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 November 30, 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 November 30, 1999
................... ................................
Common Stock, par value $.01 31,628,854
<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 months ended November 30, 1999 and 1998..............3
Consolidated Statements of Comprehensive Income
for the three months ended November 30, 1999 and 1998..............3
Consolidated Statements of Financial Condition
at November 30, 1999 and at August 31, 1999........................4
Consolidated Statements of Cash Flows
for the three months ended November 30, 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...................................................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 and in thousands, except per share data
Three Months Ended November 30, 1999 1998
................................................................................
<S> <C> <C>
Subscription Revenues
Commissions $10,896 $9,446
Cash Fees 19,388 14,384
------ ------
Total subscription revenues 30,284 23,830
------ ------
................................................................................
Expenses
Cost of services 10,560 8,511
Selling, general, and administrative 11,042 8,725
------ -----
Total operating expenses 21,602 17,236
------ ------
................................................................................
Income from operations 8,682 6,594
Other income 687 493
----- -----
Income before income taxes 9,369 7,087
Income taxes 3,843 2,767
------ ------
Net income $5,526 $4,320
====== ======
................................................................................
Weighted average common shares (Basic) 31,608 30,094*
................................................................................
Weighted average common shares (Diluted) 34,580 33,226*
................................................................................
Basic earnings per common share $0.17 $0.14*
................................................................................
Diluted earnings per common share $0.16 $0.13*
................................................................................
* Number of shares outstanding and earnings per share amounts give retroactive
effect to the 3-for-2 stock split that occurred on February 5, 1999 and the
2-for-1 stock split that was declared on January 13, 2000 and will be
distributed on February 4, 2000.
</TABLE>
<TABLE>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands and unaudited
Three Months Ended November 30, 1999 1998
................................................................................
<S> <C> <C>
Net Income $5,526 $4,320
Unrealized loss on investments,
net of taxes (22) -
------ ------
Comprehensive Income $5,504 $4,320
====== ======
................................................................................
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
<CAPTION>
ASSETS
November 30, August 31,
Unaudited and in thousands 1999 1999
................................................................................
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $35,411 $31,837
Investments 27,768 22,934
Receivables from clients and clearing brokers 15,769 14,399
Receivables from employees 773 614
Deferred taxes 6,345 6,437
Other current assets 471 413
------ ------
Total current assets 86,537 76,634
................................................................................
LONG-TERM ASSETS
Property, equipment, and leasehold improvements, at cost 58,749 55,334
Less accumulated depreciation 36,835 33,951
------ ------
Property, equipment, and leasehold improvements, net 21,914 21,383
................................................................................
OTHER LONG-TERM ASSETS
Deferred taxes 2,087 1,785
Other assets 1,753 1,742
------- -------
TOTAL ASSETS $112,291 $101,544
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30, August 31,
Unaudited and in thousands 1999 1999
................................................................................
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $9,270 $6,657
Accrued compensation 7,487 7,558
Deferred fees and commissions 5,739 6,964
Dividend payable 796 788
Current taxes payable 4,650 1,522
------ ------
Total current liabilities 27,942 23,489
------ ------
................................................................................
NON-CURRENT LIABILITIES
Deferred rent 433 441
------ -----
Total liabilities 28,375 23,930
------ ------
................................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 318 316
Capital in excess of par value 16,209 14,160
Retained earnings 69,181 64,482
Unrealized (loss) gain on investments,
net of tax (15) 7
Less treasury stock, at cost (1,777) (1,321)
------ ------
Total stockholders' equity 83,916 77,614
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $112,291 $101,544
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
<CAPTION>
Unaudited and in thousands Three Months Ended November 30, 1999 1998
................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $5,526 $4,320
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 2,884 1,909
Deferred tax benefit (210) (534)
Accrued ESOP contribution 313 250
----- -----
Net income adjusted for non-cash items 8,513 5,945
Changes in working capital
Receivables from clients and clearing brokers (1,370) 483
Receivables from employees (159) (31)
Accounts payable and accrued expenses 2,613 906
Accrued compensation 616 574
Deferred fees and commissions (1,225) 28
Current taxes payable 3,128 693
Other working capital accounts, net (62) 175
----- -----
Net cash provided by operating activities 12,054 8,773
................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments (4,871) -
Purchases of property, equipment, and
leasehold improvements (3,415) (3,004)
----- ------
Net cash used in investing activities (8,286) (3,004)
................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends payments (728) -
Repurchase of common stock from employees (456) (35)
Proceeds from exercise of stock options 280 897
Income tax benefits from option exercises 710 -
----- -----
Net cash (used in) provided by financing activities (194) 862
................................................................................
