===============================================================================
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 September 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-19690
BARRA, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2993326
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2100 Milvia Street
Berkeley, California 94704-1113
(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
September 30, 1999 was 14,038,715.
<PAGE>
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and as of March 31, 1999
Unaudited Condensed Consolidated Statements of Income
for the Three and Six Month Periods Ended September 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three and Six Month Periods Ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND MARCH 31, 1999
(In thousands except for share and per share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $24,638 $31,343
Short-term investments........................... 25,020 17,229
Investment in municipal debt securities-
available for sale.............................. 6,571 6,498
Accounts receivable:
Subscription and other (Less allowance for
doubtful accounts of $726 and $526)........... 20,349 20,774
Asset Management............................... 11,730 9,059
Related parties................................ 4,840 4,326
Prepaid expenses................................. 3,414 2,361
------------- -------------
Total current assets........................... 96,562 91,590
------------- -------------
Investments in unconsolidated companies............ 2,508 2,602
Premises and equipment:
Computer and office equipment.................... 19,528 21,272
Furniture and fixtures........................... 5,989 5,872
Leasehold improvements........................... 8,701 8,647
------------- -------------
Total premises and equipment................... 34,218 35,791
Less accumulated depreciation and amortization..... (15,821) (17,312)
------------- -------------
18,397 18,479
Deferred tax assets................................ 3,036 3,036
Computer software (less accumulated amortization
of $1,185 and $1,015)............................ 2,034 958
Other assets....................................... 887 1,188
Goodwill and other intangibles (less accumulated
amortization of $6,076 and $4,691)............... 25,461 25,236
------------- -------------
Total.............................................. $148,885 $143,089
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $1,153 $2,288
Due to related party............................. -- 200
Accrued expenses payable:
Accrued compensation........................... 8,010 10,770
Accrued corporate income taxes................. 7,073 5,544
Accrued restructuring charges.................. 1,687 --
Other accrued expenses......................... 9,029 9,026
Unearned revenues................................ 23,838 23,790
------------- -------------
Total current liabilities...................... 50,790 51,618
------------- -------------
Deferred tax liabilities........................... 1,588 1,398
Minority interest in equity of subsidiary.......... 4,125 1,868
STOCKHOLDERS' EQUITY:
Preferred stock, no par; 10,000,000 shares
authorized; none issued and outstanding......... -- --
Common stock, $.0001 par value; 75,000,000
shares authorized; 14,038,715 and 14,012,852
shares issued and outstanding................... 1 1
Additional paid-in capital....................... 28,959 31,764
Retained earnings................................ 63,221 56,885
Accumulated other comprehensive income (loss).... 201 (445)
------------- -------------
Total stockholders' equity..................... 92,382 88,205
------------- -------------
Total.............................................. $148,885 $143,089
============= =============
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands except for share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues:
Subscription and consulting
fees....................... $28,830 $28,238 $57,375 $55,028
Electronic trading........... 4,468 4,519 8,904 8,286
Asset management............. 10,510 6,270 15,562 11,626
------------ ------------ ------------ ------------
Total operating revenues... 43,808 39,027 81,841 74,940
------------ ------------ ------------ ------------
Operating Expenses:
Cost of subscription products 1,606 2,328 3,905 4,959
Compensation and benefits.... 21,350 18,998 42,492 35,746
Occupancy ................... 1,778 1,884 3,678 3,623
Other operating expenses..... 6,202 6,308 11,805 12,650
Restructuring charges -- -- 5,561 --
------------ ------------ ------------ ------------
Total operating expenses... 30,936 29,518 67,441 56,978
------------ ------------ ------------ ------------
Interest Income & Other........ 402 230 755 803
------------ ------------ ------------ ------------
Income before Equity
in Net Income and Loss of
Investees, Minority Interest
and Income Taxes............. 13,274 9,739 15,155 18,765
Equity in Net Income and Loss
of Investees................. 18 (117) (94) (367)
Minority Interest.............. (3,800) (1,955) (4,959) (3,311)
------------ ------------ ------------ ------------
Income before Income
Taxes........................ 9,492 7,667 10,102 15,087
Income Taxes................... (3,540) (2,990) (3,766) (5,884)
------------ ------------ ------------ ------------
Net Income .................... $5,952 $4,677 $6,336 $9,203
============ ============ ============ ============
Net Income Per Share:
Basic........................ $0.42 $0.34 $0.45 $0.67
============ ============ ============ ============
Diluted...................... $0.41 $0.32 $0.43 $0.63
============ ============ ============ ============
Weighted Average Common and
Common Equivalent Shares:
Basic........................ 14,113,380 13,821,724 14,087,485 13,784,447
============ ============ ============ ============
Diluted...................... 14,673,167 14,568,491 14,687,742 14,569,809
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................... $6,336 $9,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of investees............ 94 367
Minority interest............................ 4,959 3,311
Depreciation and amortization................ 3,901 3,185
Amortization of computer software............ 195 365
Gains on marketable securities............... (72) (250)
Non-cash restructuring charges............... 1,687 --
Other........................................ 616 87
Changes in:
Accounts receivable - subscription and other. 425 (4,825)
Accounts receivable - asset management....... (2,671) (4,757)
Accounts receivable - related parties........ (514) (1,516)
Prepaid expenses............................. (1,053) 183
Other assets................................. 301 148
Accounts payable, due to related party
and accrued expenses........................ (2,563) (4,549)
Unearned revenues............................ 48 1,322
------------- -------------
Net cash provided by operating activities.. 11,689 2,274
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (4,042) (4,419)
Short-term investments purchased - net............ (7,719) (6,773)
Investment in municipal debt securities -
available for sale.............................. (73) (126)
Acquisitions - cash paid.......................... (1,053) (5,356)
Investments in unconsolidated companies........... -- (622)
------------- -------------
Net cash used in investing activities (12,887) (17,296)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to minority shareholders................. (2,702) (2,875)
Proceeds from sale of common stock................ 1,726 1,283
Repurchases of common stock....................... (4,531) --
------------- -------------
Net cash used in financing activities............. (5,507) (1,592)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (6,705) (16,614)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.. 31,343 33,673
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $24,638 $17,059
============= =============
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................. $0 $8
Income taxes................................. $2,237 $5,828
</TABLE>
The accompanying notes are an integral part of the BARRA, Inc. Consolidated
Financial Statements
<PAGE>
BARRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements
include the accounts of BARRA, Inc. (the Company, which may be
referred to as BARRA, we, us or our) and its wholly-owned
subsidiaries. All significant intercompany transactions and
balances have been eliminated. Certain reclassifications have
been made to prior period financial statements to conform to the
current period presentation.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments
(consisting of normal recurring entries) necessary to present
fairly the financial position of BARRA as of September 30, 1999
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, 1999 condensed consolidated balance sheet is
derived from the audited consolidated financial statements
included in BARRA's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 (Form 10-K), but does not include all
disclosures required by generally accepted accounting principles.
