Form 10-Q
United States Securities And Exchange Commission
Washington, D.C. 20549
|X| Quarterly Report pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the fiscal quarter ended May 31, 1999
|_| 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 Identification No.)
incorporation or organization)
One Greenwich Plaza, Greenwich, Connecticut 06830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 863-1500
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at May 31, 1999
................... ................................
Common Stock, par value $.01 15,646,478
<PAGE>
FactSet Research Systems Inc.
Form 10-Q
Table of Contents
Part I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Income
for the three and nine months ended May 31, 1999 and 1998..........3
Consolidated Statements of Financial Condition
at May 31, 1999 and at August 31, 1998.............................4
Consolidated Statements of Cash Flows
for the nine months ended May 31, 1999 and 1998....................5
Notes to the Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................10
Part II OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities...............................................16
Item 3. Defaults Upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures....................................................................16
<PAGE>
<TABLE>
<CAPTION>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended
In thousands, except per share data and unaudited May 31, May 31,
1999 1998 1999 1998
.......................................................................................................
<S> <C> <C> <C> <C>
Subscription Revenues
Commissions $10,091 $8,459 $29,613 $24,438
Cash Fees 16,360 11,737 45,903 32,309
------ ------ ------ ------
Total subscription revenues 26,451 20,196 75,516 56,747
------ ------ ------ ------
.......................................................................................................
Expenses
Cost of services 9,503 7,727 27,067 22,228
Selling, general, and administrative 9,641 7,056 27,594 19,652
------ ----- ------ -----
Total operating expenses 19,144 14,783 54,661 41,880
------ ------ ------ ------
.......................................................................................................
Income from operations 7,307 5.413 20,855 14,867
Other income 461 380 1,406 1,131
----- ----- ----- -----
Income before income taxes and extraordinary gain 7,768 5,793 22,261 15,998
Income taxes 2,922 2,526 8,580 7,027
------ ------ ------ ------
Net income before extraordinary gain 4,846 3,267 13,681 8,971
Extraordinary gain - - - 242
------ ------ ----- -----
Net income $4,846 $3,267 $13,681 $9,213
====== ====== ====== ======
.......................................................................................................
Weighted average common shares (Basic) 15,574 14,471 15,294 14,429
.......................................................................................................
Weighted average common shares (Diluted) 17,045 16,562 16,595 16,428
.......................................................................................................
Basic earnings per common share $0.31 $0.23 $0.89 $0.64
.......................................................................................................
Diluted earnings per common share $0.28 $0.20 $0.82 $0.56
.......................................................................................................
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
<CAPTION>
ASSETS
May 31, August 31,
Unaudited and in thousands 1999 1998
...............................................................................
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $47,916 $37,631
Receivables from clients and clearing brokers 14,710 11,121
Receivables from employees 617 533
Other receivables 2,374 0
Prepaid taxes 435 0
Deferred taxes 4,572 4,034
Other current assets 411 921
------ ------
Total current assets 71,145 54,240
...............................................................................
LONG-TERM ASSETS
Property, equipment, and leasehold improvements, at cost 51,632 38,839
Less accumulated depreciation (30,994) (24,159)
------ ------
Property, equipment, and leasehold improvements, net 20,638 14,680
...............................................................................
OTHER NON-CURRENT ASSETS
Deferred taxes 1,158 1,250
Other assets 167 386
------- -------
TOTAL ASSETS $92,998 $70,556
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, August 31,
Unaudited and in thousands 1999 1998
...............................................................................
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $6,814 $4,755
Accrued compensation 5,138 6,155
Deferred cash fees and commissions 6,515 4,546
Current taxes payable 0 2,842
Deferred rent 67 92
------ ------
Total current liabilities 18,534 18,390
------ ------
...............................................................................
