UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
|X| Annual Report pursuant to Section 13 or 15(D) of the Securities Exchange Act
of 1934 for the fiscal year ended August 31, 1998
|_| Transition Report pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the transition period from ____ to ____
__________________
Commission File Number: 1-11869
FACTSET RESEARCH SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3362547
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Greenwich Plaza, Greenwich, Connecticut 06830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 863-1500
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Name of each exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the common stock held by non-affiliates of the
registrant as of November 13, 1998 was $180,658,330.
The number of shares outstanding of the registrant's common stock as of November
13, 1998 was 10,032,396.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended August
31, 1998 into Parts I and II.
Portions of the definitive Proxy Statement dated November 24, 1998 into Part
III.
<PAGE>
FACTSET RESEARCH SYSTEMS INC.
FORM 10-K
For The Fiscal Year Ended August 31, 1998
PART I
Page
ITEM 1. Business............................................................3
ITEM 2. Properties..........................................................4
ITEM 3. Legal Proceedings...................................................4
ITEM 4. Submission of Matters to a Vote of Security Holders.................4
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters.................................................5
ITEM 6. Selected Financial Data.............................................5
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation..................................5
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..........5
ITEM 8. Financial Statements and Supplementary Data.........................5
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................5
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................6
ITEM 11. Executive Compensation..............................................7
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......7
ITEM 13. Certain Relationships and Related Transactions......................7
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....8
Signatures ....................................................................9
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<PAGE>
PART I
ITEM 1. BUSINESS
FactSet Research Systems Inc. ("the Company" or "FactSet") is a leading provider
of online integrated database services to the global financial community. The
Company provides a comprehensive, one-stop source of financial information and
analytics for investment managers, investment bankers, and other financial
professionals. FactSet combines over 100 databases into a single mainframe
information system which is accessible by clients through their personal
computers.
The Company acquires financial information from over 30 database vendors and
when possible, strives to maintain contractual relationships with a minimum of
two database providers for each type of financial data. Database vendor charges
may be billed directly to FactSet or its clients. Data charges to FactSet are on
a fixed or royalty (per client) fee basis, with contracts generally renewable
annually and cancelable on one year's notice. Many of the database information
providers compete with one another and in some cases, with the Company. The
Company is a significant distributor for many of the databases offered by
FactSet to its clients.
FactSet's advanced proprietary communication and software tools enable users to
access the Company's mainframe centers and its integrated data library in order
to create investment analyses using easy-to-use Windows-based programs. Wide
area network connections provide a direct, high-speed data transmission link
between the Company's mainframes and the client's network. Through the Company's
proprietary software tools, clients can download, screen, manipulate, and
analyze data in a virtually infinite array of formats, allowing for custom
reports and charts designed by and for the user. By charging annual flat fees,
the Company encourages its clients to make full use of the FactSet system. Other
than the data charges described above, there are no extra usage charges or
telecommunication costs and FactSet includes extensive support and training at
no additional charges.
An integral part of FactSet's service is its superior consulting and training
services. The Company's client support consultants create lasting and profitable
client relationships by providing hands-on training and continuous technical
support to clients. Clients gain a stronger understanding of FactSet's system by
working with client support consultants in developing custom applications and
spreadsheets that meet their information needs.
Due to the vast array of financial data that financial service professionals
depend on, the Company believes that it has become increasingly important for
financial service firms to integrate different types of financial information
from multiple databases in order to reach their investment decisions. Financial
information databases are maintained by a large number of vendors who provide
the information to clients through the Internet, online dial-up connections,
CD-ROM, and print formats. Without being able to integrate financial data from
many different sources, individual users must access and retrieve data from
different sources, often in varied formats, and manually integrate the data to
complete their objective.
The financial information services industry is competitive and characterized by
rapid technological change containing both large and well-capitalized companies
as well as smaller competitors. In a broad sense, the Company competes or may
compete directly and indirectly in the United States and internationally with
well-established news and information providers, market data suppliers, and with
many of the database providers from whom FactSet obtains data for inclusion in
the FactSet system. FactSet's most direct competitors include online and CD-ROM
database suppliers and integrators such as OneSource Inc., COMPUSTAT PC Plus,
Baseline Inc., StockVal Incorporated, Disclosure Inc., and IDD Information
Services primarily in the United States, and Datastream and Randall-Helms
primarily in international markets. A large number of these competitors offer
services that, in one form or another, are similar to those offered by the
Company, which in some cases are at lower prices. Although many of FactSet's
competitors offer similar applications, the Company believes that none of its
competitors offer a package of services as comprehensive and powerful as those
offered by FactSet.
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<PAGE>
The most important new feature on the FactSet system developed during fiscal
1998 was the new FactSet interface called Directions. Directions incorporates
the breadth and power of the FactSet system with several enhancements and a more
intuitive, easy-to-use interface. The new interface represents a complete
reorganization of the user's road map so that a line of inquiry can now be
pursued intuitively and easily. Directions is a major advance by the Company
toward an easier-to-use system which is expected to help broaden the Company's
potential user base. The Company's new interface has completed the beta test
phase and is expected to be released in fiscal 1999.
The number of employees of FactSet and its subsidiaries totaled 265 as of August
31, 1998, up from 193 at August 31, 1997.
Additional information with respect to the Company's business is included in
FactSet's fiscal year 1998 Annual Report to Shareholders which is incorporated
herein by reference:
Five-Year Summary of Selected Financial Data -- page 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations -- pages 13-18
Note 1 to Consolidated Financial Statements entitled "Organization
and Nature of Business" -- page 26
Note 10 to Consolidated Financial Statements entitled "Net Capital" -- page 32
ITEM 2. PROPERTIES
Refer to footnote 11 "Lease Commitments" on page 32 of FactSet's fiscal year
1998 Annual Report to Shareholders for properties information.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following information included in FactSet's fiscal year 1998 Annual Report
to Shareholders is incorporated herein by reference:
Quarterly Financial Data, Common Stock and Quarterly Stock Prices -- page 38
ITEM 6. SELECTED FINANCIAL DATA
Refer to the Five-Year Summary of Selected Financial Data included on page 12 of
FactSet's fiscal year 1998 Annual Report to Shareholders, which is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Refer to the Management's Discussion and Analysis of Financial Condition and
Results of Operations included on pages 13-18 of FactSet's fiscal year 1998
Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal 1998, the Company sold its investments resulting in an after-tax
extraordinary gain of $242,000. At August 31, 1998, the Company had no
investments and no outstanding debt. In addition, the Company's exposure to
foreign currency fluctuations is immaterial. More than 95% of fiscal 1998
revenues were billed in U.S. dollars. Also, the net monetary assets held by the
Company's foreign offices at August 31, 1998 were immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the following information included in FactSet's fiscal year 1998 Annual
Report to Shareholders, which is incorporated herein by reference:
Consolidated Statements of Income -- page 19
Consolidated Statements of Financial Condition -- pages 20-21
Consolidated Statements of Changes in Stockholders' Equity -- pages 22-23
Consolidated Statements of Cash Flows -- pages 24-25
Notes to Consolidated Financial Statements -- pages 26-37
Report of Independent Accountants -- page 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of FactSet Research Systems Inc. as of
November 24, 1998 were as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ----------------------------------- ------------------ ---------------------------------------------------------------
<S> <C> <C>
Howard E. Wille 70 Chairman of the Board of Directors,
Chief Executive Officer and Director
Charles J. Snyder 56 President, Chief Technology Officer and Director
Ernest S. Wong 44 Senior Vice President, Chief Financial Officer and Secretary
David R. Korus 37 Director
Joseph E. Laird, Jr. 52 Director
John C. Mickle 72 Director
Walter F. Siebecker 57 Director
</TABLE>
Howard E. Wille, Chairman of the Board of Directors, Chief Executive Officer and
Director. Mr. Wille was a founder of the Company in 1978 and has held his
current positions with the Company since that time. From 1966 to 1977, Mr. Wille
was a Partner and Director of Research at Faulkner, Dawkins & Sullivan, Inc., a
Wall Street investment firm, and held a managerial position with Shearson Hayden
Stone, Inc. after its acquisition of Faulkner, Dawkins & Sullivan, Inc. in 1977.
He was President and Chief Investment Officer of Piedmont Advisory Corporation
from 1961 to 1966 and, prior to that time served as a securities analyst,
investment manager and investment counselor for several firms. Mr. Wille
received a B.A. in Philosophy from the City College of New York. Mr. Wille has
been a Director of the Company since its formation in 1978.
Charles J. Snyder, President, Chief Technology Officer and Director. Mr. Snyder
was a founder of the Company in 1978 and has held his current positions with the
Company since that time. From 1964 to 1977, Mr. Snyder worked for Faulkner,
Dawkins & Sullivan, Inc. eventually becoming Director of Computer Research, a
position he retained with Shearson Hayden Stone, Inc. after its acquisition of
Faulkner, Dawkins & Sullivan, Inc. in 1977. Mr. Snyder received a B.S.E. in
Electrical Engineering from Princeton University and a M.S. in Mathematics from
New York University. Mr. Snyder has been a Director of the Company since its
formation in 1978.
Ernest S. Wong, Senior Vice President, Chief Financial Officer and Secretary.
Mr. Wong joined the Company in his current position in June 1996. Between 1991
and 1996, he held several positions with Montedison SpA including Vice
President, Finance and Treasurer of Montedison USA, Inc. and Director of
Corporate Finance of Montedison Corporation of America. From 1988 to 1991, he
was Vice President in the North American Banking Group of The First National
Bank of Chicago, and prior to that time served as Manager of Domestic Finance at
PepsiCo, Inc. and Second Vice President in the Corporate Bank of The Chase
Manhattan Bank. Mr. Wong received a B.A. in Psychology from Cornell University
and an M.B.A. in Finance from Columbia University Graduate School of Business.
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<PAGE>
David R. Korus, Director. Mr. Korus is a Partner and Portfolio Manager with
Owenoke Capital Management LLC ("Owenoke"). Prior to founding Owenoke in 1998,
Mr. Korus managed technology assets for Westcliff Capital Management LLC and
Kingdon Capital Management, large diversified hedge funds. Mr. Korus began his
career in 1983 with Kidder, Peabody & Co. researching technology stocks. Later
he became Chairman of the Research Steering Committee and was responsible for
managing the technology research department. During his 11-year tenure with
Kidder, Peabody & Co., Mr. Korus followed over 100 companies in the software and
hardware industries. Mr. Korus is a member of the Compensation Committee and has
served on the Board since July 1997.