We suggest that these condensed consolidated financial statements
be read in conjunction with the audited consolidated financial
statements and related notes included 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. RESTRUCTURING CHARGE
On April 19, 1999, our management announced a restructuring plan
to reduce the cost of operating our U.S. fixed income business and
focus future development and sales efforts on global and
enterprise-wide fixed income products. The restructuring plan
discontinued certain U.S. fixed income products and eliminated
various sales, client and product support positions in the U.S.
Revenues from discontinued products ceased on April 30, 1999.
Customers who had prepaid subscriptions for periods after April
30, 1999 received refunds on or before August 31, 1999. Although
the decision to discontinue these products was made in April 1999,
certain support activities will continue through December 31,
1999. All termination notices and benefits were communicated to
the affected employees prior to June 30, 1999. Revenues from
discontinued products amounted to approximately $8 million in
fiscal 1999 or 5% of our total revenues. Revenues from
discontinued products included in the accompanying condensed
consolidated statements of income for the three month period ended
September 30, 1999 and 1998 amounted to zero and $2.1 million,
respectively. Revenues from discontinued products included in the
accompanying condensed consolidated statements of income for the
six month periods ended September 30, 1999 and 1998 amounted to
$.6 million and $4.1 million, respectively.
We recorded two significant charges in connection with the
restructuring plan. The first charge of approximately $4 million
($.27 per diluted share) was recorded in the quarter ended March
31, 1999. It consisted of non-cash charges for the write-off of
goodwill and capitalized software development costs related to our
1997 acquisition of a company engaged in the development of
products for the U.S. fixed income market. The second charge of
approximately $5.6 million ($.23 per diluted share) was recorded
in the quarter ended June 30, 1999. This charge consisted of: (a)
$3.6 million in severance, termination benefits, and wages for
less than 50 terminated employees (some of which were retained for
various periods up until December 31, 1999 to exclusively support
the discontinued products); (b) $1.3 million for non-cancelable
services directly related to the discontinued products including
certain costs associated with continuing to support the products
up until their final termination dates; and (c) $.4 million in
excess facilities costs. At September 30, 1999, approximately $1.7
million of the $5.6 million in restructuring charges remained
accrued. We expect most of the remaining accrued amounts to be
paid out during the next quarter as costs associated with
supporting these products will substantially cease on December 31,
1999. Activity in the restructuring accrual for the six months
ended September 30, 1999 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Severance and Excess Other
Termination Facilities Restructuring Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1999.... $0 $0 $0 $0
------------ ------------ ------------ ------------
Restructuring charges........ 3,555 357 1,649 5,561
Cash payments................ (2,687) (213) (974) (3,874)
------------ ------------ ------------ ------------
Balance at September 30, 1999 $868 $144 $675 $1,687
============ ============ ============ ============
</TABLE>
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation
gains and losses that have been previously excluded from net
income and reflected in equity. A summary of comprehensive income
(loss) follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Income .................. $5,952 $4,677
Foreign currency translation
gain (loss)................ 753 (125)
------------ ------------
Comprehensive income ........ $6,705 $4,552
============ ============
Six Months Ended September 30,
-------------------------
1999 1998
------------ ------------
<C> <C>
Net Income .................. $6,336 $9,203
Foreign currency translation
gain ...................... 646 --
------------ ------------
Comprehensive income ........ $6,982 $9,203
============ ============
</TABLE>
4. SEGMENT INFORMATION
In 1999, we adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Operating segments are defined as components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker
when deciding how to allocate resources and when assessing
performance. BARRA's chief operating decision making group is the
Executive Committee, which is comprised of the Chief Executive
Officer and certain other Executive Officers. Effective in the
September 1999 quarter, BARRA was reorganized into two business
units, BARRA Core and BARRA Ventures. The Core business unit is
one segment and the Ventures unit has three segments, Symphony
Asset Management, the POSIT Joint Venture and all of the other
ventures are aggregated into the third segment.
Our business segments are organized on the basis of differences in
our related products and services. The core business is the
subscription and consulting segment and consists of developing,
marketing and supporting investment analytics software, data
products, and related consulting services to portfolio fund
managers, pension sponsors and others engaged in the management of
financial assets.
BARRA Ventures are investments, joint ventures or significant
licensing arrangements that leverage the ideas and intellectual
property of the Core business. The POSIT Joint Venture licenses
institutional trading systems that allow institutional investors
to trade portfolios of securities directly with each other in a
confidential environment. The Symphony Asset Management venture
is a jointly owned subsidiary that provides money management
services. All other BARRA ventures are aggregated in this
presentation.
Segment income from operations is defined as segment revenues net
of segment expenses, restructuring charges, and equity in joint
venture gains and losses for the current year. Segment expenses
include costs for sales and client support activities, the cost of
delivering the product or service including data and data
processing costs, and allocated amounts of depreciation and
amortization. Segment expenses also include allocated portions of
research and development and general and administrative expenses,
amortization of acquired intangibles, and interest income for the
current year. In periods previous to this year, these items of
income and expense were not allocated to segments. For all years
presented, segment expenses exclude income taxes.
There are no differences between the accounting policies used to
measure profit and loss for segments and those used on a
consolidated basis. Revenues are defined as revenues from external
customers and there are no inter-segment revenues or expenses.
Our management does not identify or allocate its assets, including
capital expenditures, by operating segment. Assets are not being
reported by segment because the information is not available by
segment and is not reviewed by our Executive Committee to make
decisions about resources to be allocated to the segments when
assessing their performance. Depreciation and amortization is
allocated to segments in order to determine segment profit or
loss.