NON-CURRENT LIABILITIES
Deferred rent 426 470
------ ------
Total liabilities 18,960 18,860
------ ------
...............................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 157 97
Capital in excess of par value 13,416 3,605
Retained earnings 61,347 48,439
Less treasury stock (882) (445)
------ ------
Total stockholders' equity 74,148 51,696
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $92,998 $70,556
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
<CAPTION>
Nine Months Ended May 31,
Unaudited and in thousands 1999 1998
..............................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $13,681 $9,213
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 6,835 4,564
Tax benefits from employee stock option plans 6,747 451
Deferred tax benefit (446) (107)
Gain on sale of investment - (433)
Accrued ESOP contribution 750 563
----- -----
Net income adjusted for non-cash items 27,567 13,800
Changes in working capital
Receivable from clients and clearing brokers (3,589) (2,987)
Other receivables (2,374) 0
Prepaid taxes (435) 0
Accounts payable and accrued expenses 2,059 1,662
Accrued compensation (1,011) 588
Deferred fees and commissions 1,969 (152)
Current taxes payable (2,843) (1048)
Other working capital accounts, net 576 729
----- -----
Net cash provided by operating activities 21,919 13,043
..............................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and
leasehold improvements (12,793) (10,343)
Proceeds from sale of investments - 1,389
----- ------
Net cash used in investing activities (12,793) (8,954)
..............................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid (773) -
Repurchase of common stock from employees (437) (5)
Proceeds from exercise of stock options 2,369 149
----- -----
Net cash provided by financing activities 1,159 144
..............................................................................
Net increase in cash and cash equivalents 10,285 4,233
Cash and cash equivalents at beginning of period 37,631 26,816
------- -------
Cash and cash equivalents at end of period $47,916 $31,049
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FactSet Research Systems Inc.
May 31, 1999
(Unaudited)
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.
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, Hong Kong, and Sydney.
2. ACCOUNTING POLICIES
The accompanying interim consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting principles,
consistent in all material respects with those applied in the Annual Report on
Form 10-K for the fiscal year ended August 31, 1998. Interim financial
information is unaudited, but reflects all normal adjustments which are, in the
opinion of management, necessary to present fairly the results for the interim
periods presented. The interim financial statements should be read in connection
with the audited financial statements (including the footnotes thereto) in the
Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998.
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. Immaterial
reclassifications to prior year balances in the consolidated statements of
income have been made to conform to the current fiscal year presentation.
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, office expenses, 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 may differ from those estimates.
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.
<PAGE>
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.
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 expenses, deferred
cash fees and commissions; deferred rent; and property, equipment, and leasehold
improvements. <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 common 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.
A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
In thousands, except per share data and unaudited (Numerator) (Denominator) Amount
.....................................................................................................
For the Quarter Ended May 31, 1999
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $4,846 15,574 $0.31
=====
Effect of dilutive stock options 0 1,471
------ ------
DILUTED EPS
Income available to common shareholders $4,846 17,045 $0.28
====== ====== =====
.....................................................................................................
For the Quarter Ended May 31, 1998
BASIC EPS
Income available to common shareholders $3,267 14,471 $0.23
=====
Effect of dilutive stock options 0 2,091
------ ------
DILUTED EPS
Income available to common shareholders $3,267 16,562 $0.20
====== ====== =====
.....................................................................................................
For the Nine Months Ended May 31, 1999
BASIC EPS
Income available to common shareholders $13,681 15,294 $0.89
=====
Effect of dilutive stock options 0 1,301
------- ------
DILUTED EPS
Income available to common shareholders $13,681 16,595 $0.82
======= ====== =====
.....................................................................................................
For the Nine Months Ended May 31, 1998
BASIC EPS
Income available to common shareholders $9,213 14,429 $0.64
=====
Effect of dilutive stock options 0 1,999
------ ------
DILUTED EPS
Income available to common shareholders $9,213 16,428 $0.56
====== ====== =====
.....................................................................................................
</TABLE>
Stock-Based Compensation
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards "SFAS" No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
New Accounting Pronouncements
In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, was issued. This statement is
effective for the Company's fiscal year ending in 2000. The impact from adopting
this statement on the Company's results of operations and financial position is
not expected to be material. <PAGE>
3. COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. For the
quarter and nine months ending May 31, 1999, there were no differences between
comprehensive income and net income. This statement did not have any effect on
the Company's financial position or results of operation, as it requires only
additions to current disclosures.
4. SEGMENTS
In fiscal 1998, the Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Company has two reportable
segments based on geographic operations: the United States and International.
Each segment markets online integrated database services to investment managers,
investment banks, and other financial services professionals. The U.S. segment
consists of services provided to financial institutions throughout North
America. The International segment consists of services provided to investment
professionals primarily in Europe and the Pacific Rim. The International segment
includes 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, 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
................................................................................