Joseph E. Laird, Jr., Director. Mr. Laird has been a Managing Director of
Veronis, Suhler & Associates ("Veronis"), a leading specialty investment bank
exclusively serving the media and information industries since 1989. From 1982
to 1989, he was an institutional equity salesman and a senior securities analyst
of database information services for Hambrecht & Quist. From 1975 to 1982, Mr.
Laird was an institutional equity salesman and investment strategist for
PaineWebber Mitchell Hutchins. Mr. Laird is a member of the Compensation
Committee and has served on the Board since 1993.
John C. Mickle, Director. Mr. Mickle has been President of Sullivan, Morrissey &
Mickle Capital Management Corporation since 1978. Mr. Mickle is an experienced
investment advisor, having held prior positions with Shearson Hayden Stone,
Inc., UBS-DB Corporation, and Faulkner, Dawkins & Sullivan, Inc. Mr. Mickle is
also a Director of Mickelberry Communications Inc. Mr. Mickle is a member of the
Audit Committee and has served on the Board since November 1997.
Walter F. Siebecker, Director. Mr. Siebecker joined the National Securities
Clearing Corporation ("NSCC") in 1996 as a Managing Director in charge of the
organization's Annuity Processing Service. Mr. Siebecker has an extensive
background in retail and institutional investment services in the domestic and
global markets. Prior to joining NSCC, Mr. Siebecker was a consultant to the
Trading Services Division at Lehman Brothers and spent 16 years at Smith Barney
Inc., where he was responsible for the operations division as Executive Vice
President and Chief Operations Officer. Mr. Siebecker is a member of the Audit
Committee and has served on the Board since November 1997.
The information set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" contained on page 3 of the definitive Proxy Statement
dated November 24, 1998 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Information Regarding Executive
Officer Compensation" and "Compensation Pursuant to Stock Options" contained on
pages 4 and 5 of the definitive Proxy Statement dated November 24,1998 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information Regarding Beneficial
Ownership of Principal Shareholders, Directors, and Management" contained on
page 3 of the definitive Proxy Statement dated November 24, 1998 is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Information Regarding the Board of
Directors and Related Committees" on pages 1 through 3 and "Certain
Transactions" on page 8 of the definitive Proxy Statement dated November 24,
1998 is incorporated herein by reference.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
The following information from FactSet Research Systems Inc.'s fiscal year 1998
Annual Report to Shareholders is incorporated by reference under Items 1, 5, 6,
7, and 8 and are filed as part of this report as part of Exhibit 13.1:
Five-Year Summary of Selected Financial Data -- page 12
Management's Discussion and Analysis of Results of Operations
and Financial Condition -- pages 13-18
Consolidated Statements of Income -- page 19
Consolidated Statements of Financial Condition -- pages 20-21
Consolidated Statements of Changes in Stockholders' Equity -- pages 22-23
Consolidated Statements of Cash Flows -- pages 24-25
Notes to Consolidated Financial Statements -- pages 26-37
Quarterly Financial Data, Common Stock and Quarterly Stock Prices -- page 38
Report of Independent Accountants -- page 39
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.
(c) Exhibit Listing
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation (1)
3.2 By-laws (1)
4.1 Form of Common Stock (1)
10.1 Form of Employment Agreement between the Company and
Howard E. Wille and Charles J. Snyder (1)
10.2 Letter Agreement between the Company and Ernest S. Wong (1)
13.1 The Company's fiscal 1998 Annual Report to Shareholders
21 Subsidiaries of the Company
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No.333-4238).
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwich,
State of Connecticut, on November 25, 1998.
FACTSET RESEARCH SYSTEMS INC.
/s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on November 25, 1998.
SIGNATURE TITLE
/s/ HOWARD E. WILLE Chairman of the Board of Directors and
Howard E. Wille Chief Executive Officer and Director
/s/ CHARLES J. SNYDER President, Chief Technology Officer and Director
Charles J. Snyder
/s/ ERNEST S. WONG Senior Vice President, Chief Financial Officer,
Ernest S. Wong and Secretary
/s/ DAVID R. KORUS Director
David R. Korus
/s/ JOSEPH E. LAIRD, JR. Director
Joseph E. Laird, Jr.
/s/ JOHN C. MICKLE Director
John C. Mickle
/s/ WALTER F. SIEBECKER Director
Walter F. Siebecker
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<PAGE>
EXHIBIT 13.1
The Company's fiscal 1998 Annual Report to Shareholders
Contents
1 About FactSet
Financial Highlights
3 To Our Shareholders
13 Management's Discussion and Analysis
19 Consolidated Statements of Income
20 Consolidated Statements of Financial Condition
22 Consolidated Statements of Changes in Stockholders' Equity
24 Consolidated Statements of Cash Flows
26 Notes to Consolidated Financial Statements
39 Report of Independent Accountants
40 Directors and Management Corporate Information
<PAGE>
ABOUT FACTSET
FactSet Research Systems Inc. is the leading provider of online integrated
database services to the global financial community. The Company was formed in
1978 and now conducts operations from six locations worldwide.
For investment managers, investment bankers, and other financial professionals,
FactSet is a comprehensive, one-stop source of financial information and
analytics. FactSet combines more than 100 databases into a single mainframe
information system. The Company's aggregated data library offers a broad array
of financial, market, and economic information, including fundamental data on
tens of thousands of companies and securities worldwide. Using FactSet software,
clients are afforded simultaneous access to disparate data sources. They can
also search for specific data and download it directly into their spreadsheets
or other applications.
FactSet's proprietary software tools permit clients to manipulate and analyze
data and present it in an infinite variety of formats, including their own
custom-designed reports.
<TABLE>
<CAPTION>
Financial Highlights
Thousands, except per share data Years Ended August 31, 1998 1997 %Change
.........................................................................................
<S> <C> <C> <C>
Revenues $78,911 $58,358 35.2
Income from operations 20,883 14,862 40.5
Income before income taxes and extraordinary gain 22,439 15,733 42.6
Net income before extraordinary gain 12,609 8,930 41.2
Net income 12,851 8,930 43.9
Stockholders' equity 51,025 37,627 35.6
.........................................................................................
Per Share Data
Diluted earnings per common share $1.17 $0.82 42.7
Book value per common share $4.65 $3.47 34.0
Weighted average common shares (diluted) 10,980 10,838
.........................................................................................
Performance Ratios
Operating margin 26.5% 25.5%
Pretax margin* 28.4% 27.0%
Net margin* 16.0% 15.3%
Return on average stockholders' equity* 28.4% 27.1%
.........................................................................................
</TABLE>
* Excludes an extraordinary after-tax gain of $242,000 in 1998.
Graphic Omitted [Revenues - fiscal years 1994, 1995, 1996, 1997, 1998]
Graphic Omitted [Earnings per share - fiscal years 1994, 1995, 1996, 1997, 1998]
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<PAGE>
Graphic Picture - [Total number of passwords - fiscal years 1996, 1997, 1998]
Graphic Picture - [Total number of clients - fiscal years 1996, 1997, 1998]
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<PAGE>
To Our Shareowners
We are pleased to submit FactSet's annual report for the fiscal year ended
August 31, 1998. By all measures, it was a very good year. Beyond our attainment
of record-breaking financial results, the period was marked by substantial
progress in company building. Great strides were made in engineering,
professional staffing, product development, and expansion of our physical plant.
Every one of our operating units participated. We are consequently today better
equipped than ever before to face the challenges and capitalize on the
opportunities that lie ahead.
Fiscal 1998's revenues and profits continued to surge. Revenues rose 35.2% to a
new high of $78.9 million. Operating profit margins maintained an upward slope,
rising another 100 basis points to 26.5%. Operating profits jumped 40.5% to
$20.9 million. Net income, aided by a small gain on disposition of an
investment, increased 43.9% to $12.9 million. Earnings per share, including the
$0.02 of nonrecurring income, were up 42.7% to $1.17 from $0.82 in fiscal 1997.
In view of the current turmoil and uncertainties occurring in global financial
markets, we felt obliged to offer our shareowners a better understanding of the
metrics behind FactSet's growth and stability. The table below, "Anatomy of
Growth," sketches out a simple formula of the factors underlying recent growth.
<TABLE>
<CAPTION>
Anatomy of Growth 2-Year
Years ended August 31, 1996 1997 1998 %Change
......................................................................................
<S> <C> <C> <C> <C>
Number of clients 439 498 564 28.5
Average users per client 14.2 21.6 29.5 107.7
Total number of users 6,245 10,771 16,647 166.6
......................................................................................
Avg. $ commitment per client $ 116,000 $ 138,000 $ 164,000 41.4
Year-end commitments $ 50,815,000 $ 68,551,000 $ 92,479,000 82.0
......................................................................................
</TABLE>
As you can see, we managed to create growth at every stage. In the past two
years the number of clients rose 28.5%. This is where our client retention rate,
which once again exceeded 95%, played a deciding role. With the average number
of passwords per account more than doubling in just two years, the total number
of passwords has skyrocketed from 6,000 to nearly 17,000, for a gain of 166.6%.
The number of passwords accessing our computer centers can be viewed as an
indicator of the level of services we are currently delivering and reflects the
rising demand for our services. More new databases and more new applications
obviously translate to a broader potential audience. A recent example of this
was the creation of Portfolio Management Workstation, which opened an entirely
new market for FactSet and which has generated hundreds of new users. In
addition, recent years have been witness to a sea change in the breadth of our
business. A fair number of client additions in the last few years have been
global in scope, entailing vast numbers of new users. This process is
continuing. Another factor is a movement toward greater consolidation and
control of
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<PAGE>
data flowing into client offices. Consequently, as a supplier of more than 100
integrated databases, FactSet is evolving into a primary conduit for much of
this data. Our continual addition of databases (18 in the past year alone)
facilitates the process.
We should also like our shareowners to gain a clearer understanding of the
relationship between client "commitments" and subsequent revenue growth.
"Commitments" simply means the forward billing rate. It is a freeze frame of
total billings for all the services being delivered to clients at any point in
time. This statistic increases essentially every month (it declined only once in
the past 96 months and that was several years ago).
In the table below, "Client Commitments and Reported Revenues," we display
commitments at two time periods, namely at the beginning of the fiscal year and
then six months later. Juxtaposed against the latter number are the actual
revenues reported for that fiscal year. At least for the past few years,
February commitments proved to be very reliable forecasters of full-year
revenues.
<TABLE>
<CAPTION>
Client Commitments and Reported Revenues
Years Ended August 31, 1996 1997 1998 1999
........................................................................
