<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
OR
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 0-19690
BARRA, INC.
(Exact name of registrant as specified in its charter)
California 94-2993326
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1995 University Avenue, Suite 400
Berkeley, California 94704-1058
(Address, including zip code, of principal executive offices)
(510) 548-5442
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of the registrant's Common Stock outstanding as of
December 31, 1996 was 8,373,221.
Exhibit Index is located on page 21.
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INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Unaudited Consolidated Balance Sheets as of December 31, 1996
and as of March 31, 1996 3
Unaudited Consolidated Statements of Income for the Three
Months and Nine Months Ended December 31, 1996 and
December 31, 1995 4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1996 and December 31, 1995 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PAGE
NUMBER
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
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PART I Financial Information
ITEM 1. FINANCIAL STATEMENTS.
BARRA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1996 AND MARCH 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
31-Dec-96 31-Mar-96
---------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $18,693,189 $22,493,363
Accounts receivable:
Trade (Less allowance for doubtful accounts of $143,000 and $129,237) 17,966,378 12,303,850
Other 451,176 522,112
Related parties 497,435 45,899
Short-term investments 4,292,728 3,511,518
Investment in municipal debt securities - available for sale 6,758,700 --
Prepaid expenses 1,252,935 822,450
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 49,912,541 39,699,192
- ------------------------------------------------------------------------------------------------------------------------------
NOTES RECEIVABLE 7,362,139 1,658,960
NON-MARKETABLE INVESTMENTS 169,925 7,300,347
FURNITURE AND EQUIPMENT:
Computer equipment 11,249,324 8,716,136
Office equipment 667,037 729,248
Furniture and fixtures 3,717,184 3,335,342
- ------------------------------------------------------------------------------------------------------------------------------
Total furniture and equipment 15,633,545 12,780,726
Less accumulated depreciation and amortization (9,254,295) (7,742,149)
- ------------------------------------------------------------------------------------------------------------------------------
6,379,250 5,038,577
DEFERRED TAX ASSETS 1,584,431 1,584,431
COMPUTER SOFTWARE
(Less accumulated amortization of $507,817 and $422,953) 576,888 971,077
INTANGIBLES AND OTHER ASSETS
(Less accumulated amortization of $1,206,588 and $492,482) 8,643,255 7,796,401
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $74,628,429 $64,048,985
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,858,510 $1,368,466
Due to related party 705,308 567,201
Accrued expenses payable:
Accrued compensation 6,021,959 4,850,817
Accrued corporate income taxes 2,662,883 2,250,098
Other accrued expenses 5,414,411 4,035,904
Former shareholder notes payable and line of credit 725,426 1,594,534
Unearned revenues 11,950,031 11,883,577
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 29,338,528 26,550,597
- ------------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES:
Deferred tax liabilities 1,469,587 1,217,817
Long-term debt -- 1,384,380
- ------------------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 1,469,587 2,602,197
- ------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 327,711 --
SHAREHOLDERS' EQUITY:
Preferred stock, no par; 10,000,000 shares authorized; non issued and outstanding
Common stock, no par; 40,000,000 shares authorized; 8,373,221 shares and
8,300,484 shares issued and outstanding 12,415,316 12,487,184
Retained earnings 31,311,829 22,393,261
Foreign currency translation adjustment (234,542) 15,746
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,492,603 34,896,191
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $74,628,429 $64,048,985
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
3
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BARRA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------- ------------------------------
1996 1995 1996 1995
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Subscription and consulting fees $19,004,617 $16,690,396 $55,337,648 $46,943,461
Electronic brokerage and information 2,573,056 1,650,638 7,279,543 4,604,916
Asset management 6,306,702 2,228,740 12,667,773 5,302,461
-------------------------- --------------------------
Total operating revenues 27,884,375 20,569,774 75,284,964 56,850,838
-------------------------- --------------------------
OPERATING EXPENSES:
Cost of subscription products 1,867,445 1,694,466 5,427,290 4,474,014
Compensation and benefits 13,153,782 10,714,823 37,260,274 30,058,723
Rent expense 1,000,976 965,601 2,970,214 2,891,645
Other operating expenses 4,879,185 4,751,921 13,757,247 11,442,020
Merger costs and one-time charges -- -- 1,756,189 --
-------------------------- --------------------------
Total operating expenses 20,901,388 18,126,811 61,171,214 48,866,402
-------------------------- --------------------------
INTEREST INCOME & OTHER 533,471 239,487 1,498,836 1,147,041
-------------------------- --------------------------
INCOME BEFORE EQUITY IN NET INCOME AND LOSS OF
INVESTEES, MINORITY INTEREST AND INCOME TAXES 7,516,458 2,682,450 15,612,586 9,131,477
