Form 10-Q
United States Securities And Exchange Commission
Washington, D.C. 20549
|X| Quarterly Report pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the fiscal quarter ended May 31, 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 May 31, 2000
................... ...........................
Common Stock, par value $.01 32,538,980
<PAGE>
FactSet Research Systems Inc.
Form 10-Q
Table of Contents
Part I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Income
for the three and nine months ended May 31, 2000 and 1999..........3
Consolidated Statements of Comprehensive Income
for the three and nine months ended May 31, 2000 and 1999..........4
Consolidated Statements of Financial Condition
at May 31, 2000 and at August 31, 1999.............................5
Consolidated Statements of Cash Flows
for the nine months ended May 31, 2000 and 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...................................................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 Three Months Ended Nine Months Ended
May 31, May 31,
In thousands, except per share data and unaudited 2000 1999(1) 2000 1999(1)
.......................................................................................................
<S> <C> <C> <C> <C>
Subscription Revenues
Commissions $12,349 $10,091 $35,225 $29,613
Cash fees 21,946 16,360 61,839 45,903
------ ------ ------ ------
Total subscription revenues 34,295 26,451 97,064 75,516
------ ------ ------ ------
.......................................................................................................
Operating Expenses
Cost of services 11,415 9,503 33,537 27,067
Selling, general, and administrative 12,700 9,641 35,418 27,594
Non-recurring retirement bonus (see Note 5) 2,750 - 2,750 -
------ ------ ------ ------
Total operating expenses 26,865 19,144 71,705 54,661
------ ------ ------ ------
.......................................................................................................
Income from operations 7,430 7,307 25,359 20,855
Other income 958 461 2,345 1,406
----- ----- ----- ------
Income before income taxes 8,388 7,768 27,704 22,261
Provision for income taxes 3,238 2,922 10,833 8,580
Non-recurring tax benefit - - (1,119) -
----- ----- ------ -----
Total income taxes 3,238 2,922 9,714 8,580
Net income $5,150 $4,846 $17,990 $13,681
===== ===== ====== ======
.......................................................................................................
Basic earnings per common share .16 .16 .56 .45
Diluted earnings per common share .15 .14 .52 .41
.......................................................................................................
Weighted average common shares (Basic) 32,431 31,148 31,933 30,588
Weighted average common shares (Diluted) 34,505 34,090 34,525 33,190
.......................................................................................................
(1)Diluted earnings per share and weighted average common shares give retroactive effect to the 2-for-1
stock split 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
Three Months Ended Nine Months Ended
May 31, May 31,
In thousands and unaudited 2000 1999 2000 1999
.......................................................................................................
<S> <C> <C> <C> <C>
Net income $5,150 $4,846 $17,990 $13,681
Unrealized loss on investments,
net of taxes (55) - (81) -
----- ----- ------ ------
Comprehensive income $5,095 $4,846 $17,909 $13,681
===== ===== ====== ======
.......................................................................................................
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FactSet Research Systems Inc.
<CAPTION>
ASSETS
May 31, August 31,
In thousands and unaudited 2000 1999
...............................................................................
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $42,596 $31,837
Investments 22,874 22,934
Receivables from clients and clearing brokers 18,070 14,399
Receivables from employees 761 614
Prepaid taxes 2,223 -
Deferred taxes 5,585 6,437
Other current assets 418 413
------ ------
Total current assets 92,527 76,634
...............................................................................
LONG-TERM ASSETS
Property, equipment, and leasehold improvements, at cost 64,314 55,334
Less accumulated depreciation (42,656) (33,951)
------ ------
Property, equipment, and leasehold improvements, net 21,658 21,383
...............................................................................
OTHER LONG-TERM ASSETS
Deferred taxes 2,601 1,785
Other assets 1,771 1,742
------- -------
TOTAL ASSETS $118,557 $101,544
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, August 31,
In thousands, except per share data and unaudited 2000 1999
...............................................................................
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $4,934 $6,657
Accrued compensation 8,453 7,558
Deferred fees and commissions 7,667 6,964
Dividend payable 976 788
Current taxes payable - 1,522
------ ------
Total current liabilities 22,030 23,489
------ ------
...............................................................................
NON-CURRENT LIABILITIES
Deferred rent 517 441
------ ------
Total liabilities 22,547 23,930
------ ------
...............................................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock 329 316
Capital in excess of par value 18,029 14,160
Retained earnings 79,702 64,452
Treasury stock (1,976) (1,321)
Unrealized (loss) gain on investments, net of tax (74) 7
------ ------
Total stockholders' equity 96,010 77,614
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,557 $101,544
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FactSet Research Systems Inc.