The following tables present information about reported segments
for the three and six month periods ended September 30, 1999 and
1998, respectively (in thousands):
<TABLE>
<CAPTION>
For the three months ended September 30, 1999:
------------- -------------------------------------------------------
BARRA CORE BARRA VENTURES
------------- ------------------------------------------------------- -------------
Subscription
and POSIT Symphony Asset Total Consolidated
Consulting Joint Venture Management Other Ventures Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Subscription revenues....... $23,078 $23,078
Consulting revenues......... 5,411 5,411
Venture revenues............. 4,468 10,240 611 15,319 15,319
------------- ------------- ------------- ------------- ------------- -------------
Total revenues 28,489 4,468 10,240 611 15,319 43,808
Segment expenses............ (25,799) (671) (3,311) (753) (4,735) (30,534)
Equity in joint venture
gains (losses) and minority
interest................... 64 (3,800) (46) (3,782) (3,782)
------------- ------------- ------------- ------------- ------------- -------------
Total segment expenses (25,799) (607) (7,111) (799) (8,517) (34,316)
------------- ------------- ------------- ------------- ------------- -------------
Segment income (loss) $2,690 $3,861 $3,129 ($188) $6,802 $9,492
============= ============= ============= ============= ============= =============
Depreciation and amortization $1,782 $40 $55 $129 $224 $2,006
For the three months ended September 30, 1998:
---------------------------------------------------------------------
Subscription
and Electronic Asset Consolidated
Consulting Trading Management Unallocated Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $28,238 $4,519 $6,270 $39,027
Segment expenses............ (16,005) (250) (2,477) (18,732)
Minority interest............ (1,955) (1,955)
------------- ------------- ------------- ------------- -------------
$12,233 $4,269 $1,838 $18,340
============= ============= ============= ============= =============
Research and development..... (5,348) (5,348)
General and administrative... (4,776) (4,776)
Amortization of intangibles.. (662) (662)
Interest and other........... 230 230
Equity in joint venture
losses..................... (117) (117)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes...................... $12,233 $4,269 $1,838 ($10,673) $7,667
============= ============= ============= ============= =============
Depreciation and amortization $465 $25 $60 $390 $940
For the six months ended September 30, 1999:
------------- -------------------------------------------------------
BARRA CORE BARRA VENTURES
------------- ------------------------------------------------------- -------------
Subscription
and POSIT Symphony Asset Total Consolidated
Consulting Joint Venture Management Other Ventures Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Subscription revenues....... $46,807 $46,807
Consulting revenues......... 9,894 9,894
Venture revenues............. 8,904 15,060 1,176 25,140 25,140
------------- ------------- ------------- ------------- ------------- -------------
Total revenues 56,701 8,904 15,060 1,176 25,140 81,841
Segment expenses............ (52,125) (1,213) (6,281) (1,506) (9,000) (61,125)
Restructuring charges....... (5,561) 0 (5,561)
Equity in joint venture
gains (losses) and minority
interest................... 64 (4,959) (158) (5,053) (5,053)
------------- ------------- ------------- ------------- ------------- -------------
Total segment expenses (57,686) (1,149) (11,240) (1,664) (14,053) (71,739)
------------- ------------- ------------- ------------- ------------- -------------
Segment income (loss) ($985) $7,755 $3,820 ($488) $11,087 $10,102
============= ============= ============= ============= ============= =============
Depreciation and amortization $3,683 $70 $85 $258 $413 $4,096
For the six months ended September 30, 1998:
---------------------------------------------------------------------
Subscription
and Electronic Asset Consolidated
Consulting Trading Management Unallocated Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $55,028 $8,286 $11,626 $74,940
Segment expenses............ (30,722) (515) (4,961) (36,198)
Minority interest............ (3,311) (3,311)
------------- ------------- ------------- ------------- -------------
$24,306 $7,771 $3,354 $35,431
============= ============= ============= ============= =============
Research and development..... (9,963) (9,963)
General and administrative... (9,608) (9,608)
Amortization of intangibles.. (1,209) (1,209)
Interest and other........... 803 803
Equity in joint venture
gains (losses)............. (367) (367)
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes...................... $24,306 $7,771 $3,354 ($20,344) $15,087
============= ============= ============= ============= =============
Depreciation and amortization $1,256 $50 $110 $765 $2,181
</TABLE>
5. PER SHARE DATA
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" ("SFAS 128"), basic
earnings per share is based on the weighted-average number of
common shares outstanding for the period. Diluted earnings per
share data is based on the weighted-average number of common and
dilutive potential common shares outstanding. Dilutive potential
common shares result from the assumed exercise of outstanding
stock options that have a dilutive effect when applying the
treasury stock method. For all periods presented, the only
difference between basic and diluted earnings per share for the
Company is the inclusion of dilutive stock options in the
denominator for purposes of calculating diluted earnings per
share.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This discussion and analysis and other parts of this Form 10-Q
contain forward looking statements that involve risk and
uncertainties. These forward-looking statements are made in
reliance on safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. For further information regarding
how to identify forward looking statements and the factors that
could cause actual results to differ, please refer to the
information under the heading "Cautionary Factors That May Affect
Future Results" below. Any or all of the forward-looking
statements that we make in this Form 10-Q or any other public
statements we issue may turn out to be wrong. It is also
important to remember that other factors besides those we mention
could also adversely affect us and our business, operating results
or financial condition.
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.
Year 2000 Update
Our Y2K Project (as described below) is substantially complete.
Nonetheless, we continue to address the potential effects of the
Y2K problem on our products and services, as well as on our
vendor-supplied internal hardware and software systems. The
following terms are important to this discussion about our Y2K
efforts:
"BARRA Products" refers to our Investment Analytics and
Data Products software applications that allow users to access our
risk, valuation and other proprietary models and databases. The
term "BARRA Products" does not include our proprietary data
update processes, third party technology, joint venture technology
or data embedded in BARRA Products.
"BARRA Services" refers to the Investment Consulting,
Strategic Consulting and Corporate Consulting services offered by
our parent and several wholly-owned subsidiaries as well as the
asset management services provided through our wholly-owned
subsidiaries other than Symphony Asset Management, Inc. (Symphony
Inc.). The term "BARRA Services" does not include asset
management and other services provided by various partnerships or
joint ventures in which we participate but are not the principal
operator, such as POSIT, Symphony Inc. and Symphony Asset
Management, LLC (together with Symphony Inc., referred to as
Symphony).
"DUPs" refer to our internal proprietary systems that
update the data processed through most BARRA Products and some
BARRA Services.
"Y2K compliant" means that a product or system has file
structures and naming conventions that accommodate a date
transition to the next century without performance interruption.
As described in our prior SEC filings, our Y2K project plan (the
"Y2K Project") had two objectives: (1) testing substantially all
BARRA Products and BARRA Services that we anticipate selling and
supporting as of January 1, 2000 for Y2K compliance by March 31,
1999; and (2) testing our other systems for Y2K compliance by
September 30, 1999.
The scope of the Y2K Project covers BARRA Products, DUPs, BARRA
Services, third party and joint venture products, and other
systems (e.g. hardware, software, embedded systems, and other
products supporting our infrastructure). The table below
describes the seven phases of the Y2K Project as it relates to
those BARRA Products, DUPs and BARRA Services that we anticipate
selling and supporting as of January 1, 2000. The percentages and
target deadlines are based on estimates at November 10, 1999 of
the total number of labor hours, including internal and outside
personnel, required for each phase:
<TABLE>
<CAPTION>
Status as of November 10, 1999: Approximate
Phase Objective Percentage Complete
- ------------ -------------------------------------- ------------------------------------------------
<S> <C> <C>
Awareness Make each department aware of the Y2K 100% Complete for BARRA Products, DUPs and
problem, and convey management's BARRA Services.
commitment to BARRA's Y2K compliance
efforts to all departments.
Inventory Create comprehensive lists of each 100% Complete for BARRA Products, DUPs and
BARRA Product, DUP and BARRA Service. BARRA Services.
Assessment Assess the inventoried BARRA 100% Complete for BARRA Products, DUPs and
Products, DUPs and BARRA Services to BARRA Services.
determine what modifications or
enhancements are needed, if any.
Solution Plan the activities, develop the 100% Complete for BARRA Products, DUPs and
Design and schedule, and estimate the costs of BARRA Services.
Planning Y2K modifications. In addition,
establish basic management and
development processes, along with
general standards and verification
techniques applicable to the Y2K
compliance tasks.
Development Execute the plans developed to 100% Complete for BARRA Products and BARRA
and achieve Y2K compliance. Services.
Modification 99% Complete for DUPs
Testing Test and verify Y2K compliance. 100% Complete for BARRA Products and BARRA
Services.
99% Complete for DUPs
Distribution Deliver Y2K compliant BARRA Products 100% Complete for BARRA Products and BARRA
and BARRA Services to clients. Services.