EQUITY IN NET INCOME AND LOSS OF INVESTEES (147,213) (68,855) (256,330) (667,616)
MINORITY INTEREST 55,623 (32,022) 234,166 (211,525)
-------------------------- --------------------------
INCOME BEFORE INCOME TAXES 7,424,868 2,581,573 15,590,422 8,252,336
INCOME TAXES (3,210,760) (1,350,535) (6,671,854) (3,804,254)
-------------------------- --------------------------
NET INCOME $4,214,108 $1,231,038 $8,918,568 $4,448,082
-------------------------- --------------------------
-------------------------- --------------------------
NET INCOME PER SHARE:
PRIMARY $0.45 $0.14 $0.96 $0.51
-------------------------- --------------------------
-------------------------- --------------------------
FULLY-DILUTED $0.45 $0.14 $0.95 $0.50
-------------------------- --------------------------
-------------------------- --------------------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES:
PRIMARY 9,347,899 8,873,539 9,306,732 8,703,054
-------------------------- --------------------------
-------------------------- --------------------------
FULLY-DILUTED 9,377,746 9,010,936 9,358,544 8,944,763
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
4
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BARRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended,
December 31,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $8,918,568 $4,448,082
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income and loss of investees 256,330 667,616
Minority interest (234,166) 211,525
Depreciation and amortization 1,512,146 1,078,391
Amortization of computer software and intangibles 1,005,642 132,074
Dividends received from investee (226,583) (207,920)
Gains on marketable securities (315,353) (320,000)
One-time charges - Capitalized software 448,426 --
Other 219,620 139,899
Changes in:
Trade accounts receivable (5,534,709) (208,094)
Other accounts receivable (189,473) (28,211)
Related parties receivable (451,536) 160,810
Prepaid expenses (398,083) (357,923)
Prepaid corporate income taxes -- (267,762)
Other assets 436,688 (536,669)
Accounts payable, due to related party and accrued expenses 3,434,123 2,344,013
Unearned revenues (28,131) (119,190)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,853,509 7,136,641
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,602,095) (1,556,901)
Short-term investments - net (465,857) 3,719,937
Investment in municipal debt securities - available for sale (6,758,700) --
Exercise of Options -- 156,969
Purchase of Model Rights -- (4,447,280)
Non-marketable investments:
Investments in affiliates (875,000) 84,819
Dividends received from investee 226,583 207,920
Note receivable issued -- (1,600,000)
Consolidation of Bond Express L.P. - cash acquired 146,742 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,328,327) (3,434,536)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and lines of credit 445,140 710,618
Repayments on notes payable and lines of credit (2,698,628) --
Proceeds from sale of common stock 530,105 823,920
Common stock repurchased (601,973) (2,806,598)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,325,356) (1,272,060)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,800,174) 2,430,045
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,493,363 16,042,932
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,693,189 $18,472,977
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $142,245 $116,766
Income taxes $4,351,990 $2,930,012
Non-cash investing transactions during the period for:
Exchange of equity interest in LBIC for debt (Note 6) $7,219,458 --
Consolidation of Bond Express (Note 4):
Note receivable ($2,100,000) --
Net assets acquired $1,139,726 --
Minority Interest $512,877 --
Goodwill $1,473,151 --
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements
5
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include BARRA, Inc. (the
"Company" or "BARRA") and its subsidiaries: BARRA International, Ltd.; BARRA
International (U.K.), Ltd.; BARRA International (Japan), Ltd.; Berkeley Advisors
Holding Company; BARRA (FSC), Inc.; BARRA (U.S.A.), Inc.; Symphony Asset
Management, Inc. ("Symphony"); and Rogers, Casey & Associates, Inc. and
subsidiaries (collectively "RCA" - see Note 2). The financial position and
results of operations for Bond Express L.P. have also been consolidated
beginning June 1, 1996 (see Note 4). All significant intercompany transactions
and balances have been eliminated. Certain reclassifications have been made to
prior year financial statements to conform to current year presentation.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (consisting of normal recurring entries)
necessary to present fairly the financial position of BARRA as of December 31,
1996 and the results of its operations and cash flows for the periods presented
in conformity with generally accepted accounting principles. The results of
operations for the interim periods are not necessarily indicative of results of
operations for a full year. The March 31, 1996 consolidated balance sheet is
derived from the unaudited consolidated balance sheet of RCA (see Note 2) and
the audited consolidated financial statements included in BARRA's Annual Report
which was incorporated by reference in its Form 10-K for the fiscal year ended
March 31, 1996, and filed with the Securities and Exchange Commission on
June 20, 1996 (the "Form 10-K"), but does not include all disclosures required
by generally accepted accounting principles. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes incorporated by reference in the
Form 10-K and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this Form 10-Q.