<CAPTION>
In thousands and unaudited Nine Months Ended May 31, 2000 1999
......................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $17,990 $13,681
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 8,705 6,835
Deferred tax provision (benefit) 36 (446)
Accrued ESOP contribution 938 750
------ ------
Net income adjusted for non-cash operating items 27,669 20,820
Changes in working capital
Receivable from clients and clearing brokers (3,671) (3,589)
Other receivables - (2,374)
Prepaid taxes (2,223) (435)
Accounts payable and accrued expenses (1,723) 2,059
Accrued compensation 957 (1,011)
Deferred fees and commissions 703 1,969
Current taxes payable (1,522) (2,843)
Other working capital accounts, net (97) 576
------ ------
Net cash provided by operating activities 20,093 15,172
......................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments, net (21) -
Purchases of property, equipment, and
leasehold improvements (8,980) (12,793)
----- ------
Net cash used in investing activities (9,001) (12,793)
......................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend payments (2,353) (733)
Repurchase of common stock from employees (655) (437)
Proceeds from stock option exercises 1,708 2,369
Income tax benefits from stock option exercises 967 6,747
----- -----
Net cash (used in) provided by financing activities (333) 7,946
......................................................................................
Net increase in cash and cash equivalents 10,759 10,285
Cash and cash equivalents at beginning of period 31,837 37,631
------ ------
Cash and cash equivalents at end of period $42,596 $47,916
====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FactSet Research Systems Inc.
May 31, 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 in cash (in which case
subscription revenues are recorded as cash fees).
To facilitate the receipt of subscription revenues on a commission basis,
clients direct trades 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. 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. FactSet Limited has foreign branch operations
in London, and FactSet Pacific has foreign branch operations in 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 of operation and
financial position 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
miscellaneous expenses.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates have been made in areas including valuation allowances for
deferred tax 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 nine months ended May 31, 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 $1.8 million and $3.7 million at May 31, 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, after adjustment for the 2-for-1 stock split, 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's is evaluating accounting
policies pertaining to SAB No. 101 and does not expect the impact of
implementation to be material.
<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:
In thousands and unaudited 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at September 1, 31,538 29,020
Additional stock issued for ESOP 50 72
Exercise of stock options 975 2,221
Repurchase of common stock (24) (20)
------ ------
Balance at May 31, 32,539 31,293
====== ======
--------------------------------------------------------------------------------------------
A reconciliation between the weighted average shares outstanding used in the basic and
diluted EPS computations is as follows:
Net Income Shares Per Share
In thousands, except per share data and unaudited (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------
May 31 May 31 May 31
For the Three Months Ended 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Basic EPS
Net income available to common stockholders $5,150 $4,846 32,431 31,148 $0.16 $0.16
Diluted EPS
Dilutive effect of stock options - - 2,074 2,942
----- ----- ----- -----
Net income available to common stockholders $5,150 $4,846 34,505 34,090 $0.15 $0.14
===== ===== ====== ======
------------------------------------------------------------------------------------------------------------------------
May 31 May 31 May 31
For the Nine Months Ended 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Basic EPS
Net income available to common stockholders $17,990 $13,681 31,933 30,588 $0.56 $0.45
Diluted EPS
Dilutive effect of stock options - - 2,592 2,602
------ ------ ------ ------
Net income available to common stockholders $17,990 $13,681 34,525 33,190 $0.52 $0.41
====== ====== ====== ======
------------------------------------------------------------------------------------------------------------------------
</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 operations from four branch
offices 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. 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
................................................................................
For Three Months Ended May 31, 2000
<S> <C> <C> <C>
Revenues from external clients $28,455 $5,840 $34,295
Segment operating profit* 5,238 2,192 7,430
Total assets at May 31, 2000 110,089 8,468 118,557
Capital expenditures 738 1,076 1,814
................................................................................
For Three Months Ended May 31, 1999
Revenues from external clients $22,693 $3,758 $26,451
Segment operating profit* 5,936 1,371 7,307
Total assets at May 31, 1999 86,442 6,556 92,998
Capital expenditures 2,133 1,498 3,631
................................................................................
For the Nine Months Ended May 31, 2000
Revenues from external clients $81,312 $15,752 $97,064
Segment operating profit* 19,104 6,255 25,359
Capital expenditures 6,862 2,118 8,980
................................................................................
For the Nine Months Ended May 31, 1999
Revenues from external clients $64,885 $10,631 $75,516
Segment operating profit* 16,464 4,391 20,855
Capital expenditures 10,628 2,165 12,793
................................................................................
</TABLE>
* Expenses are not allocated or charged between segments. Expenditures
associated with the Company's computer centers, software development costs,
clearing fees, data fees, income taxes, and corporate headquarter charges are
recorded by the U.S. segment.
Two separate regions (Europe and the Pacific Rim) were aggregated to form the
International segment. The Europe and Pacific Rim segments have similar market
characteristics and each offers identical products and services through a common
distribution method to financial services institutions.