DUPs: phase not applicable to DUPs
</TABLE>
Only the DUPs for one product that accounted for less than 1% of
our total revenues at September 30, 1999 has yet to complete the
Development and Modification and Testing phases. We expect to
complete these phases for this product by mid December 1999.
As previously reported, in March 1999 we increased our internal
staffing on the remaining DUP project phases and decreased our
reliance on, and augmented the efforts of, outside contractors.
Substantially all of our increased staffing comes from our
research and data management groups. To the extent individuals
within these groups continue to dedicate their time to the Y2K
Project, we will continue to experience general delays in our
efforts to develop enhancements to BARRA Products, as well as in
our research efforts supporting our next generation of products.
We have delivered Y2K compliant versions of BARRA Products that we
anticipate selling and supporting as of January 1, 2000 to our
clients via regular maintenance services. Decisions to
discontinue other BARRA Products before the Year 2000 have been
made in the ordinary course of business and were not based solely
on Y2K issues. Except for the single country fixed income
products that BARRA previously announced will be discontinued
during 1999, discontinued BARRA Products will continue to be
replaced with more advanced software applications that are Y2K
compliant prior to the Year 2000.
As previously reported, we delivered questionnaires to
substantially all of our vendors that currently provide data for
BARRA Products, DUPs, and BARRA Services in order to assess their
Y2K compliance efforts and our related exposure. Substantially
all of these vendors responded to our questionnaires by July 31,
1999. However, our Y2K inquiries will continue indefinitely to
the extent that our vendors develop new, enhanced or modified
products or that we enter into new data contracts throughout 1999.
Most responses to date indicate that the data, and the vendors'
internal processes for generating, updating and delivering the
data, are currently Y2K compliant, or will be before the Year
2000. In the occasional circumstance in which a vendor's response
indicated that its data is not currently delivered in a Y2K
compliant format, we typically requested test data be provided
when it is rendered Y2K compliant. We also successfully ran
internal tests on some of the more critical vendor data using test
data either provided by the vendors or created in-house. In
addition, we have indirectly tested substantially all of the
vendors' data as part of our general Y2K testing of BARRA
Products, DUPs, and BARRA Services. There can be no assurance,
however, that the data vendors responding to our questionnaires
have accurately evaluated their own Y2K readiness.
Because generally no single client of BARRA Products or BARRA
Services has accounted for more than 2% of our total revenues
during 1999, we reviewed the Y2K compliance of only our thirty
largest clients. More than two-thirds of these clients had
responded to questionnaires as of September 30, 1999, and all such
responses indicate that their systems are currently Y2K compliant,
or will be prior to the Year 2000. We also reviewed the websites
of the clients not responding to our questionnaires, and such
websites similarly indicated that their systems are currently Y2K
compliant or will be prior to the Year 2000.
The Y2K Project includes some review of POSIT and Symphony.
Because we are not the principal operator of Symphony or POSIT, we
are only indirectly involved in reviewing these businesses for Y2K
compliance. Based on information available to us as of October
31, 1999, the first six phases described in the table above have
been completed for the products and services offered by these
businesses. The distribution phase is inapplicable to the products
and services of these businesses. Our Y2K Project does not cover
either the Y2K readiness of other systems applicable to POSIT or
Symphony (i.e. other than their products and services) nor the Y2K
readiness of our business partners in these ventures. In
addition, our Y2K Project does not cover the businesses of other
various partnerships and joint ventures in which we participate
but are not the principal operator.
Beyond our products and services, our Y2K Project also covers our
other systems supporting our infrastructure. These other areas
include 1) internal hardware (such as computer equipment and phone
systems), 2) software (such as operating systems, software
supporting our products and services, software for our payroll,
accounting and other support systems) and 3) other systems,
including non-information technology (such as our security system,
building equipment, power utilities and embedded
microcontrollers). We remain substantially dependent on outside
vendors in these areas, and we do not independently verify the Y2K
readiness of these vendor-supplied products or services. We have
made various inquiries (including written or verbal inquiries, or
review of website information) of substantially all of our
existing vendors whose products or services support such systems
in order to assess their Y2K compliance efforts and our related
exposure. Most information received in response to such inquiries
indicates that the system is currently delivered in a Y2K
compliant format, or will be prior to the Year 2000. We have
completed assessment and remediation of any material Y2K
compliance problems discovered by us to date. However, our Y2K
efforts will continue indefinitely to the extent that we acquire
new components for, or make modifications or improvements to, our
existing internal systems. In addition, there can be no assurance
that the vendors providing information have accurately evaluated
their own Y2K readiness. We expect to replace any components that
are not identified as Y2K compliant with compliant versions from
either the same or alternate vendors.
We estimate the total direct cost of the Y2K Project will be
approximately $11.0 million, which includes fees paid to outside
solution providers, the costs of repairing or replacing hardware
and the direct costs associated with our internal labor expenses.
The total amount we have incurred on the Y2K Project through
September 30, 1999 was approximately $7.9 million, of which
approximately $3.85 million are costs associated with outside
contractors. The total amount we spent on the Y2K Project for the
quarter ending September 30, 1999 was approximately $2.3 million,
of which approximately $950,000 were costs associated with outside
contractors and another $350,000 related to special additional
internal costs. We anticipate that costs for outside contractors
and other special additional internal costs for the quarters
ending December 31, 1999 and March 31, 2000 will be approximately
$900,000 and $400,000, respectively. The costs incurred during
the first calendar quarter of the Year 2000 are expected to
primarily relate to our contingency plans (discussed below),
including running and stabilizing our DUPs. Of the total amount
expended on the Y2K Project through September 30, 1999,
approximately $3.9 million related to internal labor expenses
(including approximately $700,000 of special incentive
compensation related directly to Y2K efforts), of which
approximately $1.3 million was incurred during the quarter ending
September 30, 1999. We have spent a total of approximately
$150,000 to repair or replace hardware solely for Y2K compliance
reasons through September 30, 1999.
We estimate the future cost of completing the Y2K Project to be
approximately $3.1 million, of which approximately $1.0 million
relates to outside contractors, approximately $1.8 million relates
to internal labor expenses and approximately $340,000 relates to
the cost of repairing or replacing hardware. We expect that the
bulk of these costs will be incurred in the quarter ending
December 31, 1999. The remainder of the costs, relating to our
contingency plans, will occur in the quarter ending March 31,
2000. Internal labor costs include the salaries and special
incentive bonuses of those employees other than senior management
who spend a portion of their time on the Y2K Project.
The above amounts include our costs for reviewing the Y2K
compliance of Symphony and POSIT. These amounts exclude, however,
our potential share of other costs incurred by those and other
various partnerships and joint ventures in which we participate
but are not the principal operator. We expense costs of the Y2K
Project during the period in which they are incurred. Funds for
the Y2K Project are provided from our available cash resources,
including cash provided from operations and short-term
investments. We do not expect funds needed to complete the Y2K
Project to exceed such available cash resources.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, our normal business activities,
operations, or systems. Such failures could materially and
adversely affect our results of operations, liquidity, and
financial condition. Also, because we derive significant revenue
from licenses for our software applications, we generally face
additional Y2K risks of product disruption and potential liability
not applicable to non-software providers.
