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 February 28, 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 February 28, 1999
................... ................................
Common Stock, par value $.01 15,458,004
<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 six months ended February 28, 1999 and 1998......3
Consolidated Statements of Financial Condition
at February 28, 1999 and at August 31, 1998........................4
Consolidated Statements of Cash Flows
for the six months ended February 28, 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...........................................9
Part II OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities...............................................15
Item 3. Defaults Upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures....................................................................15
<PAGE>
<TABLE>
<CAPTION>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME-Unaudited Three Months Ended Six Months Ended
In thousands, except per share data February 28, February 28,
1999 1998 1999 1998
.......................................................................................................
<S> <C> <C> <C> <C>
Subscription Revenues
Commissions $10,076 $8,203 $19,522 $15,979
Fees 15,159 10,854 29,543 20,572
------ ------ ------ ------
Total subscription revenues 25,235 19,057 49,065 36,551
------ ------ ------ ------
.......................................................................................................
Expenses
Cost of services 9,053 7,630 17,564 14,501
Selling, general, and administrative 9,228 6,571 17,953 12,596
------ ----- ------ -----
Total operating expenses 18,281 14,201 35,517 27,097
.......................................................................................................
Operating income 6,954 4,856 13,548 9,454
Other income 452 384 945 751
----- ----- ----- -----
Income before income taxes and extraordinary gain 7,406 5,240 14,493 10,205
Income taxes 2,891 2,311 5,658 4,501
------ ------ ------ ------
Net income before extraordinary gain 4,515 2,929 8,835 5,704
Extraordinary gain, net of income taxes 0 242 0 242
------ ------ ----- -----
Net income $4,515 $3,171 $8,835 $5,946
====== ====== ====== ======
.......................................................................................................
Basic earnings per common share $0.29 $0.22 $0.58 $0.41
Diluted earnings per common share $0.27 $0.19 $0.53 $0.36
.......................................................................................................
Weighted average common shares(Basic) 15,242 14,423 15,146 14,409
Weighted average common shares(Diluted) 16,805 16,424 16,565 16,412
.......................................................................................................
</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
February 28, August 31,
Unaudited and in thousands 1999 1998
...............................................................................
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $44,627 $37,631
Receivable from clients and clearing brokers 13,450 11,121
Receivable from employees 400 533
Deferred taxes 4,078 4,034
Other current assets 421 921
------ ------
Total current assets 62,976 54,240
...............................................................................
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements, at cost 48,001 38,839
Less accumulated depreciation (28,408) (24,159)
------ ------
Property, equipment, and leasehold improvements, net 19,593 14,680
...............................................................................
OTHER NON-CURRENT ASSETS
Deferred taxes 1,512 1,250
Other assets 167 386
------- -------
TOTAL ASSETS $84,248 $70,556
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, August 31,
Unaudited and in thousands 1999 1998
...............................................................................
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $7,855 $4,755
Accrued compensation 6,830 6,155
Deferred fees and commissions 4,469 4,546
Current taxes payable 2,633 3,513
Deferred rent 74 92
------ ------
Total current liabilities 21,861 19,061
------ ------
...............................................................................
NON-CURRENT LIABILITIES
Deferred rent 442 470
------ ------
Total liabilities 22,303 19,531
------ ------
...............................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 155 97
Capital in excess of par value 5,351 2,934
Retained earnings 57,274 48,439
Less treasury stock (835) (445)
------ ------
Total stockholders' equity 61,945 51,025
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $84,248 $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>
Six Months Ended February 28,
Unaudited and in thousands 1999 1998
..............................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $8,835 $5,946
Adjustments to reconcile net income to net
cash provided by operating activities
Gain on sale of investment 0 (433)
Depreciation and amortization 4,249 2,637
Deferred tax expense (benefit) (306) 180
Accrued ESOP contribution 500 375
----- -----
Net income adjusted for non-cash items 13,278 8,705
Changes in working capital
Receivable from clients and clearing brokers (2,329) (1,912)
Accounts payable and accrued expenses 3,100 4,100
Accrued compensation 930 934
Deferred fees and commissions (77) (1,034)
Current taxes payable (880) (2,323)
Other working capital accounts, net 806 707
----- -----
Net cash provided by operating activities 14,828 9,177
..............................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and
leasehold improvements (9,162) (6,862)
Proceeds from sale of investments 0 1,389
----- ------
Net cash used in investing activities (9,162) (5,473)
..............................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock from employees (390) (5)
Proceeds from exercise of stock options 1,720 71
----- ---
Net cash provided by financing activities 1,330 66
..............................................................................
