000 hospitals today. Through our research, we cover all areas of health care performance, providing best practice insights to the industry’s most pressing issues. Through our technology and consulting we solve specific business problems by applying best practices to create deep analytics, technology, and service solutions that enable the action members need to take.
Best Practices Research Programs
Best practice insight is the core of our business. Through our membership model, we offer our member organizations a direct line to the industry’s most-needed insights and best-practice ideas to help address their most important problems and find and implement the best solutions to their toughest challenges. We have deep relationships with senior-most leaders and an understanding of the key industry topics that will keep them up at night, and we dive into the root causes of key issues and find practices that have been demonstrated to have an impact.
Each of our best practices research programs is targeted at a specific member executive and addresses the executive’s specific strategic challenges, operational issues, and management concerns. Each program includes published studies, executive education, proprietary databases and online services, access to experts, and executive briefings, among other services, as we continue to enhance the programs with innovative features. For each best practices research program, we typically publish two to four best practices research studies annually. We design each study to present the conclusions and supporting best practices in a graphical format, enabling the intended audience to assimilate quickly the 100 to 250 pages of research content. Consistent application of our research methodology and extensive staff member training across all programs enable us to maintain a high level of research quality in the programs.
In addition to our research studies, we deliver an executive education curriculum based on our proprietary research to member institutions nationwide through four channels: general membership meetings; presentations conducted on-site at member organizations; on-call access to experts; and frequent teleconferences. In all four settings, we use interactive discussions to provide a deeper understanding and facilitate practical application of the best practices we have identified. In the year ended December 31, 2016, we delivered executive education services to more than 150,000 executive and managerial participants through more than 130 member meetings, over 2,300 on-site seminars, and approximately 250 webconferences. These interactions serve as an important building block for our relationships with members, allowing us the opportunity to gather input about our research agendas and services, generate leads for cross-selling additional programs to existing members, and identify ideas for potential new programs.
Across our research programs, we also offer a variety of online databases, content, tools, and calculators to increase the utility of our research, facilitate analysis of an organization’s current performance, and assist the adoption of best practices at member institutions. Each research program has a dedicated section on our password-protected member website, accessible only to members of the program, which includes such items as best practices, executive modules, online data, audit toolkits, and market forecasting instruments. Through the website, members of each program may search and access program-specific content, which includes the ability to access an electronic library of past and current research studies, review executive education modules, view meeting schedules, and communicate with our staff and other members. A few examples of our 18 research programs include:
Health Care Advisory Board: Through the Advisory Board's flagship research program, we provide CEOs and their executive teams strategic guidance, tools, and implementation support needed to win market share, protect margins, and drive population health return on investment.

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Clinical Roundtables: We provide tools and benchmarks, best practices from health system peers, and expert insight to help our members strategically address specific service-line challenges in areas such as cardiovascular and oncology, as well as physician practices alignment and performance improvement.
Nursing Executive Center: We arm nurse executives with market insights and guidance to help set strategy, and provide support with the best practices and tools to help them achieve their top goals.
Post-Acute Care Collaborative: We provide best practice research and supporting tools to help our members navigate delivery system and payment reform challenges while helping to strengthen their acute and post-acute relationships and care quality.
We typically charge a separate annual membership fee for each program that is fixed for the duration of the membership agreement and entitles participating members to access all of a program’s membership services. Most programs are sold as recurring, multi-year contracts. Institutions may access our services within a program only if they are members of that program.
Technology Programs
We offer technology analytics programs anchored by cloud-based software applications that surface performance improvement opportunities to accelerate progress. These applications are regularly updated with member-specific data as well as third-party and proprietary data, and provide all member institutions with access to specific performance improvement metrics. The software applications pull data from disparate legacy information systems through standardized data extracts and, with analytics and proprietary metrics informed by our best practices research and insights, transform hard-to-access legacy data into performance reports and benchmarks offering actionable insight for managers and executives.
The technology programs are renewable and address perennial problems in areas in which we have developed significant knowledge through our research programs. Our programs are cloud-based, allowing members to derive value with minimal upfront investment costs. Cloud-based software allows continual access via the Internet and can quickly be updated, delivering new program content and functionality to all members with minimal disruption. The programs are built to be flexible and easy to use, offering members ad hoc querying, performance alerts, drill-down analysis, and comparative benchmarking.
Through the combination of our research and access to the technology programs, members gain insight into areas of opportunity for operational or financial improvement, receive best practices toolkits to capture the improvement, and directly use our resources to inform front-line decisions on an hourly, daily, and weekly basis. Our programs allow members to transform their data into information they can use to enhance performance, enabling them to quantify areas of opportunity and identify value captured through use of our programs, and allow members to benchmark themselves against each other and learn how other members captured value from our software applications and consulting services.
We offer 19 technology programs and enhanced solutions, a few of which include:
Planning 20/20 is a recently redesigned planning solution that integrates Crimson Market Advantage with several key research assets, enhanced analytics, and business development guidance to support hospital strategic planners’ need to meet new and evolving industry demands across the continuum of care.
Crimson Continuum of Care helps hospitals achieve physician alignment, identify outliers in care delivery, and measure and sustain outcomes from unwarranted care variation reduction initiatives in order to advance quality goals and secure cost savings.
Integrated Revenue Cycle Management Platform spans the revenue lifecycle from patient access to mid-cycle to business office and contract/payer management, delivering workflow, analytics, and data-enabled automation that enables health systems to dramatically improve revenue capture, eliminate re-work, and  optimize reimbursement.
Consulting Services
Through our consulting services, we provide on-the-ground support for major performance improvement initiatives, as well as best practice professional management of key areas of the hospital or medical group. We assist in three primary ways: expert counsel, including business planning and strategy development; dedicated support, including interim senior management to oversee a specific change management process for a defined period; and long-term management, involving a seasoned group of senior executives working on-site for an extended period to provide hands-on, practical advice and execution against financial and operational goals.

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Our consulting engagements deliver meaningful insights and results in areas such as strategy, electronic medical record (EMR) optimization, revenue cycle optimization, clinical quality and care redesign, physician practice management, operational capacity and workforce efficiency, supply cost savings, and development of accountable care organizations and clinically integrated networks. Our members benefit from outcome-focused consultants experienced in change management, access to best practice performance criteria, industry standard and proprietary benchmarks, implementation-oriented recommendations, and an objective third-party perspective.
Focus Areas
Our technology and consulting programs cover our members’ most important problem areas, and are organized into three areas of focus:
Driving Health System Growth: Driving the acquisition and retention of patients by assembling the network needed to effectively bring care in the right setting
Reducing Care Variation: Improving care quality and reducing cost by eliminating unwarranted care variation
Optimizing the Revenue Cycle: Ensuring members’ financial viability by improving the efficiency and effectiveness of revenue management
In each area we have multiple technology solutions and industry experts focused on delivering significant value to our health care members. In 2016, we were able to document over $2 billion in incremental savings, efficiency, and revenue capture for our members through their work with us. In addition, we have, and continue to innovate and develop, enterprise capabilities that integrate across all areas of our members operations.
Education
Our education offerings were launched in 2007 and are presented to the marketplace collectively as EAB (www.eab.com). In fiscal year 2016, we worked with more than 1,100 college and university members, conducted approximately 5,000 research interviews, maintained more than 450 million course records in our student success analytic models, and engaged in more than 1.2 billion student interactions.
As in our health care business, our education offerings are all based on best practice. They are delivered through three types of renewable subscription programs: research, technology, and data-enabled services.
Research Programs
We offer more than a dozen research programs aimed at helping today's education leaders solve their most pressing issues and biggest problems. We identify best practices to address education’s top challenges with research forums dedicated to all key leaders of the academy, including provosts, chief business officers, chief information officers, chief research officers, vice presidents of enrollment management, vice presidents of student affairs, deans of continuing and online education, and many other key academic and administrative leaders. Across our research programs, we complete 50 major research initiatives each year. These best practices are disseminated to our membership through 100-250 page graphically-oriented publications, online publications and tools on our password protected member websites, and executive education presentations. In the year ended December 31, 2016, we delivered executive education services to more than 15,000 executive and managerial participants through more than 90 member meetings, over 390 on-site seminars, and over 100 webconferences.
Our research programs provide us deep access to our member colleges and universities, strong relationships with their leaders, and an unparalleled view of the key problems they face. This set of insights not only fuels our best practice work through our research programs but also provides a continuous source for new business ideas, which we have continually capitalized on throughout our decade of serving education institutions. These best practice insights have seeded not only additional research programs but also programs where we hardwire them through technology and data-enabled services.
Technology Programs
Currently, our technology programs are primarily focused in the area of student success. With disappointing graduation rates and student retention an increasing problem on college campuses, colleges and universities are spending an estimated $3.2 billion on student success. In 2009, we published a study in our research program for vice presidents of academic affairs that identified sixteen best practices for student retention and timely graduation. Out of that work, we have developed a membership that combines analytics, interaction, and workflow technology to help our members support, retain, and graduate more students. With more than 450 million course records in the platform and over 3.6 million daily logins, our student success technology is used to improve student advising and increase student success by identifying and positively influencing choices by at-risk and off-path students.

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In addition, we also partner with university academic and business leaders to leverage department-specific benchmarks in enrollment, capacity, outcomes, and costs to help make smart decisions and investments to improve academic efficiency and grow program revenues.
Data-enabled services
Currently, our data-enabled services are primarily focused in the area of enrollment management. With slowing demographic trends and declines in public funding, colleges and universities are spending an estimated $4.1 billion on enrollment management. Through data-driven solutions, we support colleges and universities in targeting qualified prospective students; building relationships with prospective students during the search, application, and yield process; and optimizing financial aid resources. Our differentiated capabilities are bolstered by our more than 1.2 billion student interactions, contact with virtually all U.S. college-bound students, and proprietary methodologies and marketing campaign testing.
Our Membership
As of the date of this report, our membership consisted of approximately 5,600 members, composed primarily of hospitals and health systems and colleges and universities, as well as selected other health care and education institutions.
We seek to involve the country’s most progressive health care and education organizations in our membership. The participation of these members provides us with a window into the latest challenges confronting the industries we serve and the most innovative best practices that we can share broadly throughout our membership. As of December 31, 2016, we served all 20 of the honor roll hospitals listed in the 2016-2017 U.S. News and World Report ranking, all of the Becker Hospital Review largest 15 health systems in the United States, 30 of the world’s largest pharmaceutical and medical device companies, and 91 of the U.S. News and World Report top 100 national universities for 2017.
Our programs serve a range of constituencies, including both the most senior executives and the broader management team. As of the date of this report, our programs reached over 10,000 chief executive and chief operating officers and over 200,000 other senior executives, clinical leaders, department heads, and product-line managers. No one member accounted for more than 1.5% of our revenue in fiscal year 2016, fiscal year 2015, or the 2014 transition period. We generated approximately 2%, 2%, and 4% of our revenue from members outside the United States in fiscal year 2016, fiscal year 2015, and the 2014 transition period, respectively.
Pricing and Contracts
We typically charge a separate fixed annual membership fee for each of our programs that covers all of the services in the program. Annual fees vary by program based on the target executive constituency and the specific combination of services we provide to participating members. The annual fees paid by members within the same program also vary based on the size of the member institution and the total number of program memberships the member purchases. Membership fees also may be lower for the initial members of new programs. Annual fees for software programs are higher than annual fees for research and insights programs. On average, we increase membership fees 2% to 3% per year, and, in some of our programs, charge our members for certain direct billable expenses, such as travel expenses. Most of our memberships are multi-year agreements. Fees for our programs are generally payable in advance.
Sales and Marketing
We maintain new business development teams that are responsible for selling new memberships and member services teams that are responsible for servicing and renewing existing memberships. New business development representatives typically focus on selling specific programs through face-to-face meetings with senior executives at current and prospective member institutions. Member services representatives assume a relationship management role and perform most of their responsibilities over the telephone. New business development teams and member services teams are compensated with base salaries and variable, goal-based incentives. For many of our members, we assign an executive advisor to ensure that the member is receiving value from the programs in which it currently participates, to identify new programs that could assist the member with key challenges that it faces, and to coordinate the activities of the new business development and member services teams with the goal of serving the member and expanding the overall member relationship.
Intellectual Property
We offer our members a range of products to which we claim intellectual property rights, including research content, online services, databases, electronic tools, cloud-based applications, performance metrics, and software products. We own and control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, and other intellectual property rights that, in the aggregate, are of material importance to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and license other companies to use certain technology and other intellectual property that we control. We consider our trademarks, service marks, databases, software, and other intellectual

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property to be proprietary, and rely on a combination of copyright, trademark, trade secret, non-disclosure, and contractual safeguards to protect our intellectual property rights. We have been granted federal registration for some of our trademarks and service marks.
Competition
We are not aware of any other organization that offers services to health care or education organizations across as broad a range of best practices, technology and data-enabled services, and consulting services as those offered by our company. We compete in some discrete programs and for discretionary expenditures against health care-focused, education-focused, and multi-industry firms. These include consulting and strategy firms; market research, data, benchmarking, and forecasting providers; technology vendors and services firms; health care information technology firms; technology advisory firms; outsourcing firms; and specialized providers of educational and training services. Other organizations, such as state and national trade associations, group purchasing organizations, non-profit think-tanks, and database companies, also may offer research, consulting, tools, and education services to health care and education organizations.
We believe that the principal competitive factors in our market include quality and timeliness of research and analysis; applicability and efficacy of recommendations; strength and depth of relationships with member senior executives; reliability and effectiveness of software applications; distinctiveness of dashboards and user interfaces; depth and quality of the customer network; ability to meet the changing needs of current and prospective members; measurable returns on customer investment; and service and affordability. We believe we compete favorably with respect to each of these factors.
Our collaboration agreement with CEB, a global business membership and research organization, to enhance our services to members and explore new product development opportunities expired in February 2017. The collaboration agreement includes a limited non-competition provision that survives the expiration until February 2018 in accordance with its terms.
Legal Proceedings
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.
Employees
As of December 31, 2016, we employed approximately 3,800 professionals, approximately 2,000 of whom are based in our headquarters in Washington, D.C. None of our employees are represented by a collective bargaining arrangement.
Government Regulation
The health care and education industries are highly regulated and subject to changing political, legislative, regulatory, and other influences. Existing and new federal and state laws and regulations affecting the health care and education industries could create unexpected liabilities for us, could cause us or our members to incur additional costs and could restrict our or our members’ operations. Many of the laws are complex and their application to us, our members, or the specific services and relationships we have with our members are not always clear.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010, collectively referred to as the Affordable Care Act, was signed into law with the stated goal of expanding access to affordable health insurance, controlling health care costs, and improving health care quality.
Based on public statements made by President Trump and members of Congress, it is possible that legislation may be enacted that would materially affect the Affordable Care Act and its implementation, including legislation that would repeal, replace, amend, or defund the law. We cannot predict the impact a repeal or substantial revision of the Affordable Care Act may have on our business or the business of our members.
Our failure to anticipate accurately the application of the laws and regulations affecting the health care and education industries, or our other failure to comply, could create liability for us, result in adverse publicity, and otherwise negatively affect our business. See the “Risk Factors” section of this report for more information about the impact of government regulation on our company.

