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 29, 2000
|_| 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 29, 2000
................... ................................
Common Stock, par value $.01 32,240,082
<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 29, 2000
and February 28, 1999..............................................3
Consolidated Statements of Comprehensive Income
for the three months and six months ended February 29, 2000
and February 28, 1999..............................................4
Consolidated Statements of Financial Condition
at February 29, 2000 and at August 31, 1999........................5
Consolidated Statements of Cash Flows
for the six months ended February 29, 2000
and February 28, 1999..............................................6
Notes to the Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................11
Part II OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities...............................................16
Item 3. Defaults Upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures....................................................................16
<PAGE>
<TABLE>
<CAPTION>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF INCOME-Unaudited Three Months Ended Six Months Ended
In thousands, except per share data Feb 29, 2000 Feb 28, 1999(1) Feb 29, 2000 Feb 28, 1999(1)
............................................................................................................................
<S> <C> <C> <C> <C>
Subscription Revenues
Commissions $11,980 $10,076 $22,876 $19,522
Cash fees 20,505 15,159 39,893 29,543
------ ------ ------ ------
Total subscription revenues 32,485 25,235 62,769 49,065
------ ------ ------ ------
............................................................................................................................
Expenses
Cost of services 11,562 9,053 22,122 17,564
Selling, general, and administrative 11,676 9,228 22,718 17,953
------ ----- ------ -----
Total operating expenses 23,238 18,281 44,840 35,517
------ ------ ------ ------
............................................................................................................................
Income from operations 9,247 6,954 17,929 13,548
Other income 700 452 1,387 945
----- ----- ------ -----
Income before income taxes 9,947 7,406 19,316 14,493
Provision for income taxes 3,752 2,891 7,595 5,658
Non-recurring tax benefit (1,119) - (1,119) -
----- ------ ----- ------
Total income taxes 2,633 2,891 6,476 5,658
Net income $7,314 $4,515 $12,840 $8,835
====== ====== ======= ======
............................................................................................................................
Basic earnings per common share $0.23 $0.15 $0.40 $0.29
Diluted earnings per common share $0.21 $0.13 $0.37 $0.27
............................................................................................................................
Weighted average common shares (Basic) 31,887 30,484 31,709 30,292
Weighted average common shares (Diluted) 34,659 33,610 34,556 33,130
............................................................................................................................
(1) Earnings per share and weighted average common shares give retroactive effect to the 2-for-1 stock split, effected as a
stock dividend, that occurred on February 4, 2000.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME-Unaudited
In thousands
Three Months Ended Six Months Ended
Feb 29, 2000 Feb 28, 1999 Feb 29, 2000 Feb 28, 1999
...................................................................................................................
<S> <C> <C> <C> <C>
Net income $7,314 $4,515 $12,840 $8,835
Unrealized loss on investments,
net of taxes (4) - (26) -
------ ------ ------- ------
Comprehensive Income $7,310 $4,515 $12,814 $8,835
====== ====== ======= ======
...................................................................................................................
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION-Unaudited
<CAPTION>
ASSETS
February 29, August 31,
In thousands 2000 1999
...............................................................................
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $33,516 $31,837
Investments 27,284 22,934
Receivable from clients and clearing brokers 17,639 14,399
Receivable from employees 733 614
Prepaid taxes 1,063 -
Deferred taxes 6,156 6,437
Other current assets 440 413
------ ------
Total current assets 86,831 76,634
...............................................................................
LONG-TERM ASSETS
Property, equipment, and leasehold improvements, at cost 62,500 55,334
Less accumulated depreciation (40,020) (33,951)
------ ------
Property, equipment, and leasehold improvements, net 22,480 21,383
...............................................................................
OTHER LONG-TERM ASSETS
Deferred taxes 2,472 1,785
Other assets 1,742 1,742
------- -------
TOTAL ASSETS $113,525 $101,544
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
February 29, August 31,
In thousands 2000 1999
...............................................................................