<S> <C> <C> <C> <C>
Commitments: Beginning of year $40,223 $50,815 $68,551 $92,479
Ensuing February 44,099 58,357 78,652
Full-year revenues 44,348 58,358 78,911
........................................................................
</TABLE>
[Picture of Howard E. Wille, Chairman and Chief Executive Officer, and Charles
J. Snyder, President and Chief Technology Officer]
We of course, do not know what the near-term future holds, particularly in view
of recent world events. We do, however, know that we start the new fiscal year
comfortably ahead of fiscal 1998. We begin with client commitments of $92.5
million, which is 34.9% above the $68.6 million of a year ago. We cannot predict
what client commitments will be next February or, for that matter, whether that
month's level will again produce a good forecast of fiscal 1999 revenues; we
will deal with these short-term considerations as they unfold. But we remain
confident in the efficacy of our business model and the soundness of the
long-term strategies we are pursuing.
Reference to long-term strategies gives rise to one of our pet peeves; namely,
the market's focus on quarterly performance. We believe that it is our
fundamental obligation to serve the best long-term interests of shareowners. We
are thus troubled by the near obsession many people have with quarterly
financial results. How can you sustain a long-term plan while managing the
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<PAGE>
business to meet someone else's short-term "expectations"?
The foregoing comments notwithstanding, we have produced ten quarterly reports
since becoming a public company in June 1996. The first was the May 1996 report
in which revenues showed a gain of 26.1%. That gain was smaller than any of the
nine subsequent quarters. In fact, in each of the last seven quarters revenue
growth has exceeded 32%. And for these same seven quarters, the smallest rise in
earnings per share was just under 36%. In our most recent three-month report
(August 1998), E.P.S. were up 43.5% on revenue growth of 34.7%. While we do not
manage for quarterly results, the underlying strength of our secular growth and
the consistency of profit margins have helped generate strong interim results.
<TABLE>
<CAPTION>
Quarterly Performance
Year-to-Year % Change Operating
Revenues E.P.S. Profit Margin
..............................................................
<S> <C> <C> <C>
1996: May 26.1% 45.5% 24.6%
August 28.3 33.3 24.3
November 26.5 28.6 26.0
..............................................................
1997: February 32.4 35.7 25.0
May 32.0 37.5 25.8
August 34.7 43.8 25.0
November 36.4 38.9 26.3
..............................................................
1998: February 36.3 42.1 25.5
May 33.8 36.4 26.8
August 34.7 43.5 27.1
..............................................................
</TABLE>
Our high profit margins have devolved from a combination of factors, prominent
among which is our record of client retention. We have successfully kept client
retention above 95% ever since we started measuring this factor. Maintenance of
client loyalty is reliant on service integrity, on superior technology, and on
basic business fairness. High profitability is also a function of corporate
style. We try hard to control costs, to avoid overstaffing, and to run a
generally tight ship. We do not stint on making investments in new technology
and on building pleasant work environments. We strive to attract talented
personnel willing to work hard for good recompense. Average revenues per
employee have held at $345,000 for each of the past two years in the face of
heavy investment in infrastructure. Employees contributing to the Company's
success are afforded wealth-building opportunities through stakes in stock
ownership. This philosophy has served the Company well in the past and should
continue to do so.
With profit margins at their current levels, we cannot realistically anticipate
significant additional improvements. The only sustainable source of earnings
growth is expanding revenues. We have generated most of our growth by adding
clients, passwords, and
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applications, with a resultant increase in revenues per client. The majority of
growth has been developed from within our existing client base. We intend that
this process be maintained. Longer-term we will need to create new markets for
our services both within markets we already serve and new ones that can be
exploited through application of FactSet's demonstrably superior computer and
database technologies.
An example of new market niches within our existing client base is our Portfolio
Management Workstation, or PMW. This application allows a client to examine a
portfolio's fundamental structure and to identify the sources of investment
returns. It produces this analysis in both absolute and benchmark relative
terms. In addition, PMW's integration with FactSet's other suite of services
provides advance information for decision support. Introduced late in fiscal
1997, this service is giving strong evidence of protracted growth opportunities
for FactSet. We have two dedicated teams of product designers and applications
engineers addressing the development needs of this innovative service. Judging
from the speed of client acceptance, we appear to have identified a void in the
services available to the investment management community.
The most important 1998 contribution of our product development group was
completion of FactSet's new "front end." We named it DIRECTIONS as a code word
for easy passage from one FactSet application to another. It represents a
complete reorganization of the user's road map so that a line of inquiry can now
be pursued intuitively and easily.
If a client, for example, has an interest in a specific company, all the data we
have on that company is now organized to be a mouse click away from all of our
other data sources. Thus, a user might want to see a brief company overview or
an in-depth look at that company's financials, its EDGAR* filings, a business
description, recent news, a security price record, or an earnings estimate. They
are all immediately at hand.
DIRECTIONS is ready for deployment, having already passed the beta test phase.
Installation will entail considerable effort and time. Our systems engineering
and consulting staffs are geared up to accomplish the task. It is our
expectation that this major advance toward ease-of-use will help broaden our
potential user base.
Year 2000
FactSet is now prepared to manage the millennium date change systemwide. Our
compliance with a four-digit year format will not affect clients using our
system. The behavior of no existing request codes, screening items, or FactSet
formulas will be altered. Futhermore, wherever a date can be entered, whether in
an online application or within a data request code, either two- or four-digit
years will be correctly interpreted. As of June 30, 1998, we completed our "Year
2000" transition related to our mainframe systems and applications interface.
This means that any enhancements or modifications to the behavior of the online
system resulting from our compliance effort are now complete and available to
users.
Having achieved this a full 18 months prior to the turn of the millennium has
given FactSet's users ample time for their remediation efforts. It also insures
that the code, which will be in place in the year 2000, will be thoroughly
tested and stable.
* EDGAR is a registered trademark of the U.S. Securities and Exchange
Commission.
-6-
<PAGE>
Euro Currency Conversion
Eleven countries from the 15-member European Union are scheduled to transition
to the new currency, the euro, on January 1, 1999. Due to the extensive number
of global databases offered through FactSet, the shift to the new currency will
have a broad impact. On December 31, 1998, the conversion rate between each of
these 11 currencies and the euro will be irrevocably fixed. Going forward from
that date, converting from one participating country's currency to any other
currency will be a simple calculation with the fixed rate and the floating euro
rate.
How to view pre-euro data requires some debate. To provide the most flexible
solution, we will by default convert all legacy currency data to the euro via
the fixed rates. Therefore, after the conversion, all data in any of the 11
former national currencies will be displayed in euros unless otherwise
specified.
To summarize where we stand, 1998 was a great year. Record-breaking financial
performances were topped off with major strides in staffing, product
development, technological achievement, and facilities expansion. While there
might be a few bumps in the road ahead due to unsettled world conditions, we
start this next leg of the journey well ahead of year-earlier levels, which
should translate to another good year.
And beyond short-term considerations, FactSet has never been in stronger shape.
We have the strategies, the technology, and the professional personnel to
advance resolutely into the new millennium.
Howard E. Wille Charles J. Snyder
Chairman and Chief Executive Officer President and Chief Technology Officer
-7-
<PAGE>
With explosive growth in the number of FactSet users, the past year required
extraordinary growth in systems resources.
[Picture]
The system architecture at FactSet is unique in the industry. Both applications
and databases are developed and executed from the Alpha platform and are
accessed via FactSet's communications program installed on client workstations.
As a consequence of this architecture, updates and enhancements to the system
are reflected instantaneously across our entire client base, and in fact, are a
daily occurrence. The result is a system that is highly responsive to the
ever-evolving and -expanding needs of FactSet clients.
[Picture]
Data center systems, wide area networking, Lotus Notes, desktop PC systems and
support, as well as telephony systems were all successfully scaled to meet the
additional demand.
Our data centers in Greenwich and New York were each upgraded to five clustered
COMPAQ-Digital 8480 AlphaServers, each with 10 gigabytes of RAM and 1.6
terabytes of disk space. This produced an 80% increase in CPU power, a 108%
increase in memory, and a 60% expansion in disk space.
[Picture]
-8-
<PAGE>
[Picture]
DIRECTIONS required several enhancements to our graphical user interface
toolkit. Among these were the ability to generate presentation-quality output
directly from our online applications as well as a complete overhaul of our
charting system to allow for interactivity and a broader variety of chart
styles.
We also added the ability to encrypt our communications stream, allowing us to
offer clients more security options when using our system to manipulate their
own sensitive data. The Portfolio Management Workstation in particular will
benefit enormously from these enhanced security features.
[Picture]
The most important engineering effort in the past year was DIRECTIONS, our
completely redesigned user interface. Another intriguing application release was
Company Web Site, which provides clients with a seamless window into the
Internet. We created a database of Web site addresses for all major companies
worldwide. With this database, FactSet DIRECTIONS becomes a Web browser leading
the user to the Web site of a company for more detailed information-normally its
annual report.
[Picture]
-9-
<PAGE>
[Picture]
-10-
<PAGE>
FINANCIAL REVIEW
Management's Discussion and Analysis
Consolidated Statements of Income
Consolidated Statements of Financial Condition
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
-11-
<PAGE>
The following section summarizes information with respect to the operations and
financial condition of FactSet Research Systems. Further detail is available in
the Company's Form 10-K, filed with the U.S. Securities and Exchange Commission.
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Thousands, except per share data
Years Ended August 31, 1998 1997 1996 1995 1994
......................................................................................
<S> <C> <C> <C> <C> <C>
Revenues $78,911 $58,358 $44,348 $36,188 $29,019
Income from operations 20,883 14,862 10,633 8,100 3,443*
Income before taxes and extra. gain 22,439 15,733 11,384 8,670 3,694*
Net income 12,851** 8,930 6,470 4,939 1,947*
......................................................................................
Earnings per share (diluted) 1.17** 0.82 0.60 0.48 0.21*
Wtd. avg. common shares (diluted) 10,980 10,838 10,767 10,263 9,342
......................................................................................
Total assets 70,556 50,835 36,510 28,663 22,345
Stockholders' equity 51,025 37,627 28,197 21,373 16,033
......................................................................................
</TABLE>
* Includes a special one-time executive bonus expense of $2,500,000.
** Includes an extraordinary after-tax gain of $242,000.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenues
Revenues for fiscal 1998 increased 35.2% to a record $78.9 million. Fiscal 1997
revenues rose 31.6% to $58.4 million versus $44.3 million in the prior fiscal
year. Increased service subscriptions and users, client additions, and continued
rapid expansion of international operations drove this growth. Further
penetration of existing clients accounted for approximately two-thirds of the
revenue growth in fiscal 1998 and 1997.