Net increase in cash and cash equivalents 3,574 6,631
Cash and cash equivalents at beginning of period 31,837 37,631
------- -------
Cash and cash equivalents at end of period $35,411 $44,262
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
November 30, 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. At the option of each client, these charges may be
paid either in commissions on securities transactions (in which case
subscription revenues are recorded as commissions) or on a cash basis (in which
case subscription revenues are recorded as cash fees).
To facilitate the receipt of subscription revenues on a commission basis, the
Company's wholly owned subsidiary, FactSet Data Systems, Inc. ("FDS"), is a
member of the National Association of Securities Dealers, Inc. and is a
registered broker-dealer under Section 15 of the Securities Exchange Act of
1934. FDS does not otherwise engage in the securities business.
Subscription revenues paid in commissions are derived from securities
transactions introduced and cleared on a fully disclosed basis primarily through
two clearing brokers. That is, a client paying subscription charges on a
commission basis directs the clearing broker, at the time the client executes a
securities transaction, to credit the commission on the transaction to FDS's
account.
FactSet Limited and FactSet Pacific, Inc. are wholly owned subsidiaries of the
Company and are U.S. corporations with foreign branch operations in London,
Tokyo, Hong Kong, and Sydney.
2. ACCOUNTING POLICIES
The accompanying unaudited 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, 1999. 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, 1999.
The significant accounting policies of the Company and its subsidiaries are
summarized below.
Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
activity and balances have been eliminated from the consolidated financial
statements.
Cost of services is composed of employee compensation and benefits for the
applications engineering and consulting groups, clearing fees, data costs,
communication costs, and computer maintenance and depreciation expenses.
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
other 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.
Significant estimates have been made in areas including valuation allowances for
deferred tax assets, depreciable lives of fixed assets, accrued liabilities and
allowances for doubtful accounts. Actual results could 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 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 and
clearing brokers. 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 clearing brokers used to execute
and settle clients' securities transactions. Clearing fees are recorded when
subscription revenues recorded as commissions are earned.
Cash and Cash Equivalents
Cash and cash equivalents consists of demand deposits and money market
investments with maturities of 90 days or less.
Investments
Investments have original maturities greater than 90 days and are classified as
available-for-sale securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and are reported at market value. Unrealized gains
and losses on available-for-sale securities are recognized as a separate
component of stockholders' equity, net of tax.
Property, Equipment, and Leasehold Improvements
Depreciation of computers and related equipment acquired before September 1,
1994 is recognized using the double declining balance method over estimated
useful lives of five years. Computers and related equipment acquired after
September 1, 1994 are depreciated on a straight-line basis over estimated useful
lives of three years. Depreciation of furniture and fixtures is recognized using
the double declining balance method over estimated useful lives of five years.
Leasehold improvements are amortized on a straight-line basis over the terms of
the related leases or estimated useful lives of the improvements, whichever
period is shorter.
Taxes
Deferred taxes are determined by calculating the estimated 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 liabilities;
deferred cash fees and commissions; deferred rent; and property, equipment, and
leasehold improvements, net of depreciation and amortization.
Income tax benefits derived from the exercise of non-qualified stock options or
the disqualifying disposition of incentive stock options are recorded directly
to capital in excess of par value.
Included in accounts payable and accrued expenses are accrued taxes other than
income taxes of $4.2 and $3.7 million at November 30, 1999 and August 31, 1999,
respectively.
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.