Net increase in cash and cash equivalents 6,996 3,770
Cash and cash equivalents at beginning of period 37,631 26,816
------- -------
Cash and cash equivalents at end of period $44,627 $30,586
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FactSet Research Systems Inc.
February 28, 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 compensation,
deferred cash fees and commissions; deferred rent; and property, equipment, and
leasehold improvements.
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.
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 potential impact
from adopting this statement on the Company's results is under evaluation.
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 six months ending February 28, 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.
<PAGE>
4. SEGMENTS
In fiscal 1998, the Company 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
while 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 February 28, 1999
<S> <C> <C> <C>
Revenues from external clients $21,651 $3,584 $25,235
Segment operating profit* 5,696 1,258 6,954
Total assets as of 2/28/99 79,482 4,766 84,248
Capital expenditures 5,807 351 6,158
................................................................................
Quarter Ended February 28, 1998
Revenues from external clients $16,737 $2,320 $19,057
Segment operating profit* 3,952 904 4,856
Total assets as of 2/28/98 55,622 2,959 58,581
Capital expenditures 5,894 130 6,024
................................................................................
For the Six Months Ended February 28, 1999
Revenues from external clients $42,192 $6,873 $49,065
Segment operating profit* 10,528 3,020 13,548
Capital expenditures 8,495 667 9,162
................................................................................
For the Six Months Ended February 28, 1998
Revenues from external clients $32,148 $4,403 $36,551
Segment operating profit* 7,493 1,961 9,454
Capital expenditures 6,677 185 6,862
................................................................................
</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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
Three Months Ending Six Months Ending
February 28, February 28,
Unaudited and in thousands, except per share data 1999 1998 Change 1999 1998 Change
...............................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Revenues $25,235 $19,057 32.4% $49,065 $36,551 34.2%
Operating expenses 18,281 14,201 28.7 35,517 27,097 31.1
Operating income 6,954 4,856 43.2 13,548 9,454 43.3
Income before income taxes and extraordinary gain 7,406 5,240 41.3 14,493 10,205 42.0
Net income before extraordinary gain 4,515 2,929 54.1 8,835 5,704 54.9
Extraordinary gain, net of income taxes 0 242 0 242
Net income 4,515 3,171 42.4 8,835 5,946 48.6
Earnings per share(Diluted) $0.27 $0.19 42.1% $0.53 $0.36 47.2%
...............................................................................................................
</TABLE>
REVENUES
Revenues for the quarter ended February 28, 1999 increased 32.4% to $25.2
million versus $19.1 million for the year ago quarter. This marked the ninth
straight quarter which revenue growth exceeded 30%. For the first half of the
year, revenues increased 34.2% to $49.1 million. Revenue growth has been the
result of increased subscriptions to services, databases and passwords, as well
as new client additions.
Quarterly revenues from international operations were up 54% and totaled $3.6
million. Revenue growth from European operations was 55%. Asia Pacific revenues
grew by 53%. Overseas revenues over the first half of fiscal 1999 increased 56%
to $6.9 million versus the comparable period of fiscal 1998. Revenues from
international sources accounted for over 14% of consolidated revenues for both
the second fiscal quarter and the first half of fiscal 1999, up from 12% for the
comparable periods a year earlier periods.
CLIENT COMMITMENTS & PASSWORDS
Client commitments reached $103.2 million at February 28, 1999, up 31% over the
previous year. Additional services, databases, and a 45% increase in password
subscriptions increased the average annual commitment per client 15% to
$173,000. ("Commitments" at a given point in time represent the forward-looking
revenues for the next 12 months from on all services currently being supplied to
clients.) At February 28, 1999, no individual client accounted for more than 4%
of total commitments, and commitments among the top ten clients did not exceed
15% of the total. As a matter of policy, the Company does not seek to enter into
written contracts with its clients. Accordingly, clients are free to add or
delete services at any time. Historically, commitments have grown in virtually
every month.