Passwords. Passwords, a measure of the number of users, grew more than 50%
during fiscal 1998, totaling more than 16,000 at August 31, 1998. Fiscal 1997
saw client passwords increase over 70%.
Client Count. The number of clients serviced by FactSet expanded to 564 as of
August 31, 1998. Fiscal 1998 marked the first year in which market penetration
exceeded 50% among the top 300 U.S. investment managers. The Company also
counted among its clients all top ten U.S. investment banks. The net increase of
66 clients over the past 12 months was slightly more than the 59 net client
additions in fiscal 1997.
International. The Company's overseas revenues rose nearly 60% in fiscal 1998 to
$10.0 million. In fiscal 1997, international revenues were $6.3 million, more
than double the prior year. The continuing revenue growth over the past two
fiscal years reflects the strong demand for the Company's broadening array of
services and data available to its international clients. Revenues from
international sources accounted for nearly 13% of consolidated revenues for the
12 months of fiscal 1998, up from 11% for the comparable period a year earlier.
Commitments. Client commitments at August 31, 1998 rose 34.9% to $92.5 million.
At fiscal year end 1997, commitments improved 35.0% over the prior year to $68.6
million. ("Commitments" at a given point in time represent the forward-looking
revenues for the next 12 months from all services currently being supplied to
clients.) During the past three fiscal years, commitments grew in every month.
These increases translated into an average commitment per client of $164,000 and
$138,000 at the end of fiscal 1998 and 1997, respectively. As a matter of
policy, the Company does not seek to enter into written contracts with its
clients. Clients are free to add to, delete from, or terminate the service at
any time. Historically, revenues at the end of the fiscal year have been higher
than total commitments reported at the beginning of the fiscal year.
Client Concentration. As of and for the fiscal year ended August 31, 1998, no
individual client accounted for more than 4% of total commitments or total
revenues. The ten largest clients did not account for as much as 15% of either
revenues or commitments.
Client Retention. Client retention in fiscal 1998 continued, as it has for the
past nine years, at a rate in excess of 95%.
Graphic Omitted [Revenue Growth Rate - fiscal years 1996, 1997, 1998]
Graphic Omitted [Commitments - fiscal years 1996, 1997, 1998]
-13-
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
% of Revenues Years Ended August 31, 1998 1997 1996
................................................................................
<S> <C> <C> <C>
Cost of services 38.8% 40.0% 40.6%
Selling, general, and administrative 30.9 30.9 32.1
Other expenses 3.9 3.6 3.2
Income taxes 12.5 11.7 11.1
Retained earnings 13.9 13.8 13.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
................................................................................
</TABLE>
Cost of Services. Cost of services represented 38.8% of total revenues in fiscal
1998, a decline of 1.2% from the prior fiscal year. As a result of the growth of
the Company's business, cost of services in fiscal 1998 increased 31.1% to $30.6
million versus a 29.6% rise in fiscal 1997. These increases were due mainly to
higher compensation and benefit expenses of employees in the applications
engineering and consulting groups and increased depreciation expense. Employee
compensation and benefits for the aforementioned groups increased $3.5 million
in fiscal 1998 and $2.4 million in fiscal 1997. Employee additions and merit
raises drove these increases. To meet the growing programming and support
requirements of the Company, the applications engineering and consulting
departments increased staff by 42% during fiscal 1998. In fiscal 1997, these
departments grew by 41%. Depreciation expense on computers increased by $1.5
million in both fiscal 1998 and 1997. Such increases were the result of higher
levels of computer equipment capital spending to upgrade and increase mainframe
capacity in support of an expanded user base. Fiscal 1998's and 1997's
computer-related equipment purchases exceeded the prior year's by $5.0 million
and $200,000, respectively.
Selling, General, and Administrative. Selling, general, and administrative
expenses ("SG&A") was 30.9% of total fiscal 1998 and 1997 revenues. For fiscal
1998, SG&A grew by 35.0% to $24.4 million. In fiscal 1997, SG&A rose 26.6% to
$18.0 million. These increases were attributable to higher employee compensation
in the sales, product development, and various other support departments;
increased promotional expenses; and the expansion of office facilities. During
fiscal 1998, employee compensation and benefits increased $4.1 million over the
prior year. In fiscal 1997, employee compensation and benefits grew by $1.8
million. During fiscal year 1998, the sales, product development, and various
other support departments increased staff by 30%. At fiscal year end 1997,
headcount grew by 23% from the year before. Promotional expenses rose $1.1
million during the 12 months of fiscal 1998. Higher travel costs to support a
larger, more diverse client base drove the increase. In fiscal 1997, office
space additions caused occupancy expenses to increase by $850,000.
Foreign Currency. The majority of international clients pay for services in U.S.
dollars and the net monetary assets held by the Company's foreign offices are
insignificant. More than 95% of fiscal 1998 revenues were billed in U.S.
dollars. Accordingly, the Company's exposure to foreign currency fluctuations is
immaterial.
-14-
<PAGE>
Operating Margins
Operating margins rose 100 basis points, from 25.5% in fiscal 1997 to 26.5% for
fiscal 1998. Fiscal 1997 operating margins increased 150 basis points from
fiscal 1996. Margin improvement was the result of declining clearing fees, data
costs, and rent as a percentage of sales partially offset by increased
compensation costs and depreciation expenses.
Clearing Fees. Cash fees generate higher margins than commission revenues,
although net revenues to the Company are approximately the same under both
payment methods. Clients electing to settle obligations using commissions on
securities transactions pay a higher amount than cash-paying clients in order to
cover clearing charges paid by the Company. Over the past three fiscal years,
commissions as a percentage of total revenues have been declining. Cash fees
represented 57% of total revenues in fiscal 1998, 53% in fiscal 1997, and 47% in
fiscal 1996.
Data Costs. During fiscal 1998, data costs declined as a percentage of revenues
due to a combination of strong top-line growth and certain database charges
formerly paid through FactSet moving to direct billing by the database supplier.
This changeover had the effect of raising FactSet's operating margins.
Rent. Improved utilization of office space in fiscal 1998 increased operating
margins.
Depreciation. Operating margin improvement in fiscal 1997 was also partially
offset by added depreciation on computer equipment.
Profitability
Net Income. Fiscal 1998 net income increased 43.9% to $12.9 million. Included in
net income was a $242,000 extraordinary gain from the sale of an investment in a
limited partnership. Excluding this sale, net income was $12.6 million for the
12 months of fiscal 1998, an increase of 41.2% over the prior year period.
Fiscal 1997 net income rose 38.0% to $8.9 million compared to fiscal 1996.
Earnings Per Share. Diluted earnings per share were $1.17 for fiscal 1998.
Excluding the extraordinary gain, diluted earnings per share were $1.15, up
40.2% from the year earlier. For fiscal 1997, diluted earnings per share were
$0.82 compared to $0.60 for fiscal 1997.
Liquidity
Cash from Operations. Cash generated by operating activities was $21.2 million
for the 12 months of fiscal 1998 compared to $17.0 million in the same period a
year ago. This increase primarily reflected higher levels of profitability as
well as additional depreciation and amortization expenses.
Capital Expenditures. Cash used in investing activities was $10.6 million in
fiscal 1998 with capital expenditures of $12.0 million partially offset by the
sale of a $1.4 million limited partnership investment. Major capital
expenditures included the purchase of two COMPAQ-Digital 8480 AlphaServer
systems for each data center, more than doubling RAM to 100 gigabytes and
increasing both I/O capacity and disk storage capacity by approximately 60%.
Graphic Omitted [Operating Margins - fiscal years 1996, 1997, 1998]
Graphic Omitted [EPS Growth Rate - fiscal years 1996, 1997, 1998]
-15-
<PAGE>
Financing Operations and Capital Needs. Capital and operating expense
requirements have been financed, in their entirety, by cash from operations.
FactSet has no outstanding debt. Cash and cash equivalents at August 31, 1998
totaled $37.6 million, which represented 53% of the Company's total assets.
The Company is in the process of negotiating revolving credit facilities
totaling $25 million for working capital and general corporate purposes,
including certain acquisitions. There are no present plans to utilize any
portion of the available credit facilities upon signing of the agreements.
Forward-Looking Factors
Recent Market Trends. Until the fourth quarter of fiscal 1998, the strength of
the U.S. and European financial markets over the past three fiscal years
supported a robust business environment for both investment management and
investment banking firms. In Asia, the equity markets have been more volatile,
particularly during the 1998 fiscal year, with the Nikkei index recently hitting
a 13-year low. Despite these difficult conditions, revenues from the Company's
Pacific Rim operations grew 32% in fiscal 1998 from the prior fiscal year.
The Company has a very small share of a market in which companies spend annually
more than $10 billion on financial information. While the buoyant global
economies and increased activity in the U.S. and international stock markets
have positively impacted FactSet, the Company believes that there is only a
moderate correlation between performance of the financial markets and its
results of operations.
A continuing downward trend in the global stock markets would likely impact the
profitability of some FactSet clients adversely. With that, the possibility of
personnel reductions among clients increases, as does the likelihood that more
clients would reduce or cancel services. Therefore, a protracted bear market
could interrupt Company revenue growth and could adversely impact future results
of operations.
Capital Spending. The Company, in its continuing effort to expand in the global
marketplace, has made significant investments in its infrastructure,
particularly in technology and people. Capital spending in fiscal 1998 ($12
million) was approximately twice that of fiscal 1997 and is likely to exceed $15
million in fiscal 1999.
Investments in People. Expansion of the Company's workforce and strong employee
retention continues. Fiscal 1998's annual employee retention rate exceeded 92%.
At August 31, 1998, the Company employed 265 individuals, an increase of 37%
from the end of fiscal 1997.
Office Facility Expansion. In order to accommodate the growth of its business,
the Company signed leases during the fiscal year for new office space in New
York, Stamford (Connecticut), San Mateo (California), Hong Kong, and Tokyo.
During fiscal 1999, incremental SG&A from additional occupancy costs is not
expected to be material.
Year 2000. Almost all companies are confronted with business risks associated
with the Year 2000 because many computer hardware and software systems use only
two digits to indicate a year. These systems and programs, therefore, may
incorrectly process dates beyond 1999, which may result in information errors or
system failures.
-16-
<PAGE>
The Year 2000 issue extends beyond the Company's internal back-office systems to
its mainframe centers and related application programs that support the entire
client base. Given the relative importance of this issue, the Company recognizes
the need to remain vigilant and is vigorously pursuing its analysis, assessment,
and planning for the Year 2000.
