Amended Current Report Filing (8-k/a)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 9, 2015

The Advisory Board Company

(Exact name of registrant as specified in its charter)

Delaware

000-33283

52-1468699

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

2445 M Street, NW

Washington, District of Columbia

20037

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (202) 266-5600

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

This Current Report on Form 8-K/A is filed as an amendment to the Current Report on Form 8-K of The Advisory Board Company (the “Company”) that was filed with the Securities and Exchange Commission on January 12, 2015 (the “Original Form 8-K”) to report, among other matters, the completion of the Company’s acquisition of Royall Acquisition Co. (“Royall”), on January 9, 2015. This Form 8-K/A amends Item 9.01 of the Original Form 8-K to provide certain financial statements of Royall and to provide certain unaudited pro forma financial information of the Company in connection with the Company’s acquisition of Royall.

Item 9.01.

Financial Statements and Exhibits

(a)	Financial Statements of Businesses Acquired

The audited consolidated financial statements of Royall Acquisition Co. and its subsidiaries as of June 30, 2014, 2013 and 2012, and for the years then ended (including the consolidated statements of comprehensive income, changes in stockholder’s equity and cash flows for Royall & Company Holding, Inc. and its subsidiaries for the period from July 1, 2011 to December 22, 2011), and the unaudited consolidated financial statements of Royall Acquisition Co. and its subsidiaries as of and for the three months ended September 30, 2014 and 2013 are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and incorporated by reference in this Item 9.01(a).

(b)	Pro Forma Financial Information

The unaudited pro forma combined financial information of The Advisory Board Company as of September 30, 2014, for the six months ended September 30, 2014, and for the year ended March 31, 2014 are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated by reference in this Item 9.01(b).

(c)	Exhibits


Exhibit Number		Description of Exhibit

23.1		Consent of PricewaterhouseCoopers, LLP, independent auditor for Royall Acquisition Co.

99.1		Audited Consolidated Financial Statements of Royall Acquisition Co. and Subsidiaries:

		Reports of Independent Auditor
		Consolidated Balance Sheets as of June 30, 2014, 2013 and 2012
		Consolidated Statements of Comprehensive Income for the years ended June 30, 2014, 2013 and 2012
		Consolidated Statements of Changes in Stockholder’s Equity for the years ended June 30, 2014, 2013 and 2012
		Consolidated Statements of Cash Flows for the years ended June 30, 2014, 2013 and 2012
		Notes to Consolidated Financial Statements

- 2 -



		Unaudited Consolidated Financial Statements of Royall Acquisition Co. and Subsidiaries:

		Consolidated Balance Sheets as of September 30, 2014, June 30, 2014 and September 30, 2013
		Consolidated Statements of Comprehensive Income for the three months ended September 30, 2014 and 2013
		Consolidated Statements of Cash Flows for the three months ended September 30, 2014 and 2013
		Notes to Unaudited Consolidated Financial Statements

99.2		Unaudited pro forma combined financial information of The Advisory Board Company as of September 30, 2014, for the six months ended September 30, 2014, and for the year ended March 31, 2014

- 3 -

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		The Advisory Board Company

Date: January 20, 2015		/s/ Michael T. Kirshbaum
		Michael T. Kirshbaum
		Chief Financial Officer (Duly Authorized Officer)

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

23.1		Consent of PricewaterhouseCoopers, LLP, independent auditor for Royall Acquisition Co.

99.1		Audited Consolidated Financial Statements of Royall Acquisition Co. and Subsidiaries:

		Reports of Independent Auditor
		Consolidated Balance Sheets as of June 30, 2014, 2013 and 2012
		Consolidated Statements of Comprehensive Income for the years ended June 30, 2014, 2013 and 2012
		Consolidated Statements of Changes in Stockholder’s Equity for the years ended June 30, 2014, 2013 and 2012
		Consolidated Statements of Cash Flows for the years ended June 30, 2014, 2013 and 2012
		Notes to Consolidated Financial Statements

		Unaudited Consolidated Financial Statements of Royall Acquisition Co. and Subsidiaries:

		Consolidated Balance Sheets as of September 30, 2014, June 30, 2014 and September 30, 2013
		Consolidated Statements of Comprehensive Income for the three months ended September 30, 2014 and 2013
		Consolidated Statements of Cash Flows for the three months ended September 30, 2014 and 2013
		Notes to Unaudited Consolidated Financial Statements

99.2		Unaudited pro forma combined financial information of The Advisory Board Company as of September 30, 2014, for the six months ended September 30, 2014, and for the year ended March 31, 2014

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-84422, No. 333-140757, No. 333-162032, No. 333-177006, No. 333-192270) and Form S-3 (No. 333-104584, No. 333-112712, No. 333-122850) of The Advisory Board Company (the “Company”) of our reports dated January 2, 2015 relating to the financial statements of Royall & Company Holding, Inc. and Royall Acquisition Co., which appear in the Current Report on Form 8-K/A of the Company dated January 9, 2015.

/s/ PricewaterhouseCoopers LLP

Richmond, Virginia

January 20, 2014

Exhibit 99.1

Royall Acquisition Co. and Subsidiaries

Consolidated Financial Statements

As of June 30, 2012, 2013 and 2014 and for the period December 23,

2011 to June 30, 2012 and years ended June 30, 2013 and 2014

(Successor) and period July 1, 2011 to December 22, 2011

(Predecessor)

Royall Acquisition Co. and Subsidiaries

Index

June 30, 2014


	Page(s)

Independent Auditor’s Reports		3-4

Consolidated Financial Statements

Consolidated Balance Sheets		5

Consolidated Statements of Comprehensive Income		6

Consolidated Statements of Changes in Stockholder’s Equity		7

Consolidated Statements of Cash Flows		8

Notes to Consolidated Financial Statements		9-20

LOGO

Independent Auditor’s Report

To the Board of Directors of Royall Acquisition Co.:

We have audited the accompanying consolidated financial statements of Royall & Company Holding, Inc. and its subsidiaries (the “Predecessor Company”), which comprise the consolidated statements of comprehensive income, changes in stockholder’s equity and cash flows for the period from July 1, 2011 to December 22, 2011.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Predecessor Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Predecessor Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Predecessor Company’s consolidated statements of comprehensive income, changes in stockholder’s equity and cash flows for the period from July 1, 2011 to December 22, 2011 in accordance with accounting principles generally accepted in the United States of America.

Richmond, Virginia

January 2, 2015

LOGO

Independent Auditor’s Report

To the Board of Directors of Royall Acquisition Co.:

We have audited the accompanying consolidated financial statements of Royall Acquisition Co. and its subsidiaries (the “Successor Company”), which comprise the consolidated balance sheets as of June 30, 2014, June 30, 2013 and June 30, 2012, and the related consolidated statements of comprehensive income, changes in stockholder’s equity and cash flows for the years ended June 30, 2014, 2013 and the period from December 23, 2011 to June 30, 2012.

Management’s Responsibility for the Consolidated Financial Statements

Auditor’s Responsibility

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Successor Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Successor Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Successor Company at June 30, 2014, June 30, 2013 and June 30, 2012, and the results of their operations and their cash flows for the years ended June 30, 2014, 2013 and the period from December 23, 2011 to June 30, 2012 in accordance with accounting principles generally accepted in the United States of America.

Richmond, Virginia

January 2, 2015

LOGO

Royall Acquisition Co. and Subsidiaries

Consolidated Balance Sheets

June 30, 2012, 2013 and 2014


	Successor
	2012			2013			2014

Assets
Current assets
Cash and cash equivalents	$	1,205,117		$	7,343,376		$	7,350,632
Accounts receivable, net		12,576,975			16,160,893			16,956,470
Current taxes receivable		—			—			338,729
Prepaid expenses and other		710,124			793,141			892,261
Costs advanced for clients		145,611			355,668			611,355

Total current assets		14,637,827			24,653,078			26,149,447

Property and equipment
Equipment and furniture		1,538,044			3,038,963			3,946,681
Internally developed software		6,636,655			7,443,578			8,750,264
Leasehold improvements		408,414			1,699,831			3,497,149

Total property and equipment		8,583,113			12,182,372			16,194,094

Less accumulated depreciation and amortization		(1,369,056	)		(4,242,391	)		(7,352,840	)

Net property and equipment		7,214,057			7,939,981			8,841,254

Deferred financing costs		6,585,545			6,328,802			3,839,517
Customer relationships, net		78,608,416			74,572,616			71,587,016
Other intangible assets, net		—			—			765,600
Goodwill		293,819,388			293,819,388			296,287,472

Total assets	$	400,865,233		$	407,313,865		$	407,470,306

Liabilities and Stockholder’s Equity
Current liabilities
Current maturities of notes payable	$	5,320,000		$	3,372,935		$	1,830,000
Accounts payable		1,014,522			876,509			1,008,108
Accrued expenses		4,256,219			5,104,342			6,538,573
Current taxes payable		—			64,007			—
Deferred revenue		1,766,375			4,833,471			3,205,854

Total current liabilities		12,357,116			14,251,264			12,582,535

Deferred rent		—			852,045			832,570
Deferred tax liability		13,100,369			16,878,836			20,082,221
Notes payable, less current maturities		174,845,648			168,600,479			247,338,381

Total liabilities		200,303,133			200,582,624			280,835,707

Stockholder’s equity
Common stock - 1,000 shares authorized and outstanding at June 30, 2012, 2013 and 2014; par value $0.01 per share		10			10			10
Additional paid-in capital		202,251,128			202,251,128			202,251,128
Retained earnings (Accumulated deficit)		(1,689,038	)		4,480,103			(75,616,539	)

Total stockholder’s equity		200,562,100			206,731,241			126,634,599

Total liabilities and stockholder’s equity	$	400,865,233		$	407,313,865		$	407,470,306

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended June 30, 2012, 2013 and 2014


	Predecessor			Successor
	Period Ended December 22, 2011			Period Ended June 30, 2012			Year Ended June 30, 2013			Year Ended June 30, 2014

Revenue	$	32,720,889		$	45,768,178		$	88,615,775		$	104,632,341
Postage expenses		(3,128,382	)		(3,418,611	)		(6,831,872	)		(8,090,529	)
Printing, mailshop, data processing and other production expenses		(4,823,941	)		(5,189,374	)		(10,973,401	)		(11,744,601	)
Personnel and benefits expenses		(12,103,062	)		(14,003,813	)		(28,767,284	)		(31,611,705	)
Occupancy expenses		(588,725	)		(639,669	)		(1,531,713	)		(1,755,535	)
Depreciation and amortization expense		(2,014,348	)		(3,476,702	)		(6,943,079	)		(7,339,171	)
Travel and workshop expenses		(628,930	)		(910,689	)		(1,647,939	)		(1,822,465	)
Selling, general and administrative expenses		(1,129,146	)		(1,702,729	)		(4,610,394	)		(4,023,356	)