Password count at the beginning and end of the second quarter of fiscal 1999 was
18,000. An increased user base among investment management clients was offset by
a reduction of passwords in several of the Company's largest investment banking
clients. Recent fluctuations in the number of users among investment banking
clients reduces the likelihood that quarter-over-quarter commitment growth rates
will remain above 30% over the short-term.
CLIENT COUNT
The number of clients using FactSet rose to 595, a net addition of 74 clients
over the past twelve months. Retention of existing clients continued at a 95%
rate.
OPERATING EXPENSES
COST OF SERVICES
Cost of services for the quarter ended February 28, 1999 increased 18.7% to $9.1
million compared to the prior year period. For the first half of the year, cost
of services increased 21.1% to $17.6 million. For both periods, the addition of
new employees and increased depreciation were the primary reasons for these
increases. For the quarter ended February 28, 1999, cost of services represented
35.9% of total revenues, down from 40% a year ago. For the first half of fiscal
1999, cost of services represented 35.8% of total revenues, down from 39.7% in
the comparable period of fiscal 1998. This margin improvement was a result of
declining clearing fees and data costs as a percentage of revenues offset by
additional compensation and depreciation.
<PAGE>
Employee Compensation and Benefits
Compensation and benefits for the applications engineering and consulting groups
rose $1 million for the second quarter of fiscal 1999 compared to the prior
year. For the first half of fiscal 1999, employee compensation and benefits rose
$2.2 million. Employee additions and merit raises drove this increase. In order
to support the continuing growth and the client base of the Company, the
applications engineering and consulting departments increased staff by 51% over
the past twelve months.
Depreciation Expense
Depreciation expense on computers increased $526,000 for the three months ended
February 28, 1999. Depreciation expense for the first 6 months of the year
increased $1.2 million. These increases are the result of higher levels of
computer equipment capital spending to upgrade and increase mainframe capacity.
Clearing Fees
Higher margins are generated from cash fees than commission revenues, although
net revenues to the Company are approximately the same under both payment
methods. Clients electing to settle obligations through commissions on
securities transactions pay a higher amount than cash-paying clients in order to
cover broker clearing charges paid by the Company. For the three months and six
months ending February 28, 1999, commission revenues declined as a percentage of
total revenues from approximately 43% to 40%. The end result of this decrease is
declining clearing fees as a percentage of revenues by 0.63% for the quarter and
1.2% for the six months ended February 28, 1999.
Data Costs
Data costs for the first half of the year declined as a percentage of revenues,
primarily due to strong revenue growth and certain database charges previously
charged to FactSet that are currently paid directly to the client by the
database supplier. Increased revenues and the decline in data costs contributed
3% to operating margin improvement for the quarter and first half of 1999.
SELLING, GENERAL AND ADMINISTRATIVE
For the second quarter of fiscal 1999, selling, general, and administrative
("SG&A") expenses grew 40% over the prior year period, totalling $9.2 million.
During the first half of fiscal 1999, SG&A expenses rose 43% to $18.0 million .
The increase in SG&A expense is mainly attributable to additional employee
compensation and the expansion of office facilities.
Employee Compensation and Benefits
Employee compensation and benefits for the sales, product development, and
various other support departments grew by $1.25 million in the second quarter of
fiscal 1999 compared to the prior year. For the six months ended February 28,
1999, employee compensation rose $2.68 million. Employee headcount grew by 28%
for these departments during the 12 months ended February 28, 1999.
Rent Expense and Amortization of Leasehold Improvements
Rent and amortization expense increased by $454,000 for the quarter ended
February 28, 1999 and $1.0 million for the first half of fiscal 1999 as compared
to a year ago. Office openings in New York, Stamford, Hong Kong and Sydney
during the past year, as well as expansion of the San Mateo and Tokyo offices
were the factors behind the increase.
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 was also immaterial. As a
result, the Company's exposure to foreign currency fluctuations was
insignificant.
Income Taxes
Income taxes decreased nearly 1% as a percentage of revenues for both the second
quarter and first six months fiscal 1999 versus the prior year. This decline was
the result of non-qualified stock option exercises and disqualifying
dispositions of incentive stock options during the first six months of fiscal
1999. As a result, the Company's effective tax rate declined to 39% compared to
44% for the year ago periods.