2. BUSINESS COMBINATION
On July 24, 1996, BARRA merged with RCA, a firm specializing in investment
consulting to money managers and pension plan sponsors. All of the common stock
and outstanding options of RCA were exchanged for 481,364 shares of BARRA's
common stock and 30,257 options on BARRA common stock. This merger was
accounted for as a pooling-of-interests. The pooling-of-
6
<PAGE>
interests method of accounting is intended to present as a single interest two
or more common shareholders' interests which were previously independent;
accordingly, the unaudited financial information presented here reflects the
combined results of BARRA and RCA for all periods presented.
All fees and expenses related to the merger have been expensed as required under
the pooling-of-interests method of accounting. These fees and expenses were
$1,307,763 for the nine months ended December 31, 1996 and consisted primarily
of fees for legal and accounting services, investment banking fees and costs
associated with integrating the operations of the combined companies. The
Company also recorded a one-time charge of $448,426 related to the write-off of
capitalized software on the books of RCA at the time of the merger.
The operating results of the separate companies prior to the merger were as
follows:
Three months ended December 31, 1995:
Revenues Net Income(Loss)
-------- ----------------
BARRA $15,973,936 $2,008,676
RCA 4,595,838 (777,638)
----------- -----------
Combined $20,569,774 $1,231,038
Nine months ended December 31, 1995:
Revenues Net Income(Loss)
-------- ----------------
BARRA $44,640,212 $5,171,529
RCA 12,210,626 (723,447)
----------- ----------
Combined $56,850,838 $4,448,082
3. REORGANIZATION OF SYMPHONY ASSET MANAGEMENT
Effective July 1, 1996, the Company's wholly owned subsidiary, Symphony Asset
Management, Inc.("Symphony"), contributed its assets, liabilities and
business to Symphony Asset Management LLC ("SAM LLC"), a newly formed entity,
in exchange for interests in SAM LLC pursuant to an Operating Agreement of
Symphony Asset Management LLC (the "Agreement"). The capitalization of SAM
LLC consists of four defined Interest Classes (Class 1, Class 2, Class 3 and
Class 4). Class 1, Class 2 and Class 4 interests belong to Symphony (which
continues to be wholly owned by the Company) while Class 3 interests belong
to a newly formed limited liability company, Maestro, LLC ("Maestro"), whose
owners are principals of SAM LLC.
The Agreement also provides for a bonus to be paid to certain employees of SAM
LLC equal to 25% of SAM LLC profits (as
7
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defined). This bonus is only in effect until the Class 2 interests are
redeemed. In the quarter ended December 31, 1996, the Class 2 interests were
redeemed and the bonus will be replaced by a profits interest that will start at
25% and could grow to a maximum of 50% depending upon future levels of SAM LLC
operating income.
The Company had previously consolidated Symphony and will consolidate the
financial position and results of operations of SAM LLC and separately record
the Class 3 interest share of net assets and net income as a minority interest.
4. CONSOLIDATION OF BOND EXPRESS, L.P.
In August 1995 the Company committed to make a long-term loan of $2,100,000
to Bond Express, L.P. ("Bond Express"). Bond Express is a distributor, on a
subscription basis, of software and databases of fixed income security
offering information from bond dealers. During the quarter ended June 30,
1996, the Company fully disbursed its remaining commitment on the loan which
activated the Company's option to convert its interest in Bond Express from
debt to a 55% controlling equity interest. While this option has not been
exercised, the Company believes that it has operational and financial control
over Bond Express. Accordingly, beginning June 1, 1996, the Company has
consolidated the financial position and results of operations of Bond
Express. The difference between the Company's investment (principally its
note receivable) and the net assets of Bond Express at June 1, 1996 of
approximately $1.5 million has been recorded as goodwill and will be
amortized over a period of 10 years. Bond Express had operating revenues of
$324,342 and $701,849 and operating expenses of $754,188 and $1,528,458 for
the three and nine month periods ended December 31, 1996, respectively, which
have been combined with BARRA's consolidated results of operations for the
same periods. Subsequent to June 1, 1996, the Company has disbursed an
additional $115,000 to Bond Express on terms similar to the existing note
receivable. The minority interest's share (45%) of net assets and net losses
has been shown separately in the consolidated financial statements.
5. INVESTMENT IN MUNICIPAL DEBT SECURITIES
Beginning in April 1996 the Company, through an unaffiliated professional
portfolio manager, began investing a portion of its available cash resources
in debt securities issued by various state and county municipalities. The
Company has classified these securities as available for sale pursuant to the
criteria established by SFAS 115 "Accounting for Certain Investments in
Marketable Equity and Debt Securities".