Our ability to continue normal business operations itself depends
on the Y2K compliance of our various data vendors and other
suppliers. For example, our data vendors may be unable to provide
timely and accurate data because of the Y2K problem. Moreover,
most BARRA Products and some BARRA Services require that data be
processed through our DUPs. Consequently, any inability to
receive not only timely and accurate data from our vendors, but
also timely and accurate data updates processed through our own
DUPs, could significantly undermine the quality and delivery of
the BARRA Products and BARRA Services.
As is the case with other similarly situated software companies,
if our current or future clients fail to achieve Y2K compliance or
if they divert technology expenditures (especially technology
expenditures that were reserved for BARRA Products or BARRA
Services) to address Y2K compliance problems, our business,
financial condition or results of operations could be adversely
affected. We also face the risk of declining sales in calendar
1999 caused by buyers of our products and services deferring
investments in our software products due to concerns regarding
Year 2000. Because Year 2000 related impacts on client purchasing
decisions are unprecedented, our ability to forecast the impact of
the Year 2000 issue on our quarter-to-quarter revenues is limited.
For example, the slowdown in product sales due to Y2K concerns for
the quarter ended September 30, 1999 was less material than we had
earlier predicted. We continue, however, to expect sales of new
products to slow during the last quarter of calendar 1999.
We face general uncertainty inherent in the Y2K problem. This is
due in part to our uncertainty of the Year 2000 readiness of
vendors and other third parties (including joint venture partners)
with whom we have business relationships. Therefore, we are
unable to determine at this time whether the consequences of the
Y2K problem will have a material impact on our results of
operations, liquidity, or financial condition. The Y2K Project
continues to significantly reduce our uncertainty about the Y2K
problem and, in particular, about the compliance and readiness of
our material third party business relationships.
We continue developing contingency plans to deal with Y2K problems
that arise despite our compliance efforts. In particular, we have
deployed a contingency plan that seeks to mitigate the impact on
our clients of certain limited disruptions of our normal DUP
environment, such as might be occasioned by Y2K problems. The
contingencies provided for by this plan are:
A single major data vendor is off-line for two months;
A local temporary failure by a utility company occurs.
The contingency plan involves our receipt of certain key data
items from two sources in order to avoid disruption in the event a
single source experiences Y2K disruptions. The computer systems
implementing this contingency plan have been deployed in our
Berkeley office and our London office to reduce the risks of local
utility failure. Depending on the nature of the failure, our
products and services may be negatively impacted despite this
contingency plan. In particular, there can be no assurance that
all data required to sustain a minimal level of client service
will actually be available and no assurance that, even if the data
is available, clients will find our sustainable level of service
adequate to their needs. In addition, this contingency plan does
not address the failure by multiple major data suppliers, a
permanent failure by a single data provider or systemic failure of
the power or telephone systems.
With regard to other contingency plans, we have implemented a
preparedness plan under which key personnel will be placed on
standby from late December 1999 through the beginning months of
the calendar year 2000 to address any Y2K issues that may arise.
This will include personnel from our sales and client support,
facilities, software engineering, information services and data
management functions. We also expect to have the ability to cover
the critical business functions of a BARRA office experiencing
Y2K-related failures in at least one other BARRA office. In
addition, in the event that automated financial data updates (such
as price quotes) or computerized trade executions used by Symphony
or our Asset Management Group fail because of Y2K non-compliance,
we may obtain the updates manually or execute trades over the
telephone, to the extent practical. In the event that vendors'
products and services supporting our infrastructure are not Y2K
compliant, we intend to replace them through upgrades or
replacements. There is no assurance, however, that any potential
replacements of vendors supporting these other systems will be
available, that their products and services will be Y2K compliant
or that we will be able to quickly incorporate such products and
services into our own businesses.
We face general uncertainty inherent in the Y2K problem, resulting
in part from the uncertainty of the Year 2000 readiness of
external parties and the interdependence of global businesses.
Therefore, we cannot make any assurances regarding our ability to
timely and cost-effectively resolve Y2K problems. Failure to
resolve these problems may affect our results of operations,
liquidity and financial condition, or expose us to third party
liability.
This discussion of our Y2K efforts, including but not limited to
cost estimates, the timing of costs and estimates about the Y2K
Project phases (including completion percentages and target
deadlines within each phase) derive from management estimates that
are based on numerous assumptions of future events. These
estimates are subject to uncertainties that could cause actual
results to materially differ. There can be no guarantee that any
such estimates will be achieved. There can also be no guarantee
against delays in, or increased costs associated with, the
implementation of the Y2K Project. Factors that could influence
such estimates or cause them to differ from actual results
include, but are not limited to: 1) our success and timeliness in
identifying all relevant software code, data and other affected
product/service features and functions, 2) the nature, amount and
adequacy of programming and research required to accommodate the
Year 2000 date change, 3) timely responses to and corrections by
third parties, 4) the ability to implement interfaces between any
new systems and those systems not being replaced, 5) the rate and
magnitude of labor and consulting costs associated with the Y2K
Project, 6) the availability and cost of personnel for the Y2K
Project and other resources, and 7) the success and timeliness of
our vendors, clients and other third parties with whom we have
business relationships in addressing the Y2K problem.
Due to their status as a registered investment adviser or broker-
dealer, some of our subsidiaries and affiliates must file Y2K
reports required by the SEC. Additional information regarding our
Y2K compliance efforts may be found in those publicly available
reports.
Foreign Currency
As an international corporation, we generate revenue from clients
throughout the world, maintain sales and representative offices
worldwide and hold certain deposits and accounts in foreign
currencies. Our revenue is generated from both United States and
non-U.S. currencies. Prior to January 1, 1999 our subscriptions
in the United Kingdom and the European Community were priced in
British pounds sterling (pounds) and European Currency Units
(ECUs), respectively. Subsequent to December 31, 1998, European
Community subscriptions are priced in EMUs (Euro's).
Additionally, our consolidated subsidiary, BARRA International
(Japan), Ltd. (BARRA Japan), generates revenues, has expenses and
has assets and liabilities in Japanese yen.
The following table presents a summary of revenue by geographic
region for the three months ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
% of Total % of Total
Revenues Revenues Revenues Revenues
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
North America:
United States............ $30,421 69% $25,968 67%
Other.................... 735 2 763 2
-------------- -------------- -------------- --------------
Total North America...... 31,156 71 26,731 69
============== ============== ============== ==============
Europe:
United Kingdom........... 4,910 11 4,990 13
France................... 1,219 3 1,194 3
Germany.................. 1,346 3 1,311 3
Other.................... 304 1 206 1
-------------- -------------- -------------- --------------
Total Europe............. 7,779 18 7,701 20
============== ============== ============== ==============
Asia and Australia:
Japan.................... 3,305 8 2,755 7
Other.................... 1,568 3 1,840 4
-------------- -------------- -------------- --------------
Total Asia and Australia. 4,873 11 4,595 11
============== ============== ============== ==============
-------------- -------------- -------------- --------------
TOTAL $43,808 100% $39,027 100%
============== ============== ============== ==============
</TABLE>
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. We have considered our exposure to foreign
currency fluctuations and to this point have decided not to engage
in hedging or managing exposures to foreign currency fluctuations
through contracts for the purchase, sale or swapping of
currencies. Accordingly, a strengthening of the U.S. dollar versus
non-U.S. currencies could have a material adverse impact on our
results of operations and financial condition.