5. NON-RECURRING RETIREMENT BONUS
On May 22, 2000, the Company announced the retirement of Howard E. Wille as
Chief Executive Officer of the Company. He will also retire as Chairman of the
Board effective August 31, 2000 and will remain a director of the Company. In
recognition of his service and contribution for the past 22 years, the Company
awarded Mr. Wille a retirement bonus, to be paid upon his retirement as Chairman
of the Board. This resulted in a non-recurring charge of $2.75 million in the
third quarter.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenues
For the third quarter ended May 31, 2000, revenues increased 29.7% to $34.3
million versus $26.5 million for the same period a year ago. Revenues during the
first nine months of fiscal 2000 increased 28.5% from $75.5 million to $97.1
million. Subscriptions by existing users to additional services and databases,
as well as the net addition of 97 new clients over the past twelve months drove
revenue growth.
Quarterly revenues from international operations were up 55.4% and totaled $5.8
million. Revenue growth from European operations was 55.5% over the same period
a year ago and Asia Pacific revenues grew by 55.3% for the same period. Overseas
revenues over the first nine months of fiscal 2000 increased 48.2% to $15.8
million versus the comparable period of fiscal 1999. Revenues from international
sources accounted for over 16% of consolidated revenues for both the third
fiscal quarter and the first nine months of fiscal 2000.
Client Retention and Commitments
Client retention for fiscal 2000, including the third quarter, continued at a
rate in excess of 95%. As of May 31, 2000, total client commitments were $142.5
million, a 29.5% increase over the $110.1 million reported a year ago. The
addition of new clients, additional workstations by existing clients and new
products and services aimed at portfolio managers and investment bankers were
among the key contributors to the commitment increase. During the quarter, the
number of clients using FactSet rose to 717. At May 31, 2000, approximately 160
clients, representing nearly 1,200 users subscribed to FactSet's portfolio
analytics 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.) In addition, during the quarter, a leading
investment bank agreed to purchase 950 ProActive Publishing workstations for
installation on a global basis. Internationally, commitments totaled $25
million, representing approximately 18% of total commitments. The average
commitment from clients increased 12% to $199,000. As a matter of policy, the
Company generally does not seek to enter into written contracts with its clients
and clients can add or delete services at any time. Commitments have
historically grown in virtually every month.
Password count, which represents the number of FactSet users, at the end of May
2000 was approximately 22,000, up 22% from the comparable period in 1999.
Operating Expenses
Cost of Services
Cost of services for the quarter ended May 31, 2000 increased 20.1% to $11.4
million compared to the prior year period. For the first nine months of the
year, cost of services increased 23.9% to $33.5 million. The increase in cost of
service expenses for the third quarter was primarily the result of higher
employee compensation. For the nine months ended May 31, 2000, cost of services
increased largely due to higher employee compensation, clearing fees, and
depreciation expenses.
Employee Compensation and Benefits
Employee compensation and benefits for the applications engineering and
consulting groups increased $1.1 million for the quarter and rose $3.1 million
for the nine months ended May 31, 2000. Employee additions and additional merit
compensation drove this increase. In order to sustain the continuing growth and
the expanding client base of the Company, the applications engineering and
consulting groups have increased staff by 17% since the third quarter of fiscal
1999.
Clearing Fees
Clearing fees rose $1.3 million for the first nine months of the fiscal year.
This increase was the result of higher client commission payments and clearing
rates emanating from clients paying through international trades.
Depreciation Expense
For the quarter ended May 31, 2000, depreciation expense growth was relatively
flat. Increased depreciation expense related to new capital spending was
partially offset by a decrease in depreciation expense caused by equipment
becoming fully depreciated in the third fiscal quarter of 2000. For the nine
months ended May 31, depreciation expense grew by $1.4 million over the same
period a year ago. This increase is the result of higher levels of computer and
communication equipment spending to support FactSet's growing user base. Capital
spending for the first nine months of fiscal 2000 was $9 million.
<PAGE>
Selling, General, and Administrative
During the third quarter of fiscal 2000, selling, general, and administrative
(SG&A) expenses grew 31.7% over the comparable period in the prior year,
totaling $12.7 million. During the first nine months of fiscal 2000, SG&A
expenses rose 28.4% to $35.4 million. The increase in SG&A expenses for the
third quarter was primarily the result of higher employee compensation and
travel, offset by lower taxes other than income taxes. For the nine months ended
May 31, 2000, SG&A increased largely due to higher employee compensation, travel
and entertainment expense, and rent expense and amortization of leasehold
improvements.
Employee Compensation and Benefits
During the third quarter of fiscal 2000, employee compensation and benefits for
the sales, product development, and various other support departments grew by
$1.8 million. For the nine months ended May 31, 2000, employee compensation rose
$3.6 million. These increases were the result of employee headcount growth of
34% during the 12 months ended May 31, 2000.