Operating income		8,304,355			16,426,591			27,310,093			38,244,979

Other expenses
Interest expense		(2,995,625	)		(8,835,870	)		(16,004,414	)		(15,769,395	)
Transaction expenses		(1,159,661	)		(5,996,466	)		—			—
Amortization of deferred financing costs		(330,382	)		(604,706	)		(1,267,973	)		(5,351,157	)
Other loss		(857	)		(349	)		(20,508	)		(51,675	)

Net income before income taxes		3,817,830			989,200			10,017,198			17,072,752
Income tax expense		(1,570,395	)		(2,678,238	)		(3,848,057	)		(6,669,394	)

Net income (loss)	$	2,247,435		$	(1,689,038	)	$	6,169,141		$	10,403,358

Total comprehensive income (loss)	$	2,247,435		$	(1,689,038	)	$	6,169,141		$	10,403,358

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Consolidated Statements of Changes in Stockholder’s Equity

Years Ended June 30, 2012, 2013 and 2014


	Common Stock						Series A Preferred Stock						Additional Paid in Capital			Retained Earnings / (Accumulated Deficit)
	Shares			Amount									Additional Paid in Capital			Retained Earnings / (Accumulated Deficit)			Total

Balance at June 30, 2011 (Predecessor)		110,400		$	1,104			63,883		$	639		$	59,837,447		$	(3,311,221	)		$	56,527,969
Net income																	2,247,435				2,247,435

Balance at December 22, 2011 (Predecessor)		110,400			1,104			63,883			639			59,837,447			(1,063,786	)			58,775,404

Stock cancellation		(110,400	)		(1,104	)		(63,883	)		(639	)		(59,837,447	)						(59,839,190	)
Elimination of predecessor accumulated deficit																	1,063,786				1,063,786

Balance at December 23, 2011 (Successor)		—			—			—			—			—			—				—

Issuance of Shares		1,000			10									202,251,128							202,251,138
Net loss																	(1,689,038	)			(1,689,038	)

Balance at June 30, 2012 (Successor)		1,000			10			—			—			202,251,128			(1,689,038	)			200,562,100

Net income																	6,169,141				6,169,141

Balance at June 30, 2013 (Successor)		1,000			10			—			—			202,251,128			4,480,103				206,731,241

Dividends paid to Royall Holdings LLC																	(90,500,000	)			(90,500,000	)
Net income																	10,403,358				10,403,358

Balance at June 30, 2014 (Successor)		1,000		$	10			—		$	—		$	202,251,128		$	(75,616,539	)		$	126,634,599

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2012, 2013 and 2014


	Predecessor			Successor
	Period Ended December 22, 2011			Period Ended June 30, 2012			Year Ended June 30, 2013			Year Ended June 30, 2014

Operating activities
Net income (loss)	$	2,247,435		$	(1,689,038	)	$	6,169,141		$	10,403,358
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		2,014,347			3,476,702			6,943,079			7,339,171
Deferred income tax expense (benefit)		(3,713,433	)		2,678,238			3,778,467			3,562,116
Amortization of deferred financing costs		330,382			604,706			1,267,973			5,351,153
Loss on interest rate derivative agreements		52,106			23,747			2,025			161
Capitalization of subordinated debt interest		—			665,648			1,127,766			832,467
Loss on disposal of assets		857			349			23,424			57,670
Amortization of deferred rent		—			—			302,045			(19,475	)
Changes in operating assets and liabilities
Receivables		(14,331,113	)		9,623,739			(3,583,918	)		(795,577	)
Prepaid expenses and other		34,934			(154,196	)		(85,045	)		(99,281	)
Costs advanced for clients		(2,236,525	)		2,222,802			(210,057	)		(255,687	)
Accounts payable		1,146,345			(1,881,893	)		703,532			144,611
Accrued expenses		3,063,624			1,105,577			848,123			1,022,648
Current taxes payable		2,810,077			(1,572,404	)		64,007			(183,551	)
Deferred revenue		25,432,360			(24,639,495	)		3,067,096			(1,627,617	)

Net cash provided by (used in) operating activities		16,851,396			(9,535,518	)		20,417,658			25,732,167

Investing activities
Acquisitions, net of cash acquired		—			(362,861,191	)		—			(4,588,417	)
Capital expenditures		(639,667	)		(959,061	)		(3,948,172	)		(4,137,126	)

Net cash used in investing activities		(639,667	)		(363,820,252	)		(3,948,172	)		(8,725,543	)

Financing activities
Issuance of Common stock		—			202,251,138			—			—
Dividends paid to Royall Holdings, LLC		—			—			—			(90,500,000	)
Payments under interest rate swap agreement		(253,099	)		—			—			—
Payments of Refinance term loan		(1,165,625	)		—			—			—
Borrowings under Senior Term loan		—			112,000,000			—			—
Payments under Senior Term Loan		—			—			(5,820,000	)		(106,180,000	)
Borrowings under Senior Debt Facility Refinance term loan		—			—			—			183,000,000
Payments under Senior Debt Facility Refinance term loan		—			—			—			(457,500	)
Borrowings under Subordinate Mezzanine Debt		—			64,000,000			—			—
Borrowings under revolving credit facility		—			3,500,000			—			—
Payments under revolving credit facility		(2,800,000	)		—			(3,500,000	)		—
Payments of deferred financing costs		—			(7,190,251	)		(1,011,227	)		(2,861,868	)

Net cash provided by (used in) financing activities		(4,218,724	)		374,560,887			(10,331,227	)		(16,999,368	)

Net increase in cash		11,993,005			1,205,117			6,138,259			7,256
Cash and cash equivalents
Beginning of year		40,804			—			1,205,117			7,343,376

End of year	$	12,033,809		$	1,205,117		$	7,343,376		$	7,350,632

Supplemental disclosures of noncash investing and financing activities
Equipment acquired through obligations outstanding in accounts payable	$	57,611		$	452,055		$	160,510		$	147,498
Recognition of a deferred tax benefit resulting from tax-deductible goodwill in excess of book goodwill	$	—		$	—		$	—		$	577,916

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

1.	Description of Business

Royall Acquisition Co. (“Acquisition”), a Delaware corporation, is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. Acquisition’s subsidiaries provide response driven marketing and consultation services under contracts to colleges and universities located primarily in the United States.

The consolidated financial statements include the accounts of Acquisition, Acquisition’s wholly owned subsidiary, Royall & Company Holding, Inc. (“Holding”), Holding’s wholly owned subsidiary, Royall & Company (“Royall”), and Royall’s wholly owned subsidiary, Advancement Services, Inc. (“ASI”). Together, Acquisition, Holding, Royall and ASI together are referred to as the “Company”.

On December 23, 2011, Acquisition acquired 100% of the outstanding stock and voting interests of Holding from its shareholders for $365 million, including $280.8 million to Holding’s shareholders and $16.7 million in fees and expenses (the “Purchase Transaction”). Acquisition obtained $95.3 million of these funds by refinancing Holding’s credit facilities (the “2011 Refinancing”), with the balance coming from newly raised equity.

Acquisition’s cost of acquiring Holding has been pushed-down to establish a new accounting basis for Holding beginning as of December 23, 2011. Accordingly, the accompanying consolidated financial statements are presented for two periods, Predecessor and Successor, which related to the accounting periods preceding and succeeding the Purchase Transaction. The Predecessor and Successor periods have been separated by a vertical line on the face of the consolidated financial statements to highlight the fact that the financial information for such periods has been prepared under two different historical-cost bases of accounting. References to “Predecessor 2012” refer to the period from July 1, 2011 through December 22, 2011 and references to “Successor 2012” refer to the period from December 23, 2011 through June 30, 2012.

On May 7, 2014, Royall acquired substantially all the assets of Hardwick-Day, Inc. (“Hardwick Day”), an enrollment optimization consulting firm, for $4.8 million, of which $4.6 million was paid in cash at closing and $250,000 was placed in escrow for post-closing adjustments. The escrow balance was reconciled and settled in November 2014 for approximately $250,000.

2.	Basis of Presentation and Summary of Significant Accounting Policies

Purchase Accounting

The application of purchase accounting requires that the total purchase price of an acquired entity be allocated to the fair value of assets acquired and liabilities assumed, with the amount in excess of fair values being recorded as goodwill. Fair values of identified intangible assets are determined based on future expected discounted cash flows for customer relationships, current replacement costs for computer software, and comparable transaction values for similar intangibles.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

The following table summarizes the fair values of the Holding assets acquired and liabilities assumed as of December 23, 2011:


Fair Value of Consideration Transferred:
Cash	$	365,000,000

Total fair value of consideration transferred	$	365,000,000

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Current assets, including cash of $2,138,809	$	27,287,611
Property and equipment		7,230,019
Intangible assets subject to amortization Customer relationships		80,716,000
Current liabilities		(33,630,887	)
Deferred tax liability		(10,422,131	)

Net recognized amounts of identifiable assets acquired		71,180,612

Goodwill	$	293,819,388

The following table summarizes the fair values of the Hardwick Day assets acquired and liabilities assumed as of May 7, 2014:


Fair Value of Consideration Transferred:
Cash	$	4,588,417
Deferred Payment Obligations		250,000

Total fair value of consideration transferred	$	4,838,417

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Property and equipment	$	100,000
Intangible assets subject to amortization
Customer relationships		1,062,000
Know how		792,000
Current liabilities		(161,583	)

Net recognized amounts of identifiable assets acquired		1,792,417

Goodwill	$	3,046,000

Revenue Recognition

Revenues are recognized when the service obligations associated with the contracts have been fulfilled. Deferred revenue is recorded when a service obligation has not been fulfilled, but the cash has been paid or is payable to the Company.

Receivables

Accounts receivable primarily represent amounts due from clients for marketing and consulting services provided. The Company grants credit to clients, substantially all of whom are colleges and universities located throughout the United States. The Company provides an allowance for doubtful collections that is

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the client. An allowance for doubtful collections of $0, $136,446, and $109,519 related to financially troubled clients has been recorded as of June 30, 2012, 2013 and 2014, respectively.

Accounts receivable at June 30, 2012, 2013 and 2014 include unbilled receivables of $4,805,744, $5,010,228 and $6,204,568, respectively.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Costs advanced for clients

Costs incurred for client projects that have not yet been billed are stated at cost.

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the consolidated statements of comprehensive income.