Earnings per share and number of shares outstanding give retroactive effect for
all years, presented for the 3-for-2 stock split that occurred on February 5,
1999 and the 2-for-1 stock split that was declared on January 13, 2000 and will
be distributed on February 4, 2000. Diluted earnings per share is based on the
weighted average number of common shares and potentially dilutive common shares.
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
SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was
issued in 1998 and establishes accounting and reporting standards for derivative
instruments. It requires that derivatives be recorded at fair value as either
assets or liabilities in the Statements of Financial Condition. Additionally,
the fair value adjustments will impact either stockholders' equity or net
income, depending whether or not the derivative instrument qualifies as a hedge
and, if so, the nature of the hedging activity. The Company is required to adopt
this new standard in fiscal year 2001. The impact from adoption on the Company's
results of operations and financial position is not expected to be material
because, at present, the Company does not use derivatives to hedge risks
associated with equity, interest rates, or foreign currency markets. The actual
impact, however, will depend on the fair values of derivative instruments the
Company may hold at the time of FactSet's adoption.
In March 1998, STATEMENT OF POSITION 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, was issued. The Company adopted
this statement effective September 1, 1999. The impact on the Company's results
of operations and financial position was not material.
<PAGE>
3. COMMON STOCK AND EARNINGS PER SHARE
<TABLE>
Shares of common stock and related amounts give retroactive effect to the
3-for-2 stock split that occurred on February 5, 1999 and the 2-for-1 stock
split that was declared on January 13, 2000 and will be distributed on February
4, 2000.
Shares of common stock outstanding were as follows:
In thousands and unaudited Three months ended November 30, 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance at September 1, 31,538 29,020
Additional stock issued for ESOP 46 70
Exercise of stock options 60 1012
Repurchase of common stock (16) (2)
------ ------
Balance at November 30, 31,628 30,100
====== ======
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
A reconciliation between the weighted average shares outstanding used in the basic and
diluted EPS computations is as follows:
In thousands, except per share data and unaudited Income Shares Per Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Three Months Ended November 30, 1999
Basic EPS
Net income available to common stockholders $5,526 31,608 $0.17
Diluted EPS
Dilutive effect of stock options - 2,972
----- ------
Net income available to common stockholders $5,526 34,580 $0.16
===== ======
- -------------------------------------------------------------------------------------------------------
For the Three Months Ended November 30, 1998
Basic EPS
Net income available to common stockholders $4,320 30,094 $0.14
Diluted EPS
Dilutive effect of stock options - 3,132
----- ------
Net income available to common stockholders $4,320 33,226 $0.13
===== ======
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4. SEGMENTS
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 services financial institutions throughout North
America, while the International segment serves investment professionals located
in Europe and Asia Pacific. The International segment consists of two foreign
branch operations that are staffed mainly 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 International segment. The accounting policies of the
segments are the same as those described in Note 2, "Accounting Policies."
<TABLE> <CAPTION>
Segment Information
In thousands and unaudited U.S. International Total
................................................................................
Three Months Ended November 30, 1999
<S> <C> <C> <C>
Revenues from external clients $25,512 $4,772 $30,284
Segment operating profit* 6,554 2,128 8,682
Total assets as of November 30, 1999 105,365 6,926 112,291
Capital expenditures 3,186 229 3,415
................................................................................
Three Months Ended November 30, 1998
Revenues from external clients $20,541 $3,289 $23,830
Segment operating profit* 4,832 1,762 6,594
Total assets as of November 30, 1998 73,847 4,319 78,166
Capital expenditures 2,688 316 3,004
................................................................................
</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 headquarters charges are
recorded by the U.S. segment.
Two separate regions (Europe and Asia Pacific) were aggregated to form the
International segment. The Europe and Asia Pacific 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
November 30,
In thousands, except per share data and unaudited 1999 1998 Change
................................................................................
<S> <C> <C> <C>
Revenues $30,284 $23,830 27.1%
Operating expenses 21,602 17,236 25.3
Operating income 8,682 6,594 31.7
Net income 5,526 4,320 27.9
Diluted earnings per common share* $0.16 $0.13 23.1%
................................................................................