Travel and Entertainment Expense
Travel and entertainment (T&E) expense increased $540,000 for the quarter ended
May 31, 2000. For the nine months ended May 31, 2000, T&E grew $1.3 million. The
growth in T&E expense for both periods resulted from employees servicing an
expanding global client base.
Taxes Other Than Income Taxes
In the third fiscal quarter of 2000, the Company reached a settlement with a
state tax authority, thereby reducing the expense for taxes other than income
taxes for the third quarter of fiscal 2000 versus the same period a year ago.
The settlement did not have a negative impact on the Company's results of
operations or financial position, as the payment made on settlement was charged
to existing reserves.
Rent Expense and Amortization of Leasehold Improvements
For the nine months ended May 31, 1999, rent and amortization expense increased
$1.1 million. These increases were the result of office openings in New York,
Stamford, Hong Kong and Sydney, and office expansions in San Mateo and Tokyo.
Non-recurring Retirement Bonus
In the third quarter of fiscal 2000, the Company recorded a non-recurring charge
of $2.75 million in connection with a retirement bonus awarded by the Board of
Directors to Howard E. Wille, Co-Founder, Chairman of the Board, and former CEO.
Mr. Wille retired as CEO on May 22, 2000 and will retire as Chairman of the
Board effective August 31, 2000. Mr. Wille will remain a director of the
Company.
Foreign Currency
More than 95% of the Company's revenues are collected in U.S. dollars. The net
monetary assets held by the Company's foreign offices during fiscal 2000 were
immaterial. As a result, the Company's exposure to foreign currency fluctuations
was insignificant.
Operating Margin
Operating margin for the quarter ended May 31, 2000, was 21.7%, down from 27.6%
a year ago. Not including the non-recurring retirement bonus, the operating
margin was 29.7% for the quarter, an increase of over two percent. Operating
margin for the nine months ended May 31, 2000 was 26.1%, down from 27.6% from
the same period a year ago. Not including the non-recurring retirement bonus,
the operating margin was 29.0% for the nine months ended May 31, an increase of
over one percent. These increases were largely the result of three factors;
first, the reduction in depreciation expense as a percent of revenues, second,
the elimination of the need to accrue for taxes other than income taxes, both of
which are discussed above, and third, declining data costs.
Income Taxes
Income tax expense for the first nine months of fiscal 2000 was $9.7 million.
Included in this amount was a non-recurring tax benefit of $1.1 million,
recorded in the second quarter. Without this one-time benefit, the effective tax
rate would have been 39% for both nine-month periods ended May 31, 1999 and
2000.
Liquidity
For the nine months ended May 31, 2000, cash generated by operating activities
was $20.1 million compared to $15.2 million in the year earlier period. This
$4.9 million increase was the result of higher levels of profitability, higher
levels of depreciation and amortization expense, and income tax refunds received
in the second quarter, offset by a reduction in accounts payable and accrued
expenses.
Capital Expenditures
The Company's capital expenditures totaled $9.0 million for the first nine
months of fiscal 2000. Capital expenditures related primarily to purchases of
computer and communications equipment, including the purchase of a new computer
integration phone system. When installed, this system will allow for more
efficient servicing of incoming client support calls. Currently, each of the
Company's two data centers consists of six Compaq Alpha GS 140 systems,
containing a total of 48 700-megahertz/64 bit CPUs, 96 GB of RAM and over 3.3
terabytes of disk space. Total capital spending for the fiscal year is expected
to be close to $15 million.
<PAGE>
Financing Operations and Capital Needs
At quarter end, cash, cash equivalents and investments represented 55% or nearly
$66 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 May 15, 2000, the Company announced that its Board of Directors approved a
regular quarterly cash dividend of $0.03. The regular quarterly cash dividend
was paid on June 21, 2000 to Common Stockholders of record at the close of
business on May 31, 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 correlation
between results of the Company's operations and the performance of global equity
markets. Nevertheless, a prolonged 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 May 31, 2000 was
$22.9 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 over 95% of the Company's revenues
are paid 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.
<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
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
4.1.....................................................Form of Common Stock (1)
10.1............................Form of Employment Agreement between the Company
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)
10.33...............Retirement Agreement between the Company and Howard E. Wille
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:
On May 26, 2000, the Company filed a report on Form 8-K which announced the
retirement of Chief Executive Officer, Howard E. Wille. A copy of the Company's
press release announcing this matter was attached and incorporated by reference
therein.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FACTSET RESEARCH SYSTEMS INC.
Date: July 14, 2000 BY: /s/ ERNEST S. WONG
Ernest S. Wong,
Senior Vice President, Chief Financial Officer
and Secretary