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $7,442 $6,657
Accrued compensation 7,134 7,558
Deferred fees and commissions 6,253 6,964
Dividend payable 982 788
Current taxes payable - 1,522
------ ------
Total current liabilities 21,811 23,489
------ ------
...............................................................................
NON-CURRENT LIABILITIES
Deferred rent 523 441
------ ------
Total liabilities 22,334 23,930
------ ------
...............................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 326 316
Capital in excess of par value 17,167 14,160
Retained earnings 75,514 64,452
Unrealized (loss) gain on investments, net of taxes (19) 7
Less treasury stock, at cost (1,797) (1,321)
------ ------
Total stockholders' equity 91,191 77,614
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,525 $101,544
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FactSet Research Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS-Unaudited
<CAPTION>
Six Months Ended
In thousands Feb 29, 2000 Feb 28, 1999
......................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $12,840 $8,835
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 6,069 4,249
Deferred tax benefit (406) (306)
Accrued ESOP contribution 625 500
----- -----
Net income adjusted for non-cash operating items 19,128 13,278
Changes in working capital
Receivable from clients and clearing brokers (3,240) (2,329)
Prepaid taxes (1,063) -
Receivable from employees (119) 133
Accounts payable and accrued expenses 785 3,100
Accrued compensation (49) 930
Deferred fees and commissions (711) (77)
Current taxes payable (1,522) (880)
Other working capital accounts, net 56 673
----- -----
Net cash provided by operating activities 13,265 14,828
......................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments, net (4,376) -
Purchases of property, equipment, and
leasehold improvements (7,167) (9,162)
----- ------
Net cash used in investing activities (11,543) (9,162)
......................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend payments (1,461) -
Repurchase of common stock from employees (476) (390)
Proceeds from exercise of stock options 1,032 1,720
Income tax benefits from option exercises 862 -
----- -----
Net cash (used in) provided by financing activities (43) 1,330
......................................................................................
Net increase in cash and cash equivalents 1,679 6,996
Cash and cash equivalents at beginning of period 31,837 37,631
------- -------
Cash and cash equivalents at end of period $33,516 $44,627
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
February 29, 2000
(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,
clients direct trends to the Company's wholly owned subsidiary, FactSet Data
Systems, Inc. ("FDS"). 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, 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 consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany activity and balances
have been eliminated from the consolidated financial statements.
Cost of services is composed of employee compensation and benefits for the
applications engineering and consulting groups, clearing fees, data costs,
computer maintenance and depreciation expenses, and communication costs.
Selling, general, and administrative expenses include employee compensation and
benefits for the sales, product development and various other support
departments, promotional expenses, rent, amortization of leasehold improvements,
depreciation of furniture and fixtures, 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.
Actual results could differ from those estimates. Significant estimates have
been made in areas including valuation allowances for deferred taxes assets,
depreciable lives of fixed assets, accrued liabilities, income tax provision 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 each recognized 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. 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
Computers and related equipment 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 compensation
and other liabilities; deferred cash fees and commissions; deferred rent; and
property, equipment, and leasehold improvements, net of depreciation and
amortization. Included in income taxes for the second quarter of fiscal 2000 was
a non-recurring tax benefit of $1.1 million from adjustments to prior years'
federal and state income tax returns.
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 $4.8 million and $3.7 million at February 29, 2000 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
the 2-for-1 stock split announced on January 13, 2000 and distributed on
February 4, 2000, for all years presented. 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
In January 2000, the Company's shareholders approved the Year 2000 Employee
Stock Option Plan. Under this plan, stock options to purchase up to 4,000,000
shares of Common Stock were made available for grant to employees of the Company
and its subsidiaries selected by the Company's Compensation Committee.
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
New Accounting Pronouncement
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.
In December 1999, Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION
IN FINANCIAL STATEMENTS, was issued. The Company reviewed this bulletin and
noted that we are in compliance with SAB No. 101.