* Diluted earnings per share give retroactive effect to the 3-for-2 stock split
that occurred on February 5, 1999 and the 2-for-1 stock split that was declared
on January 13, 2000 and will be distributed on February 4, 2000.
</TABLE>
Revenues
For the first quarter of fiscal year 2000, revenues grew 27.1% to $30.3 million
versus $23.8 million in the same period a year ago. The driving force behind
revenue growth was the net addition of 84 clients in the last 12 months, as well
as subscriptions to additional services and databases by existing clients.
In the three months ended November 30, 1999, revenues from international
operations were up 45.1% to $4.8 million. Revenues grew 36.7% from European
sources and 68.4% in Asia Pacific. Revenues from international operations
accounted for 15.8% of consolidated revenues, up from 13.8% a year ago.
Client retention for the first quarter of fiscal 2000 continued at a rate in
excess of 95%. Total client commitments at November 30, 1999 were $124.0
million, up 26.3% from a year ago. New products and services aimed at portfolio
managers and the rollout of a new FactSet "front end" were major contributors to
the increase in commitments. ("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.) At November 30, 1999, the average commitment from
the Company's 668 clients was $186,000, an increase of 11% over the same period
a year ago. As of November 30, 1999, no individual client accounted for more
than 4% of total commitments, and commitments from the top 10 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. Historically commitments have grown in virtually
every month.
Password count, which represents the number of FactSet users, at the end of
November 1999 was 21,000, up 20% from the comparable period in 1998.
Operating Expenses
Cost of Services
Cost of services for the quarter ended November 30, 1999 were $10.6 million, an
increase of $2 million or 24% over the year earlier period. This increase is
largely due to higher employee compensation and additional depreciation on
computer equipment.
Employee Compensation and Benefits Employee compensation and benefits for the
applications engineering and consulting groups increased $1.2 million for the
quarter. Employee additions and additional merit compensation drove this
increase. Since the first quarter of fiscal 1999, the applications engineering
and consulting groups in aggregate have increased staff by 20%.
Depreciation Expense
Depreciation expense on computer related equipment increased $709,000 for the
three months ended November 30, 1999. This increase is a result of capital
spending to support FactSet's user base. During the past eight fiscal quarters,
six Compaq GS 140 mainframe systems were added, system-wide memory more than
doubled to 192 gigabytes and disk storage capacity increased to 2.5 terabytes.
During the first quarter of fiscal 2000, enhancements were made to the CPU,
increasing capacity by 35%.
Selling, General, and Administrative
In the first quarter of fiscal 2000, selling, general, and administrative (SG&A)
expenses totaled $11.0 million, up 27% from the same period a year earlier. This
increase was largely the result of additional employee compensation, promotional
and office expenses.
Employee Compensation and Benefits
During the first quarter of fiscal 2000, employee compensation and benefits for
the sales, product development, and various other support departments grew by
$950,000. During the past 12 months total employee headcount for these
departments grew 33%.
<PAGE>
Office Expansion
For the three months ended November 30, 1999, office related expenses increased
$500,000 over the year earlier period. These increases were the result of office
openings in Hong Kong and Sydney, and office expansions in San Mateo and Tokyo.
Foreign Currency
More than 95% of the Company's revenues are received in U.S. dollars. Net
monetary assets held by the Company's overseas offices during the first quarter
of fiscal 2000 were immaterial. As a result, FactSet's foreign currency gains
and losses were not material.
Operating Margin
Operating margin for the quarter ended November 30, 1999 was 28.7%, up from
27.7% for the year earlier period. The improvement in the first quarter of
fiscal 2000 was primarily the result of declining clearing fees and data costs,
offset by depreciation and amortization costs.
Clearing Fees
Cash fees generate higher margin percentages than commission revenues, although
revenues net of clearing fees are approximately the same under both payment
methods. Clients electing to pay for FactSet services 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 two
fiscal years, commissions as a percentage of total revenues have been declining.