Quarter Ended May 31, 1999
<S> <C> <C> <C>
Revenues from external clients $22,693 $3,758 $26,451
Segment operating profit* 5,936 1,371 7,307
Total assets as of 5/31/99 86,442 6,556 92,998
Capital expenditures 2,133 1,498 3,631
................................................................................
Quarter Ended May 31, 1998
Revenues from external clients $17,510 $2,606 $20,196
Segment operating profit* 4,210 1,203 5,413
Total assets as of 5/31/98 58,619 3,443 62,062
Capital expenditures 3,368 113 3,481
................................................................................
For the Nine Months Ended May 31, 1999
Revenues from external clients $64,885 $10,631 $75,516
Segment operating profit* 16,464 4,391 20,855
Capital expenditures 10,628 2,165 12,793
................................................................................
For the Nine Months Ended May 31, 1998
Revenues from external clients $49,738 $7,009 $56,747
Segment operating profit* 11,703 3,164 14,867
Capital expenditures 10,045 298 10,343
................................................................................
</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.
<PAGE>
<TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<CAPTION>
RESULTS OF OPERATIONS
Three Months Ending Nine Months Ending
May 31, May 31,
Unaudited and in thousands, except per share data 1999 1998 Change 1999 1998 Change
...............................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Revenues $26,451 $20,196 31.0% $75,516 $56,747 33.1%
Operating expenses 19,144 14,783 29.5 54,661 41,880 30.5
Income from operations 7,307 5,413 35.0 20,855 14,867 40.3
Income before income taxes and extraordinary gain 7,768 5,793 34.1 22,261 15,998 39.2
Net income before extraordinary gain 4,846 3,267 48.3 13,681 8,971 52.5
Extraordinary gain - - - 242
Net income 4,846 3,267 48.3 13,681 9,213 48.5
Diluted earnings per common share $0.28 $0.20 40.0% $0.82 $0.56 46.4%
...............................................................................................................
</TABLE>
Revenues
For the third quarter ending May 31, 1999, revenues increased 31.0% to $26.5
million versus $20.2 million for the same period a year ago. This marks the
tenth consecutive fiscal quarter in which revenues have grown more than 30% over
the comparable period revenues from a year earlier. Revenues during the first
nine months of fiscal 1999 increased 33.1% from $56.7 million to $75.5 million.
Subscriptions to additional services and databases by our existing 18,000 users,
as well as the net addition of 72 new clients over the past twelve months drove
this revenue growth.
Quarterly revenues from international operations were up 44.2% and totaled $3.8
million. Revenue growth from European operations was 37.7%. Asia Pacific
revenues grew by 63.5%. Overseas revenues over the first nine months of fiscal
1999 increased 52.6% to $10.6 million versus the comparable period of fiscal
1998. Revenues from international sources accounted for over 14% of consolidated
revenues for both the third fiscal quarter and the first nine months of fiscal
1999, up from 12% for the comparable periods a year earlier.
Client Retention & Commitments
Client retention for fiscal 1999, including the third quarter, continued at a
rate in excess of 95%. Total client commitments at May 31, 1999 were $110.1
million, up 31.0% from May 31, 1998 ("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). The average commitment from the Company's
620 clients increased 16% to $178,000. As of May 31, 1999, no individual client
accounted for more than 4% of total commitments, and commitments from the top
ten clients did not exceed 15% of total commitments. As a matter of policy, the
Company does not seek to enter into written contracts with its clients and
clients can add or delete services at any time. Commitments have historically
grown in virtually every month.
At May 31, 1999, the year over year increase in passwords was 36%. Password
count at the beginning and end of fiscal 1999's third quarter was stable at
18,000. Recent fluctuations in password subscriptions among investment banking
clients caused password growth to be flat, thereby reducing the likelihood that
the quarterly commitment growth rate will remain above 30% in the short term.
Operating Expenses
Cost of Services
Cost of services for the quarter ended May 31, 1999 increased 23.0% to $9.5
million compared to the prior year period. For the first nine months of the
year, cost of services increased 21.8% to $27.1 million. These increases are
largely due to higher employee compensation and additional depreciation on
computer equipment. For the quarter ended May 31, 1999, cost of services
represented 35.9% of total revenues, a decrease of 2.3% from a year ago. For the
first nine months of fiscal 1999, cost of services represented 35.8% of total
revenues, a decrease of 3.3% from a year ago. These margin improvements were the
result of declining data costs and clearing fees as a percentage of revenues,
offset by additional compensation and depreciation expense.