For the three month period ended September 30, 1999, when compared
to the same period a year ago, the U.S. dollar strengthened
against the pound and Euro and significantly weakened against the
yen - all of which had the net effect of increasing net revenues
and net income by approximately $325,000 and $75,000,
respectively, compared to exchange rates in effect for the three
month period ended September 30, 1998.
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
stockholders' equity.
Under current operating arrangements in the countries in which we
do business, there are no significant restrictions upon the flow
of funds from our foreign subsidiaries to the parent company.
B. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The dollar and percentage increases or decreases set forth below
in this discussion and analysis of our consolidated financial
condition result from a comparison of BARRA's balance sheet at
September 30, 1999 (unaudited) to the balance sheet at March 31,
1999.
Financial Condition
Total assets increased $5,796,000 or 4%.
Total current assets increased $4,972,000 or 5%. This net increase
was primarily due to increases in accounts receivable for asset
management fees reflecting an increase in related revenues. (Refer
to the accompanying unaudited condensed consolidated statement of
cash flows for more information on cash flows.)
Premises and equipment, net, decreased $82,000. This net decrease
reflects capital expenditures of $2,771,000 reduced by
depreciation and other adjustments of $2,853,000. In addition,
approximately $4,334,000 in fully depreciated assets were also
written-off during the quarter in connection with the Company's
implementation of a new fixed asset system.
Computer software increased $1,076,000 due to the purchase of a
new accounting and human resources system expected to be fully
implemented by January 2000.
Total current liabilities decreased $828,000 or 2%. This net
decrease primarily reflects lower accrued compensation as a result
of the payment of annual bonuses to employees in May 1999 and
lower accounts payable offset by increases in accrued expenses
associated with the restructuring plan announced in April 1999 and
an increase in accrued income taxes.
Minority interest in equity of subsidiary represents minority
equity interests in the net assets of Symphony LLC.
Liquidity and Capital Resources
Cash and cash equivalents, short-term investments and investment
in municipal debt securities available-for-sale totaled
$56,229,000 at September 30, 1999.
We believe that our cash flow from operations (including prepaid
subscription fees), together with existing cash balances, will be
sufficient to meet cash requirements for capital expenditures and
other cash needs for ongoing business operations. Other than
commitments described in this discussion and analysis and in the
financial statements and notes, we have no present binding
understandings or commitments with respect to any significant
expenditures.
Principal Financial Commitments. Our principal financial
commitments consist of obligations under operating leases and
contracts for the use of computer and office facilities, possible
future royalties payable to Redpoint shareholders, possible future
consideration for the acquisition of Bond Express, and severance
and other related compensation associated with the restructuring
plan announced in April 1999. Our Board of Directors has also
authorized the repurchase of up to $10,000,000 of our common stock
and has authorized up to $17 million in funds as "seed"
investments for new asset management products developed by
Symphony or our Asset Services Group. Approximately $2.0 million
of that amount has not yet been disbursed.
C. RESULTS OF OPERATIONS
References to the dollar and percentage increases or decreases set
forth below in this discussion and analysis of our results of
operations are derived from comparisons of our condensed
consolidated statements of income for the three and six month
periods ended September 30, 1999 and September 30, 1998.
Net Income. Net income for the three month period ended September
30, 1999 was $5,952,000 or $0.41 per share (diluted) compared to
net income of $4,677,000 or $0.32 per share (diluted) for the same
quarter a year ago. Net income for the six month period ended
September 30, 1999 was $6,336,000 or $0.43 per share (diluted)
compared to net income of $9,203,000 or $0.63 per share (diluted)
for the same period a year ago. Results for the six month period
ended September 30, 1999 included restructuring charges of
$5,561,000 ($.24 per diluted share).
Operating Revenues. Total operating revenues for the three and six
month periods ended September 30, 1999 increased $4,781,000 or 12%
and $6,901,000 or 9%, respectively, compared to the same periods a
year ago.
Subscription and Consulting fees consist of annual subscription
fees for our software and investment data products, revenues from
other sources related to the institutional analytics business and
consulting services to pension plan sponsors and investment
managers. A summary of the components and related changes is as
follows (amounts in $000's):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 %Change 1999 1998 %Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Analytics subscriptions-
continuing products.... $22,566 $19,855 14 $43,878 $39,128 12
Analytics subscriptions-
discontinued fixed
products............... -- 2,137 -- 595 4,118 (86)
Other analytics related.. 1,123 1,912 (41) 3,510 3,527 --
Consulting............... 5,141 4,334 19 9,392 8,255 14
-------- -------- -------- -------- -------- --------
TOTAL.................... $28,830 $28,238 2 $57,375 $55,028 4
======== ======== ======== ======== ======== ========
</TABLE>
Analytics Subscriptions are for our software and related updates.
We generally bill and collect fees on an annual basis, but
recognize the income 1/12th per month over each year of the
subscription period. The growth in annual subscription fees
continues to be generated from a combination of obtaining new
clients (including subscriptions from enterprise risk management
systems), increasing revenues from existing customers through the
introduction of new products and services, and acquisitions.
Revenue growth primarily came from equity models and related data
reflecting the continued success of the BARRA Aegis System TM.
Various new single country and global enhancements of this equity
analytics system have been introduced during the past year. Sales
of the international versions of the fixed income products also
contributed as a result of sales of the BARRA COSMOS System TM.
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.
Revenues from discontinued fixed income products for the six
months ended September 30, 1999 only represent amounts earned on
these products during April 1999. As part of the restructuring,
we agreed to provide license and support services without charge
from May 1, 1999 until the product termination dates. The
termination dates range from October to December 1999.
Other Analytics Related revenues associated with other
institutional analytics business sources include consulting fees
associated with enterprise risk system installations, timesharing
revenues, seminar revenues and other recurring fees. The net
decrease in these revenues for both periods reflects significant
growth in consulting fees from enterprise wide risk installations
offset by lower seminar and timeshare fees. Fluctuations in non-
consulting revenue sources result primarily from the number and
timing of seminars and the amount of timesharing billed to
clients. Our Enterprise Risk Management services generally involve
the sale of software and services including a one-time license
fee, recurring subscription, maintenance and support fees, as well
as consulting services related to implementation and software
modification. Revenues from licenses, subscriptions and
maintenance are included in subscription revenues. Enterprise Risk
Management revenues are subject to significant volatility as a
result of the uneven nature in which the various elements of the
services are earned and recognized for reporting purposes.
Consulting Fees consist of services delivered by our Investment
Consulting and Strategic Consulting business groups. Revenues from
consulting services increased over the same three and six month
periods a year ago as a result of significant increases in project
revenue from the Strategic Consulting group offset by more modest
growth in investment consulting.