Commission revenues represented 36.0% of total revenues in the first quarter of
fiscal 2000 compared to 39.6% for the year earlier period. The result of this
decrease is declining clearing fees as a percentage of revenues for the quarter
ended November 30, 1999.
Data Costs
Data costs for the first three months of fiscal 2000 declined as a percentage of
revenues, primarily due to 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 effect of increasing FactSet's operating margin percentage
for the first fiscal quarter of 2000.
Income Taxes
Income taxes increased $1.1 million and 1.1% as a percentage of revenues for the
three months ended November 30, 1999. The Company's estimated effective tax rate
for the first quarter of fiscal 2000 was 41% compared to 39% a year ago. The
1999 tax rate was positively impacted by a one-time net refund from the
conclusion of two state income tax audits.
LIQUIDITY
For the three months ended November 30, 1999, cash generated by operating
activities increased 37% to $12.1 million. This was the result of improved
profitability, timing of income tax payments, and higher depreciation and
amortization expenses.
Capital Expenditures
The Company's capital expenditures totaled $3.4 million for the first quarter of
fiscal 2000. These capital expenditures were primarily related to purchases of
computer and communications equipment, including a CPU upgrade to our mainframe
systems.
Financing Operations and Capital Needs
As of November 30, 1999, cash, cash equivalents, and investments totaled $63.2
million, representing 56% 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
The Company is a party to 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 November 16, 1999, the Company announced that its Board of Directors approved
a regular quarterly dividend of $0.025 per share. The cash dividend was paid on
December 21, 1999 to common stock holders of record at the close of business on
November 30, 1999. This amount is reflected as dividend payable on the
Consolidated Statements of Financial Condition.
On January 13, 2000, the Company announced that its Board of Directors approved
a two-for-one stock split of the Company's shares of Common Stock and declared a
regular quarterly cash dividend of $0.03. The two-for-one Common Stock split
will be effected as a stock dividend. The Common Stock will be distributed on
February 4, 2000 to Common Stockholders of record at the close of business on
January 21, 2000. As a result of the two-for-one Common Stock split, the
Company's outstanding shares of Common Stock will be approximately 31.6 million
shares. The regular quarterly cash dividend will be paid on March 21, 2000 to
Common Stockholders of record at the close of business on February 29, 2000.
Capital Spending
In order to meet the requirements of its expanding client user population, the
Company continues to invest significantly in technology. Capital spending, which
amounted to $16.5 million in fiscal 1999, is currently expected to approximate
$20 million for fiscal 2000. Leasehold improvements are estimated to account for
20% of total spending in fiscal 2000.
Recent Market Trends
In the ordinary course of business, the Company is exposed to financial risks
involving equity, foreign currency markets and interest rates.
Throughout the past three fiscal years, the U.S. and European equity markets
have achieved record highs. Traditionally, there has been little connection
between results of the Company's operations and the performance of global equity
markets. Nevertheless, a decline in the global stock market could negatively
impact a large number of the Company's clients (investment management firms and
investment banks) and increase the probability of personnel reductions among
FactSet's existing and potential clients.
The fair market value of the Company's investment portfolio at November 30, 1999
was $27.8 million. The fair market value of the portfolio is impacted by
fluctuations in interest rates. The portfolio of fixed income investments is
managed to preserve principal and includes instruments entered into for purposes
other than trading. Under the investment guidelines established by the Company,
third-party managers construct portfolios to achieve high levels of credit
quality, liquidity, and diversification. Short-term investments included in the
Company's portfolios are held for a period not longer than 18 months.
Investments such as puts, calls, strips, short sales, straddles, options,
futures, or investments on margin are not permitted by the Company's investment
guidelines. For these reasons, in addition to the fact that the Company has no
outstanding debt, financial exposure to changes in interest rates is expected to
continue at a low level.
All investments are held in U.S. dollars and nearly 95% of the Company's
revenues are received in U.S. dollars. As a result, exposure to movements in
foreign currency prices is expected to continue to be insignificant.
Income Taxes
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 a material adverse effect on its
results of operation or financial position.
YEAR 2000
Nearly all companies have been 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. 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.