8
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Accordingly, the securities are reported at their fair value in the consolidated
statement of financial position with any unrealized net gains or losses
reported as a separate component of stockholders' equity. At December 31, 1996,
the Company had $6,758,700 in municipal debt securities - available for sale and
no unrealized gains or losses.
6. INVESTMENT IN LIBERTY BROKERAGE INVESTMENT CORPORATION
As previously reported in the Company's Annual Report for the fiscal year ending
March 31, 1996, the Company exchanged its investment in preferred stock of
Liberty Investment Brokerage Corp. (LBIC) for a $7,219,474 convertible secured
7.84% promissory note on April 16, 1996. The principal amount of the note
receivable issued by LBIC was equal to the Company's investment balance on the
date of the exchange. Prior to the exchange, the Company accounted for its
investment in LBIC using the cost method. Accordingly, the transaction resulted
in a reclassification of the Company's investment from non-marketable
investments to note receivable in the accompanying consolidated balance sheet.
Principal payments on the note receivable are due in installments of $1,804,869
on March 31, 1997, and September 30, 1997, respectively, and the remaining
balance is due on March 31, 1998.
7. NET INCOME PER SHARE
Net income per share is computed using the primary and fully diluted weighted
average number of common shares outstanding during the period as adjusted for
the shares issued in the merger described in Note 2 and after including the
effect on dilution, if any, of the exercise of common stock options using the
treasury stock method.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
BARRA, Inc. ("BARRA" or the "Company") unaudited financial statements and
related notes presented in this Form 10-Q. The discussion of results, causes or
trends should not be construed to imply that such results, causes or trends will
necessarily continue in the future. Each statement made in this discussion and
analysis and elsewhere in this report containing any form of the words
"anticipate", "expect," "believe," "future" or "forward" is a forward-looking
statement that may involve a number of risk factors and uncertainties. Among
other factors that could cause actual results to differ materially are the
following: business conditions and other changes in the Company's industry;
competitive factors such as rival products and price pressures both domestically
and internationally; availability of adequate third-party data on reasonable
terms and at reasonable prices; significant delays or excessive costs associated
with product research, development and/or introduction; the loss of a large
single revenue source; the investment performance and the timing of performance
fee determination dates for the Company's asset management subsidiary;
significant changes in trading volumes on the POSIT trading system; and
fluctuations in U.S. dollar exchange rates for non-U.S. currencies. Further
information and potential risk factors that could affect the Company's financial
results are included in the Company's Form 10-K for the fiscal year ended March
31, 1996.
A. GENERAL
Certain of the information required by this item has been previously reported
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Form 10-K.
As discussed in Note 2 to the financial statements, on July 24, 1996, BARRA
merged with RCA. The unaudited financial information presented here reflects the
combined results of BARRA and RCA for all periods presented.
As discussed in Note 4 to the financial statements provided in Part I, the
Company consolidated Bond Express, L.P. beginning June 1, 1996. Accordingly,
the following discussion of changes in financial position and results of
operations for the three month and nine month periods ending December 31,
10
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1996 includes related amounts from Bond Express for the period beginning June 1,
1996 only.
FOREIGN CURRENCY
BARRA, as an international corporation, generates revenues from clients
throughout the world, maintains sales and representative offices world-wide and
holds certain deposits and accounts in foreign currencies. BARRA's revenues are
generated from both United States and foreign currencies. BARRA's subscriptions
in the United Kingdom and the European Community are priced in British pounds
sterling ("pounds") and European Currency Units ("ECUs"), respectively.
Additionally, BARRA's consolidated subsidiary, BARRA International (Japan), Ltd.
("BARRA Japan", formerly N.B. Investment Technology Co., Ltd.), generates
revenues, has expenses and has assets and liabilities in Japanese yen. All
other things being equal, weakening of the U.S. dollar has a positive impact on
profits, and strengthening of the U.S. dollar has a negative impact. The
Company has considered its exposures to foreign currency fluctuations and to
this point has decided not to engage in hedging or managing exposures to foreign
currency fluctuations through contracts for the purchase, sale or swapping of
currencies.
For the quarter ended December 31, 1996, when compared to the same quarter a
year ago, the U.S. dollar continued to strengthen against the yen, and
weakened against the pound and the ECU - all of which had the net effect of
increasing the dollar value of net revenues denominated in these non-U.S.
currencies. Although the strengthening of the U.S. dollar against the yen
had a significant negative impact on revenues and net income, the Company
estimates that the overall net impact of all currency fluctuations was
$120,000 in increased consolidated operating revenues and approximately
$20,000 in increased consolidated net income for the quarter ended December
31, 1996 when compared to the same quarter a year ago.