The Company’s policy for assigning useful lives is as follows:


Office equipment and furniture		3-7 years
Internally developed software		3-5 years
Leasehold improvements		4-10 years

Intangible Assets

Intangible assets are stated at fair value as of the date of acquisition. Amortization is computed using the straight-line method over the estimated lives of the intangible assets, as follows:


Customer Relationships acquired in December 2011		20 years
Customer Relationships acquired in May 2014		15 years
Know how acquired in May 2014		5 years

The gross and net carrying balances and accumulated amortization of intangibles are as follows:


Intangible Assets	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer Relationships
June 30, 2012		80,716,000		(2,107,584	)		78,608,416
June 30, 2013		80,716,000		(6,143,384	)		74,572,616
June 30, 2014		81,778,000		(10,190,984	)		71,587,016

Other Intangible Assets
June 30, 2012		—		—			—
June 30, 2013		—		—			—
June 30, 2014		792,000		(26,400	)		765,600

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

Amortization expense related to the Company’s intangible assets amounted to $1,486,415 for Predecessor 2012, $2,107,584 for Successor 2012, and $4,035,800 and $4,074,000 for the years ended June 30, 2013 and 2014, respectively.

Estimated annual amortization expense related to the Company’s intangible assets is as follows:


Year Ending June 30,	Amount
2015	$	4,265,000
2016		4,265,000
2017		4,265,000
2018		4,265,000
2019		4,238,600
2020 and thereafter		51,054,016

	$	72,352,616

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable and intangible assets acquired and liabilities assumed in a business combination. The Company tests goodwill for impairment annually on June 30, or whenever events occur or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying amount. Determining the fair value of reporting units involves the use of significant estimates and assumptions. The estimate of the fair value of the Company’s reporting unit is based on management’s projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business strategies.

For its annual impairment test for the year ended June 30, 2014, the Company followed authoritative guidance that permits the Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If based on this assessment the Company determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The results of this qualitative assessment performed as of June 30, 2014 indicated that the fair value of the business exceeded its carrying value and, therefore, the Company’s goodwill was not impaired.

In June 2008, Holding obtained approximately $105 million of goodwill deductible for tax purposes through its acquisition of Royall. As the transaction through which this goodwill originated was accounted for under Financial Accounting Standard no. 141, or FAS 141, “Business Combinations,” the Company continues to follow those rules in accounting for the benefit of tax amortization from excess tax goodwill over book goodwill (component 2 goodwill). As such, the Company reduces goodwill generated from business combinations accounted for under FAS 141 when the benefit from tax amortization of component 2 goodwill results in a reduction in current income taxes payable.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

The details of the goodwill balance are as follows:


	2012		2013		2014
Balance as of beginning of period
Goodwill	$	—	$	293,819,388	$	293,819,388
Accumulated impairment losses		—		—		—

		—		293,819,388		293,819,388
Goodwill acquired		293,819,388		—		3,046,000
Reducution in current taxes payable as a result of amortization of goodwill for tax purposes		—		—		(577,916	)

Balance as of end of year
Goodwill		293,819,388		293,819,388		296,287,472
Accumulated impairment losses		—		—		—

	$	293,819,388	$	293,819,388	$	296,287,472

Impairment of long-lived assets

The carrying value of long-lived assets is evaluated when certain events and circumstances indicate that the carrying amount may exceed fair value. The fair value is calculated using undiscounted projected cash flows produced by the asset, or the appropriate grouping of assets, over the remaining life of such assets and their eventual disposition. If the undiscounted projected cash flows are less than the carrying amount, an impairment will be recognized. No impairments have been recognized in the years ended June 30, 2012, 2013 and 2014.

Software developed for internal use

The Company capitalizes certain costs incurred in connection with developing internal use software. Software development costs that do not meet capitalization criteria are expensed immediately.

Software development projects and associated hardware are summarized below as of June 30, 2012, 2013 and 2014:


	2012			2013			2014

Net balance as of beginning of year	$	—		$	5,521,241		$	4,150,681
Additions		6,636,655			812,393			1,307,277
Amortization expense		(1,115,414	)		(2,182,861	)		(2,331,935	)
Disposals		—			(92	)		—

Net balance as of end of year	$	5,521,241		$	4,150,681		$	3,126,023

Postage expense

The amounts billed for the reimbursement of postage expense are recognized as a component of gross revenues, and the expense is reflected as an operating cost.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

Advertising

The costs of advertising the Company’s services are generally expensed as incurred. Total advertising costs amounted to $137,078 for Predecessor 2012, $59,084 for Successor 2012 and $67,039 and $58,720 for the years ended June 30, 2013 and 2014, respectively.

Income taxes

The Company and its subsidiaries file a consolidated U.S. income tax return. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. Deferred tax assets are subject to periodic assessment as to recoverability and valuation allowances are recognized if it is determined that it is more likely than not that the benefits will not be realized. In evaluating whether it is more likely than not that the Company will recover these deferred tax assets, future taxable income, the reversal of existing temporary differences and tax planning strategies are considered.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently issued accounting pronouncements

In May 2014, the Financial Accounting Standards Board issued new accounting guidance regarding revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for reporting periods beginning after December 15, 2016. The new guidance is to be applied retrospectively to each reporting period presented or retrospectively with the cumulative effect of initially applying the new guidance at the date of initial application. We are currently assessing the impact that the adoption of the new accounting guidance will have on our consolidated financial statements.

3.	Accrued Expenses

Accrued expenses at June 30, 2012, 2013 and 2014 consist of the following:


	2012		2013		2014

Incentive Compensation Payable	$	1,601,779	$	1,693,774	$	2,948,714
Interest Payable		1,770,358		2,433,287		1,535,764
Other		884,082		977,281		2,054,095

	$	4,256,219	$	5,104,342	$	6,538,573

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

4.	Notes Payable

Notes payable at June 30, 2012, 2013 and 2014 consist of the following:


	2012		2013		2014

Revolving credit facilities	$	3,500,000	$	—	$	—
Senior term loan		112,000,000		106,180,000		182,542,500
Subordinated notes, including capitalized interest		64,665,648		65,793,414		66,625,881

		180,165,648		171,973,414		249,168,381
Less: Current portion		5,320,000		3,372,935		1,830,000

Long-term portion	$	174,845,648	$	168,600,479	$	247,338,381

In March 2014, the Company replaced its Senior Debt Facility (defined below) with a new $198,000,000 Credit Facility Agreement (“Senior Debt Facility Refinance”) pursuant to which $183,000,000 was borrowed on a term basis. The Senior Debt Facility Refinance, together with the Company’s cash reserves, financed a dividend transaction pursuant to which a $90,500,000 dividend was made to the Company’s stockholder.

The $183,000,000 term loan has scheduled maturities of principal which commenced June 30, 2014 and additional payments of principal required based on the Company’s annual operating performance for the fiscal year ended June 30, 2015 and each fiscal year thereafter. The term loan bears interest, based on the Company’s election, at LIBOR (but not less than 1.0%) plus an applicable margin, currently 4.25%. The Company can also choose to pay prime rate plus an applicable margin, currently 3.25%, or 6.5% total. The Company’s election as of June 30, 2014 was to carry the loan primarily at LIBOR plus the applicable margin, resulting in a rate of 5.25%. The Company estimates that the fair market value of the debt approximates carrying value due to the variable nature of the interest rates.

The Senior Debt Facility Refinance contains a provision commencing the year ending June 30, 2015 for 50% of excess cash flow (as defined) to be used for unscheduled prepayments of the term loan. This amount is reduced to 0% of excess cash flow (as defined) once the Company reaches a specified level in its financial covenants.

The Company also has available, pursuant to the Senior Debt Facility Refinance, a $15,000,000 revolving credit facility, bearing interest at the same rates as the $183,000,000 term loan.

The Senior Debt Facility Refinance contains various financial and other covenants with which the Company must comply for so long as amounts are outstanding under either the term or revolving loans. These include covenants limiting the amount of indebtedness, requiring a minimum level of earnings before interest, taxes, depreciation and amortization, and limiting the amount of certain payments to a multiple of cash flow. The Company was in compliance with all covenants under the Senior Debt Facility Refinance at June 30, 2014.

The Company incurred financing costs totaling $2,824,961 to obtain the Senior Debt Facility Refinance. These costs have been capitalized and are being amortized to interest expense over the life of the Senior Debt Facility Refinance. During the year ended June 30, 2014, amortization of Senior Debt Facility Refinance deferred financing costs totaled $248,668.

During the 2011 Refinancing, the Company entered into a $127,000,000 Credit Facility Credit Agreement (“Senior Debt Facility”) with a group of lenders, pursuant to which $112,000,000 was borrowed on a term basis.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

The $112,000,000 term loan had scheduled maturities of principal which commenced January 1, 2013 and additional payments of principal required based on the Company’s annual operating performance for the fiscal year ended June 30, 2013 and each fiscal year thereafter. The Company amended the Senior Debt Facility in December 2012 (“2012 Amendment”) to amend certain covenants and the interest rate payable under the facility. The term loan bore interest, based on the Company’s election, at LIBOR (but not less than 1.25%) plus an applicable margin. The Company could also choose to pay prime rate plus an applicable margin, currently 3.5%, or 6.75% total.

The Senior Debt Facility contained a provision for up to 50% of excess cash flow (as defined) to be used for unscheduled prepayments of the term loan. This amount was reduced to 25% of excess cash flow (as defined) or eliminated if the Company reaches a specified level in its financial covenants. For the year ended June 30, 2013, the required principal prepayment of $3,480,342 was paid on April 2, 2013 as part of a $4,000,000 principal prepayment on the term loan.

The Senior Debt Facility contained various financial and other covenants with which the Company must comply for so long as amounts are outstanding under either the term or revolving loans. These included covenants limiting the amount of capital expenditures, limiting the amount of indebtedness, requiring a minimum level of earnings before interest, taxes and depreciation, and limiting the amount of certain payments to a multiple of cash flow. The Company was in compliance with all covenants under the Senior Debt Facility at June 30, 2012 and 2013.

The Company incurred financing costs totaling $5,559,079 to obtain the Senior Debt Facility and $766,835 to amend the facility as part of the 2012 Amendment. These costs were capitalized and amortized to interest expense over the life of the Senior Debt Facility. Amortization of deferred financing costs from the Senior Debt Facility totaled $0 for Predecessor 2012, $483,182 for Successor 2012 and $1,012,226 and $4,830,506 for the years ended June 30, 2013 and 2014, respectively.