The Company has been successfully operating in the first two weeks of January
2000. Regular usage of its mainframe centers and software application programs
has been ongoing. Internal back-office systems have experienced normal use and
functionality. No material Y2K problems have been noted during the first two
weeks of January 2000.
The Company's State of Readiness
Three broad areas were identified as potential concerns for Y2K-related
problems. They were (1) the FactSet online system, (2) FactSet's internal
infrastructure and (3) client remediation efforts related to Y2K.
The FactSet Online System
The FactSet online system universally accepts four-digit years wherever a year
specification can be made. All source code was scrutinized to ensure that
wherever dates can be manipulated, those dates beyond the Year 2000 are being
handled properly. Quality assurance testing has also been completed on all
online applications to test for compliance problems. The FactSet online system
continued to function properly throughout the Year 2000 transition.
Underlying the FactSet online system are the databases that provide the
information upon which applications operate. Databases on the online system
contain information received from over 30 database vendors. A critical part of
FactSet's compliance effort involved ensuring that the flow of information from
the database vendors to FactSet continued uninterrupted into the new millennium.
Since the beginning of the new year many of FactSet's database vendors have
transmitted at least some new information in the form of new updates. This fact
reinforces many of the assurances we had received from our vendors of their
ability to provide uninterrupted transmissions to FactSet beyond the new year.
Most of FactSet's databases now have information dated post 1/1/2000 and in the
upcoming weeks and months, the remaining databases will receive their first wave
of 2000 data. The timing of this for each database is a function of the
periodicity of time series question. E.g. daily, monthly, yearly. No material
Y2K issues have occurred to date. Data from vendors continues to be monitored
and reviewed for Y2K compliance. Contingency plans have been arranged with the
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.
Internal Infrastructure
FactSet is dependent upon several 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. To date, there has
been no failure or interruption to these systems in the Year 2000.
Client Remediation Efforts
From the outset of FactSet Y2K project, a critical importance was placed on
providing a very high level of proactive support to facilitate the remediation
efforts of all FactSet clients. 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 has proactively facilitated the remediation process of
its users. A testbed of Y2K data and a Y2K auditor application was released. A
significant number of the Company's clients used these tools to prepare for Y2K.
Regular client usage of the FactSet system, including client "models"
interfacing with the Company's mainframe centers and software application
programs, has been ongoing in January 2000. No significant Y2K-related issues
have resulted. Not all existing client "models" have been uploaded or accessed
by clients in the first two weeks of January 2000. Y2K compliance of client
"models" continues to be monitored by the Company.
The Costs to Address Year 2000
Costs relating to Y2K projects principally relate to salaries of FactSet
employees and are not incremental to recurring operating expenses. Internal
costs incurred are not separately tracked or recorded. The total estimated
internal costs incurred to prepare all FactSet systems to be Y2K compliant was
approximately $3 million and was incurred primarily in fiscal years 1999 and
2000. Any future costs incurred is expected to be immaterial to results of
operations.
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. The Company has
experienced normal operations during the first two weeks of January 2000, and to
date, no material Y2K issues have been noted. Monitoring Y2K compliance
continues in the areas of database transmissions and client remediation efforts.
Although the Company believes its Y2K efforts will be successful, any failure or
delay to address Y2K issues arising in the future could result in a 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.
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 was
adopted as of September 1, 1999. The impact from adopting this statement on the
Company's results of operations and financial position was not material.