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Executive Officers
The following table sets forth as of the date of this report the names, ages, and positions of the persons who serve as our executive officers.
Executive Officers
 
Age
 
Position
Robert W. Musslewhite
 
47
 
Chief Executive Officer and Chairman
David L. Felsenthal
 
46
 
President and Director
Michael T. Kirshbaum
 
40
 
Chief Financial Officer and Treasurer
Evan R. Farber
 
44
 
Chief Legal Officer and Corporate Secretary
Cormac F. Miller
 
43
 
Chief Product Officer
Richard A. Schwartz
 
51
 
Chief Operating Officer, Health Care
Mary D. Van Hoose
 
52
 
Chief Talent Officer
Our executive officers are appointed by, and serve at the pleasure of, our board of directors.
Robert W. Musslewhite has served as our Chief Executive Officer since September 2008. Mr. Musslewhite joined us in 2003, initially serving in executive roles in strategic planning and new product development. In 2007, Mr. Musslewhite was named Executive Vice President and general manager in charge of software-based programs, and he became CEO the following year. Before joining us, Mr. Musslewhite was an Associate Principal in the Washington, D.C., Amsterdam, and Dallas offices of McKinsey & Company, an international consulting firm, where he served a range of clients across the consumer products industry and other industries and was a co-leader of McKinsey’s Pricing Center. Mr. Musslewhite received an A.B. degree in Economics from Princeton University and a J.D. from Harvard Law School.
David L. Felsenthal became our President in September 2008. Mr. Felsenthal first joined us in 1992. He served as Chief Financial Officer, Secretary, and Treasurer from April 2001 through February 2006 before his service as an Executive Vice President beginning in February 2006 and as Chief Operating Officer from January 2007 to September 2008. From 1997 to 1999, Mr. Felsenthal worked as Director of Business Development and Special Assistant to the CEO/CFO of Vivra Specialty Partners, a private health care services and technology firm. From 1992 through 1995, Mr. Felsenthal held various positions with us in research and new product development. Mr. Felsenthal received an A.B. degree from Princeton University and an M.B.A. from Stanford University.
Michael T. Kirshbaum became our Chief Financial Officer in February 2006 and Treasurer in March 2007. Mr. Kirshbaum joined us in 1998, and before his current role held a variety of positions in the finance group, most recently serving as Senior Director of Finance. In that role, Mr. Kirshbaum was responsible for most of our finance operations, including our overall financial strategy and budgeting process, as well as a number of other accounting functions. Mr. Kirshbaum currently serves on the board of Evolent Health, Inc., a value-based care company. Mr. Kirshbaum received a B.S. degree in Economics from Duke University.
Evan R. Farber became our Chief Legal Officer in September 2015. Mr. Farber joined us in October 2007 as General Counsel and also has served as Corporate Secretary since November 2007. Before joining us, Mr. Farber was a partner at Hogan & Hartson L.L.P. (now Hogan Lovells US LLP), an international law firm, where he practiced corporate, securities, transactional, and commercial law. Mr. Farber received a B.A. degree from Binghamton University, State University of New York, and a J.D. from The George Washington University Law School.
Cormac F. Miller was named Chief Product Officer in January 2016. Mr. Miller served as our Executive Vice President from August 2011 through January 2016, with responsibility for corporate strategy and new product development, and as our Executive Director, Strategic Planning and New Product Development from January 2007 through August 2011. Mr. Miller joined us in 1996 and held various management positions within our research programs, including Executive Director, Research from October 2005 to December 2006, and Managing Director from October 2002 through October 2005. Mr. Miller received a B.S. degree from the University of Wisconsin-Madison.

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Richard A. Schwartz became our Chief Operating Officer, Health Care in January 2016. He previously served as President, Performance Technologies and Consulting since March 2014 and as Executive Vice President from February 2006 to February 2014, responsible for strategic planning and general management of our physician-oriented programs. Mr. Schwartz joined us in 1992 and held various management positions within our research programs, including Executive Director, Research from June 1996 to March 2000 and General Manager, Research from 2001 to 2006. Mr. Schwartz received a B.A. degree from Stanford University and an M.B.A. from Duke University.
Mary D. Van Hoose has served as Chief Talent Officer since 2009. In this role Ms. Van Hoose oversees recruiting, retention, engagement, and development of our staff worldwide, and works closely with the executive team on a broad range of issues that include organizational planning, goal setting, leadership development, and firm communication. Ms. Van Hoose joined us in 1991 and initially served as a research analyst focusing on certain clinical best practices for hospitals and health care providers. From 2000 to 2009, Ms. Van Hoose served as our Executive Director of Career Management. Ms. Van Hoose received a B.A. degree from the University of Virginia.

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Item 1A. Risk Factors.
We describe below what we believe are currently the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that could adversely affect our business, financial condition, results of operations, and prospects.
Risks Related to the Health Care and Education Industries
Because most of our members are in the health care industry, factors that adversely affect the financial condition of the health care industry could have a negative impact on us.
We historically have derived most of our revenue from members in the health care industry. As a result, our business, financial condition, and results of operations could be adversely affected by conditions affecting the health care industry generally and hospitals and health systems in particular. Our ability to grow will depend on the economic environment of the health care industry as well as our ability to increase the number and the breadth of the services that we sell to our members. There are many factors that could affect the purchasing practices, operations, and, ultimately, the operating funds of health care organizations, such as reimbursement policies for health care expenses, consolidation in the health care industry, and regulation, litigation, and general economic conditions. Because of current macro-economic conditions, many health care delivery organizations continue to experience deteriorating cash flow, access to credit, and budgets. It is unclear what long-term effects general economic conditions will have on the health care industry and in turn on us.
The health care industry is highly regulated and subject to changing political, legislative, regulatory, and other influences. Existing and new federal and state laws and regulations affecting the health care industry could create unexpected liabilities for us, could cause us or our members to incur additional costs, and could restrict our or our members’ operations. Many health care laws are complex and their application to us, our members, or the specific services and relationships we have with our members is not always clear. In addition, federal and state legislatures periodically have considered programs to reform or amend the U.S. health care system at both the federal and state level, and we expect that additional federal and state health care reform measures will be adopted in the future. In March 2010, the Affordable Care Act was signed into law with the goal of expanding access to affordable health insurance, controlling health care costs, and improving health care quality. Based on public statements made by President Trump and members of Congress, it is possible that legislation may be enacted that would materially affect the Affordable Care Act and its implementation, including legislation that would repeal, replace, amend, or defund the law. We cannot predict the impact that a repeal or substantial revision of the Affordable Care Act could have on our business or the business of our members.
Because of the significant implementation issues arising under these laws and because regulations for implementing these laws are being released on an ongoing basis, it is unclear what long-term effects such issues they will have on the health care industry and in turn on our business, financial condition, and results of operations. Among other effects, we could be required to make unplanned modifications of our products and services or could suffer delays or cancellations of orders or reductions in demand for our products and services as a result of changes in regulations affecting the health care industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, changes to the Health Insurance Portability and Accountability Act of 1995, and the regulations that have been issued under it, which we refer to collectively as HIPAA, and other federal or state privacy laws, laws relating to the tax-exempt status of many of our members, or restrictions on permissible discounts and other financial arrangements. Our failure to anticipate accurately the application of these laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity, and negatively affect our business.
Federal and state regulations governing our members in the education industry may negatively affect our members’ businesses, marketing practices, and budgets, any or all of which could have a material adverse effect on our ability to generate revenue.
We expect to derive an increasing amount of revenue from post-secondary educational institutions. Such educational institutions are subject to extensive federal and state regulation, including the Higher Education Act, Department of Education regulations, and individual state higher education regulations. The regulations govern many aspects of the operations of our higher education members, including marketing and recruiting activities, as well as their eligibility to participate in Title IV federal student financial aid programs, which is the principal source of funding for many of our members. There recently have been significant changes to these regulations, and a high level of regulatory activity and heightened legislative scrutiny is expected to continue. Changes in, new interpretations of, or noncompliance with applicable laws, regulations, standards, or policies applicable to our members could have a material adverse effect on their accreditation, authorization to operate in various states, or receipt of funds under Title IV programs, any of which, in turn, may harm our ability to generate revenue from these members and negatively affect our financial results.

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Privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.
The privacy and security of personally identifiable information, also known as personal data, is a major issue in our industries. We must comply with extensive requirements regarding the use, disclosure, retention, and security of personal data, including patient health care information. Failure by us to comply with any of the applicable laws, regulations, and standards regarding privacy, identity theft prevention and detection, breach notification, and data security may subject us to actual or threatened proceedings, actions, and public statements against us by government entities, private parties, consumer advocacy groups, or others, including civil monetary penalties and, in some circumstances, criminal penalties or contractual liability under our agreements with our members. In addition, any such failure may harm our reputation and adversely affect our ability to retain existing members and attract new members.
Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about data security breaches suffered by well-known companies and institutions and the activities of various government agencies and lawsuits filed in response to these breaches. Concerns about our practices with regard to the collection, use, disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business. In addition, we may incur significant costs in monitoring and complying with the multitude of evolving laws and regulations relating to privacy and security, the scope of which is changing and subject to differing interpretations.
The Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act (or the HITECH Act, which was enacted as part of the American Recovery and Reinvestment Act of 2009), and the implementing regulations issued under these statutes contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the Privacy Rule and Security Rule portions of HIPAA. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is authorized by the individual or is specifically required or permitted under the Privacy Rule, and requires covered entities to provide individuals with certain rights with respect to their protected health information. The Privacy Rule imposes a complex system of requirements on covered entities for complying with these basic standards. Under the HIPAA Security Rule, covered entities must establish administrative, physical, and technical safeguards to protect the confidentiality, integrity, and availability of electronic protected health information maintained or transmitted by them or by others on their behalf.
The HIPAA Privacy and Security Rules historically have applied directly to covered entities, such as our members who are health care providers that engage in HIPAA-defined standard electronic transactions or health plans. Because some of our members disclose protected health information to us so that we may use that information to provide certain services to them, we are a “business associate” of those members. To provide members with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our members. Such agreements must, among other matters, provide adequate written assurances:
as to how we will use and disclose the protected health information;
that we will implement reasonable administrative, physical, and technical safeguards to protect such information from misuse;
that we will enter into similar agreements with our agents and subcontractors that have access to the information;
that we will report security incidents and other inappropriate uses or disclosures of the information; and
that we will assist the covered entity with certain of its duties under the Privacy Rule.
On January 25, 2013, the United States Department of Health and Human Services, Office for Civil Rights, published a final rule modifying the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules, referred to as the Final HIPAA Omnibus Rule, that implemented many of the provisions of the HITECH Act. The Final HIPAA Omnibus Rule applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities. We must directly comply with certain aspects of the Privacy and Security Rules, and are also subject to enforcement for a violation of HIPAA. The Final HIPAA Omnibus Rule also imposes mandatory federal requirements for both covered entities and business associates regarding notification of breaches of unsecured protected health information.
Any failure or perception of failure of our products or services to meet HIPAA and related regulatory requirements could expose us to risks of investigation, notification, litigation, penalty, or enforcement, could adversely affect demand for our products and services, and force us to expend significant capital and other resources to modify our products or services to address the privacy and security requirements of our members and HIPAA.
In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in

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this area, including privacy safeguards, security standards, and data security breach notification requirements. We may be required to comply with these state laws, if they are more stringent than HIPAA requirements and therefore not preempted by the federal requirements.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business, products, services, or the associated costs of compliance.
Federal or state governmental authorities may impose additional data security standards or additional privacy or other restrictions on the collection, use, transmission, and other disclosures of health information that would limit, forbid, or regulate the use or transmission of health information pertaining to U.S. patients outside of the United States. Such legislation, if adopted, could render operations outside of the United States impracticable or substantially more expensive. In addition, although most of our business is conducted in the United States, some of our businesses and operations are international in nature and consequently are subject to regulation in the jurisdictions in which we conduct those operations. We may be obligated to comply with these regulatory regimes, which include, among other matters, privacy and data protection regulations (including requirements for cross-border data transfers) that vary from jurisdiction to jurisdiction.
Our higher education industry members are required to comply with The Family Educational Rights and Privacy Act, or FERPA, and if we violate obligations relating to such members’ FERPA compliance, our reputation and business could suffer.
FERPA generally prohibits an institution of higher education from disclosing personally identifiable information from a student’s education records without the student’s consent. Our members disclose to us certain information that originates from or constitutes a student education record under FERPA and must make such disclosures to us in compliance with FERPA. As an entity that provides services to institutions, we are indirectly subject to FERPA and may not transfer or otherwise disclose any personally identifiable information from a student record to another party other than in a manner permitted under the statute. Any violation of us by FERPA could result in a material breach of contract with one or more of our members and could harm our reputation. Further, if we disclose student information in violation of FERPA, the Department of Education could require one or more members to suspend our access to student information for an extended period.
If we or our subcontractors or agents cause a violation of the Higher Education Act and corresponding regulations established by the Department of Education as they relate to the ban on incentive compensation, we could be liable to our members for substantial fines, sanctions, or other liabilities.
Many of our higher education members are subject to the ban on incentive compensation established under the Higher Education Act and corresponding regulations established by the Department of Education. Such institutions are prohibited from providing any incentive payments based directly or indirectly on success in securing enrollments or financial aid to any persons or “entities” engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance. Such entities would include us to the extent that we are engaged in any student recruiting or admission activities, or in making decisions regarding financial aid, for a member. Moreover, the ban on incentive compensation extends to incentive payments, based directly or indirectly on success in securing enrollments or financial aid, to the employees of such entities if the employees are involved with or responsible for admissions, recruiting, or financial aid activities. If we or our subcontractors or agents act in a manner that causes a violation of the incentive compensation rule, we could be liable to our members for substantial fines, sanctions, or other liabilities, including liabilities related to “whistleblower” claims under the federal False Claims Act. Any such claims, even if without merit, could require us to incur significant costs to defend the claims, distract management’s attention from our operations, and damage our reputation.
If we or our subcontractors or agents act in a manner that causes a violation of the Department of Education’s misrepresentation rule, or similar federal and state regulatory requirements, we could face fines, sanctions, and other liabilities.
Many of our higher education members are subject to other regulations promulgated by the Department of Education that affect our student recruitment activities, including the misrepresentation rule. The misrepresentation rule is broad in scope and may apply to certain statements our employees, subcontractors, or agents may make on behalf of or at the direction of a higher education member about the nature of a member’s program, a member’s financial charges, or the employability of graduates of a member’s program. A violation of this rule, or other federal or state regulations applicable to our activities, based on statements or conduct by us or by an employee, subcontractor, or agent performing services for members could negatively affect our reputation, result in the termination of member contracts, require us to pay the fees associated with indemnifying a member from private claims or government investigations, or require us to pay substantial fines, sanctions, or other liabilities.

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If our products or services fail to provide accurate information, or if our content or any other element of our products or services is associated with incorrect, inaccurate, or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable for damages to customers or the government.
Our products and content were developed based on the laws, regulations, and third-party payor rules in existence at the time such software and content was developed. Members could assert claims against us or the government, or qui tam relators on behalf of the government could assert claims against us under the federal False Claims Act or similar state laws, if we interpret those laws, regulations, or rules incorrectly; the laws, regulations, or rules materially change at any point after the software and content was developed; we fail to provide up-to-date, accurate information; or our products or services are otherwise associated with incorrect, inaccurate, or faulty coding, billing, or claims submissions by our members. The assertion of such claims and ensuing litigation, regardless of the resolution, could result in substantial costs to us, divert management’s attention from operations, damage our reputation, and decrease market acceptance of our services. Although we attempt to limit by contract our liability to customers for damages, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages. We cannot limit liability the government could seek to impose on us under the False Claims Act.
If we fail to comply with federal and state laws governing health care fraud and abuse or reimbursement, we may be subject to civil and criminal penalties or loss of eligibility to participate in government health care programs.
A number of federal and state laws, including physician self-referral laws, anti-kickback restrictions, and laws prohibiting the submission of false or fraudulent claims, apply to health care providers, physicians, and others that make, offer, seek, or receive referrals or payments for products or services that may be paid for through any federal or state health care program and, in some instances, private programs. These laws are complex and change rapidly and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities recently have increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other health care reimbursement laws and rules. From time to time, participants in the health care industry receive inquiries or subpoenas to produce documents in connection with government investigations. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted from operations by these efforts.
These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our proprietary applications or that relate to claims or cost report information or services that relate to relationships between our members and other health care providers, including physicians, may be determined or alleged to be in violation of these laws and regulations. Any failure of our proprietary applications or services, including consulting and management services, to comply with these laws and regulations could result in substantial civil or criminal liability and could, among other impacts, adversely affect demand for our services, invalidate all or portions of some of our contracts with our members, require us to change or terminate some portions of our business, cause us to be disqualified from serving customers doing business with government payors, and give our members the right to terminate our contracts with them.
We could become subject to regulation by the Food and Drug Administration if functionality in one or more of the software applications we offer causes the software to be considered a medical device.
The overall framework of the laws and regulations administered by the Food and Drug Administration, or FDA, applies to all products that meet the definition of a “medical device.” To the extent that functionality in one or more of the software products we currently or may in the future offer causes the software to be considered a medical device under existing FDA regulations or policies or under regulations and policies now under active consideration by the FDA, we, as a provider of application functionality, could be required, depending on the functionality, to:
register our company and list products with the FDA;
notify the FDA and demonstrate substantial equivalence to other products on the market before marketing our functionality;
obtain FDA approval by demonstrating the safety and effectiveness of the regulated products prior to marketing; and
comply with various FDA regulations, including the agency’s quality system regulation, medical device reporting regulations, corrections and removal reporting regulations, and post-market surveillance regulations.
The FDA can impose extensive requirements governing pre- and post-market conditions, such as service investigation and conditions relating to approval, labeling, and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. Any application of FDA regulations to our business could adversely affect our financial results by increasing our operating costs, slowing our time to market for regulated software products, and making it uneconomical to offer some software products.