Also during the 2011 Refinancing, the Company issued $64,000,000 of Senior Subordinated Notes due on December 23, 2018. The Company amended the Senior Subordinated Notes in December 2012 and again in March 2014 to amend certain covenants and the interest rate payable under the notes. These notes bear interest at 11.75%, of which 11.0% is paid on a quarterly basis and 0.75% is capitalized as additional principal. The full amount of the notes, including the additional principal, is due in full upon maturity. The Senior Subordinated Notes also contain various financial and other covenants with which the Company must comply until the principal is repaid. These covenants are identical to those contained within the Senior Debt Facility, but with less restrictive thresholds for compliance, so that if the Company is in compliance with its covenants under the Senior Debt Facility it will also be in compliance with the covenants contained within the Senior Subordinated Notes.

The Company incurred financing costs totaling $1,631,172 to obtain the Senior Subordinated Notes, $244,392 to amend the notes in December 2012 and $36,907 to amend the notes in March 2014. These costs have been capitalized and are being amortized to interest expense over the seven year life of the Senior Subordinated Notes. Amortization of deferred financing costs from the Senior Subordinated Notes totaled $0 for Predecessor 2012, $121,524 for Successor 2012 and $255,747 and $271,977 for the years ended June 30, 2013 and 2014, respectively.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

Aggregate maturities of notes payable as of June 30, 2014 are as follows:


Year Ending	Amount
2015	$	1,830,000
2016		1,830,000
2017		1,830,000
2018		177,052,500
2019		66,625,881

	$	249,168,381

Cash payments for interest were $1,545,386 for Predecessor, $7,884,683 for Successor 2012 and $14,257,440 and $15,818,134 for the years ended June 30, 2013 and 2014, respectively.

5.	Related Parties

For Predecessor 2012, the Company incurred expenses of $215,322 pursuant to a management services agreement dated June 5, 2008 between Holding and its majority shareholder. This agreement provided for annual payments of $450,000 in exchange for management and advisory services.

Concurrent with the 2011 Purchase Transaction, the Company entered into new management services agreements with its two largest investors. These agreements provide for annual payments totaling $1.5 million in exchange for management and advisory services. For Successor 2012 and the years ended June 30, 2013 and 2014, the Company paid $782,170, $1,543,779 and $1,537,222, respectively, pursuant to the agreement in place subsequent to the closing of the 2011 Purchase Transaction.

6.	Consulting Contracts

The Company has consulting agreements with former Royall stockholders, as follows:

•

With the Chairman of the Board, formerly Royall’s majority shareholder, an agreement to provide services through June 30, 2015 for $250,000 per annum.

•

With the Managing Director, an agreement to provide services through February 2013 for $500,000 per annum.

7.	Employee Benefit Plans

The Company continues to participate in the 401(k) profit sharing retirement plan previously adopted by Royall and effective January 1, 1997. Eligible participants are substantially all employees. Salary deferrals are limited to specific dollar amounts determined by the Internal Revenue Code. The Company may match up to a uniform percentage of employee salary deferrals each year. The Company may also make a discretionary profit sharing contribution each year in addition to the salary deferral match contribution. Total Company expense amounted to $166,772 for Predecessor 2012, $232,648 for Successor 2012 and $419,504 and $439,281 for the years ended June 30, 2013 and 2014, respectively.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

8.	Income Taxes

The Company’s provision for income taxes consisted of the following:


	Predecessor			Successor
	Period Ended December 22, 2011			Period Ended June 30, 2012		Year Ended June 30, 2013		Year Ended June 30, 2014

Current income tax expense
Federal	$	4,744,061		$	—	$	69,590	$	2,759,650
State		539,767			—		—		347,628

Total		5,283,828			—		69,590		3,107,278
Deferred income tax expense
Federal		(3,362,928	)		2,398,843		3,377,036		3,093,433
State		(350,505	)		279,395		401,431		468,683

Total		(3,713,433	)		2,678,238		3,778,467		3,562,116

Total income tax expense	$	1,570,395		$	2,678,238	$	3,848,057	$	6,669,394

The significant components of the Company’s estimated deferred tax assets and liabilities as of June 30, 2012, 2013 and 2014 is as follows:


	2012			2013			2014

Deferred tax assets:
Net operating loss carryforward	$	2,964,753		$	1,337,737		$	—
Deferred financing costs		23,769			66,190			62,853
Deferred rent		—			115,102			125,999
Interest rate cap		50,837			14,406			—
Alternative minimum tax		—			69,590			—
Intangible assets		—			—			326,040
Other		4,176			5,220			53,216

Total deferred tax assets		3,043,535			1,608,245			568,108

Deferred tax liabilities:
Depreciation		(338,556	)		(715,278	)		(825,428	)
Customer relationships		(13,786,612	)		(13,718,993	)		(13,729,618	)
Goodwill		(1,252,359	)		(3,828,372	)		(6,082,362	)
Intangible assets		(766,377	)		(224,438	)		(12,921	)

Total deferred tax liabilities		(16,143,904	)		(18,487,081	)		(20,650,329	)

Net deferred tax liability	$	(13,100,369	)	$	(16,878,836	)	$	(20,082,221	)

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

The reconciliation of the reported estimated income tax expense to the amount that would result by applying the US federal statutory tax rate to net income or loss is as follows:


	Predecessor			Successor
	Period Ended December 22, 2011			Period Ended June 30, 2012		Year Ended June 30, 2013		Year Ended June 30, 2014

Tax expense at US federal statutory rate	$	1,336,241		$	336,328	$	3,405,847	$	5,804,736
Tax expense at state corporate rate		189,262			279,395		401,431		816,311
Nondeductible transaction expenses		268,489			2,038,798		—		—
Other nondeductible items		(223,597	)		23,717		40,779		48,347

Income tax expense	$	1,570,395		$	2,678,238	$	3,848,057	$	6,669,394

Cash payments for income taxes were $2,473,751 for Predecessor 2012, $1,573,801 for Successor 2012 and $0 and $3,290,000 for the years ended June 30, 2013 and 2014, respectively.

The accounting for uncertain tax provisions prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The accounting for uncertain tax positions also provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Company has not identified any uncertain tax positions.

The Company is subject to audits and examinations of its tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service (“IRS”). Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of provisions for income taxes. The Company is not currently under examination by any tax authorities. Certain of the Company’s tax years 2012 and forward remain open for audit by the IRS and various state governments.

9.	Lease Commitments

The Company currently leases approximately 86,000 square feet of office space in three buildings within one office park in Virginia under an operating lease expiring in April 2022 (“Virginia Lease”) and 4,000 square feet of office space in an office building in Minneapolis under an operating lease expiring in July 2015. There is a provision in the Virginia Lease for two optional extension terms of five years each.

Future minimum lease payments under this lease consists of the following:


Year Ending	Amount
2015	$	1,558,263
2016		1,519,844
2017		1,534,059
2018		1,554,333
2019		1,575,012
2020 and thereafter		5,402,268

Total minimum lease payments	$	13,143,779

Rent expense for all operating leases amounted to $492,122 for Predecessor 2012, $528,784 for Successor 2012 and $1,294,669 and $1,471,109 for the years ended June 30, 2013 and 2014, respectively.

Royall Acquisition Co. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2012, 2013 and 2014

10.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. As of June 30, 2012, 2013 and 2013, the Company had $0, $7,093,376 and $7,100,632 of cash deposits in excess of federally insured limits being held by a federally insured financial depository institution, respectively. The carrying value of cash and cash equivalents approximates fair value.

11.

Quarterly Financial Information (Unaudited)

Unaudited financial data by quarter for the fiscal year ended June 30, 2014 are as follows:


	1st Quarter 2014			2nd Quarter 2014			3rd Quarter 2014			4th Quarter 2014

Revenue	$	16,793,217		$	28,649,566		$	31,577,289		$	27,612,269
Postage expenses		(1,147,507	)		(2,766,054	)		(3,098,890	)		(1,078,078	)
Printing, mailshop, data processing and other production expenses		(3,076,586	)		(4,390,096	)		(4,033,408	)		(244,511	)
Personnel and benefits expenses		(7,173,101	)		(7,290,363	)		(8,270,178	)		(8,878,063	)
Occupancy expenses		(442,752	)		(437,285	)		(426,389	)		(449,109	)
Depreciation and amortization expense		(1,775,522	)		(1,830,956	)		(1,841,567	)		(1,891,126	)
Travel and workshop expenses		(515,539	)		(307,978	)		(402,037	)		(596,911	)
Selling, general and administrative expenses		(793,952	)		(1,011,189	)		(974,711	)		(1,243,504	)

Operating income		1,868,258			10,615,645			12,530,109			13,230,967
Other expenses
Interest expense		(3,733,991	)		(3,758,556	)		(3,850,578	)		(4,426,270	)
Amortization of deferred financing costs		(336,356	)		(336,356	)		(4,423,897	)		(254,548	)
Other gain (loss)		45			(51,000	)		5,675			(6,395	)

Net income (loss) before income taxes		(2,202,044	)		6,469,733			4,261,309			8,543,754
Income tax (expense) benefit		860,228			(2,527,401	)		(1,664,680	)		(3,337,541	)

Net income (loss)	$	(1,341,816	)	$	3,942,332		$	2,596,629		$	5,206,213

Total comprehensive income (loss)	$	(1,341,816	)	$	3,942,332		$	2,596,629		$	5,206,213

12.

Subsequent Events

The preparation of these financial statements includes an evaluation of subsequent events through January 2, 2015, which is the date on which the financial statements were issued.

On December 10, 2014, Acquisition’s stockholder and The Advisory Board Company (“ABCO”) entered into a Stock Purchase Agreement whereby ABCO will acquire all of the outstanding shares of Acquisition for $850 million. After the close of the transaction, the Company will operate as a subsidiary of ABCO. The completion of the transaction is subject to the satisfaction of customary closing conditions, including the expiration of waiting periods and the receipt of approvals under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction is projected to close in January 2015.