The Company has completed testing of its mainframe systems and application
interface and believes no further Year 2000 alterations to these systems are
necessary. The assessment of Year 2000 readiness of data from third-party
suppliers and data storage capabilities is in progress. The Company maintains
ongoing discussions with its data suppliers and has been encouraging them to
prepare and transmit data that is Year 2000 compliant. The extent of preparation
and readiness varies among suppliers. Contingency plans have been arranged with
a view that the Company will not rely on the ability of data suppliers to
provide Year 2000 compliant data. Programs have been tested and are planned to
adjust data to be Year 2000 compliant if a data supplier does not provide it in
the proper format.
The suppliers of significant internal back-office systems (accounting and
payroll) have been queried for confirmation that their software is Year 2000
ready. The Company has received written confirmations from these suppliers and
to date there has been no indication that these suppliers will not be Year 2000
compliant.
The Company also faces Year 2000 issues with third-party telecommunications
systems over which its products and services are accessed by clients. The
Company has reviewed correspondence from each of its significant
telecommunications providers concerning Year 2000 compliance. There has been no
indication from such review that Year 2000 issues are anticipated to cause a
significant failure or interruption of telecommunications services. However, a
significant service interruption on the telecommunications networks over which
the Company conducts its business may result in a material adverse effect on the
Company's financial condition, results of operations, and cash flows.
Past and estimated costs to prepare all FactSet systems to be Year 2000
compliant have not been and are not expected to be material. Year 2000 changes
take place at the Company's mainframe centers and do not require a separate
program installation on each user's personal computer or supporting network.
Year 2000 compliance matters have not delayed and are not expected to delay any
significant information technology projects.
There can be no assurances that the databases distributed by the Company, or
related applications, mainframe, telecommunications, and back-office systems, do
not contain undetected errors or defects associated with the Year 2000 date
functions. Although the Company believes its efforts will be successful and does
not anticipate the cost of compliance to be material, any failure or delay to
address Year 2000 issues could result in major disruption of its business,
damage to the Company's reputation, and a material, adverse change in its
results of operations.
The Euro. Effective January 1, 1999, 11 of the 15 member countries of the
European Union will shift to a new single currency, the euro. The exchange rates
for the participating currencies will be irreversibly fixed against the euro.
The impact on the Company's results of operations from the euro conversion are
not expected to be material. There are no competitive implications to the
Company from increased price transparency, as all
-17-
<PAGE>
European clients are billed in U.S. dollars. In addition, the euro is expected
to have minimal impact on the Company's products and services.
Income Taxes. At August 31, 1998, employees held vested stock options to
purchase 982,000 shares of the Company's common stock. The majority represents
incentive stock options with an exercise price of $2.70. The exercise of
nonqualified stock options or disqualifying disposition of incentive stock
options has a positive impact on the Company's effective tax rate. The extent
and timing of such exercises are beyond the control of the Company. However, it
is likely that the Company's future effective tax rate will decrease as a result
of option exercises.
The Company's tax filings are subject to audit by federal and state tax
authorities in the normal course of business. While the Company does not
anticipate that any such audits currently in process will result in tax
assessments that would have a material adverse effect on the results of
operations or financial position of the Company, there is inherent uncertainty
in this process.
Accounting Pronouncements. In June 1997, Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, were
issued. Neither statement will have any effect on the Company's financial
position or results of operations, as they require only changes in or additions
to current disclosures. In March 1998, Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, was
issued and is effective for the Company's fiscal year 2000. The potential impact
on the Company's results from adopting this statement is under review. Refer to
Note 2, "Accounting Policies" for further information on new accounting
pronouncements.
Forward-Looking Statements. This Management's Discussion and Analysis contains
forward-looking statements that are based on management's current expectations
and beliefs. The phrases "commitments," "believes," "would likely," "could," "is
likely," "continues," "will not," "is expected," "may," "are planned," "is not
expected," "may result," "are not expected," "does not anticipate," "could
result," "remains uncertain," "are uncertain," and "will have," are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties, and assumptions
which are difficult to predict ("future factors"). Therefore, actual results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to publicly update any
forward-looking statements as a result of new information, future events, or
otherwise.
Future factors include the ability to hire qualified personnel; maintenance of
the Company's leading technological position; the impact of global market trends
on the Company's revenue growth rate and future results of operations; the
success of the Year 2000 and euro compliance activities; the negotiation of
contract terms supporting new and existing databases; the successful resolution
of ongoing audits by tax authorities; the continued employment of key personnel;
the absence of U.S. or foreign governmental regulation restricting international
business; and the sustainability of historical levels of profitability and
growth rates in cash flow generation.
-18-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FactSet Research Systems Inc.
Thousands, except per share data Years Ended August 31, 1998 1997 1996
......................................................................................
Subscription Revenues
<S> <C> <C> <C>
Commissions $33,581 $27,028 $23,659
Cash fees 45,330 31,330 20,689
------ ------ ------
Total subscription revenues 78,911 58,358 44,348
------ ------ ------
......................................................................................
Expenses
Cost of services 30,605 23,353 18,024
Selling, general, and administrative 24,359 18,046 14,253
Other expenses 3,064 2,097 1,438
------ ------ ------
Total operating expenses 58,028 43,496 33,715
------ ------ ------
......................................................................................
Income from operations 20,883 14,862 10,633
Other income 1,556 871 751
----- --- ---
Income before income taxes and extraordinary gain 22,439 15,733 11,384
Income taxes 9,830 6,803 4,914
----- ----- -----
Net income before extraordinary gain 12,609 8,930 6,470
Extraordinary gain 242 - -
--- --- ---
Net income $12,851 $8,930 $6,470
====== ===== =====
......................................................................................
Weighted average common shares (basic) 9,630 9,546 9,523
Weighted average common shares (diluted) 10,980 10,838 10,767
......................................................................................
Basic earnings per common share $1.33 $0.94 $0.68
Diluted earnings per common share $1.17 $0.82 $0.60
......................................................................................
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
Assets
Thousands At August 31, 1998 1997
............................................................................................
Current Assets
<S> <C> <C>
Cash and cash equivalents $37,631 $26,816
Investments - 1,375
Receivables from clients and clearing brokers 11,121 7,335
Receivables from employees 533 549
Deferred taxes 4,034 3,149
Other current assets 921 731
--- ---
Total current assets 54,240 39,955
............................................................................................
Long-Term Assets
Property, equipment, and leasehold improvements, at cost 38,839 26,880
Less accumulated depreciation (24,159) (17,658)
------ ------
Property, equipment, and leasehold improvements, net 14,680 9,222
............................................................................................
Other Non-Current Assets
Deferred taxes 1,250 927
Other assets 386 731
............................................................................................
Total Assets $70,556 $50,835
====== ======
............................................................................................
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
Thousands At August 31, 1998 1997
............................................................................................
Current Liabilities
<S> <C> <C>
Accounts payable and accrued expenses $4,755 $2,216
Accrued compensation 6,155 3,676
Deferred cash fees and commissions 4,546 4,499
Current taxes payable 3,513 2,426
Deferred rent 92 68
-- --
Total current liabilities 19,061 12,885
------ ------
............................................................................................
Non-Current Liabilities
Deferred taxes - 180
Deferred rent 470 143
--- ---
............................................................................................
Total liabilities 19,531 13,208
------ ------
Lease commitments (see Note 11)
............................................................................................
Stockholders' Equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 40,000,000 shares
authorized, 9,736,266 and 9,626,733 shares issued;
9,673,040 and 9,568,895 shares outstanding at
August 31, 1998 and 1997, respectively 97 96
Capital in excess of par value 2,934 1,995
Retained earnings 48,439 35,588
Unrealized gain on investments, net of taxes - 239
--- ---
51,470 37,918
Less treasury stock - 63,226 and 57,838 shares at
August 31, 1998 and 1997, respectively, at cost 445 291
--- ---
Total stockholders' equity 51,025 37,627
------ ------
............................................................................................
Total Liabilities and Stockholders' Equity $70,556 $50,835
====== ======
............................................................................................
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FactSet Research Systems Inc.
Years Ended August 31, 1998 1997 1996
...................................................................................
<S> <C> <C> <C>
Common Stock
Balance, beginning of year $96,267 $95,781 $94,798
Additional stock issued for ESOP 219 247 923
Exercise of stock options 880 239 60
...................................................................................
Balance, end of year 97,366 96,267 95,781
...................................................................................
Capital in Excess of Par
Balance, beginning of year 1,995,404 1,431,360 1,235,202
Additional stock issued for ESOP 599,781 499,753 479,077
Exercise of stock options 338,152 64,291 16,140
Initial public offering costs incurred
by the Company - - (299,059)
...................................................................................
Balance, end of year 2,933,337 1,995,404 1,431,360
...................................................................................
Unrealized Gain on Investments,
Net of Taxes
Balance, beginning of year 238,907 175,961 16,538
Change in unrealized gain
on investments, net of taxes (238,907) 62,946 159,423
...................................................................................
Balance, end of year - 238,907 175,961
...................................................................................
Retained Earnings
Balance, beginning of year 35,587,992 26,658,287 20,187,802
Net income 12,851,368 8,929,705 6,470,485
...................................................................................
Balance, end of year 48,439,360 35,587,992 26,658,287
...................................................................................
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Years Ended August 31, 1998 1997 1996
...................................................................................
Treasury Stock
<S> <C> <C> <C>
Balance, beginning of year (291,179) (163,901) (161,580)
Repurchase of common stock (153,709) (127,278) (2,321)
...................................................................................
Balance, end of year (444,888) (291,179) (163,901)
...................................................................................
Total Equity
Balance, beginning of year 37,627,391 28,197,488 21,372,760
Additional stock issued for ESOP 600,000 500,000 480,000
Repurchase of common stock (153,709) (127,278) (2,321)
Exercise of stock options 339,032 64,530 16,200
Change in unrealized gain on
investments, net of taxes (238,907) 62,946 159,423
Initial public offering costs incurred
by the Company - - (299,059)
Net income 12,851,368 8,929,705 6,470,485
...................................................................................
Balance, end of year $51,025,175 $37,627,391 $28,197,488
...................................................................................
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-23-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
Thousands Years Ended August 31, 1998 1997 1996
......................................................................................