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Risks Related to Our Operations
Our revenue and results of operations may suffer if we are unable to attract new members, obtain renewals from existing members, or sell additional products and services.
We derive most of our revenue from annual memberships for our programs, products, and services. Our growth therefore depends on our ability to attract prospects to their first membership, achieve and sustain high renewal rates on existing memberships, and sell additional products and services to existing members. This depends on our ability to understand and anticipate market and pricing trends and members’ needs, the continuity of our principal contacts at a member organization, our members’ budgetary environment, and our ability to deliver consistent, reliable, high-quality, and timely products and services that are more attractive than those of our competition. Failure to achieve new member additions, to deliver acceptable member renewal rate levels, or to cross-sell additional memberships and services to existing members at the level we forecast could materially and adversely affect our operating results.
If we are unable to maintain our reputation and expand our name recognition, we may have difficulty attracting new business and retaining current members.
Our professional reputation is an important factor in attracting and retaining our members and in building relationships with the progressive health care and education organizations that supply many of the best practices we feature in our research. We believe that establishing and maintaining a good reputation and name recognition are critical for attracting and retaining members. Promotion and enhancement of our reputation will depend largely on our success in continuing to provide effective solutions. Our brand name and reputation will suffer, and our ability to attract new members or retain existing members could be adversely affected, if members do not perceive our solutions to be effective or of high quality or if there are inaccuracies or defects in our solutions.
If we are not able to offer new and valuable products and services, our business may suffer.
Our success depends on our ability to identify and develop new products and services that serve specific constituencies, to anticipate changing market trends, and to adapt our research, software applications, 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 could cause some of our existing products and services to become obsolete, particularly in the health care industry, where needs continue to evolve rapidly with the introduction of new technology and the obsolescence of old technology, changing payment systems and regulatory requirements, 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 timely research, software applications, and consulting and management services for issues and topics of importance. As a result, we must continue to invest resources in development of new programs and services in order to enhance our existing products and services and introduce new high-quality products and services that will appeal to members and potential members.
Many of our member relationships are non-exclusive or terminable after a specified term. If our new or modified product and service innovations are not responsive to user preferences or emerging industry standards or regulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing members, be unable to obtain new members, or incur impairment of capitalized software development assets.
Because many of our programs offer a standardized set of services that allows us to spread our largely fixed program cost structure across our membership base of participating organizations, we may lose money on or terminate a program if we are unable to attract or retain a sufficient number of members in that program to cover our costs. Terminating a program could adversely affect our business by causing dissatisfaction among members of the terminated program and by impairing our reputation with current and potential members.
Competition may adversely affect our business.
Any failure by us adequately to identify, understand, or address competitive pressures could have a material adverse effect on our business. We compete in discrete programs and for discretionary dollars against health care-focused, education-focused, and multi-industry firms. These include traditional consulting firms; market research, data, benchmarking and forecasting providers; technology vendors and services firms; health care and education information technology firms; technology advisory firms; and specialized providers of educational and training services. Other entities, such as state and national trade associations, group purchasing organizations, non-profit think-tanks, and database companies, also may offer research, consulting, data-enabled services, and education services to health care and education organizations that are competitive with our programs.
We compete on the basis of several factors, including breadth, depth, and quality of product and service offerings, ability to deliver clinical, financial, and operational performance improvement through the use of products and services, quality and

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reliability of services, ease of use and convenience, brand recognition, and the ability to integrate services with existing technology. Some of our competitors are more established, benefit from greater name recognition, have larger member bases, and have substantially greater financial, technical, and marketing resources. Other of our competitors have proprietary technology that differentiates their product and service offerings from ours. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products, and services, and make more attractive offers to our members.
We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other factors, competition within the industry, consolidation of health care industry participants, practices of managed care organizations, government action affecting reimbursement, government action affecting access to student loans, and financial stress experienced by our members. If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected.
We cannot be certain that we will be able to retain our current members or expand our member base in this competitive environment. If we do not retain current members or expand our member base, our business, financial condition, and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the health care information technology and health care industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively and could harm our business, financial condition, and results of operations.
Our prospects will suffer if we are not able to hire, train, motivate, manage, and retain a significant number of highly skilled employees.
Our future success depends upon our ability to hire, train, motivate, manage, and retain a significant number of highly skilled employees, particularly research analysts, technical experts, and sales and marketing staff. We have experienced, and expect to continue to experience, competition for professional personnel from management consulting firms and other producers of research, technology, and analysis services. Hiring, training, motivating, managing, and retaining employees with the skills we need is time consuming and expensive. Any failure by us to address our staffing needs in an effective manner could hinder our ability to continue to provide high-quality products and services, implement software applications, complete existing member engagements, or attract new members.
Unsuccessful design or implementation of our software may harm our future financial results.
Software development and implementation can take long periods of time and require significant capital investments. If our software applications are less effective, cost-efficient, or attractive to our members than they anticipate or do not function as expected or designed, we may not recover the development costs, and our competitive position, operations, or financial results could be adversely affected. In addition, any defects in our software applications or other intellectual property could result in additional development costs, the diversion of technical and other resources from our other development efforts, significant cost to resolve the defect, loss of members, harm to our reputation, risk of nonpayment, loss of revenue, and exposure to liability claims. We also rely on technology and implementation support provided by others in some of our programs that offer software applications. Our business could be harmed by defects in this technology or by the failure of third parties to provide timely and accurate services.
Some of our products and services are complex and require significant work to implement. If the member implementation process is not executed successfully or if execution is delayed, our relationships with some of our members may be adversely impacted, and our results of operations may be negatively affected. In addition, cancellation of any of our products and services after implementation has begun may involve loss to us of time, effort, and resources invested in the canceled implementation as well as lost opportunity for acquiring other members over the same period.
We may experience significant delays in generating, or an inability to generate, revenue if potential members take a long time to evaluate our products and services.
A key element of our strategy is to market our products and services directly to health care providers, such as health systems and acute care hospitals, and education institutions, such as colleges and research universities, to increase the number of our products and services utilized by existing members. If we are unable to sell additional products and services to existing hospital, health system, and education members, or enter into and maintain favorable relationships with other health care providers or education organizations, our ability to increase our revenue could be materially adversely affected. We do not control many of the factors that will influence the decisions of these organizations regarding the purchase of our products and services. The evaluation process sometimes can be lengthy and involve significant technical evaluation and commitment of personnel by these organizations. The use of our products and services also may be delayed due to reluctance to change or modify existing procedures.

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Unsuccessful delivery of our consulting and management services may harm our future financial success.
We provide strategic and operational support to our member institutions to help them achieve key clinical quality and financial performance goals, as well as to accelerate the implementation of best practices profiled in our research studies and to perform some services that they otherwise may perform themselves. If we do not deliver our services in an appropriate or timely manner, our relationships with some of our members and our results of operations may be negatively affected. To maintain our annual revenue and contract value from our consulting and management services, we will have to sell new consulting and management engagements each year as we complete other consulting and management engagements. We may not be successful in selling consulting and management engagements in the future as a result of a lack of continued market acceptance of our offerings or other factors. We also are subject to litigation for any failure to provide our services appropriately or in a timely manner.
We could sustain a material loss of business, substantial legal liability, and significant harm to our reputation as a result of an actual or attempted breach of security, unauthorized disclosure of information, denial of service attack, or the perception that personal or other sensitive or confidential information in our possession is not secure.
We receive, collect, process, and use a large amount of data and information from our employees and from or on behalf of our members and prospective members and other third parties in the course of our operations, including personally identifiable, protected health, and other sensitive and confidential information. This data and information are often accessed by us and our members through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our information technology systems. We have implemented security measures, technical controls, and contractual precautions designed to identify, detect, and prevent unauthorized access, alteration, use, or disclosure of our and our clients' and employees' data. These measures, however, may not provide absolute security. Beyond external criminal activity, systems that access or control access to our services and databases may be compromised as a result of human error, fraud, or malice on the part of employees or third parties, or may result from accidental technological failure. Because the techniques used to obtain unauthorized access, disable service, or sabotage systems change frequently, may originate from less regulated and remote areas around the world, and generally are not recognized until launched against us, we may be unable to address proactively these techniques or to implement adequate preventative measures.
If someone is able to circumvent or breach our security systems, they could misappropriate information or cause interruptions to our operations. Successful or attempted security breaches also could damage our reputation and expose us to a risk of monetary loss, litigation, fines, and sanctions. We also face risks associated with security breaches affecting third parties that conduct business with us or our members and others who interact with our data. Although we maintain insurance against loss for certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all potential liability.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after an incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential members that may impede our critical functions. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our members or other third parties could expose us, our members, or other third parties affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise harm our business. In addition, we rely in certain limited capacities on third-party data management providers whose possible security problems and security vulnerabilities may have similar effects on us.
Our business could be harmed by disruptions in service or operational failures at our data centers or at other service provider locations related to the storage, transmission, and presentation of member data.
Our data centers and service provider locations store and transmit critical member data that is essential to our business. While these locations are chosen for their stability, failover capabilities, and system controls, we do not directly control the continued or uninterrupted availability of every location. Interruptions in service or damage to locations may be caused by natural disasters, power loss, Internet or network failures, operator error, security breaches, computer viruses, denial-of-service attacks, or similar events, and could result in service interruptions, delays in access, or the destruction of data. Disaster recovery, data backups, and business continuity planning address many of these possible service interruptions, but the varied types and severity of the interruptions that could occur may render our safeguards inadequate. These service interruption events could impair our ability to deliver services or products or cause us to miss specified service levels in our agreements with our members, which could negatively affect our ability to retain existing members and attract new members.

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We may be liable to our members and may lose members if we are unable to collect and maintain member data or if we lose member data.
Because of the large amount of data that we collect and manage from our members and other third parties and the increasing use of technology in our programs, hardware failures or errors in our processes or systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our members regard as significant. Further, our ability to collect and report data may be interrupted or limited by a number of factors, including the failure of our network, software systems, or software applications, or the terms of our members’ contracts with their third-party suppliers. Computer viruses may harm our systems, causing us to lose data, and the transmission of computer viruses could expose us to litigation. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store, supply, utilize, and report information, our reputation could be harmed and we could lose existing members and experience difficulties in attracting new members.
Failure by our members to obtain proper permissions and waivers for use and disclosure of the information we receive from them or on their behalf may result in claims against us or may limit or prevent our use of data, which could harm our business.
We require our members to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the information that we receive, and we require contractual assurances from our members that they have done so and will do so. If our members do not obtain necessary permissions and waivers, our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy laws or other laws. Any such failure to obtain proper permissions and waivers could impair our functions, processes, and databases that reflect, contain, or are based on such data and may prevent our use of such data. In addition, such a failure could interfere with or prevent creation or use of rules and analyses or limit other data-driven activities that benefit us. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of our lack of a valid notice, permission, or waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.
Our sources of data might restrict our use of or refuse to license us such data, which could adversely affect our ability to provide certain products or services.
A portion of the data that we use is purchased, licensed, or otherwise obtained from third parties, including from our members, government entities, and public records. We believe that we currently have the rights necessary to use the data that are incorporated into our products and services, although our licenses for information may not allow us to use that information for all potential or contemplated applications and products. These third parties could seek to withdraw their data from us for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data, or if judicial or regulatory interpretations are issued restricting use of the data, and they also could fail to adhere to our data quality standards, causing us to incur additional expense to utilize the data appropriately. If a substantial number of data providers withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our members could be materially adversely impacted, and would have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to maintain our third-party providers or strategic alliances, or enter into new alliances, we may be unable to expand our current business.
Our business strategy includes entering into strategic alliances and affiliations with leading service providers. If existing alliances are terminated or we are unable to enter into alliances with such providers, we may be unable to maintain or increase our market presence. We work closely with our strategic partners either to expand our penetration in certain areas or to expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. Moreover, these companies, in certain circumstances, may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services.
Our business could be harmed if we are no longer able to license, integrate, or access third-party technologies and data.
We depend upon licenses from third-party vendors for some of the technology and data used in our software applications, for some of the technology platforms upon which these applications operate. We also use third-party software to maintain and enhance content generation and delivery, and to support our technology infrastructure. These technologies might not continue to be available to us on commercially reasonable terms, or at all. Most of these licenses can be renewed only by mutual agreement and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period. Our inability to obtain any of these licenses could delay our ability to provide services until alternative technology can be identified, licensed, and integrated, which may harm our financial condition and results of operations. Some of our third-party licenses are

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non-exclusive, and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us.
Our use of third-party technologies exposes us to increased risks, including risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology, and the generation of revenue from licensed technology sufficient to offset associated procurement and maintenance costs. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions to operate as effectively without this technology.
In addition, we need to access a member’s information technology systems, some of which are provided to our members by third parties, in order to extract some of the member’s data for certain of our software applications or otherwise to provide some of our consulting and management services to the member. Some of those third parties may limit, condition, or otherwise deny us access to those systems for any reason, including if there is a competitive reason to do so. Our inability to obtain timely access to a member’s system on reasonable terms may increase the cost to deliver such services to our members and may adversely affect our ability to serve or retain existing members, gain new members, or continue to provide certain services.
Potential liability claims may adversely affect our business.
Our services, which may include recommendations and advice to organizations 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. Health care and education organizations often are the subject of regulatory scrutiny and litigation, and we also may become the subject of such litigation based on our advice and services. Any such litigation, whether or not resulting in a judgment against us, may adversely affect our reputation and could have a material adverse effect on our financial condition and results of operations. We may not have adequate insurance coverage for claims against us.
If the protection of our intellectual property is inadequate, our competitors may gain access to our intellectual property and we may lose our competitive advantage.
Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of internal controls, contractual arrangements, and legal protections to protect our proprietary rights in our products and services. The steps we have taken to protect our intellectual property rights may not be adequate to deter misappropriation of our rights and may not enable us to detect unauthorized uses and take timely and effective steps to enforce our rights. Our financial condition and results of operations could be negatively affected if we lose our competitive advantage because others are able to use our intellectual property. If unauthorized uses of our proprietary products and services were to occur, we may be required to engage in costly and time-consuming litigation to enforce our rights, and we might not prevail in any such litigation. If others were able to use our intellectual property, our ability to charge our fees for our products and services could be adversely affected. In addition, we may be subject to infringement claims as we become more well-known to non-operating entities, sometimes referred to as patent trolls, or to competitors, that assert patents against other entities.
If we are alleged to infringe, misappropriate, or violate the proprietary rights of third parties, we could incur unanticipated expense and be prevented from providing our products and services.
We could be subject to intellectual property infringement, misappropriation, or other intellectual property violation claims to the extent that our research content and applications’ functionality may overlap with competitive products, and third parties may claim that we do not own or have rights to use all intellectual property rights used in the conduct of our business. We cannot assure you that infringement, misappropriation, or claims alleging intellectual property violations will not be asserted against us. Also, we cannot assure you that any such claims will be unsuccessful. We could incur substantial costs and diversion of management resources defending any such claims. Further, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Licenses for any intellectual property of third parties that might be required for our products or services may not be available on commercially reasonable terms, or at all. Such claims also might require us to indemnify of our members at significant expense.
A number of our contracts with our members contain indemnity provisions in which we indemnify such members against certain losses that may arise from third-party claims that are brought in connection with the use of our products.
Our exposure to risks associated with the use of intellectual property may be increased as a result of our acquisitions of technology, as we have limited information about the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.