Electronic Trading revenues consist of fees from licenses of the
Portfolio System for Institutional Trading (POSIT), which
decreased $51,000 or 1% compared to the same quarter a year ago
and increased $629,000 or 8% compared to the same six month period
a year ago. Our revenues from POSIT are derived from commissions
generated by the trading volume of the various licensees. POSIT
revenue fluctuations reflect changes in trading volumes as
compared to the same periods a year ago and new license fees from
EuroPOSIT, the joint venture established to operate the POSIT
system in European equity markets.
Asset Management revenues increased $4,240,000 or 68% compared to
the same quarter a year ago and increased $3,936,000 or 34%
compared to the same six month period a year ago. Asset management
revenues consist of fees generated from active management of
investor accounts by Symphony and fees earned by our Asset
Services Group from management of customized multi-manager
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 for the three and six month
periods ended September 30, 1999 were $10,241,000 and $15,060,000,
respectively, compared to $6,005,000 and $10,888,000,
respectively, for the same periods a year ago. These increases in
total revenues were the result of increases in both base and
performance fees due to growth in assets under management and
improved performance returns in some of Symphony's largest funds
compared to the prior year. As of September 30 1999, Symphony had
approximately $3.2 billion under direct management. Of the funds
under direct management, approximately $2.2 billion are managed
under agreements that provide for performance fees in addition to
a base management fee.
Base fees for assets under management for the three and six month
periods ended September 30, 1999 were $3,783,000 and $7,945,000,
respectively, compared to $3,690,000 and $7,189,000 for the same
periods a year ago. Base fees for the three and six month periods
ended September 30, 1999 were negatively impacted by a contract
renegotiation on one investor account agreement which resulted in
a change to the mix of base and performance fees earned. This
negotiation was finalized in the September 30, 1999 quarter and
resulted in a reclassification of base fees to performance fees in
the current quarter.
Performance fees included in total revenues were $6,458,000 and
$7,115,000, respectively, for the three and six months ended
September 30, 1999 compared to $2,315,000 and $3,699,000 for 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 each year of the contract.
Symphony's performance fees for the September 1999 quarter were
for accounts representing approximately 27% of the current total
of assets subject to performance fees compared to approximately
23% for the same quarter in the prior year. The increase in
performance fee revenue for the September 1999 quarter over the
same period a year ago was the result of an increase in the value
of investor account anniversaries and an increase in the net
returns for those investor accounts compared to the same period a
year ago. Assets under management subject to performance fees
have increased approximately $500 million or 30% from September
30, 1998. The pattern of anniversaries can change from quarter to
quarter because of the addition, termination or renegotiation of
account agreements. There is also no assurance that the investment
performance will continue at historical levels. It is presently
estimated that approximately 50% and 2% of the performance-based
funds under management will have performance fee determination
dates in the quarters ended December 31, 1999 and March 31, 2000,
respectively.
Symphony's future revenues will depend on levels of assets under
management, the performance of the funds it manages and the timing
of anniversary fee determination dates for performance based
funds.
Operating Expenses. For the quarter ended September 30, 1999
compared to the same quarter a year ago, total operating expenses
increased $1,418,000 or 5%. For the six months ended September 30,
1999 compared to the same period a year ago, total operating
expenses, including restructuring charges, increased $10,463,000
or 18%. Excluding restructuring charges, operating expenses
increased $4,902,000 or 9%.
Cost of Subscription Products consists of computer access and
communication charges, data and software acquisition expenses,
BARRA's computer leasing expenses, and seminar expenses. This
component of expense decreased $722,000 or 31% compared to the
same quarter a year ago and decreased $1,054,000 or 21% compared
to the same six month period a year ago. These decreases are
primarily the result of lower seminar, computer access and data
costs. Seminar costs decreased as a result of fewer seminar
events and the timing of certain major annual research seminars.
Lower contract costs for certain outside computer facilities and
the write-off of certain communication and data costs attributable
to the discontinued fixed income products account for the decrease
in computer access and data costs.
Compensation and Benefits increased $2,352,000 or 12% compared to
the same quarter a year ago and $6,746,000 or 19% compared to the
same six month period a year ago. The increase from the same
periods a year ago are primarily the result of: (a) annual salary
adjustments that take effect on July 1 each fiscal year; (b)
increases in incentive compensation including the effect of
changes in the pattern of accrual during each year; (c) an
increase in total average headcount; (d) increases in consultant
costs associated with Year 2000 and other projects; (e) increases
in other related employee benefit costs associated with more
employees; and (f) general cost increases.
External and other incremental costs associated with the Y2K
Project and included in compensation and benefits were $1.3
million and $2.6 million for the three and six month periods ended
September 30, 1999 compared to $205,000 and $395,000,
respectively, for the same periods a year ago. Y2K Project costs
for the current quarter consisted of external costs for
contractors of $962,000 and special incentive compensation of
$350,000. Costs associated with the Y2K Project are expected to be
approximately $.9 million for the three month period ended
December 31, 1999 after which such costs are expected to decline
significantly. (Refer to "Year 2000 Update" in Part I, Item 2,
Management's Discussion and Analysis.)
Occupancy Expense decreased $106,000 or 6% compared to the same
quarter a year ago and increased $55,000 or 2% compared to the
same six month period a year ago. The decrease in the current
quarter is attributable to excess facilities costs being charged
to the restructuring accrual.
Other Operating Expenses decreased $106,000 or 17% compared to the
same quarter a year ago and decreased $845,000 or 7% compared to
the same six month period a year ago. Other operating expenses
include travel, office, maintenance, depreciation, amortization,
data and other expenses related to asset management operations,
marketing, advertising, outside legal and accounting services,
foreign currency translation gains and losses, and other corporate
expenses. Other operating expenses decreased from the same periods
a year ago as a result of: (a) lower printing, postage and other
general office expenses due to both a reduction in publishing
costs for certain products as well as the timing of various
product releases; (b) lower data costs associated with asset
management operations; (c) lower foreign currency translation
losses; and (d) lower professional service fees.
Restructuring Charge - Refer to Note 2 in the accompanying notes
to the condensed consolidated financial statements for more
information on the restructuring charges.
Interest income and other increased $172,000 or 75% compared to
the same quarter a year ago and decreased $48,000 or 6% compared
to the same six month period a year ago. Fluctuations in both
periods are the result of higher or lower unrealized gains on
short-term investments which result from the performance of our
investment portfolio.
Equity in net income (loss) of investees represents gains (losses)
from our equity investments in Data Downlink Corporation and Risk
Reporting Limited.
Minority Interest primarily represents the share of profits from
Symphony Asset Management LLC that is due to the minority
shareholders.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Our disclosure and analysis in this Form 10-Q contain several
forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. You can
identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as
anticipate, estimate, expect, project, intend, plan, believe,
designed, future, forecast, perceive, possible, potential, target,
will, may, scheduled, would, could, should, forward, assure and
other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In
particular, these include statements relating to future actions,
events or results. From time to time we may also provide oral or
written forward-looking statements in other materials that we
release to the public.
Any or all of the forward-looking statements that we make in this
Form 10-Q or any other public statements we issue may turn out to
be wrong. They can be affected by inaccurate assumptions that we
might make or by known or unknown risks and uncertainties. Many
factors mentioned in this Form 10-Q will be important in
determining future results. Consequently, no forward looking
statement can be guaranteed. Actual future results may vary
materially.