Employee Compensation and Benefits
Employee compensation and benefits for the applications engineering and
consulting groups increased $1.4 million for the quarter and rose $3.6 million
for the nine months ended May 31, 1999. Employee additions and additional merit
compensation drove this increase. In order to sustain the continuing growth and
the expanding client base of the Company, the applications engineering and
consulting groups have increased staff by 40% since the third quarter of fiscal
1998.
Depreciation Expense
Depreciation expense on computer related equipment increased $289,000 for the
quarter ended May 31, 1999 and $1.5 million for the first nine months of fiscal
1999. Increased depreciation expense is the result of continuing capital
spending to add computer capacity. <PAGE>
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 pay using commissions on securities transactions are charged
a higher amount than cash-paying clients in order to cover clearing broker fees
paid by the Company. Over the past year, commissions as a percentage of total
revenues have been declining. Commission revenues represented 38.2% of total
revenues in the third quarter of fiscal 1999 compared to 41.9% for the year
earlier period. The result of this decrease is declining clearing fees as a
percentage of revenues for the quarter and for the first nine months ended May
31, 1999.
Data Costs
Data costs for the first nine months of fiscal 1999 declined as a percentage of
revenues, primarily due to revenue growth in excess of 30% and changes in data
fee payment arrangements. Prior to January 1, 1999, certain database charges
were charged by FactSet and subsequently paid to the Company's data vendor.
These charges are currently being paid directly to the database vendor by the
Company's clients. This changeover had the positive effect of raising FactSet's
operating margin for the quarter and first nine months of 1999.
Selling, General, and Administrative
For the third quarter of fiscal 1999, selling, general, and administrative
(SG&A) expenses grew over 36% over the comparable period in the prior year,
totaling $9.6 million. During the first nine months of fiscal 1999, SG&A
expenses rose 40% to $27.6 million. For the quarter and nine months ended May
31, 1999, SG&A represented 36.5% of total revenues, up from 34.9% and 34.6% for
the respective year ago periods. These increases were largely the result of
additional employee compensation and expansion of office facilities.
Employee Compensation and Benefits
During the third quarter of fiscal 1999, employee compensation and benefits for
the sales, product development, and various other support departments grew by
$1.4 million. For the nine months ended May 31, 1999, employee compensation rose
$3.6 million. These increases were the result of employee headcount growth of
25% during the 12 months ended May 31, 1999.
Rent Expense and Amortization of Leasehold Improvements
For the third quarter of fiscal 1999, rent and amortization expense increased
$704,000 over the year earlier quarter. For the nine months ended May 31, 1999,
rent and amortization expense increased $1.7 million. These increases were the
result of office openings in New York, Stamford, Hong Kong and Sydney, and
office expansions in San Mateo and Tokyo.
Foreign Currency
More than 95% of the Company's revenues are billed in U.S. dollars. The net
monetary assets held by the Company's foreign offices during fiscal 1999 were
immaterial. As a result, the Company's exposure to foreign currency fluctuations
was insignificant.
Income Taxes
Income taxes decreased 1% as a percentage of revenues for the third quarter and
nine months of fiscal 1999 versus the prior year. The Company's effective tax
rate for fiscal year 1999 is expected to be approximately 39% compared to 43% a
year ago. Included in the 1999 rate is the net effect from concluding two state
income tax audits. Without considering the net effect of the audits, the
effective tax rate would have approached 42%.
LIQUIDITY
For the nine months ended May 31, 1999, cash generated by operating activities
increased 68% to $21.9 million. This was the result of improved profitability,
increased deferred fees and commissions, and higher depreciation and
amortization expenses.
Capital Expenditures
Cash used in investing activities for the nine months ended May 31, 1999 was
$12.8 million, an increase of 42.9% over the prior year period. This increase is
largely due to investments in mainframe equipment at the Company's two computer
centers and the continued expansion of office space. During fiscal 1999, the
Greenwich and New York computer centers underwent major upgrades of their 10
Compaq GS 140 mainframe systems, adding approximately 50% to capacity. The main
memory at each of the systems was increased 60% to 16 gigabytes. System-wide
disk storage space was boosted to 2 terabytes.