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $12,851 $8,930 $6,470
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 6,557 4,737 3,049
Deferred tax benefit (1,208) (1,238) (859)
Accrued ESOP contribution 750 600 500
Gain on sale of investment (433) - -
Gain on disposal of equipment - - (120)
--- --- ---
Net income adjusted for non-cash items 18,517 13,029 9,040
Changes in working capital
Receivables from clients and clearing brokers (3,786) (1,154) (2,079)
Receivables from employees 16 397 3,236
Accounts payable and accrued expenses 2,539 1,061 (473)
Accrued compensation 2,329 1,596 500
Deferred cash fees and commissions 47 701 947
Current taxes payable 1,086 1,633 25
Other working capital accounts, net 508 (231) (758)
--- --- ---
Net cash provided by operating activities 21,256 17,032 10,438
......................................................................................
Cash Flows from Investing Activities
Sales (Purchases) of investments 1,389 (43) 91
Purchases of property, equipment, and
leasehold improvements, net of retirements (12,015) (5,810) (6,389)
Proceeds from disposal of equipment - - 257
--- --- ---
Net cash used in investing activities (10,626) (5,853) (6,041)
......................................................................................
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Thousands Years Ended August 31, 1998 1997 1996
......................................................................................
Cash Flows from Financing Activities
<S> <C> <C> <C>
Repurchase of common stock from employees (5) (127) (2)
Proceeds from exercise of stock options 190 64 16
Initial public offering costs incurred by
the Company - - (299)
--- --- ---
Net cash provided by (used in) financing activities 185 (63) (285)
......................................................................................
Net increase in cash and cash equivalents 10,815 11,116 4,112
Cash and cash equivalents at beginning of year 26,816 15,700 11,588
------ ------ ------
Cash and cash equivalents at end of year $37,631 $26,816 $15,700
====== ====== ======
......................................................................................
......................................................................................
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for income taxes $10,134 $6,145 $5,749
......................................................................................
Supplemental Disclosure of Non-Cash Flow Information
Issuance of stock during the year for purchase of
shares for the ESOP $600 $500 $480
......................................................................................
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc. August 31, 1998, 1997, and 1996
1. ORGANIZATION AND NATURE OF BUSINESS
FactSet Research Systems Inc. (the "Company") provides online integrated
database services to the financial community. The Company's revenues are derived
from subscription charges. Solely at the option of each client, these charges
may be paid either in commissions on securities transactions (in which case
subscription revenues are recorded as commissions) or on a cash basis (in which
case subscription revenues are recorded as cash fees).
To facilitate the receipt of subscription revenues on a commission basis, the
Company's wholly owned subsidiary, FactSet Data Systems, Inc. ("FDS"), is a
member of the National Association of Securities Dealers, Inc. and is a
registered broker-dealer under Section 15 of the Securities Exchange Act of
1934. FDS's only function is to facilitate the receipt of commission payments
with respect to subscription charges and it does not otherwise engage in the
securities business.
Subscription revenues paid in commissions are derived from securities
transactions introduced and cleared on a fully disclosed basis primarily through
two clearing brokers. That is, a client paying subscription charges on a
commission basis directs the clearing broker, at the time the client executes a
securities transaction, to credit the commission on the transaction to FDS's
account.
FactSet Limited and FactSet Pacific, Inc. are wholly owned subsidiaries of the
Company and are U.S. corporations with foreign branch operations in London,
Tokyo, and Hong Kong.
2. ACCOUNTING POLICIES
The significant accounting policies of the Company and its subsidiaries are
summarized below.
Financial Statement Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany activity and balances have been eliminated from the
consolidated financial statements.
Cost of services is composed of employee compensation and benefits for the
applications engineering and consulting groups, clearing fees, data costs,
computer maintenance and depreciation expenses, and communication costs.
Selling, general, and administrative expenses include employee compensation and
benefits for the sales, product development, and various other support
departments, promotional expenses, rent, amortization of leasehold improvements,
depreciation of furniture and fixtures, and office expenses. The components of
other expenses are professional fees and miscellaneous expenses.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.
-26-
<PAGE>
Revenue Recognition. Subscription charges are quoted to clients on an annual
basis, but are earned monthly as services are provided. Subscription revenues
recorded as commissions and subscription revenues recorded as cash fees are each
recorded as earned each month, based on one-twelfth of the annual subscription
charge quoted to each client. Amounts that have been earned but not yet paid
through the receipt of commissions on securities transactions or through cash
payments are reflected on the Consolidated Statements of Financial Condition as
receivables from clients. Amounts that have been received through commissions on
securities transactions or through cash payments that are in excess of earned
subscription revenues are reflected on the Consolidated Statements of Financial
Condition as deferred cash fees and commissions.
Clearing Fees. When subscription charges are paid on a commission basis, the
Company incurs clearing fees, which are the charges imposed by the clearing
brokers used to execute and settle clients' securities transactions.
Cash and Cash Equivalents. Cash and cash equivalents consists of demand deposits
and money market investments.
Investments. Investment securities are classified as available-for-sale
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and are reported at market value or fair value as determined by
management. Unrealized gains and losses on available-for-sale securities are
recognized as a separate component of stockholders' equity, net of tax.
Property, Equipment, and Leasehold Improvements. Depreciation of computers and
related equipment acquired before September 1, 1994 is recognized using the
double declining balance method over estimated useful lives of five years.
Computers and related equipment acquired after September 1, 1994 are depreciated
on a straight-line basis over estimated useful lives of three years.
Depreciation of furniture and fixtures is recognized using the double declining
balance method over estimated useful lives of five years. Leasehold improvements
are amortized on a straight-line basis over the terms of the related leases or
estimated useful lives of the improvements, whichever period is shorter.
Deferred Taxes. Deferred taxes are determined by calculating the future tax
consequences associated with differences between financial accounting and tax
bases of assets and liabilities. A valuation allowance is established to the
extent management considers it more likely than not that some portion or all of
the deferred tax assets will not be realized. The effect on deferred taxes from
income tax law changes is recognized immediately upon enactment. The deferred
tax provision is derived from changes in deferred taxes on the balance sheet and
reflected on the Consolidated Statements of Income as a component of income
taxes.
The Company records deferred taxes for such items as accrued compensation,
deferred cash fees and commissions; deferred rent; and property, equipment, and
leasehold improvements.
-27-
<PAGE>
Earnings Per Share. The computation of basic earnings per share in each year is
based on the weighted average number of common shares outstanding. The weighted
average number of shares outstanding includes shares issued to the Company's
employee stock ownership plan at the date authorized by the Board of Directors.
Diluted earnings per share is based on the weighted average number of common
shares and common share equivalents outstanding. Shares available pursuant to
grants made under the Company's stock option plans are included as common share
equivalents using the treasury stock method.
Stock-Based Compensation. The Company follows the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. See Note 13, "Stock
Option Plans," for further information.
New Accounting Pronouncements. In June 1997, SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, were issued. Both statements will have no
effect on the Company's financial position or results of operations, as they
require only changes in or additions to current disclosures. SFAS No. 131 was
adopted in fiscal 1998. See Note 14, "Segments" for further information. SFAS
No. 130 will be adopted in fiscal 1999. In March 1998, Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, was issued and is effective for the Company's fiscal year
commencing in the year 2000. The potential impact from adopting this statement
on the Company's results is under evaluation.
3. SUBSCRIPTION REVENUES
Each client has the option to pay subscription charges either in the form of
commissions on securities transactions or on a cash basis, regardless of the
nature or amount of the services provided by FactSet to such client. When a
client elects to pay subscription charges in the form of commissions, the
Company incurs clearing fees, which are charges imposed by the clearing broker
used to execute and settle clients' securities transactions. For commission
transactions, the dollar amount payable to the Company is higher than the fee
that would be payable for the same services on a cash basis because of the
associated clearing fees incurred by the Company. However, commissions net of
related clearing fees are approximately equal to the fees that would be paid by
a client on a cash basis.
-28-
<PAGE>
<TABLE>
<CAPTION>
Subscription revenues consists of the following:
Years Ended August 31, 1998 1997 1996
................................................................................
<S> <C> <C> <C>
Commissions $33,581,415 $27,027,946 $23,659,093
Cash fees 45,330,056 31,329,908 20,688,652
---------- ---------- ----------
$78,911,471 $58,357,854 $44,347,745
========== ========== ==========
............................................................................
</TABLE>
Clearing fees paid by the Company related to commissions on securities
transactions were $5,842,000, $4,687,000, and $4,389,000 for fiscal years 1998,
1997, and 1996, respectively.
4. RECEIVABLES FROM CLIENTS AND CLEARING BROKERS
Receivables from clients and clearing brokers consists of the following:
<TABLE>
<CAPTION>
At August 31, 1998 1997
...............................................................................
<S> <C> <C>
Receivables from clients-cash fees $6,950,059 $4,602,224
Receivables from clients-commissions 2,895,890 2,516,650
Receivables from clearing brokers 1,274,900 215,804
--------- -------
$11,120,849 $7,334,678
========== =========
................................................................................
</TABLE>
Receivables from clients-cash fees and receivables from clients-commissions are
reflected net of aggregate allowances for doubtful accounts of $672,000 and
$370,000 at August 31, 1998 and 1997, respectively.
5. INVESTMENTS
The Company held an investment in a limited partnership that invests primarily
in convertible bonds and preferred stocks. During fiscal 1998, this investment
was sold and a $242,000 after-tax extraordinary gain was recorded. At August 31,
1997, there was a net unrealized gain of $238,907 recorded as a separate
component of stockholders' equity and a related deferred income tax liability of
$180,228.
Investments, classified as available-for-sale securities, consists of the
following:
<TABLE>
<CAPTION>
Gross
Unrealized
Cost Basis Fair Value Gains
................................................................................
<S> <C> <C> <C>
At August 31, 1997
Investment in limited partnership $912,767 $1,331,902 $419,135
Other 43,410 43,410 -
------ ------ ------
$956,177 $1,375,312 $419,135
======= ========= =======
................................................................................
</TABLE>
-29-
<PAGE>
6. RECEIVABLES FROM EMPLOYEES
Receivables from employees consists of the following interest-bearing and
non-interest-bearing promissory notes and advances to employees of the Company:
<TABLE>
<CAPTION>
At August 31, 1998 1997
................................................................................
Non-interest-bearing promissory demand notes
<S> <C> <C>
and advances to employees $251,800 $432,354
6% demand notes from employees 281,580 117,000
------- -------
$533,380 $549,354
======= =======
................................................................................
</TABLE>
7. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
At August 31, 1998 1997
................................................................................