<PAGE>
3. COMMON STOCK AND EARNINGS PER SHARE
<TABLE>
Shares of common stock and related amounts give retroactive effect to the 2-for-1
stock split, effected as a stock dividend, that occurred on February 4, 2000.
Shares of common stock outstanding were as follows:
Six months ended
In thousands and unaudited Feb 29, 2000 Feb 28, 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at September 1, 31,538 29,020
Additional stock issued for ESOP 48 72
Exercise of stock options 670 1,842
Repurchase of common stock (16) (18)
------ ------
Balance at February 29, 2000 and February 28, 1999 32,240 30,916
====== ======
- -------------------------------------------------------------------------------------------
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
Net Income Shares Per Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended February 29, 2000
Basic EPS
Net income available to common stockholders $7,314 31,887 $0.23
Diluted EPS
Dilutive effect of stock options - 2,772
------ ------
Net income available to common stockholders $7,314 34,659 $0.21
====== ======
- --------------------------------------------------------------------------------------------------------
For the Three Months Ended February 28, 1999
Basic EPS
Net income available to common stockholders $4,515 30,484 $0.15
Diluted EPS
Dilutive effect of stock options - 3,126
------ ------
Net income available to common stockholders $4,515 33,610 $0.13
====== ======
- --------------------------------------------------------------------------------------------------------
For the Six Months Ended February 29, 2000
Basic EPS
Net income available to common stockholders $12,840 31,709 $0.40
Diluted EPS
Dilutive effect of stock options - 2,847
------- ------
Net income available to common stockholders $12,840 34,556 $0.37
======= ======
- --------------------------------------------------------------------------------------------------------
For the Six Months Ended February 28, 1999
Basic EPS
Net income available to common stockholders $8,835 30,292 $0.29
Diluted EPS
Dilutive effect of stock options - 2,838
------ ------
Net income available to common stockholders $8,835 33,130 $0.27
====== ======
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4. SEGMENTS
The Company follows Statement of Financial Accounting Standards ("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
................................................................................
Three Months Ended February 29, 2000
<S> <C> <C> <C>
Revenues from external clients $27,345 $5,140 $32,485
Segment operating profit* 7,312 1,935 9,247
Total assets at February 29, 2000 105,796 7,729 113,525
Capital expenditures 2,939 813 3,752
................................................................................
Three Months Ended February 28, 1999
Revenues from external clients $21,651 $3,584 $25,235
Segment operating profit* 5,696 1,258 6,954
Total assets at February 28, 1999 79,482 4,766 84,248
Capital expenditures 5,807 351 6,158
................................................................................
For the Six Months Ended February 29, 2000
Revenues from external clients $52,857 $9,912 $62,769
Segment operating profit* 13,866 4,063 17,929
Capital expenditures 6,125 1,042 7,167
................................................................................
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
................................................................................
</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 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-Unaudited
Three Months Ended Six Months Ended
Feb 29, Feb 28, Feb 29, Feb 28,
In thousands, except per share data 2000 1999 Change 2000 1999 Change
.............................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Revenues $32,485 $25,235 28.7% $62,769 $49,065 27.9%
Operating expenses 23,238 18,281 27.1 44,840 35,517 26.2
------ ------ ------ ------
Operating income 9,247 6,954 33.0 17,929 13,548 32.3
Provision for income taxes 3,752 2,891 29.8 7,595 5,658 34.2
Non-recurring tax benefit (1,119) - (1,119) -
------ ------ ------ ------
Total income taxes 2,633 2,891 6,476 5,658
Net income 7,314 4,515 62.0 12,840 8,835 45.3
Diluted earnings per common share* $0.21 $0.13 61.5 $0.37 $0.27 37.0
.............................................................................................................................
* Diluted earnings per share give retroactive effect to the 2-for-1 stock split that occurred on February 4, 2000.
</TABLE>
REVENUES
Revenues for the quarter ended February 29, 2000 grew 28.7% to $32.5 million
compared to $25.2 million a year ago. For the first half of fiscal 2000,
revenues increased 27.9% to $62.8 million. The primary drivers behind revenue
growth were incremental subscriptions to additional services and databases by
existing clients, as well as the net addition of 95 clients over the past twelve
months.