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Our use of open source technology could adversely affect our ability to commercialize our software applications and subject us to possible litigation.
The products or technologies acquired, licensed, or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. Such open source software generally is licensed by its authors or other third parties under various public domain or other open source licenses. Some open source software licenses require users who distribute open source software as part of their software to disclose publicly all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. There is little or no legal precedent governing the interpretation of many of the terms of these licenses and therefore the potential impact of such terms on our business is unknown and may result in unanticipated conditions or restrictions on our ability to market our software applications.
If an author or other party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations. If our defenses were not successful, we could be subject to significant damages, be enjoined from the distribution of our products that contained the open source software, and be required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, we could be required under some open source licenses to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.
We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.
In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. In addition, as discussed in Note 2 to our consolidated financial statements for the year ended December 31, 2016 included in this report, we make certain estimates, including decisions related to provisions for uncollectible revenue, income taxes, and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. If any of these estimates and assumptions should change or prove to have been incorrect, our reported operating results could be materially adversely affected.
Any significant increase in bad debt in excess of recorded estimates would have a negative impact on our business, financial condition, and results of operations.
Our operations may incur unexpected losses from unforeseen exposures to member credit risk. We initially evaluate the collectability of our accounts receivable based on a number of factors, including a specific member’s ability to meet its financial obligations to us, the length of time the receivables are past due, and historical collections experience. Based on these assessments, we record a reserve for specific account balances as well as a general reserve based on our historical experience for bad debt to reduce the related receivables to the amount we expect to collect from members. If circumstances related to specific members change as a result of economic conditions or otherwise, such as a limited ability to meet financial obligations due to bankruptcy, or if conditions deteriorate to the extent that our past collection experience is no longer relevant, the amount of accounts receivable that we are able to collect may be less than our previous estimates as we experience bad debt in excess of reserves previously recorded.
We are continuing to integrate the operations of Royall and other acquisitions into our business, and we may be unable to do so in the manner expected.
Our ability to achieve the anticipated benefits of our acquisition of Royall Acquisition Co., or Royall, and other acquisitions continue to be subject to a number of uncertainties. The integration of Royall’s operations, which is continuing in 2017, could result in brand confusion, reduced employee morale and engagement, the disruption of our businesses, processes, and systems, inconsistencies in standards, controls, procedures, practices, and policies, and a significant burden on our management and internal resources, any of which could adversely affect our ability to achieve the anticipated the benefits of the acquisition as and when expected, or at all. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenue and efficiencies from the Royall and other, smaller acquisitions and could adversely affect our operating results and future growth.
We may pursue other acquisition opportunities, which could subject us to considerable business and financial risk.
We evaluate potential acquisitions of complementary businesses on an ongoing basis and may from time to time pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the value, strengths, and weaknesses of these opportunities, or completing acquisitions on acceptable terms. Future acquisitions may result in dilution to

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our earnings, including as a result of dilutive issuances of equity securities we may pay as acquisition consideration. Acquisitions may expose us to particular business and financial risks, including risks that we may:
suffer the diversion of financial and management resources from existing operations;
incur indebtedness and assume additional liabilities, known and unknown, including liabilities relating to the use of intellectual property we acquire;
incur significant additional capital expenditures, transaction expenses, operating expenses, and non-recurring acquisition-related and integration charges;
experience an adverse impact on our earnings from the amortization or impairment of acquired goodwill and other intangible assets;
fail to integrate successfully the operations and personnel of the acquired businesses;
enter new markets or market new products with which we are not entirely familiar; and
fail to retain key personnel of, vendors to, and clients of the acquired businesses.
If we are unable to manage the risks associated with acquisitions, or if we experience unforeseen expenses, difficulties, complications, or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, we may fail to achieve expected cost savings, revenue opportunities, and other expected benefits of our acquisition strategy and may be required to focus resources on integrating the acquired operations rather than on our primary product and service offerings.
Goodwill impairment charges may adversely affect our operating results.
Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We have a substantial amount of goodwill on our balance sheet generated in connection with our acquisitions and business growth strategy. As of December 31, 2016, our goodwill of approximately $739.5 million represented approximately 36.3% of our total assets as of that date. We test the goodwill balances allocated to our reporting units for impairment on an annual basis and if events occur or circumstances change that indicate that the fair value of one or more of our reporting units may be below its carrying amount. A decline in the quoted market price of our stock could denote a triggering event indicating that goodwill may be impaired. When testing goodwill for impairment, we determine fair value using both an income and market approach. The income approach is based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital, or WACC. The market approach is based on revenue and earnings multiple data of peer companies. Because market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the fair value of the reporting units, including estimating revenue growth rates, operating margins, terminal growth rates, and discount rates. We also perform a reconciliation between our market capitalization and our estimate of the aggregate fair value of the reporting units, including consideration of a control premium. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in the estimates and assumptions described above.
In connection with our annual goodwill assessment on October 1, 2015, management reduced its cash flow projections for Royall due in part to first year performance being below the expectations we had set as of the acquisition date. Based on the results of the impairment test, we recorded an impairment charge of 15.3% of Royall’s goodwill. For information about this $99.1 million impairment charge, see Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report.
Continued lower than expected revenue growth, a trend of weaker than anticipated financial performance, including the pace and extent of operating margin, a decline in our share price from current levels for a sustained period of time, or an increase in the market-based WACC, among other factors, could significantly impact our impairment analysis and may result in further goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Policies - Goodwill and Other Intangible Assets.”
We may invest in companies for strategic reasons and may not realize a return on our investments.
From time to time, we may make investments in companies to further their strategic objectives and support our key business initiatives. Such investments could include equity or debt instruments in private companies, many of which may be not be marketable at the time of our initial investment. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The success of these companies may depend on product development, market acceptance, operational efficiency, and other key business factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain

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favorable investment terms for future financings, or take advantage of liquidity events such as public offerings, mergers, and private sales. If any of these private companies fails, we could lose all or part of our investment in that company. If we determine that impairment indicators exist and that there are other-than-temporary declines in the fair value of the investments, we may be required to write down the investments to their fair value and recognize the related write-down as an investment loss.
If our members who operate as not-for profit entities lose their tax-exempt status, those members would suffer significant adverse tax consequences which, in turn, could adversely affect their ability to purchase products or services from us.
State tax authorities have challenged the tax-exempt status of hospitals and other health care facilities claiming such status on the basis that they are operating as charitable or religious organizations. The outcome of these cases has been mixed, with some facilities retaining their tax-exempt status and others being denied the ability to continue operating as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the Internal Revenue Service and the U.S. Congress are investigating the practices of non-for profit hospitals. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments that could have a material adverse impact on their cash flow, financial strength, and, in some cases, continuing viability. If the tax-exempt status of any member is revoked or compromised by new legislation or interpretation of existing legislation, that member’s financial health could be adversely affected, which could have a negative impact on our sales to the member.
If we are required to collect sales and use taxes on the programs we sell in various jurisdictions, we may be subject to liability for past sales and incur additional related costs and expenses and may experience a decrease in our future sales.
We may lose sales or incur significant expenses if states are successful in imposing state sales and use taxes on our services. A successful assertion by one or more states that we should collect sales or other taxes on the sale of our services could result in substantial tax liabilities for past sales, decrease our ability to compete with software vendors not subject to sales and use taxes, and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. We review these rules and regulations periodically and, when we believe that our services are subject to sales and use taxes in a particular state, may approach state tax authorities to determine how to comply with their rules and regulations. We may become subject to sales and use taxes and related interest and penalties for past sales in states where we believe no compliance is necessary. If we are required to collect and pay back taxes and the associated interest and penalties, and if our members fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our future services will effectively increase the cost of such services to our members and may adversely affect our ability to retain existing clients or to gain new members in the states in which such taxes are imposed.
We may not be able to fully realize our deferred tax assets.
For tax purposes, we have deferred income tax assets consisting primarily of state income tax credit and net operating loss carryforwards. As of December 31, 2016, our deferred income tax assets totaled approximately $52.5 million, which constituted approximately 2.6% of our total assets as of that date. If our future taxable income is less than we believe it will be, we may not be able to fully realize our deferred tax assets. In estimating future tax consequences, we do not consider the effect of future changes in existing tax laws or rates in the determination and evaluation of deferred tax assets and liabilities until the new tax laws or rates are enacted. We have established our deferred income tax assets and liabilities using currently enacted tax laws and rates. We will recognize an adjustment to income for the impact of new tax laws or rates on the existing deferred tax assets and liabilities when and if new tax laws or rates are enacted that have an impact on our deferred income taxes.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
We are subject to income and other taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating our provision for income taxes. We also are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation, or the effects of a change in tax policy in the United States or in any of the international jurisdictions where we do business, could have a material effect on our operating results in the period or periods for which that determination is made.
Our growing operations in India expose us to risks that could have an adverse effect on our costs of operations.
As of December 31, 2016, we employed approximately 370 employees in India through our Indian subsidiary, ABCO Advisory Services India Private Ltd., which expects to continue adding personnel. While there are cost advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees and has led to a commensurate increase in compensation expense. In the future, we may not be able to hire and retain such

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personnel at compensation levels consistent with our existing compensation and salary structure in India. In addition, our reliance on a workforce in India exposes us to disruptions in the business, political, and economic environment in that region. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our operations in India require us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. Our Indian operations also may subject us to trade restrictions, reduced or inadequate protection for intellectual property rights, and security breaches. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.
As a result of the inherent limitations in our internal control over financial reporting, misstatements due to error or fraud may occur and not be detected.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file with or submit to the SEC under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to management and recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls.
Risks Related to Our Indebtedness
Our level of debt and interest payment obligations may limit our growth and operational flexibility.
As of December 31, 2016, we had approximately $524.7 million in aggregate outstanding indebtedness, consisting of $424.7 million in borrowings under our senior secured term loan facility and $100 million in borrowings under our senior secured revolving credit facility. As of the same date, we could incur up to an additional $80.9 million of indebtedness outstanding at any time under our senior secured revolving credit facility. This substantial level of indebtedness may have important consequences. For example, it may:
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
limit our ability to obtain additional financing to expand our business or alleviate liquidity constraints, as a result of financial and other restrictive covenants in our indebtedness;
limit our ability to pursue our acquisition strategy;
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
place us at a competitive disadvantage relative to companies that have less indebtedness.
Covenants under our senior secured credit agreement may restrict our future operations.
Our senior secured credit agreement imposes operating and financial restrictions that limit our discretion on certain business matters, which could make it more difficult for us to expand, finance our operations, and engage in other business activities that may be in our interest. These restrictions include a requirement that we comply on a quarterly basis with financial covenants. Our debt covenants limit our ability and the ability of our subsidiaries to:
incur indebtedness;
create liens on assets;
pay cash dividends;
repurchase shares of our common stock or make other restricted payments;
make investments in or loans to other parties;
sell assets;
engage in mergers and acquisitions;

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enter into transactions with affiliates;
enter into sale and leaseback transactions; and
engage in businesses other than businesses of the type we conduct currently.
We may incur indebtedness in addition to the foregoing indebtedness. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
We are subject to interest rate risk that could cause us to incur unanticipated costs.
Borrowings under our senior secured credit agreement are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed would remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. We have entered into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility for a notional amount of $262.3 million as of December 31, 2016. However, we may not maintain interest rate swaps with respect to all of our variable-rate indebtedness and any swaps we enter into may not fully mitigate our interest rate risk. Additionally, hedging transactions involve additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions, and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense.
In the event that we need to refinance all or a portion of our outstanding debt before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing debt or refinance our existing debt at all. If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to the refinanced debt would increase.
Hedging instruments often are not guaranteed by an exchange or its clearing house and involve risks and costs.
Hedging instruments involve risk since they are often not guaranteed by an exchange or a clearing house. The enforceability of agreements underlying derivative transactions may depend on compliance with applicable regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with which we enter into a hedging transaction would most likely result in a default, which would result in the loss of unrealized gains and force us to cover our resale commitments, if any, at the then current market price. Although we generally seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until its expiration, which could result in losses.
Risks Related to Our Common Stock
Any failure by us to maintain effective internal control over financial reporting may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required under Section 404 of the Sarbanes-Oxley Act to furnish a report by management on the effectiveness of our internal control over financial reporting and to include a report by our independent auditors attesting to such effectiveness. Any failure by us to maintain effective internal control over financial reporting could adversely affect our ability to report accurately our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent auditors determine that we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remediate any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, also could restrict our future access to the capital markets. As discussed in this report under “Controls and Procedures,” our management has concluded that we have a material weakness in our internal control over financial reporting related to our tax process.
Our issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plans, or otherwise could adversely affect the market price of our common stock.
Our charter authorizes us to issue up to 135,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations and our debt covenants, we may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans, or otherwise. We may issue additional shares of common stock at a discount from the market price of our common stock on the

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Table of Contents

issue date. Any issuance of stock could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.
Provisions in our charter and bylaws could discourage takeover attempts we oppose even if our stockholders might benefit from a change in control of our company.
Provisions in our charter and bylaws may make it difficult and expensive for a third party to pursue a takeover attempt we oppose even if a change in control of our company would be beneficial to the interests of our stockholders. These provisions also could make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you support. The charter and bylaw provisions:
provide that the number of directors that will constitute the entire board of directors will be determined by a resolution of a majority of the board of directors;
provide that any vacancy on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors then in office;
provide that a special meeting of stockholders may be called only by a majority of the directors then in office, by the chairman of the board of directors, or by any holder or holders of at least 40% of the outstanding shares of capital stock then entitled to vote on any matter for which the special meeting is being called;
prohibit stockholders from taking action by written consent in lieu of a meeting with respect to any actions that are required or permitted to be taken by stockholders at any annual or special meeting of stockholders;
provide authority for our board of directors without stockholder approval to provide for the issuance of up to 5,000,000 shares of preferred stock, in one or more classes or series, with terms and conditions, and having rights, privileges and preferences, to be determined by the board of directors; and
establish advance notice procedures for stockholders to make nominations of candidates for election as directors or to present any other business for consideration at any annual or special stockholder meeting.



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Table of Contents

Item 1B. Unresolved Staff Comments.
None.

Item 2. Properties.
Our headquarters is located in approximately 340,000 square feet of office space in Washington, D.C. The facilities accommodate research, delivery, marketing and sales, software development, information technology, administration, and operations personnel. We occupy our headquarters facilities under an operating lease that expires in May 2019. The lease contains provisions for rental escalation and requires us to pay our portion of our executory costs such as taxes, insurance, and operating expenses.
In December 2015, we entered into a new lease to move our headquarters to a building that is being constructed in Washington, D.C. We expect to occupy the building for 16 years, starting no later than May 1, 2019. Payments to the landlord under our new lease agreement will not begin until May 2019.
As of December 31, 2016, we also leased office space under operating leases in Birmingham, Alabama; San Francisco, California; Chicago, Illinois; Bloomington, Minnesota; Plymouth Meeting, Pennsylvania; Nashville, Tennessee; Austin, Texas; Houston, Texas; Richmond, Virginia; and London, England. We also lease office space in Chennai, India through our Indian subsidiary, ABCO Advisory Services India Private Ltd. For information about our leases, see Note 14, “Commitments and contingencies,” to our consolidated financial statements included elsewhere in this report. We believe that our facilities are adequate for our current needs and that additional facilities will be available for lease on a commercially reasonable basis to accommodate our anticipated growth.

Item 3. Legal Proceedings.
From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.
Item 4. Mine Safety Disclosures.
None.

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Table of Contents

PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the Global Select Market of The NASDAQ Stock Market LLC and is traded under the NASDAQ symbol “ABCO.” The following table sets forth, for our last two fiscal years, the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market.
 
High
 
Low
Year Ended December 31, 2016:
 
 
 
First quarter
$
49.17

 
$
18.87

Second quarter
$
36.45

 
$
28.99

Third quarter
$
48.86

 
$
34.48

Fourth quarter
$
44.85

 
$
24.85

Year Ended December 31, 2015:
 
 
 
First quarter
$
56.49

 
$
43.00

Second quarter
$
54.94

 
$
46.67

Third quarter
$
60.38

 
$
43.59

Fourth quarter
$
54.84

 
$
40.70

As of February 28, 2017, there were nine holders of record of our common stock and 40,235,820 shares of common stock outstanding. The number of record holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker, bank, or other nominee, but does include each such broker, bank, or other nominee as one record holder.
We have not declared or paid any cash dividends on our common stock since we became a public company in 2001. We do not currently anticipate declaring or paying any cash dividends. The timing and amount of future cash dividends, if any, is periodically evaluated by our board of directors and would depend on, among other factors, our earnings, financial condition, cash requirements, and restrictions on dividend payments under our senior secured credit facilities.

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Table of Contents

The Advisory Board Company Stock Comparable Performance Graph
The graph below compares the cumulative total stockholder return on our common stock during the period from March 31, 2012 through December 31, 2016, with the cumulative total return on the S&P 500 Index, the Russell 2000 Index, and the NASDAQ Composite Index for the same period. The comparison assumes that $100 was invested on March 31, 2012 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.

38540172_capture.jpg
 
 
The Advisory Board Company
 
S&P 500
Index
 
Russell
2000 Index
 
NASDAQ
Composite Index
March 31, 2012
 
$
100

 
$
100

 
$
100

 
$
100

March 31, 2013
 
$
119

 
$
114

 
$
116

 
$
107

March 31, 2014
 
$
145

 
$
139

 
$
145

 
$
139

December 31, 2014
 
$
111

 
$
155

 
$
151

 
$
159

December 31, 2015
 
$
112

 
$
157

 
$
144

 
$
170

December 31, 2016
 
$
75

 
$
176

 
$
175

 
$
185






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Table of Contents

Item 6. Selected Financial Data.
The following table presents our selected financial data. The table should be read in conjunction with our consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report. In November 2014, we elected to change our fiscal year from the period beginning on April 1 and ending on March 31 to the period beginning on January 1 and ending on December 31.
 