<S> <C> <C>
Computers and related equipment $29,542,418 $19,410,177
Leasehold improvements 4,531,488 3,568,428
Furniture, fixtures, and other 4,764,974 3,901,463
--------- ---------
Total 38,838,880 26,880,068
Less accumulated depreciation and amortization (24,158,614) (17,657,916)
---------- ----------
$14,680,266 $9,222,152
========== =========
................................................................................
</TABLE>
8. DEFERRED CASH FEES AND COMMISSIONS
Subscription revenues recorded as commissions and subscription revenues recorded
as cash fees are each recorded as earned each month, based on one-twelfth of the
annual subscription charge quoted to each client. Amounts that have been
received through commissions on securities transactions or through cash payments
that are in excess of earned subscription revenues are reflected on the
Consolidated Statements of Financial Condition as deferred cash fees and
commissions.
Deferred cash fees and commissions consists of the following:
<TABLE>
<CAPTION>
At August 31, 1998 1997
................................................................................
<S> <C> <C>
Deferred cash fees $500,137 $542,131
Deferred commissions 4,046,135 3,956,811
--------- ---------
$4,546,272 $4,498,942
========= =========
................................................................................
</TABLE>
-30-
<PAGE>
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended August 31, 1998 1997 1996
................................................................................
Current tax expense
<S> <C> <C> <C>
U.S. federal $7,690,398 $5,653,562 $4,179,054
State and local 3,347,223 2,387,102 1,593,454
--------- --------- ---------
Total current taxes 11,037,621 8,040,664 5,772,508
---------- --------- ---------
Deferred tax benefit
U.S. federal (841,583) (870,448) (618,146)
State and local (366,296) (367,529) (240,484)
------- ------- -------
Total deferred taxes (1,207,879) (1,237,977) (858,630)
--------- --------- -------
Total tax provision $9,829,742 $6,802,687 $4,913,878
========= ========= =========
................................................................................
</TABLE>
Deferred tax assets (liabilities) consists of the following:
<TABLE>
<CAPTION>
At August 31, 1998 1997
................................................................................
Deferred tax assets
Current
<S> <C> <C>
Deferred cash fees and commissions $1,954,897 $1,916,999
Accrued compensation 2,079,050 1,231,956
--------- ---------
Total current deferred taxes 4,033,947 3,148,955
--------- ---------
Non-current
Property, equipment, and
leasehold improvements 1,008,180 643,028
Deferred rent 241,694 89,813
Investment in limited partnership - 194,146
------- -------
Total non-current deferred taxes 1,249,874 926,987
--------- -------
Gross deferred tax assets 5,283,821 4,075,942
Deferred tax liabilities - (180,228)
Deferred tax asset valuation allowance - -
------- -------
$5,283,821 $3,895,714
========= =========
................................................................................
</TABLE>
-31-
<PAGE>
The provisions for income taxes differ from the amount of income tax determined
by applying the U.S. statutory federal income tax rate to income before income
taxes as a result of the following factors:
<TABLE>
<CAPTION>
Years Ended August 31, 1998 1997 1996
................................................................................
<S> <C> <C> <C>
Tax at statutory U.S. tax rates $7,853,538 $5,396,210 $3,884,527
Increase in taxes resulting from:
State and local taxes, net of
U.S. federal income tax benefit 1,660,462 1,307,510 891,315
Other, net 315,742 98,967 138,036
------- ------ -------
Tax at effective tax rates $9,829,742 $6,802,687 $4,913,878
========= ========= =========
................................................................................
</TABLE>
10. NET CAPITAL
As a registered broker-dealer, FDS is subject to Rule 15c3-1 under the
Securities Exchange Act of 1934, which requires that FDS maintain minimum net
capital equal to the greater of $5,000 or 6.67% of aggregate indebtedness and a
ratio of aggregate indebtedness to net capital of not more than 15 to 1 (the
"minimum net capital requirement"). FDS may be prohibited from paying cash
dividends to the Company if such dividends would result in its net capital
falling below the minimum net capital requirement or its ratio of aggregate
indebtedness to net capital exceeding 15 to 1.
At all times during the years presented, FDS had net capital in excess of its
minimum net capital requirement. At August 31, 1998, FDS had net capital of
$3,854,417, which was $3,584,675 in excess of its minimum net capital
requirement of $269,742. The ratio of aggregate indebtedness to net capital was
1.05 to 1.
11. LEASE COMMITMENTS
The Company leases office space in Greenwich, Connecticut under a lease
agreement which expires in August 2003 and which contains certain escalation
clauses. The Company is required to pay minimum annual rental fees averaging
$1,376,617 through the end of the lease. The total minimum rental payments
associated with the lease are being recorded as rent (a component of selling,
general, and administrative expenses) on a straight-line basis over the period
commencing with the occupancy of the premises in August 1990 through the end of
the lease. In fiscal 1998, the Company entered into new lease agreements in
connection with opening offices in New York, Hong Kong, and Stamford
(Connecticut), as well as expanding office space in Tokyo and San Mateo
(California). The new leases expire at various dates through the period ending
November 2008, have a weighted average term of 8.2 years, and require a minimum
annual aggregate rental payment of $1,235,888.
-32-
<PAGE>
At August 31, 1998, the Company's lease commitments for office space, with
noncancelable lease terms in excess of one year, provide for the following
minimum annual rentals:
<TABLE>
<CAPTION>
Years Ended August 31,
................................................................................
<S> <C>
1999 $2,906,551
2000 2,805,723
2001 3,086,386
2002 2,948,575
2003 2,919,862
Thereafter 2,704,991
---------
Minimum lease payments $17,372,088
==========
................................................................................
</TABLE>
At August 31, 1998, standby letters of credit aggregating approximately $279,417
have been issued on behalf of the Company serving as security deposits for
leased premises.
12. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan (the "Plan" or "ESOP").
The Company may make optional annual contributions for the benefit of
participating employees in such amounts as designated by the Board of Directors.
The Board of Directors authorized contributions in the amounts of $750,000,
$600,000, and $500,000 for the years ended August 31, 1998, 1997, and 1996,
respectively. Such contributions are recorded in cost of services and selling,
general, and administrative as compensation expense at the time they are
authorized; issuance of the related shares occurs shortly thereafter, generally
in the following fiscal year.
Employees of the Company and its subsidiaries who have performed at least 1,000
hours of service during the year are generally eligible to participate in the
Plan. The Company contribution allocated to an individual account begins to vest
upon completion of the employee's third year of service at the rate of 20% in
each successive year of service. Forfeited non-vested interests in the Plan are
allocated to the other participants' accounts.
The Plan owned 828,834, 806,966, and 787,824 shares of the Company's common
stock at August 31, 1998, 1997, and 1996, respectively.
13. STOCK OPTION PLANS
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board
of Directors on December 21, 1994, and approved by the Company's stockholders on
December 22, 1994. Under the 1994 Plan, stock options were made available to
purchase up to 1,481,000 shares of common stock. In fiscal year 1995, incentive
and non-qualified stock options to purchase up to 1,481,000 shares of common
stock at prices which range from $2.50 to $2.70 per share were granted to
employees of the Company.
-33-
<PAGE>
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the Board
of Directors on April 29, 1996, and approved by the Company's stockholders on
May 1, 1996. Under the 1996 Plan, stock options were made available to purchase
up to 950,000 shares of common stock. In fiscal years 1998, 1997, and 1996,
incentive and non-qualified stock options to purchase up to 317,000, 211,000,
and 40,000 shares of common stock, respectively, at prices which range from
$17.00 to $30.00 per share were granted to employees of the Company. The
Company's Non-Employee Director Stock Option Plan was adopted by the Board of
Directors and ratified by the Company's stockholders in fiscal 1998.
Non-qualified options to purchase 40,000 of common stock at $28.19 were granted
to non-employee directors of the Company.
Options granted under the 1994 Plan, the 1996 Plan, and the Non-Employee
Director Plan (the "Plans") expire not more than ten years from the date of
grant and, in most cases, vest at a rate of 20% per year beginning one year
after the grant date. The option exercise prices equal the fair market value of
the Company's stock on the date the option was granted. Options are not
transferable or assignable other than by will or the laws of descent and
distribution. During the grantee's lifetime, they may be exercised only by the
grantee.
A summary of the status of the Company's stock option plans at August 31, 1998,
1997, and 1996, and changes during each of the years then ended is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Thousands, except per share Exercise Exercise Exercise
data Shares Price Shares Price Shares Price
................................................................................
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
fiscal year 1,669 $4.96 1,491 $3.04 1,481 $2.66
Granted 357 29.80 211 18.75 40 17.00
Exercised 88 3.97 24 2.70 6 2.70
Forfeited 12 21.39 9 17.63 24 2.70
Outstanding at fiscal year end 1,926 9.52 1,669 4.96 1,491 3.04
Exercisable at fiscal year end 982 3.48 744 2.77 530 2.59
................................................................................
</TABLE>
Of the 1,926,000 options outstanding at August 31, 1998, 1,346,000 have exercise
prices between $2.50 and $2.70 per share, with a weighted average exercise price
of $2.66 per share and a weighted average remaining contractual life of 6.2
years. Of these options, 928,000 were exercisable at August 31, 1998, at a
weighted average exercise price of $2.64. The remaining 580,000 options have
exercise prices between $17.00 and $30.00 per share, with a weighted average
exercise price of $25.33 per share and a weighted average remaining contractual
life of 9.1 years. Of these options, 54,000 were exercisable at August 31, 1998,
at a weighted average exercise price of $18.30.
-34-
<PAGE>
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company accounts for the Plans
under APB Opinion No. 25, under which no compensation cost has been recorded.
Had compensation cost for the 1996 Plan been determined pursuant to the
measurement principles under SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts for fiscal
years 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended August 31, 1998 1998 1997 1997
Thousands, except per share data As Reported Pro Forma As Reported Pro Forma
................................................................................
<S> <C> <C> <C> <C>
Net income $12,851 $12,142 $8,930 $8,760
Earnings per share $1.17 $1.11 $0.82 $0.81
Wtd. avg. fair value of option grants $11.43 $6.35
................................................................................
</TABLE>
Disclosure of the pro forma impact from the method of accounting prescribed by
SFAS No. 123 is effective for fiscal years beginning after December 15, 1994. As
such, options granted in fiscal 1995 are excluded from the calculations of
compensation costs included in the pro forma net income and earnings per share
amounts above.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal years 1997 and 1998:
<TABLE>
<CAPTION>
Years Ended August 31, 1998 1997
................................................................................
<S> <C> <C>
Risk-free interest rate 5.51% 6.10%
Expected lives of options 4.2 years 4 years
Expected volatility 38% 31%
Dividend yield - -
................................................................................