Financing Operations and Capital Needs
As of the quarter ended May 31, 1999, cash and cash equivalents totaled $47.9
million representing 53% of the Company's total assets. All of the Company's
capital and operating expense requirements have been financed by cash from
operations. The Company has no outstanding indebtedness.
Revolving Credit Facilities
In November 1998, the Company entered into two revolving credit facilities
totaling $25 million for working capital and general corporate purposes. The
Company has not drawn on either facility and has no present plans to utilize any
portion of the available credit. <PAGE>
FORWARD-LOOKING FACTORS
Cash Dividend
On June 15, 1999, the Company announced that its board of directors approved a
regular quarterly dividend of $0.05 per share. The cash dividend will be paid on
September 20, 1999 to common stock holders of record at the close of business on
August 31, 1999.
Capital Spending
In order to meet the requirements of its client user population and expand in
the global marketplace, the Company has invested significantly in technology and
its workforce. Capital spending, which amounted to $12 million in fiscal 1998,
is scheduled to increase to $18 million for fiscal 1999. Leasehold improvements
will account for approximately 25% of the total capital spending during fiscal
1999.
Recent Market Trends
During the past three fiscal years, the U.S. and European equity markets have
increased and reached record highs. The results of the Company's operations and
the performance of global equity markets have historically not been correlated.
Although there has been little correlation in the past, an extended global stock
market decline could negatively impact some of the Company's clients (investment
management firms and investment banks) and increase the likelihood of personnel
reductions among FactSet's potential user base.
YEAR 2000
Almost all companies are confronted with business risks associated with the Year
2000 ("Y2K") because many computer hardware systems and software programs 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. The effort at FactSet to address issues concerning Y2K has been
in progress since the fall of 1997. During this time FactSet has made progress
in insuring against significant problems resulting from Y2K related issues. The
Y2K 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 pursuing its analysis, assessment, and
planning for the Y2K issue.
The Company's State of Readiness
Three broad areas have been identified as potential concerns for Y2K related
problems. They are (1) the FactSet online system, (2) FactSet's internal
infrastructure and (3) client remediation efforts relating to Y2K.
The FactSet Online System
In contrast to most organizations, the core product that FactSet provides has an
extremely tight dependency on its computer systems correctly handling and
manipulating dates. This dependency is a critical aspect of FactSet's ability to
do business. FactSet has taken a number of steps to make the FactSet Online
System fully Y2K compliant.
With respect to Y2K compliance, the FactSet online system can be broken up into
four components. They are: 1) the user interface, 2) the internal applications
that deliver the data from databases to the end user's desktop, 3) the databases
that contain the information we receive from vendors, and 4) the method of
transmission of data from vendors to FactSet and from FactSet to clients. The
Company has completed testing of the FactSet online system and believes that no
further significant Y2K alterations are necessary to be Y2K compliant.
Determining the specific enhancements necessary to make the online system
compliant was one immediate concern for the entire Y2K effort. Consequently, Y2K
enhancements to the FactSet online system's user interface are in place. Having
achieved this has enabled FactSet users to proceed with their own remediation
efforts without concern for unexpected changes occurring in the behavior of the
FactSet online system. The FactSet online system now universally accepts
four-digit years wherever a year specification can be made.
Approximately 95% of all source code comprising the FactSet online system has
been reviewed by application engineers. The code has been scrutinized to insure
that wherever dates are manipulated, those beyond the year 2000 are being
handled properly. To insure the completeness of the process an inventory of all
system applications has been made to enable FactSet to confirm that all systems
have been reviewed. Quality assurance testing is also being done on all the
online applications to test for compliance problems. Completion of the source
code review is expected in the third calendar quarter of 1999.
Underlying all of the FactSet online applications are the databases which
provide the information upon which the applications operate. Many of the
databases FactSet provides contain historical information, and therefore dates
to which those data items correspond. As part of FactSet's compliance effort all
such databases have been reviewed to insure that dates and historical data
beyond the year 2000 can be accommodated. Many of the databases were already in
an internally compliant format. Most of the more recently added databases were
designed to store years as a full four-digit integer as opposed to a two-digit
integer. A similar inventory of all FactSet databases has been made to manage
the process of identifying databases which are compliant and which databases
need to be made compliant. Approximately 95% of the FactSet databases are now
internally Y2K compliant. Remediation efforts to make all databases compliant
are expected to be complete in the third calendar quarter of 1999.