 
Year Ended December 31,
 
Nine Months Ended December 31,
 
Year Ended March 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
803,424

 
$
768,348

 
$
434,002

 
$
519,429

 
$
450,286

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Cost of services, excluding depreciation and amortization
 
392,956

 
392,676

 
230,769

 
271,923

 
237,605

Member relations and marketing
 
130,028

 
120,958

 
81,244

 
96,298

 
85,264

General and administrative
 
126,634

 
128,669

 
75,483

 
74,169

 
62,185

Depreciation and amortization
 
77,268

 
73,134

 
30,317

 
31,084

 
20,108

Impairment of capitalized software
 

 
8,166

 
2,086

 

 

Goodwill impairment
 

 
99,145

 

 

 

Total costs and expenses
 
726,886

 
822,748

 
419,899

 
473,474

 
405,162

Operating income (loss)
 
76,538

 
(54,400
)
 
14,103

 
45,955

 
45,124

Other (expense) income:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(18,137
)
 
(21,121
)
 

 

 

Other (expense) income, net
 
(2,789
)
 
(6,499
)
 
(1,327
)
 
2,706

 
2,604

Loss on financing activities
 

 
(17,398
)
 

 

 

Total other (expense) income, net
 
(20,926
)
 
(45,018
)
 
(1,327
)
 
2,706

 
2,604

Income (loss) before provision for income taxes and gains (losses) from equity method investments
 
55,612

 
(99,418
)
 
12,776

 
48,661

 
47,728

Provision for income taxes
 
(11,040
)
 
(15,200
)
 
(3,530
)
 
(18,737
)
 
(17,899
)
Gains (losses) from equity method investments
 
46,666

 
(4,396
)
 
(6,540
)
 
(6,051
)
 
(6,756
)
Net income (loss) before allocation to noncontrolling interest
 
91,238

 
(119,014
)
 
2,706

 
23,873

 
23,073

Net (loss) income and accretion to redemption value attributable to noncontrolling interest
 

 

 
(6,253
)
 
119

 
108

Net income (loss) attributable to common stockholders
 
$
91,238

 
$
(119,014
)
 
$
(3,547
)
 
$
23,992

 
$
23,181

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders per share – basic
 
$
2.25

 
$
(2.84
)
 
$
(0.10
)
 
$
0.67

 
$
0.67

Net income (loss) attributable to common stockholders per share – diluted
 
$
2.23

 
$
(2.84
)
 
$
(0.10
)
 
$
0.65

 
$
0.64

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
40,528

 
41,888

 
36,213

 
35,909

 
34,723

Diluted
 
40,871

 
41,888

 
36,213

 
36,959

 
36,306




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Table of Contents

 
 
Year Ended December 31,
 
Nine Months Ended December 31,
 
Year Ended March 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
(In thousands)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense included in Statement of Operations:
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Cost of services
 
$
9,231

 
$
9,211

 
$
5,977

 
$
5,527

 
$
3,975

Member relations and marketing
 
5,028

 
5,176

 
3,348

 
3,688

 
2,643

General and administrative
 
15,176

 
14,706

 
8,640

 
9,002

 
7,295

Total costs and expenses
 
29,435

 
29,093

 
17,965

 
18,217

 
13,913

Operating income
 
(29,435
)
 
(29,093
)
 
(17,965
)
 
(18,217
)
 
(13,913
)


 
 
December 31,
 
March 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
(In thousands)
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
91,151

 
$
71,825

 
$
72,936

 
$
23,129

 
$
57,829

Marketable securities
 

 

 
14,714

 
164,396

 
156,839

Working capital (deficit)
 
8,826

 
(25,454
)
 
46,635

 
(61,038
)
 
(26,720
)
Total assets
 
2,036,878

 
1,979,477

 
1,125,643

 
1,042,064

 
898,849

Deferred revenue
 
734,594

 
755,424

 
672,743

 
589,077

 
503,576

Total stockholders’ equity
 
517,044

 
449,091

 
317,810

 
336,665

 
283,185




 
 
December 31,
 
March 31,
 
 
2016
 
2015
 
2014
 
2014
 
2013
(unaudited)
 
 
 
 
 
 
 
 
 
 
Other Operating Data:
 
 
 
 
 
 
 
 
 
 
Contract value (in thousands) (1)
 
$
781,368

 
$
762,595

 
$
601,842

 
$
541,903

 
$
466,329

 
—————————————
(1)
Represents the aggregate annualized revenue attributable to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement.

    



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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The following management’s discussion and analysis should be read in conjunction with our audited consolidated financial statements included in this report.
In November 2014, we elected to change our fiscal year end from March 31 to December 31. We refer to the nine-month transition period that began on April 1, 2014 and ended December 31, 2014 as the 2014 transition period. We believe that a reader’s understanding of our results of operations will be enhanced by review of a comparison between our audited results for the fiscal year ended December 31, 2015, referred to as fiscal year 2015, and our unaudited results for the calendar year ended December 31, 2014, referred to as calendar year 2014. Accordingly we present our discussion and analysis under “Results of Operations” below based on comparisons of the results for such periods, as well as based on a comparison of the results of fiscal year 2015 to the results for our fiscal year ended December 31, 2016, referred to as fiscal year 2016.
Overview of Our Operations
We are a leading provider of insight-driven performance improvement software and solutions to the rapidly changing health care and education industries. Through our subscription-based membership programs and consulting capabilities, we leverage our intellectual capital to help our clients, which we refer to as our members, solve their most critical business problems. As of the date of this report, we served approximately 5,600 members.
Our membership business model allows us to create value for our members by providing proven solutions to common and complex problems as well as high-quality content and innovative software on a broad set of relevant issues. Our growth has been driven by strong renewal rates, expansion of our relationships with existing members, new program launches, acquisition activity, the addition of new members, and annual price increases. Our member institution renewal rate has equaled or exceeded 90% in each of the twelve-month fiscal periods in the three-year period ended December 31, 2016. We believe high renewal rates reflect of our members’ recognition of the value they derive from participating in our programs.
Our revenue grew 4.6% in fiscal year 2016 over fiscal year 2015 and 34.4% in fiscal year 2015 over calendar year 2014. Our contract value increased 2.5% from December 31, 2015 to $781.4 million as of December 31, 2016 and 26.7% from December 31, 2014 to $762.6 million as of December 31, 2015. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at a particular date, without regard to the initial term or remaining duration of any such agreement. In each of our programs, we generally invoice and collect fees in advance of accrual revenue recognition.
On January 3, 2017, we approved a restructuring plan as part of our ongoing efforts to better align our resources and health care business strategy to meet member needs and market demand as well as to improve efficiency and future growth. In connection with such restructuring plan, we will reduce our workforce as a part of a broader effort to more closely align operating expenses with our long-term strategic initiatives and current macroeconomic business conditions. The reduction-in-force will affect approximately 220 employees and is expected to be completed during fiscal year 2017. We expect to recognize approximately $7 to $9 million of pre-tax restructuring charges in fiscal year 2017 in connection with this reduction-in-force, consisting of severance and other employee termination benefits.
We expect revenue and rate of revenue growth to be stable year-over-year in fiscal year 2017 due to the exiting of certain products and services which do not fully align with our long-term strategy, the absence of acquisition activity in fiscal year 2016 after our acquisition of Royall in fiscal year 2015, and slower sales in the quarter ended December 31, 2016 offset by expansion of our relationships with existing members, the addition of new members, and annual price increases.
Our operating costs and expenses consist of cost of services, member relations and marketing expense, general and administrative expenses, depreciation and amortization expense, impairment of capitalized software, and goodwill impairment.
Cost of services includes the costs associated with the production and delivery of our products and services, consisting of compensation for research, creative, data, and analysis personnel, consultants, software developers, and in-house faculty; costs of the organization and delivery of membership meetings, teleconferences, and other events; production and distribution of published materials; technology license fees; costs of developing and supporting our cloud-based content and software; and fair value adjustments to acquisition-related earn-out liabilities.
Member relations and marketing expense includes the costs of acquiring new members and the costs of account management, and consists of compensation (including sales incentives), travel and entertainment expenses, and costs for training of personnel, sales and marketing materials, and associated support services.
General and administrative expense includes the costs of human resources and recruiting; finance and accounting; legal support; management information systems; real estate and facilities management; corporate development; new program development; and other administrative functions.

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Depreciation and amortization expense includes the cost of depreciation of our property and equipment; amortization of costs associated with the development of software and tools that are offered as part of certain of our membership programs; and amortization of acquired intangibles.
Impairment of capitalized software includes the impairment charge taken to write down acquired technology and internally developed capitalized software balances to their fair value.
Goodwill impairment includes the impairment charge taken to write down goodwill to its estimated fair value.
Our operating costs for each period include stock-based compensation expenses and expenses representing additional payroll taxes for compensation expense as a result of the taxable income employees recognize upon their exercise of common stock options and the vesting of restricted stock units issued under our stock incentive plans.
The inclusion of the results of acquired businesses affect the comparability of our results of operations for the periods addressed in this management’s discussion and analysis.

Non-GAAP Financial Presentation
This management’s discussion and analysis presents supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP.” These financial measures, which are considered “non-GAAP financial measures” under SEC rules, are referred to as adjusted revenue, adjusted EBITDA, adjusted net income, non-GAAP earnings per diluted share, adjusted effective tax rate, and adjusted weighted average common shares outstanding - diluted. See “Non-GAAP Financial Measures” below for information about our use of these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of such measures, and reconciliations of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

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Table of Contents

Results of Operations
The following table shows statements of operations data expressed as a percentage of revenue for the periods indicated: 
 
Year Ended December 31, (1)
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
 
 
 

 
(Unaudited)
 

Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of services, excluding depreciation and amortization
48.9

 
51.1

 
52.0

 
53.2

Member relations and marketing
16.2

 
15.7

 
18.8

 
18.7

General and administrative
15.8

 
16.7

 
16.5

 
17.4

Depreciation and amortization
9.6

 
9.5

 
6.8

 
7.0

Impairment of capitalized software

 
1.1

 
0.4

 
0.5

Goodwill impairment

 
12.9

 

 

Total costs and expenses
90.5

 
107.0

 
94.5

 
96.8

Operating income (loss)
9.5

 
(7.1
)
 
5.5

 
3.2

Interest expense
(2.3
)
 
(2.7
)
 

 

Other (expense) income, net
(0.3
)
 
(0.8
)
 
(0.1
)
 
(0.3
)
Loss on financing activities

 
(2.3
)
 

 

Total other (expense) income, net
(2.6
)
 
(5.9
)
 
(0.1
)
 
(0.3
)
Income (loss) before provision for income taxes and gains (losses) from equity method investments
6.9

 
(12.9
)
 
5.4

 
2.9

Provision for income taxes
(1.4
)
 
(2.0
)
 
(1.8
)
 
(0.8
)
Gains (losses) from equity method investments
5.8

 
(0.6
)
 
(1.6
)
 
(1.5
)
Net income (loss) before allocation to noncontrolling interest
11.3

 
(15.5
)
 
1.9

 
0.6

Net loss and accretion to redemption value attributable to noncontrolling interest

 

 
(1.1
)
 
(1.4
)
Net income (loss) attributable to common stockholders
11.3
 %
 
(15.5
)%
 
0.8
 %
 
(0.8
)%
(1)
Shows the audited results for our fiscal year ended December 31, 2016 and 2015, the unaudited results for the calendar year ended December 31, 2014, and the audited results for the nine-month transition period that began on April 1, 2014 and ended on December 31, 2014.

Years ended 2016, 2015, and 2014
Net income (loss) attributable to common stockholders. Net income attributable to common stockholders was $91.2 million in fiscal year 2016 compared to net loss attributable to common stockholders of $119.0 million in fiscal year 2015. Our net income in fiscal year 2016 reflected an increase in revenue of $35.1 million, a $29.7 million post-tax gain on the sale of a portion of our shares in Evolent Inc., an $18.2 million post-tax dilution gain due to Evolent's acquisition activity, and a $3.0 million decrease in interest expense. The net loss in the prior year period was primarily attributable to a $99.1 million goodwill impairment, $21.1 million in interest expense related to new indebtedness, a $17.4 million loss on financing activities, and a discrete tax item of $10.8 million related to a write-off of accumulated Washington, D.C. tax credits as a result of changes in District of Columbia tax laws effective January 1, 2015. We did not incur comparable expenses in the current period.
Net loss attributable to common stockholders in fiscal 2015 also included an $8.2 million impairment of capitalized software, $6.6 million in acquisition-related costs, a $3.2 million impairment of a cost method investment, and increases in operating expenses, which were principally related to our acquisition of Royall. The effects of these items were partially offset by a $196.5 million increase in revenue over the revenue generated in calendar year 2014 and a non-cash accretion of $6.3 million in calendar year 2014 associated with the change in the redemption value of our redeemable noncontrolling interest in a private entity.
Revenue. Total revenue increased 4.6% to $803.4 million in fiscal year 2016 from $768.3 million in fiscal year 2015, while contract value increased 2.5% to $781.4 million as of December 31, 2016 from $762.6 million as of December 31, 2015.

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The increases in revenue and contract value were primarily attributable to membership growth in our Royall enrollment services, education research programs, student success software program, and EMR optimization services offering.
Total revenue increased 34.4% to $768.3 million in fiscal year 2015 from $571.8 million in calendar year 2014, while contract value increased 26.7% to $762.6 million as of December 31, 2015 from $601.8 million as of December 31, 2014. The increases in revenue and contract value were primarily attributable to our acquisition of Royall, strong performance in our consulting and management offerings, including the addition of EMR optimization services through acquisitions and continued growth in our software and research programs.
Cost of services. Cost of services increased to $393.0 million for fiscal year 2016 from $392.7 million for fiscal year 2015. As a percentage of revenue, cost of services was 48.9% and 51.1% for fiscal years 2016 and 2015, respectively. The decrease in cost of services as a percentage of revenue for the fiscal year 2016 was primarily attributable to the benefit of more revenue across our fixed cost platform and lower average employee bonuses. Cost of services included fair value adjustments to our acquisition-related earn-out liabilities, which resulted in decreases in such liabilities of $1.3 million and $1.7 million in fiscal years 2016 and 2015, respectively.
Cost of services increased to $392.7 million for fiscal year 2015 from $297.4 million for calendar year 2014. The increase in cost of services was primarily due to an increase of $46.6 million relating to our acquisition of Royall and increases of $13.8 million relating to the continued growth and expansion of our Crimson programs, as well as to our recent acquisitions of Clinovations and ThoughtWright, LLA d/b/a Grades First, or GradesFirst. Cost of services in the fiscal year 2015 also reflected increased costs associated with the delivery of program content and tools to our expanded membership base, including increased staffing, licensing fees, and other costs. As a percentage of revenue, cost of services was 51.1% for fiscal year 2015 and 52.0% for calendar year 2014. Cost of services included fair value adjustments to our acquisition-related earn-out liabilities, which resulted in decreases in such liabilities of $1.7 million in fiscal year 2015 and $4.7 million in calendar year 2014.
Member relations and marketing expense. Member relations and marketing expense increased 7.5% to $130.0 million in fiscal year 2016 from $121.0 million in fiscal year 2015. As a percentage of revenue, member relations and marketing expense in fiscal years 2016 and 2015 was 16.2% and 15.7%, respectively. The increases in member relations and marketing expense were primarily attributable to increases in sales staff and related travel and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base.
Member relations and marketing expense increased 12.4% to $121.0 million in fiscal year 2015 from $107.7 million in calendar year 2014. As a percentage of revenue, member relations and marketing expense was 15.7% in fiscal year 2015 and 18.8% in calendar year 2014. The increase in member relations and marketing expense was primarily attributable to an increase in sales staff and other associated costs, as well as to an increase in member relations personnel and related costs required to serve our expanding membership base. The decrease in member relations and marketing expense as a percentage of revenue resulted from our acquisition of Royall as the Royall business historically spends less on marketing relative to revenue, as well as increased efficiency of our sales teams.
General and administrative expense. General and administrative expense decreased to $126.6 million in fiscal year 2016 from $128.7 million in fiscal year 2015. As a percentage of revenue, general and administrative expense decreased to 15.8% in fiscal year 2016 from 16.7% in fiscal year 2015. The decrease of $2.0 million in general and administrative expense was primarily attributable to $6.6 million in acquisition costs related to our acquisition of Royall in fiscal year 2015, $4.0 million relating to an all-employee event during 2015 with no comparable expense in fiscal year 2016, and lower average employee bonuses. This decrease was offset in part by increased investment in administrative functions and office space to support our growing organization.
General and administrative expense increased to $128.7 million in fiscal year 2015 from $94.2 million in calendar year 2014. As a percentage of revenue, general and administrative expense increased to 16.7% in fiscal year 2015 from 16.5% in calendar year 2014. The increase of $34.4 million in general and administrative expense was primarily attributable to increases of $4.6 million in costs related to investments in our human resources, finance, and information technology infrastructure to support our growing employee base and number of office locations, as well as an increase of $5.0 million in our new product and corporate development groups. For fiscal year 2015, we also recognized a total of $6.6 million in acquisition costs related to our acquisition of Royall, $4.0 million relating to an all-employee event, and $3.2 million in costs relating to signing our new headquarters lease.
Depreciation and amortization. Depreciation expense increased to $77.3 million, or 9.6% of revenue in fiscal year 2016, from $73.1 million, or 9.5% of revenue in fiscal year 2015. The increase in depreciation and amortization expense in the current period was primarily attributable to increased amortization expense from developed capitalized internal-use software and depreciation of improvements made to our Washington, D.C. headquarters.