Because the functional currency of BARRA Japan is the yen, the translation gains
and losses associated with the consolidation of its balance sheets at points in
time are reported as part of shareholders' equity.
Under current operating arrangements in the countries in which BARRA does
business, there are no restrictions upon the flow of funds from BARRA's foreign
subsidiary to the parent company. There are currently no known commitments or
requirements for material capital expenditures outside of the United States.
11
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B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The dollar and percentage increases or decreases set forth below in this
discussion and analysis of BARRA's consolidated financial condition result from
a comparison of BARRA's balance sheet at December 31, 1996 to the balance sheet
at March 31, 1996. All amounts have been rounded to the nearest $1,000.
FINANCIAL CONDITION
Total assets increased $10,579,000 or 16.5%.
Total current assets increased $10,213,000 or 25.7%. This net increase consisted
primarily of increased cash, investments and trade receivables (principally from
performance fee billings) resulting from business growth.
Notes receivable increased $5,703,000 and Non-Marketable investments decreased
$7,130,000 primarily as a result of the Company's exchange of its investment in
preferred stock of LBIC into a note receivable of approximately $7,219,000 (see
Note 6 to the financial statements provided in Part I) offset by the
consolidation of Bond Express which resulted in a $1,600,000 reduction when
compared to the amount outstanding at March 31, 1996.
Intangibles and other assets increased by $847,000. This increase was almost
entirely due to the Company's consolidation of Bond Express resulting in
additional goodwill of approximately $2,100,000; $600,000 of which related to a
prior transaction recorded on the financial statements of Bond Express that was
unrelated to the consolidation. This increase was partially offset by the
amortization of intangibles during the period totaling approximately $800,000.
Total current liabilities increased by $2,788,000 or 10.5% primarily due to
increases in accruals and unearned revenues associated with the general growth
of BARRA's business and the timing of advanced payments received on subscription
contracts offset by repayments on notes payable and lines of credit.
Long-term debt, principally RCA loans, was re-paid during the quarter without
premium.
Minority interest in equity of subsidiary represents the 45% and Class 3
interests in the net assets of Bond Express and SAM LLC, respectively, not owned
by the Company.
Shareholders' equity in common stock decreased by $72,000 reflecting the net
result of RCA contractually required share repurchases prior to the merger and
the issuance of BARRA
12
<PAGE>
common stock during the quarter in connection with exercises of stock options
under the Company's Employee Stock Option Plan and shares purchased under the
Employee Stock Purchase Plan.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, short-term investments and investment in municipal
debt securities available-for-sale totaled $29,745,000 at December 31, 1996. In
addition, the Company has a commitment from a bank for an unsecured short-term
line of credit of up to $5 million - of which, no amounts have been, or are
presently anticipated to be, drawn down.
BARRA believes that its cash flow from operations (including prepaid
subscription fees), together with existing cash balances, will be sufficient to
meet its cash requirements for capital expenditures and other cash needs for
ongoing business operations. Other than what has been described herein, the
Company has no present binding understandings or commitments with respect to
any significant acquisitions.
PRINCIPAL FINANCIAL COMMITMENTS. The Company's principal financial commitments
consist of obligations under operating leases and contracts for the use of
computer and office facilities.
C. RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set forth below
in this discussion and analysis of BARRA's results of operations are derived
from comparisons of BARRA's consolidated statements of income for the three
months and nine months ended December 31, 1996 and December 31, 1995. All
amounts, except per share amounts, have been rounded to the nearest $1,000.
NET INCOME
NET INCOME for the current quarter was $4,214,000 or $0.45 per share, compared
to $1,231,000 or $0.14 per share for the same quarter a year ago, and $8,919,000
or $0.96 per share for the nine months ended December 31, 1996 compared to
$4,448,000 or $0.51 per share for the same period a year ago. Net income for
the nine months ended December 31, 1996 is computed after merger costs and one-
time charges of $1,756,000 or $0.11 per share related to the acquisition of RCA.
OPERATING REVENUES. Total operating revenues increased $7,315,000 or 36% over
the same quarter a year ago and $18,434,000 or 32% over the same nine month
period a year ago.
13
<PAGE>
SUBSCRIPTION AND CONSULTING FEES consist of annual subscription fees for BARRA's
software products and revenues from other sources related to the core
institutional analytics business (which include timesharing revenues, seminar
revenues and other recurring and one-time fees) and consulting services to
pension plan sponsors and investment managers. Total subscription and consulting
fees increased $2,314,000 or 14% over the same quarter a year ago and $8,394,000
or 18% over the same nine month period a year ago.