Liquidity
For the six months ended February 28, 1999, cash generated by operating
activities increased 61% to $14.8 million. This increase was primarily due to
improved profitability and higher depreciation and amortization expenses.
Capital Expenditures
Cash used in investing activities for the six months ended February 28, 1999 was
$9.2 million, up from fiscal 1998's comparable period total of $5.5 million.
This increase was driven by capital expenditures in the Greenwich and New York
computer centers and continued expansion of office space. During the first half
of fiscal 1999, the Company's 10 Compaq GS 140 mainframe systems underwent major
upgrades, adding approximately 50 percent to capacity. Main memory for each
systems also increased by 60% to 16 gigabytes. Disk storage was boosted to
increase system wide capacity of 2 terabytes.
Financing Operations and Capital Needs
At quarter end, cash and cash equivalents represented 53% or nearly $45 million
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.
Forward-Looking Factors
CASH DIVIDEND
On March 16, 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
June 21, 1999 to common stockholders of record at the close of business on May
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 likely to exceed $16 million for fiscal 1999. During fiscal 1999, leasehold
improvements will account for approximately 25% of the total capital spending.
RECENT MARKET TRENDS
The U.S. and many of the European equity markets have reached record highs
during past three fiscal years. Although the business environment in Asia has
been difficult, the Company's Pacific Rim revenues have grown 54% during the
first half of fiscal 1999 compared to the prior year. Historically, there has
been little correlation between the performance of the global stock markets and
the Company's results of operations. However, a prolonged 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 users 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 concerns 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 3rd 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% all of the FactSet databases are
now internally Y2K compliant. Remediation efforts to make all databases
compliant are expected to be complete in the 3rd quarter of 1999.
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 will conduct its own tests on
mainframe computer centers. The initial test is scheduled for second calendar
quarter of 1999. Final testing is scheduled for the fourth quarter 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 user end
does not encounter Y2K difficulties. The enormous flexibility of the FactSet
system provides its users the opportunity to create extremely customized
"models". These "models" can take the form of private databases, formulas, or
universal screens. In essence 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 literally thousands of proprietary models on the FactSet mainframes. A
certain amount of remediation effort must still responsibly 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 test bed
to simulate the operation of the online system in a post-year 2000 environment.
The "Y2K Test Bed" 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 test bed 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 has recently released the Y2K Auditor, a software program developed
in-house, to further facilitate remediation testing by users. The Y2K Auditor is
an online application, which quickly scans through client models searching for
potential Y2K issues. The Y2K auditor provides an analysis of 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.
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 exercise of nonqualified stock options or disqualifying dispositions of
incentive stock options have a positive impact on the Company's effective tax
rate. As a result of these stock option exercises during the first half of
fiscal 1999, the Company's effective tax rate decreased to 39% as compared to
44% from the year ago period. Over 50% of the 2.0 million stock options
outstanding at February 28, 1999 have an exercise price of $1.80 and will be
fully vested on January 3, 2000. As more employees exercise these options in the
following years, the Company believes that its future effective tax rate will
continue at a level consistent with its current rate.
In the normal course of business, the Company's tax filing are subject to audit
by federal and state tax authorities. Audits by several 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 to its
results of operation, cash flows and financial position.
Accounting Pronouncements
In 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.
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:
The Annual Meeting of Shareholders of FactSet Research Systems Inc. was held on
January 7, 1999.
1. Each of the three nominees to the Board of Directors was elected:
Director Term For Not For Abstain
-------- ---- --- ------- -------
John D. Connolly 3 yrs. 9,462,385 3,570 575,979
Joseph E. Laird, Jr. 3 yrs. 8,886,806 579,149 575,979
Charles J. Snyder 3 yrs. 9,462,685 3,270 575,979
2. The appointment of PricewaterhouseCoopers LLP as independent public
accountants of the Company was ratified:
For 9,462,525
Not For 3,430
Abstain 0
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)
10.31...............................................364-Day Credit Agreement (2)
10.32............................................Three Year Credit Agreement (2)
27......................................................Financial Data Schedules
(1)Incorporated by reference to the Company's Registration Statement on Form S-1
(File No.333-4238)
(2)Incorporated by reference to the Company's first quarter fiscal 1999 10Q.
(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: April 14, 1999 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary
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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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<NAME> FactSet Research Systems Inc.
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<PERIOD-END> FEB-28-1999
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