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Depreciation expense increased to $73.1 million, or 9.5% of revenue in fiscal year 2015, from $39.1 million, or 6.8% of revenue in calendar year 2014. The increase in depreciation and amortization expense in the current period was primarily attributable to increased amortization expense of $23.4 million from acquired intangibles relating to our acquisitions of Royall, GradesFirst, and Clinovations, as well as, developed capitalized internal use software, and depreciation of improvements made to new expansion floors in our Washington, D.C. headquarters.
Impairment of capitalized software. During fiscal year 2015, we concluded that certain internally developed and acquired technology assets would no longer be utilized in our services, and as a result, we recognized a $8.2 million impairment charge on the remaining unamortized costs. During the calendar year 2014, we concluded that certain internally developed capitalized software for sale assets were not fully recoverable, and as a result recognized a $2.1 million impairment on the remaining unamortized costs.
Goodwill impairment. We performed our annual goodwill impairment assessment on October 1, 2015 and, in connection with the preparation of our audited financial statements for fiscal year 2015, concluded that the Royall reporting unit was impaired by $99.1 million. See Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report for information about this impairment change. There was no comparable activity in the other periods.
Interest expense. Interest expense decreased to $18.1 million in fiscal year 2016 from $21.1 million in fiscal year 2015. The decrease in interest expense was due to lower average debt balances following our retirement of $150 million of indebtedness and a related refinancing that occurred during the fiscal year 2015 in addition to continued principal payments.
Interest expense of $21.1 million was recognized during fiscal year 2015 on indebtedness incurred to fund the Royall acquisition on January 9, 2015. Subsequently in fiscal 2015, $150 million of such an acquisition indebtedness was retired and the balance of such indebtedness was refinanced. There was no comparable activity in calendar year 2014.
Other (expense) income, net. Other (expense) income, net consists of gains and losses on investments in preferred stock and common stock warrants, interest income, and foreign currency gains and losses. Other expense, net for fiscal year 2016 was $2.8 million and consisted of foreign exchange losses of $1.4 million. In addition, we incurred a $1.8 million impairment loss on a cost method investment and a $0.4 million gain on our interest rate swap during fiscal year 2016. The foreign currency gains and losses reflected the effect of fluctuating currency rates on our receivable balances denominated in foreign currencies.
For fiscal year 2015, other income, net consisted of gains and losses on investments in preferred stock and common stock warrants, interest income, and foreign currency gains and losses. Other expense, net for fiscal year 2015 was $6.5 million and consisted of a loss of $3.6 million on a cost method investment, and a foreign exchange rate loss of $2.9 million. Other expense, net for calendar year 2014 was $0.6 million and consisted of interest income of $1.1 million, offset by a foreign exchange rate loss of $1.7 million. As of December 31, 2015, we no longer owned marketable securities, except for our ownership interest in Evolent Health, Inc., which is accounted for under the equity method.
Loss on financing activities. A loss on financing activities of $17.4 million was recognized in connection with the refinancing of acquisition indebtedness during fiscal year 2015. There was no comparable activity in fiscal year 2016 or 2014.
Provision for income taxes. Our provision for income taxes was $11.0 million and $15.2 million for calendar years 2016 and 2015, respectively. Our effective tax rate for fiscal year 2016 was 19.9% compared to (15.3)% for fiscal year 2015.
Our provision for income taxes for the fiscal year 2015 was $15.2 million compared to $10.5 million for the calendar year 2014. Our effective tax rate of (15.3)% for the fiscal year 2015 decreased from our effective tax rate of 34.0% for the calendar year 2014. The tax expense for fiscal year 2015 included a $10.8 million impact related to a write-off of accumulated Washington, D.C. income tax credits as a result of changes in District of Columbia tax laws effective January 1, 2015.
Gains (losses) from equity method investments. Our proportionate share of gains and losses in our investments in the Evolent entities, net of tax during fiscal years 2016, 2015, and calendar year 2014 were $46.7 million, $4.4 million, and $6.5 million, respectively. The primary drivers for the gains in fiscal year 2016 was the sale of a portion of our ownership interest in Evolent Inc. and dilution gains recognized as a result of Evolent's acquisition activity. Total cash received from the partial sale was $48.6 million and resulted in the recognition of a post-tax gain of $29.7 million in fiscal year 2016. Total post-tax dilution gains recognized as the result of Evolent's acquisition activity was $18.2 million.
Net loss and accretion to redemption value of noncontrolling interest. In July 2012, we entered into an agreement with an entity created for the sole purpose of providing consulting services for us on an exclusive basis. We determined that this entity met the definition of a variable interest entity over which we have significant influence and, as a result, have consolidated the results of this entity into our consolidated financial statements. During calendar year 2014, we determined that the conditions to satisfy the put option discussed further in Note 9, "Noncontrolling interest," of our consolidated financial statements included in this report were probable of achievement and at such time recorded an accretion charge to the estimated redemption amount of our redeemable noncontrolling interest of $6.3 million.

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Stock-based compensation expense. We recognized the following stock-based compensation expense in the consolidated statements of operations line items for stock options and restricted stock units issued under our stock incentive plans for fiscal years 2016 and 2015, and calendar year 2014 (in thousands):
 
Year Ended
 
Year Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2014
Stock-based compensation expense included in:
 
 
 
 
(unaudited)
Costs and expenses:
 
 
 
 
 
Cost of services
$
9,231

 
$
9,211

 
$
7,358

Member relations and marketing
5,028

 
5,176

 
4,190

General and administrative
15,176

 
14,706

 
10,839

Depreciation and amortization

 

 

Total costs and expenses
29,435

 
29,093

 
22,387

Operating income
(29,435
)
 
(29,093
)
 
(22,387
)
There are no stock-based compensation costs capitalized as part of the cost of an asset.
Stock-based compensation expense by award type for calendar years 2016, 2015, and 2014 was as follows (in thousands):
 
Year Ended
 
Year Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2014
Stock-based compensation expense by award type:
 
 
 
 
(unaudited)
Stock options
$
13,270

 
$
10,908

 
$
6,585

Restricted stock units
16,165

 
18,185

 
15,802

Total stock-based compensation
$
29,435

 
$
29,093

 
$
22,387

As of December 31, 2016, $49.0 million of total unrecognized compensation cost related to stock-based awards is expected to be recognized over a weighted average period of 2.4 years.
Liquidity and Capital Resources
Cash flows generated from operating activities represent our primary source of liquidity. We believe that existing cash and cash equivalents and operating cash flows will be sufficient to support our expected operating and capital expenditures, as well as our debt service obligations, during at least the next 12 months. We had cash and cash equivalents of $91.2 million as of December 31, 2016 and cash and cash equivalents balances of $71.8 million as of December 31, 2015. We expended $61.6 million in fiscal year 2016 and $53.0 million in fiscal year 2015 in cash to purchase shares of our common stock through our share repurchase program. We expended $1.9 million in fiscal year 2016 and $746.7 million in fiscal year 2015 in cash for acquisitions.
Cash Flows
Cash flows from operating activities. The combination of revenue growth, profitable operations, and payment for memberships in advance of accrual revenue typically results in operating activities that generate cash flows in excess of net income attributable to common stockholders on an annual basis. Net cash flows provided by operating activities were $112.6 million for fiscal year 2016, compared to $161.9 million for fiscal year 2015. The decrease was primarily attributable to the change in taxes paid from a net refund of $4.7 million in fiscal year 2015 to net tax payments of $25.9 million in fiscal year 2016, as well as to a slower rate of cash collection and the timing of payments of accounts payable. Operating cash flow was further reduced by income tax payments primarily attributed to the sale of a portion of our ownership interest in Evolent Inc. The cash proceeds from the sale are included in our cash flows from investing activities.
Net cash flows provided by operating activities were $161.9 million for fiscal year 2015 and consisted primarily of net loss offset by non-cash impairment charges of $110.9 million, non-cash depreciation and amortization expense, stock-based compensation expense, and loss on financing activities. The changes in membership fees receivable and deferred revenue which increased operating cash flows reflect the fact that we invoice and collect in advance of services performed.

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Net cash flows provided by operating activities were $64.6 million for the transition period and consisted primarily of net income plus non-cash depreciation and amortization expense, stock-based compensation expense, and deferred revenue, offset in part by changes in membership fees receivable.
Cash flows from investing activities. Our cash management, investment and acquisition strategy, and capital expenditure programs affect investing cash flows. Cash used in investing activities for fiscal year 2016 was $1.9 million, consisting primarily of $48.6 million of cash received from the sale of a portion of our ownership interest in Evolent Inc., offset by capital expenditures of $48.5 million, and expenditures of $1.9 million for our acquisition.
Cash used in investing activities for fiscal year 2015 was $791.7 million, consisting primarily of expenditures of $746.7 million for our acquisitions, capital expenditures of $56.7 million, and a contribution of $3.0 million to Evolent LLC. The effect of these factors was offset in part by redemptions of $14.7 million of marketable securities.
During the transition period, investing activities provided $29.9 million in cash, which primarily consisted of net redemptions of $151.4 million of marketable securities, partially offset by expenditures of $70.2 million for our acquisitions of Healthpost, GradesFirst, and Clinovations and by capital expenditures of $51.4 million.
Cash flows from financing activities. In fiscal year 2016, we had net cash flows used in financing activities of $91.4 million consisting of proceeds of $17.0 million from the issuance of debt, proceeds of $4.8 million from the issuance of common stock, and excess tax benefits of $1.3 million resulting from the exercise of employee options. The effect of those items was partially offset by the repurchase of 1,951,258 shares of our common stock for approximately $61.6 million, the pay-down of debt of $45.8 million, $3.6 million in acquisition-related earn-out payments, and our use of $3.5 million to satisfy minimum employee tax withholding for vested restricted stock units.
In fiscal year 2015, we had net cash flows used in financing activities of $628.6 million consisting of proceeds of $1,840.7 million from the issuance of debt, proceeds of $154.0 million from the issuance of common stock, and excess tax benefits of $4.9 million resulting from the exercise of employee options. The effect of those items was partially offset by the pay-down of debt of $1,307.2 million, the repurchase of 1,069,357 shares of our common stock for approximately $53.0 million, our use of $6.1 million to satisfy minimum employee tax withholding for vested restricted stock units, $3.3 million to pay debt issuance costs, and $1.5 million to make acquisition-related earn-out payments.
In the transition period, we had net cash flows used in financing activities of $44.6 million, consisting of our repurchase of 731,559 shares of our common stock for approximately $36.0 million, our use of $7.6 million to satisfy minimum employee tax withholding for vested restricted stock units, and a $6.1 million payment for the acquisition of a noncontrolling interest. The effect of those items was partially offset by our receipt of $4.3 million from the exercise of stock options, $0.4 million in excess tax benefits resulting from the exercise of employee options, and $0.4 million from the issuance of common stock under our employee stock purchase plan.
Senior secured credit facilities
On February 6, 2015, we obtained $675 million of senior secured credit facilities, referred to as the Credit Facilities, under a credit agreement with a syndicate of lenders. The Credit Facilities were amended on October 30, 2015.
The amended Credit Facilities consist of (a) a five-year senior secured term loan facility in the principal amount of $475 million, or Term Facility, and (b) a five-year senior secured revolving credit facility, or Revolving Facility, under which up to $200 million principal amount of borrowings and other credit extensions may be outstanding at any time.
The Advisory Board Company is the borrower under the Credit Facilities. The obligations of The Advisory Board Company under the Credit Facilities are guaranteed by its domestic subsidiaries, subject to certain exceptions, and the obligations of The Advisory Board Company and the subsidiary guarantors under the Credit Facilities are secured by a first-priority security interest in substantially all of the assets of The Advisory Board Company and such domestic subsidiaries.
Term Facility 
As of December 31, 2016, $424.7 million was outstanding under the Term Facility. We are able to elect, subject to pro forma compliance with the financial covenants and other customary conditions, to solicit the lenders under the Credit Facilities or other prospective lenders to add one or more incremental term loan facilities to the Credit Facilities or to increase commitments under the Revolving Facility in an aggregate amount of no more than (a) $150 million plus (b) the amount of voluntary prepayments of borrowings under the Credit Facilities not funded with the incurrence of other long-term indebtedness. Any such voluntary prepayments of loans under the Revolving Facility must be accompanied by permanent reductions of commitments under the Revolving Facility.
To the extent not previously paid, the Term Facility will mature, and all term loans outstanding under the facility will become due and payable, on February 6, 2020. The term loans are repayable in quarterly installments, which commenced with

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the quarter ended June 30, 2015, equal to a specified percentage of the aggregate principal amount drawn on the facility closing date, as follows: (a) 1.25% for each of the first eight full fiscal quarters following the facility closing date; (b) 2.5% for each of the ninth through twelfth full fiscal quarters following the facility closing date; and (c) 3.75% for each of the thirteenth through nineteenth full fiscal quarters following the facility closing date. We also are required to make principal prepayments under the Term Facility from the net proceeds of specified types of asset sales, casualty events, and incurrences of debt. We may voluntarily prepay outstanding term loans without premium or penalty.
Amounts drawn under the Term Facility generally bear interest, payable monthly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate, or LIBOR, plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time. The interest rate on the alternate base rate loans will fluctuate as the base rate fluctuates, while the interest rate on the LIBOR loans will be adjusted at the end of each applicable interest period. Interest on alternate base rate loans will be payable monthly in arrears, while interest on LIBOR loans will be payable at the end of each applicable interest period, except that, in the case of any interest period longer than three months, interest will be payable at the end of each three-month period.
Revolving Facility 
As of December 31, 2016, $100 million of borrowings were outstanding under the Revolving Facility. Up to a maximum of $200 million of amounts (including letters of credit) may be outstanding at any time under the facility. The Revolving Facility will mature, and all revolving loans outstanding under the facility will become due and payable, on February 6, 2020. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility. We may use the proceeds of borrowings under the Revolving Facility, when drawn, to finance working capital needs and for general corporate purposes, including permitted acquisitions.
Amounts drawn under the Revolving Facility generally bear interest, payable quarterly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time.
We are obligated to pay a commitment fee at an initial annual rate of 0.30%, subject to reduction based on our total leverage ratio from time to time, accruing on the average daily amount of available commitments under the Revolving Facility.
The Credit Facilities contain customary negative covenants restricting certain actions that may be taken by us and our subsidiaries. Subject to specified exceptions, these covenants limit our ability and the ability of our subsidiaries to incur indebtedness, create liens on our assets, pay cash dividends, repurchase our common stock and make other restricted payments, make investments in or loans to other parties, sell assets, engage in mergers and acquisitions, enter into transactions with affiliates, enter into sale and leaseback transactions, and change our businesses. The Credit Facilities also contain customary affirmative covenants, including, among others, covenants requiring compliance with laws, maintenance of corporate existence, licenses, properties, and insurance, payment of taxes and performance of other material obligations, and delivery of financial and other information to the lenders. We are required to maintain compliance with financial covenants consisting of (a) a maximum total leverage ratio and (b) a minimum interest coverage ratio, each measured as of the last day of our fiscal quarter, for a period consisting of our most recently completed four fiscal quarters. We were in compliance with these financial covenants as of December 31, 2016.
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2016. These obligations relate to our debt, leases for our headquarters and other offices, and a non-cancelable agreement for the purchase of data. These are more fully described in Note 14, “Commitments and contingencies,” to our consolidated financial statements included in this report.
 