Quarterly revenues from international operations increased 43.4% to $5.1
million. Revenues from European operations grew 38.5%. Revenue growth in Asia
Pacific grew 56.8%. Overseas revenues for the first half of fiscal 2000, rose
44.2% to $9.9 million. Revenues from international operations accounted for over
15% of consolidated revenues for both the second quarter and the first six
months of fiscal 2000.
Client retention for both the second quarter of fiscal 2000 and for the first
half of the year continued at a rate in excess of 95%. Total client commitments
at February 29, 2000 were $132.2 million, an increase of 28.1% over the year
earlier period. New products and services aimed at portfolio managers were among
the key contributors to the commitment increase. Approximately 140 clients
representing nearly 1,000 users now subscribe to FactSet's portfolio analytic
applications. ("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.) As of February 29, 2000, the average commitment from
the Company's 690 clients was $192,000, an increase of 11% over the same period
a year ago. 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.
Password count at the beginning and end of the second quarter of fiscal 2000 was
21,000. An increased user base among existing clients was offset by the effect
of a revised agreement with a major client. This agreement resulted in the
reduction of the number of passwords held by this client, but significantly
increased its annual commitment.
Operating Expenses
Cost of Services
Cost of services for the quarter ended February 29, 2000 were $11.6 million, an
increase of 27.7% compared to the same period a year ago. For the first six
months of fiscal 2000, cost of services increased 25.9% to $22.1 million.
Increases for both periods was due to higher employee compensation, higher
clearing fees and increased depreciation expense.
Employee Compensation and Benefits
Employee compensation and benefits for the applications and engineering
departments increased $900,000 in the second quarter of fiscal 2000. For the six
months ended February 29, 2000, employee compensation and benefits rose $2.0
million. Employee additions and additional merit raises drove these increases.
The applications engineering and consulting departments have increased staff 20%
over the past twelve months.
<PAGE>
Clearing Fees
Clearing fees rose $600,000 in the second quarter of fiscal 2000 and $900,000
for the first half of the year. These increases are the result of higher client
commission payments and clearing rates emanating from international trades.
Depreciation Expense
Depreciation expense on computer related equipment grew $700,000 in the second
quarter and $1.4 million for the first six months of the fiscal year over the
same period a year ago. These increases are the result of higher levels of
computer and communication equipment spending to support FactSet's growing user
base. During the first six months of fiscal 2000, data center enhancements were
made to increase capacity by 35%. Disk storage capacity increased 36% to 3.4
terabytes. In addition, a new computer telephony integration phone system, which
will allow for enhanced processing and servicing of incoming client calls, was
purchased in the second quarter of fiscal 2000.
Selling, General, and Administrative
For the three months ending February 29, 2000, selling, general, and
administrative (SG&A) expenses totaled $11.7 million, up 26.5% from the same
period a year ago. SG&A expenses for the first half of fiscal 2000 totaled $22.7
million, an increase of 26.5% over the same period a year ago. These increases
were largely the result of additional employee compensation, travel and
entertainment and rent expenses.
Employee Compensation and Benefits
Employee compensation and benefits for the sales, product development, and
various other support departments grew by $903,000 in the second quarter of
fiscal 2000 compared to the prior year. For the six months ended February 29,
2000, employee compensation rose $1.8 million. Employee headcount grew by 25%
for these departments during the 12 months ended February 29, 2000.
Travel and Entertainment Expense
Travel and entertainment (T&E) expense grew $366,000 for the quarter ended
February 29, 2000. For the six months ended February 29, 2000, T&E grew
$740,000. Increases in T&E for both periods resulted from the servicing of an
expanding global client base.