SUBSCRIPTION AND RELATED FEES increased $1,865,000 or 15% over the same quarter
a year ago and $5,889,000 or 16% over the same nine month period a year ago.
The following discusses changes in the primary sources of subscription and
related fees for the three month and nine month periods ending December 31, 1996
compared to the same periods a year ago:
ANNUAL SUBSCRIPTION FEES FOR BARRA'S SOFTWARE PRODUCTS increased approximately
$2,624,000 or 25% compared the same quarter a year ago and $6,657,000 or 22%
compared to the same nine month period a year ago. The growth in annual
subscription fees continues to be generated from a combination of both obtaining
new clients through entry into new markets as well as increasing revenues from
existing customers through the introduction of new products and services. For
the three months ended December 31, 1996 compared to the same quarter a year
ago, annual subscription fees revenue for the U.S and non-U.S. markets increased
approximately 24% and 25%, respectively. For the nine months ended December 31,
1996 compared to the same period a year ago, annual subscription fees revenue
for the U.S and non-U.S. markets increased approximately 28% and 19%,
respectively. For both markets, revenue growth primarily came from equity
models and related data reflecting the continued success of the BARRA Aegis
System-TM-. Fixed Income product sales also contributed to the non-US increase
as a result of sales of the BARRA COSMOS System-TM-, which was introduced in
May, 1996. Increases in subscription revenues continue to come most
significantly from net increases in the number of subscriptions and less
significantly from changes in the prices of subscriptions. With respect to the
non-U.S. markets, the U.S. dollar strengthened against the yen and weakened
against both the pound and the ECU - all of which had the net effect of
increasing the dollar value of these revenues for the current quarter which are
denominated in non-U.S. currencies.
REVENUES FROM OTHER SOURCES RELATED TO THE CORE INSTITUTIONAL ANALYTICS BUSINESS
- - which include timesharing revenues, seminar revenues and other recurring and
one-time fees - represent approximately 10% and 12% of total subscription and
14
<PAGE>
related fees for the three and nine month periods ended December 31, 1996
compared to 17% and 16% for the same periods a year ago. The decline in the
relative and absolute amounts of this component of revenue continues to be
the result of the conversion of clients from timesharing to in-house
computers for running BARRA's products, changes in the timing of various
royalties, and declines in one-time fees associated with various projects as
a result of a de-emphasis on such revenue opportunities.
CONSULTING FEES
Consulting fee revenues increased $448,000 or 11% from the same quarter a year
ago and $2,506,000 or 23% from the same nine month period a year ago.
Consulting fees consist primarily of services to pension plan sponsors ("Sponsor
Services") which are usually recurring retainer-based fee arrangements, and
consulting to money managers ("Strategic Services"), which are usually non-
recurring, project type engagements that are completed in phases. Also included
in Strategic Services revenues are fees related to consulting work done in
connection with strategic transactions involving clients. Accordingly,
Strategic Services revenues are susceptible to a large degree of variability
depending on the ability to source new projects and the unpredictable nature and
significance of fees associated with strategic transactions.
ELECTRONIC BROKERAGE AND INFORMATION ELECTRONIC BROKERAGE AND INFORMATION
revenues increased $922,000 or 56% compared to the same quarter a year ago
and $2,675,000 or 58% compared to same nine month period a year ago. This
component of revenue consists principally of license fees from Portfolio
System for Institutional Trading ("POSIT"), which in itself increased
$598,000 or 36% compared to the same quarter a year ago and $1,973,000 or 43%
compared to the same nine month period a year ago. BARRA's revenues from
POSIT are derived from commissions generated by the trading volume in the
system. POSIT revenue increases reflect higher trading volumes attributed to
overall higher market trading activity during the quarter as well as greater
usage of the system by its major participants. The consolidation of Bond
Express accounted for $324,000 and $702,000 of the increases from the three
and nine month periods ended December 31, 1995.
ASSET MANAGEMENT
ASSET MANAGEMENT revenues increased $4,078,000 or 183% compared to the same
quarter a year ago and $7,365,000 or 139% compared to the same nine month
period a year ago. Asset management revenues consist of business from both
Symphony and RCA asset management services, which include management of
15
<PAGE>
customized multi-manager programs and advisory services for private market
investment programs.
Symphony's revenues consist primarily of asset management fees which are a fixed
percentage of asset value and performance fees that are based on the performance
over a benchmark for each account. Symphony's total revenues were $5,085,000
for the current quarter and $9,143,000 for the nine month period ended December
31, 1996 compared to $1,092,000 and $2,272,000 for the same periods a year ago.