<PAGE>
SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was
issued in 1998 and establishes accounting and reporting standards for derivative
instruments. It requires that derivatives be recorded at fair value as either
assets or liabilities in the Statements of Financial Condition. Additionally,
the fair value adjustments will impact either stockholders' equity or net
income, depending whether the derivative instrument qualifies as a hedge and, if
so, the nature of the hedging activity. The Company is required to adopt this
new standard in fiscal year 2001. The impact from adoption on the Company's
results of operations and financial position is not expected to be material
because, at present, the Company does not use derivatives to hedge risks
associated with equity, interest rates, or foreign currency markets. The actual
impact, however, will depend on the fair values of derivative instruments the
Company may hold at the time of adoption.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains forward-looking statements
that are based on management's current expectations and beliefs. The phrases
"commitments," "believes," "is likely," "will not," "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," are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions that 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 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(1)
10.2.................Letter Agreement between the Company and Ernest S. Wong (1)
10.3............................Form of Consulting Agreement between the Company
and Charles J. Snyder
10.31......................................Amendment to 364-Day Credit Agreement
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: January 14, 2000 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary
AMENDMENT TO 364-DAY CREDIT AGREEMENT
This Amendment to 364-Day Credit Agreement (the "Amendment"), dated as of
November 18, 1999, is between (i) FactSet Research Systems Inc. (the
"Borrower"), and (ii) The Chase Manhattan Bank (the "Bank").
WHEREAS, the Borrower and the Bank are parties to a 364-Day Credit
Agreement dated as of November 20, 1998 (the "Credit Agreement"); and
WHEREAS, the Bank and the Borrower desire to amend the Credit Agreement to
extend the Maturity Date.
NOW, THEREFORE, in consideration of the premises herein contained, and for
other good and valuable consideration, receipt of which is acknowledged, it is
hereby agreed as follows:
Section 1. Definitions. Terms used but not otherwise defined herein shall
have the respective meanings ascribed to such terms in the Credit Agreement.
Section 2. Amendment to Section 1.01. The definition of the term Maturity
Date, in Section 1.01 of the Credit Agreement, is hereby amended to read in its
entirety as follows:
"Maturity Date" means November 16, 2000.
Section 3. Representations. The Borrower hereby represents and warrants to
the Bank that: (i) the representations and warranties set forth in Article III
of the Credit Agreement are true and correct in all material respects with the
same effect as if made on the date hereof, except to the extent such
representations and warranties relate to an earlier date; (ii) before and after
giving effect to this Amendment, no Event of Default or Default has occurred and
is continuing; and (iii) the making and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action.
Section 4. Conditions. The amendment set forth in Section 2 above shall
become effective on the date first above written provided that the Bank shall
have received a counterpart of this Amendment duly executed and delivered by the
Borrower.
Section 5. Miscellaneous. Except as specifically amended hereby, the Credit
Agreement shall continue in full force and effect in accordance with the
provisions thereof as in existence on the date hereof. After the date hereof,
any reference to "this Agreement", "herein", "hereunder" and similar terms
referring to the Credit Agreement shall be deemed to refer to the Credit
Agreement as amended hereby. This Amendment (i) shall become effective as of the
date first above written, (ii) shall be governed by and construed in accordance
with the laws of the State of New York, and (iii) may be executed in counterpart
(and by different parties hereto on different counterparts), each of which when
taken together shall constitute a single contract. Should any terms or
provisions of the Credit Agreement conflict with the terms and provisions
contained in this Amendment, the terms and provisions of this Amendment shall
prevail.
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this Amendment as of the day and year first above
written.
FACTSET RESEARCH SYSTEMS INC. THE CHASE MANHATTAN BANK
By: ________________________________ By: _______________________________
Its: _______________________________ Its:________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<CIK> 0001013237
<NAME> FactSet Research Systems Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 35,411
<SECURITIES> 27,768
<RECEIVABLES> 15,769
<ALLOWANCES> 947
<INVENTORY> 0
<CURRENT-ASSETS> 86,537
<PP&E> 21,914
<DEPRECIATION> 2,884
<TOTAL-ASSETS> 112,291
<CURRENT-LIABILITIES> 27,942
<BONDS> 0
0
0
<COMMON> 159
<OTHER-SE> 83,916
<TOTAL-LIABILITY-AND-EQUITY> 112,291
<SALES> 30,284
<TOTAL-REVENUES> 30,284
<CGS> 0
<TOTAL-COSTS> 21,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,369
<INCOME-TAX> 3,843
<INCOME-CONTINUING> 5,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,526
<EPS-BASIC> .17<F1>
<EPS-DILUTED> .16
<FN>
<F1> FOR PURPOSES OF THIS STATEMENT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