Rent Expense and Amortization of Leasehold Improvements
Rent and amortization expense increased $513,000 for the quarter ended February
29, 2000. For the first half of fiscal 2000, rent and amortization expense
increased $924,000 as compared to the same period a year ago. Office openings in
Sydney and Boston and office expansions in San Mateo, Tokyo and London were the
factors behind this increase.
Foreign Currency
Approximately 95% of the Company's revenues were collected in U.S. dollars. The
net monetary assets held by the Company's foreign offices were also immaterial.
As a result, the Company's exposure to foreign currency fluctuations was
insignificant.
Operating Margin
Operating margin for the quarter ended February 29, 2000 was 28.5%, up from
27.6% a year ago. Operating margin for the six months ended February 29, 2000
was 28.6%, up from 27.6% from the same period a year ago. The improvement in the
operating margin was primarily the result of declining clearing fees, data costs
and employee compensation, offset by increased depreciation, travel and
occupancy costs as a percentage of revenues.
Clearing Fees
Higher margin percentages 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 for their subscription than
cash-paying clients in order to cover broker clearing charges paid by the
Company. For the six months ended February 29, 2000, commission revenues
declined as a percentage of total revenues from approximately 40% to 36%. The
end result of this decrease is declining clearing fees as a percentage of
revenues for the six months ended February 29, 2000.
Data Costs
Data costs for the three months and six months ended February 29, 2000 declined
as a percentage of revenues, primarily due to changes in data fee payment
arrangements. Prior to January 1, 2000, certain database charges were charged by
FactSet and subsequently remitted to the database vendor. These charges are
currently being paid directly to the database vendor by the Company's clients.
This change in the structure of payments had the effect of increasing FactSet's
operating margin for the three months and six months ended February 29, 2000.
Income Taxes
Income taxes for the second quarter of fiscal 2000 were $2.6 million, a decline
of $300,000 and 3.4% as a percentage of revenues compared to the year ago
period. Included in income taxes was a non-recurring tax benefit of $1.1 million
from adjustments to prior years federal and state income tax returns. Without
this one-time benefit, the effective tax rate would have been 38% and income
taxes as a percentage of revenues would have been 11.5%. These percentages
before the non-recurring benefit are consistent with the effective tax rate
(39%) and income taxes as a percentage of revenues (11.5%) reported in the year
ago period.
Income taxes for the first half of fiscal 2000 were $6.5 million, $800,000
higher than the comparable amount in fiscal 1999. Included in the fiscal 2000
amount was a non-recurring tax benefit of $1.1 million. Without this one-time
benefit, the effective tax rate would have been 39% in both periods.
Liquidity
For the six months ended February 29, 2000, cash generated by operating
activities totaled 12% of total assets or $13.2 million compared to $14.8
million in the year earlier period. This $1.6 million decline was the result of
an increased receivable from clients and clearing brokers, the timing of income
tax payments offset by higher accounts payable and accrued expenses, and by
higher depreciation and amortization expenses.
Capital Expenditures
The Company's capital expenditures totaled $7.2 million for the first half of
fiscal 2000. These capital expenditures were related primarily to purchases of
computer and communications equipment, including an upgrade to the
communications system currently in place. During the first six months of fiscal
2000, enhancements were made to the mainframe system, including a CPU upgrade.
Disk storage capacity increased approximately 40% to 3.4 terabytes. In addition,
a new computer integration phone system was purchased, allowing for more
efficient servicing of incoming client calls.
Financing Operations and Capital Needs
At quarter end, cash, cash equivalents and investments represented 54% or nearly
$61 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
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.
Forward-Looking Factors
CASH DIVIDEND
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 stock split occurred
on February 4, 2000 to Common Stockholders of record at the close of business on
January 21, 2000. The regular quarterly cash dividend was paid on March 21, 2000
to Common Stockholders of record at the close of business on February 29, 2000.
Shares of common stock and related amounts give retroactive effect to the
2-for-1 stock split, effected as a stock dividend.