Royall Acquisition Co. and Subsidiaries

Unaudited Consolidated Financial Statements

September 30, 2014, June 30, 2014 and September 30, 2013

Royall Acquisition Co. and Subsidiaries

Index

September 30, 2014


	Page(s)

Unaudited Consolidated Financial Statements

Unaudited Consolidated Balance Sheets		23

Unaudited Consolidated Statements of Comprehensive Income		24

Unaudited Consolidated Statements of Cash Flows		25

Notes to Unaudited Consolidated Financial Statements		26-28

Royall Acquisition Co. and Subsidiaries

Unaudited Consolidated Balance Sheets

September 30, 2014, June 30, 2014 and September 30, 2013


	September 30, 2014			June 30, 2014			September 30, 2013
Assets
Current assets
Cash and cash equivalents	$	14,177,046		$	7,350,632		$	21,638,277
Accounts receivable, net		30,590,346			16,956,470			21,864,483
Current taxes receivable		—			338,729			—
Prepaid expenses and other		880,627			892,261			765,029
Costs advanced for clients		4,409,884			611,355			1,898,934

Total current assets		50,057,903			26,149,447			46,166,723

Property and equipment
Equipment and furniture		4,605,392			3,946,681			3,334,501
Internally developed software		9,042,193			8,750,264			7,819,671
Leasehold improvements		3,636,163			3,497,149			2,416,960

Total property and equipment		17,283,748			16,194,094			13,571,132
Less accumulated depreciation and amortization		(8,263,378	)		(7,352,840	)		(5,008,528	)

Net property and equipment		9,020,370			8,841,254			8,562,604

Deferred financing costs		3,584,865			3,839,517			5,992,446
Customer relationships, net		70,560,366			71,587,016			73,563,666
Other intangible assets, net		726,000			765,600			—
Goodwill		296,287,472			296,287,472			293,819,388

Total assets	$	430,236,976		$	407,470,306		$	428,104,827

Liabilities and Stockholder’s Equity
Current liabilities
Current maturities of notes payable	$	1,830,000		$	1,830,000		$	3,947,522
Accounts payable		3,599,181			1,008,108			2,275,562
Accrued expenses		7,465,258			6,538,573			4,230,989
Current taxes payable		1,374,000			—			1,510,000
Deferred revenue		24,914,210			3,205,854			27,905,360

Total current liabilities		39,182,649			12,582,535			39,869,433
Deferred rent		829,361			832,570			853,628
Deferred tax liability		17,644,685			20,082,221			14,492,283
Notes payable, less current maturities		247,006,831			247,338,381			167,500,058

Total liabilities		304,663,526			280,835,707			222,715,402

Stockholder’s equity
Common stock - 1,000 shares authorized and outstanding at September 30, 2014, June 30, 2014 and September 30, 2013; par value $0.01 per share		10			10			10
Additional paid-in capital		202,251,128			202,251,128			202,251,128
Retained earnings / (Accumulated deficit)		(76,677,688	)		(75,616,539	)		3,138,287

Total stockholder’s equity		125,573,450			126,634,599			205,389,425

Total liabilities and stockholder’s equity	$	430,236,976		$	407,470,306		$	428,104,827

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

Three Months Ended September 30, 2014 and 2013


	Three Months Ended September 30,
	2014			2013
Revenue	$	22,329,770		$	16,793,217
Postage expenses		(1,618,043	)		(1,147,507	)
Printing, mailshop, data processing and other production expenses		(4,050,098	)		(3,076,586	)
Personnel and benefits expenses		(9,237,994	)		(7,173,101	)
Occupancy expenses		(456,045	)		(442,752	)
Depreciation and amortization expense		(1,976,788	)		(1,775,522	)
Travel and workshop expenses		(813,721	)		(515,539	)
Selling, general and administrative expenses		(896,202	)		(793,952	)

Operating income		3,280,879			1,868,258
Other expenses
Interest expense		(4,466,640	)		(3,733,991	)
Transaction expenses		(318,462	)		—
Amortization of deferred financing costs		(254,652	)		(336,356	)
Other gain		6,647			45

Net loss before income taxes		(1,752,228	)		(2,202,044	)
Income tax benefit		691,079			860,228

Net loss	$	(1,061,149	)	$	(1,341,816	)

Total comprehensive loss	$	(1,061,149	)	$	(1,341,816	)

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

Three Months Ended September 30, 2014 and 2013


	Three Months Ended September 30,
	2014			2013
Operating activities
Net loss	$	(1,061,149	)	$	(1,341,816	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		1,976,788			1,775,522
Deferred income tax expense		(2,437,536	)		(2,386,553	)
Amortization of deferred financing costs		254,652			336,356
Capitalization of subordinated debt interest		125,950			248,753
Gain on disposal of assets		—			403
Deferred rent		(3,209	)		1,583
Changes in operating assets and liabilities
Receivables		(13,633,876	)		(5,703,590	)
Prepaid expenses and other		11,634			28,112
Costs advanced for clients		(3,798,529	)		(1,543,266	)
Accounts payable		2,512,552			1,119,259
Accrued expenses		926,685			(873,353	)
Current taxes receivable / payable		1,712,729			1,445,993
Deferred revenue		21,708,356			23,071,889

Net cash provided by operating activities		8,295,047			16,179,292

Investing activities
Capital expenditures		(1,011,133	)		(1,109,804	)

Net cash used in investing activities		(1,011,133	)		(1,109,804	)

Financing activities
Payments of Senior Debt Facility term loan		—			(774,587	)
Payments of Senior Debt Facility Refinance term loan		(457,500	)		—

Net cash used in financing activities		(457,500	)		(774,587	)

Net increase in cash		6,826,414			14,294,901
Cash and cash equivalents
Beginning of year		7,350,632			7,343,376

End of year	$	14,177,046		$	21,638,277

Supplemental disclosures of noncash investing and financing activities
Equipment acquired through obligations outstanding in accounts payable	$	226,019		$	440,304

The accompanying notes are an integral part of the financial statements.

Royall Acquisition Co. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2014, June 30, 2014 and September 30, 2013

1.	Description of Business

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Royall Acquisition Co. and Subsidiaries Consolidated Financial Statements as of and for the year ended June 30, 2014.

Because of the seasonal nature of our marketing and consultation services, the results of operations for the three months ended September 30, 2014 and 2013 are not indicative of such results for the full fiscal year.

2.	Recently Issued Accounting Pronouncements

3.	Accounts Receivable

Accounts receivable at September 30, 2014, June 30, 2014 and September 30, 2013 include unbilled receivables of $9,668,093, $6,204,568 and $5,429,559, respectively.

4.	Software Developed for Internal Use

Software development projects and associated hardware are summarized below as of September 30, 2014, June 30, 2014 and September 30, 2013:


	September 30, 2014			June 30, 2014			September 30, 2013

Net balance as of beginning of year	$	3,126,023		$	4,150,681		$	4,150,681
Additions		291,929			1,307,277			376,093
Amortization expense		(602,565	)		(2,331,935	)		(563,746	)
Disposals		—			—			—

Net balance as of end of period	$	2,815,387		$	3,126,023		$	3,963,028

Royall Acquisition Co. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2014, June 30, 2014 and September 30, 2013

5.	Intangible Assets and Goodwill

Intangible assets are stated at fair value as of the date of acquisition. Amortization is computed using the straight-line method over the estimated lives of the intangible assets, as follows:


Customer Relationships acquired in December 2011			20 years
Customer Relationships acquired in May 2014			15 years
Know how acquired in May 2014			5 years

The gross and net carrying balances and accumulated amortization of intangibles are as follows:


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible Assets
Customer Relationships
September 30, 2014		81,778,000		(11,217,634	)		70,560,366
June 30, 2014		81,778,000		(10,190,984	)		71,587,016
September 30, 2013		80,716,000		(7,152,334	)		73,563,666

Other Intangible Assets
September 30, 2014		792,000		(66,000	)		726,000
June 30, 2014		792,000		(26,400	)		765,600
September 30, 2013		—		—			—

Amortization expense related to the Company’s intangible assets amounted to $1,066,250 and $1,008,950 for the three months ended September 30, 2014 and 2013, respectively.

Goodwill is reviewed for impairment at least annually as of June 30, or whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. The Company believes that no such impairment indicators existed during the three months ended September 30, 2014 or 2013. There was no impairment of goodwill recorded in the three months ended September 30, 2014 or 2013.

6.	Accrued Expenses

Accrued expenses at September 30, 2014, June 30, 2014 and September 30, 2013 consist of the following:


	September 30, 2014		June 30, 2014		September 30, 2013

Incentive compensation payable	$	967,773	$	2,948,714	$	613,754
Interest payable		1,514,508		1,535,764		1,392,689
Production expenses		1,965,624		275,407		1,050,542
Due to related parties		1,172,998		172,998		87,501
Other		1,844,355		1,605,690		1,086,503

	$	7,465,258	$	6,538,573	$	4,230,989

Royall Acquisition Co. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2014, June 30, 2014 and September 30, 2013

7.	Notes Payable

Notes payable at September 30, 2014, June 30, 2014 and September 30, 2013 consist of the following:


	September 30, 2014		June 30, 2014		September 30, 2013

Revolving credit facilities	$	—	$	—	$	—
Senior term loan		182,085,000		182,542,500		105,405,413
Subordinated notes, including capitalized interest		66,751,831		66,625,881		66,042,167

		248,836,831		249,168,381		171,447,580
Less: Current portion		1,830,000		1,830,000		3,947,522

Long-term portion	$	247,006,831	$	247,338,381	$	167,500,058

We were in compliance with all covenants under our debt agreements at September 30, 2014, June 30, 2014 and September 30, 2013.

8.	Lease Commitments

9.	Subsequent Events

The preparation of these financial statements includes an evaluation of subsequent events through January 2, 2015, which is the date on which the financial statements were issued.

Exhibit 99.2

Unaudited Pro Forma Combined

Financial Statements

On January 9, 2015, after the end of our most recent fiscal period, we completed our acquisition of Royall Acquisition Co. (“Royall”), a leading provider of strategic, data-driven student engagement and enrollment management, financial aid optimization, and alumni fundraising solutions to the higher education industry.

In connection with the transaction, all outstanding shares of Royall common stock were acquired for the sum of (a) an amount of cash equal to (i) $750.0 million, minus (ii) the amount by which target working capital exceeds estimated net working capital, estimated to be $6.2 million on the closing date of the acquisition, and (b) 2,428,364 shares of common stock of Advisory Board, estimated to be valued at $121.2 million on January 9, 2015 based on the closing price of Advisory Board common stock on such date as reported on the NASDAQ Global Select Market.

The aggregate consideration for acquisition accounting purposes, including extinguishment of Royall’s debt of approximately $250.8 million, is calculated as follows (in thousands):


Net cash paid (1)	$	743,849
Fair value of shares issued		121,224

Fair value of consideration transferred	$	865,073
(1) Net of estimated working capital adjustment of $6,151.

The following unaudited pro forma combined financial information has been prepared to give effect to the acquisition of Royall and the related financing as discussed further below.

The unaudited pro forma combined balance sheet as of September 30, 2014 gives effect to the acquisition and related financing as if they had been completed on September 30, 2014. The unaudited pro forma combined statements of operations for the year ended March 31, 2014 and for the six months ended September 30, 2014 give effect to the acquisition and related financing as if they had occurred on April 1, 2013. Royall’s historical year-end was on June 30, and as a result the pro forma combined financial statements for the year ended March 31, 2014 reflect the Advisory Board’s historical results for the year ended March 31, 2014 while the Royall historical results are for the year ended June 30, 2014.