</TABLE>
14. SEGMENTS
The Company has two reportable segments based on geographic operations: the
United States ("U.S.") and International. Each segment markets online integrated
database services to investment managers, investment banks, and other financial
services professionals. The U.S. segment services financial institutions
throughout North America while the International segment serves investment
professionals primarily in Europe and the Pacific Rim. The International segment
consists of two foreign branch operations that are primarily staffed by sales
and consulting personnel. Segment revenues reflect direct sales of products and
services to clients based on their geographic location. There are no
intersegment or intercompany sales. Each segment records compensation, travel,
office, and other direct expenses related to its employees. Expenses for
software development, expenditures related to the Company's computing centers,
data costs, clearing fees,
-35-
<PAGE>
income taxes, and corporate headquarters charges are recorded by the U.S.
segment and are not allocated to the foreign segments. The accounting policies
of the segments are the same as those described in Note 2, "Accounting
Policies."
<TABLE>
<CAPTION>
Segment Information
Thousands U.S. International Total
................................................................................
Year Ended August 31,
1998
<S> <C> <C> <C>
Revenues from external clients $68,938 $9,973 $78,911
Interest revenues 1,543 13 1,556
Depreciation and amortization 6,239 318 6,557
Segment operating profit* 16,155 4,728 20,883
Income tax expense 9,830 - 9,830
Extraordinary gain 242 - 242
Total assets 66,858 3,698 70,556
Capital expenditures 11,573 442 12,015
................................................................................
Year Ended August 31,
1997
Revenues from external clients $52,046 $6,312 $58,358
Interest revenue 867 4 871
Depreciation and amortization 4,488 249 4,737
Segment operating profit* 12,572 2,290 14,862
Income tax expense 6,803 - 6,803
Total assets 48,607 2,228 50,835
Capital expenditures 5,226 584 5,810
................................................................................
</TABLE>
* Expenses are not allocated or charged between segments. Expenditures
associated with the Company's computer centers, software development costs,
clearing fees, data fees, income taxes, and corporate headquarter charges are
recorded by the U.S. segment.
Two separate regions (Europe and the Pacific Rim) were aggregated to form the
International segment. The Europe and Pacific Rim segments have similar market
characteristics and each offers identical products and services through a common
distribution method to financial services institutions.
<TABLE>
<CAPTION>
Geographic Information
Year Ended August 31, 1998 At August 31, 1998
Thousands Revenues Long-lived Assets
................................................................................
<S> <C> <C>
United States $68,938 $13,829
United Kingdom 6,045 608
Other foreign countries 3,928 243
----- ---
Total $78,911 $14,680
====== ======
................................................................................
</TABLE>
-36-
<PAGE>
Fees quoted by the Company are based on subscriptions to its products and
services. Around-the-clock consulting, unlimited client training, and payment of
daily communication costs are significant services provided to all clients. Fees
for these services are included in subscription charges and are not separately
stated in client invoices or in the Company's accounting records. Accordingly,
disclosure of revenues by products and services is not practicable.
For the fiscal year ended August 31, 1998, no individual client accounted for
more than 4% of total revenues. Revenues from the top ten clients did not exceed
15% of the total.
15. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, securities transactions of clients of FDS are
introduced and cleared through correspondent brokers. Pursuant to agreements
between FDS and its correspondent brokers, the correspondents have the right to
charge FDS for unsecured losses that result from a client's failure to complete
such transactions. The Company seeks to control the credit risk of
nonperformance by evaluating the creditworthiness of its clients and by
reviewing their trading activity on a periodic basis.
Receivable from clearing brokers represents a concentration of credit risk and
relates to securities transactions cleared through two correspondent brokers.
-37-
<PAGE>
Quarterly Financial Data (Unaudited)
Quarterly results of operations and earnings per common share for fiscal 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Thousands, except per share data First Second Third Fourth
................................................................................
1998
<S> <C> <C> <C> <C>
Revenues $17,494 $19,057 $20,196 $22,164
Cost of services 6,871 7,630 7,727 8,377
Selling, general, and administrative 5,318 5,799 6,387 6,855
Income from operations 4,598 4,856 5,413 6,016
Net income 2,775 3,171 3,267 3,638
Diluted earnings per common share $ 0.25 $ 0.29 $ 0.30 $ 0.33
Wtd. avg. common shares (diluted) 10,970 10,949 11,041 11,078
................................................................................
1997
Revenues $12,824 $13,985 $15,097 $16,452
Cost of services 5,097 5,693 6,039 6,524
Selling, general, and administrative 3,888 4,285 4,588 5,286
Income from operations 3,340 3,501 3,902 4,118
Net income 1,962 2,092 2,358 2,517
Diluted earnings per common share $ 0.18 $ 0.19 $ 0.22 $ 0.23
Wtd. avg. common shares (diluted) 10,827 10,814 10,813 10,902
................................................................................
</TABLE>
Common Stock
The principal stock exchange on which the Company's common stock (par value
$0.01 per share) is listed is the New York Stock Exchange. At August 31, 1998,
there were approximately 1,500 shareholders of the Company's common stock.
Quarterly Stock Prices
Quarterly stock prices reflect the high and low prices for FactSet's common
stock on the New York Stock Exchange composite tape for the last two fiscal
years.
<TABLE>
<CAPTION>
First Second Third Fourth
................................................................................
1998
<S> <C> <C> <C> <C>
High $33.63 $32.00 $37.00 $40.75
Low 25.00 23.38 29.56 30.69
................................................................................
1997
High $24.50 $22.00 $22.13 $28.88
Low 18.63 17.88 17.00 19.50
................................................................................
</TABLE>
-38-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FactSet Research Systems Inc.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of FactSet Research Systems Inc. and its subsidiaries at August 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years ended August 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
September 11, 1998
-39-
<PAGE>
DIRECTORS
Howard E. Wille
Chairman of the Board
Chief Executive Officer
Charles J. Snyder
President
Chief Technology Officer
David R. Korus
Partner
Owenoke Capital Management, LLC
New York, New York
Joseph E. Laird, Jr.
Managing Director
Veronis, Suhler & Associates Inc.
New York, New York
John C. Mickle
President
Sullivan, Morrissey & Mickle
Capital Management Corporation
New York, New York
Walter F. Siebecker
Managing Director
National Securities Clearing Corporation
New York, New York
MANAGEMENT
Howard E. Wille
Chairman of the Board
Chief Executive Officer
Charles J. Snyder
President
Chief Technology Officer
Ernest S. Wong
Senior Vice President
Chief Financial Officer and Secretary
Timothy J. Aune
Director, Pacific Rim Operations
President of FactSet Pacific, Inc.
Jon D. Carlson
Director, PC Software Development
Nathaniel B. Day
Senior Sales Executive
Michael F. DiChristina
Director, Software Engineering
William F. Faulkner
Director, Product Development
Michael D. Frankenfield
Director, Investment Banking
Philip A. Hadley
Director, Sales and Marketing
Kieran M. Kennedy
Director, Consulting Services
Edward A. Martin
Director, Information Research
Kristen L. McCutcheon
Director, Quality Assurance
Adelaide P. McManus
Chief Administrative Officer
Townsend Thomas
Director, Systems Engineering
Daniel A. Viens
Director, Human Resources
Peter G. Walsh
Director, Planning and Control
Susan L. Warzek
Director, Marketing Communications
and Documentation
Merle E. Yoder
Director, European Operations
Managing Director, FactSet Limited
-40-
<PAGE>
CORPORATE INFORMATION
HEADQUARTERS
FactSet Research Systems Inc.
One Greenwich Plaza
Greenwich, Connecticut 06830
203.863.1500 /203.863.1501 fax
INTERNET ADDRESS
www.factset.com
OFFICES
FactSet Research Systems Inc.
90 Park Avenue
New York, New York 10016
212.476.4300
FactSet Research Systems Inc.
2600 Campus Drive
San Mateo, California 94403
650.286.4900
FactSet Limited
One Angel Court
London EC2R 7HJ
44.171.606.0001
FactSet Pacific, Inc.
Daini Okamotoya Building 8F
1-22-16 Toranomon
Minato-ku Tokyo 105-0001
81.3.5512.7700
FactSet Pacific, Inc.
Bank of America Tower, Suite 801
12 Harcourt Road
Central Hong Kong
85.2.2584.6278
LEGAL COUNSEL
Cravath, Swaine & Moore
New York, New York
STOCK TRANSFER AGENT/REGISTRAR
The Bank of New York
800.524.4458
[email protected]
COMMON STOCK INFORMATION
FactSet trades on the New York Stock Exchange under the ticker symbol "FDS."
High and low stock prices for the period August 31, 1997 to August 31, 1998 were
$40 3/4 and $23 3/8, respectively.
No cash dividends have been paid in the past.
ADDITIONAL INFORMATION, INCLUDING
THE FORM 10-K, CAN BE OBTAINED FROM:
Investor Relations
FactSet Research Systems Inc.
Greenwich, Connecticut
203.863.1500
[email protected]
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m. on Thursday,
January 9, 1999, at the FactSet Headquarters One Greenwich Plaza Greenwich,
Connecticut. On November 25, 1998, proxy material will be sent to shareholders
of record as of November 13, 1998.
-41-
<PAGE>
EXHIBIT 21
Subsidiaries:
FactSet Data Systems, Inc.
FactSet Limited
FactSet Pacific, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
This schedule contains summary financial information extracted from the
consolidated statement of financial condition, consolidated statement of income,
and consolidated statement of cash flows included in the Company's form 10-K for
the period ending August 31, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 37,631
<SECURITIES> 0
<RECEIVABLES> 11,121
<ALLOWANCES> 672
<INVENTORY> 0
<CURRENT-ASSETS> 54,240
<PP&E> 14,680
<DEPRECIATION> 6,557
<TOTAL-ASSETS> 70,556
<CURRENT-LIABILITIES> 19,061
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 50,928
<TOTAL-LIABILITY-AND-EQUITY> 70,556
<SALES> 78,911
<TOTAL-REVENUES> 78,911
<CGS> 0
<TOTAL-COSTS> 58,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,439
<INCOME-TAX> 9,830
<INCOME-CONTINUING> 12,609
<DISCONTINUED> 0
<EXTRAORDINARY> 242
<CHANGES> 0
<NET-INCOME> 12,851
<EPS-PRIMARY> 1.33<F1>
<EPS-DILUTED> 1.17
<FN>
<F1> FOR PURPOSES OF THIS STATEMENT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