<PAGE>
Databases on the online system contain information received from over 30
database vendors. A critical part of FactSet's compliance effort involves
insuring that the flow of information from the database vendors to FactSet
continues uninterrupted into the new millennium. Fortunately, FactSet has
flexibility in processing the information that comes from the database vendors.
As opposed to receiving tightly packaged "databases" from our vendors we
received transmissions upon which programs are written to load the information
contained therein into databases stored on the FactSet mainframes. These
programs have all been written by in-house database engineers and can therefore
be customized to accommodate any changes that a vendor may make to its
transmission format in order to achieve compliance.
The assessment of Y2K readiness of data vendors is ongoing and will continue
throughout 1999. The Company maintains regular discussions with its data vendors
and has been encouraging them to prepare and transmit data that is Y2K
compliant. Test transmissions were also requested where applicable to enable
simulations of the update process with post-year 2000 data before it is
contained in the live transmissions. FactSet also requested from each of its
database providers written compliance statements confirming the expectation of
uninterrupted transmissions into the new millennium. There has been no
indication from correspondence with vendors that transmittal of data that is not
Y2K complaint is anticipated.
Internal Infrastructure
FactSet is no different from many organizations in its dependence upon external
systems that are a critical part of its infrastructure. These systems include
but are not limited to: the mainframe systems, phone systems, accounting and
payroll systems, and physical plant systems such as heating, air conditioning,
and utilities.
FactSet has 10 Compaq GS 140 mainframe systems. FactSet has reviewed
correspondence from Compaq stating that no interruption or failure is
anticipated from Y2K issues. In addition, FactSet has conducted its own tests on
the mainframe computer centers. The initial test was conducted during the second
quarter of 1999 and additional tests are scheduled for the third and fourth
quarters of 1999. No interruption of FactSet's service is planned during Y2K
testing of mainframe systems.
The Company also faces Y2K issues with third-party telecommunications systems
over which clients access its products and services. The Company has reviewed
correspondence from each of its significant telecommunications providers
concerning Y2K compliance. There has been no indication from such review that
Y2K issues are anticipated to cause a significant failure or interruption of
telecommunications services.
The suppliers of significant internal back-office systems (accounting and
payroll) have been queried for confirmation that their software is Y2K ready.
The Company has received written confirmations from these suppliers and to date
there has been no indication that the systems/software provided by these
suppliers would not be Y2K compliant.
Client Remediation Efforts
FactSet is concerned not only about insuring the compliance of its online
system, but also insuring that the use of FactSet information by the end user
does not encounter Y2K difficulties. The flexibility of the FactSet system
provides its users the opportunity to create customized "models." These "models"
can take the form of private databases, formulas, or universal screens. Users
can program their use of FactSet much in the same way a programmer utilizes a
programming language. The compliance of a programming language does not
necessarily insure the compliance of all the programs written in that language.
Some of FactSet's most sophisticated clients have thousands of proprietary
models on the FactSet mainframes. A certain amount of remediation effort must
still be undertaken by the Company's client base, regardless of what FactSet
does to provide a seamless Y2K transition.
FactSet is proactively facilitating the remediation process of its users and has
developed extensive tools for this purpose. FactSet has implemented a testbed to
simulate the operation of the online system in a post-year 2000 environment. The
"Y2K TestBed" provides users with the ability to perform remediation testing on
their internal systems that may depend on information returned by FactSet's
online system. The testbed effectively connects the live FactSet online system
and all its applications to databases cast forward in time beyond the year 2000.
This allows for testing of the entire process that takes the data from the
mainframes, through the applications, and ultimately to the user desktop.
FactSet released Y2K Auditor in fiscal 1999, a software program developed
in-house, to further facilitate remediation testing by users. The Y2K Auditor is
an online application that quickly scans through client models searching for
potential Y2K issues. Y2K Auditor analyzes each model, enabling the user to
identify whether a given model should continue to behave properly, or whether
some remediation is required.
FactSet has made efforts to heighten client awareness of its Y2K initiative.
Documentation concerning Y2K has been made available. Clients have also been
encouraged to attend one of the Y2K forums that are being held in over a dozen
cities throughout the world. The forums present an overview of FactSet's
compliance strategy as well as introducing the remediation facilities that have
been provided to assist in the transition to the next millennium.