In preparing the unaudited pro forma combined statement of operations for the six months ended September 30, 2014, the statement of operations for the six months ended September 30, 2014 for the Advisory Board was combined with the statement of operations for the quarters ended September 30, 2014 and June 30, 2014 for Royall Acquisition Co., respectively.

The unaudited pro forma combined financial statements, referred to as the unaudited pro forma financial statements, were derived from and should be read in conjunction with the following:

•

audited consolidated financial statements of the Advisory Board as of March 31, 2014 and 2013 and for each of the three years in the period ended March 31, 2014 and the related notes;

•

unaudited consolidated financial statements of the Advisory Board as of September 30, 2014 and for the three and six months ended September 30, 2014 and 2013 and the related notes;

•

audited consolidated financial statements of Royall as of June 30, 2012, 2013, and 2014 and for the period December 23, 2011 to June 30, 2012 and years ended June 30, 2013, and 2014 (Successor) and the period from July 1, 2011 to December 22, 2011 (Predecessor) and the related notes; and

•

unaudited consolidated financial statements of Royall as of September 30, 2014 and June 30, 2014 and the three month period ended September 30, 2014 and the related notes.

The Advisory Board has been treated as the acquirer for accounting purposes. The allocation of the purchase price was based upon the estimated fair value of the assets acquired and liabilities assumed.

The unaudited pro forma financial statements have been prepared in a manner consistent with the Advisory Board’s accounting policies. The unaudited pro forma adjustments were based on the best information available and certain assumptions and estimates that the Advisory Board believes are reasonable under the circumstances. Pro forma adjustments have been included only to the extent adjustments are directly attributable to the acquisition of Royall and related financing, and appropriate information is known, factually supportable and reasonably available to the Advisory Board. There were no transactions between the Advisory Board and Royall during the periods presented in the unaudited pro forma financial statements that needed to be eliminated. The accompanying unaudited pro forma financial statements are presented in accordance with Article 11 of the SEC’s Regulation S-X. The assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma financial statements.

The unaudited pro forma financial statements are presented for illustrative and informational purposes only and are not intended to represent or be indicative of what the Advisory Board’s results of operations or financial position would have been had the Royall acquisition and related financing actually occurred on the dates indicated. The unaudited pro forma financial statements should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2014 and Quarterly Report on Form 10-Q for the three and six months ended September 30, 2014. The unaudited pro forma financial statements also should not be considered representative of our future results of operations or financial position.

The unaudited pro forma financial statements have been prepared using the acquisition method of accounting under generally accepted accounting principles in the U.S. (“U.S. GAAP”). Under the acquisition method of accounting, the purchase price is allocated to the underlying assets acquired and liabilities assumed based on their respective fair market values, with any excess purchase price allocated to goodwill. The pro forma purchase price allocation has been derived from estimates of the fair market value of the tangible and intangible assets and liabilities of Royall based upon management’s estimates using established valuation techniques. The Advisory Board judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Advisory Board’s results of operations. The total purchase price has been allocated on a preliminary basis to identifiable assets acquired and liabilities assumed based upon valuation procedures performed to date. Currently the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed and the related allocations of purchase price are preliminary. A final determination of fair values will be based on the actual identifiable tangible and intangible assets acquired and liabilities assumed that existed

as of the closing date of the acquisition. The final purchase price allocation will be based, in part, on third party appraisals and may be different than that reflected in the pro forma purchase price allocation and any differences may be material. The Advisory Board will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the acquisition date.

Our unaudited pro forma financial statements have been adjusted to give effect to events that are (1) directly attributable to the acquisition and related transaction, (2) factually supportable, and (3) with respect to the statements of income, expected to have a continuing impact on us. The unaudited pro forma condensed combined statements of operations do not reflect any non-recurring charges directly related to the acquisition and the related transaction that have already been incurred by us. These non-recurring charges are further described in the accompanying notes to the unaudited pro forma financial statements and include transaction-related costs such as financial advisory, legal and regulatory filing fees. The unaudited pro forma financial statements should be read in conjunction with the accompanying notes.

Unaudited Pro Forma Combined Balance Sheet

As Of September 30, 2014

(in thousands)


	Historical Advisory Board			Historical Royall			Reclassifications			Transaction adjustments			Total pro forma
ASSETS
Current assets:
Cash and cash equivalents	$	26,886		$	14,177		$	—		$	19,234	(b) (c)	$	60,297
Marketable securities, current		2,402			—			—			(2,402	)(c)		—
Membership fees receivable, net		476,908			—			30,590	(a)		—			507,498
Accounts receivable, net		—			30,590			(30,590	)(a)		—			—
Prepaid expenses and other current assets		26,553			881			4,410	(a)		—			31,844
Deferred income taxes, current		6,944			—			—			1,762	(d)		8,706
Costs advanced for clients		—			4,410			(4,410	)(a)		—			—

Total current assets		539,693			50,058			—			18,594			608,345
Property and equipment, net		116,252			9,020			—			(2,815	)(e)		122,457
Intangible assets, net		32,909			—			71,286	(a)		207,714	(f)		311,909
Deferred incentive compensation and other charges		77,802			—			—			—			77,802
Marketable securities, net of current portion		85,018			—			—			(85,018	)(c)		—
Goodwill		153,028			296,287			—			362,786	(g)		812,101
Investments in and advances to unconsolidated entities		12,509			—			—			—			12,509
Deferred financing costs		—			3,585			(3,585	)(a)		—			—
Customer relationships, net		—			70,560			(70,560	)(a)		—			—
Other intangible assets, net		—			726			(726	)(a)		—			—
Other non-current assets		5,370			—			3,585	(a)		(835	)(h)		8,120

Total assets	$	1,022,581		$	430,236		$	—		$	500,426		$	1,953,243


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred revenue, current	$	460,312		$	24,914		$	—		$	(11,710	)(i)	$	473,516
Accounts payable and accrued liabilities		70,122			—			11,064	(a)		(1,833	)(j)		79,353
Accrued incentive compensation		16,624			—			—			—			16,624
Current maturities of note payable		—			1,830			—			5,420	(k)		7,250
Accounts payable		—			3,599			(3,599	)(a)		—			—
Accrued expenses		—			7,465			(7,465	)(a)		—			—
Current taxes payable		—			1,374			—			—			1,374

Total current liabilities		547,058			39,182			—			(8,123	)		578,117
Deferred revenue, net of current portion		137,889			—			—			—			137,889
Deferred income taxes, net of current portion		7,515			17,645			—			73,632	(l)		98,792
Deferred rent		—			829			—			(829	)(m)		—
Notes payable, less current portion		—			247,007			—			446,928	(k)		693,935
Other long-term liabilities		8,633			—			—			—			8,633

Total liabilities		701,095			304,663			—			511,608			1,517,366


Redeemable noncontrolling interest		6,763			—			—			—			6,763

The Advisory Board Company’s stockholders’ equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized, zero shares issued and outstanding		—			—			—			—			—
Common stock, par value $0.01; 135,000,000 shares authorized, 35,996,976 and 36,321,825 shares issued and outstanding as of September 30, 2014 and March 31, 2014, respectively		360			—			—			24	(n)		384
Additional paid-in capital		432,178			202,251			—			(81,051	)(n)		553,378
Accumulated deficit		(117,498	)		(76,678	)		—			69,528	(n)		(124,648	)
Accumulated other comprehensive (loss) income		(317	)		—			—			317	(c)		—

Total stockholders’ equity (deficit)		314,723			125,573			—			(11,182	)		429,114

Total liabilities and stockholders’ equity	$	1,022,581		$	430,236		$	—		$	500,426		$	1,953,243

Unaudited Pro Forma Combined Statement Of Income

For The Year Ended March 31, 2014

(in thousands, except per share amounts)


	Historical Advisory Board			Pre-acquisition historical results of Royall and Co. 7/1/13 - 6/30/14			Reclassifications			Transaction adjustments			Total pro forma

Revenue	$	520,596		$	104,632		$	—		$	—		$	625,228
Cost and expenses:
Cost of services, excluding depreciation and amortization		272,523			—			39,506	(a)		1,349	(b)		313,378
Member relations and marketing		96,298			—			4,167	(a)		899	(b)		101,364
General and administrative		74,169			—			15,376	(a)		711	(b) (c)		90,256
Depreciation and amortization		30,420			7,339			—			13,534	(d)		51,293
Postage expenses		—			8,091			(8,091	)(a)		—			—
Printing, mailshop, data processing and other production expenses		—			11,745			(11,745	)(a)		—			—
Personnel and benefits expenses		—			31,612			(31,612	)(a)		—			—
Occupancy expenses		—			1,756			(1,756	)(a)		—			—
Travel and workshop expenses		—			1,822			(1,822	)(a)		—			—
Selling, general and administrative expenses		—			4,023			(4,023	)(a)		—			—

Operating income		47,186			38,244			—			(16,493	)		68,937
Other income (expenses):
Other income (expense), net		2,706			—			—			(2,750	)(e)		(44	)
Interest expense		—			(15,769	)		(5,351	)(a)		(18,409	)(f)		(39,529	)
Amortization of deferred financing costs		—			(5,351	)		5,351	(a)		—			—
Other loss		—			(52	)		—			—			(52	)

Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entities		49,892			17,072			—			(37,652	)		29,312
Provision for income taxes		(19,208	)		(6,669	)		—			15,437	(h)		(10,440	)
Equity in loss of unconsolidated entities		(6,051	)		—			—			—			(6,051	)

Net income from continuing operations		24,633			10,403			—			(22,215	)		12,821
Net loss attributable to noncontrolling interest		119			—			—			—			119

Net income attributable to common stockholders	$	24,752		$	10,403		$	—		$	(22,215	)	$	12,940


Earnings per share:
Net income attributable to common stockholders per share - basic	$	0.69											$	0.34
Net income attributable to common stockholders per share - diluted	$	0.67											$	0.33

Weighted average number of shares outstanding:
Basic		35,909												38,337	(i)
Diluted		36,959												39,387	(i)

Unaudited Pro Forma Combined Statement Of Operations

For The Six Months Ended September 30, 2014

(in thousands, except per share amounts)


	Historical Advisory Board			Pre-acquisition historical results of Royall 4/1/14 - 9/30/14			Reclassifications			Transaction adjustments			Total pro forma