We are under no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events
or otherwise. We suggest, however, that you consult any further
disclosures we make on related subjects in our Form 10-Q, 8-K and
10-K filings with the SEC. Our Form 10-K filing for the 1999
fiscal year listed various important factors that could cause
actual results to differ materially from expected and historic
results. We note these factors for investors as permitted by the
Private Securities Litigation Reform Act of 1995. Readers can
find them in Part I of that filing under the heading "Risk
Factors." We incorporate that section of that Form 10-K in this
filing and investors should refer to it. Those are factors that
we think could cause our actual results to differ materially from
expected and historical results. Other factors besides those
listed in our Form 10-K or elsewhere in this Form 10-Q could also
adversely affect us or our business. You should understand that
it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to the interest bearing portions of our direct
investment portfolio. We place our direct investments with high
quality credit issuers and, by policy, limit the amount of credit
exposure to any one issuer. Our first priority is to reduce the
risk of principal loss. Consequently, we seek to preserve our
invested funds by limiting default risk, market risk, and re-
investment risk. We attempt to mitigate default risk by investing
only in high quality credit securities that we believe to be low
risk and by positioning our portfolio to respond appropriately to
a significant reduction in credit rating of any investment issuer
or guarantor. The direct investment portfolio includes only
marketable securities with active secondary or resale markets to
ensure portfolio liquidity. We do not use derivative financial
instruments in our investment portfolio.
Our direct interest bearing investment portfolio primarily
consists of investments in short-term, high-credit quality money
market funds. These investments totaled approximately $32.6
million at September 30, 1999 with an average interest rate of
5.2%. At September 30, 1999, the portfolio also had approximately
$6.6 million of short-term, high credit quality municipal debt
securities with an average taxable equivalent interest rate of
6.7%. The short-term money market funds and the municipal debt
securities are not insured and because of the short-term nature of
the investments are subject to credit risk, but are not likely to
fluctuate significantly in market value.
From time to time, we provide the initial invested funds for the
startup of new investment products offered by Symphony and our
Asset Services Group. In these cases the primary considerations
are related to supporting a new business rather than making
investments that fall under the guidelines of our investment
policy.
Our investments in market-neutral programs, which amounted to
approximately $17.0 million at September 30, 1999, are non-
interest bearing and consist principally of long and short
positions placed directly (in the case of funds managed by
Symphony) or indirectly (in the case of funds managed by our Asset
Services Group) through other fund managers in U.S and non-U.S.
equity securities of both public and private issuers. Although the
intent of the managers of these funds is to structure portfolios
that are hedged against general market movements, these
investments can be subject to significant changes in market value
and are not insured. In both cases the managers may use derivative
financial instruments in connection with hedging activities. All
investment decisions with respect to these market neutral programs
are made by professional investment advisers and the performance
of the funds is reviewed periodically by our management and our
Board of Directors.
Foreign Currency Risk
We invoice customers in Europe in both pounds and euros. In
Japan, we bill our customers in Japanese Yen. Excluding customers
in these locations, we generally bill for our services in U.S.
dollars. We have not engaged in foreign currency hedging
activities. To the extent we invoice our customers in local
currency (Yen, Pound and Euro), our international revenues are
subject to currency exchange fluctuation risk. To the extent that
international revenues that are invoiced in local currencies
increase in the future, our exposure to fluctuations in currency
exchange rates will correspondingly increase. Currency
fluctuations may also effectively increase the cost of our
products and services in countries in which customers are invoiced
in U.S. dollars.
We have no foreign debt and non-U.S. dollar cash balances held
overseas are generally kept at levels necessary to meet current
operating and capitalization needs. The capitalization of BARRA
Japan includes approximately $4.0 million invested in a yen-
denominated investments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
All information required by this item was reported under the
heading "Legal Proceedings" in our March 31, 1999 Form 10-K.
There have been no other material developments in our legal
proceedings since the date of our Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
All information required by this item has been previously reported
under Part II, Item 2 in our June 30, 1999 Form 10-Q. There were
no other matters submitted for a stockholder vote since the date
of the Form 10-Q.
ITEM 5. OTHER INFORMATION.
On August 27, 1999, we repurchased in two transactions 113,500
shares of our own Common Stock for an aggregate price of
$2,298,375 and 100,000 shares of our Common Stock at an aggregate
price of $2,025,000.
On September 8, 1999, we repurchased in a private transaction from
the Rudd Family Trust 10,000 shares of our Common Stock for an
aggregate price of $208,125. Andrew Rudd, the Chairman of our
Board of Directors and a principal stockholder of BARRA, is (along
with his wife, Virginia Rudd) a beneficiary and trustee of the
Rudd Family Trust.
At its October 28, 1999 quarterly meeting, our Board of Directors
authorized our officers to use up to $10,000,000 (including all
previously authorized but unused amounts) to repurchase additional
shares of our Common Stock on The Nasdaq Stock Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) the following exhibits are required by Item 601 of the Regulation
S-K:
Exhibit
Number Exhibit Description
- ------ -------------------
10.22 Amendment No. 3 to BARRA Stock
Option Plan dated August 5,
1999 (incorporated by reference
to Exhibit No. 4.4 to our
registration statement on Form
S-8 filed August 6, 1999
(File No. 333-35379)
27.1 Financial Data Schedule
(electronic filing only)
(b) Reports on Form 8-K:
On August 3, 1999, we filed a Current Report on Form 8-K dated
August 2, 1999 containing our press release announcing the
appointment of Kamal Duggirala as our Chief Executive Officer.
<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: November 11, 1999 /s/ Kamal Duggirala
Kamal Duggirala, Chief
Executive Officer
Date: November 11, 1999 /s/ James D. Kirsner
James D. Kirsner, Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
10.22 Amendment No. 3 to BARRA Stock
Option Plan dated August 5,
1999 (incorporated by reference
to Exhibit No. 4.4 to our
registration statement on Form
S-8 filed August 6, 1999
(File No. 333-35379)
27.1 Financial Data Schedule
(electronic filing only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,638
<SECURITIES> 31,591
<RECEIVABLES> 37,645
<ALLOWANCES> 726
<INVENTORY> 0
<CURRENT-ASSETS> 96,562
<PP&E> 34,218
<DEPRECIATION> 15,821
<TOTAL-ASSETS> 148,885
<CURRENT-LIABILITIES> 50,790
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 92,381
<TOTAL-LIABILITY-AND-EQUITY> 148,885
<SALES> 81,841
<TOTAL-REVENUES> 81,841
<CGS> 3,905
<TOTAL-COSTS> 63,536 <F3>
<OTHER-EXPENSES> 5,053 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (755)<F2>
<INCOME-PRETAX> 10,102
<INCOME-TAX> 3,766
<INCOME-CONTINUING> 6,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,336
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.43
<FN>
<F1>MINORITY INTEREST SHARE OF NET INCOME AND LOSS ON EQUITY JOINT VENTURES
<F2>REPRESENTS NET INTEREST INCOME
<F3>INCLUDES RESTRUCTURING CHARGES OF 5,561,000 (.23 PER DILUTED SHARE)
</FN>
</TABLE>