<PAGE>
Contingency Plans
The Company's Y2K project team is continuing to develop contingency plans to
address worst case scenarios regarding Y2K. These plans supplement many levels
of redundancy already built into the FactSet information technology structure.
Primarily, the New York and Greenwich, Connecticut data centers are operated as
"hot" sites, each running at roughly 50% of capacity. If one data center should
fail or require shutdown, the other will have sufficient capacity to carry the
entire client base comfortably. Each data center is serviced by different public
utilities, reducing the dependency on a single source of electric power. Nearly
every client has at least two methods to access the data centers, reducing
dependency on a single communications carrier. The extent of preparation and
readiness for Y2K varies among the Company's data vendors. Contingency plans
have been arranged by FactSet with a view that the Company will not rely on the
ability of data vendors to provide Y2K compliant data. Programs have been tested
and are planned to adjust data to be Y2K compliant if a data supplier does not
provide it in a specifically compliant format. In the event of failure of the
electronic information delivery mechanisms between FactSet and its data vendors,
plans are also in development to secure data on tape from major vendors for
separate upload to FactSet's data centers.
The Costs to Address Year 2000
Costs relating to Y2K projects principally relate to salaries of in-house
software engineers and are not incremental to recurring operating expenses.
Internal costs incurred are not separately tracked or recorded. However, based
on estimated time incurred by FactSet staff, both past and future costs to
prepare all FactSet systems to be Y2K compliant are approximately $1.5 million.
Y2K 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. Y2K compliance matters have not delayed and are not expected to delay
any critical information technology projects.
The Risks of Year 2000
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities. There can be no
assurances that the databases distributed by the Company, or related
applications, mainframe, communications, and back-office systems do not contain
undetected errors or defects associated with Y2K date functions. Due to the
general uncertainty inherent in the Y2K problem, resulting in part from the Y2K
readiness of third parties beyond the control of FactSet, the Company is unable
to determine at this time whether the Y2K problem will have a material impact on
the Company. Although the Company believes its Y2K efforts will be successful
and does not anticipate the cost of compliance to be material, any failure or
delay to address Y2K 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, cash flows and financial position.
Office Facility Expansion
During fiscal 1999, the Company opened offices in New York, Stamford
(Connecticut), Sydney and plans to expand the San Mateo and Tokyo facilities.
Incremental rent expense from office facility expansion is not expected to be
material.
Income Taxes
The Company previously reported in the first and second quarters of 1999 that
its effective tax rate for fiscal 1999 was expected to be approximately 39%. For
the latest quarter and for the first nine months of fiscal 1999, the effective
tax rate of 39% reflects the net benefit of recently completed income tax audits
in two state jurisdictions. Without considering the net effect of the audits,
the effective tax rate for 1999 would have approached 42% and remain at that
approximate rate for fiscal year 2000.
In the normal course of business, the Company's tax filings are subject to audit
by federal and state tax authorities. Audits by two taxing authorities are
currently ongoing. There is inherent uncertainty contained in the audit process
but the Company has no reason to believe that such audits will result in
additional tax payments that would have an adverse material effect on its
results of operation, cash flows and financial position.
Accounting Pronouncements
In March 1998, Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, was issued. This statement is
effective for the Company's fiscal year ending in 2000. The impact from adopting
this statement on the Company's results of operations and financial position is
not expected to be material. <PAGE>
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", "will be", "is likely", "will account", "could negatively",
"likelihood", "may incorrectly", "may result", "believes", "is expected", "may
make", "will continue", "are anticipated", "may depend", "should continue",
"could result", "will have", "is not expected", "believes that", 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 Y2K 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.
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
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)
27......................................................Financial Data Schedules
(1)Incorporated by reference to the Company's Registration Statement on Form S-1
(File No.333-4238)
(b) Reports on Form 8-K: None
SIGNATURE
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.
FACTSET RESEARCH SYSTEMS INC.
Date: July 15, 1999 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary
<TABLE> <S> <C>
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<LEGEND>
Exhibit 27
This schedule contains summary financial information extracted from FactSet
Research Systems Inc. consolidated statement of financial condition,
consolidated statement of income, and consolidated statement of cash flows for
the period ending February 28, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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