Performance fees included in total revenues were $4,084,000 and $6,232,000, for
the current fiscal quarter and nine month period compared to $205,000 and
$405,000 for each of the same periods a year ago. Performance fees are
recognized only at the measurement date for determining performance of an
account, which typically is at the end of the first year of the contract and at
the end of each subsequent measurement period thereafter. The increase in
performance fee revenues for the December 1996 quarter is the result not only of
good investment performance, but the fact that approximately 39% of the
performance based funds under management had anniversary fee determination dates
in the quarter. It is estimated that approximately 20% of the performance based
funds under management will have performance fee determination dates in the
quarter ended March 31, 1997. Because of an improving pattern of investment
performance, however, it is likely that performance fees for the March 1997
quarter will not be less than those recognized in the quarter ended December 31,
1996.
As of December 31, 1996, Symphony had approximately $949 million under direct
management and another $241 million under management on a sub-advisory basis. Of
the funds under direct management, approximately $636 million are managed under
agreements that provide for performance fees in addition to a base management
fee.
Symphony's future revenues will depend, in some cases to a great extent, on the
performance of the funds it manages and the timing of anniversary fee
determination dates for performance based funds.
OPERATING EXPENSES. Total operating expenses increased $2,775,000 or 15%
compared to the same quarter a year ago and $12,305,000 or 25% from the same
nine month period a year ago.
COST OF SUBSCRIPTION PRODUCTS
COST OF SUBSCRIPTION PRODUCTS consists of computer access charges, data and
software acquisition expenses, BARRA's computer leasing expenses, and seminar
expenses. This component of expense increased $173,000 or 10% compared to the
same quarter a year ago and $953,000 or 21% from the same nine
16
<PAGE>
month period a year ago primarily due to increased data and computer access
costs associated with new and existing BARRA services. Seminar expenses also
contributed to the increase as a result of changes in the timing of certain
seminars. The Company anticipates that data costs will continue to increase
into the future as BARRA's demands for new and expanded data sources increase in
order to meet product development and enhancement and market needs.
COMPENSATION AND BENEFITS
COMPENSATION AND BENEFITS increased $2,439,000 or 23% compared to the same
quarter a year ago and $7,202,000 or 24% from the same nine month period a year
ago. The increase from the same quarter a year ago is a result of higher
incentive compensation expenses due principally to higher profits at Symphony.
The number of full-time personnel has actually declined slightly from the same
quarter a year ago and the Company expects to fill a number of open position
during the next quarter to accommodate the growth in business. For the nine
month period comparison, the increase is again primarily the result of higher
incentive compensation due to an increase in the profits at Symphony, combined
with the Company's annual salary administration and performance evaluation
process which results in annual reviews and salary adjustments that are
effective on July 1 of each year. The consolidation of Bond Express contributed
$268,000 of the increase from the same quarter a year ago and $643,000 of the
increase for the nine month period.
OTHER OPERATING EXPENSES OTHER OPERATING EXPENSES increased $127,000 or 3%
compared to the same quarter a year ago and $2,315,000 or 20% from the same
nine month period a year ago. Other operating expenses include travel,
office, maintenance, depreciation, amortization, data costs related to
non-subscription services, marketing, advertising, outside legal and
accounting services and other corporate expenses. The increase of only 3%
from the same quarter a year ago reflects approximately $940,000 of one-time
marketing and development costs included in the December 31, 1995 quarter
associated with the introduction of a new RCA investment data base product.
Excluding these one-time marketing charges, the increases for both period
comparisons was predominantly the result of higher external development costs
associated with information systems upgrades and higher data costs at
Symphony related to their increase in revenues. Other increases in travel,
computer and office equipment, outside printing and documentation and
insurance related expenses were reflective of, and consistent with, the
general growth of BARRA's business and the costs of supporting a larger
client base. The consolidation of Bond Express also contributed approximately
$429,000 and $732,000
17
<PAGE>
to the increases from the quarter and nine month periods ended December 31,
1995.
MERGER COSTS AND ONE-TIME CHARGES
In the quarter ended September 30, 1996, in connection with the RCA merger, the
Company recorded related costs of approximately $1,308,000 consisting of the
following: (i) $821,000 in legal, accounting and other outside professional
services; (ii) $420,000 in severance, relocation and other costs associated with
integrating the combined operations of the two firms; and (iii) $67,000 in
incremental travel and related expenditures. The Company also recorded a one-
time charge of approximately $448,000 for the write-off of capitalized software
related to a product under development in which the costs were not recoverable
based on present revenue estimates and whose value was therefor impaired.