Revenue	$	286,040		$	49,942		$	—		$	—		$	335,982
Cost and expenses:
Cost of services, excluding depreciation and amortization		148,296			—			18,545	(a)		674	(b)		167,515
Member relations and marketing		53,368			—			2,326	(a)		450	(b)		56,144
General and administrative		47,285			—			8,692	(a)		366	(b) (c)		56,343
Depreciation and amortization		18,757			3,868			—			6,622	(d)		29,247
Postage expenses		—			2,696			(2,696	)(a)		—			—
Printing, mailshop, data processing and other production expenses		—			4,295			(4,295	)(a)		—			—
Personnel and benefits expenses		—			18,116			(18,116	)(a)		—			—
Occupancy expenses		—			905			(905	)(a)		—			—
Travel and workshop expenses		—			1,411			(1,411	)(a)		—			—
Selling, general and administrative expenses		—			2,140			(2,140	)(a)		—			—

Operating income		18,334			16,511			—			(8,112	)		26,733
Other income (expenses):
Other income (loss), net		(141	)		—			—			(1,025	)(e)		(1,166	)
Interest expense		—			(8,893	)		(510	)(a)		(10,276	)(f)		(19,679	)
Transaction expenses		—			(318	)		—			318	(g)		—
Amortization of deferred financing costs		—			(510	)		510	(a)		—			—
Other loss		—			1			—			—			1

Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entities		18,193			6,791			—			(19,095	)		5,889
		18,193			6,791			—			(19,095	)		5,889
Provision for income taxes		(4,643	)		(2,646	)		—			7,830	(h)		541
Equity in loss of unconsolidated entities		(3,347	)		—			—			—			(3,347	)

Net income from continuing operations		10,203			4,145			—			(11,265	)		3,083
Net loss and accretion to redemption value of noncontrolling interest		(6,890	)		—			—			—			(6,890	)

Net income (loss) attributable to common stockholders	$	3,313		$	4,145		$	—		$	(11,265	)	$	(3,807	)


Earnings per share:
Net income attributable to common stockholders per share - basic	$	0.09											$	(0.10	)
Net income attributable to common stockholders per share - diluted	$	0.09											$	(0.10	)

Weighted average number of shares outstanding:
Basic		36,301												38,729	(i)
Diluted		36,871												38,729	(i)

Notes to unaudited pro forma condensed combined financial information (in thousands, except per share amounts)

Balance Sheet Adjustments

(a) The following adjustments represent the reclassification of Royall’s balance sheet amounts as of September 30, 2014 to conform to our unaudited pro forma combined presentation:


	Historical Advisory Board		Historical Royall		Reclassifications			Historical combined as reclassified before pro forma adjustments
Membership fees receivable, net	$	476,908	$	—	$	30,590		$	507,498
Accounts receivable, net		—		30,590		(30,590	)		—
Prepaid expenses and other current assets		26,553		881		4,410			31,844
Costs advanced for clients		—		4,410		(4,410	)		—
Intangible assets, net		32,909		—		71,286			104,195
Customer relationships, net		—		70,560		(70,560	)		—
Deferred financing costs		—		3,585		(3,585	)		—
Other intangible assets, net		—		726		(726	)		—
Other non-current assets		5,370		—		3,585			8,955
Accounts payable and accrued liabilities		70,122		—		11,064			81,186
Accounts payable		—		3,599		(3,599	)		—
Accrued expenses		—		7,465		(7,465	)		—

(b) The following table illustrates the sources and uses of cash in the acquisition and related financing, assuming they had occurred on September 30, 2014:


Sources:			Uses:
New senior secured credit facilities (1)
New revolving credit facility	$	—	Net cash purchase price (3)	$	743,849
New senior secured term loan facility		725,000	Financing costs (4)		26,565
Cash from balance sheet (2)		54,009	Estimated fees and expenses (5)		8,595

Total Sources	$	779,009	Total Uses	$	779,009

(1)	Our new senior secured credit facilities, which we entered into on January 9, 2015 in conjunction with our acquisition of Royall consist of (A) a new $50,000 revolving credit facility with a five-year maturity and (B) a new $725,000 term loan facility with a seven-year maturity.

(2)

Represents the estimated cash contribution from our balance sheet used to partially fund our acquisition of Royall and pay financing costs, fees and expenses. The amount of the cash contribution may be further adjusted pursuant to the working capital adjustment in the acquisition agreement. Does not reflect (A) our pro forma adjustment to re-characterize our marketable securities to cash and cash equivalents (see note (c) below) and (B) $14,177 of Royall cash we did not acquire as the acquisition of Royall was cash free/debt free.

(3)

Represents the consideration paid to Royall stockholders net of the estimated working capital adjustment. The amount of the purchase price may be further adjusted pursuant to the working capital adjustment in the acquisition agreement. At the closing of the acquisition, Royall stockholders used $241,986 of the cash received and $19,030 of Royall cash on hand to repay $250,834 of existing indebtedness and $10,182 of seller transaction costs.

(4)

Represents the capitalization of estimated financing fees and initial purchaser discounts that were incurred in connection with the new senior secured credit facilities. $2,750 of this balance is presented as a long-term asset with the balance of $23,815 presented net of our new senior secured term loan facility on our unaudited pro forma balance sheet.

(5)	Represents our estimate of acquisition related fees and expenses associated with our acquisition of Royall.

(c) In connection with the acquisition, we liquidated all our marketable securities to partially fund the Royall purchase price. This adjustment reflects the re-characterization of our marketable securities to cash and cash equivalents, as well as the recognition of our net unrealized losses from the liquidation of our marketable securities of approximately $317, net of taxes. Actual cash proceeds we received subsequent to September 30, 2014 totaled approximately $89,500.

(d) This adjustment reflects an increase in the current deferred income tax asset of $1,762 which will be generated from approximately $8,595 of transaction costs that we expect to expense as part of the acquisition, of which approximately 50% of the transaction costs are estimated to not be tax deductible. The pro forma adjustment to the current deferred income tax asset generated from transaction costs was based on a statutory tax rate of 41%.

(e) For purposes of the unaudited pro forma combined financial statements we estimated that the net book value of our property and equipment was equal to fair value. The final purchase price allocation will be based on a complete appraisal and may result in a materially different allocation for our property and equipment than that presented in this unaudited pro forma combined. This adjustment represents the elimination of the net book value of Royall’s historical internally developed software which is now included as part of the intangible assets, net. See the pro forma balance sheet adjustment in note (f) below.

(f) A summary of the effects of the preliminary purchase price allocation to other identifiable intangible assets is as follows:


	Historical net book value		Estimated fair value		Purchase accounting adjustments
	Historical net book value		Estimated fair value		Purchase accounting adjustments
Trade name	$	—	$	9,000	$	9,000
Technology - database and analytics		—		7,000		7,000
Technology - developed software		726		30,000		29,274
Customer relationships		70,560		233,000		162,440

Total intangibles	$	71,286	$	279,000	$	207,714

The fair value and useful lives assigned to Royall’s trade names, technology and customer relationships intangible assets have been estimated based on preliminary valuation studies utilizing widely accepted valuation methodologies and principles. The final purchase price allocation will be based on a complete appraisal and may result in a materially different allocation for intangible assets than that presented in this unaudited pro forma condensed combined financial information. Any change in the amount of the final purchase price allocated to amortizable, definite-lived intangible assets could materially affect the amount of amortization expense.

(g) This adjustment is to reflect the estimated goodwill from the preliminary purchase price allocation resulting from the acquisition of Royall. Except for the specific fair value adjustments discussed below, we assumed that the historical carrying value of all other assets acquired and liabilities assumed reflect fair value. The preliminary allocation of purchase price is as follows (in thousands):


Costs to acquire (see (b) above):
Cash payment to holders of Royall common stock(1)	$	743,849
Fair value of shares issued		121,224

Total fair value of consideration transferred	$	865,073


Allocated to:
Membership fees receivable, net		30,590
Prepaid expenses and other current assets		5,291
Property and equipment, net		6,205
Intangible assets, net		279,000
Current taxes payable		(1,374	)
Deferred revenue, current		(13,204	)
Accounts payable and accrued liabilities		(9,231	)
Deferred income taxes, net of current portion		(91,277	)

Preliminary net assets acquired		206,000

Preliminary allocation to goodwill	$	659,073

(1) Net of estimated working capital adjustment of $6,151

A summary of the effects of the preliminary purchase price allocation to goodwill is as follows:


	Historical net book value		Estimated fair value		Purchase accounting adjustment
Goodwill	$	296,287	$	659,073	$	362,786

(h) This adjustment represents the net impact from the elimination of the historical Royall capitalized deferred financing costs of $3,585 and the new capitalized financing costs related to the new senior secured credit facilities totaling $2,750.

(i) This represents an adjustment to decrease Royall’s recorded value of deferred revenue to its estimated remaining future service obligations as part of the purchase price allocation based on the preliminary valuation. The fair value and estimated future service obligation assigned to deferred revenue has been estimated based on a preliminary valuation. The final purchase price allocation will be based on a complete analysis and may result in a materially different allocation for deferred revenue than that presented in these unaudited pro forma financial statements. However, this adjustment is not reflected in the unaudited pro forma combined statement of income since it is directly related to the acquisition but will not have a recurring effect. This adjustment will result in a reduction of revenue during the twelve months subsequent to the acquisition of Royall on January 9, 2015.

(j) This adjustment is to eliminate the historical Royall accrued interest balance of $1,515 and to eliminate accrued transaction costs $318, both of which were paid by the sellers from the cash proceeds they received.

(k) These adjustments give effect to the repayment of Royall’s existing debt as of September 30, 2014 and the incurrence of new debt (see note (b) above) to fund the acquisition. Royall’s existing debt was paid by the sellers using $241,986 of the cash proceeds they received and $19,030 of Royall cash on January 9, 2015. The following table presents the short- and long-term debt outstanding of Advisory Board as a result of the acquisition and related financing:


New senior secured credit facilities:
New term loan, current portion	$	7,250
New term loan, long-term portion (1)		693,935

Total debt	$	701,185

(1)	Net of OID and finance fees paid to lenders totaling $23,815.

(l) Represents the purchase accounting adjustments to record an incremental deferred tax liability to account for the difference between the revised book basis (i.e., fair value) of the Royall intangible assets, other than goodwill, and liabilities recorded under purchase accounting and the carryover tax basis of those assets and liabilities. The pro forma adjustment to the deferred tax liabilities was based on a statutory tax rate of 41%.

(m) Represents a purchase accounting adjustment to reverse the remaining accrued straight-line rent balance at September 30, 2014 which Royall recorded for each operating lease to recognize rental expense on a straight-line basis over the life of each operating lease.

(n) Represents (1) the elimination of the Royall stockholder’s equity balances resulting from the acquisition of the Royall outstanding common stock; (2) the issuance of 2,428,364 shares of common stock to the sellers of Royall, valued at $121,224 on January 9, 2015, and (3) a reduction of stockholders’ equity of $6,833 related to non-recurring transaction costs net of related tax benefit (see note (d) above).