Payment due by period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Long-term debt
$
522,086

 
$
49,347

 
$
156,540

 
$
316,199

 
$

Build-to-suit lease obligation
$
446,133

 
$

 
$
16,515

 
$
50,407

 
$
379,211

Non-cancelable operating leases
$
62,053

 
$
17,421

 
$
27,398

 
$
11,621

 
$
5,613

Purchase obligation
$
2,375

 
$
1,375

 
$
1,000

 
$

 
$

Interest payments on debt obligations
$
37,247

 
$
14,086

 
$
22,448

 
$
713

 
$


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In addition to the contractual obligations above, as of December 31, 2016 we have payments of up to $1.2 million contingently payable through December 31, 2017 related to business acquisitions. For additional detail, see Note 4, “Fair value measurements,” to our consolidated financial statements included in this report.
Share Repurchase Program
In January 2004, our board of directors authorized the repurchase by us from time to time of up to $50 million of our common stock. This authorization subsequently was increased in cumulative amount to $100 million in October 2004, to $150 million in February 2006, to $200 million in January 2007, to $250 million in July 2007, to $350 million in April 2008, to $450 million in May 2013, and to the current level of $550 million in November 2015. We intend to fund any future share repurchases with cash on hand and with cash generated from operations. No minimum number of shares for repurchase has been fixed, and the share repurchase authorization has no expiration date. All repurchases have been made in the open market pursuant to this publicly announced repurchase program. As of December 31, 2016, the remaining authorized repurchase amount was $36.5 million. Our ability to repurchase common stock is restricted by the covenants in our senior secured credit facilities.
Exercise of Stock Options and Purchases Under Our Employee Stock Purchase Plan
Options granted to participants under our stock-based incentive compensation plans that were exercised to acquire shares generated cash of approximately $4.3 million for fiscal year 2016, $4.7 million for fiscal year 2015, and $4.3 million for the 2014 transition period from payment of option exercise prices.
Cash flows of approximately $0.5 million for fiscal year 2016, $0.5 million for fiscal year 2015, and $0.4 million for the 2014 transition period were provided by discounted stock purchases by participants under our employee stock purchase plan.
Off-Balance Sheet Arrangements
As of December 31, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition or results of operations.
Summary of Critical Accounting Policies
We have identified the following policies as critical to our business operations and the understanding of our results of operations. This listing is not a comprehensive identification of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Certain of our accounting policies are particularly important to the presentation of our financial condition and results of operations and may require the application of significant judgment by our management. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, our observation of trends in the industry, information provided by our members, and information available from other outside sources, as appropriate. For a more detailed discussion on the application of these and other accounting policies, see Note 2, “Summary of significant accounting policies,” to our consolidated financial statements included in this report. Our critical accounting policies are discussed below.
Revenue Recognition
Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectibility is reasonably assured. Fees are generally billable when a letter of agreement is signed by the member. Fees receivable during the subsequent twelve-month period and related deferred revenue are recorded on the balance sheet upon the commencement of the membership and are subsequently updated at the end of each reporting period. In many of our higher priced membership program agreements with terms that are greater than one year, fees may be billed on an installment basis. In certain multi-year arrangements, the member has the ability to cancel the arrangement within a defined notice period without penalty.
Our membership programs generally include more than one deliverable. Deliverables are determined based upon the availability and delivery method of the services and may include: best practices research; executive education curricula; cloud-based content, databases, and calculators; performance or benchmarking reports; diagnostic tools; interactive advisory support; and technology. Access to such deliverables is generally available on an unlimited basis over the membership period. When an agreement contains multiple deliverables, we review the deliverables to determine if they qualify as separate units of accounting. In order for deliverables in a multiple-deliverable arrangement to be treated as separate units of accounting, the deliverables must have standalone value upon delivery, and delivery or performance of undelivered items in an arrangement with a general right of return must be probable. If we determine that there are separate units of accounting, arrangement

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consideration at the inception of the membership period is allocated to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. Because of the unique nature of our products, neither vendor specific objective evidence nor third-party evidence is available. Therefore, we utilize best estimate of selling price to allocate arrangement consideration in multiple- deliverable arrangements. Best estimate of selling price is an estimate and, as such, could change over time.
In general, the deliverables in membership programs do not qualify as separate units of accounting. These deliverables are consistently available throughout the membership period, and, as a result, the consideration is recognized ratably over the membership period. When a service offering includes a combination of unlimited and limited service offerings, revenue is recognized over the appropriate service period, either ratably, if the service is consistently available, or, if the service is not consistently available, upon the earlier of the delivery of the service or the completion of the membership period, provided that all other criteria for recognition have been met.
Certain membership programs incorporate hosted software. In many of these agreements, members are charged set-up fees in addition to subscription fees for access to the hosted cloud-based software and related membership services. Both set-up fees and subscription fees are recognized ratably over the term of the membership agreement, which is generally three years, and is consistent with the pattern of the delivery of services under these arrangements. Upon launch of a new program that incorporates software, all program revenue is deferred until the program is generally available for release to our membership, and then recognized ratably over the remainder of the contract term of each agreement.
Certain arrangements include performance-based fees that are contingent upon the member realizing a benefit over a defined period. These performance-based fees are included in the arrangement consideration and recognized when the related services are provided to the member and we are reasonably assured that the amounts due are collectible. We have not recognized any revenue that is at risk due to future performance contingencies.
We also perform professional services sold under separate agreements that include consulting and management services. These agreements are either fixed fee or time-and-materials arrangements. For fixed fee arrangements, we recognize professional services revenues using the proportional performance method based on effort expended. We recognize professional services revenues for time-and-materials arrangements as services are rendered based on contractual rates.
For arrangements in which a customer purchases multiple membership programs or purchases a membership program together with consulting and management services, each program and professional services arrangement is generally considered a separate unit of accounting, and arrangement consideration is allocated based on our best estimate of selling price. We develop our best estimate of selling price by considering pricing practices, margin, competition, and geographies in which we offer our products and services.
Although we believe that our approach to estimates and judgments with respect to revenue recognition is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material.
Allowance for Uncollectible Revenue
Our ability to collect outstanding receivables from our members has an effect on our operating performance and cash flows. We maintain an allowance for uncollectible revenue as a reduction of revenue based on our ongoing monitoring of members’ credit and the aging of receivables. To determine the allowance for uncollectible revenue, we examine our collections history, the age of accounts receivable in question, any specific member collection issues that have been identified, general market conditions, and current economic trends.
Basis of Presentation and Consolidation
We may enter into various agreements with unrelated third parties to provide, directly or indirectly, services to our members or prospective members. We must determine for each of these business arrangements, which could include an investment by us in the third party, whether to consolidate the third party or account for our investment under the equity or cost basis of accounting. We determine whether to consolidate certain entities based on our rights and obligations under the agreements, applying the applicable accounting guidance. For investment interests that we do not consolidate, we evaluate the guidance to determine the accounting framework to apply. The application of the rules in evaluating the accounting treatment for each agreement is complex and requires substantial management judgment. Therefore, we believe the decision to choose an appropriate accounting framework is a critical accounting estimate. We evaluate our accounting for investments on a regular basis, including when a significant change in the design of an entity occurs.

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Property and Equipment
Property and equipment consists of leasehold improvements, furniture, fixtures, equipment, capitalized internal use software development costs, and acquired developed technology. Property and equipment is stated at cost, less accumulated depreciation and amortization. In certain membership programs, we provide technology under a hosting arrangement where the software application resides on our or our service providers’ hardware. The members do not take delivery of the software and only receive access to the software during the term of their membership agreement.
Software development costs that are incurred in the preliminary project stage for internal use software are expensed as incurred. During the development stage, direct consulting costs and payroll and payroll-related costs for employees that are directly associated with each project are capitalized and amortized over the estimated useful life of the software once it is placed into operation. Capitalized software is amortized using the straight-line method over its estimated useful life, which is generally five years. Replacements and upgrades and enhancements to existing systems that result in added functionality are capitalized, while maintenance and repairs are charged to expense as incurred.
Acquired developed software represents the fair value of software acquired through a business combination that resides on our or our service providers’ hardware and is made available to members through the memberships. Amortization for acquired developed software is included in the depreciation and amortization line item of our consolidated statements of operations. Acquired developed software is amortized over its weighted average estimated useful life of eight years based on the cash flow estimate used to determine the value of the intangible asset at its acquisition.
Furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term.
Construction Costs for a Build-to-Suit Lease
In December 2015, we entered into a build-to-suit lease agreement for a new corporate headquarters in Washington, D.C., which is currently being constructed. For accounting purposes only, we are the deemed owner of the building during the construction period. Accordingly, we estimate the construction-in-progress asset and the corresponding construction financing obligation on at least a quarterly basis. Estimates for the total cost of the construction and percentage of completion are based on project plans and progress reports. We anticipate that construction will be completed in mid-2019.
Business Combinations
Accounting for acquisitions requires our management to estimate the fair value of the assets and liabilities acquired, which involves a number of judgments, assumptions, and estimates that could materially affect the timing or amounts recognized in our financial statements. The items involving the most significant assumptions, estimates, and judgments include those requiring determination of the fair value of the following:
acquired technologies and other intangible assets, including valuation methodology, estimations of future cash flows, and discount rates, as well as the estimated useful life of assets;
the acquired company’s trademark, as well as assumptions about the period of time the acquired trademark will continue to be used;
deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances, which are initially estimated as of the acquisition date;
property and equipment, pre-existing liabilities, deferred revenue, and contingent consideration, as each may be applicable; and
goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
We allocate goodwill and intangible assets to the reporting unit based on the reporting unit that is expected to benefit from the business combination. Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Increases or decreases in the fair value of contingent consideration obligations resulting from changes in the estimates of earn-out results can materially impact the financial statements. As of December 31, 2016, we had a liability of $1.2 million for

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contingent consideration related to acquisitions. See Note 4, “Fair value measurements,” to our consolidated financial statements included in this report for further detail.
Goodwill and Other Intangible Assets
The excess cost of an acquisition over the fair value of the net assets acquired is recorded as goodwill. The primary factors that generate goodwill are the value of synergies between us and our acquired entities and the acquired assembled workforce, neither of which qualifies as an identifiable intangible asset. Our goodwill and other intangible assets with indefinite lives are not amortized, but rather tested for impairment on an annual basis on October 1, or more frequently if events or changes in circumstances indicate potential impairment.
When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.
We estimate the fair value of our reporting units using both an income and a market approach. The income approach is based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital determined separately for each reporting unit. The determination of fair value using the income approach involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, terminal growth rates, and discount rates. The market approach is based on revenue and earnings multiple data of peer companies. See Note 7, “Goodwill and intangibles,” to our consolidated financial statements included in this report for further detail, including information about our recognition of a goodwill impairment charge of $99.1 million during fiscal year 2015.
Other intangible assets consist of capitalized software for sale and acquired intangibles. We capitalize consulting costs and payroll and payroll-related costs for employees directly related to building a software product for sale once technological feasibility is established. We determine that technological feasibility is established by the completion of a detailed program design or, in its absence, completion of a working model. Once the software product is ready for general availability, we cease capitalizing costs and begins amortizing the intangible asset on a straight-line basis over its estimated useful life. The weighted average estimated useful life of capitalized software is five years. Other intangible assets include those assets that arise from business combinations and that consist of developed technology both for internal use and external sale, non-competition covenants, trademarks, contracts, and customer relationships that are amortized, on a straight-line basis, over two years to seventeen years. Finite-lived intangible assets are required to be amortized over their useful lives and are evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Recovery of Long-lived Assets (Excluding Goodwill)
We record our long-lived assets, such as property and equipment, at cost. We review the carrying value of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be fully recoverable. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss, if any, is measured as the amount that the carrying value of the asset exceeds the asset’s fair value if the asset is not recoverable. We consider expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of assets is impaired. If we determine that an asset’s carrying value is impaired, we will record a reduction in the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. Although we believe that the carrying values of our long-lived assets are appropriately stated, changes in our business strategy or market conditions or significant technological developments could significantly affect these judgments and require adjustments to recorded asset balances.
Deferred Incentive Compensation and Other Charges
Incentive compensation to our employees related to the negotiation of new and renewal memberships, license fees to third-party vendors for tools, data, and software incorporated in specific memberships that include software, and other direct

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and incremental costs associated with specific memberships are deferred and amortized over the term of the related memberships.
Income Taxes
Deferred income taxes are determined using the asset and liability method. Under this method, temporary differences arise as a result of the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in our management's opinion, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and tax rates on the date of the enactment of the change.
Our tax positions are subject to income tax audits by federal, state, local, and foreign tax authorities. A tax benefit from an uncertain position may be recognized in the financial statements only if it is more likely than not that the position is sustainable, based on its technical merits. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time.
Stock-based Compensation
We measure and recognize stock-based compensation cost based on the estimated fair values of the stock-based awards on the grant date. Stock-based compensation costs are recognized as an expense in the consolidated statements of operations over the vesting periods of the awards. We calculate the grant date estimated fair value of all stock options, with the exception of the stock options issued with market-based conditions, using a Black-Scholes valuation model. The fair value of stock options issued with both performance-based and market-based conditions is calculated on the date of grant using a Monte Carlo model.
Determining the estimated fair value of stock-based awards is subjective in nature and involves the use of estimates and assumptions, including the term of the stock-based awards, risk-free interest rates over the vesting period, expected dividend rates, the price volatility of our shares, forfeiture rates of the awards, and the impact of market conditions. The probability of achieving performance conditions and the estimated time to achieve such performance conditions are significant estimates in determining when and in what amount to recognize stock-based awards with performance conditions. Such estimates are made based on the historical achievement of similar conditions and our estimated operating plan. As these factors change, the estimates of probability and estimated time to achieve performance conditions are updated. Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate is based on historical experience. Our fair value estimates are based on assumptions we believe are reasonable but that are inherently uncertain. The fair value of all restricted stock units, with the exception of the restricted stock units issued with market-based conditions, is determined as the fair market value of the underlying shares on the date of grant. The fair value of restricted stock units issued with both performance-based and market-based conditions is calculated on the date of grant using a Monte Carlo model. To the extent we change the terms of our employee stock-based compensation programs, experience market volatility in the pricing of our common stock that increases the implied volatility calculation, or refine different assumptions in future periods such as the probability or timing of achieving performance conditions and forfeiture rates that differ from our current estimates, among other potential factors, the stock-based compensation expense that we record in future periods and the tax benefits that we realize may differ significantly from the expense and the tax benefits we have recorded in previous reporting periods.
Recent Accounting Pronouncements
See Note 2, “Summary of significant accounting policies,” to our consolidated financial statements included elsewhere in this report for a description of recent accounting pronouncements, including the expected dates of adoption.
Non-GAAP Financial Measures
The tables below present supplemental measures of our performance which we have derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. We refer to these financial measures, which are considered “non-GAAP financial measures” under SEC rules, as adjusted revenue, adjusted EBITDA, adjusted net income, non-GAAP earnings per diluted share, adjusted effective tax rate, and adjusted weighted average common shares outstanding-diluted.
Our management uses these non-GAAP financial measures, together with financial measures prepared in accordance with GAAP, to enhance understanding by investors of our core operating performance, as well as for internal forecasting purposes. Our management believes that providing information about these non-GAAP financial measures facilitates an assessment by our investors of our fundamental operating trends and addresses concerns of investors that various financing, acquisition-

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related, non-cash, and other effects included in GAAP measures may obscure such underlying trends. We believe that, by highlighting such trends relating to our underlying performance, our non-GAAP presentation helps our investors to make meaningful period-to-period comparisons of our results.
There are limitations to the use of our non-GAAP financial measures. These non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Our non-GAAP financial measures exclude the items discussed below. Because the excluded items have a material impact on our financial results, we use non-GAAP financial measures to supplement financial information presented in accordance with GAAP.
Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are set forth below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. The discussion below presents information about each of the non-GAAP financial measures and our reasons for excluding the enumerated items from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.
Adjusted Revenue
We adjust revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.
Adjusted Net Income and Non-GAAP Earnings Per Diluted Share
We present adjusted net income and non-GAAP earnings per diluted share to provide investors with a meaningful, consistent comparison of our operating results and trends for the periods presented. Our management believes that these measures are also useful to investors by allowing investors to evaluate our operations using the same tools that management uses to evaluate our past performance and prospects for future performance. These two non-GAAP financial measures reflect adjustments based on the exclusion of the following items as well as adjustments for related income tax effects:
Effect on revenue of fair value adjustments to acquisition-related deferred revenue: We adjust revenue to exclude the impact of acquisition-related deferred revenue fair value adjustments. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.
Accretion of noncontrolling interest to redemption value:  We have excluded a charge resulting from management’s determination during 2014 that it was probable that a put option owned by a variable interest entity would become exercisable prior to its expiration. The charge represents an increase in the carrying value to estimated redemption value. We do not expect this type of transaction to recur.
Goodwill impairment: We have excluded the impact of impairments of goodwill resulting from acquisitions, as such non-cash amounts are inconsistent in amount and frequency and are significantly affected by the timing and size of acquisitions.
Impairments of capitalized software: We have has excluded the impact of impairments of finite-lived software assets, as such non-cash amounts are inconsistent in amount and frequency and are significantly affected by the timing and extent of our software development efforts. Our management believes that the adjustments for these items more closely correlate the reported financial measure with the ordinary and ongoing course of our operations.
Gain (loss) from equity method investments: We have excluded our proportionate share of income (loss) and other gains recorded in connection with our equity method investments. Our management believes that the exclusion of such amounts allows investors to better understand our core operating results.
Amortization of acquisition-related intangible assets: Amortization of acquisition-related intangible assets consists of amortization of customer relationships, developed technology, and trade names. Amortization charges for acquired intangible assets are significantly affected by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges to