INTEREST INCOME AND OTHER
INTEREST INCOME AND OTHER increased $294,000 or 123% compared to the same
quarter a year ago and increased $352,000 or 31% from the same nine month period
a year ago. Increase from the same quarter a year ago reflects higher recorded
gains on the Company's short-term investments and lower interest expense on
debt. Increase from the same nine month period a year ago reflects higher
dividend/interest income from LBIC, lower interest expense from debt reduction
and higher average investment balances.
EQUITY IN NET INCOME AND LOSS OF INVESTEES
Net losses from BARRA's joint ventures and other strategic relationships
increased $78,000 compared to the same quarter a year ago as a result of losses
at BARRA Analytic Securities of which BARRA owns a 50% interest. The decrease
of $412,000 from the same nine month period a year ago is primarily the result
of non-recurring losses incurred by the Company in prior year periods in
connection with interests in Metaxis S.A. and Metaxis Placements S.A.
MINORITY INTEREST
Minority interest primarily represents the 45% share of Bond Express, L.P.'s
net loss. Beginning next quarter, the Class 3 interests in SAM LLC will
begin to receive a profit share percentage (as opposed to a bonus) due to
redemption of the Class 2 interest that occurred during the current quarter
ended December 31, 1996 (see Note 3 to the financial statements).
Accordingly, the Class 3 share of profits or losses will be included in
minority interest in future periods.
18
<PAGE>
PART II - OTHER INFORMATION
Each statement made in this Part II containing any form of the words
"anticipate" or "expect" is a forward looking statement that may involve a
number of risk factors and uncertainties. A discussion of those risk factors is
located in the first paragraph of Part I, Item 2.
ITEM 1. LEGAL PROCEEDINGS.
All information required by this item has been previously reported under the
heading "Business-Litigation" in the Form 10-K. There have been no other
material developments in the legal proceedings of BARRA since the date of the
Form 10-K.
ITEM 5. OTHER INFORMATION.
SUBSEQUENT TRANSACTIONS
On December 23, 1996, Liberty BAS Participation Corporation ("LBAS"), a
wholly-owned subsidiary of Liberty Brokerage Investment Corp. ("Liberty"),
notified BARRA International (U.K.) Ltd. ("BIUK"), a wholly-owned subsidiary
of the Company, that it was withdrawing from its 50/50 partnership with BIUK
in BARRA Analytics Securities ("BAS"), a licensed broker dealer established
to distribute trading analytics and other services relating to fixed income
securities. Under the terms of the partnership agreement between LBAS and
BIUK, BIUK had the right to purchase LBAS's interest in BAS at book value,
which right was exercised by BIUK in January 1997. Effective on February 1,
1997, BIUK became the sole owner of BAS. BIUK intends to continue the
original business plan for the operation of BAS. Pursuant to the amended
partnership agreement between LBAS and BIUK, Liberty has agreed to provide
certain services to BAS during the next two years for a reasonable charge.
The Company expects to continue to incur start-up expenses in BAS without
commensurate revenues. By reason of the change in ownership such losses will
no longer appear as a part of "Equity in Net Income and Loss of Investees."
Instead, expenses incurred in BAS will be reported as operating expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) the following exhibits are required by Item 601 of Regulation S-K: None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, BARRA
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BARRA, Inc.
(Registrant)
Date: February 14, 1997 Andrew Rudd
-----------------------------------
Andrew Rudd, Chairman of the
Board of Directors and Chief
Executive Officer
Date: February 14, 1997 James D. Kirsner
----------------------------------
James D. Kirsner, Chief
Financial Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Exhibit Description Page Number
- ------ ------------------- -----------
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE
UNAUDITED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1996
<CASH> 18,693,189
<SECURITIES> 6,758,700
<RECEIVABLES> 18,109,378
<ALLOWANCES> 143,000
<INVENTORY> 0
<CURRENT-ASSETS> 49,912,544
<PP&E> 15,633,545
<DEPRECIATION> 9,254,295
<TOTAL-ASSETS> 74,628,429
<CURRENT-LIABILITIES> 29,338,528
<BONDS> 0
0
0
<COMMON> 12,415,316
<OTHER-SE> 31,077,287
<TOTAL-LIABILITY-AND-EQUITY> 74,628,429
<SALES> 75,284,964
<TOTAL-REVENUES> 75,284,964
<CGS> 0
<TOTAL-COSTS> 5,427,290
<OTHER-EXPENSES> 55,743,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,245
<INCOME-PRETAX> 15,590,422
<INCOME-TAX> 6,671,854
<INCOME-CONTINUING> 8,918,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,918,568
<EPS-PRIMARY> $0.96
<EPS-DILUTED> $0.95
</TABLE>