Statements of Operation Adjustments

As Royall was acquired on January 9, 2015, Advisory Board historical results for the year ended March 31, 2014 and the six-months ended September 30, 2014 exclude any Royall results, and have been adjusted to include the Royall results for the year ended June 30, 2014 and the six-months ended September 30, 2014. The following table presents Royall’s Statements of Operations for the six months ended September 30, 2014 which have been derived from Royall’s unaudited Statements of Operations for the fourth quarter of Royall’s fiscal year 2014 and the unaudited Statements of Operations for the first quarter of Royall’s fiscal year 2015, respectively.


	Three Months Ended June 30, 2014			Three Months Ended September 30, 2014			Pre-acquisition historical results of Royall 4/1/14 - 9/30/14

Revenue	$	27,612		$	22,330		$	49,942
Cost and expenses:
Depreciation and amortization		1,891			1,977			3,868
Postage expenses		1,078			1,618			2,696
Printing, mailshop, data processing and other production expenses		245			4,050			4,295
Personnel and benefits expenses		8,878			9,238			18,116
Occupancy expenses		449			456			905
Travel and workshop expenses		597			814			1,411
Selling, general and administrative expenses		1,244			896			2,140

Operating income		13,230			3,281			16,511
Other income (expenses):
Other income, net		—			—			—
Interest expense		(4,426	)		(4,467	)		(8,893	)
Transaction expenses		—			(318	)		(318	)
Amortization of deferred financing costs		(255	)		(255	)		(510	)
Other gain (loss)		(6	)		7			1

Income from continuing operations before provision for income taxes and equity in loss of unconsolidated entities		8,543			(1,752	)		6,791
Provision for income taxes		(3,337	)		691			(2,646	)
Equity in loss of unconsolidated entities		—			—			—

Net income from continuing operations		5,206			(1,061	)		4,145
Net loss and accretion to redemption value of noncontrolling interest		—			—			—

Net income attributable to common stockholders	$	5,206		$	(1,061	)	$	4,145

(a) The following adjustments represent the estimated allocation of Royall’s statement of operations amounts to conform to the Advisory Board’s presentation:


Year ended March 31, 2014:
	Historical Advisory Board		Pre-acquisition historical results of Royall and Co. 7/1/13 - 6/30/14			Reclassifications			Historical as reclassified before pro forma adjustments

Cost of services, excluding depreciation and amortization		272,523		—			39,506			312,029
Member relations and marketing		96,298		—			4,167			100,465
General and administrative		74,169		—			15,376			89,545
Postage expenses		—		8,091			(8,091	)		—
Printing, mailshop, data processing and other production expenses		—		11,745			(11,745	)		—
Personnel and benefits expenses		—		31,612			(31,612	)		—
Occupancy expenses		—		1,756			(1,756	)		—
Travel and workshop expenses		—		1,822			(1,822	)		—
Selling, general and administrative expenses		—		4,023			(4,023	)		—
Interest expense		—		(15,769	)		(5,351	)		(21,120	)
Amortization of deferred financing costs		—		(5,351	)		5,351			—

Six months ended September 30, 2014:
	Historical Advisory Board		Pre-acquisition historical results of Royall 4/1/14 - 9/30/14			Reclassifications			Historical as reclassified before pro forma adjustments

Cost of services, excluding depreciation and amortization		148,296		—			18,545			166,841
Member relations and marketing		53,368		—			2,326			55,694
General and administrative		47,285		—			8,692			55,977
Postage expenses		—		2,696			(2,696	)		—
Printing, mailshop, data processing and other production expenses		—		4,295			(4,295	)		—
Personnel and benefits expenses		—		18,116			(18,116	)		—
Occupancy expenses		—		905			(905	)		—
Travel and workshop expenses		—		1,411			(1,411	)		—
Selling, general and administrative expenses		—		2,140			(2,140	)		—
Interest expense		—		(8,893	)		(510	)		(9,403	)
Amortization of deferred financing costs		—		(510	)		510			—

(b) A portion of this adjustment is to record recognition of the estimated stock based compensation Advisory Board expects to recognize as a result of the issuance of certain stock based compensation awards related to the acquisition. In connection with the acquisition, Advisory Board adopted The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees to provide for inducement grants of equity awards to certain continuing Royall employees, to attract and retain their services following the acquisition. In connection with the closing of the acquisition, inducement awards were made to approximately 60 continuing employees of Royall, and consisted of performance-based stock options to purchase an aggregate of 1,760,000 shares of common stock, and performance-based restricted stock units for an aggregate of 146,667 shares of common stock. Stock options granted under the inducement plan have an exercise price equal to $49.92, the closing price of Advisory Board’s common stock on the NASDAQ Global Select Market on January 9, 2015. The stock options have a seven-year term and are eligible to vest, if performance-based vesting criteria are satisfied, in installments commencing in January 2017 and ending in January 2020. The restricted stock units were also valued at $49.92 and are also eligible to vest in installments

commencing in January 2017 and ending in January 2020, subject to satisfaction of performance-based vesting criteria. The vesting criteria in both cases are based on performance of the Royall programs and services. The aggregate grant date fair value of the performance-based stock options, assuming all performance targets are met, is estimated to be approximately $20.6 million. The aggregate grant date fair value of the performance-based restricted stock units, assuming all performance targets are met, is estimated at approximately $7.3 million. Based on the current estimates of future performance against the targets, the Advisory Board currently expects 50% of the performance-based stock options and restricted stock units to vest, respectively. For pro forma purposes, the stock-based compensation we have recorded during the year ended March 31, 2014 and the six-months ended September 30, 2014 estimates Royall will achieve 70-99% of their performance targets. The actual stock-based compensation expense we will recognize is dependent upon, but not limited to, Royall satisfying certain performance conditions and continued employment of the award recipient at the time performance conditions are met. The actual amount we will recognize may increase or decrease based on the actual results of Royall and employment conditions at the time performance conditions are met. The following average key assumptions were used in the valuation of the stock options issued to Royall employees using the Black-Scholes model:

Risk-free interest rate: 0.69% - 1.67%

Expected lives in years: 2 - 5

Expected volatility: 30.10% - 32.85%

Dividend yield: -%

Estimated forfeitures: 5.2%

Fair value of stock options issued: $9.45 - $15.16

Total pro forma stock-based compensation expense attributable to The Advisory Board Company Inducement Stock Incentive Plan for Royall Employees is as follows:


	Year Ended March 31, 2014		Six Months Ended September 30, 2014
Cost of services, excluding depreciation and amortization	$	1,349	$	674
Member relations and marketing		899		450
General and administrative		2,248		1,124


Total	$	4,496	$	2,248

(c) An adjustment to eliminate the annual management fee Royall previously paid to its owner totaling $1,537 and $758 for the year ended March 31, 2014 and the six months ended September 30, 2014, respectively.

(d) This adjustment is to reflect the estimated incremental amortization expense based on the preliminary estimates of fair value and useful lives of identified, finite-lived intangible assets (see note (f) to the unaudited pro forma condensed combined balance sheet above).


	Estimated fair value		Estimated life	Annual amortization expense
Trade name	$	9,000	10 years	$	900
Technology		7,000	4 years		1,750
Developed software		30,000	11 years		2,727
Customer relationships		233,000	16 years		14,563

Total	$	279,000		$	19,940

A summary of the effects of the adjustments to amortization expense are as follows:


	Year Ended March 31, 2014			Six Months Ended September 30, 2014

Estimated amortization expense based on above	$	19,940		$	9,970
Elimination of historical depreciation and amortization expense		(6,406	)		(3,348	)

Incremental amortization expense related to finite-lived intangibles	$	13,534		$	6,622

(e) This adjustment reflects the elimination of our interest income and net realized gains associated with our marketable securities that were liquidated as part of the acquisition (see pro forma balance sheet note (c)).

(f) This adjustment is to record: (1) the incremental estimated interest expense recognized on our new senior secured credit facilities as calculated using the estimated interest expense of 5.0% and including the unused line fees under the new revolving credit facility; and (2) the incremental amortization of OID and capitalized debt issuance costs associated with the newly-issued debt as computed below. A change of one-eighth of one percent (12.5 basis points) in the interest rates, to the extent that LIBOR is in excess of the 1.00% floor rate applicable to our new senior secured credit facilities would result in additional annual interest expense (if the interest rate increases) or a reduction to annual interest expense (if the interest rate decreases) of approximately $906. OID and debt issuance costs will be amortized over the life of the related debt using the effective interest method. A summary of the effects of the adjustments on incremental interest expense are as follows:


	Year Ended March 31, 2014			Six Months Ended September 30, 2014
Estimated interest expense related to newly issued debt (per above)	$	36,114		$	17,921
Amortization of OID and estimated capitalized debt issuance costs related to the newly issued debt (per above)		3,415			1,758
Historical interest expense		(21,120	)		(9,403	)

Net increase in interest expense	$	18,409		$	10,276

(g) This adjustment is to eliminate transaction expenses incurred by Royall related to its sale to Advisory Board, due to the non-recurring nature of this expense.

(h) This adjustment is to reflect the tax effect of the pro forma adjustments described in the unaudited pro forma combined statement of operations above, based on our estimated statutory tax rate of 41.0%. Because the tax rate used for these pro forma financial statements is an estimate, it may vary from the actual effective rate in periods subsequent to the acquisition.

(i) Pro forma basic earnings per share is computed by dividing net income attributable to common stockholders by the number of weighted average common shares outstanding during the period. Pro forma diluted earnings per share is computed by dividing net income attributable to common stockholders by the number of weighted average common shares and potentially dilutive common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance with the treasury stock method, using the Company’s prevailing tax rates. Certain potential common share equivalents were not included in the computation because their effect was anti-dilutive.

A reconciliation of pro forma basic to pro forma diluted weighted average common shares outstanding is as follows (in thousands):


	Year Ended March 31, 2014		Six Months Ended September 30, 2014
Basic weighted average common shares outstanding		35,909		36,301
Pro forma shares (1)		2,428		2,428

Pro forma basic weighted average common shares outstanding		38,337		38,729
Effect of dilutive outstanding stock-based awards		1,050		—

Pro forma diluted weighted average common shares outstanding		39,387		38,729

(1)

Represents the shares of our common stock used to partially fund our acquisition of Royall.

In the year ended March 31, 2014, 1,000 shares related to share-based compensation awards have been excluded from the calculation of the effect of pro forma dilutive outstanding stock-based awards shown above because their effect was anti-dilutive. For the six months ended September 30, 2014, all outstanding restricted stock units and stock options have been deemed anti-dilutive and excluded from the computation of diluted EPS as the Advisory Board has reported a pro forma loss for the period.

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