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facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
Loss on financing activities: We have excluded loss on financing activities, as this item represents a non-cash charge. In addition, the amount and frequency of such charges are not consistent over time and are significantly affected by the timing and size of debt refinancing transactions.
Acquisition and similar transaction charges: We have excluded certain acquisition-related charges resulting from acquisitions (including legal, accounting, and due diligence costs) to allow more comparable comparisons of our financial results to our historical operations. Such charges generally are not relevant to assessing the long-term performance of the acquired assets, and are not a material consideration in management’s evaluation of potential acquisitions. In addition, the frequency and amount of such charges vary significantly based on the size and timing of the acquisitions and the maturities of the businesses being acquired. 
Fair value adjustments to acquisition-related earn-out liabilities: We have excluded the impact of acquisition-related contingent consideration non-cash adjustments due to the inherent uncertainty and volatility associated with such amounts based on changes in assumptions with respect to fair value estimates. The amount and frequency of such adjustments are not consistent across transactions and are significantly affected by the timing and size of our acquisitions, the future outlook of the acquired business, the estimated discount rate, and the nature of the transaction consideration.
Stock-based compensation expense: Although stock-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense because the expense can vary significantly from period to period based on our share price, as well as the timing, size, and nature of equity awards granted. In addition, our management believes that the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other companies, many of which also exclude such expense in determining their non-GAAP financial measures.
Other corporate expenses: We have excluded certain other expenses that are the result of other, non-comparable events, primarily charges associated with the fair valuing of certain equity instruments. These events arise outside of the ordinary course of our continuing operations. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
Income tax effects and adjustments: During the twelve months ended December 31, 2015, we adjusted for the impact of certain discrete items included in the effective tax rate, including items unrelated to the current year, changes in statutory tax rates, or other items that are not indicative of our ongoing operations. We exclude these items because management believes it will facilitate the comparison of the annual effective tax rate over time. The adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes discrete items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.
Adjusted EBITDA
Adjusted EBITDA reflects the adjustments to net income prepared on a GAAP basis, as discussed above, and, to the extent not already subject to such adjustments, excludes expenses related to interest, taxes, depreciation and amortization. Companies exhibit significant variations with respect to capital structure and cost of capital (which affects relative interest expense) and differences in taxation and book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. By eliminating some of these variations and reflecting the other adjustments, discussed above, our management believes that this non-GAAP financial measure allows investors to evaluate more effectively our fundamental operating performance relative to that of other companies.
Adjusted Effective Tax Rate
Adjusted effective tax rate is the effective tax rate prepared on a GAAP basis adjusted for the impact of certain non-cash items included in the effective tax rate, including changes in statutory tax regulations and other items that are not indicative of our ongoing operations. We exclude these items because our management believes this non-GAAP financial measure will facilitate the comparison by investors of our annual effective tax rates over time. The adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, which excludes specified items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

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There are various limitations associated with the non-GAAP financial measures we use, including the following:
the non-GAAP financial measures generally do not reflect all depreciation and amortization, and although the assets being depreciated and amortized will in some cases have to be replaced in the future, the measures do not reflect any cash requirements for such replacements;
the non-GAAP financial measures do not reflect the expense of equity awards to employees; and
the non-GAAP financial measures do not reflect the effect of earnings or charges resulting from matters that our management considers not indicative of our ongoing operations, but which may recur from year to year.
Because of their limitations, our non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, net income, earnings per diluted share, effective tax rate, and weighted average common shares outstanding-diluted prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
Adjusted net income and adjusted EBITDA. We expect adjusted EBITDA growth in excess of revenue growth and adjusted EBITDA margin expansion in fiscal year 2017 due to scale and efficiency from revenue growth relative to a fixed cost base for existing programs, our restructuring plan, and absence of significant additional acquisition activity in fiscal year 2016. Adjusted net income increased 39.3% to $89.4 million for fiscal year 2016 from $64.2 million for fiscal year 2015, while adjusted EBITDA increased 9.6% to $188.3 million for fiscal year 2016 from $171.7 million for fiscal year 2015. The increases in adjusted net income and adjusted EBITDA were attributable to continued growth in our Royall enrollment services, education research programs, student success software program, and EMR optimization services offering. This revenue growth was partially offset by higher marketing and member relations costs.
Adjusted net income increased to $64.2 million for fiscal year 2015 from $47.3 million for calendar year 2014, while adjusted EBITDA increased 80% to $171.7 million for calendar year 2015 from $95.7 million for calendar year 2014. The increases in adjusted EBITDA and adjusted net income for calendar year 2015 were attributable to our increased revenue and our acquisition of Royall, the effects of which were partially offset by increased investment in our general and administrative infrastructure to support our growing employee base, higher marketing and member relations costs attributable to an increase in the number of new sales teams, and the costs of new and growing programs.
 
Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Revenue
$
803,424

 
$
768,348

 
$
571,805

 
$
434,002

Effect on revenue of fair value adjustments to acquisition-related deferred revenue

 
12,499

 

 

Adjusted revenue
$
803,424

 
$
780,847

 
$
571,805

 
$
434,002


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Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Net income (loss) attributable to common stockholders
$
91,238


$
(119,014
)
 
$
4,790

 
$
(3,547
)
Effect on revenue of fair value adjustments to acquisition-related deferred revenue


12,499

 

 

(Gains) losses from equity method investments
(46,666
)

4,396

 
9,271

 
6,540

Accretion of noncontrolling interest to redemption value

 

 
6,253

 
6,253

Provision for income taxes
11,040

 
15,200

 
10,463

 
3,530

Interest expense
18,137

 
21,121

 

 

Other expense (income), net
2,789

 
6,499

 
595

 
1,327

Loss on financing activities

 
17,398

 

 

Depreciation and amortization
77,268

 
73,134

 
39,101

 
30,317

Impairment of capitalized software

 
8,166

 
2,086

 
2,086

Goodwill impairment

 
99,145

 

 

Acquisition and similar transaction charges

 
6,610

 
4,592

 
4,592

Build-to-suit land rent
3,733

 

 

 

Fair value adjustments to acquisition-related earn-out liabilities
1,292

 
(1,665
)
 
(4,700
)
 
(600
)
Vacation accrual adjustment

 
(850
)
 
850

 
850

Stock-based compensation expense
29,435

 
29,093

 
22,388

 
17,965

Adjusted EBITDA
$
188,266

 
$
171,732

 
$
95,689

 
$
69,313


 
Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Net income (loss) attributable to common stockholders
$
91,238

 
$
(119,014
)
 
$
4,790

 
$
(3,547
)
Effect on revenue of fair value adjustments to acquisition-related deferred revenue

 
12,499

 

 

(Gains) losses from equity method investments
(46,666
)
 
4,396

 
9,271

 
6,540

Accretion of noncontrolling interest to redemption value

 

 
6,253

 
6,253

Impairment of capitalized software

 
8,166

 
1,502

 
1,502

Goodwill impairment

 
99,145

 

 

Amortization of acquisition-related intangibles
28,408

 
31,033

 
9,893

 
7,566

Loss on financing activities

 
17,398

 

 

Acquisition and similar transaction charges

 
6,610

 
4,592

 
4,592

Fair value adjustments to acquisition-related earn-out liabilities
1,292

 
(1,665
)
 
(4,700
)
 
(600
)
Loss on investment in common stock warrants

 
370

 
180

 
180

Impairment of cost method investment
1,800

 
3,200

 

 

Build-to-suit land rent
3,733

 

 

 

Vacation accrual adjustment

 
(850
)
 
850

 
850

Stock-based compensation expense
29,435

 
29,093

 
22,388

 
17,965

Income tax effects and adjustments
(19,835
)
 
(26,180
)
 
(7,722
)
 
(6,704
)
Adjusted net income
$
89,405

 
$
64,201

 
$
47,297

 
$
34,597


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Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Net income (loss) attributable to common shareholders per share - diluted
$
2.23

 
$
(2.84
)
 
$
0.13

 
$
(0.10
)
Effect of adjusted weighted average common shares outstanding - diluted on earnings (loss) per share

 
0.02

 

 
0.01

Effect on revenue of fair value adjustments to acquisition-related deferred revenue

 
0.30

 

 

(Gains) losses from equity method investments
(1.14
)
 
0.10

 
0.25

 
0.18

Accretion of noncontrolling interest to redemption value

 

 
0.17

 
0.17

Impairment of capitalized software

 
0.19

 
0.04

 
0.04

Goodwill impairment

 
2.34

 

 

Amortization of acquisition-related intangibles
0.70

 
0.73

 
0.27

 
0.20

Loss on financing activities

 
0.41

 

 

Acquisition and similar transaction charges

 
0.16

 
0.12

 
0.12

Fair value adjustments to acquisition-related earn-out liabilities
0.03

 
(0.04
)
 
(0.13
)
 
(0.02
)
Loss on investment in common stock warrants

 
0.01

 
0.01

 

Impairment of cost method investment
0.04

 
0.08

 

 

Build-to-suit land rent
0.09

 

 

 

Vacation accrual adjustment

 
(0.02
)
 
0.02

 
0.02

Stock-based compensation expense
0.72

 
0.69

 
0.61

 
0.49

Income tax effects and adjustments
(0.48
)
 
(0.62
)
 
(0.21
)
 
(0.18
)
Non-GAAP earnings per diluted share
$
2.19

 
$
1.51

 
$
1.28

 
$
0.93


 
Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Effective tax rate
19.9
%
 
(15.3
)%
 
34.0
 %
 
27.6
%
Effect on tax rate of Washington, D.C. tax law change including write-off of DC income tax credits
%
 
18.0
 %
 
 %
 
%
Effect on tax rate of loss on financing activities
%
 
(13.0
)%
 
 %
 
%
Effect on tax rate of asset impairment
%
 
52.1
 %
 
 %
 
%
Effect on tax rate of unconsolidated equity method investment related FIN 48 liability
%
 
 %
 
(5.6
)%
 
%
Effect on tax rate of Royall acquisition costs and other acquisition-related tax items
%
 
(2.6
)%
 
 %
 
%
Adjusted effective tax rate
19.9
%
 
39.2
 %
 
28.4
 %
 
27.6
%

 
Year Ended December 31,
 
Nine Months Ended December 31,
 
2016
 
2015
 
2014
 
2014
Weighted average common shares outstanding - diluted
40,871

 
41,888

 
36,877

 
36,213

Dilutive shares outstanding

 
516

 

 
555

Adjusted weighted average common shares outstanding - diluted
40,871

 
42,404

 
36,877

 
36,768


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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk. As of December 31, 2016, we had $424.7 million of outstanding borrowings under our senior secured term loan facility and $100.0 million of outstanding borrowings under our revolving credit facility. Amounts drawn under each facility generally bear interest, payable quarterly, at an annual rate calculated, at our option, on the basis of either (a) an alternate base rate plus an initial margin of 1.25% or (b) the applicable London interbank offered rate, plus an initial margin of 2.25%, subject in each case to margin reductions based on our total leverage ratio from time to time. Accordingly, we are exposed to fluctuations in interest rates on the variable-rate borrowings under our senior secured term loan facility and revolving credit facility. A hypothetical 10% increase in LIBOR would increase our annual cash interest expense on our variable-rate debt by approximately $0.4 million.
During fiscal year 2016, we utilized an interest rate swap to manage exposure to interest rates on a portion of the variable rate of our indebtedness. Our interest rate swap is with major financial institutions and is not used for speculative or trading purposes. We have designated our interest rate swap as a cash flow hedge, and changes in the fair value of the interest rate swap are recognized in other comprehensive (loss) income. Hedge ineffectiveness associated with the interest rate swap is reported in interest expense. We recorded the interest rate swap at fair value, which amounted to an asset of $1.0 million as of December 31, 2016.
Foreign Currency Risk. Our international operations, which accounted for approximately 2.4% of our consolidated total revenue for the fiscal year 2016, subject us to risks related to currency exchange fluctuations. Prices for our services sold to members located outside the United States are sometimes denominated in local currencies (primarily the British Pound Sterling). As a consequence, increases in the U.S. dollar against local currencies in countries where we have members would result in a foreign exchange loss recognized by us. We recorded a foreign currency exchange rate loss of $1.4 million for fiscal year 2016, $2.9 million for fiscal year 2015, and $1.7 million for the 2014 transition period. These amounts are included in other income, net in our consolidated statements of operations. A hypothetical 10% change in foreign currency exchange rates would not have had a material impact on our financial position as of December 31, 2016.


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Item 8. Financial Statements and Supplementary Data.
Report of Management’s Assessment of Internal Control Over Financial Reporting
Management is responsible for the preparation and integrity of our consolidated financial statements appearing in our Annual Report on Form 10-K. Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s estimates and judgments.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting. We maintain a system of internal control that is designed to provide reasonable assurance as to the reliable preparation and presentation of our consolidated financial statements in accordance with generally accepted accounting principles, as well as to safeguard assets from unauthorized use or disposition.
Our control environment is the foundation for our system of internal control over financial reporting and is reflected in our Code of Ethics for Employees, Code of Business Conduct and Ethics for Members of the Board of Directors and Code of Ethics for Finance Team Members. Our internal control over financial reporting is supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with members of management and the independent registered public accounting firm to review and discuss internal control over financial reporting and accounting and financial reporting matters. The independent registered public accounting firm reports to the Audit Committee.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control-Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. In its evaluation, management identified control deficiencies in its tax process that constituted a material weakness as such deficiencies potentially would not prevent or detect and correct a material misstatement of the Company’s consolidated financial statements. As a result, management has concluded that our internal control over financial reporting was not effective as of December 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm which has issued a report on our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting, which is included herein and which expresses an adverse opinion thereon.
 
 
/s/ Robert W. Musslewhite
 
 
 
Robert W. Musslewhite
 
Chief Executive Officer and Director
 
March 15, 2017
 
 
 
/s/ Michael T. Kirshbaum
 
 
 
Michael T. Kirshbaum
 
Chief Financial Officer and Treasurer
 
March 15, 2017
 

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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders of
The Advisory Board Company and subsidiaries

We have audited The Advisory Board Company and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Advisory Board Company and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weaknesses in internal controls related to the Company’s tax process. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Advisory Board Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated March 15, 2017 which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, The Advisory Board Company and subsidiaries have not maintained effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.


/s/ Ernst & Young LLP

McLean, Virginia
March 15, 2017





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Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
The Board of Directors and Stockholders of
The Advisory Board Company and subsidiaries

We have audited the accompanying consolidated balance sheets of The Advisory Board Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the consolidated financial statements of Evolent Health, Inc. or Evolent Health LLC, entities in which the Company has a 7.9% and 7.7% interest, respectively, as of December 31, 2016. In the consolidated financial statements, the Company’s investment in Evolent Health, Inc. is stated at $10.3 million and $0 as of December 31, 2016 and 2015, respectively, the Company’s investment in Evolent Health LLC is stated at $9.6 million and $0.7 million as of December 31, 2016 and 2015, respectively, the Company’s equity in the net loss of Evolent Health, Inc. is stated at $4.3 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively, and the Company’s equity in the net loss of Evolent Health LLC is stated at $6.1 million and $8.6 million for the years ended December 31, 2016 and 2015, respectively, and $6.5 million for the nine months ended December 31, 2014. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Evolent Health, Inc. and Evolent Health LLC, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Advisory Board Company and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years ended December 31, 2016 and 2015, and the nine months ended December 31, 2014, in conformity with U.S. generally accepted accounting principl