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 correlation
between results of the Company's operations and the performance of global equity
markets. Nevertheless, a decline in the various worldwide markets 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 February 29, 2000
was $27.3 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. Under the investment guidelines established by
the Company, third-party managers construct portfolios to achieve high levels of
credit quality, liquidity, and diversification. The weighted average duration of
short-term investments included in the Company's portfolios is not to exceed 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 to be minimal.
All investments are held in U.S. dollars and approximately 95% of the Company's
revenues are earned in U.S. dollars. As a result, exposure to movements in
foreign currency prices is expected to continue to be insignificant.
Income Taxes
The effective tax rate for the second quarter of fiscal 2000 was 27% including
the impact of a non-recurring tax benefit of $1.1 million. Without this one-time
benefit, the effective rate would have been 38%, a 3% reduction from 41%
reported in the first quarter of fiscal 2000. For the remaining quarters of
fiscal 2000, the effective tax rate is expected to range between 38% and 39%.
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.
<PAGE>
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 operating successfully in the first three months of
calendar 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 through March
31, 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 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.
Databases on the online system contain information received from over 30
database vendors. Most of FactSet's databases now have information dated after
January 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.
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
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.
Regular client usage of the FactSet system, including client "models"
interfacing with the Company's mainframe centers and software application
programs, has been ongoing since January 2000. No significant Y2K-related issues
have resulted. Not all existing client "models" have been uploaded or accessed
by clients in the first three months of 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 are 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 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 have been and will continue to 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.
<PAGE>
Forward-Looking Statements
This Management's Discussion and Analysis contains forward-looking statements
that are based on management's current expectations and beliefs. The phrases
"commitments", "will be", "is likely", "will account", "could negatively",
"likelihood", "may incorrectly", "may result", "believes", "is expected", "may
make", "will continue", "are anticipated", "may depend", "should continue",
"could result", "will have", "is not expected", "believes that", are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties, and assumptions
which are difficult to predict ("future factors"). Therefore, actual results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to publicly update any
forward-looking statements as a result of new information, future events, or
otherwise.
Future factors include the ability to hire qualified personnel; maintenance of
the Company's leading technological position; the impact of global market trends
on the Company's revenue growth rate and future results of operations; the
success of the Y2K compliance activities; the negotiation of contract terms
supporting new and existing databases; the successful resolution of ongoing
audits by tax authorities; the continued employment of key personnel; the
absence of U.S. or foreign governmental regulation restricting international
business; and the sustainability of historical levels of profitability and
growth rates in cash flow generation.
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
The Annual Meeting of Shareholders of FactSet Research Systems Inc. was held on
January 13, 2000.
1. Two nominees to the Board of Directors were elected:
Director Term For Not For Abstain
-------- ---- --- ------- -------
Walter F. Siebecker 3 yrs. 14,406,592 90,465 -
Howard E. Wille 3 yrs. 14,416,242 80,815 -
2. The appointment of PricewaterhouseCoopers LLP as independent public
accountants of the Company was ratified:
For 14,373,325
Not for 5,725
Abstain 118,007
3. The adoption of the 2000 Employee Stock Option Plan was ratified:
For 10,250,895
Not for 3,010,041
Abstain 128,251
Broker no-vote 1,107,870
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 of Agreement between the Company and Ernest S. Wong(1)
10.31.................Amendment to 364-Day Credit Agreement, dated April 3, 2000
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 Quarterly Report on Form 10-Q for
the first quarter of fiscal year 1999.
(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, 2000 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary
SECOND AMENDMENT TO 364-DAY CREDIT AGREEMENT
This Second Amendment to 364-Day Credit Agreement (the "Amendment"),
dated as of April 3, 2000, 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 March 31, 2001.
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>
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<NAME> FactSet Research Systems Inc.
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<S> <C>
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<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> FEB-29-2000
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<SECURITIES> 27,284
<RECEIVABLES> 17,639
<ALLOWANCES> 1,025
<INVENTORY> 0
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0
0
<COMMON> 326
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<F1> FOR PURPOSES OF THIS STATEMENT, PRIMARY MEANS BASIC.
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